Teutonic Tricks Germany Becomes Tax Haven for Firms and Wealthy
German Finance Minister Peer Steinbrück has been railing against tax havens such as Switzerland and Luxembourg with harsh rhetoric. But he has paid too little attention to completely legal loopholes -- such as having subsidiaries on Malta -- that allow German corporations and the ultra-rich to minimize their tax burdens.
The Swiss are essentially a placid people. But for the past few months, two words have been sufficient to transport them into a state of agitation: Peer Steinbrück.
They have referred to the German finance minister as "Peitschen Peer" ("Whip Peer"), ever since he threatened to call in the cavalry unless Switzerland, traditionally a tax haven, cooperated with other countries. Even Luxembourg Prime Minister Jean-Claude Juncker, whose country Steinbrück also included in his verbal attack, feels deeply offended.
Only one person is pleased with these reactions: Steinbrück himself.
"It wasn't only friends that I made during the fight against tax havens," he says. However, he adds, it was important to "sail against the wind and stay on course in this effort." But now Steinbrück lacks more than popularity. Now he also needs money. Last week, Germany's Federal Statistical Office reported a national deficit of 17.3 billion ($24.8 billion) for the first half of 2009.
But the minister's rage against tax havens risks obscuring a much bigger problem: A completely legal tax avoidance industry is flourishing right at home in Germany. It is an industry that thrives on the mistakes made by ministries and the parliament in drawing up tax legislation. And hardly any other industry is as successful, irrespective of the current economic situation, or operates as efficiently.
While ordinary German workers are at the mercy of the tax authorities, millionaires and corporations use aggressive tax models to make themselves appear to be artificially poor -- and it's completely legal. In fact, seminars on "International Tax Structuring" are even tax-deductible in Germany as professional training.
What the national treasury loses in the process is far from insignificant. The German Institute for Economic Research (DIW) has calculated that there is a gap of 100 billion between the demonstrated profits of corporations and partnerships and the profits they have reported for purposes of taxation. "This points to tax breaks and structuring options with which companies can lower their taxable profits or shift them abroad," writes the DIW.
In fact, German corporations structure their international subsidiaries in such a way that the most profitable ones are located in the countries with the lowest tax rates. Corporate tax paid by corporations makes up only 2.8 percent of the government's total tax revenues of 561 billion. Germany's army of wage-earners contributes the largest share.
"Germany is a tax haven for large companies," says Wiesbaden-based economist Lorenz Jarass. "People with normal incomes are being robbed."
Steinbrück isn't so keen to discuss this injustice. He prefers to draw attention to his latest coups in the fight against tax havens: Belgium and Luxembourg have agreed to release information about potential tax evaders. And Swiss representatives will arrive in Berlin on Sept. 8 to negotiate a new double-taxation treaty that provides for increased mutual assistance between Swiss and German authorities.
This is undoubtedly progress. But another one of Steinbrück's prestigious projects has already failed: The interest-rate barrier that limits the tax deductibility of interest costs for businesses has been relaxed.
He was also forced to make concessions on the tax evasion law passed in July. Instead of leaving it solely up to the finance minister to determine which countries are to be ostracized as tax havens, the Foreign Ministry and Economics Ministry will also be involved in such decisions in the future. However if a country is classified as a tax haven, it will mean that investors and companies doing business there will be subject to stricter requirements regarding providing tax-related information.
Corporations have little to fear from such a toothless tiger. They maintain entire departments for the sole purpose of optimizing their tax situation. In their international web of subsidiaries, they manage to control the internal flows of money with the help of three adjusting mechanisms: interest payments, license fees and transfer prices.
It works in the following way: Swiss subsidiaries charge their German parent company high fees for the use of patents or charge prices higher than the cost price for product shipments. The resulting profits are earned in the tax havens.
However Dieter Ondracek, head of the German Tax Trade Union, claims some of these problems have already been fixed. "Many of these loopholes were plugged with the 2008 corporate tax reform," he says.
Tax expert Hanno Berger, for one, finds that argument laughable. Berger, a stout man in his late fifties with a construction worker's handshake, spent 14 years auditing Frankfurt banks for the German tax authorities -- until he succumbed to the lure of private industry. Nowadays, he sits in his office on the 31st floor of the Skyper building in Frankfurt and designs tax savings models for the ultra-rich and large corporations.
Berger's trademark is zero taxes for multi-millionaires. He is considered the king of the industry. With the skyline of Frankfurt's financial center as a backdrop, he uses a flipchart to illustrate his most successful structures -- those with tax-free returns of up to 10 percent. For Berger, finding ways to beat the tax system is an "athletic and intellectual challenge." Is it his problem that Berlin enacts amateurish laws? It's no wonder that the Finance Ministry sees Berger as one of its greatest enemies.
Of course, Berger is also familiar with the latest mecca for Germans seeking to optimize their tax structure: Malta. In the global game of financial Monopoly, the small Mediterranean country has become one of German industry's preferred locations in the time since it joined the European Union in 2004.
Companies like Lufthansa, Puma, BASF, K+S and Fraport have their offices in the town of St. Julian's, near the "Stiletto Gentleman's Club" and the pubs where foreign language students drink themselves into oblivion. The offices of the BMW Malta Group are near the casino in the upscale Portomaso waterfront development.
"The number of companies in Malta is growing rapidly," says Andrew Manduca, a partner in the accounting firm Deloitte Malta. He avoids using the term tax haven. "Companies pay a 35 percent tax rate here, which is more than in Germany." Technically, this is correct, but in a second step, shareholders can apply for a refund of the bulk of those taxes. On balance, profit distribution in the form of dividends is taxed at only 5 percent. After taxation, the net dividends are returned to the coffers of the German parent companies -- 95 percent tax-exempt, thanks to the decisions of the former Social Democratic and Green Party coalition government under former Chancellor Gerhard Schröder.
No one seems to be troubled by the fact that this loophole deprives the German treasury of massive amounts of revenue. On the contrary.
Last summer, Germany's ambassador to Malta invited German banking executive Frank Krings -- now a member of the management board of the troubled mortgage lender Hypo Real Estate -- to his private residence for a meeting with representatives of subsidiaries of German companies. Krings apparently liked what he heard. The local media has reported that banking giant Deutsche Bank plans to expand its business in Malta this year.
- Part 1: Germany Becomes Tax Haven for Firms and Wealthy
- Part 2: 'The State Is Lagging Hopelessly Behind'