Questioning Germany’s VAT Rate Cut

Überraschung!

Tax leaders within many companies that operate in Germany were surprised by the temporary value added tax (VAT) rate reduction included in the country’s 4 June stimulus package proposal. They were primarily caught off guard by the size of the reductions—standard rates will decline from 19% to 16%, while reduced rates drop from 7% to 5%—and how the country defined “temporary.”

The proposal has received final approval on 12 June. The VAT reduction will take effect 1 July and conclude on 31 Dec.

“Many are questioning the logic of the decision as they argue that the rate change is marginal and the short timeframe may not have a significant economic impact,” reports Mattias Cruz Cano in an International Tax Review article (subscription required). “Furthermore, making internal adjustments such as changing settings in ERP systems comes at a cost to businesses … Taxpayers agree that enormous bureaucratic efforts are required to adapt internal systems... Furthermore, a lot of monitoring and contract reviews are required such as changes to tax clauses, instalments, and down payments.”

Since the reduction only lasts until 31 Dec, companies will be pressed to generate positive returns given the cost of work needed to adjust to the temporary VAT rate reduction and switch back at the end of the year.

To be clear, the main objective of the rate cuts is to stimulate consumer spending and, by extension, the economy.

Yet, Mattias reports that the rate cut will negatively affect business-to-business companies, a significant segment of the German economy. “Germany’s measures to strengthen the economy through the impact of COVID-19 is well-intentioned, but not commercially aware,” he concludes. “This shows that governments need to consult the business community in developing their recovery plans. Multinational enterprises (MNEs) need preparation time for significant changes, good or bad.”

By the same token, tax leaders should actively seek to collaborate with governments at all levels as they adjust tax policies in the post-COVID economic environment. These relationships can help eliminate unpleasant surprises. (For some practical guidance on initiating and improving those collaborations in the U.S., check out Vertex Chief Tax Officer Michael Bernard’s post here.)