Company Taxation: Safeguarding International Competitiveness
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 national tax policies as instruments 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 worldwide in the future. So far, no measures have been taken such as introducing 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 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. However, other plans – such as expanding the land and real estate purchase tax (Grunderwerbssteuer) or introducing 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 19 percent to 15 to 10 percent, in an effort to improve the competitiveness of British industry.
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 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, 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
Restructuring the taxation of digital business models needs to be done in an international consensus. National go-it-alone actions burden all undertakings with a strong commitment to digitalisation. Also in future, the land and real estate purchase tax must not burden trading by listed capital companies.