Handelsblatt Exclusive

Germany's Voodoo Pension Tax

European Finance Ministers Attend Eurogroup Meeting
Companies are paying too much due to dated calculations.
  • Why it matters

    Why it matters

    A study argues German companies are paying more in tax than they should, which jeopardizes jobs and their financial stability.

  • Facts

    Facts

    • A study by the Cologne Institute for Economic Research found that companies paid €20 billion to €25 billion more in pension taxes than they should have between 2008 and 2014.
    • This is because the German Finance Ministry calculates tax liability on the assumption that companies are earning 6 percent interest on their pension reserves.
    • Market interest rates are lower due to the European Central Bank’s low-interest policy.
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    Audio

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German companies are paying more than they should in taxes on employee pension obligations, according to a study obtained exclusively by Handelsblatt.

The Cologne Institute for Economic Research found that companies paid between €20 billion and €25 billion ($22 billion and $27 billion) more in taxes than they should have between 2008 and 2014.

Companies are paying taxes on fictitious earnings

This is due to a discrepancy between market interest rates and the fixed rate used by the German Finance Ministry to calculate corporate tax obligations on pension reserves.

Though market rates are at historic lows due to the European Central Bank’s zero-interest policy, Germany’s Finance Ministry still assumes that companies earn 6 percent on their pension reserves.

Low market rates are forcing companies to put greater and greater sums of money aside to meet their pension obligations to employees.

Between 2008 and 2014, companies had to increase their pension reserves from €22,000 to €37,000 per employee as yields fell due to declining interest rates.

 

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But the Finance Ministry continues to assess taxes based on the higher assumed interest rate of 6 percent, a figure that it hasn’t changed in 35 years.

“The result is that companies are paying taxes on fictitious earnings,” wrote Tobias Hentze, the author of the Cologne Institute for Economic Research’s study.

The financial burden jeopardizes jobs and in a worst-case scenario companies could default.

“Companies don’t have enough liquidity because they are paying too much to the tax office,” Mr. Hentze said. “They are postponing investments or foregoing them altogether.”

The study calls on the Finance Ministry to lower the 6-percent interest rate used to calculate companies’ tax obligations for pensions. Lowering the rate by just 1 percent would lead to one-time savings of €12 billion for companies. This could stimulate investments, the study said, which would also benefit the government.

Responding to protest from the business community, the Finance Ministry is already considering a small and gradual drop in the 6-percent rate. The ministry will makes its decision in the fall.

The study also called for the market rate, which companies use to determine how much they should set aside for pension obligations, to be based on the development of rates over the past 15 to 20 years. This would slow the market rate’s decline because its calculation would include more data from before the current era of low interest rates.

While German companies are being hit hard by the European Central Bank’s low-interest policy, the Finance Ministry is profiting handsomely.

In 2009, Finance Minister Wolfgang Schäuble calculated €38 billion in interest payments into the federal budget. For 2017, the figure has dropped just €20.1 billion.

At the same time, the ministry is raking in additional revenue from the fixed rate it uses to assess taxes on corporate pension reserves.

Citizens who owe the ministry money are also charged 0.5 percent in monthly interest or 6 percent for the year.

“Citizens are hardly receiving any interest and the state helps itself to a 6-percent rate,” said Thomas Schäfer, Hesse’s state finance minister.

 

Peter Thelen writes about social security systems, the job market and labor topics. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. To contact the authors: thelen@handelsblatt.com and hildebrand@handelsblatt.com.

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