Coping with the crisis: the German chemical industry is
in a better position than most competitors

Strong SMEs and a division of labour inside the chemical industry are major advantages / Demand to abolish the interest barrier; the need for fiscal promotion of research

Verband der Chemischen Industrie (VCI) believes that the German chemical industry is in a good position to successfully cope with the global economic crisis. Professor Dr Ulrich Lehner, President of the VCI, notes in a statement to the press in Frankfurt: "We can respond more flexibly to this challenge and we are better positioned than most of our world market competitors."

Lehner sees a major and unique advantage of the German chemical industry in the intensive division of labour between small, medium-sized and large undertakings. The production of basic chemicals is an important field of activity especially for 150 large businesses, while over 1,500 small and medium-sized enterprises (SMEs) process these basic chemicals into fine and specialty chemicals. Nowhere else in the world are chemical SMEs so strong and well-established. Products from 87 percent of German SMEs are present on international export markets, where they fill niches. Another advantage is that the German chemical industry creates value from many more different sources than chemical industries elsewhere. Lehner: "The German chemical industry is closely connected with all other industries in our country. Furthermore, our products enter the value chain at all levels."

The VCI President recommends the introduction of two instruments by the German federal government, in order to strengthen the innovative ability of industry as a whole. First, fiscal promotion of research and development (R&D). Lehner: "We advocate an approach where companies engaged in research can deduct at least 10 percent of their total self-financed R&D spending from their tax payable. Where companies are making losses, they should be paid out a corresponding tax credit." The VCI anticipates significant advantages for Germany as a research location, if the government decides to introduce a fiscal promotion of R&D without time limit and at equal standing with project support – namely, companies are free to choose their own research topics, and this promotion measure is easy to handle. Lehner points to R&D promotion through tax rules in almost all major industrial countries, with tax credits of between 8 and 20 percent being frequently granted in OECD countries.

Abolishing the interest barrier is the VCI's second demand to the federal government, in order to stimulate innovation. The interest barrier (Zinsschranke), which was introduced with the company tax reform 2008, renders credit-financed research and investment more difficult. Now the interest barrier limits the tax deductibility of interest payments – as operating expenses – to only up to 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA). The negative impact of the interest barrier intensifies considerably in the present economic and financial crisis, because company profits are falling and credit interest rates are rising. As a research and plant-oriented industry, the chemical-pharmaceutical industry is more strongly impacted by the interest barrier than other industries. According to Lehner, the interest barrier should be abolished as soon as possible. At the very least, the interest barrier should be suspended for two years.