Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Policy,Research,andExternalAffairs
WORKING PAPERS |_Debt
andInternational Finance
InternationalEconomicsDepartment TheWorld Bank September1991 WPS765
li
7
-0.326 (3.35)
0.43
228
Mat < 8
-0.605 (8.81)
0.52
430
Mat : 9
-0.085 (0.54)
0.31
80
Notes as for Table 5.
31
Endnotes
1. See Foreign Tax Credits for Banks (KPMG), p. 171. 2. See The Banker's Guide to the Tax Reform Act of 1986 (Peat, Marwick, Mitchell & Co.), p. 88. 3. According to U.S. tax regulations, the foreign tax credit actually taken can not exceed the U.S. tax on the foreign source income. Hence, if the foreign tax paid exceeds the U.S. tax due, then the bank will be in an excess credit position. 4. Equation (1) assumes away the possibility that a bank can collect rents due.to an informationalor other advantage. The extent to which banks are forced to pass on tax credits depends on various aspects of the banking market structure that are beyond the scope of this study. 5. For 8 - 1, (5) exactly corresponds to (4). For 8 o 1, the correspondenceis not exact, and 8 in (5) approximates the P in previous equations. Below, it is shown that for various regressions the hypothesis of 81 is not rejected. 6. For a discussion of the usefulness of potential tax credits in reducing future tax rates in a world of uncertainty, see Altshuler and Auerbach [1990., p.76].
7. Regressions on U.S. loans and non-U.S. loans for the period before 1976 yield tax effects of -0.821(3.61)and -0.409(2.73)with samples of 30 and 131 loans. The estimate of the U.S. tax effect prior to 1975 yields 1.371(2.19)for a sample of 22, while estimate for non-U.S. loans for the same period is -0.403(2.31)with 109 loans. These results suggest a clean regime break in the case of the U.S., although the small sample size limits the meaning of both U.S. estimates. 8. See Internal Revenue Service Statistics of Income - 1976-1979, InternationalIncome and Taxes, Foreign Income and Taxes Reported on U.S. Income Tax Reforms, Table 2, p. 97 and Internal Revenue Service Statistics of Income, Compendium of Studies of InternationalIncome and Taxes, Table 1, p.36. 9. Sachs and Huizinga [19871 show that bank stock prices reflect third world
debt holdingswithouttakingintoaccountdifferencesin withholdingtax rates.
32
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