Company Taxation: Safeguarding International Competitiveness
Arguments and Positions
While Germany is still dealing with the implementation of the OECD BEPS (Base Erosion and Profit Shifting) measures concerning the profit shifting of companies, the USA and the UK are taking a very different approach: They are using their national tax policies as instruments to strenghten their national economies.
In Germany this will be an important task for the next federal government. For businesses, the burden of income, corporate and trade tax is likely to rise from currently 138.7 billion euros to an estimated 161 billion euros by 2021. Internationally operating German companies pay a disproportionately high share of their earnings taxes in Germany. This holds true especially in the chemical industry.
USA and UK are changing course
Triggered by the Brexit vote, the UK government has announced a reduction of corporate taxation from 15 to 10 percent, in an effort to improve the competitiveness of British industry. The USA, too, wants to reduce the business tax, with a bill planning a tax rate of 20-22 percent. This is to the disadvantage of German undertakings which keep their head offices in Germany: because in this country, the municipalities with their high trade tax rates (Hebesätze) have increased the tax burden on enterprises to up to 34 percent. There are some municipalities with „Hebesätze“ of over 500 percent – tendency rising. This factually brings a higher company tax burden which meanwhile ranks among the heaviest worldwide.
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 shape. 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.
- Bring company tax law in a competitive shape
German tax law should be able to compete internationally. This goal could be achieved by eliminating fiscal obstacles to innovation, reducing the disadvantages of foreign corporate activities as compared with domestic ones, and reforming the trade tax. 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.
- Refrain from unsystematic multiple taxation
A significant broadening of the assessment base – by additionally adding income-independent elements like rent, interest, leasing or licencing fees – should be avoided. One necessary step would be to remedy the ever wider interpretation by the financial administration.
- Avoid double taxation
Only binding and effective intergovernmental dispute settlement mechanisms under double taxation agreements would ensure a settlement of disputes between countries according to binding standards. These should not be automatically to the detriment of German companies and the location Germany.
- Cut company tax
Low tax rates have a strong signal effect for investment decisions. For this reason, cutting the company tax would be an obvious step, enabling Germany to keep pace internationally.