German Tax Reform: A Closer Look at Industry Feedback and Calls for Enhanced Incentives

Germany, as one of Europe's economic powerhouses, has faced its share of economic challenges in recent years. These challenges, compounded by the global economic downturn and the ongoing COVID-19 pandemic, have prompted the German government to take decisive steps to stimulate economic growth and enhance the country's competitiveness. Central to this effort is a tax reform plan aimed at revitalizing the economy. While some aspects of the plan have garnered support, particularly from the government, it has also faced scrutiny and calls for further incentives, notably from the country's largest industry representative association, BDI.

BDI, which represents a wide range of German industries, has expressed its views on the tax reform plan introduced by the government. While acknowledging certain positive aspects, BDI believes that there is room for improvement and that more robust incentives are necessary to foster increased investment in the country's economy.

At the core of the German government's tax reform plan lies the Growth Opportunities Act, known as "Gesetz zur Stärkung des Wirtschaftswachstums und der Zukunftsinvestitionen" in German. The government contends that this act will inject €7 billion ($7.47 billion) in relief into the economy between now and 2028. The act includes a series of measures designed to stimulate economic growth, such as extending the loss carryback period to three years, relaxing minimum taxation rules, introducing declining amortization rates, and reinstating immediate expensing for certain movable assets.

On the surface, these measures appear promising and aligned with the government's goal of reviving the economy. However, BDI has raised several key points of concern, asserting that the reform falls short of what is needed to effectively bolster the German economy. Nadja Fochmann, the BDI's spokesperson on taxes and financial policy, underscores that while the legislation represents a positive step, it is "too timid, restrictive, and time-limited in many respects." Among the BDI's primary concerns are the tightening measures related to interest deduction and reporting requirements, which it believes will create additional bureaucracy for businesses.

As Germany grapples with economic challenges, the government is actively seeking ways to stimulate investment, foster growth, and enhance the country's competitiveness. The tax reform plan, particularly the Growth Opportunities Act, has been introduced as a key instrument in achieving these objectives. However, the BDI's feedback raises important questions about the effectiveness of the proposed measures and calls for further considerations.

The BDI's Perspective

BDI acknowledges that there are positive elements within the Growth Opportunities Act, and it is not entirely critical of the government's efforts. The association recognizes that the climate investment grant, aimed at encouraging companies to invest in projects promoting climate neutrality, is a step in the right direction. Additionally, the reintroduction of declining depreciation is seen as beneficial for companies, as it is expected to improve liquidity.

However, the BDI contends that improvements in loss carryforwards have been limited and do not align with industry expectations. In this regard, the association emphasizes that more robust measures are necessary to support businesses effectively.

Nadja Fochmann, the BDI's spokesperson on taxes and financial policy, underscores the organization's stance, stating, "Nevertheless, it is too timid, restrictive, and time-limited in many respects. Particularly problematic are the numerous tightening measures regarding interest deduction and the reporting requirement for domestic tax arrangements, which create additional bureaucracy for businesses."

Recommendations for Enhanced Incentives

BDI's feedback on the tax reform plan goes beyond highlighting areas of concern; it also includes specific recommendations for improving the effectiveness of the government's efforts to stimulate economic growth and investment. The association believes that additional measures are needed to create a more conducive environment for businesses and investors. Some of the key recommendations put forward by BDI include:

1. Reducing Electricity Prices

One of the primary recommendations made by BDI is the reduction of electricity prices for all companies. The association advocates for achieving this reduction through a comprehensive lowering of the electricity tax. By reducing operational costs related to electricity, companies could become more competitive and better positioned for growth.

Fochmann explains the rationale behind this recommendation, stating, "First and foremost, electricity prices need to be reduced for all companies. The best way to achieve this is through a comprehensive reduction of the electricity tax."

2. Permanent Implementation of Certain Tax Provisions

BDI asserts that some tax provisions introduced in the Growth Opportunities Act should be made permanent. This recommendation is particularly relevant to measures such as the investment grant and declining depreciation. By ensuring the permanency of these provisions, the government can provide businesses with a stable and predictable tax environment, fostering long-term investment.

"In addition, many measures such as the investment grant or declining depreciation should be permanently implemented," notes Fochmann.

3. Unlimited Loss Carryforwards

The association also calls for the allowance of unlimited loss carryforwards, offering companies greater flexibility in offsetting losses against future profits. By removing limitations on loss carryforwards, businesses can navigate economic challenges more effectively, ultimately contributing to the country's economic recovery.

"Unlimited loss carryforwards should be allowed," emphasizes Fochmann.

4. Reduction of Corporate Taxes

Perhaps one of the most significant recommendations put forward by BDI is the reduction of corporate taxes to an internationally standardized level, targeting at least 25%. Currently, Germany's corporate tax rate stands at 15%. However, when accounting for state and local taxes, the effective rate can exceed 30%, varying based on a company's location.

Fochmann highlights the importance of this recommendation, stating, "Above all, corporate taxes should be reduced to an internationally standardized level, at least to 25%."

Parliamentary Scrutiny and the Future of German Tax Policy

The German government's tax reform plan, including the Growth Opportunities Act, is now under parliamentary scrutiny. Both the upper and lower houses of the German parliament, the Bundestag, must vote in favor of the draft bill for it to become law. While the BDI anticipates that the legislation may pass given the governing coalition's majority, it also acknowledges that changes could occur during the legislative process.

The BDI's feedback on the tax reform plan underscores the importance of industry input in shaping effective economic policies. The association's recommendations are rooted in the belief that more robust incentives and a favorable tax environment can significantly impact businesses' ability to thrive and contribute to economic recovery.

In addition to the Growth Opportunities Act, the German parliament will also consider other tax-related bills in the coming months. Policymakers will evaluate a draft bill related to the implementation of pillar two, addressing international tax challenges. Another draft bill aims to reform real estate transfer tax rules. This period promises to be a critical juncture for German tax policy, as policymakers navigate calls for greater incentives and clarity in the country's tax framework.

As Germany strives to overcome economic challenges and position itself for future growth, the ongoing dialogue between industry representatives like BDI and policymakers remains essential. The outcome of these discussions will not only impact the country's tax landscape but also shape its economic trajectory in the post-pandemic era.

By fLEXI tEAM