Shining a Light on Corporate Tax Havens: CDU and Greens Seek Change in North Rhine-Westphalia
Conservative Party (CDU) and Green Party aim to curb corporation tax evasion practices - Coalition of CDU and Greens seeks legislation to combat industrial tax evasion
There's a push in North Rhine-Westphalia (NRW) to tackle corporate tax havens in select municipalities. The ruling coalition is urging the new federal government to elevate the corporate tax minimum rate from the current 200% to 280%. A motion is scheduled for submission to the NRW state parliament next week, mirroring the agreement reached by Union and SPD at the federal level.
The corporate tax is a major revenue source for cities and municipalities. On average, the tax rate in NRW municipalities hovers around 450%, with the highest rate reaching 700%. However, in two municipalities—Monheim and Leverkusen—the rate drops to a shocking 250%.
Anti-tax fraud efforts
In their coalition agreement, both CDU and Greens in NRW vowed to tackle existing corporate tax havens within municipalities. To achieve this, regulations would be integrated into municipal finance law, rendering tax havens less appealing.
Moreover, NRW's financial administration will assist municipalities in pinpointing business locations. The new NRW state agency for financial crime has made combating tax fraud through shell companies in corporate tax havens a top priority.
Unfair competition and letterbox companies
The ruling coalition finds it troubling that, despite the low tax rate, corporate tax havens yield disproportionately high corporate tax revenues compared to their surrounding municipalities. This practice of corporate tax dumping, limited to some NRW municipalities, is not only detrimental to neighboring municipalities but also contributes to the establishment of pure letterbox company seats.
Municipalities on a consolidation path, which have had to increase their tax rates accordingly, are particularly vulnerable to the adverse effects of aggressive tax competition and the loss of tax revenue due to corporate tax havens, according to CDU and Greens.
"Cities and municipalities are undermining each other"
Christof Sommer, head of the Association of Cities and Towns in NRW, opined, "A tax rate bidding war is a vicious cycle. Communities are undermining each other, and there are only losers." The financial distress faced by many cities and municipalities underscores why they resort to such risky tactics. An increase in the minimum tax rate is a step in the right direction, but ultimately, improvement in the financial situation of municipalities is the ultimate goal.
Association calls for action against unfair tax competition
The Association of Cities and Towns in NRW had urged the state government, as early as 2023, to combat unfair corporate tax competition and advocate for a comprehensive package of measures at the federal level. They believe state financial and justice authorities should help municipalities combat illegal tax avoidance.
Insight:
- Germany's tax policy landscape is a blend of corporate tax reductions and increased minimum tax rates, with motives ranging from boosting competitiveness and attracting investment to preventing harmful tax competition and protecting local government finances.
- The global minimum tax framework is crucial in the fight against cross-border tax avoidance and base erosion.
- The sector-specific incentives and accelerated depreciation for green energy and digital infrastructure investments aim to keep high-value business activities within Germany.
- The CDU and Greens in North Rhine-Westphalia, aiming to pursue financial aid in combating corporate tax havens, are advocating regulatory changes within municipal finance law and support from the state's financial administration, as they strive to put an end to unfair tax competition and protect local government finances.
- The Association of Cities and Towns in North Rhine-Westphalia has long emphasized the need for action against unfair tax competition, urging the state government to assist municipalities in tackling illegal tax avoidance, and to advocate for comprehensive federal-level measures, as part of a broader strategy to bolster the financial situation of municipalities and move away from harmful tax competition.
