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Law360 (April 23, 2020, 1:40 PM EDT) -- Germany will cut the value-added tax on restaurant meals as a way to help the dining sector recover from losses caused by shutdowns imposed to combat the novel coronavirus pandemic, the country's Finance Ministry said Thursday.
The rate will be reduced from 19% to 7%, the ministry said on Twitter. The rate cut is due to begin in July and last for one year.
In a statement, the Finance Ministry said the VAT reduction was part of a package of measures that also included an increase in the short-time work allowance used to compensate workers who are laid off or given reduced hours, and tax relief for small and medium-size businesses.
Even as some parts of the economy are reopening in Germany, restaurants remain closed to in-person dining for now. The tax rate on takeout service, which is still generally permitted, is already 7%.
Germany's hospitality association DEHOGA, which had campaigned for the tax cut, welcomed the announcement. In a news release, the group's president, Guido Zöllick, called the government's actions "an important and encouraging signal," though he suggested disappointment that the reduction wasn't extended to bars or other establishments that serve only drinks.
Stefan Bach, an economist at the DIW research group in Berlin, said the tax cut in normal circumstances would cost Germany about €6.5 billion ($7 billion) in revenue, but he cautioned that the public's reluctance to consume meant that the hit would be "significantly less" in the current circumstances. He also told Law360 he thought restaurants would take advantage of the benefit by not passing the full deduction on to customers.
The move represents the latest effort by governments across the world to use the tax system to help cushion the health consequences and economic blows of the virus, which causes the respiratory disease COVID-19. The outbreak has forced governments to enact restrictions on citizens' movements that are unprecedented in peacetime. Austria recently announced that it was cutting VAT on protective masks to make them more affordable. Some countries are extending tax payment deadlines and allowing essential workers to collect tax-free bonus payments.
Some tax specialists say there are better ways to help suffering sectors than granting them special VAT rules.
Dominika Langenmayr, a professor at the Catholic University of Eichstätt-Ingolstadt in Germany, told Law360 that while restaurants might pass the lower tax on to consumers, it's unclear if circumstances will allow restaurants to serve many customers in the summer.
A more constructive way to help the sector, she said, would be to loosen rules on loss carrybacks, which Germany is already doing to some extent.
--Editing by Robert Rudinger.
Update: This article has been updated to add information from the Finance Ministry.
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