Summary
One of the federal government’s most important projects is its reform of business taxation, planned for 2008. The key elements of this reform, published in summer 2006, provide for a reduction in the nominal tax burden on corporations from 38.65 % to 29.8 %. In return, an aspect of German taxation, namely the Hinzurechnung method, by which the interest paid on long-term debt was added back onto profit and which up to now has applied only with respect to the trade tax collected by the municipalities, is to be extended to corporation tax and is to include all interest paid as well as the financing part of rents, hire and leasing amounts. The key elements did not mention what percentage was to be added back on. One aspect which is important in terms of the effect the 2008 reform of business taxation has on the tax burden on companies is whether, despite a reduction in the tax rate, extending the Hinzurechnung method will lead to an increase in the burden on companies from taxes not dependent on earnings, and how this burden fares in international comparison. Attempts are being made to answer this question using a microeconomic and a macroeconomic approach. It would appear that the amendments as set out in the key elements published would lead to an increase in Germany’s currently very low burden from taxes not dependent on earnings. However, it should also be noted that even if this burden were to experience a strong percentage rise, it would still be relatively low in international comparison. In contrast to the extension of the Hinzurechnung method used in trade tax, a critical view should be taken of any inclusion into corporate taxation of non-earnings-dependent elements.
The effective Validity of Corporation Tax Rate Cuts Policy