Germany Plans VAT Reform

by Ulrika Lomas, Tax-News.com, Brussels

02 July 2010

Finally stepping up the tempo as regards plans to carry out a (long overdue) reform of the country’s value-added tax (VAT) system, Germany’s coalition government has united on plans to set up a commission in September to examine the bewildering array of exemptions currently contained in the law and to put forward proposals for change.

Eager to bring to an end the chaotic existing system, the government is also determined to use the opportunity to resolve the controversial issue of the VAT break accorded to its hotel industry, as reform could well lead to the tax perk being swiftly removed.

Describing the tax perk currently benefiting hoteliers as “a mistake”, the Free Democratic Party’s General Secretary Christian Lindner emphasized that, in his opinion, the decision to reduce the rate should have been taken after the big reform and not before.

Pressure has mounted on the government recently to act, as an increasing number of politicians have called for changes to VAT, and even the Federal Court of Auditors has now called for an urgent review of the numerous tax breaks available in Germany, currently costing the state an estimated EUR25bn.

In a bid to improve the competitiveness of the German hotel industry, and in an endeavor to boost tourism, the government agreed to lower the VAT rate accorded to hoteliers from 19% to 7% from January 1, 2010, as part of the country’s growth acceleration law. The decision has proven highly controversial from the start.

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