The taxation Details for the German Legislature

The legislative power for sales tax in Germany lies formally with the federal government (Art. 105 II GG), which is dependent on the approval of the Bundesrat (Art. 105 III GG). In the legal reality, however, these two institutions are obliged to follow the requirements of the European Union in […]

The legislative power for sales tax in Germany lies formally with the federal government (Art. 105 II GG), which is dependent on the approval of the Bundesrat (Art. 105 III GG). In the legal reality, however, these two institutions are obliged to follow the requirements of the European Union in their legislative activities, insofar as these corresponding requirements (through EC directives) has made. The power to do this is conferred on the EU by Article 93 of the EC Treaty. it has made extensive use of it, so that the federal government thus in fact only has its own decision-making authority for sales tax in the remaining areas (e.g. within certain limits when determining tax rates). 

As a result, sales tax is largely aligned within the EU:

The sales tax systems of all member states must move within the framework of the provisions of the VAT System Directive (revised in 2006, previously known as the “Sixth Directive on the Harmonization of Sales Taxes”, 1977), unless special national solutions are expressly implemented are permitted. Accordingly, the following statements on German law also apply accordingly to the law of other EU states.The legal basis in Germany is the Value Added Tax Act (UStG) and the related Value Added Tax Implementation Ordinance (UStDV), important administrative instructions are compiled in the sales tax guidelines (UStR) of the Federal Ministry of Finance. While you calculate sales tax you can find the essential results there.

Basic principles:

The sales tax largely pays attention to competition neutrality, i.e. the taxation is largely designed in such a way that the competitive chances of the entrepreneurs among themselves are not changed by the taxation. In the international context, it follows from this principle that the right to tax sales is ultimately granted to the country in which the consumption ultimately takes place (destination principle). if the right to tax would be granted to the country in which the service is produced or the individual entrepreneur is based (country of origin principle), suppliers from different countries could make offers to the same customer in which different sales tax rates are factored in:a Luxembourg resident could offer a service with a surcharge of only 15 percent (tax rate in Luxembourg), but a Dane at 25 percent (tax rate in Denmark). 

The Distortion

However, this would distort competition so much that individual providers would have to disappear from the market simply because of taxation. From the country of destination principle it inevitably follows that German entrepreneurs are not only subject to the German Value Added Tax Act, but possibly, if they also offer services abroad, have to pay the (local) VAT for these services abroad instead of in Germany. Although competitive neutrality and the country of destination principle are indispensable cornerstones of the sales tax system, they can of course not always be fully implemented in individual cases. The specific regulations in the UStG are therefore always decisive for the assessment of individual processes.

Lois C. Ferrara

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