Company Taxation: Safeguarding International Competitiveness
Arguments and Positions
In its coalition agreement the German federal government does not provide answers to the tax policy developments in the USA and the UK. Both countries use their national tax policies as an instrument for better framework conditions and thus for strengthening their economies.
The coalition agreement lacks suitable measures to get the investment location Germany in good shape for the future – by reducing the overall tax burden on companies. Quite the contrary, due to the constant increase in trade tax rates (Hebesätze), the burden on enterprises has risen to up to 24 percent over the last years. This means that meanwhile the company tax burden in Germany ranks among the heaviest worldwide.
Structural reform of the tax policy is urgently needed. The announced plans to introduce fiscal incentives for research are a first positive signal. By contrast, plans to expand the land and real estate purchase tax (Grunderwerbssteuer) or to introduce new taxation on digital business models would weaken the location Germany.
Different approaches in the UK and the USA
The UK government wants to reduce corporate taxation from 15 to 10 percent, in an effort to improve the competitiveness of British industry.
In early 2018, the US 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 write-off 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 more and more left at a disadvantage.
So far, internationally operating companies in Germany pay a disproportionately high share of their earnings taxes in this country. This holds true especially in the chemical industry.
Situation in Germany
Since the last major company tax reform in 2008, the German legislator has done nothing to bring the fiscal framework conditions in an internationally 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 and lowering the much too high "low tax country" threshold under the foreign transactions tax law (Außensteuergesetz) from 25 to 15 percent.
- 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
Restructuring the taxation of digital business models is possible only in an international consensus. National go-it-alone actions would burden all undertakings with a strong commitment to digitalisation. Also in the future, the land and real estate purchase tax should allow meaningful structures of groups of enterprises. Furthermore, fiscal incentives for research should be introduced at long last for all research-based companies.