German states battle over tax avoidance clampdown
Billions of euros at stake in banking cum/cum trades dispute
A dispute has erupted among Germany’s regions over a planned clampdown on a tax avoidance strategy that could cost the country’s banks billions of euros.
A group of Social Democrat-led administrations headed by the industrial North Rhine-Westphalia state, Germany’s most populous, is pressing for tough action against the banks. Other states such as Hesse, home to the financial centre of Frankfurt, where chancellor Angela Merkel’s conservatives hold sway, want a less aggressive approach.
The dispute concerns how to deal with so-called cum/cum trades, a contentious practice that allows foreign investors to avoid a German withholding tax on dividends.
“This conflict is about billions of income for the banks and what happens to the banks if the tax authorities say ‘We want this money’ and German banks have to pay €10bn or more,” said Gerhard Schick, parliamentary finance spokesman for the Green party.
“This burden would fall more on some banks than others. A bank could fail. There is a conflict between protecting the banks and recovering unpaid tax. This is a big issue for German banks.”
A cum/cum trade involves a German bank borrowing a foreign investor’s shares in a company in the run-up to the company’s dividend payment. By doing so banks can take advantage of a loophole in German law that lets domestic investors claim a credit on taxes on dividends.
Such trades were prohibited this year but Germany’s 16 regions, which collect taxes and collectively decide key regulations, are split on how to deal with transactions made before 2016.
How much a retrospective penalisation of cum/cum trades would cost Germany’s banks depends on how far back the regions reach and how many trades they pursue.
The Association of German banks said it was “working constructively” with a parliamentary committee investigating the trades and would “not engage in any speculation” about the possible outcome.
With elections due next year in both North Rhine-Westphalia and nationally, the dispute is gathering political momentum as the SPD, Ms Merkel’s junior coalition partner in Berlin, seeks to differentiate itself from her CDU/CSU bloc.
North Rhine-Westphalia wants a 2015 ruling by Germany’s Federal Fiscal Court, the country’s highest arbiter of tax disputes, to be applied in such a way that regions can seek back taxes from banks involved in all cum/cum transactions before 2016. The state this month persuaded its peers to reject a narrower draft proposal from the federal finance ministry.
Officials in North Rhine-Westphalia say that billions of euros in back taxes are at stake.
“All in all, the chance is now growing to penalise tax tricks by the owners of securities and see them for what they are: massive tax avoidance to the cost of the whole community,” said Norbert Walter-Bojans, North Rhine-Westphalia finance minister.
Other regions say North Rhine-Westphalia’s maximalist approach would be self-defeating. “Retrospectively outlawing all cum/cum trades might be something you dream of doing, but unfortunately the legal situation was not clear until the end of 2015,” said Thomas Schäfer, Hesse’s finance minister. “Looking back, I want to concentrate on the extreme cases where we have a realistic chance of winning.”
Critics warn that if Germany’s regions take too long to agree how to proceed the amount of taxes that could be reclaimed could shrink as older trades start to fall outside the statute of limitations.
“We need a new finance ministry paper which makes clear that cum/cum deals from 2010-15 should be investigated,” says Mr Schick. “The sooner the better.”