Communication from the Commission to the Council and the European Parliament - Taxation of passengers cars in the European Union - options for action at national and Community levels [SEC(2002) 858]
Date: 2002-09-06
Institutions: European Commission
Subjects: environmental policy, motor car, reduction of gas emissions, single market, tax law, tax system, vehicle tax

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 06.09.2002
COM(2002) 431 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND
THE EUROPEAN PARLIAMENT

TAXATION OF PASSENGERS CARS IN THE EUROPEAN UNION -
options for action at national and Community levels

{SEC(2002)858}

TABLE OF CONTENTS

1.

2.

2.1.

2.2.

2.3.

2.4.

2.5.

3.

3.1.

3.2.

Introduction.............................................................................................................. 3

Passenger Car related taxes - Current state of play .................................................... 5

Impact on national budgets ....................................................................................... 5

Registration Tax (RT): ............................................................................................. 6

Annual Circulation Tax (ACT) ................................................................................. 6

Value Added Tax (VAT) .......................................................................................... 7

Fuel taxes (FT) ......................................................................................................... 7

Passenger car Taxation, the internal market and current community law................... 8

Impact on the Internal Market and the EU-citizen..................................................... 8

Current state of Community law with regard to vehicle taxation ............................. 10

3.2.1.

Existing Community legislation.............................................................................. 10

3.2.2.

Identification of the main problems raised by citizens and car trade........................ 11

4.

5.

5.1.

5.2.

5.3.

5.4.

6.

Removing tax obstacles in the internal market for passenger cars: a new approach

to passenger car taxation......................................................................................... 14

Passenger car taxation as one of the tools to reduce CO2 emissions from new
passenger cars......................................................................................................... 16

Introduction............................................................................................................ 16

Fiscal measures, a tool for CO2 emissions reduction ............................................... 18

Tax differentiation based on CO2 sensitive parameters ........................................... 18

Company car taxation............................................................................................. 20

Conclusions and Policy Recommendations............................................................. 22

Annex: Tables and figures from the TIS and the COWI studies {SEC(2002)858}

2

1.

INTRODUCTION

Motoring has been an important source of revenue for a long time. All Member
States rely heavily on a range of tax instruments to ensure significant budgetary
receipts from both private and commercial road users. The vehicle related taxation
systems implemented in the Member States reflect a variety of influences beyond the
obvious need to raise revenue: geographic, industrial, social, environmental, energy
and transport policy considerations can all have a bearing on the type of approach
followed.

The variety of influences has led, traditionally, to large differences in the overall
strategies followed in the Member States. These differences apply both in terms of
the overall level of dependence on the sector for a contribution to total revenues, the
choice of instruments and their precise implementation. The operation of 15 different
vehicle tax systems within the EU has resulted in tax obstacles, distortions and
inefficiencies. From an internal market point of view the car market in the EU is still
a long way from a true single market.

• From the citizen’s viewpoint, the notion of a single market implies freedom to
move between Member States and buy a car in the Member State of his choice,
and to pay purchase-related taxes in that State. The citizen expected that the levels
of vehicle taxes would be approximated and that problems associated with
movement - either temporary or permanent - between Member States would
disappear. The citizen is often asked to pay a Registration Tax (RT) twice, if he
moves his passenger car from one Member State to another, both of which apply a
RT.

• From the motor industry viewpoint, the wide differences in tax systems have a
negative impact on their ability to achieve the potential benefits of operating
within a single market, and consequently to improve competitiveness and create
new jobs. On the other hand, precisely because of the differences in tax levels, the
car industry adapts its pre-tax prices taking into consideration the level of taxation
in Member States. Pre-tax prices are much higher in those Member States
applying no, or a low, RT.

From an environmental point of view,
is
responsible for 28% of total CO2 emissions. Road transport alone currently
represents 84% of all transport related CO2 emissions; more than half is accounted
for by passenger cars1.

it should be recalled that

transport

The Gothenburg European Council, in June 2001, confirmed that combating climate
change is a major priority of the European Union's Sustainable Development
Strategy. In March 2002 the Council ratified the Kyoto Protocol on behalf of the
European Community. This shows the urgency of a successful implementation of the
Community's strategy to reduce CO2 emissions from passenger cars and improve fuel
economy. The use of fiscal measures is one of the pillars of this strategy.

1

Passenger car means the category M1 as defined in Annex I of Council Directive 70/156/EEC (OJ L 42
of 23.2.1970, p. 1-15).

3

In the Communication on "Tax policy in the European Union - Priorities for the
years ahead" 2, the Commission sets out its views on the fundamental priorities for
tax policy in the European Union in the years ahead. It must serve the interests and
wishes of citizens and business to benefit fully from the internal market. This means
that it is necessary to focus on the removal of tax obstacles and distortions, the
elimination of inefficiencies linked to the operation of 15 different tax systems
within the EU, and the simplification of these tax systems to make them more
accessible to citizens. EU tax policy must also reinforce, inter alia, EU sustainable
development, environmental and energy policies. In the view of the Commission,
vehicle taxation is an area where this new tax policy approach should be applied. The
Commission considers it useful to have a debate on these important issues. This
Communication can serve as a starting point for this debate.

Objective of the Communication

The main purpose of this Communication is to propose, for discussion in the Council
and the European Parliament, policies and options for future action in the field of
passenger car taxation.

The priority is to ensure the smooth functioning of the Internal Market and, at the
same time,
in particular the Community's
environmental objectives provided for by the Kyoto Protocol.

to advance other policy objectives,

The Communication is based on the outcome of two recent studies, as well as a
number of best practices in use by Member States. It explores possibilities to:

• modernise and simplify the existing vehicle taxation systems, and in particular to
include new parameters in the tax bases of passenger car related taxes, in order to
make them partially, or totally, CO2 based;

• better co-ordinate and, at a later stage, to approximate passenger car taxation
systems, and to remove tax obstacles and distortions to free circulation of
passenger cars within the Internal Market.

2

COM(2001)260 final (OJ C284 of 10.10.2001, p. 6-19)

4

2.

PASSENGER CAR RELATED TAXES - CURRENT STATE OF PLAY

Taxes on passenger cars are very diversified in terms of structure and levels. They
are based on one or a mix of elements such as fiscal horsepower, engine capacity,
weight, kW, price of the car, fuel consumption, or CO2 emissions. Tables 1, 3, 5 and
6 in Annex, give a clearer picture of these taxes.

Taxes and charges on passenger cars include:

• taxes payable at the time of acquisition, or first putting into service, of a passenger car,

defined in most cases as Registration Tax (RT);

• periodic taxes payable in connection with the ownership of the passenger car, defined in

most cases as Annual Circulation Tax (ACT);

• taxes on fuel (FT);
• any other taxes and charges, such as insurance taxes, registration fees, road user charges,

road tolls etc.

This Communication focuses on RT, ACT and to some extent fuel taxes, as they are
by far the most important passenger car related taxes.

2.1.

Impact on national budgets

The level of budgetary dependence on vehicle related taxes varies considerably from
one Member State to another. The following Figure, and Table 8 in Annex, present
this dependence, in absolute and relative terms, in nine Member States:

Figure1: Revenue from vehicle related taxes as % of total taxation, in 1999
Source: TIS study3, Figure 26. For Austria petrol figures also include diesel figures.

3

Study on vehicle taxation in the Member States of the EU, January 2002, TIS/PT. The study covered a
representative number of high, medium and low taxing Member States and is available under the
following web site address:
http://europa.eu.int/comm/taxation_customs/taxation/car_taxes/vehicle_tax_study_15-02-2002.pdf

5

2.2.

Registration Tax (RT):

• Ten Member States are currently applying a RT4.
• Tax bases and tax levels currently applied are strongly diversified; tax levels
range, in extreme cases, between zero and 180% of pre-tax car price. In absolute
terms average RT ranged, in 1999, between 15659 EUR in Denmark and 267
EUR in Italy.

• RT concerns most of the complaints European citizens rise, contesting in
particular, disproportionate rates, or double payment of RT. In case of exportation
of a passenger car, or its permanent removal to another Member State, the absence
of a RT refund system makes partial recovery of RT impossible.

• The significant differences in RT levels partly influence the pre-tax price of
passenger cars, and provide an incentive to citizens to purchase their vehicles in a
Member State with high RT, since the pre-tax prices in these Member States are,
as a rule, lower.

Member States having a large car industry tend not to apply a RT, or they apply a
lower RT, while car importing Member States tend to levy higher RT. In 1999,
relatively high average RT levels were found, for example, in DK, FIN and NL,
while five Member States did not apply a RT. As shown in table 5, most tax bases
are based on sale prices, although rates may be differentiated according to cm³.

2.3.

Annual Circulation Tax (ACT)

All Member States apart from France apply ACT at national level. Very different
objective factors are used as tax bases (e.g. cm³, kW, CO2, weight), which are often
further adjusted at national level to define country-specific fiscal parameters and
brackets (e.g. fiscal horsepower based on cm³) or environmental objectives (e.g.
differentiation in accordance to compliance with emission limits (EURO II, III and
IV). As far as effective rates are concerned, high average levels of ACT were found,
for example, in DK, NL and IRL. In most Member States, diesel cars face higher
ACT than petrol cars of the same size, mainly in order to compensate for the lower
diesel fuel taxes.

• Fourteen Member States5 are currently applying an ACT.
• Tax bases used and tax levels applied are very diversified; the average ACT paid
in 1999 ranged from 30 EUR/vehicle in Italy, to 463 EUR/vehicle in Denmark.
• ACT has the advantage of being a more stable source of revenue (less sensitive to
economic cycles) than RT, since ACT produces its revenue during the entire
lifetime of a vehicle, unlike RT, which produces its revenue upon purchase of a
passenger car.

• Important differences in average ACT levels can provide an incentive to citizens
to register their passenger car in a Member State other than the Member State
where they have their permanent residence.

4

5

D, F, L, S and UK do not apply any RT.
In 2000 F has abolished ACT for passenger cars used by private persons.

6

2.4.

Value Added Tax (VAT)

VAT is subject to a Community-wide regime, which imposes, in the case of new
cars, a considerable degree of common rules. Motor vehicles are generally subjected
to the standard rate of VAT (see Table 1, in Annex). Common rules govern the
method of calculation of the taxable amount.

After the completion of the Internal Market in 1993, Member States, which had
previously applied a luxury VAT rate and/or an excise duty on cars, adapted their
vehicle tax systems, replacing these taxes with registration taxes. Furthermore, it
became clear that, given the existing differences in VAT rates, Member States
wanted VAT on all means of transport to be collected in the jurisdiction, and at the
rate of the country where the owner of the vehicle resides. Generally, a non-taxable
person is allowed to purchase goods within the Community and pay the VAT in the
Member States where the goods are purchased. However, since the introduction of
the transitional VAT arrangements, this principle has been adjusted for the purchase
of new means of transport. In this case VAT is due in the Member State of
destination, which normally coincides with the country where the vehicle is
registered. This situation, which contrasts with the general rules applicable to other
consumer goods purchased in the internal market and which does not favour
convergence of the VAT scheme applied to passenger cars, is the result of non-
approximation of VAT rates.

2.5.

Fuel taxes (FT)

Excise duties on motor fuels are seen as an effective fiscal instrument to collect
revenue, to influence the level of car use, or for internalising environmental and
social costs linked to the use of passenger cars, such as infrastructure costs, accident
costs, and air pollution costs. Given the direct relation between CO2 emission and
fuel consumption they are a particularly effective instrument
to internalise the
external cost of emissions. Usually, Member States applying no, or low RT,
compensate revenue losses by higher fuel tax levels. With the only exception of the
UK, they all apply lower tax levels on diesel, traditionally used by commercial
vehicles. Diesel is taxed on average about 140 EUR/1000 litres lower than unleaded
petrol.

Indeed,

This difference in taxation on diesel would no longer be justifiable if taxation on
diesel used as fuel for commercial uses, was de-coupled from taxation of diesel for
private use. The Commission has already supported the view that the excise duty on
diesel, used as fuel for private cars, should be gradually aligned to the excise duty
imposed on unleaded petrol (see Proposal for a Council Directive COM (2002) 410
and be
final).
environmentally consistent. Despite a more positive balance than petrol as far as CO2
emissions are concerned, the combustion of diesel fuel in today's passenger cars'
engines triggers other environmental problems (e.g. particulate matters, nitrogen
dioxide). However, it can be expected that these differences between diesel and
petrol engines used in passenger cars will disappear within the coming years. Taking
into account all these aspects, there is no a-priori justification from an environmental
viewpoint to tax the two types of fuel differently.

such approximation would reduce

tax distortions

7

3.

PASSENGER CAR TAXATION, THE INTERNAL MARKET AND CURRENT COMMUNITY
LAW

3.1.

Impact on the Internal Market and the EU-citizen

The great variety in vehicle taxation systems,
significant impact on the Internal Market.

their tax bases and rates, has a

Important differences in pre-tax car prices

As vehicle taxes are paid in the Member State where the vehicle is to be used, pre-tax
car price could be an important factor likely to influence cross-border trade. The car
industry establishes recommended pre-tax prices, which consumers should pay for a
particular car model, taking into account, among other factors, consumer purchasing
power, and the level of taxation in each Member State. These prices are in general
higher in Member States applying no, or low, RT. Since cross-border retailing and
purchases in the Internal market do not take place to any significant extent, in
response to high RT in some MS, car manufacturers fix pre-tax prices at a lower
level than in MS applying no, or low, RT (see Table 4 in Annex for a synthesis6).
Different
the European car price
differentials7.

taxation levels can explain about 20% of

Car market fragmentation

The wide differences in tax systems have a negative impact on the ability of the car
industry and European consumers to reap the benefits of operating within a single
market. Car market fragmentation prevents industry from exploiting economies of
scale, or to produce motor vehicles for the entire Internal Market, applying the same
specifications and does not prevent pre-tax prices from varying significantly within
the internal market. Industry is often obliged to produce a specific car model, with
different specifications, in order to soften the pre-tax prices, in particular when the
vehicle is destined to high taxing Member States. This generates additional costs that
undermine the competitiveness of the European car industry, and consequently, has
negative repercussions on the employment situation in the EU. In parallel, as tax
requirements differ, cars marketed in one Member State with specifications designed
to meet national requirements and “tax influenced” demand (e.g. brackets of fiscal
horsepower, tax policy regarding diesel), are imperfect substitutes of and may not
effectively compete with cars sold in a different Member State, thereby undermining
the benefits which EU consumers should derive from a competitive and integrated
market.

Figure 2 hereafter, presenting tax as % of the pre-tax price of the car, provides an
example of how RT and VAT are affecting retail prices of a 2000 cc passenger
vehicle in all EU Member States:

6

7

Comprehensive information about price differentials, pre and post tax prices in the EU is available in
the biannual report on car prices, which can be found in:
http://europa.eu.int/comm/competition/car_sector/price_diffs/. See also Press release IP/02/305 of
25.2.2002.
See TIS study

8

Source: ACEA Guide, updated in April 2001

Tax consequences of cross border transfers of cars

Cars are important means of transport for their users, and assist them to exercise the
right of free circulation granted by the EC Treaty. Many citizens take their car when
they move, either temporarily or permanently, from one Member State to another.
Other citizens buy, or hire, a car in another Member State.

For the EU-citizen, many questions arise with regard to the fiscal consequences of
these cross border transfers of cars. When a car is moved from a Member State to
another, different
tax structures and administrative problems lead to a lack of
transparency, and increase transaction costs for the consumer.

Although ACT is sometimes reimbursed, RT is never re-paid when a car is
transferred to another Member State. Member States that levy RT require that a RT
has to be paid (again), when a car is to remain permanently on their territory. Double
taxation and other fiscal consequences of cross border transfers of cars are dealt with
in section 3.2.

Other barriers to cross border transfers of cars

Apart from the fact that the citizen can be confronted with double taxation, the
procedure necessary for moving a car from one Member State to another is often
very complex. There is a lack of comprehensive and easily accessible information on
this issue for the EU citizen. Although taxation is not the only reason for this
procedure, the significant difference in car taxation levels between Member States is
one of the main reasons for it. From the citizen's viewpoint,
these complex
procedures act as evidence that we are a long way from a true single market.

The following list provides some quantified information concerning certain
additional costs that the EU citizen has to face:

9

• In case of exportation8 of a vehicle, workload for the citizen for de-registration
ranges between few minutes and one day. It requires the presentation of between
5-11 documents, and to contact a number of institutions ranging between 1-5.
Total cost, involving de-registration fee, temporary road permit, and other costs,
can range between zero and 64 EUR.

• In case of importation of a vehicle, workload for the citizen for registration ranges
between one and nine hours.
It requires the presentation of between 1-9
documents, and to contact a number of institutions ranging between 1-7. The total
cost, involving registration fee9, temporary road permits, other costs, is much
higher, and can range between 70 and 437 EUR.

• The average cost for the citizen, who moves his place of residence to another

Member State, and takes his car with him, is estimated to be up to 351 EUR.

• Information on vehicle exportation is, with the exception of NL, available only in
national language; on importation, only in DK, NL and IRL is a certain amount of
information available in a foreign language.

• The assistance of a native speaker, or even a specialist is often necessary for a
private EU citizen, to accomplish the cross border transfer procedures, particularly
if some documents must be completed in the national language.

3.2.

Current state of Community law with regard to vehicle taxation

The way Member States apply their car taxes gives rise to an increasing number of
complaints by citizens and the car trade to the European Commission, petitions to the
European Parliament, and cases before the Court of Justice.

The Commission has made an analysis of current Community law and of the
jurisprudence of the Court of Justice. This analysis is laid down in a Working paper
of the Commission, which indicates the rights that citizens have at present when
moving (with) their cars from one Member State to another Member State. This
Working
addresses:
http://citizens.eu.int/originchoice.htm or http://europa.eu.int/citizens.

following

provided

Internet

paper

the

at

is

3.2.1.

Existing Community legislation

Two Council Directives10 were introduced in 1983 concerning the tax treatment of
private vehicles when persons move, either temporarily or permanently, from one
Member State to another. At that time, fiscal frontiers between Member States still
existed. In 1998, the Commission put forward a proposal11 to replace these two
Directives by a new one, to update the existing Community legislation in this area,
and to better address the situations that arise with greater freedom of movement
under an internal market. So far, this proposal has failed to secure agreement at
Council.

8

9

10

11

For the purpose of this analysis the terms exportation and importation cover both importations from and
exportations to third countries as well as vehicle transfers to and from another EU Member States.
Registration fee is a separate charge and should not be confused with RT (Table 1 in Annex)
Directives 83/182/EEC and 83/183/EEC (OJ L 105 of 23.4.1983, p. 59-67)
COM(98)30 final (OJ C108 of 7.4.1998, p. 75-81)

10

the Commission observes that

Furthermore,
if passenger cars are transferred,
"imported", from one Member State to another, Member States have to respect the
general principles of the EC Treaty and shall not:

–

–

–

give rise to border-crossing formalities in trade between Member States
(Article 3 (3) of Directive 92/12/EEC);

impose charges having equivalent effect to Customs duties (Article 23 and 25
of the EC Treaty);

impose internal taxation of any kind in excess of that imposed on similar
domestic products (Article 90 of the EC Treaty).

Over recent years, the EC Treaty itself has undergone some important changes.
Article 14 states that, the internal market shall comprise an area without internal
frontiers in which the free movement of goods, persons, services and capital is
ensured in accordance with the provisions of this Treaty. On the basis of Article 18
of the Treaty, every citizen of the Union shall have the right to move and reside
freely within the territory of the Member States. An indirect attack on this freedom
by means of an unjustified tax on vehicles, which are the means most used to
exercise this free movement, is not acceptable.

The two above-mentioned Directives, as well as Article 90 of the EC Treaty, have
already led to an abundant case law of the Court of Justice, which has specified, and
limited, the competence of the Member States to tax cars transferred from one
Member State to another.

3.2.2.

Identification of the main problems raised by citizens and car trade

Based on the analysis made in the above-mentioned Working Paper of
Commission, this section shows what are the main issues:

the

a)

RT on definitive transfer of a vehicle to another Member State (without
change of residence of the owner)

A definitive transfer normally implies that new registration (standard plates) will be
necessary in the Member State of destination.

Currently, certain taxes other than VAT (in particular RT) can be required to be paid
at this time in the Member State of destination, even if comparable taxes have
already been paid in the Member State of origin. However, the above-mentioned
provisions of Community law limit the taxing powers of the Member States in this
field (see the Commission’s Working paper on the Internet site).

The main complaint with regard to such transfer relates to the excessive residual
values for second hand cars that are applied by the Member State of destination,
in high, and disproportionate, RT amounts. These amounts of RT
which result
applied on "imported" cars, were found in a number of cases to be higher than the
residual RT amounts corresponding to similar cars circulating on the same national
markets. The Court has already identified a number of objective criteria with regard
to the determination of the residual value, which include the vehicle's age, make or

11

model, mileage, method of propulsion, general condition, the mechanical state or the
state of maintenance of the vehicle12. Member States are obliged to apply a
transparent method for calculating the residual value of second hand passenger cars,
and to enforce the application of these objective criteria established by the Court of
Justice. However, some of these criteria can be difficult to apply in practice.

b)

Disproportionate level of registration fees in the case of transfers of
vehicles in the event of change of normal residence

If the transfer of the vehicle coincides with the change of normal residence, the
citizen is normally not obliged to pay again a tax, like the RT, in the Member State of
his new residence. However, in order to benefit from the exemption, a number of
conditions must generally be fulfilled, which are stipulated by Directive 83/183/EEC.
The only taxes for which the citizen will become liable in the Member State of his
new residence, as from the moment he begins to use the vehicle in this Member
State, are periodic taxes (monthly or annual) connected with the use of the vehicle
within the Member State, generally called ACT.

It must be observed, however, that the Member State of the new residence can charge
certain “fees” at the time of registration of the vehicle, the amount of which should
be limited to the approximate cost of the services rendered (registration fees). These
fees should not to be confused with the RT, or similar taxes. As Member States can
make a confusion between "registration fees" and "registration taxes", citizens are
sometimes invited to pay duties in some Member States which seem disproportionate
to be considered as a fee.

c)

The absence of a (partial) refund of the RT paid in the Member State of
first registration

The absence of a refund system, which would allow for partial reimbursement of the
RT paid in the Member State of first registration, appears to be a major concern for
citizens and the car trade.

Discussions on the possible non-conformity with Community law of a refusal of a
Member State to reimburse (partially) the RT paid in that State, can be expected to
be influenced by the forthcoming case law of the Court of Justice (see the
Commission’s Working paper on the Internet site).

d)

Place of normal residence and registration of the vehicle

Normally, the place of establishment of the vehicle coincides with the Member State
of the citizen's normal residence. In this Member State the vehicle must be
to the vehicle related taxes,
registered, use the standard plates, and is subject
particularly RT and ACT. However, in exceptional cases, a person may want to
register a passenger car in a Member State other than that of his normal residence –
or may reasonably be invited to do so by the authorities of that other Member State -
(e.g. in the Member State of his second residence), if he returns very often to that
Member State, and for reasons linked to distance he is unable to use his vehicle
registered in the Member State of normal residence. Such a situation must not give
rise to a double taxation (see the Commission’s Working paper on the Internet site).

12

ECJ, 22 February 2001, C-393/98 Gomes Valente Rec. p I-1327, points 24, 26, and 28

12

On the basis of the analysis in this Chapter the Commission is of the opinion that:

• the way car taxes, in particular RT, are still applied by (some) Member States
amounts to a clear obstacle to the freedom of movement in the Internal Market;

• although existing Community legislation, and the case law of the Court of Justice,
help to resolve a number of problems that
the European citizens face, new
legislation would increase legal certainty, and reduce the number of complaints by
citizens;

• Community legislation, governing the treatment of vehicles moving between
Member States, should therefore be adapted, in order to achieve a more efficient
Internal Market without internal tax obstacles.

4.

REMOVING TAX OBSTACLES IN THE INTERNAL MARKET FOR PASSENGER CARS: A
NEW APPROACH TO PASSENGER CAR TAXATION

Gradual reduction of Registration Tax

In the opinion of the Commission there is a valid reason for a gradual reduction of
RT divergences in the EU.

A gradual transfer of revenue should take place from RT to ACT and to some extent,
to fuel tax. This should lead to a RT stabilisation at low levels, or preferably, to a
complete abolition of RT in the long term. Such a transfer would:

• provide more fiscal stability for the budget. ACT is a more stable source of
revenue than RT. Revenues of RT are dependent on yearly car sales, which can
show quite strong fluctuations

• provide for car consumer price approximation in the EU

• result in more vehicle tax approximation in the EU

• bring forward in some MS significant retail car price reductions

• require a transitional period, in order to avoid an excessive tax burden on those
who have bought a new car and paid a high RT, and also having to pay a higher
ACT

• improve the functioning of the Internal Market and the competitiveness of the

European car industry, for the benefit of the European citizen

• cause transition costs in the Member States with a (very) high RT. These
structural changes in vehicle taxation seem feasible however, taking into account
the establishment of a sufficiently long transitional period.

Because the above-mentioned shift from RT to ACT and fuel tax, requires a rather
long transitional period, additional legal measures are appropriate to deal with the
problems which citizens and the car trade face today, and to offer them simple and
uniformly applicable rules.

13

Therefore, the Commission intends to propose the following measures, which go
beyond what was foreseen in the 1998 proposal for a Directive:

• general rules with regard to the method of calculation of the RT on used cars
imported from other Member States. The jurisprudence of the Court of Justice (in
particular the Gomes Valente case, C-393/98) contains important interpretations
that could be translated in harmonised Community rules. This would result in
more legal certainty and transparency for the citizen;

• a refund system for the RT in cases where a used car is sold to another MS or
exported to a third country. The way of calculating the residual RT to refund
should be the same as in the case of import of used cars from other Member
States;

• when ACT has previously been paid for a number of months following the
removal of a vehicle to another Member State, double taxation of ACT must be
avoided. This implies that Member States would have to grant a refund of the
ACT already paid for the number of months following the removal of the vehicle
from their territory

Refund system for Registration Tax

In the view of the Commission a harmonised RT refund system should be established
without delay in all ten Member States currently applying a RT. This refund should
apply to used cars, which are transferred permanently to another Member State (by a
EU citizen, or by a car trade company). Clear rules on such a system would be
helpful to the citizen. It would also have a positive influence on the export of used
cars, because prices can be lower as a consequence of the refund of RT.

The refund system should also apply in the case of cars moved permanently to
another Member State in connection with a transfer of residence. For these cases the
1983 Directive - and the 1998 proposal for a Directive - provide for the application
of an exemption of RT in the Member State of arrival. If such an exemption is
granted, there is no need for a refund of the RT in the Member State of departure,
because the citizen is not faced with double taxation13. The Commission considers
that it would be more clear and simple to apply a refund system in all cases where a
used car is transferred permanently to another Member State (i.e. in connection to
transfer of residence, and in cases where a used car is sold to another Member State).

Taking into account the above-mentioned amendments, the Commission considers it
is to be preferred to withdraw its 1998 proposal and replace it by a new proposal
incorporating all new elements referred to in this Chapter.

13

See article 2 (2) (a) of Directive 83/183/EEC and article 4 (1) (a) of the proposal for a Directive
COM(98)30 final. An exemption is only granted if the car was not subject to an exemption or refund in
the MS from which it is brought.

14

5.

PASSENGER CAR TAXATION AS ONE OF THE TOOLS TO REDUCE CO2 EMISSIONS
FROM NEW PASSENGER CARS

5.1.

Introduction

In order to reduce CO2 emissions the Council endorsed in 199614 the Community
strategy to reduce CO2 emissions from passenger cars and improve fuel economy15,
which is based on three pillars16:

• Commitments of the car industry on fuel economy improvements17.

• Fuel-economy labelling18

• Fiscal measures

The European Council and the European Parliament have adopted a target of
reducing CO2 emissions from new passenger cars to 120 gram per kilometre by
2005, or by 2010 at the latest. This target goes beyond the target of 140 g CO2/km
provided for in the commitments of the car industry, leaving a “gap” of 20 g CO2/km
to cover. The car industry's commitment is to be achieved mainly through technical
developments, and market changes linked to these developments. This leaves scope
for further market changes being induced by the other instruments - in particular
fiscal ones - which are part of the Community strategy19. The 20 g CO2/km "gap",
mentioned above, must be closed with the help of these other instruments, and the
Council invited the Commission, on several occasions, to consider fiscal framework
measures.

In the year 2000, the average level of CO2 emissions from newly registered cars
produced by members of ACEA, JAMA and KAMA was 172 g/km. According to a
recent Commission report, based on monitoring figures on the implementation of
these commitments, it appears that the car industry is making significant efforts to
meet the target20.

14

15

16

17

18

19

20

Council conclusions of 25.6.1996.
Communication from the Commission to the Council and the European Parliament: A Community
Strategy to reduce CO2 emissions from passenger cars and improve fuel economy, COM(95)689final.
For details see http://europa.eu.int/comm/environment/co2/co2_home.htm
Commitments made by European (ACEA), Japanese (JAMA) and Korean (KAMA) automobile
manufacturers' associations to reduce average new passenger car CO2 emissions, see COM(98)495final,
COM(99)446 final, and Recommendations 1999/125/EC, 2000/304/EC, 2000/303/EC.
Directive 1999/94/EC relating to the availability of consumer information on fuel economy and CO2
emissions in respect of the marketing of new passenger cars (OJ L 12 of 18.1.2000, p. 16-23).
COM(1998)495 final.
COM(2001)643 final.

15

the
With the objective of contributing to the “third pillar” of the strategy,
Commission has established an "Expert Group on Fiscal framework measures" and it
conducted a comprehensive study21. This chapter sets out the main conclusions of the
study.

Based on model projections on road transport CO2 emissions, it can be estimated that
the CO2 emissions would change in the period 1995 to 2010 as follows:

• without additional measures + 17%

• with car industries commitments being implemented (target 140 g/km)+7%

• with Community target being implemented (target 120 g/km) +3%

This means that if the 120 g/km target could be met the upward trend in total CO2
emissions from road transport could be nearly broken and emissions could be more
or less stabilised, around 1995 levels, somewhere between 2005 and 2010.

As far as the total CO2 emissions from passenger cars are concerned, the picture is as
follows:

• if car

industry commitments are implemented (target 140 g/km),

the CO2

emissions of passenger cars could be stabilised;

• if the 120 g/km target were met, these emissions would go down by a few
percentage points, as compared to 1995 levels. In absolute terms a total additional
EU CO2 emissions reduction of about 30 Mt could be achieved, compared to the
140 g/km target levels.

Therefore, to meet the 120 g/km target is of importance for the achievement of
Community's Kyoto Protocol target.

21

Study on fiscal measures to reduce CO2 emissions from new passenger cars - A study undertaken by
COWI Consulting Engineers and Planners AS, November 2001. This study is available under the
following website
address:http://europa.eu.int/comm/taxation_customs/taxation/car_taxes/co2_cars_study_25-02-2002.pdf

16

5.2.

Fiscal measures, a tool for CO2 emissions reduction

The study (COWI) confirmed that,
among national vehicle taxation systems:

irrespective of the considerable differences

• fiscal measures do have a potential in supporting the reduction of the average CO2

emissions from new cars, in all the Member States that were analysed;

• the level of RT or ACT,

is not very relevant for the
in absolute terms,
effectiveness of vehicle taxes with regard to CO2 emissions of new cars22. Solely
increasing the overall level of the existing tax rates, without changing the tax
base, does not provide for a significant effect, within the boundary conditions (see
explanatory note on Table 7 in the Annex;

• more significant reductions can be achieved, if the national taxation systems were
designed in such a way that a CO2 specific element was inserted in the existing
tax basis of either or both RT and ACT;

• tax differentiation is the key parameter for improving the fuel efficiency of

passenger cars;

• the highest CO2 emissions reduction level, going up to 8,5%, has been calculated
in DK, if both RT and ACT would turn into purely CO2 based taxes and would be
differentiated in a co-ordinated manner (see Table 7 in the Annex for a summary
of the results);

• the highest possible CO2 reductions can be achieved if efforts are focused on that

vehicle tax, which, in absolute terms, has the higher level.

• modifications of RT or ACT do not lead to significantly different CO2 reduction

results. RT and ACT seem to be equally effective.

5.3.

Tax differentiation based on CO2 sensitive parameters

Tax differentiation has been identified as an important parameter for improving the
overall fuel-efficiency of new cars. The design of tax differentiation should take into
account the characteristics of national vehicle taxes and vehicle markets.

22

The effect on total CO2 emissions of vehicle fleet has not been studied. However, it is obvious that the
type of vehicle tax, as well as the level of tax can have repercussions on the renewal of the fleet and
consequently on CO2 emissions.

17

• To give an example: if the ACT is based on the cylinder capacity of a passenger
car, two particular vehicles of 1500 cc pay the same ACT, irrespective or their
fuel consumption, weight, age or technology. Tax differentiation means that the
owner of a fuel-efficient passenger car should pay lower ACT, compared to the
owners of a similar but less fuel-efficient car. The total tax revenue for the state
should, nevertheless, remain stable. Tax differentiation between these two cars
should be sufficiently high, in order to provide a strong incentive to consumers in
favour of the more efficient car.

• If RT and ACT are partially or totally CO2 based, tax differentiation has more

room for providing incentive to improve CO2 efficiency.

• Currently only one Member State (UK) applies a CO2 based ACT. A passenger
car emitting less than 150g CO2/km is charged by 159 EUR, while more polluting
cars are charged by a tax amount increasing gradually to reach the level of 246
EUR for those cars emitting more than 185 g CO2/km .

• In the Netherlands, from 1 January 2002, fuel efficient passenger cars have been

awarded an energy bonus. This bonus is provided as a reduction of RT.

In the Commission's opinion vehicle taxation:

• is an important complementary instrument to support the realisation of the EU-
target of 120 g CO2/km for new cars by 2008-2010, and to contribute to the
accomplishment of the EU engagements under the Kyoto Protocol.

• needs to establish a more direct

relation between tax level and the CO2
performance of each new passenger car. Vehicle tax differentiation has been
identified as an important parameter for improving the overall fuel-efficiency of
new passenger cars. Existing vehicle taxes should be replaced by taxes fully based
on CO2 emissions or, alternatively, a CO2 sensitive element should be added to
existing RT and ACT. Add-on elements would also allow taking into account
other national environmental objectives, e.g. the early introduction of EURO IV
standards.

The Commission is aware of the potential conflict between the revenue objective of
vehicle taxation and other policy objectives. If RT and ACT were restructured in an
revenues from these taxes could show a
environmentally friendly direction,
downward trend as a result of a successful environmental policy. However, this very
much depends on the design of the restructured taxes, and on the way car buyers, and
car drivers, react on new tax incentives. In order to ensure stable revenue, and to
maintain the incentive function of these taxes, it may be necessary to amend the
design, and the levels, of these taxes. Such amendments would also take into account
the potential for revenue losses, due the expected higher fuel efficiency of future
passenger car generations.

18

5.4.

Company car taxation

Company cars are a significant proportion of new passenger cars sold each year, and
of the total car fleet. So far, no single and generally acceptable definition has been
established of what constitutes a "company car". This is due to the fact that the
circumstances, and tax arrangements, differ significantly from one Member State to
another. Generally speaking, company cars:

• tend to be 8 - 10% larger and more powerful than the national fleet average, and

consequently more CO2 polluting.

• normally have a higher mileage per year than the fleet average, and a higher
contribution to total traffic levels, pollutant emissions and average fleet fuel
consumption.

• remain in company's ownership for a period between one and three years, before

being sold on to the private second-hand market.

• due to their type, and number, have an important impact upon the size and
composition of the entire car fleet, and hence upon its CO2 emissions profile.

• are less sensitive to retail price changes than private passenger cars.

Company cars are a significant proportion of all passenger cars (new and second
hand). Of all cars sold in the main EU markets in 1999, sales of company cars
formed between 35% and 45% (see Table 9 in Annex). Ireland and Italy are
exceptions with 7,5% and 10% respectively. Company cars tend to be larger, and
more powerful than the fleet average. This is partly explained by the fact that more
affluent motorists (professionals, managers and company executives) for various
reasons use many of
financial
arrangements may reduce the real costs to buyers or drivers, encouraging a trend
towards larger cars.

tax treatment and other

In addition,

them.

Although taxation on company cars varies considerably from one Member State to
another, the arrangements generally provide for:

• corporate tax arrangements, which allow the purchase/leasing and running costs

of the company cars to be deducted from the taxable profit and

• income tax has to be paid by the employee using the company car. Generally, the
use of a company car is considered as a "benefit in kind", and the estimated car
benefit is added to his personal income, and taxed in accordance with the national
taxation system. To calculate the annual amount of this benefit, a rate, varying
according to Member State, is applied on the purchase value of the company car
(pre-tax price + RT + VAT). Its level ranges from 9% in Sweden and 12% in
Germany up to a level of 25.5% in Ireland and 35% in the UK.

Moreover, the input VAT paid by a company when buying or leasing a company car,
is in principle deductible, in so far as the car is used for the purposes of taxable
activities (in certain Member States deduction is however subject to limitation).
Taking into account the size and value of cars companies normally buy, deduction of

19

VAT may provide a strong incentive for them to buy such expensive, and as rule,
less fuel-efficient, passenger cars.

Recent developments show that several Member States are revising their company
car tax system. Three Member States impose charges on the supply of free fuels for
private use (Ireland, Finland and the UK), while others apply a charge per km driven.
A new company car taxation scheme is due to enter into force in the UK in 2002.
According to this scheme, the income tax to be paid by the employee using the
company car will partly be based on the CO2 emissions of the car. This new scheme
could provide useful experience, and serve as a best practice for future action in other
Member States.

The Commission encourages companies to take into account the general transport
and environmental policy objectives, when providing cars to their staff
for
commuting to work. It intends to amend Commission Recommendation on guidance
for the implementation of Regulation No 761/200123 (EMAS) in order to ensure that
the environmental impact of company cars is fully taken into the audit.

23

OJ L 114, of 24.4.2001, page 1

20

6.

CONCLUSIONS AND POLICY RECOMMENDATIONS

The EU passenger car market is fragmented into fifteen national markets, and this is
partly due to very divergent policies in respect of car taxation. This raises a series of
problems for both the European citizen and the car industry. The introduction of the
Euro has started to bring greater price and tax transparency, and could increase
pressure for more vehicle tax approximation. This Communication provides evidence
that a number of policy measures and actions should be considered in the area of
passenger car taxation, in order to provide definitive solutions for the problems faced
by citizens and the car industry, and thus improve the functioning of the Internal
Market and the benefits which EU consumers derive therefrom. Apart from this, the
Communication has made clear
that vehicle taxation can contribute to the
achievement of the Kyoto Protocol commitments.

A.

Removing tax obstacles in the internal market for passenger cars

Registration tax levels should be gradually reduced, with a view of RT stabilisation
at low levels, and preferably with a view to its total abolition. This action should take
place over a transitional period of about 5 to 10 years. It should take into account the
specific conditions in each Member State.

A gradual transfer of revenue from RT to ACT, and to some extent to fuel taxes,
should be decided. This transfer is feasible, and can take place in parallel with the
reduction of RT, in a budget neutral context.

Action has to be taken in order to ensure a certain degree of ACT approximation
among all Member States, in particular as regards tax bases. Reasonable ACT
divergences would prevent car market fragmentation, and prevent
increased tax
avoidance in future.

The excise duty on diesel, used as fuel by passenger cars, should be gradually
increased in view of its total alignment, in the medium term, to the excise duty
applied on unleaded petrol. At the same time, ACT for diesel cars should be aligned
to the ACT for petrol cars.

A RT refund system should be established without delay in all ten Member States
currently applying a RT. This system should ensure, during the transitional period, a
pro rata refund of the residual RT in all cases where a passenger car, registered in
one Member State, is exported or is moved permanently to another Member State.
Should such a system be adopted, it would resolve all problems relating to double
payment of RT that the EU citizen faces today. The refund system should also apply
in the case of cars moved permanently to another Member State in connection with a
transfer of residence. The refund system would also have a positive influence on the
export of used cars, because prices can be lower as a consequence of the refund of
RT.

General rules with regard to the method of calculation of RT on used cars imported
from other Member States should be established. This method of calculation of the
residual amount of RT should also apply to the refund system.

1.

2.

3.

4.

5.

6.

21

7.

1.

2.

3.

1.

2

General rules should be established with regard to the avoidance of double taxation
of ACT.

B.

Fiscal measures one of the tools for CO2 emissions reduction of cars

Vehicle tax bases need to be restructured in order to establish a more direct relation
between taxation levels and the CO2 emissions of new passenger cars. Both RT and
ACT should be turned into entirely CO2 based taxes, or at least a CO2 sensitive
element should be added to both of them. This structural change is necessary in order
to optimise the effect of taxation on the reduction of CO2 emissions from new
passenger cars. It should take into account the specific conditions in each Member
State. For example if the RT in a Member State is already rather low, the transitional
period during which the RT will be further reduced could be relatively short. In this
case, it may not be worthwhile to carry through this structural change in the RT. The
restructuring should then focus on the ACT, in a context of gradual approximation of
tax bases.

All Member States should establish tax differentiation as an important parameter for
making passenger car tax systems more CO2 efficient and optionally to contribute to
the reduction of other emissions. The optimal level of tax differentiation could differ
from one Member State to another, taking into account the particular characteristics
of each Member State's market.

Company car taxation has to take into account the general objectives of EU policies,
and in particular, those of transport and environmental policies. Taxation should take
into account the increasing importance of company cars, and provide a clear and
strong incentive to companies to use more CO2 efficient cars. In most Member
States, existing corporate or income tax structures do not include such an incentive.

WAY FORWARD AND CONCLUSION

the Council approves the general principles
The Commission recommends that
mentioned under paragraphs A and B above and that the MS take into account these
general principles when evaluating and revising their national vehicle taxation
systems.

The Commission, based on these principles and in the light of the results of the
consultation process, could submit proposals for Community legislation, which:

• in the short term establishes a RT refund system and general rules with regard to
the method of calculation of RT on used cars, which are transferred between
Member States;

• during a transitional period provides for the gradual reduction of RT to a low

level, and preferably with a view to its total abolition; and,

• provides for the restructuring and approximation of the ACT and RT tax bases, in
order to make these taxes more CO2 efficient and more consistent with the
internal market.

22