Germany’s 2017 federal election: Jamaica to take over Berlin?

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Hermann Gauss
Tax Policy Leader – EY Germany

Roland Nonnenmacher
National Tax – EY Germany

In September 2017, German citizens will elect a new federal Parliament. Given current election polls, Chancellor Angela Merkel appears to have a good chance of remaining in office for an additional four years. This would increase her total time in office to an astonishing 16 years, equaling the record of former chancellor Helmut Kohl.

While both major parties look likely to achieve enough parliamentary seats to proceed with the current grand coalition, the continuation of this arrangement between the Conservatives and the Social Democrats cannot be taken for granted. In fact, it becomes more and more improbable as a result of internal disputes and the minority role of the Social Democrats within the governmental cooperation.

The only realistic alternative is represented by the so called “Jamaica Coalition” composed of the Conservatives, the Liberal Democrats and the Greens — the label derived from the colors of the parties that match with the flag of the Caribbean island of the same name, and clearly indicating that such a coalition would create a rather unusual kind of political cooperation on the federal level.

The reason for this potential lack of coalition opportunities is the likely fragmentation of the parliament. There is little doubt that the Liberal Democrats will re-enter the Parliament, but in addition, the Alternative for Germany (AfD) party, according to polls, has a solid chance of becoming a new federal political player. The success of this right-wing party that was founded in 2013 can be seen as a reaction to the liberal readjustment of Angela Merkel’s Conservatives, especially regarding Merkel’s refugee and immigration policy.

But though the AfD is represented in 13 of 16 state parliaments, other parties have made clear that they are unwilling to forge a coalition with them, which further decreases realistic coalition opportunities.

The outlook for tax policies

Irrespective of speculative coalition arithmetic, any upcoming coalition agreement will be based on the parties’ election programs, which have recently been published. According to these programs, three top priorities can be identified:

Personal income tax reliefs

Overall, tax revenue has achieved new record levels in recent years, enabling Germany to in turn significantly reduce its public debt levels. Both major parties and the Liberal Democrats are campaigning on the improved state of public finances and are including personal income tax reliefs in their manifestos.

The proposed amounts vary between EUR10 and EUR30 billion per year. This seems plausible both in terms of being sizeable yet not too ambitious, given that Germany’s debt is still above the target rate of 60% of GDP that applies to Eurozone members. Furthermore, any tax relief has to be in accordance with the so called “debt break” that substantially restricts new borrowing.

Despite the general consensus, differences remain on the design of the tax reduction.

While the campaign of the Conservatives implies a relief for all individuals by widening some of the progressive income tax brackets, the Social Democrats wish to reduce the burden mainly for small and middle-income earners, but also include increasing the tax rates for higher income tax brackets.

For businesses, two aspects of this discussion are important. First, all partnerships, which are the predominant legal form of business in Germany, are directly affected by any change of the personal income tax rates. Second, in the context of a personal tax relief, most parties also recommend a scaling back of the so called Solidarity Surcharge, a surcharge on the tax bill that was introduced in the 1990s to finance the burden of German reunification. Any reduction or abolition of the Solidarity Surcharge would benefit both partnerships and corporations.

R&D tax incentives

The majority of OECD and European Union Member States currently have some form of R&D tax incentives in place (e.g., tax credits, super-deductions or patent boxes). Germany, though a global R&D player and very generous on nontax Government R&D funding, does not. This will likely change under the next government, as almost all parties are now campaigning for the introduction of some form of R&D tax incentive. The most probable outcome will be a tax credit targeted at small and medium-sized enterprises.

Fight against tax evasion and BEPS

A broad consensus exists among all parties to continue Germany’s international cooperation on the fight on BEPS and tax evasion. The next German Government is highly likely to implement the EU’s Anti-Tax Avoidance Directives (ATAD 1 and 2) and the OECD’s Multilateral Instrument (MLI).

But there also is one major issue on which the position of the current German Government differs from most European partners on Public country-by-country reporting (PCbCR). Chancellor Merkel and Finance Minister Schäuble oppose this initiative, as they think it would not lead to increased understanding of a business’ tax footprint. Instead, they think such figures would be difficult for the public to interpret, causing misunderstanding.

In terms of the aims of the BEPS project’s German implementation, a PCbCR would simply not be necessary as the nonpublic BEPS CbCR has already been implemented, with taxpayer to tax authority transparency seen as the correct outcome. However, while the Liberal Democrats share the view of the Conservatives, the Social Democrats, the Greens and the Left Party are in favor of a PCbCR adaption.

Conclusion

Given the stable economic development with record-low unemployment and record-high tax revenue, Germans can look forward to increased tax reliefs in 2018. But as the parties’ election programs clearly show, this will mainly focus on personal income taxes.

In this context, business representatives will wish to remind Government officials of the benefit of a competitive tax environment for businesses.

Nevertheless, partnerships will directly benefit from a reduced PIT rate and all businesses could benefit from the likely reduction of the Solidarity Surcharge. Furthermore, the long awaited introduction of R&D incentives should foster investment in Germany.

Additionally, all parties are planning to increase public investment. All in all, for the next legislative period from 2017 to 2021, one can expect a combined economic stimulus stemming from reduced taxes and increased public investment in Germany.

  • Personal income tax reliefs (including abolition of the Solidarity Surcharge)
  • R&D tax incentives
  • Continuing the fight against tax evasion and base erosion and profit shifting (BEPS)