Schroder's Tax Reform Package May Fail In Bundesrat

Ulrika Lomas, Tax-news.com, Berlin

13 July 2000

The future of the German Chancellor's tax reform package hangs in the balance today as last-minute negotiations take place with the four federal States whose support is crucial to a Government majority in a vote tomorrow in the Bundesrat, Germany's upper house of parliament.

The four States in question are ruled by the Gerhard Schroder's SPD (Social Democrat) party in alliance with opposition parties, and these States often abstain in the Bundesrat on controversial votes. If Schroder cannot convince at least one of them to vote for the tax package, he will probably lose the vote, having firm control of only about 38% of Bundesrat votes.

The result is too close to call at the moment, but the odds are probably tilted against a victory for the Chancellor. If the vote is lost, then the reform package, or what is left of it, definitely slides into the autumn, and there may be a new set of conciliation talks between the parties during the summer recess, to try to assemble a consensus away from the hothouse atmosphere of the sitting parliament.

The headline measure of the reform package was to have been the removal of capital gains tax on corporate share transactions, which would have set in train a boom in merger and acquisition activity as firms raced to dismantle ossified interlocking corporate structures in order to re-deploy assets more productively in the new economy. Political opposition has already forced the Government to water down its proposals, and a reduction of the capital gains tax to perhapas 25% is now more likely than outright abolition - that's if there is a tax package at all.

German politics is very consensual, and it is therefore significant that at yesterday's annual general meeting of Allianz, Europe's largest insurer and a powerful voice inside Germany, Chief Executive Henning Schulte-Noelle said: "In my personal opinion, there is a reasonable proposal on the table; any delay will cause considerable damage to the German economy."

In his remarks, Schulte-Noelle said that the reforms could turn Germany into a very attractive location for holding companies: "In view of further cross-border mergers that can be expected, especially within Europe, such an advantage cannot be valued highly enough." He was probably recalling the takeover of Mannesman by Vodaphone, which notoriously resulted in plans to move the headquarters of Mannesman to Switzerland or Ireland for tax reasons.

Allianz itself has a string of major shareholdings in other top German companies, including 25% in Munich Re and 22% of Dresdner Bank. The company said that it was proceeding with its plan to dispose of parts of its existing holdings, regardless of events in parliament, but that if the proposed package had been in place in 1999, it would have paid 300m euros less in tax, representing 15% of its pretax profits.

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