EU Proposes Car Tax Changes

by Ulrika Lomas, for LawAndTax-News.com, Brussels

07 July 2005

The European Commission on Tuesday presented a proposal for a Directive that would require Member States to restructure their passenger car taxation systems.

The proposal aims to improve the functioning of the Internal Market by removing existing tax obstacles to the transfer of passenger cars from one Member State to another, and to promote sustainability by restructuring the tax base of both registration taxes and annual circulation taxes in order to include elements directly related to carbon dioxide emissions of passenger cars.

The Commission's passenger car tax proposal contains three elements:

• Abolition of car registration taxes over a transitional period of five to ten years. The Member States' revenues would not be affected if the gradual abolition of registration taxes is accompanied by a parallel increase of annual circulation taxes and, if necessary, other taxes. A gradual change would protect car owners from dramatic devaluations of their cars. The transitional period would also allow those Member States applying high registration taxes to make the necessary structural changes to their car tax systems.
• 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.
• The introduction of a CO2 element into the tax base of both annual circulation taxes and registration taxes. This would mean a tax differentiation on the basis of the number of grams of carbon dioxide emitted per kilometre by a car. By 31 December 2008, at least 25% of the total tax revenue from registration and annual circulation taxes should derive from the CO2 based element of the taxes and this figure should rise to 50% by 2010.

“Following the extensive consultations that the Commission has conducted with stakeholders, we believe that there is strong support for the abolition of registration taxes which give rise to double taxation for European citizens and create fragmentation within the European car industry" EU Taxation and Customs Commissioner László Kovács observed with regard to the proposed rules. He continued:

"There is also considerable support for tax measures that would encourage consumers to select more environmentally friendly passenger cars".

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