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Germany's parliament will decide on reform this summer |
It is not often that a corporate tax cut causes outrage from business. But Germany's proposal for a rate reduction of almost nine percentage points has attracted as much criticism as praise.
The government plans to cut the headline rate from an average of 38.7% to under 30% for 2008 but companies have condemned some of the suggestions for financing the cut. In particular, business is furious about plans to limit the tax deductibility of interest, believing this will lead to a fall in investment in Germany.
Firms had also hoped to see the system, which is considered one of the most complex in the world, simplified.
Following the release of the second draft of the reform plans on March 13, the German finance ministry responded to these complaints and gave an insight into how it expects the reform to look when it is introduced in 2008.
International Tax Review (ITR): Why are the changes to tax deductibility of interest in the second draft despite strong criticism from business?
Finance ministry (FM): Because these are an important element of the reform. We are looking to have profits generated in Germany taxed in Germany. And we want to prevent a situation where losses are transferred to Germany simply for the purposes of reducing the tax bill. Incidentally, there have always been restrictions on the deductibility of debt interest in Germany. We have reformed the system and made it more attractive for many companies, since there is no longer any discrimination with respect to long-term debt (long-term debt is already not tax deductible for corporate tax payments paid to the municipalities, but is tax deductible for payments to central government).
ITR: Why has the finance ministry not made more fundamental changes to the tax code to simplify the system?
FM: Germany's tax legislation is already very simple for the vast majority of people. This is certainly not the case for companies. Nevertheless, simple tax legislation does not necessarily mean successful tax legislation. Look at the situation beyond our borders. The US tax regime is at least as complicated as the German one. But we now have, once again, an attractive and competitive tax system, and this is what matters.
ITR: Why has the finance ministry not reformed municipal taxes so that the tax base is the same as it as at the federal level?
FM: This is a misunderstanding. The tax burden companies face consists of corporation tax and local tax. We have now reduced this burden by almost 25%, from 38.7% to 29.8%. It was important for us not to weaken the position of the municipalities. And the dual approach fosters domestic tax competition. The companies in Germany need the municipalities, especially in light of their importance in terms of providing business for small and medium-sized companies.
ITR: What does the finance ministry think the economic effects of the reform will be?
FM: The reform of business taxation will enhance the forces for growth in Germany. It represents an investment in our country, and one which is well worth making. Germany once again has a competitive tax system. Coupled with our other strengths, the reform serves to make Germany a more attractive place to locate, from the perspective of German and international companies.
ITR: Does the finance ministry expect any significant changes to be made to the reform plans from now until they are passed?
FM: We assume that there may be a need for minor adjustments here or there. However, the major elements of the reform are so well-balanced that they will not need to be changed.
ITR: What happens next for reform?
FM: The Cabinet has made its decision. Now it's up to both our houses of parliament, the Bundestag and the Bundesrat, to consider the issue. We are confident that the reform will be promulgated in our law gazette before the summer. This will give companies half a year in which to adjust to the changes.
