Germany’s small and medium-sized enterprises (SMEs) – collectively known as the ‘Mittelstand’ – are the backbone of the German economy. In fact, over 99 percent of all companies in the country belong to the Mittelstand. They generate more than half of the net national product, employ almost 60 percent of all workers and provide around 82 percent of all in-house apprenticeship jobs. Indeed, the country’s SMEs are one of the main reasons why Germany’s economy continues to be such a success. And yet this success is being put at risk in a number of sectors as there is something going on that is not quite right. Whilst it is perfectly normal for private sector companies to be subject to VAT laws and for them to take this tax into account when calculating their prices, a number of state-owned firms are exempt. What’s more these municipal businesses are offering more and more services themselves, competing with and effectively pushing efficient private firms out of the market. As local authorities are exempt from charging VAT, they can offer their customers prices that are up to 19% cheaper – for exactly the same service. This has nothing whatsoever to do with fair competition. Private sector jobs are being put at risk, council tax revenues are falling.
Those most affected are the private sector waste management and recycling firms. Local authorities, which have set up their own waste management companies, can organise these businesses so that they do not have to charge VAT – giving them a huge price advantage over their competitors from the private sector. According to Professor Roman Seer from the Institute for Tax Law and Tax Procedure Law at the Ruhr University in Bochum, this system – which is being protected by the German Ministry of Finance – is in breach of the law and is impacting negatively on municipal budgets and, as a result, on taxpayers.
“Consumers have no control over their costs when municipal businesses operate as monopolies.”
Peter Kurth, President of the BDE (Federal Association of the
German Waste Management Industry)
“On the one hand, this special status distorts competition in favour of municipal businesses. On the other, local residents across the country have to pay different prices for the same service,” comments Professor Seer. He recently compiled a report on the subject for the BDE (Federal Association of the German Waste Management Industry) that was financed by REMONDIS Assets & Services GmbH & Co. KG. Local residents, whose waste is managed by private sector companies, must pay VAT. Local residents, who waste is managed by companies owned by their local authority, must not. “Milk, for example, is taxed in exactly the same way whether the consumer buys it from a supermarket or a farm shop,” the tax expert continued.
Allowing municipal businesses to be exempt from charging VAT is putting SMEs at risk and burdening taxpayers.
Value-added tax is an indirect consumer tax that aims to tax consumption by final consumers. It should make no difference whether the services are offered to consumers by a public or private sector business. There are a few specific cases where public institutions may be exempt from charging tax but even here this may not create a competitive situation that is particularly unfair for private sector providers. “Waste management is most definitely not one of these specific cases,” the professor concluded.
Collection of residual & organic waste: Market share acc. to type of provider
Following its revision of Section 2b of the UStG (Value Added Tax Law), however, the German Ministry of Finance continues to stand by its decision to allow municipal businesses to be exempt from charging VAT – as it states quite clearly in a letter written on 16 December 2016. This privileged tax position not only applies to municipal waste management firms. It also puts a whole number of other private sector service providers at a disadvantage – from energy providers, to landscaping firms, all the way through to IT businesses. The Ministry continues, therefore, to defy the European Commission’s ruling that the Republic of Germany ensure that fair competition is created in these areas as well. There has been a clear trend across Germany towards remunicipalisation for many years now. More and more local authorities are founding their own companies so they can offer a range of services themselves. The VAT privileges are often the argument used for making this move. At the end of the day, however, these services are being permanently removed from the market. Being exempt from having to charge VAT, these companies effectively become municipal monopolies at the expense of the private sector and consumers.
The report was presented during a press conference in Berlin on 29 May; (from left to right) Bernhard Schodrowski, Press Officer BDE, Peter Kurth, BDE President, and Mike Mohring, Head of the CDU Parliamentary Group in the Thuringian State Parliament and Chairman of the Conference of Financial Spokespeople of all German States
Mike Mohring, head of the CDU parliamentary group in the Thuringian state parliament and chairman of the conference of financial spokespeople of all German states, believes this development is fatal. “Our society has become a great success thanks to its social market economy. It simply cannot be right that we rely on socialist structures for certain areas, such as waste management, or that we believe that the state is better at doing everything,” Mike Mohring said. “The fact is it isn’t and that’s not its job anyway.” The job of the state is to ensure that fair competition is in place. “Consumers have no control over their costs when municipal businesses operate as monopolies,” commented Peter Kurth, President of the BDE. They do, though, if there is fair competition because they will only get a good price for a service if they can choose between a number of different businesses. “We wish to compete with municipal firms in a fair environment – this is only possible if public and private sector providers are subject to the same tax laws. May the best company then win so that local residents can benefit,” Peter Kurth concluded.
Professor Seer’s report can be found here (German only)