German Profit Taxes. Christoph Freichel

List of figures

       List of tables

       Translations

       English – German

       German – English

       Index

       1Introduction to German profit tax law

       1.1The importance of taxes

      Taxes form an important part of every citizen’s financial endeavors. The liability to pay taxes accompanies every citizen from the cradle to the grave. The tax liability is imposed by the polity to finance the services performed by the state and influences citizens’ economic dealings. The state must observe certain basic principles when levying taxes, e.g. the principles of legality and uniformity of taxation. In particular, taxation is supposed to be based on the economic capacity of the taxpayer. The state may not unduly call on individual citizens (strangulation effect) if it desires to participate in the success of the private economy in a sustainable manner. Non-uniform taxation can lead to evasive reactions by the eco- nomic actors and presents credibility and legitimacy problems that, inter alia, can lead to a decrease in tax revenue.

      Thus, a state must take care to levy taxes so as to reflect the relationship between the legal protection of ownership and the social obligation arising from ownership in a legal and comprehensible manner which is seen to be just. The opposition of the objectives and interests that play a role in taxation must be taken into account in levying taxes. Economic actors want to and must reduce the tax liability, inter alia because of the pressure of globalization. On the other hand, the taxes finance tasks whose fulfillment can be for the benefit of the economic actors and provide the state with the opportunity to intervene in the economic process, inter alia, for the benefit of all.

       1.2Tax burden and tax justice

      Modern industrial states fulfill a number of political tasks of a social, regulatory and economic nature. The extent of the tasks vested in the respective political system is always reflected in its so-called Staatsquote, which indicates the ratio of government expenditures to gross national product (GNP). In Germany, this ratio was 44.3 % in 2016:

      Figure 1: Ratio of government expenditures to the GNP for Germany 2016

      Figure 2: Development of the expenditure-GNP ratio from 1980 to 2016

      States levy contributions, predominantly in the form of taxes, to finance the public services. A high public expenditure quota generally means that the economic actors are subject to an increased liability to pay taxes and contributions. This liability to pay taxes and contributions is expressed by the so-called tax ratio which indicates the ratio of taxes and social contributions to the gross national product. In 2016, this tax ratio amounted to 42.7 %:

      Figure 3: Tax and contribution ratio for Germany 2016

      Taxes influence the economic activities of the people and change their consumption, investment and savings habits. Thus, taxes must be arranged in a “just” manner. “Just” means that the circumstances of each individual case must be taken into account, as only specially tailored rules prevent generalized and therefore unjust legal consequences in individual cases. However, the more the tax laws take details into account, the more complex they become and the more difficult they become to apply or carry out. As is the case when there are too few regulations, the complexity of tax provisions caused by the increasing number of rules for specific cases leads to injustices because only those who have access to correspondingly qualified advice are able to make fiscally optimal arrangements. Those taxpayers who receive no or poor advice are thus at a disadvantage compared to those who receive good advice, because the former are unable to take advantage of the possibilities to avoid paying taxes. The term “Dummensteuer” (idiot tax) has also been used in this context. The term “just” also means not over-regulating the system of taxation, but rather keeping it manageable and comprehensible for the majority of taxpayers.

      In addition to excessive regulations for individual cases, another reason for the complexity of our tax system is the fact that the assessment of taxes not only serves as a source of income for the state, but rather is used economically and socio-politically to steer the actions of individuals. Taxes are meant to guide behavior. Instead of enacting imperatives and prohibitions, the legislature encumbers undesired behavior with additional taxes and promotes desired behavior and those goods worthy of such promotion (so-called merit goods) with tax relief (e.g. lower value-added tax of 7 % for foodstuffs and magazines, instead of the normal 19 %). Thus, the state not only pursues fiscal interests, but also steering objectives as well (e.g. the restriction of cigarette consumption with the tobacco tax, or the promotion of energy saving with the ecology tax).

       1.3The three tax disciplines

      In light of the allocative and distributive importance of taxes for the state and its economic actors, several scientific research facilities address their effects, their application, or their distribution. The tax disciplines can be broken down into the three sub-areas: tax law, financial science, and business taxation. The object of experience for all three disciplines is the phenomenon “taxes”, although the respective subject matters of their research differ. The demarcations between the individual areas are fluid.

      The discipline of tax law considers taxation to be a legal process. This discipline concentrates on the legal aspects of taxation and is concerned with the relationship between the state and its citizens with regard to taxation. The subject matter includes issues in the construction of tax provisions or the examination of their conformity with the constitution and/or the law of the European Union.

      The discipline of financial science forms part of political economics and is thus macro-economically orientated. The economic actions of the state form the object of knowledge, to the extent that earnings and expenses are included. The discipline of financial science addresses, for example, issues involving the just distribution of tax revenue or the minimization of negative effects of taxation on production, consumption and competition (influence on the allocation of resources, minimization of deadweight loss).

      The subject matter of business taxation is the examination of effects of taxation on the business activities of companies. There are four main scientific areas of research within the discipline of business taxation:

      •Problem-oriented assessment of tax law (presentation of legal norms): Knowledge of the most important national and international tax provisions is of fundamental importance for the discipline of business taxation.

      •Theory of tax effects in business economics: Analysis and description of the influence of taxation on the variables of fundamental importance to decisions made by economic actors.

      •Theory of tax planning in business economics: