Companies Shift Income To Avoid High-Tax Germany

by Ulrika Lomas, Tax-News.com, Brussels

21 August 2006

The German Finance Ministry has confirmed a report in the national press that companies are escaping EUR65 billion (US$82 billion) in German taxes annually by shifting profits abroad.

The claims, published by the daily newspaper Die Welt, are based on an internal Finance Ministry report which studied the discrepancy between the overall economic balance sheet and revenues from corporate tax. They have been confirmed by a spokesman for the Ministry.

With one of the highest combined corporate tax rates in the developed world, it is perhaps no surprise that companies operating in Europe's biggest economy are keen to cut their tax bills by shifting income to lower tax jurisdictions. Presently, large companies pay almost 40% of their income in corporate tax, based on a 25% federal corporate tax and regional corporate tax of about 13%.

The grand coalition of Chancellor Angela Merkel is seeking to remove the incentive to dodge German taxes and attract more investment in the country's flagging economy by slashing the combined corporate tax rate to less than 30%, through a cut in the headline corporate tax rate from 25% to 12.5% from 2008.

However, the tax cut, while welcome, may do little to lessen the overall burden on German companies as the government seeks to claw back lost revenues through other measures, such as a controversial proposal to tax interest payments as part of the corporate tax plans.

This proposal is designed to stop large companies based in Germany from drawing loans from subsidiaries in low-tax countries and booking interest payments as operating costs in order to minimise their tax bills, but it has reportedly split the German cabinet.

Last month, Economics Minister, Michael Glos, openly criticised the Finance Ministry's plan to tax interest, saying it could defeat the object of the corporate tax measures by leading to capital flight, particularly among private equity investors.

"I do not like the fact that completely normal business expenditures like interest payments suddenly should be treated like profits," Mr Glos told the Financial Times in an interview published last month.

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