Banks as Tax Planning Intermediaries

We provide the first large-sample evidence of banks playing an important role in facilitating tax planning by client firms. Banks could be associated with client tax avoidance through two separate mechanisms. First, banks may act as tax planning intermediaries by developing and implementing tax strategies for corporate clients or by spreading tax strategies across clients. Second, banks may select borrowers in part based on their tax avoidance. Capturing bank-client relationships using lending contracts, we find that a borrower’s own tax avoidance is strongly associated with the average tax avoidance of its bank’s other borrowers. Further tests are consistent with this result being driven in part by banks acting as tax planning intermediaries. Finally, we find that borrowers experience meaningful increases in tax avoidance when they begin a new relationship with a bank whose existing borrowers are substantial tax avoiders. Overall, our results suggest that banks, in addition to being financial intermediaries, also act as tax planning intermediaries in facilitating corporate tax planning.