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XIV. CORPORATE-SHAREHOLDER INCOME TAX ISSUES AND PRINCIPLES AS THEY RELATE TO FINANCIAL TAXATION The 2008 Corporate Tax Reform as an example for the use of taxation principles in Germany Jörg Kraeusel, Director, Federal Ministry of Finance, Germany. Outline.

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XIV. CORPORATE-SHAREHOLDER INCOME TAX ISSUES AND PRINCIPLES AS THEY RELATE TO FINANCIAL TAXATIONThe 2008 Corporate Tax Reform as an example for the use of taxation principles in GermanyJörg Kraeusel, Director, Federal Ministry of Finance, Germany

3rd International Tax Dialog (ITD)

outline
Outline
  • Neutrality of Corporate-/Capital-Taxation in Germany
  • Reform of Corporate Taxation in 2008
  • Reform of Capital Income Taxation in 2009
  • Outlook

3rd International Tax Dialog (ITD)

1 neutrality of corporate capital taxation in germany 1
1. Neutrality of Corporate-/Capital-Taxation in Germany (1)

Continuous growth of the average equity ratio (Owners Equity/Total Assets) in Germany:

  • 1997: 16 %,
  • 2007: 25 % (varied between 11 and 35 % for different sectors).

But: compared to other industrialized countries the ratio is still low.

3rd International Tax Dialog (ITD)

1 neutrality of corporate capital taxation in germany 2
1. Neutrality of Corporate-/Capital-Taxation in Germany (2)

Reasons for low average equity ratio in Germany:

  • well developed system of local banks,
  • profit shifting to abroad by using debt finance.

Empirical evidence → Factors that correlate with the equity ratio:

  • size of a firm,
  • profitability of a firm,
  • nominal income tax rates.

3rd International Tax Dialog (ITD)

1 neutrality of corporate capital taxation in germany 3
1. Neutrality of Corporate-/Capital-Taxation in Germany (3)

Deductibility of interest expenses:

  • is an implication of the net principle, but:
  • also an incentive for using debt finance → violation of the principle of financing neutrality,

→ trade off between net principle and financing neutrality,

→ need to develop the net principle further and to adjust it to the requirements of a globalized world.

3rd International Tax Dialog (ITD)

2 reform of corporate taxation in 2008
2. Reform of Corporate Taxation in 2008

Situation until 2007:

  • Germany had the highest statutory tax rate on corporate income among the EU countries,
  • Massive profit shifts to abroad,
  • Relatively low equity ratios of German firms.

3rd International Tax Dialog (ITD)

2 reform of corporate taxation in 2008 1
2. Reform of Corporate Taxation in 2008 (1)

Main goals of the 2008 CIT Reform:

  • Increase of Germany's competitiveness,
  • Giving incentives to tax domestic profits in Germany,
  • Protection of the national tax base,
  • Increase of tax neutrality.

3rd International Tax Dialog (ITD)

2 reform of corporate taxation in 2008 2
2. Reform of Corporate Taxation in 2008 (2)

Increase of Germany's competitiveness :

Statutory tax rate on corporate income reduced from

38.65% (solidarity surcharge incl.) to 29.83%

=

  • CIT rate reduced from 26.38% to 15.83%
  • Trade tax (municipal business tax) rate +

reduced from 16.67% to 14%

3rd International Tax Dialog (ITD)

2 reform of corporate taxation in 2008 3
2. Reform of Corporate Taxation in 2008 (3)

Two measures to protect the German tax base and to reduce the tax favored treatment of debt financing:

  • Interest capping rule (CIT and PIT) and
  • Modified tax base rules (Trade Tax)

→make the extensive use of debt and profit shifting through cross-border debt financing more expensive.

3rd International Tax Dialog (ITD)

2 reform of corporate taxation in 2008 4
2. Reform of Corporate Taxation in 2008 (4)

Interest capping rule (CIT and PIT)

  • Profit-based restraint on the deduction of interest expense
  • If net interest expense less than 1 M€ or escape clause checked then full deductibility of interest expense,
  • Elsedeductibility limited to 30% of EBITDA.

3rd International Tax Dialog (ITD)

2 reform of corporate taxation in 2008 5
2. Reform of Corporate Taxation in 2008 (5)

Modified tax base rules (Trade Tax)

2007: 50% of interest expense from long- term debts added to the tax base,

2008: 25% of all interest expense as well as portions of rents, leasing, license fees...

  • Flat-rate portions: 20% for movable / 65% for immovable assets,
  • Tax allowance of € 100,000 (for expense added to the tax base).

3rd International Tax Dialog (ITD)

2 reform of corporate taxation in 2008 6
2. Reform of Corporate Taxation in 2008 (6)

Temporarily modification of the interest capping rule as a reaction on the economic crisis:

  • increase of the exemption limit from 1 M€ to 3 M€ for the assessment years 2008 and 2009,
  • to help SMEs to keep liquidity during time of crisis.

3rd International Tax Dialog (ITD)

3 reform of capital income taxation in 2009 1
3. Reform of Capital Income Taxation in 2009 (1)

Tax burden on capital income before the reform

  • Capital gains: 0  45% (+ surcharge)
    • tax free outside the holding period (1 y.)
  • Interest income: 0  45% (+ surcharge)
  • Dividend income: 0  22,5% (+ surcharge)
    • half income system

3rd International Tax Dialog (ITD)

3 reform of capital income taxation in 2009 2
3. Reform of Capital Income Taxation in 2009 (2)

Tax burden on capital income – 2009

  • Final withholding tax of 25% (+ surcharge)
    • starting from 2009
    • on capital income of private households
  • Abolition of the half income system
  • Abolition of the holding period (1 y.)

3rd International Tax Dialog (ITD)

3 reform of capital income taxation in 2009 3
3. Reform of Capital Income Taxation in 2009 (3)
  • Consideration of gross income,
  • Allowance of 801 € per person, no additional expenses can be taken into account,
  • Assessment option, when the personal income tax rate is below 25 %

3rd International Tax Dialog (ITD)

4 outlook
4. Outlook
  • Monitoring of the impact of the reforms,
  • Political discussions, if further changes of reform measures will be necessary,
  • Broader evaluation of reform measures will be possible in 2012, when sufficient statistical data will be available.

3rd International Tax Dialog (ITD)

slide17
Thank you for your attention!

3rd International Tax Dialog (ITD)