New EU tax – everything is getting more expensive in German cities

In many places, invoices for an anonymous burial in a forest, for digging a grave and erecting a gravestone will soon include an additional item: VAT. Height 19 percent.

From 2023, municipalities will be obliged to add sales tax to all services that can just as well be provided by private providers. After all, funeral directors and garden centers have to charge sales tax for the same service.

Cemeteries are just one area in which the extensive sales tax exemption for the public sector is being restricted, making life for citizens more expensive from next year. And this comes of all times, as energy and food prices continue to soar to new heights.

The regulation was decided seven years ago on the basis of the European Value Added Tax System Directive and the case law based on it. The transitional period ends on New Year's Eve, and the Federal Ministry of Finance ruled out an extension due to high inflation.

Many offices in the country are currently feverishly examining which goods and services will be taxed in the future - and how the prices for the citizens will change as a result. First decisions have been made. In Saarbrücken, for example, a fine dust sticker will no longer cost 5.50 euros in 2023, but 6.50 euros. The family register, which has so far been available from 17 euros, will cost at least 19 euros.

In Bremen, photocopies are becoming more expensive in the Citizens' Registration Office. The city of Munich cites the authentication of documents and the granting of filming permits on public land as examples of price increases.

“Each service that a private entrepreneur could also provide must be billed including sales tax from January. This affects local authorities in particular, but also applies to the federal and state governments,” says Ralph Sonnenschein, head of department at the German Association of Towns and Municipalities. It starts with city tours offered by the tourist office.

If a card previously costs ten euros, from next year it will be 11.90 euros including 19 percent VAT. However, a city may choose to lower the net amount. "Then the price for the customer remains unchanged despite the tax surcharge, and the municipality's income naturally falls," says Sonnenschein. Depending on the budget situation, each municipality must decide for itself.

It is not to be expected that many municipalities will spare their citizens in view of the already high burdens due to high energy prices and rising interest rates on loans. Especially since municipalities are not allowed to top it off with a service.

“The leeway for only partially passing on the sales tax to the citizens is small for municipalities. After all, the Municipal Tax Act stipulates that costs must be covered,” says Thomas Schmidt, an expert on public sector taxation at the auditing firm KPMG.

The decisive factor here is whether the city has previously paid sales tax itself, in which case the tax is a transitory item thanks to the possible input tax deduction and should not affect the prices. "Basically, it can be said that price increases are likely wherever the city has a large number of its own personnel, since there are no advance payments that could be claimed for tax purposes," says Schmidt.

Conflicts are already emerging. Parking lots are an example. "Parking in multi-storey car parks has always been subject to sales tax, but now it could also become more expensive on the street," says Schmidt. However, it depends on whether the parking spaces are directly on the street or separated from it.

According to the Federal Ministry of Finance, so-called parking bays directly on a street are still exempt from sales tax, since the focus here is not on parking the car, but rather the bays "serve to keep stationary traffic in order". Schmidt considers this distinction to be difficult, as there is sometimes only one common machine for parking bays and the adjacent parking lot.

The final decision rests with the tax authorities as soon as they examine the municipality's VAT return. "First of all, the local tax office decides which municipal services are subject to VAT," says Sonnenschein. If there is an objection, the matter goes on, up to the financial court in the end.

The tax expert sees a major conversion effort not only in the relationship between the city and the citizens, but also in the relationship between the municipalities. “It is not uncommon for the building yard in one municipality to take on the winter service or park maintenance for the neighboring municipality. In most cases, sales tax will be due in the future, since such work can also be carried out by private providers," says Sonnenschein.

Various evasive reactions are conceivable. For example, municipal offers could be discontinued – or new ones could be created. "The neighboring community can say, if you add the 19 percent, we'll take a private provider or we'll open our own building yard right away," says Sonnenschein. One way or another, it will be more expensive for the citizens.

Finance Minister Christian Lindner (FDP) has also recognized this. He sent a letter to EU Economic Commissioner Paolo Gentiloni a week ago. Due to the interpretation of the relevant EU directive, "increasingly massive problems have arisen in practice," says the letter, which is available to WELT AM SONNTAG.

In order to ensure taxation that conforms to EU law, the competition clause in particular is currently being interpreted narrowly. This increases the cost of cooperation between municipalities, which is so important. "The resulting restriction of the range of services for citizens is met with great incomprehension and irritation," writes Lindner.

The same applies to cooperation between research institutions and universities. These institutions under public law see the threat of sales tax as a threat to academic freedom. In the end, Lindner warns his European colleague Gentiloni: "It must be our common goal not to jeopardize the high level of approval for European unification in the Federal Republic of Germany through excessively narrow specifications in one area." This affects many citizens directly.

The main issue here is Article 13 of the relevant EU directive. Lindner, the municipalities, universities and ultimately the citizens should not expect adjustments - at least not in the short term. "Currently, the Commission is not working on a proposal to change Article 13," said its press department.

For many urban offers, the prices will rise at the turn of the year 2023.

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