Business Likely To Bear Brunt Of German Trade Tax Changes

by Ulrika Lomas, Tax-News.com, Brussels

07 July 2003

German Finance Minister Hans Eichel is expected to announce his own package of measures to reform the country's trade tax system, after a commission of federal and state representatives, industry leaders, unions and municipalities failed to come up with a consensus after more than a year of discussions on the issue.

The trade tax is levied at local level, and is taken from company profits. The plan Eichel is expected to present next month is thought to be based on proposals from the municipalities - which will benefit from the tax - that will effectively increase the amount the private sector will contribute by broadening the scope of the tax to include professionals and other self-employed groups, and eliminating certain deductions.

Needless to say, business groups are opposed to any plan that increases the tax burden on private firms, and have tabled a counter-proposal which will empower local governments to place a surcharge on individual income tax in addition to corporate tax. However, business lobbyists appear resigned to their fate. "We admit defeat, there's no way around it," Michael Rogowski, head of business association BDI, told the Frankfurter Allgemeine Zeitung following the conclusion of the trade tax commission talks on Thursday. He added: "Now a fossil will be reanimated."

Naturally, the provincial cities will be happy with this deal, as it will make up for the loss of revenue from the federal government which became inevitable when Chancellor Schroeder announced the acceleration of income tax cuts at a cabinet meeting last week.

Should Eichel accept the municipalities' plan, the tax base will be broadened further by including interest paid on debt as well as lump sum payments for leases and rents. Previously businesses could deduct these from their earnings, thus decreasing their tax bills.

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