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Issue No. 4, 2006

Restructuring Passenger Car Taxation in the EU?

A proposal to revamp passenger car tax systems in Member States

There is currently no harmonisation of passenger car taxation in the European Union.  The 25 EU Member States all have their own individual tax structures and rates, which results in significant differences in new car prices amongst some of them.  In the face of this reality, the European Commission started to take relevant action last year.

On 5 July 2005, the European Commission presented a proposal for a Council Directive requiring that EU Member States restructure their passenger car taxation systems.  According to the proposed Directive, car registration taxes would be gradually abolished over a period of 5-10 years and compensated for by Member States with increases—also gradual—in annual circulation taxes.  Moreover, these taxes would take into account the CO2 emissions of cars: by 31 December 2008, at least 25% of the total tax revenue from registration and annual circulation taxes should derive from the CO2 element of the tax, with that level reaching 50% by 2010.  Finally, Member States would be required to partially refund a portion of the registration tax, pending its abolition, in cases where a passenger car registered in one Member State is transferred to another Member State.

A solution to reduce car price differentials across the EU?

Car prices across the EU can still register up to a 30% differential for the same model.  The best example is the automotive price differential between Germany, the EU’s most expensive country, and Finland, its least expensive one.  Taking into account recent European Commission figures, the lack of convergence in car prices throughout the EU and in the eurozone has remained largely unchanged during the first half of 2006.

Passenger car tax system restructuring is a crucial matter, because across the European Union’s 25 Member States there is an excessive divergence in such tax policies and practices.  This has largely contributed to the fragmentation of the EU internal market and has had a negative impact on both the motor industry and European consumers.

The motor industry has made significant efforts to reduce car price differentials across EU Member States and to market new vehicles in a genuinely integrated way.  Nevertheless, the different motor vehicle taxes that are applied across the European Union have so far been a major impediment for car manufacturers in terms of reaching those objectives.

JAMA supports the restructuring and harmonisation of passenger car taxation systems

JAMA agrees with the European Commission’s findings that gradual elimination of the passenger car registration tax would be beneficial in a number of ways.  Notably, such a move would:

JAMA is also convinced that the harmonisation of passenger car taxes would bring additional benefits, namely:

In line with the current debate on environment-friendly cars, some stakeholders argue that Member States can use registration taxes to promote the introduction of greener cars.  However, JAMA and its members believe that the elimination of passenger car registration taxes and an increased focus on car usage (with an environmental element such as CO2 emissions)—as opposed to maintaining or introducing differentiation into car registration taxes, whether based on weight or CO2 emissions—will, in fact, serve to encourage EU consumers to opt for cleaner cars.  

The restructuring and harmonisation of passenger car taxation systems is an essential condition for, first, making the European single market for cars a reality and, second, for ensuring that the market becomes increasingly competitive for both industry and European consumers. JAMA strongly supports the Commission’s initiative in this area.