As President Donald Trump trumpets progress on a massive tax cut for US companies, German firms are increasingly worried the reforms could put the country’s vaunted export economy at a disadvantage.
“The sharp reduction in the corporate tax rate will give the US a massive competitive advantage,” said Christoph Spengel, the corporate tax expert at the Center for European Economic Research in Mannheim. “Tax competition will get a new dimension with Europeans forced to compete among themselves.”
And it’s not only the United States that has the Europeans worried. The European Union Tuesday named 17 countries, including South Korea and the United Arab Emirates, as tax havens and put them on a blacklist facing possible sanctions if they don’t stop allowing individuals and companies to hide assets.
“The German government has to face up to competition and relieve companies of their tax burden.”
German companies currently pay 28.2 percent on average in a combined corporate tax, which includes a 5 percent solidarity surcharge to pay for the reunification of Germany and a trade tax. This is above the global average (see graphic below). But one of the advantages German companies enjoy is a so-called territorial tax system, which only taxes firms – many of which earn the bulk of their revenue through exports – on their earnings in Germany.
Still, business groups called on Germany to respond with its own reforms: “The new federal government has to face up to competition and relieve companies of their tax burden,” said German Federation of Industry CEO Joachim Lang. Eric Schweitzer, president of the German chamber of commerce and industry, also called on the government, when a coalition is finally in place, “to reduce the country’s relatively high tax burden.”
US firms are taxed at 35 percent of their worldwide income instead of the territorial system Germany and most others use. After taking advantage of many loopholes, their “effective” tax rate is around 22 percent. Both the House and Senate agree on switching to a territorial tax system, which would benefit companies with big overseas earnings like Amazon and Starbucks.
It is impossible to know at this stage what will emerge from a joint Congressional committee charged with reconciling the differences between the Senate and House tax bills. The tax bill that passed the Senate contains a corporate tax cut to 20 percent, but it also keeps the alternative minimum corporate tax, which could raise taxes well above the 20 percent level.
To be sure, a lowered coporate tax rate could help German firms operating in the United States. But the bill also contains a couple of provisions that make the Germans nervous. One allows companies to expense capital investments immediately rather than using the elaborate amortization requirements that currently take several years. “I expect that the investment tax write-off will pull investment to the US,” said Mr. Spengel.
Another concern for German and European companies is a proposed 20 percent tax when a US-based company pays a foreign entity of the same company. Germans worry that this will be akin to the Border Adjustment Tax proposed by House Speaker Paul Ryan. For example, VW USA might have to pay the tax on all VW cars it imports from Mexico as well as Germany. Since many US companies now source parts abroad, they are feverishly lobbying to remove the provision.
That provision made the overall tax bill something of a double-edged sword. German firms with significant operations in the US have been cautious about responding publicly. A spokesperson for plastics maker Covestro in the United States said the company was “encouraged” by the tax bill’s passage in the Senate and the reduction in corporate taxes, but added “we won’t fully understand the implications to our U.S. business until after the final bill is signed into law.”
Germany’s former finance minister, Wolfgang Schäuble, had lobbied hard along with his European counterparts to get the transfer tax removed. But interim Finance Minister Peter Altmaier says he is now facing the same issue. “Low taxes are not prohibited as such,” he said Tuesday. “The problem with the US proposals is that there are foreign companies with branches in the US.” He added that the European Commission must determine whether World Trade Organization rules on double taxation are being respected.
In addition to naming 17 countries as tax havens, the EU outlined possible sanctions that could be imposed on countries that don’t take steps to end their tax haven status, but didn’t require the sanctions immediately. “This is only the beginning and if it should turn out that sanctions are necessary, then we will speak openly about this,” said Mr. Altmaier.
The countries named as tax havens are: American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, the Marshall Islands, Mongolia, Namibia, Palau, Panama, St. Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates.
To really have an impact, some politicians suggested a broader European solution. Ralph Brinkhaus, tax policy expert with the Christian Democrats, said Germany and France should work on corporate tax reform together. Joining forces, he said, might also have a better chance of catching the attention of the United States.
Donata Riedel, Jan Hildebrand, Ruth Berschens and Christopher Cermak contributed to this article. It was adapted into English by Charles Wallace, an editor for Handelsblatt Global in New York. To contact the author: C.Wallace@extern.handelsblatt.com.