Areas of Strength
- Estimates of the corporate income tax (‘CIT’) gap and the shadow economy indicate that Germany’s corporate income tax (‘CIT’) gap and its shadow economy are smaller than the EU average. Commission estimates suggest a relatively small CIT tax gap of 7.6%, and the size of the shadow economy is estimated at 8.8%, below the EU average of 17.6%. In addition, Germany’s VAT compliance gap is close to the EU average. Germany generally performs well in VAT administration, although some processes could be simplified.
- Germany reports on and partly evaluates tax expenditures (TEs). A report is published biannually which includes both direct subsidies and tax expenditures. Major TE positions have been recently evaluated, often by external actors. The Court of Auditors has flagged up to EUR 30 billion in potential savings through better management or reduction of TEs.
- Germany demonstrates stable performance in tax collection and tax recovery. Recent changes to the VAT law help modernise VAT tax collection by introducing obligatory e-Invoicing for transactions between domestic firms For tax recovery, risk-management systems are in place which may have contributed to Germany’s very low level of tax arrears (the second lowest in the EU, relative to total revenue collected). However, coordination across tax administrations at federal and Länder level remains a challenge.
Areas for Improvement
- The digital transformation of the tax administration progresses only slowly, in part due to tasks being fragmented across the Länder. While digital strategies exist, their nationwide implementation has faced obstacles in the recent past. Tax administrations at Länder level often have their own local IT systems. The KONSENS initiative – the common IT software strategy for Germany’s tax administrations – was initiated in 2007. However, it saw a series of delays along the way and therefore regularly faced criticism, including by the Federal Court of Auditors. The Court in 2025 reiterated its call for a binding overall plan outlining a schedule for the complete crossLänder rollout of at least the core IT processes of KONSENS.
- Germany does not officially estimate or publish national tax gaps. However, the German Federal Ministry of Finance is one of the EU national administrations which participate in the EU TADEUS/FISCALIS project on tax gap estimation, including the CIT gap subgroup. Estimating CIT and personal income tax (‘PIT’) compliance gaps could help policy makers understand the nature and magnitude of the problems related to CIT and PIT tax collection. In addition, measuring and monitoring tax compliance gaps can support tax administration in assessing the effectiveness of their tax policy actions.
Tax Complexity
Germany ranks 16th out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Germany 11th among the Member States with regards to Tax Framework Complexity, and 24th with regards to Tax Code Complexity. This indicates that, whereas the performance is better in terms of tax processes carried out by the tax authorities (although there is room for improvement in areas such as enactment, according to the authors), multinational corporations face difficulties in dealing with the regulations of the tax code (particularly those relating to combat the shifting of profits to companies, according to the authors).
The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Germany can be found here.
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