[A-List] Germany: fiscal crisis

["Michael Keaney" <michael.keaney@xxxxxx>]

Germany set to impose 15% capital gains tax
By Uta Harnischfeger in Frankfurt
Financial Times: November 18 2002

Hans Eichel (pictured) , the German finance minister, appears likely to
impose a 15 per cent capital gains tax on future domestic investments,
marking the latest in a series of tax increases that have caused an outcry
against Chancellor Gerhard Schröder's re-elected government.

Ending weeks of speculation, Mr Eichel proposed the flat 15 per cent rate in
coalition talks between the Social Democrats and their junior partners, the
Greens.

The news comes as the Social Democratic-led government is trying to come to
terms with unexpectedly larger tax shortfalls, lower growth forecasts than
expected for 2002 and 2003 and a scolding from the European Commission about
its swelling budget deficit.

Mr Eichel's office said he had received "positive noises" from Mr Schröder
and the Greens when he floated his plan.

The decision to tax both equity and real-estate investments at 15 per cent
comes as a relief to many. There had been talk that such investments could
be taxed at individual income tax rates, which tend to be relatively high in
Germany.

Nevertheless, banks and investors have repeatedly warned that any capital
gains tax, regardless of the rate, would further damp Germans' inclination
to invest.

So far, equity investments are taxed only if sold within a year of their
purchase. The sale of real estate not used by its owner was taxed only if
the proprietor sold it within 10 years of the purchase.

The capital gains tax is likely to become effective on February 21 when
parliament takes a final vote on a larger tax package as part of next year's
budget. The law's first reading will be on Wednesday. The tax is estimated
to raise about ?650m a year.

Meanwhile, investments dating back before February 21 would be taxed at a
flat 1.5 per cent rate. Losses can be booked against gains.

Separately Mr Eichel must also amend the bank secrecy law since banks would
be obliged to notify tax agencies of their clients' investment gains or
losses.

Last week the latest German tax projections confirmed that the government
expected tax income to be ?15bn lower than had been thought, raising new
borrowing this year to about ?35bn.

In addition, the European Commission formally ordered Germany to bring its
swelling budget deficit under control.

Meanwhile the government's independent economic advisers published a damning
forecast for Germany's economic growth, saying the economy would grow a mere
0.2 per cent this year and 1 per cent in 2003.