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Germany’s two major parties have different visions for Germany’s domestic tax policy: Chancellor Angela Merkel’s conservative Christian Democrats (CDU) and their Bavarian sister party, the Christian Social Union, want no tax hikes. The center-left Social Democrats do.
But the two parties who are heading into Sept. 24 elections agree when it comes to Germany’s role in combating VAT non-compliance vis-a-vis international cooperation. Attorneys, tax advisers and lawmakers told Bloomberg BNA that the parties likely will reunite in a repeat of the so-called Grand Coalition that has governed Germany for eight of the past 12 years because neither is predicted to receive an outright majority.
While some are disappointed with the lack of innovation at the domestic level that could potentially expedite an international crackdown on shady e-commerce practices, others say that staying the course during the next legislative period and working transnationally to combat tax evasion is a radical move in and of itself.
“The OECD’s base erosion and profit sharing [BEPS] strategies are probably the most significant change in international taxation in 20 or 30 years,” Thomas Busching, a tax adviser and partner with Squire Patton Boggs law firm in Frankfurt, told Bloomberg BNA Sept. 19.
“If Germany follows through on this, you could say it’s more of the same,” he added. “But if everyone follows through with BEPS, that would be a pretty dramatic change in the international tax landscape.”
Germany is currently experiencing a historic period of economic growth. Unemployment in Germany was 5.7 percent as of August 2017, far lower than the double-digits seen in the previous decade, according to Germany’s Federal Labor Office.
Also, in 2016 alone, Germany had a surplus of 6.2 billion euros ($7.4 billion), according to an August 2017 report from Germany’s Finance Ministry.
Germany’s Christian Democrats are likely to be reelected Sept. 24 to lead the government, according to the latest polls: They lead the Social Democrats by 13 points, according to German polling institute Forschungsgruppe-Wahlen.
At the same time, it’s likely the Social Democrats will come in second place, according to the same polls. However, a Grand Coalition is not a given: It is possible that the CDU/CSU enters into a coalition with the Free Democrats and the Greens in a grouping known locally as the Jamaica coalition. While widely discussed—also in prior elections—such a coalition has never happened before in Germany.
Regardless, should the CDU remain in control, one-third of the nation’s surplus would be given back to German taxpayers, said Antje Tillmann, a member of the lower house of the German parliament, the Bundestag, who speaks for the party on fiscal policy. The remaining two-thirds would be used to pay off national debt and bolster the nation’s research and educational institutions, she added.
Germany won’t see tax hikes under the Christian Democrats, she said. The high-income earner tax bracket, however, would be heightened to 60,000 euros ($71,997) per year, up from 54,000 euros. That would provide a tax break for medium-earners that could be reinvested into private enterprises.
“We said originally in our 2013 manifesto that we wouldn’t raise taxes and we’re holding true to that this year,” said Tillmann. “It’s absolutely absurd to say that we’ll tax citizens more when we have a budget surplus.”
Lothar Binding, a lawmaker and the Social Democrats’ spokesman for fiscal policy in the Bundestag, says it’s time to take action.
“The CDU has proven time and again that they’re not doing anything about tax policy,” Binding told Bloomberg BNA Sept. 15. “Infrastructure and other structural policies are being prevented by their fiscal measures under the dogma of not raising taxes.”
For the Social Democrats, he says, large-scale investment comes on the heels of bolstering living standards for Germany’s middle- and low-earners. The party plans to increase the floor for the high-income earner tax bracket to 60,000 euros net income per year as well, to be taxed at 42 percent, the current percentage ceiling for income tax. They would then create a new tax bracket for the nation’s highest earners to 45 percent for those making up to 76,200 euros or more per year.
That, combined with an array of subsidies for families, could give middle- and low-income consumers more spending and investment power, attorneys told Bloomberg BNA.
“That’s not money that goes into that bank,” said Busching. “That’s money that goes immediately into consumption.”
Despite differences in domestic tax philosophy, both of Germany’s major political parties believe the best way to stanch losses from VAT revenue in e-commerce and halt profit shifting is to foster international partnerships.
For the Christian Democrats, that primarily means embracing the Organization for Economic Cooperation and Development’s base erosion and profit-shifting strategies (BEPS).
Created by the Group of 20 in 2012, BEPS seeks to employ tax planning strategies to minimize multinational companies’ ability to shift profits and take advantage of low-rate domestic tax environments, according to the OECD. Global internet giants like Google and Apple have been heavily criticized in recent years for employing such methods.
“We want to use BEPS to plug the tax loopholes that already exist. It’s a hybrid design that should be implemented transnationally,” said Tillmann, referring to a combination of international and domestic legislation. “We began this task in the last legislative period and we’ll continue down this path.”
Germany’s Parliament passed June 2, for example, a Law Against Harmful Tax Practices Related to Rights Issues, which closes loopholes for royalty payments on patent boxes, part of the nation’s implementation of just one facet of the BEPS strategy.
Tillmann didn’t suggest any concrete measures that would continue the work of transposing the BEPS strategy at the domestic level after the elections, however. The Social Democrats’ Binding says that’s proof that not enough has been done to fully embrace the OECD’s strategies.
“The CDU will tell you that they also want to intensely pursue BEPS,” he said. “But the question is always how concretely do they mean it.”
But the Social Democrats also don’t offer any concrete, domestic plans to progress BEPS after the elections, or to close e-commerce loopholes that contribute to massive losses in VAT collections, attorneys and tax advisers told Bloomberg BNA.
“As far as I can see from the CDU and SPD, there are no huge differences between these parties regarding VAT fraud,” Roger Gothmann, co-founder and director of Taxdoo, a Hamburg-based firm that offers automated sales-tax services for online retailers, told Bloomberg BNA Sept. 19.
European Union member states lose an estimated 5 billion euros per annum ($5.95 billion) in uncollected VAT on online sales, the European Commission said in December 2016. Gothmann said he’s disappointed that more innovative initiatives to slash losses and ascribe liability to e-commerce giants haven’t been embraced.
A recommendation by Germany’s Green Party May 31 ( 18/12556) demanding the government force VAT compliance on foreign sellers was denied by the governing coalition of Christian and Social Democrats June 28 in the Bundestag’s Finance Committee. The Greens and other parties in the Bundestag, such as Die Linke (the Left), don’t—and likely won’t—have enough seats in the lower house to force through legislation unless they find support among the SPD or CDU.
“I don’t see any clear measures to remedy this and I don’t predict we’ll get any after the elections,” Gothmann said.
But Busching believes that a top-down approach is the most effective way to halt international tax avoidance, a policy embraced by the Christian Democrat-led government over the past 12 years.
“The current government realizes that this is not a problem that can be simply solved on the domestic level,” he said. “Simply saying that they didn’t do enough is not correct because it’s pretty clear that it’s an international project and an international problem.”
Going forward, Bushing says that the incoming administration should stick to this course. While it might not seem as dynamic as passing a slew of domestic laws, playing the long game might be more advantageous.
“I’d put my money on international conventions and not on one-sided domestic measures to get things done.”
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