Questioning Germany’s VAT Rate Cut

Germany issues a temporary VAT rate reduction, while tax leaders try to interpret what it means for their business.

Vertex Inc. for VAT Compliance and VAT Determination


Tax leaders within many companies that operate in Germany were surprised by the temporary value added tax (VAT) rate reduction included in the country’s June 4 stimulus package proposal. They were primarily caught off guard by the size of the reductions—standard rates will decline from 19% to 16%, while reduced rates drop from 7% to 5%—and how the country defined “temporary.”

The proposal has received final approval on June 12. The VAT reduction will take effect July 1 and conclude on Dec. 31.

“Many are questioning the logic of the decision as they argue that the rate change is marginal and the short timeframe may not have a significant economic impact,” reports Mattias Cruz Cano in an International Tax Review article (subscription required). “Furthermore, making internal adjustments such as changing settings in ERP systems comes at a cost to businesses … Taxpayers agree that enormous bureaucratic efforts are required to adapt internal systems... Furthermore, a lot of monitoring and contract reviews are required such as changes to tax clauses, installments, and down payments.”

Since the reduction only lasts until Dec. 31, companies will be pressed to generate positive returns given the cost of work needed to adjust to the temporary VAT rate reduction and switch back at the end of the year.

To be clear, the main objective of the rate cuts is to stimulate consumer spending and, by extension, the economy.

Yet, Mattias reports that the rate cut will negatively affect business-to-business companies, a significant segment of the German economy. “Germany’s measures to strengthen the economy through the impact of COVID-19 is well-intentioned, but not commercially aware,” he concludes. “This shows that governments need to consult the business community in developing their recovery plans. Multinational enterprises (MNEs) need preparation time for significant changes, good or bad.”

By the same token, tax leaders should actively seek to collaborate with governments at all levels as they adjust tax policies in the post-COVID economic environment. These relationships can help eliminate unpleasant surprises. (For some practical guidance on initiating and improving those collaborations in the U.S., check out Vertex Chief Tax Officer Michael Bernard’s post here.)

Explore more Resources from our Industry Influencers:

Peter Boerhof, VAT Director at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Peter Boerhof

Senior Director, VAT

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Peter Boerhof is the Senior VAT Director for Vertex. In his role, he provides insight and thought leadership regarding the impact of tax regulations, policy, enforcement, and emerging technology trends in global tax. Peter has extensive experience in international transactions, business restructuring, tax process optimization, and tax automation. Prior to joining Vertex, Peter was responsible for leading the indirect tax function at AkzoNobel, where he designed and implemented a tax control framework, optimized VAT, and managed the transition to a centralized tax operating model for global tax processes.

He was also responsible for indirect tax planning and compliance for merger and acquisition, supply chain, and ERP projects, as well as the implementation of tax automation initiatives like tax engines and robotics. Boerhof also worked at KPN Royal Dutch Telecom managing VAT, as well as Big Four accounting firms Deloitte and Ernst & Young (EY) advising on VAT compliance and optimization processes. Boerhof holds an MBA from the Rotterdam School of Management and a master’s in tax law from the University of Groningen.

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