Better than nothing

Germany mulls corporate tax relief to remain competitive

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That’s your plan? Source: AFP

The government is looking at tax relief for corporations in order to keep Germany competitive as the US and other European countries slash corporate taxes. An initial plan for €20 billion ($23.2 billion) in tax savings, however, was criticized by economists as being too lightweight.

Economics Minister Peter Altmaier, a close ally of Chancellor Angela Merkel, has drawn up a 10-point plan to trim taxes, especially for small and medium-sized companies, but it stops short of actually cutting the corporate tax rate. The plan has not yet been released but was made available to Handelsblatt.

Instead, it is a hodgepodge of minor cuts, from abandoning the so-called solidarity surcharge introduced to fund German reunification, to providing more opportunities to offset the burdensome trade tax charged by local governments.

Germany’s current tax on companies, including the solidarity surcharge and the trade tax, is near 30 percent in most jurisdictions, spiking up to 33 percent in big cities like Munich with a higher trade tax. This compares to 26 percent in the US after the latest cut and plans in France to slash the corporate tax rate to 25 percent.

Many measures obvious and overdue

“It is important for Germany as a business location to lower the corporate tax burden,” Christoph Spengel, a tax expert at the ZEW Center for European Economic Research, told Handelsblatt. “Otherwise we will be the industrial country with the highest tax burden by 2020 at the latest.”

The new 10-point plan includes some measures so obvious it was hard for business to understand why they weren’t implemented sooner. The interest rate on overdue taxes, for instance, is to be moved “closer to market rates” by reducing it to 3 percent from 6 percent — although interest rates have been near zero for a decade. Another is to increase the expenses qualifying for immediate write-off to €1,000 from €800.

“The package is too weak to decisively strengthen Germany’s position in international tax competition,” said Clemens Fuest, head of the Ifo Institute of Economic Research. The main issue, he said, is the taxation of large corporations as opposed to the family-owned firms that can expect a smaller tax bill. For instance, even though the Altmaier plan gives some relief on the tax rate for retained earnings, that should have been greater to discourage shifting earnings abroad, Mr. Fuest said.

Corporate tax rate cut would be stronger signal

“I would have found it more sensible to cut the corporate tax rate,” said ZEW’s Mr. Spengel, who also finds the packet of measures too small. “That sends a stronger signal.”

Doing away with the solidarity surcharge provides only minimal relief to companies, economists said. Finance Minister Olaf Scholz estimates that €10 billion are still be raised by the “soli” through 2020, but companies are due to pay only €2 billion at most, said Mr. Spengel.

Nonetheless, some relief is better than none. “The packet contains sensible measures to simplify taxes and relieve, above all, small and medium-sized companies,” acknowledged Mr. Fuest.

Plan must still get through cabinet

The Association of Family Entrepreneurs welcomed the plan, noting that the elimination of the solidarity surcharge does provide significant relief to unincorporated family firms and partnerships. Reinhold von Eben-Worlée, the association’s president, expressed hope that “the economics minister will show some backbone and get it through the cabinet.”

Therein lies the rub. Finance Minister Scholz, who is primarily responsible for tax policy, is less enthusiastic about tax relief than Merkel’s confidant Mr. Altmaier. In an interview Thursday, Mr. Scholz emphasized that everything must be viewed for its impact on government debt. “Cutting taxes and simultaneously spending more on defense or welfare and getting that money from borrowing — that doesn’t work any longer,” he said.

Since the government is currently running a surplus, however, Mr. Altmaier evidently is ready to take on Mr. Scholz and get at least some tax relief for companies.

Donata Riedel covers financial policy for Handelsblatt. Thomas Sigmund is Berlin bureau chief and director of political coverage. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: riedel@handelsblatt.com and sigmund@handelsblatt.com

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