fpmi: efficacious structure needed for final withholding tax
by Finanzplatz München Initiative
Germany’s government resolved in July to introduce a final withholding tax on capital investments. Munich Financial Center Initiative views the move as being a step in the right direction. For this reason, it is highly important that the tax receive structures and contents producing greater tax fairness and honesty and less bureaucracy. Should these objectives be achieved, capital will re-flow into Germany, thus benefiting Germany’s citizens and state. This will also enhance the viability of Germany’s financial markets.
The introduction of a withholding tax would render, in many cases, the procuring of bank account statements. This procedure has given Germany’s authorities exceptionally extensive – by European standards – access to resident bank accounts. The pending legislative process should reconfigure the procedure so as to enable it to meet its original objectives of preventing terrorism and money laundering.
The members of Munich Financial Center Initiative have issued the following papers on the final withholding tax and the procurement of bank account statements:
Association of Bavaria’s banks: investors want easy-to-understand and apply tax regulationsInvestors think internationally nowadays. They seek countries offering tax codes which are easy to understand and to apply, and which offer discretion. Such considerations cause investors to increasingly consign their funds abroad. These outflows of capital harm Germany’s economy by making credit-based financing more expensive.
It is for these reasons that we are welcoming the introduction of a final withholding tax. In this arrangement, the taxes liable for payment would be retained by the bank and transferred to the taxation authorities. A 20% rate of taxation, with this including the solidarity supplement and confessional tax, would be at international levels, and would render superfluous elective tax assessment procedures. Such a refraining from permitting tax assessment procedures upon application would greatly streamline administrative procedures, and would thus cut public sector costs. This would benefit all of us.
This move would also enable the elimination of the procurement of bank account statements, which is used today as a backup system of inspection. This, in turn, would enhance the international-level viability of Germany’s tax code.
Munich Securities Exchange: current plans would greatly encumber capital marketsThe federal ministry of finance plans to revamp the taxation of capital gains. A lump sum tax of 30% is to be levied upon earnings from interest and dividends (the so-called “final withholding tax”). This is to replace the ‘half-of-income system’ (in which such earnings are taxed at half of the rate generally applied to the investor’s taxes). Also planned is the elimination of the speculation period, which allows stock profits which are not realized until a year has expired to be tax exempt. The 30% rate is to also apply to such profits.
Making investments outside Germany forms part of every wealth-creation strategy. Such investments provide German companies with an essential source of capital. The proposed measures would impair investments in German stocks at the most inopportune time. The percentage of households owning stocks in Germany is still extremely low by international standards. The apprehension is justified that the law would cause the shifting of corporate headquarters and stock portfolios abroad.
The Munich Securities Exchange expressly welcomes the simplification possibly ensuing from the final withholding tax. Its current form, however, would greatly encumber capital markets, and, particularly, the investing in stocks. The objective should be to configure this tax so as to make it conducive to achieving the desired results.
Main point of criticism is the tax's rate of 30%. Efficacious would be a rate substantially below the maximum one for corporate income tax prevailing in Germany - as is the case in those European countries which have introduced final withholding taxes. In 15 EU member countries, the final withholding tax is an average of 44.2% of the maximum income tax rate. Using this ratio yields a 20% rate for Germany. This constitutes the only way of preventing capital fleeing abroad. The new law also has to except long-term savings plans. Should these exceptions not be made, Germany's system of private old age financing would be strongly and negatively affected by the tax.
Association of Bavaria's cooperative banks and credit unions: establish an internationally-viable rate of taxationBavaria's credit unions suffered an outflow of some €434 million in deposits in the period 2004 - beginning of 2006. The cause was the employment of the automatic procurement of bank accounts statements, whose use accords to §24c KWG and § 93 paragraphs 7, 8 and § 93b of the Disclosure Code for Inspections carried out by Financial Authorities. This capital was dispatched to Austria and to other EU member countries.
In view of this outflow, the Association expressly welcomes the German government's decision to introduce a final withholding tax on capital gains, interest and dividends.
This represents the implementation of a proposal long advanced by Bavaria's Volks and Raiffeisen banks. The new tax will enhance the viability of Germany's financial markets, which this especially applying to those in Bavaria, which have been disproportionally and heavily affected by the outflow of capital.
The introduction of the final withholding tax will also enable the German government to create conditions conducive to the achieving of greater tax justice and honesty. This move will also facilitate the lessening of bureaucracy, the increasing of accountability and the strengthening of investors' confidence in Germany's financial markets.
The next step is to select a rate of taxation which makes Germany's financial markets so attractive that capital remains invested in them.
A further advantage: the introduction of the final withholding tax would render superfluous the distressing procedure of securing bank account statements. This procedure could then return to pursuing its original purpose: of fighting terrorism and preventing money laundering. No other country in Europe has equipped its tax authorities with such unlimited and far-reaching powers of investigation and access.
A country's powers of inspection are limited to its territory. Investors acting on the international level are therefore capable of entrusting their capital to the areas offering attractive conditions. The German government's resolution to introduce a final withholding tax represents an initial step in the right direction. These will hopefully be followed by further ones, ones enhancing the appeal of Germany's financial community.
Association of Bavaria's savings banks: avoid multiphase processA thorough revamping of the taxes levied on capital investments has to be strongly welcomed, as it will yield greater legal security of operation and tax honesty, will render superfluous bureaucratic systems of inspection imposing legal sanctions upon perpetrators, and will serve to reduce red-tape.
A no-delay introduction of the final withholding tax will for these reasons also benefit the public sector, which will be able to do away with the calculation of income stemming from capital gains and forming part of tax assessment processes. Carried out via the procurement of bank account statements, via the eliciting of information and via tax authorities' investigations, in-Germany inspections of capital investments will no longer be needed.
Experiences in other EU member states show that the introduction of a final withholding tax yields a stable amount of tax revenue. The proposed measures will thus equally and equitably benefit both the German government and its citizens.
To produce a returning of capital invested abroad, and to thus further increase tax revenues, it is necessary to assign a moderate rate to the final withholding tax. Should this take place, Germany will enhance its appeal as a place of investment to internationally-operating investors.
The introduction should not take place in a series of phases, as this would permit the arising of even more 'tax configuring'.
Basic principles to be applied are:
- The introduction of a final withholding tax makes sense. It should for that reason be introduced as quickly as possible.
- The new tax's rate should be set as low as possible.
vbw – Association of Bavaria's business community: finance minister's draft does not satisfy key needsThe introduction of a final withholding tax, assuming that it evinces a results-producing structure, will be an important step forward for Germany's financial community, as this tax will curtail and even reverse outflows of capital. The tax could make Germany as attractive to private investors as Austria, which is one of the countries already having such a tax.
To achieve all this, the tax has to satisfy the following key needs:
- The final withholding tax has to cause a highly-visible, customer-benefiting reduction in bureaucracy in banking operations.
- The tax can not impact upon the half-of-income procedure of
calculating dividend taxation. The failure to prevent this would cause a
painful increase in the taxes paid by recipients of dividends.
- The tax can not be misused to justify a recapturing of interest in the base of tax assessment used in calculating corporate taxation. Such a misuse would be completely and irresponsibly anti-business and anti-growth.