Passenger car taxation: Frequently Asked Questions
European Commission - MEMO/05/236 05/07/2005
Other available languages: none
Brussels, 5 July 2005
(see also IP/05/839)
Why is the Commission making a proposal for an EU framework for car taxation?
The Commission is making this proposal because it is convinced that there is a need for action to eliminate obstacles to the free movement and transfer of passenger cars within the Internal Market, to tackle market fragmentation and to promote environmental sustainability. It has come to this conclusion as a result of its research and of its extensive consultations with the European Parliament, the car industry and consumers.
Will the proposal introduce new taxes?
No. The proposal would not require Member States to introduce any new passenger car related taxes and it would not harmonise tax rates. The proposal only aims to restructure passenger car-related taxes, i.e. car registration taxes and annual circulation taxes, in those Member States that apply such taxes. Member States would remain free to decide on the steps to take so as to abolish registration tax before 2016; on the way in which to incorporate the 25%-50% CO2 based element into the tax base of annual circulation taxes and registration taxes; and, potentially, on the introduction of tax elements related to other emissions into these tax bases. Value-added tax (VAT) and fuel taxes are not covered by the proposal.
What are the main car tax problems for individuals moving their cars within the Internal Market?
The problems most frequently faced by private individuals moving cars within the Internal Market are double payment of registration tax, troublesome administrative procedures and extra costs associated with administrative delays.
As regards registration taxes, these can, in certain cases, be paid twice when a car is moved from one Member State to another.
Some Member States exempt cars from registration taxes when the car is moved as part of a change in residence but this is subject to a lot of administrative requirements. Moreover, recent case law on this question leaves Member States free to maintain or abolish these exemptions if they so wish.
In cases where cars are moved, but not as part of a change of residence, double payment of registration taxes is a frequent occurrence Furthermore, the residual car values applied for the purposes of calculating second registration taxes are often excessive which results in disproportionately high levels of tax. The case law of the Court of Justice has helped to resolve some of the problems in this area but many problems remain.
What is the recent case law concerning registration taxes on cars that are moved as part of a change of residence?
The European Court of Justice in the cases of Weigel (C-387/01) and Lindfors (C-365/02) held that registration tax can be applied a second time even where the car move is connected with a change of residence. It was originally thought to be the case that only used passenger cars which were moved without a change of residence could be subject to registration tax a second time. The Court ruled that car registration taxes fall outside the scope of the exemption from "turnover tax, excise duty and other consumption taxes", provided for in Directive 83/183/EEC, for personal property imported permanently from another Member State by private individuals. As a consequence, each Member State will now be able to decide whether to apply a registration tax or not when the permanent movement of a car is connected with a change of residence of its owner.
However, in its judgment of 16th June 2005, in case C-138/2004, the Court has also stated that registration taxes can amount to an obstacle to free movement of persons and workers, in particular because of their rates and technicalities.
What is the main tax problem in the Internal Market for the car industry?
The wide differences in registration tax systems have a negative impact on the ability of the motor industry to achieve the potential benefits of operating within the Internal Market, and consequently to improve competitiveness and create new jobs. Industry is often obliged to produce specific car models, with different specifications (as regards horsepower, diesel etc.) to reduce pre-tax prices, in particular when vehicles are destined for high taxing Member States. This generates additional costs.
On the other hand, precisely because of the differences in tax levels, the car industry often adapts its pre-tax prices according to the level of taxation in Member States. Pre-tax prices are in general lower in those Member States with a high registration tax. On the whole, taxation is responsible for about 20% of the car price differentials in the EU.
Is it really necessary to abolish registration taxes?
The Commission believes so.
Allowing registration taxes to continue to exist but merely providing for a registration tax refund system when a car is moved from one country to another would solve some of the problems for EU citizens but would not be sufficient to tackle the existing Internal Market fragmentation as the present proposal endeavours to do.
Similarly, a system of applying registration tax only in the Member State where a car is first registered and exempting it from registration tax in any Member States to which it is subsequently moved would not be a solution unless all Member States agreed to harmonise registration taxes. Otherwise, EU citizens would obviously have an incentive to buy and register their cars in a Member State with no registration tax and then move it to the Member State of permanent residence. Leasing companies would likewise opt to become established in Member States not applying registration tax and lease their cars to residents of countries with high registration taxes.
Why not harmonise registration taxes?
Because the proposal aims to respect subsidiarity by including only those elements which are absolutely necessary to strike the right balance between Community and national responsibilities. Nine of the twenty five Member States do not currently apply registration taxes and there is no reason why they should be obliged to introduce them.
Why does the proposal envisage that Member States should move from registration taxes to annual circulation taxes on passenger cars?
The European Commission simply suggests that Member States could ensure that the present proposal is revenue neutral by accompanying the gradual abolition of registration tax with equal and parallel increases of revenue from annual circulation tax and, where necessary, other taxes. The Commission is not proposing that any Member State that does not currently have an annual circulation tax introduces one.
What are the economic arguments in favour of moving from registration taxes to annual circulation taxes
Annual circulation taxes have more coherence than registration taxes because they relate to the use and permanence of the vehicle on the territory.
Additionally Member States would profit from a better revenue source as annual circulation taxes are much more stable than registration taxes. Registration tax revenues are dependent on yearly car sales, which can fluctuate quite strongly.
Finally, Member States would no longer be confronted with high administrative costs and the problems related to the levying of registration taxes on cross border transfers of cars.
Why does the proposal link the abolition of registration tax to the introduction of CO2 based taxation?
At present, once registration tax is paid on a polluting vehicle, this vehicle is free to remain in circulation and to pollute with no additional tax burden. Since registration taxes would, under the proposal, be replaced by annual circulation taxes collected on a yearly basis, it seems a good time to make adjustments to the bases of annual circulation taxes to make them more dependent on emissions so as to encourage car owners to replace their cars by less polluting ones.
Would the different application of the CO2 element from one Member State to another create new market fragmentation?
We believe not. The Commission's proposal contains minimum CO2 elements precisely in order to avoid as much as possible the risk of a new market fragmentation. The proposal would require Member States to derive at least 25% of their total tax revenue from registration and annual circulation taxes from the CO2 based element of the taxes by 31 December 2008 and to increase this figure to 50% by the end of 2010. The possible fragmentation that might arise due to a differentiation between Member States of the CO2 element would thus be much more limited than the current fragmentation based on differences in registration taxes.
How would registration taxes and annual circulation taxes be applied during the transitional period?
It is left to the competence of the individual Member States to decide on the actual rate of the gradual reduction of registration tax and the part of the loss which would be recovered from annual circulation taxes and, if necessary, other taxes
However, the proposal would introduce a system whereby a Member State would be required to refund a portion of registration tax, pending its abolition, where a passenger car that is registered in that Member State is subsequently exported or permanently transferred to another Member State. This measure would aim both to prevent the double taxation that occurs at present and to make this kind of taxes fairer by relating them to the actual use of the car in the Member State concerned. A similar refund system would be introduced for annual circulation taxes.
Will the proposal be technologically neutral?
Yes. The proposal does not provide any advantage for a specific technology. It merely establishes that Member States should apply tax differentiation on the basis of the number of grams of carbon dioxide emitted per kilometre by each particular passenger car. Tax differentiation as far as registration taxes and annual circulation taxes are concerned is based only on the CO2 performance of each particular passenger car.
As the Commission proposal is based on a minimalist approach it is only targeting the CO2 emissions for which there is also a Community reduction strategy. For other emissions Member States can also use fiscal measures providing that they apply them in accordance with the general provisions of the EC Treaty (mainly relating to non discrimination and state aids).
What Member States would be affected by the abolition of Registration tax?
Only those applying a registration tax (16 out of 25)