After the collapse of Covid19 , a temporary reduction in Value Added Tax consumption in Germany is expected to revive consumption.
The extent to which this effect has occurred or will continue to occur can only be reliably determined at the end of the year. However, figures are now available which provide an overview of the costs of the changeover for the economy.
Costs amounting to 1.25 percent of the expected volume
Note: The costs relate to both the reduction on 1 July 2020 and the re-increase on 1 January 2021.
This includes in particular the adjustment of tax settings in SAP, DATEV & Co. as well as other processes that are largely anchored in financial accounting.
If one considers that the Federal Government assumed in its forecast that the lower Value Added Tax one would provide relief to the tune of almost 19 billion euros, this relief cost 1.25 percent - on the corporate side.
Who benefits and who does not?
It's hard to say in general. Let's take a look at the food discounters to better understand the system.
Food discounter: Due to the strong competition, the food discounters have almost completely passed on the reduction in sales tax to the end consumers. This means that they incurred the above-mentioned proportionate costs of the changeover; the benefits were initially only enjoyed by customers. Especially lower income segments, which consume a large part of their income, benefit. Some of these income groups also pay little or no income tax, so a reduction in income tax would not have reached them.
So did the discounters not benefit at all? Yes, they have - and they will if demand increases as a result of the tax cut.
For other segments, the results are very heterogeneous and often depend strongly on the degree of competition: the less competition there is, the greater the probability that the entrepreneur will benefit directly from the tax rate reduction.
On average, sellers of mobile phone covers are therefore likely to be the losers in the area of online trading, as they will have to pass on the tax reduction almost in its entirety and bear the costs of the changeover due to the immense competition.
In addition, numerous weaknesses have become apparent in recent weeks.
Automation: desire and reality
Much of the cost is due to the complexity of most financial accounting and Value Added Taxcompliance processes. Many companies struggle with a clean delineation of the temporary tax rate reduction - see the following chart.
In e-commerce in particular, the date of performance relevant for sales tax purposes - regularly the time of dispatch of the goods - is often not implemented.
For many of them, this led to major challenges during the changeover.
Why limit it to six months?
A question which the Federal Government also answered in this context.
Why was the reduction of the Value Added Tax not longer - e.g. at least for one year?
The answer is understandable from an economic point of view and indicates that the Federal Government is also expecting a surge in demand, which will build up steadily until the end of the year.
The direct effect on demand is to be reinforced by consumers' pull-forward effects. These are only to be expected if a clear time limit for the measure is set from the outset. By restricting the reductions in VAT rates to six months, the Federal Government is acting in a targeted manner and making use of the amplifying effect of anticipatory effects.
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