Germany Plans to Close Tax Loopholes

Chancellor Angela Merkel’s cabinet is expected to approve a measure on Wednesday to close a tax loophole used by foreign companies operating in Germany, according to legislation drafted by finance ministry and viewed by Reuters on Monday.

The legislation, which would still need approval by the German parliament, is expected to take effect from 2018 and result in €30 billion ($32.2 billion) in additional income for German federal, state and local governments, according to the draft.

The legislation calls for tightening rules that allow deduction of certain internal expenses to discourage firms from transferring patents, licenses, concessions and market rights to other countries that either apply low taxes or none at all.

Germany’s move comes amid efforts by the Group of 20 industrialized countries and the Organization for Economic Cooperation and Development to combat licensing and patent loopholes.

Meanwhile, a ‘golden decade’ of growth and prosperity in Germany risks fading if the government fails to heed calls to boost investment and pursue structural reforms to lay the foundations for a new phase of economic expansion.

Last year, Europe’s economic powerhouse grew at the fastest rate in five years, but it is unlikely to top this performance in 2017 and beyond. A consumption-led upswing looks to have reached its peak as a slowdown in wage growth and a pick-up in inflation gradually weakens consumers’ spending power.

Exports–the mainstay of growth–could weaken given political uncertainties such as Brexit and a possible protectionist US trade policy under Donald Trump.

Germany’s economy grew by 1.9% in 2016, driven by soaring private consumption, increased state spending on refugees and higher construction investment.

But analysts polled by Reuters expect economic growth to slow to 1.4% in 2017 and 1.5% in 2018, with inflation predicted to bounce back to 1.6% this year.