High tax slow to come down in Germany

BERLIN - German Finance Minister Hans Eichel is working as quickly as possible on a more competitive system of corporate tax - but reforms will not take effect before 2007.

"We need a more competitive system of taxation, with lower rates and a broader assessment basis," Eichel said.

Companies in Germany pay more than 38 per cent taxes on their profits - the highest rate in Europe. Economists argue lower tax rates would encourage firms to invest more and boost jobs growth, a key political aim as Germany battles record unemployment of more than 5.3 million.

Asked whether reforms would be ready by next year, Eichel said: "We are working on it - as quickly and as carefully as necessary.

"If we work rapidly and are well prepared, the reforms could take effect by 2007."

Calls for urgent reforms to Germany's corporate tax system have intensified after Chancellor Gerhard Schroeder said he was considering short-term measures to boost economic growth.

He said he would discuss his ideas with opposition leaders on Thursday.

The Finance Ministry denied reports that the German Government had charged the head of its economic advisory panel to devise corporate tax reforms by May. The reports said Bert Ruerup had been asked to prepare reforms which would be at the heart of Schroeder's swathe of growth-boosting measures.

Speculation is rife as to the nature of Schroeder's proposals, with leading economists including Ruerup having warned politicians against pushing through short-term measures which could hamper longer-term reforms. However, there is a wide consensus that corporate tax reforms are necessary.

The planned reform included lower tax rates and would make it more difficult for companies to shift their liability to taxes on profits abroad.

The ministry is also looking to cut German corporate income tax rates to about 20 per cent from 25 per cent in a move costing 5 billion euros ($9.086 billion). Eichel has in the past ruled out any changes to corporate tax before the 2006 general election, despite pressure from Economy Minister Wolfgang Clement, arguing the Government could not afford further tax cuts due to its budget situation.

But he said Germany's high nominal rates compared with other European states were causing the country problems.

"We would be in a better position if we had a lower rate of corporate tax ... firms are using every possible means to ensure their profits are not taxed in Germany."

- REUTERS