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European Commission proposes new car taxation strategy

10 September 2002

The European Commission (EC) presented yesterday a new strategy on the taxation of passenger cars in the European Union. The EC analyzed current passenger car taxation systems and explored ways to remove the present tax obstacles to free movement of passenger cars within the Internal Market. Registration taxes were identified as the biggest problem and therefore the EC recommended their gradual reduction and even abolition, to be replaced by annual road taxes and fuel taxes (so that the tax burden would remain the same but related to the use of a car rather than its acquisition). The EC also examined ways of restructuring existing vehicle taxes so as to put more emphasis on environmental objectives and recommended that the taxation of new passenger cars be more directly related to their CO2 emissions. The strategy was published as the Communication COM(2002) 431.

Presently, Member States’ taxes on passenger cars are very diversified in terms both of their structure and levels. Registration tax exists in ten of the fifteen Member States, ranging in 1999 from an average of €267 in Italy to €15659 in Denmark. Usually Member States applying no, or low, registration tax compensate by applying higher fuel tax levels. All Member States apart from France apply annual road tax at national level. Tax bases and tax levels applied vary greatly: the average annual road tax paid in 1999 ranged from €30 per vehicle per year in Italy to €463 in Denmark. The diversity of taxes creates a number of problems, both for car manufacturers (who, for example, produce specific car models with different specifications concerning horsepower, diesel, etc. for different Member States to reduce pre-tax prices) and private individuals (for example, registration tax must be often paid a second time when a car is moved from one Member State to another).

The EC recommended that all ten Member States applying a registration tax should establish a system of refund of the residual tax in all cases where a passenger car, registered in one Member State, is moved permanently to another Member State. In the long-term, the Commission recommended that registration tax levels should be gradually reduced, stabilized at low levels and preferably abolished over a transitional period of five to ten years. Instead, the EC suggested, Member States should raise revenue from car owners by switching over to increased annual road taxes, and to some extent to fuel taxes. The EC recommended that Member States should bring their annual road taxes closer together, so that car manufacturers do not have to produce different models for different Member States.

The Commission recommended that both registration tax (as long it remains) and annual road tax should be based entirely or partly on CO2 emissions. Currently only the United Kingdom applies a CO2 based road tax. According to recent studies undertaken for the EC, more significant CO2 reductions can be achieved if the tax level is more directly related to the CO2 performance of each new passenger car. The European Council and the European Parliament have adopted a target of reducing CO2 emissions from new passenger cars to 120 grams per kilometer if possible by 2005, or by 2010 at the latest. The car industry committed itself to reduce these emissions to 140 g CO2/km, mainly through technical improvements, leaving a “gap” of 20 g CO2/km which has to be covered in particular by using fiscal incentives. Meeting the 120 g/km target is of importance for the achievement of the European Union’s Kyoto Protocol targets.

The Commission recommended that the Council of EU Ministers endorses the general principles of the Communication and urges Member States to take them into account when evaluating and revising their national vehicle taxation systems. Once it has had discussions with Member States, the European Parliament and other interested parties, the Commission may submit proposals for legislation.

New taxation strategy proposal:
Communication COM(2002)431

European Commission taxation studies:
Fiscal Measures to Reduce CO2 Emissions from New Passenger Cars
Study on vehicle taxation in the Member States of the European Union

Source: European Commission