Changes in car registration tax

Julian Zammit writes: I recently went to sell my car but was told to wait before buying a new car as the EU is planning some changes to the system, which would allow me to buy a car from other EU member states at a much cheaper price. Is there any truth in this rumour?

Yes, there are changes in the pipeline with regard to EU rules on car registration taxes. However, whether these changes will actually be agreed to and, if so, whether they will make a material difference is still open to question.

In July this year, the European Commission published a proposal to reform the current car tax registration regimes in the EU.

Currently, 16 out of 25 EU countries operate a car registration tax system. This means there is no single harmonised system and each country is still able to determine whether to have a registration tax and what rates of tax to apply.

Although the Commission and the European Court of Justice have not, so far, definitely established that car registration tax is incompatible with EU law, notably the law on freedom of movement, there have been slight steps in this direction and it is evident that there is increasing pressure for the EU to intervene in this sensitive issue.

I can understand this. Suffice it to say that cars and car registration tax are by far the areas on which I am most frequently quizzed in this weekly column.

And it is not just that the car registration tax is high in some countries, such as Malta. It is also that in many cases the tax must be paid twice when you move a car from one EU country to another.

For instance, if you buy a second hand car from Italy, where car registration tax applies, you would still be required to pay the car registration tax in Malta when you bring it over to our country. This is unfair but, apparently, legal.

Moreover, the value that is given to the car that you bring over is often unduly excessive, necessarily resulting in a high tax bill.

The Commission has therefore set out to try and change the current systems. It considers that this will help remove obstacles to free movement and contribute to higher environmental standards.

The proposal targets two main taxes: car registration tax and the annual road taxes.

On car registration the Commission is proposing that EU countries that currently operate this regime should phase it out before 2016. The Commission is not proposing to introduce a harmonised car registration tax system throughout the EU - indeed this would unfairly oblige countries that have no such tax to introduce it.

Instead, the Commission is proposing an outright abolition.

The Commission believes that the car registration tax system should be removed altogether because it perpetuates a market fragmentation within the EU and reduces the benefits of competition for consumers. Indeed, many manufacturers often price their cars differently depending on the rate of tax in the country where the cars will be sold. According to the Commission, pre-tax prices are often cheaper in countries where the car registration tax is very high.

But for those of you who thought that you were about to see the end of high car prices, there is a caveat.

The Commission's proposal is "revenue neutral" - in other words, it is not seeking to remove the car registration tax system and stop there, but replace it with corresponding tax increases in other areas.

This is where the annual road taxes comes in.

The Commission is proposing that EU countries that have a car registration tax should gradually replace it over a period of time by corresponding increases in the annual road tax as, if need be, other taxes. To be clear, the annual road tax is the one we pay for the car licence that we stick on our windscreen.

Moreover, the Commission is also proposing that the annual road tax should be linked to emissions, that is, a CO2-based taxation. This means that your annual road tax may change according to the level of emissions released by your car and you would be required to pay more if you pollute more. In turn, this would be an incentive for you to replace old cars with less polluting ones.

This tallies well with our recent SMS alert system for cars belching out black smoke.

To be sure, my understanding is that our current registration tax is already somehow linked with the environmental performance of the car - but given the overall high rates of registration tax in Malta it is doubtful whether this has any dissuasive effect on the decision as to which car to buy.

The proposal would require EU countries to derive at least one quarter of their total tax revenue (from registration and annual road tax) from the CO2-based element of the taxes by the end of 2008 and to gradually increase this component to 50 per cent by the end of 2010.

Other than this, EU countries would be free to determine the speed at which the changeover from registration to annual road tax is made.

And in order to obviate concerns that national treasuries may not be able to cash in the same amount of taxes, the Commission argues that annual road taxes are much more stable than registration taxes because they do not depend on yearly car sales which can fluctuate quite strongly.

I am not sure that governments would be entirely convinced.

And here's the snag. For these proposals to go through they require the unanimous agreement of all 25 EU governments. Tax decisions, remember, require unanimity with each country effectively being able to block all the rest.

Which is why I would not expect a decision to be taken any time soon.

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