Hitting the headlines earlier this year was the German tax scandal, described as the biggest in the country’s history since the end of the Second World War. A group of international stockbrokers, lawyers and bankers swindled the tax system using practices which were definitely unethical and almost certainly illegal, ultimately depriving the state of close to €32 billion (around £28 billion).
This figure is calculated through two separate tax schemes which involved dividend tax credits. The first scheme, known as ‘cum-cum’, involved German banks colluding with foreign investors to claim tax credits for a foreign entity to which it wasn’t fully entitled. The second, known as the ‘cum-ex’ scheme, saw tax credit being claimed on the same dividend by two separate companies. Whilst both schemes have since been shut down through changes to German law, the fact that these practices were being used for decades has resulted in the huge amount of tax involved.
So, what can the UK learn from the German case? Dividend tax credits were abolished in the UK in 1997, meaning that the dividend-stripping which has been happening in Germany isn’t relevant to the tax system in place in the UK today. However, there are lessons when comparing how the German government has responded to tax avoidance with the British government’s position on it.
Whilst Germany’s finance ministry has known about these schemes for at least a quarter of a century, the fact that the government is only doing something now means that they’ll be playing catch-up for some time. In contrast, the UK government’s approach is much more innovative, aiming to combat tax avoidance before it has the chance to cause major problems.
However, it’s also worth taking note of how disconnected the German tax system is, with the finance ministry and tax authority and the different ‘Länder’ (regions) of Germany working separately. This contributed to the recent scandal being able to occur to such a degree before it was stopped. With tax becoming ever more devolved between the different UK nations and with scant debate on the principles that will tie these systems together, the lesson from Germany is that different regions should remain coordinated when it comes to taxation.This seems to be key in making it as difficult as possible for those who want to avoid paying tax.