Schäuble's U-Turn

Germany's corporate tax rethink

  • Why it matters

    Why it matters

    • Plans by Britain and the U.S. to reduce corporate taxation have increased the pressure on Germany to tackle its own complex system of taxing businesses.
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  • Facts

    Facts

    • German Finance Minister Wolfgang Schäuble long resisted corporate tax reform in Germany but has changed his mind, Handelsblatt has learned.
    • The ruling conservatives are considering revamping corporate tax after the September election to spur tax harmonization across the European Union.
    • Britain’s tax-cutting plans in the wake of Brexit have added urgency to tax reform in Germany.
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    Audio

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German Finance Minister Schaeuble attends a meeting at the lower house of parliament Bundestag on 2017 budget in Berlin
After years of rejecting the idea, Wolfgang Schäuble is now considering corporate tax reform. Source: Reuters

Corporate tax reform hasn’t been on Wolfgang Schäuble’s to-do list in the past.

At the end of 2013, after he had just become finance minister for a second term, he told Handelsblatt there wouldn’t be any major changes. “I think that’s acceptable because our tax system isn’t that bad,” Mr. Schäuble said at the time.

The tax burden on firms wasn’t impairing their competitiveness, he said.

Three years on, he appears to have changed his mind.

He told a meeting of conservative lawmakers on Monday that Germany should consider a fundamental reform of corporate taxation after the next general election in September, participants told Handelsblatt.

He said reform would aid tax harmonization across the European Union. The bloc had long been discussing an alignment of the tax base for corporate tax, and Germany would need to reform its tax rules for that to happen, he added.

He didn’t give details, but he’s likely to have been referring to removing some idiosyncrasies in the German system to make it compatible with other tax regimes. These include the different taxation of joint stock companies and partnerships, said finance policy experts from Chancellor Angela Merkel’s conservative Christian Democratic Union.

There’s support in the party for Mr. Schäuble’s plans. “Corporate tax legislation is an important project for the coming parliamentary term with a view to simplification and more transparency,” said lawmaker Ralph Brinkhaus, deputy chairman of the CDU’s parliamentary group. “This is also relevant against the background of European efforts at harmonization.”

 

“Corporate tax legislation is an important project for the coming parliamentary term with a view to simplification and more transparency. ”

Ralph Brinkhaus, Deputy chairman, CDU parliamentary group

 

A reform would likely call into question the legal status of corporate partnerships. Germany is unique in requiring even large firms that are partnerships to pay income tax. In other E.U. countries, large companies tend to be incorporated as limited liability companies or joint stock corporations and are liable for corporate taxation.

However, Germany’s many powerful family businesses will likely oppose such a reform.

Mr. Schäuble’s newfound enthusiasm to revamp corporate taxation may also be inspired by British plans to lower the corporate tax rate sharply to the lowest level in all large industrial and emerging economies. That’s a threat made by British Prime Minister Theresa May in the wake of Britain’s vote last year to leave the European Union. U.S. President-elect Donald Trump also plans to reduce the tax burden on companies.

To be sure, Mr. Schäuble has repeatedly said the German government doesn’t want to take part in any international race to cut corporate taxes. But the question of how Germany’s notoriously complex tax system can be made more structurally competitive has become more urgent.

The competitiveness of German corporate taxation is a constant issue, Antje Tillmann, finance policy spokeswoman for the conservative parliamentary group, told Handelsblatt.

Especially in the wake of the Brexit vote and in view of Europe’s tax harmonization project “we must regularly examine whether German tax law is a burden to Germany’s standing as an economic location,” she said.

The German Council of Economic Experts, a panel of top economists advising the government, has for years been calling for corporate tax harmonization.

At present it’s cheaper for a company to finance its investment with debt rather than equity capital because it can write off the interest payments against tax.

The economist Lars Feld, a member of the panel, wants companies that invest equity capital to be able to write off notional interest payments to ensure there’s an equal tax treatment of equity capital and debt. That’s been possible in Belgium for a long time.

Ms. Tillmann, the CDU lawmaker, said there was a desire among the conservatives to include a fundamental reform of corporate tax in the election manifesto this year. The CDU’s party leadership is already working on that.

 

Jan Hildebrand is Handelsblatts deputy Berlin bureau chief, Donata Riedel covers financial policy from Berlin. To contact  the authors: hildebrand@handelsblatt.com, riedel@handelsblatt.com

 

 

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