Germany’s new government signals paradigm shift in international tax policy

by Ninja-Antonia Reggelin

Today, four months after the federal elections, German Chancellor Angela Merkel’s conservatives (CDU/CSU) reached an agreement on a coalition government with the center-left Social Democrats (SPD).

Although these parties have ruled together the past four years, the agreement could signal a paradigm shift for tax policy. Breaking from Germany’s previous positions, the coalition appears willing to go beyond the OECD/G20 base erosion profit shifting (BEPS) plan agreements to ensure “fair taxation,” potentially putting less emphasis on domestic corporate or economic interests for a greater European objective.

In general, the coalition agreement echoes previous corporate tax policy objectives, such as further combating “tax evasion, tax avoidance, unfair tax competition and money laundering efficiently and unbureaucratically on a national, European and international level.”

The agreement aims for “the widest possible implementation of the OECD BEPS commitments and recommendations worldwide.” However, only the implementation of BEPS obligations agreed to under the EU Anti-Tax Avoidance Directive are mentioned, such as timely updating controlled foreign company rules, supplementing the hybrid regulations, and adjusting the interest barrier.

Therein, the coalition agreement places special emphasis on further intensifying Germany’s cooperation with France:

“With France we will take concrete steps towards the realization of a German-French economic area with uniform regulations, especially in the area of corporate and bankruptcy law, and on the approximation of the tax base for corporation tax. Together with France, we will work to harmonize the rules for the completion of the European single market.”

Further on, the agreement states:

“We support a common tax base and minimum corporate tax rates in Europe. Here we want to take initiatives with France to respond to international changes and challenges, not least to the US.”

Commentators already uttered surprise when the minimum corporate tax rate was included by negotiators a couple of weeks ago, hinting at the pressure of the SPD on this point.

A key factor weighing on the policy outlook is the Social Democrats’ success in heading the finance ministry for the upcoming four years, replacing the CDU’s pro-austerity Wolfgang Schäuble. This could be significant because Schäuble has been a forceful opponent of public country-by-country reporting and increased transparency, especially within the EU.

Moreover, the coalition plans to “take action to properly tax the digital economy including rules combating VAT fraud through the online sale of goods and services,” obliging operators to provide information about the traders active on their platforms.

Withholding tax on interest income is to be abolished with the establishment of automatic exchange of information.

While the introduction of a European financial transaction tax is remains supported, it is interesting to note that is not mentioned in the agreement.

Also, while the last coalition had expressly noted that there would be no tax increases, this agreement only notes that the tax burden on citizens is not to be increased. This leaves large room for corporate taxation increases.

Although a tax incentive for research in small and medium-sized companies, which focuses on personnel and contract costs for research and development, is to be introduced in the coming four years, the solidarity surcharge for corporate and high-income earners will not be abolished.

Also, there is no mention of increasing competitiveness of the German tax system. Improvements are to be achieved through digitalization and less bureaucracy.

Finally, the coalition plans “to examine the introduction of tax incentives to mobilize private venture capital beyond what has been done so far. The private sector, the public sector, KfW and European financial partners are to participate in this venture capital financing.”

The coalition agreement still needs the approval of the SPD’s 460,000 members, who will have the final say in a postal vote due in the three to four weeks.

A minor chance remains that these members will vote against the agreement, with especially younger voters campaigning against cooperating again with the conservatives.

Ninja-Antonia Reggelin

Ninja-Antonia Reggelin

Ninja-Antonia Reggelin is based in Berlin, where she is head of tax policy at a business association.

She previously worked at the OECD, contributing to the project that led to the publication of the BEPS Action Plan. Prior to that, she was with PwC Germany, where she focused on international tax structuring.

Ninja holds a Master’s degree (LL.M.) in International Trade Law from Bond University Australia and a Master’s degree (M.A.) in International Relations from the University of Kent Brussels School of International Studies.

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