Taxation dependent on location: Germany needs modern tax legislation

There must be an end to the years of reform standstill in corporate taxation, and existing rigid structures broken down. While initial steps have been taken with the Corporate Income Tax Modernization Act, further modernization of the corporate tax law is urgently needed.

As an export-oriented sector (export ratio of 73% in 2020), the German automotive industry is particularly exposed to international competition and is also undergoing an extremely demanding transformation process. Coping with the consequences of the coronavirus crisis also poses particular challenges for companies in the automotive industry, especially in the SME sector. A tax framework that is internationally competitive and provides legal and planning certainty is an essential prerequisite for companies in Germany deciding on future investment and where to locate.

Nowadays, most of German automobile manufacturers’ turnover is made abroad, but the vast majority of taxes are still paid in Germany:

• German automobile manufacturers pay around 60% of their worldwide tax liability to the German treasury, even though only about one third of global sales are generated at home
• Most of their employees are in Germany (around 2/3 of staff), along with the associated payments of wage tax as well as the high social security contributions.

To ensure that Germany remains a successful industrial location with high employment in the future, the VDA advocates a tax policy that promotes growth and is internationally competitive.

What held true before the crisis is all the more true now, if the crisis is to be overcome: A modern tax system in Germany is an essential instrument for returning the economy to a sustainable growth path. Germany has a lot of catching up to do here. Favorable tax conditions ultimately benefit everyone, thanks to the positive effects on overall economic development: More investment, more employment, more innovation, and thus (once again) higher tax revenues overall.    

Tax policy has sat back and watched as Germany has once again become a high tax rate country. German parent companies, which make up a large part of the automotive industry, face a large number of structural tax obstacles. For this reason, to overcome the consequences of the crisis as well as to ensure sustainable growth following the crisis, tax policies must focus on the following measures in particular:

• Remove administrative burdens and avoid additional compliance demands 

Existing tax regulations are crushing some companies with administrative burdens. These include, for example, the declaration requirements in the context of the taxation of added income or the obligation to report cross-border tax arrangements. It is therefore essential to avoid increasing the tax compliance burden even further.

• Abolish excessive taxation on inbound taxes

Adherence to the low tax threshold of 25% means that almost all foreign countries are to be classified as low-tax areas. Together with the mandatory declaration according to officially prescribed forms, this regulation means an entirely excessive bureaucratic burden for the companies as well as the tax authorities.

    This puts German parent companies at a disadvantage compared to their foreign competitors. To strengthen our economic location, facilitate compliance, and, in particular, avoid excessive declaration obligations, lowering the minimum tax threshold to at least 15%, or compensating for this excessive taxation by crediting it against the trade tax, is long overdue.

• Strengthen legal certainty by accelerating procedures

Tax audits in Germany still take too long. They cause unnecessary work and expense for companies and the tax authorities alike, and tie up considerable financial and personnel resources. 
It is thus high time to clear the way for timely, i.e., faster and efficient, tax audits in Germany, too. This includes driving digitization forward and the use of innovative tools and programs on the part of the tax authorities.

• A targeted promotion of German innovation in R&D 

Continued future investment in research and development must be strengthened during the crisis. The German automotive industry is well positioned in this field: Making up 37% of all R&D investments (2019) in the German economy (excluding the state and academia), the automotive industry spends almost as much on R&D as the electronics, mechanical engineering, pharmaceuticals, and chemicals sectors combined.

Today's R&D expenditures are the innovations of tomorrow. We cannot let Germany fall behind here.

• Improve possibilities for depreciation

Depreciation terms are a key factor in stimulating investment in crisis situations, raising demand, and ultimately reviving the economy as a whole. The time limit on degressive depreciation needs to be suspended, and more depreciation options offered for investments in climate-protecting technologies and processes.

• Further flexibility in offsetting losses 

Legislators acted quickly to improve possibilities for offsetting losses in the crisis. However, the measures taken are not sufficient to relieve industrial SMEs in coping with the results of the crisis. In particular, the return period and the limit to the amount of losses to be offset need to be raised further.

• Better crediting of source taxes 

    As a result of the current economic crisis, profits are declining, in some cases drastically, dramatically exacerbating the existing problem of the credit surplus. It is therefore essential to adapt the regulation on crediting foreign source taxes (Section 34c EStG) and to provide for a carry-forward option.

• Adapt tax law to low-interest-rate policies

Interest rates remain permanently low. For companies, this significantly affects interest on federal tax claims and the discounting of pension provisions as part of company pension plans. Alongside the interest-free deferral of tax payments that has already been introduced, there is a long-overdue need to adapt the statutory interest rate under sections 233a and 238 of the German Tax Code (AO) to the altered conditions.
A reduction in the actuarial interest rate (Section 6a of the EStG) would be another good way to strengthen equity.