Germany’s series of tax cuts announced this week are likely to boost consumer spending and improve margins for businesses suffering losses in the coronavirus pandemic, tax practitioners and industry groups said.
The measures, announced June 3 as part of a 130 billion euro ($147 billion) stimulus plan, include a temporary decrease in the standard value-added tax rate to 16% from 19% and a reduced VAT rate of 5%, from 7%, for essential items such as groceries. The changes will take effect from July until January 2021.
“Everyone was really surprised by the size and nature of the measures included,” said Marko Gründig, managing tax partner at KPMG Germany. “It’s a package that includes very broad measures to increase consumer spending and help companies in terms of tax relief.”
The VAT reduction is likely to have the biggest impact on business, especially for larger purchases such as cars, Gründig and other tax advisers said. By making the reduction temporary, the government aims to push buyers to act quickly to reinvigorate the economy, they said.
Germany’s GDP fell by 2.2% during the first quarter of 2020 as a result of the coronavirus pandemic—the most since the financial crisis of 2008 and the second-largest reduction since German unification, according to the Federal Statistical Office. The country has reported about 185,00 confirmed cases of the virus and more than 8,600 deaths.
Jürgen Scholz, a managing tax partner at WTS in Germany, said he didn’t expect the VAT reduction to increase consumption in terms of day-to-day services such as grocery shopping, restaurants, and hair salons. Instead of those businesses lowering prices, they can keep their VAT-included prices the same while benefiting directly from the VAT reduction to improve their margins, Scholz said.
Other provisions in the plan allow companies to carry back tax losses of 5 million euros ($5.65 million) for 2020 and 2021, and provide a tax incentive for investment by accelerating depreciation on assets.
The VAT reductions and new tax breaks for electric vehicles would also “help stimulate the currently very weak demand on the automotive market,” Hildegard Müller, president of the German Association of the Automotive Industry, said in a June 4 statement. A measure under the tax plan would extend a vehicle tax exemption for pure electric vehicles until Dec. 31, 2030.
But while industry groups and tax advisers expect the new tax measures to help rejuvenate the economy, the government could go further.
The president of the Federation of German Industries, in a June 4 statement, called the stimulus plan “impressive” and said it sent a “strong signal” for citizens and businesses. But the federation wasn’t satisfied with the rules for deducting losses, president Dieter Kempf said.
“The return is too limited at 5 million euros,” Kempf said in the statement. “There is need for improvement here to provide companies with liquidity and reduce their risk of insolvency.”