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German Cabinet gives green light to company tax cuts

German Chancellor Angela Merkel's Cabinet agreed on a draft law to cut corporate taxes, a measure aimed at improving companies' competitiveness while setting the conditions for increased tax revenue, Finance Minister Peer Steinbrueck said.

Incorporated companies in Europe's biggest economy will face a composite tax burden of just below 30% next year, down from 38.7%, according to the draft law, which still needs to be approved by parliament. Private companies that invest profit can gain a similar reduction. „We have two principal aims: On the one hand, we want to make German company tax rates more attractive to boost investment,” Steinbrueck told reporters in Berlin today. „At the same time we aim to increase tax revenue in the medium term, gaining benefit from those attractive rates.”

By encouraging companies to take advantage of lower taxes, the government aims to encourage them to switch from reporting earnings abroad. The Finance Ministry has previously said company taxes are the highest in Europe. Steinbrueck said he only expects a revenue shortfall next year when the tax cuts come in, returning to 2007 levels a year later. By 2012, he said he expects an increase in company tax revenue of almost 30%. Corporate tax revenue last year was €11.4 billion ($15 billion), according to the Finance Ministry Web site. „Reducing company tax in Germany is terribly overdue,” Alfons Kuehn, tax department chief with the Berlin-based DIHK industry and trade chambers, which lobbied for the measure on behalf of some 3.5 million companies, said in an interview today. „It hardly needs stating that you lift companies' competitiveness, and Merkel's hopes for a net gain in revenue after a few years are also legitimate.”

The measure reflects the government's determination to end a tax regime under which company taxes in Germany last year were 25% higher than the European Union average, according to business consultants KPMG. The Finance Ministry has previously said company taxes are the highest in Europe. That potentially harms companies' ability to increase payrolls even as the economy grows.

Steinbrueck has said he earmarked costs in revenue of about €30 billion ($39.6 billion) when the steps are implemented. Narrowed opportunities to reclaim tax such as on interest payments and leasing costs will reduce the shortfall to about €6.8 billion. That compares with a planned initial loss of €8 billion in an earlier proposal. By giving less money back to companies, Steinbrueck seeks to mollify his Social Democratic Party, which forms one half of the coalition government. Some SPD lawmakers have said they won't back tax breaks for companies while consumers are being burdened with higher taxes and social insurance contributions.

„I understand that the political environment is difficult after the increase in value-added tax and a number of annoyances for many people,” Steinbrueck told ZDF national television on March 11. German companies every year report earnings worth as much as €60 billion abroad for tax purposes, often in the form of loans to subsidiaries, according to the Finance Ministry in the state of Hesse. Steinbrueck has estimated that as much as €3.6 billion in revenue can be generated in the first year when companies report a greater portion of their earnings in Germany.

Value-added tax on most items - excluding goods such as food - was raised to 19% on January 1 from 16%, leaving consumers with less money to spend. Contributions for pension and health insurance have also been raised. The company tax legislation is expected to be read in parliament this month, probably on March. 29. (Bloomberg)