After the election to the Bundestag (the lower house of the German parliament) in September 2013, the conservatives (CDU) and the social democrats (SPD) agreed to form a so-called “Grand Coalition.” On November 27, 2013 the coalition agreement was published. The coalition agreement itself qualifies as an unenforceable mutual political promise of the parties to implement certain measures during the next term of four years. However, the provisions of the coalition agreement do not exclude the possibility that further items are added to the agenda. Despite the fact that the coalition agreement does not create a legal obligation to implement the intended items in their entirety, it gives an indication of the fiscal plans of the coalition parties.
The coalition parties’ primary intention is to further develop the German tax law and to adjust it to changed legal and economic conditions. However, it is not envisioned to reform the tax law completely. A number of fiscal items which were discussed prior to the election have not been incorporated, such as the introduction of a wealth tax, an increase in the tax rates, modifications of the interest barrier rules or of the loss utilization rules.
The tax aspects of the coalition agreement include tax simplification and certain measures in relation to tax enforcement. Most significantly, the coalition agreement explicitly states that the coalition intends to combat tax evasion and tax avoidance.
Containment of Tax Evasion and Tax Avoidance
The coalition aims to restrict cross-border profit shifting of multi-national groups and to resolve tax competition between countries which encourages taxpayers to engage in profit shifting measures. For that purpose, the coalition plans to establish “country-by-country-reporting” between tax administrations, where tax relevant information is shared between German and non-German tax authorities. Such information shall include profits, losses and paid taxes, and relate to banking business and commodity trade.
In addition, the coalition declares its full support for the Base Erosion and Profit Shifting (“BEPS”) initiative of the Organization for Economic Co-operation and Development (the “OECD”). The BEPS initiative is projected by the OECD to be completed by 2015, however, the coalition expresses its intention to implement German tax legislation measures in anticipation of international regulations. Such unilateral legislative measures could consist of the following:
- limiting the deduction of business expenses for license expenditures and for
- payments to “letterbox” companies, i.e., companies without sufficient business
- activity and substance;
- establishing a public register for all business parties which are involved in trust structures along the lines of the German Prevention of Money Laundering Act;
- ensuring that a deduction of license expenses for German tax purposes corresponds to an adequate taxation of the license income in the recipient’s country of residence;
- implementing the “Immediate Response Mechanism” of the EU, which provides for immediate legislative actions deviating from the EU VAT-Directive in order to combat VAT fraud. The Bundeszentralamt für Steuern (the German Federal Central Tax Office ) shall be appointed as the central point of contact for the German state tax authorities with regard to fraudulent VAT structures;
- extending the scope of application of the EU “Interest Directive” to all kinds of capital income and to all individuals and business entities;
- halting the use of offshore financial centers for tax avoidance purposes by enforcing international tax legislation;
- tightening regulatory sanctions for banks doing business in Germany (e.g., withdrawal of banking licenses), which systematically violate German tax law;
- preventing a double non-taxation of income by supplementing existing double tax treaties and, where possible, by implementing national tax provisions; and
- tightening the requirements for voluntary disclosures leading to tax amnesty by increasing the period for which taxpayers must provide complete disclosure of all tax relevant information to 10 years
In addition, the coalition aims to intensify the EU-wide efforts for implementing a Common Consolidated Corporate Tax Base (“CCCTB”).
Tax Simplification and Tax Enforcement
In addition to countermeasures against tax evasion and tax avoidance, the coalition agreement contains several suggestions aimed at simplifying the official tax assessment procedure. For that purpose taxpayers shall be entitled to make use and to file tax returns pre-completed by the tax authorities, which already contain all relevant tax data as submitted to the tax authorities in previous fiscal years, minimizing the efforts to prepare tax returns significantly. This procedure shall be introduced by 2017 at the latest. For retirees and pensioners such filing shall already be possible from the assessment period 2015 onwards.