German army faces Commission tax evasion inquiry

Date: 19/12/02

THE European Commission has launched an investigation into the German army for failure to pay value-added taxes (VAT) on the wages of workers employed via external agencies.

These so-called "private management companies" were introduced in 2001 by the country's former defence minister, Rudolf Scharping, as part of a raft of reforms intended to streamline the cash-strapped Bundeswehr.

They provide, for example, drivers for military vehicles and maintenance workers.

German MEP Werner Langen, the European People's Party rapporteur for public services whose remit includes competition cases, said he was keenly awaiting the outcome of the investigation by Frits Bolkestein's internal market and taxation directorate. It is due to end by next March.

"This was all done so illogically and obviously wrong by Scharping that the Commission must now look into it," said Langen. "You cannot conduct a structural reform by cutting legal corners."

The mostly semi-private agencies have not been required to pay the usual VAT on their workers' wage costs, which means in turn that the Bundeswehr is freed from VAT fees it would have owed the firms.

This is all about some kind of "phantom privatisation", Langen claimed.

In a letter to Langen, Bolkestein pointed out that the Bundeswehr's tax practices contravene Article 11 of the EU's sixth VAT directive.

If the services in question related to "war materials", however, they would have been exempt from the EU-wide VAT tax rules.

Scharping was forced to resign last summer as defence minister, a post he had held since 1998, after he was accused of corruption for accepting exorbitant speaking fees from a Frankfurt PR agency.

Under German law, members of the government may not accept such payments.

His successor, fellow Social Democrat Peter Struck, has said he is "looking into" the reforms, including tax practices.

The European Commission has launched an investigation into the German army for failure to pay value-added taxes (VAT) on the wages of workers employed via external agencies.