Deutsche Post May Lose VAT Break

by Ulrika Lomas, Tax-News.com, Brussels

19 September 2008

Deutsche Post, Germany's largest postal delivery service, may lose a key competitive advantage that it has over its smaller rivals as a result of a draft law under consideration by the Finance Ministry.

Under current rules, Deutsche Post, which delivers the bulk of Germany's letters and parcels, enjoys an exemption from Germany's 19% VAT on certain basic items which subsidizes the cost of delivering mail to remote areas of Germany. However, the company, which will lose its monopoly under a reorganisation of Germany's postal sector in 2009, could lose this tax break from 2010 as the government attempts to level the playing field in this market.

It is understood that the draft law, put before the cabinet earlier this week, calls for VAT to be added to bulk deliveries and packages over a certain weight, although letters and smaller parcels will remain exempt.

The VAT exemption has long been a bone of contention since the sector was opened up to more competition, and smaller delivery and courier services, such as Hermes, have demanded that the government afford them similar VAT treatment to Deutsche Post.

Back in January, Hermes threatened to take the government to court if the company's application for a similar VAT exemption was turned down, arguing that it bears a proportionately similar cost burden as Deutsche Post when providing services in remote and rural areas.

The lifting of Deutsche Post's VAT exemption could also provide some useful additional revenues for the government at a time when its budget is again under pressure, and it has been estimated that the current rules deprive the state of about EUR500mn annually.

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