Conservative Party (CDU) and Green Party advocate for addressing industrial tax evasion practices

Cracking Down on Business Tax Havens: The CDU and Greens' Proposal in Germany

CDU and Greens advocate for addressing corporate tax evasion practices. - Conservative Party (CDU) and Green Party advocate for addressing industrial tax evasion practices

Ready to shake up the status quo? That's exactly what the CDU and Greens are doing in North Rhine-Westphalia (NRW). Their aim? To combat so-called business tax havens in certain municipalities, starting by raising the minimum business tax rate. A move to be presented in the NRW state parliament next week.

Want to go straight to the numbers? The current minimum rate is 200%; they plan to bump it up to 280%. But let's talk about the real numbers: the average business tax rate in NRW municipalities hovers around 450%, with some reaching as high as 700%. However, Monheim and its neighbor, Leverkusen, have rates of only 250%. Strange, right?

Tackling Tax Evasion

The CDU and Greens, who formed the government in NRW in 2022, have long been concerned about these tax havens. Their strategy? To make these low-tax areas less appealing by enshrining regulations in the municipal finance law, making them unattractive to tax evaders.

But that's not all. The state's financial administration will aid municipalities in identifying actual business locations. And the new NRW state agency for combating financial crime has prioritized combating tax evasion through shell companies in business tax havens.

Is This Fair to Neighboring Municipalities?

Interestingly, despite the low rate, business tax havens generate significantly higher revenues compared to their neighboring municipalities. This practice, often referred to as "business tax dumping," isn't just unfair to neighboring municipalities, it also promotes shell companies.

Pushing Back against Aggressive Tax Competition

Municipalities on a consolidation path and those who have had to increase their rates are particularly vocal about the need for regulatory measures to protect them from aggressive tax competition and the loss of tax revenue due to business tax havens.

The Battle for the Fiscal Future

As Christof Sommer, managing director of the Association of Cities and Towns in NRW, puts it, "A bidding war on business tax rates is a vicious circle." The fact that cities and municipalities are risking this shows just how dire their financial situations are. But increasing the minimum rate is just a step in the right direction, Sommer insists. Ultimate financial recovery requires more than that.

The Association of Towns and Cities in NRW has been advocating for combat against unfair business tax competition from business tax havens since early 2023. They urge the state government and the federal authorities to support municipalities in combating illegal tax avoidance.

Enrichment Insights

• This move towards increasing the minimum business tax rate is part of a broader effort to counteract business tax rate competition and prevent nominal relocations, or the practice of businesses moving solely for tax benefits [1].
• Currently, only about ten municipalities with more than 10,000 inhabitants have lower business tax rates, making them potential tax havens. However, the trend is towards increasing business tax rates, reducing their attractiveness [1].
• Municipalities are under pressure due to financial equalization rules, which often lead to higher tax rates in smaller municipalities to maintain financial stability [1].
• The increase in the minimum trade tax rate could lead to higher revenue for municipalities, potentially improving their financial situation. However, this might also increase the cost burden for businesses operating in these areas [1].
• Germany is also implementing broader corporate tax reforms, including a reduction in the corporate tax rate to 25% by 2025 and sector-specific incentives. These reforms aim to stimulate economic growth, particularly in sectors like green energy and digital infrastructure [3].
• Despite these efforts, the German economy faces challenges such as potential budget deficits and skepticism about the effectiveness of the reforms [2]. The impact of these reforms on business tax havens and municipal finances will depend on how effectively they are implemented and how they affect overall economic conditions.

1. The CDU and Greens, in their proposal to combat business tax havens in Germany, aim to make these low-tax areas less appealing by enacting regulations in municipal finance law and increasing the minimum business tax rate, potentially reducing the attraction for tax evaders and shell companies.
2. The Association of Towns and Cities in NRW, acknowledging the impact of business tax competition from tax havens, has been advocating for regulatory measures to support municipalities in combating illegal tax avoidance and encouraging the state government and federal authorities to take action, ensuring a fair distribution of tax revenue and improved financial stability for all municipalities.

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