German Tax Cut Hopes Receding Fast

by Ulrika Lomas, Tax-News.com, Brussels

27 June 2005

Hopes that a bill cutting the rate of Germany's corporate tax can be put to a parliamentary vote before the summer recess are fading fast after the government and opposition parties failed to reach an agreement last week over plans to fund the tax cut.

The tax package, worth around EUR5.3 billion, ($6.4 billion) seeks to cut the basic rate of corporate tax to 19% from 25% and would have reduced the average tax burden on business to 32.7% from 38.7% - turning Germany from one of the least attractive business environments in western Europe in taxation terms to one of the most attractive.

While the opposition parties agree that the tax cuts are desperately needed to help revive Germany's stagnating economy, by the same token, the government badly needs revenues to reduce its growing budget deficit, which is likely to breach the EU maximum again in 2005.

Consequently, the conservative Christian Democratic Union (CDU) has objected to the ruling Social Democrat's latest plan to offset the lost revenues, which would entail a hike in dividend tax to 63% from 50%, because at EUR4.4 billion, the counter-financing measures do not cover the cost of the tax cuts. The government argues however, that the resulting boost in business activity will mean the remainder of the cost will be funded through higher tax receipts, a notion which many opposition politicians reject.

Crucially, the lack of parliamentary time means that it is increasingly unlikely the government will be able to force through the tax cuts before a general election in September, so that the tax debate may have to be revisited by an entirely new government in the latter part of the year.

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