The financial equalisation comprises cost bearing rules, distribution of taxing powers, tax sharing and transfers between the federal government (Bund), the states (Länder) and the municipalities (Gemeinden). The main provisions for this are regulated in the Intergovernmental Fiscal Relations Act (IFRA), currently in the IFRA 2017 for the period 2017 to 2021.
For taxation powers, a distinction is made between exclusive taxes and shared taxes. Before the shared federal taxes are allocated specific amounts that are stipulated by law are deducted first. The allocation to the individual authorities depends on formulas laid down in IFRA. For almost all taxes the same standard formula is used. 12.8% of the municipalities’ shares are deducted and transferred to states for granting payments for special requirements to municipalities and intercommunal associations.
In addition to the disbursement of revenue generated by taxes, the financial equalisation deals with transfers (non-reimbursed cash benefits) that are made in accordance with legal stipulations at federal or states level and that serve to enable the receiving authority to fulfil its obligations. These transfers include:
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