Transparency Closing Corporate Tax Loopholes in Germany

A new law in Germany plans to put an end to corporate tax loopholes exploited by large corporations. But it has its weaknesses – and no shortage of critics.
The products appear accounted for in this Amazon warehouse, but what about their value? Photo: REUTERS/Hannibal Hanschke

It is supposed to be one of the most effective weapons in fighting tax avoidance by international corporations. “Country-by-country reporting," or CbC, requires corporations to report the countries where they generate added value, as well as the amount generated so that they can then be taxed on that value. The purpose of the law is to prevent companies from moving profits internally until their tax rate reaches zero – a practice U.S. firms such as Amazon, Google or Starbucks that have made headlines with.

Germany’s small- and medium-sized business segment, known as the Mittelstand, was meant to benefit from country-by-country reporting – at least, that's what politicians had hoped. While the new law has only been in effect since January 1 in Germany, many experts already appear to have their doubts.

Recently, at the Hamburg Forum on Corporate Tax Law, some 200 tax experts and business representatives gathered to discuss new legislation, among other things. The one point of unanimous  agreement? The new CbC regulations are opaque, inefficient and expensive. It is often impossible to determine precisely in which country the added value is generated, and companies will likely have to add entire new departments just for reporting. 

The new tax regulations are opaque, inefficient and expensive.

A new study by the Mannheim Center for European Economic Research, seen by Handelsblatt, had similar findings. "The expected costs of CbC regulation exceed the expected benefit, at least to a certain extent," it says. Perhaps even more worrisome was the study's conclusion that companies’ reports should be taken with a grain of salt.

As a result, the study's authors conclude that neither financial reports for an entire corporation nor for individual subsidiaries are appropriate as the basis for country-specific tax information. In particular, researcher Christoph Spengel criticized the fact that there are no rules for determining company profits and the valuation of company assets which are applicable to all countries.

As Mr. Sprengel argued, the policy must establish international rules. The European Union has "already taken a first step in the right direction" with its concept for a common tax base for corporate income tax, the researcher said.

However, Mr. Sprengel also warned against publicly publishing tax information as proposed by the European Union. Rainer Kambeck of the German Chamber of Industry and Commerce (DIHK), agreed: "A general publication would be an immense competitive disadvantage, especially for German tech companies." Bolstering this position was a recent ruling by the French Constitutional Court, which found the E.U. requirement to publish tax data to be illegal.

Indeed, it is unlikely that companies from countries with emerging markets would follow the CbC rules. The larger international effects of reporting requirements remains to be seen.


Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the author: [email protected]