Taxation on profit and profitability: Evidence from Brazilian commercial banks
Published:
Feb 21, 2025
Volume:
23
Keywords:
Commercial banks
Taxation
Bank profitability
Brazil
Abstract
This paper aims to analyze the impacts of taxation on profits in the profitability of Brazilian commercial banks. In this context, it seeks to evaluate these banks' ability to pass on taxation to consumers. Furthermore, it examines how factors such as size, ownership structure (state-owned or private), stock market listing, and the nationality of the bank's shareholder control (domestic or foreign) influence the ability to pass on taxes. Data from 2000 to 2021 were utilized, and dynamic panel models were estimated. The results reveal that taxation negatively affects profitability, measured by return on assets, return on equity, and net interest margin; however, the estimated coefficient is close to zero, indicating the near-complete ability of commercial banks to pass on taxation. Additionally, size does not affect the capacity to pass on taxes. Differences were also observed in the impact of taxation on public and private commercial banks, both listed and unlisted. Publicly listed banks experience a positive effect of effective taxation on their profitability, in contrast to private banks and unlisted banks.
How to cite
Davi Speck Ramos, Alexandre Schwinden Garcia, Daniel Augusto de Souza. Taxation on profit and profitability: Evidence from Brazilian commercial banks. Brazilian Review of Finance, v. 23, n. 1, 2025. p. e202502. DOI: 10.12660/rbfin.v23n1.2025.92574.
References
Afanasieff, T.S., Lhacer, P.M. and Nakane, M.I. (2002). The determinants of bank interest spread in Brazil, Money affairs, 15(2), 183-207.
Albertazzi, U. and Gambacorta, L. (2010). Bank profitability and taxation, Journal of Banking & Finance, 34(11), 2801-2810. https://doi.org/10.1016/j.jbankfin.2010.06.003
Alessandri, P. and Nelson, B.D. (2015). Simple banking: Profitability and the yield curve, Journal of Money, Credit and Banking, 47(1), 143-175. https://doi.org/10.1111/jmcb.12172
Andries, K., Gallemore, J. and Jacob, M. (2017). The effect of corporate taxation on bank transparency: Evidence from loan loss provisions, Journal of Accounting and Economics, 63(2-3), 307-328. https://doi.org/10.1016/j.jacceco.2017.03.004
Arellano, M. and Bover, O. (1995). Another look at the instrumental variable estimation of error-components models, Journal of econometrics, 68(1), 29-51. https://doi.org/10.1016/0304-4076(94)01642-D
Athanasoglou, P.P., Brissimis, S.N. and Delis, M.D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability, Journal of International Financial Markets, Institutions and Money, 18(2), 121-136. https://doi.org/10.1016/j.intfin.2006.07.001
Azevedo, M.d.A. and Gartner, I.R. (2020). Concentração e competição no mercado de crédito doméstico, Revista de Administração Contemporânea, 24, 380-399. https://doi.org/10.1590/1982-7849rac2020190347
BCB (2024). Relatório de economia bancária, Rel. técn., Banco Central do Brasil. https://www.bcb.gov.br/content/publicacoes/relatorioeconomiabancaria/reb2023p.pdf
Blundell, R. and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models, Journal of econometrics, 87(1), 115-143. https://doi.org/10.1016/S0304-4076(98)00009-8
Borio, C., Gambacorta, L. and Hofmann, B. (2017). The influence of monetary policy on bank profitability, International Finance, 20(1), 48-63. https://doi.org/10.1111/infi.12104
Borsuk, M., Kowalewski, O. and Qi, J. (2023). The dark side of bank taxes, Journal of Banking & Finance, 157, 107041. https://doi.org/10.1016/j.jbankfin.2020.107041
Borsuk, M., Przeworska, J., Saunders, A. and Serwa, D. (2024). The macroeconomic costs of the bank tax, Journal of Financial Stability, 72, 101262. https://doi.org/10.1016/j.jfs.2021.101262
Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia, Journal of Banking & Finance, 13(1), 65-79. https://doi.org/10.1016/0378-4266(89)90020-4
Boyd, J.H., Graham, S.L. and Hewitt, R.S. (1993). Bank holding company mergers with nonbank financial firms: Effects on the risk of failure, Journal of Banking & Finance, 17(1), 43-63. https://doi.org/10.1016/0378-4266(93)90079-S
Boyd, J.H. and Graham, S.L. (1986). Risk, regulation, and bank holding company expansion into nonbanking, Quarterly Review, 10(Spr), 2-17. https://doi.org/10.21034/qr.1021
Capelle-Blancard, G. and Havrylchyk, O. (2014). The ability of banks to shift corporate income taxes to customers, in Taxation and Regulation of the Financial Sector, MIT Press, p. 253. https://doi.org/10.7551/mitpress/10030.003.0016
Cardoso, E. (2003). Seigniorage, reserve requirements and bank spreads in Brazil, in Taxation of Financial Intermediation: Theory and Practice for Emerging Economies, Citeseer, pp. 241-268.
Carvalho, D.R. (2009). Essays on firms, investment and credit in emerging markets, Harvard University.
Chiaramonte, L., Croci, E. and Poli, F. (2015). Should we trust the Z-score? Evidence from the European banking industry, Global Finance Journal, 28, 111-131. https://doi.org/10.1016/j.gfj.2015.02.002
Chiorazzo, V. and Milani, C. (2011). The impact of taxation on bank profits: Evidence from EU banks, Journal of Banking & Finance, 35(12), 3202-3212. https://doi.org/10.1016/j.jbankfin.2011.05.002
Coelho, C.A., De Mello, J.M. and Rezende, L. (2013). Do public banks compete with private banks? Evidence from concentrated local markets in Brazil, Journal of Money, Credit and Banking, 45(8), 1581-1615. https://doi.org/10.1111/jmcb.12063
Cornett, M.M., Guo, L., Khaksari, S. and Tehranian, H. (2010). The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison, Journal of Financial Intermediation, 19(1), 74-94. https://doi.org/10.1016/j.jfi.2008.09.005
da Silva Vinhado, F. and Divino, J.A. (2013). Determinantes da rentabilidade das instituições financeiras no Brasil, Análise Econômica, 31(59). https://doi.org/10.22456/2176-5456.23301
De Guevara, J.F. and Maudos, J. (2007). Explanatory factors of market power in the banking system, The Manchester School, 75(3), 275-296. https://doi.org/10.1111/j.1467-9957.2007.01017.x
Demirgüç-Kunt, A. and Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence, The World Bank Economic Review, 13(2), 379-408. https://doi.org/10.1093/wber/13.2.379
Dietrich, A. and Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland, Journal of International Financial Markets, Institutions and Money, 21(3), 307-327. https://doi.org/10.1016/j.intfin.2010.11.002
Eduardus, T., Husnan, S., Hanafi, M.M. et al. (2012). Determinants of bank profit efficiency: Evidence from Indonesia, International Journal of Economics and Finance Studies, 4(2), 163-173.
Garcia, A.S. and Gonzaga, A.L.M. (2024). How credit unions affect the profitability of Brazilian commercial banks?, The Quarterly Review of Economics and Finance, 93, 190-209. https://doi.org/10.1016/j.qref.2023.12.006
Garcia, A.S. and Meurer, R. (2022a). Effects of a development bank on the profitability of commercial banks: Evidence for Brazil, The Quarterly Review of Economics and Finance, 85, 246-259. https://doi.org/10.1016/j.qref.2022.03.008
Garcia, A.S. and Meurer, R. (2022b). Elections, state-owned banks, and bank profitability in Brazil, Brazilian Review of Finance, 20(4), 83-111. https://doi.org/10.12660/rbfin.v20n4.2022.85268
García-Herrero, A., Gavilá, S. and Santabárbara, D. (2009). What explains the low profitability of Chinese banks?, Journal of Banking & Finance, 33(11), 2080-2092. https://doi.org/10.1016/j.jbankfin.2009.05.005
Hannan, T.H. and Hanweck, G.A. (1988). Bank insolvency risk and the market for large certificates of deposit, Journal of Money, Credit and Banking, 20(2), 203-211. https://doi.org/10.2307/1992111
Houge, T. and Loughran, T. (1999). Growth fixation and the performance of bank initial public offerings, 1983-1991, Journal of Banking & Finance, 23(8), 1277-1301. https://doi.org/10.1016/S0378-4266(99)00014-X
Jackowicz, K., Kowalewski, O. and Kozłowski, Ł. (2013). The influence of political factors on commercial banks in Central European countries, Journal of Financial Stability, 9(4), 759-777. https://doi.org/10.1016/j.jfs.2012.08.001
Júnior, E.S. (2007). Sistema tributário, governança corporativa e abertura de capital: Brasil versus Estados Unidos, Master’s thesis, Universidade Federal de Uberlândia.
Köhler, M. (2015). Which banks are more risky? The impact of business models on bank stability, Journal of Financial Stability, 16, 195-212. https://doi.org/10.1016/j.jfs.2014.02.005
La Porta, R., Lopez-de Silanes, F. and Shleifer, A. (2002). Government ownership of banks, The Journal of Finance, 57(1), 265-301. https://doi.org/10.1111/1540-6261.00422
Lin, X. and Zhang, Y. (2009). Bank ownership reform and bank performance in China, Journal of Banking & Finance, 33(1), 20-29. https://doi.org/10.1016/j.jbankfin.2006.11.022
Maffili, D.W., Bressan, A.A. and de Souza, A.A. (2007). Estudo da rentabilidade dos bancos brasileiros de varejo no período de 1999 a 2005, Contabilidade Vista & Revista, 18(2), 117-138.
Merz, J. and Overesch, M. (2016). Profit shifting and tax response of multinational banks, Journal of Banking & Finance, 68, 57-68. https://doi.org/10.1016/j.jbankfin.2016.03.015
Micco, A., Panizza, U. and Yanez, M. (2007). Bank ownership and performance. Does politics matter?, Journal of Banking & Finance, 31(1), 219-241. https://doi.org/10.1016/j.jbankfin.2006.02.007
Molyneux, P. and Thornton, J. (1992). Determinants of European bank profitability: A note, Journal of Banking & Finance, 16(6), 1173-1178. https://doi.org/10.1016/0378-4266(92)90065-8
Nguyen, T.L., Nguyen, T.C. and Ho, T.T. (2023). The effects of corporate taxation on the cost of bank loans, Applied Economics Letters, 1-6. https://doi.org/10.1080/13504851.2023.2216435
Pasiouras, F. and Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union, Research in International Business and Finance, 21(2), 222-237. https://doi.org/10.1016/j.ribaf.2006.03.007
Paula, L.F.d. and Pires, M.C.d.C. (2007). Determinantes macroeconômicos do spread bancário: Uma análise preliminar para economias emergentes, in L.F.d. Paula and J. Oreiro (eds), Sistema Financeiro: Uma Análise do Setor Bancário Brasileiro, Elsevier.
Primo, U.R., Dantas, J.A., Medeiros, O.R. and Capelletto, L.R. (2013). Determinantes da rentabilidade bancária no Brasil, Revista Base (Administração e Contabilidade) da UNISINOS, 10(4), 308-323.
Rover, S., Tomazzia, E.C. and Fávero, L.P. (2013). Financial and macroeconomic determinants of profitability: Empirical evidence from the Brazilian banking sector, Advances in Scientific and Applied Accounting, 156-177.
Schandlbauer, A. (2017). How do financial institutions react to a tax increase?, Journal of Financial Intermediation, 30, 86-106. https://doi.org/10.1016/j.jfi.2016.08.002
Vanhoose, D.D. (1985). Bank market structure and monetary control, Journal of Money, Credit and Banking, 17(3), 298-311. https://doi.org/10.2307/1992626
Wu, H.-L., Chen, C.-H. and Lin, H.-L. (2009). Can a stock market listing help to improve the operational performance of China’s banks?, Journal of Economic Policy Reform, 12(1), 13-28. https://doi.org/10.1080/17487870802677742
Yin, H., Yang, J. and Mehran, J. (2015). Do Chinese banks perform better after IPOs?, Managerial Finance, 41(4), 368-384. https://doi.org/10.1108/MF-06-2014-0150