Launching the Company Tax Reform
Arguments and Positions
The German federal government is still lacking answers to the tax policy developments in the USA and the UK. Both countries use their tax policies for better framework conditions and thus for strengthening their economies. An even longer wait is harmful to Germany as a business location, as investments will increasingly go to other places in the future. So far, no measures have been taken such as fiscal incentives for research for all companies, which would strengthen the business location Germany. Moreover, due to the constant increase in trade tax rates (Hebesätze), the burden on enterprises has risen to up to 30 percent over the last years. This means that company taxation in Germany ranks among the highest worldwide.
A modernisation of company tax law is urgently needed. The existing draft legislation for fiscal research incentives is a first positive signal. However, other plans – such as expanding the land and real estate purchase tax (Grund-erwerbssteuer) or new taxation on digital business models – would weaken the location.
Different approaches in the UK and the USA
The UK government wants to reduce corporate taxation from 19 percent to 15 to 10 percent. The US has implemented the largest tax reform of the last 30 years. Now, the business tax rate is reduced from 35 to 21 percent, and there is an immediate deduction of investment. Licensing fees from cross-border digital services benefit from preferential taxation; moreover, a "base erosion and anti-abuse tax" (BEAT) is charged on license and service payments from large US corporations to foreign parent companies. In consequence, the investment location Germany is left at a disadvantage.
Internationally operating companies in Germany pay a disproportionately high share of their earnings taxes in this country: According to a chemical industry survey, some of these businesses realise only around 20 percent of their sales in Germany, while this is where 50 to 60 percent of their worldwide earnings taxes become due. Add to this the wages and salaries tax (Lohnsteuer) and the employer’s contributions to social insurance.
Situation in Germany
Since the last major company tax reform in 2008, nothing has been done to bring the fiscal conditions in a competitive form. Quite the contrary, political decisions resulted in further burdens. For example, the additional inclusion of income-independent elements like rent, interest, leasing or licencing fees as well as the interest barrier (Zinsschranke) clearly broadened the assessment base and make an international harmonisation of company taxation even more difficult.
- Bring company tax law in a competitive form
German tax law should be competitive. Therefore, fiscal obstacles to innovation should be eliminated, the disadvantages of foreign corporate activities as compared with domestic ones should be reduced, and the trade tax should be reformed. This includes restoring the structural domestic bias of the trade tax, enabling economically sound group structures for enterprises also in other EU countries. This could be brought about, in particular, by lowering the much too high "low tax country" threshold under the foreign transactions tax law (Außensteuergesetz) from 25 to 15 percent and by making it possible to offset foreign taxes in German trade tax.
- Cut company tax
Low tax rates have a strong signal effect on investment decisions. For this reason, the company tax should be reduced so that Germany can keep pace internationally.
- Strengthen the location Germany with a good tax policy
Due to numerous fiscal obstacles, parent and holding companies in Germany cannot perform classic group functions and tasks at their German location. There is an urgent need for correction through structural tax policy reform. Moreover, there must be no new burdens from restructuring the taxation of digital business models. Here, solutions are needed in an international consensus. National go-it-alone actions put strains on all undertakings which use digital business models. No new artificial burdens on industrial enterprises should be introduced under the guise of preventing abuse. For example, also in the future the land and real estate purchase tax must not unnecessarily burden listed capital companies.