Germany poised to slash taxes on business by a quarter (FT)

Peer Steinbrück, the German finance minister, has finalised the outlines of a corporate tax reform aimed at slashing levies on company profits by almost a quarter from 2008.

The changes would bring the average nominal tax burden on corporations, now the third highest in the developed world after the US and Japan, from 39 per cent down to 30 per cent, below the rates in most of Germany's neighbours.

The initiative, details of which were leaked to the news media, could help restore business confidence in the "grand coalition" of Angela Merkel, chancellor. Her government of Christian Democrats and Social Democrats has come under fire for dragging its feet on structural reforms and for its planned 3 percentage point rise in value-added tax next January.

Tax cuts, however, could meet with disapproval from those European Union neighbours battling large budget deficits and fearing such cuts could fuel tax competition in the region.

"We are not provoking tax competition but it is here and we must react," a government official said. "What is objectionable is the kind of ruinous competition that leads to dramatic tax revenue falls - which will not be the case here."

Germany already faces criticism for the restrictive wage settlements of the past five years.

Critics have likened the deals to a "beggar-thy-neighbour" attempt at raising the competitiveness of German companies at the expense of domestic demand and growth.

Mr Steinbrück, who presented his blueprint to Ms Merkel yesterday, has yet to release information about his plan. The reform could be heavily changed during Germany's notoriously protracted law-making process, which could last until next year.

Officials yesterday confirmed that the minister proposed to cut the centrally set Körperschaftsteuer - corporate taxation - from 25 per cent to 12.5-16 per cent, saving companies up to €7bn ($4.8bn) in the first year.

The Gewerbesteuer - a communal tax - would be left untouched but its basis would be extended, allowing the state to recoup most of the lost revenues from the corporate tax cut in the medium term.

These two measures would result in an average consolidated rate of about 30 per cent, which would also apply to reinvested profits bynon-incorporated companies currently subject to income tax.

Mr Steinbrück's plan also envisages a new flat-rate capital gains tax at source.

While taxpayers today must declare capital gains as part of their taxable income, banks would in the future levy a 25-30 per cent tax on all gains from financial transactions.