Ever since Donald Trump last year unveiled deep tax cuts for companies in America, German industry has been wracked with fears over the economic fallout. After the first 100 days of Angela Merkel’s new government, the country’s business folk have clearly lost patience with the ruling coalition. “In the long term, Germany cannot afford to have a higher tax burden than other countries,” warned Monika Wünnemann, a tax specialist at German business federation BDI.
After a decade of stagnation, the German corporate tax code needs rewriting in order to defend the country’s allure as a business location, the BDI says. Politicians are painfully aware that pillars of the country’s economy, such as chemicals and automobiles, pay up to 60 percent of their income taxes at home, even though the domestic market makes up less than one-third of total sales. Obviously, a relocation of these behemoths to friendlier tax regimes would be a devastating blow to Germany’s public coffers.
In a list of “tax priorities” obtained by Handelsblatt, the BDI urges Berlin to cut the overall tax burden, including corporate and trade levies, to a maximum 25 percent, compared to 26 percent in the US.
But this isn’t just about Trump. Over the past year or two, tax competition has clearly heated up within the European Union: France plans to reduce its top corporate rate to 25 percent by 2022 from 34 percent. The UK wants to cut its rate to 17 percent by 2021 from 20 percent today. If it fails to take action, Germany will be stuck with the heaviest corporate tax burden among industrialized countries at over 30 percent. It’s a distinction already awarded its equally high income tax burden.
The high burden placed on German companies is split into two revenue streams — corporate and trade taxes. The BDI is proposing a gradual reduction in Germany’s corporate tax rate from 15 to 10 percent — a radical step given the current 12.5 percent rate in Ireland, whose tax burden on firms is among Europe’s lightest.
The federation also wants changes in the assessment base for trade tax, a hideously complicated system that allows one-quarter of outlays for rent and leasing to be added back into taxable income. Businessmen are yearning for trade tax to be credited against corporate income tax (which would reduce their overall tax burden), as was the case before 2008.
Ms. Wünnemann recalls that Germany’s Council of Economic Experts, a key government advisory body, has long advocated equal taxation for investments out of owners’ pockets and bank loans. The latter are still given preferential treatment. She also urges that the coalition fulfill its pledge to give tax breaks in research and development, regardless of a company’s size. At present, Ms. Merkel’s government only grants this right to smaller firms.
So far Olaf Scholz, Germany’s tight-fisted finance minister, has deflected calls for tax cuts, insisting there was no reason to match the US reform. “We are competitive in Germany,” was his office’s flat reply. Berlin has preferred to focus on its legendary trade surplus and a near-obsessive desire to balance its budget, despite enjoying its biggest economic boom for many years.
However, the Germans have quietly made a tiny concession. Mr. Scholz has agreed with his French counterpart, Bruno Le Maire (see photo, left to right), to establish an EU-wide base for tax assessment. Both governments are expected to discuss their proposals this week. A harmonizing tweak in an EU tax code would help defuse talk of European rivalry, and for once, politicians across the German political spectrum agree that a coordinated approach is sorely needed.
Donata Riedel is an economics and telecommunications correspondent for Handelsblatt and based in Berlin. Jeremy Gray adapted this story into English for Handelsblatt Global. To contact the author: email@example.com