Despite possessing one of the world's biggest economies, Germany ranked among the top 10 in the 2018 Financial Secrecy Index. Serious tax loopholes and lax enforcement contributed to the high ranking.
Germany was ranked seventh in the 2018 Financial Secrecy Index, a study published on Tuesday by the Tax Justice Network, a UK-based financial advocacy group.
The study gave Germany a secrecy score — an amalgamated rating which tallies recorded company ownership, country-by-country reporting (CbCR) and tax court secrecy among other factors — of 59.1, which ranked 80th of the 112 countries measured. However, Germany ranked in the top 10 because the study argues it accounts for more than 5 percent of the global market for offshore financial services.
Germany's rank is largely unchanged from the last Financial Secrecy Index, which was released in November 2015. However, the continued financial secrecy may be disconcerting for some German lawmakers, who have increased their efforts to prevent tax evasion and money laundering.
Unsurprisingly, Germany's European neighbor Switzerland, a country notorious for banking secrecy, tops the index, followed by the US and the Cayman Islands.
Glaring tax loopholes
Germany has taken legislative steps to crack down on tax evasion and money laundering, but the study claims that "serious loopholes remain in national legislation and negligent enforcement of tax and anti-money laundering regulation still pose a threat to their effectiveness."
One such loophole led to the cum-ex tax scandal, where German banks reportedly cost the government up to €2.9 billion ($3.46 billion) in tax revenue by rapidly trading shares with ("cum") and without ("ex") dividend rights. The aim of the transactions was to conceal the identity of the actual owner and allow both parties to claim tax rebates on capital gains tax that had only been paid once.
The study also highlighted how tax enforcement authorities suffer from understaffing and inadequate means to deal with large tax payers. States like Bavaria have not increased the number of tax auditors they employ, and the number of tax audits among millionaires has declined significantly.
A history of lax tax enforcement
When it comes to avoiding taxes, Germany has a history of making the rich richer. The study highlighted how municipalities, which have some freedom in setting corporate tax rates, attracted businesses like Deutsche Bank and Lufthansa by setting a zero-percent Gewerbesteuer ("business tax") before the central government set a minimum tax rate at 7 percent in 2004.
Perhaps more troubling is the lack of incentives to enforce taxes. After the Second World War, the Allied powers prevented Germany from creating a central tax administration. As a result, the 16 German states were responsible for their own tax collection, bearing the cost for a tax administration and tax audits but having to distribute the tax revenue to other states. That created a culture of lax tax enforcement as states had fewer incentives to collect taxes.