Yes. In a communication dated September 2002 the European Commission initiated a discussion of policy options for the taxation of passenger cars at national and Community level. Following consultations with interested parties in 2003 and 2004, the Commission published a draft directive in July 2005. It states its objectives in bringing forward the draft directive are to improve the functioning of the Single Market and implementation of the Community's strategy to reduce carbon dioxide emissions. It argues that the functioning of the Single Market is impeded by registration taxes in some member states. In addition, it argues that individuals face double taxation when transferring their vehicles from one member state to another and believes environmental concerns should be to the fore in framing passenger car taxation systems.
The proposed directive has three specific elements, namely, the abolition of registration taxes on a phased basis by 2016; restructuring of the tax base in order that by 31 December 2008 at least 25% of total tax revenue from registration and annual circulation taxes would originate from a carbon dioxide based element of those taxes and that this proportion would increase to at least 50% by 31 December 2010, and a refund system for those passenger cars registered in one member state and subsequently exported or permanently transferred to another.
There is a wide discrepancy within the 25 EU countries in how each approaches the taxation of cars. Nine member states do not have a registration tax, while the member states that do apply different rates. In many ways, this simply reflects the different approaches to taxation generally across the European Union. A good illustration of this is that while the United Kingdom has no registration tax, motorists there pay the highest fuel taxes within the European Union. In addition, the UK annual excise charge, the equivalent of our motor tax, is by reference to the CO2 emissions from the car.
Ireland has taken the general approach in all discussions with the European Commission and other member states that taxation is the responsibility of each member state. This is long-standing policy in Ireland. We regard VRT as a national tax that falls within national competence. Simply, the policy is that the mix of taxes, their levels and rates are matters for EU member states based on legitimate choices. As regards the balance of taxation, Ireland prioritised tax reductions on income earned by employees in preference to other tax areas, which policy has helped create record employment levels.
We have stated we are willing to enter into the debate with the European Commission and other EU member states about the merits or otherwise of this proposal. However, from our perspective, it must be stated VRT raises significant revenue for the Exchequer, a total of €1.15 billion in 2005, which is used to fund vital public services. The collection of this tax is also cost efficient, with the large majority of transactions now done on-line. In addition, its collection, while obviously not popular, has not impacted negatively on car sales in the State. Latest data show an 11.5% increase in new registrations for 2005 compared with the figure for 2004 and strong sales are expected throughout 2006. Sales of new cars last month were likely to amount to more than 40,000, an increase of approximately 8% on the figures for January 2005. Given such a buoyant market, any move towards reducing taxes on new cars could be seen by many as unnecessarily reducing the revenue streams required to fund the level of public services the country requires. In addition, a range of issues within the transport and environment areas would point people towards criticising such a decision from a public policy perspective.
I referred to the concept of reducing VRT and how that might be perceived in isolation. However, in fairness to the Commission, its proposal would require that, while VRT would be abolished over time, the funds generated by VRT should be substituted by other forms of taxation on the cost of motoring. It is important that those willing to enter the debate on the draft directive understand this is the case. Comment suggesting the Irish Administration is resisting EU moves that would benefit motorists does not present the whole picture.
Would an Irish motorist be happier paying less tax on the price of a new car but instead paying higher annual motor taxes and/or higher fuel taxes? This is an open question but it might be worth noting that someone who is in a position to buy a new car every two or three years would benefit much more under such a regime than a motorist driving the same car over a number of years. The flip side of this argument is that new cars tend to have lower emissions as manufacturers continue to make improvements in this area. However, some figures for the committee to consider are that replacing VRT with higher motor tax would result in average motor tax payments increasing from €400 to €960 per annum. Alternatively, replacing VRT with higher fuel taxes would increase prices at the pump by more than 20 cents per litre.
VRT is charged by reference to a fixed percentage of the open market selling price and these percentages are categorised by reference to engine size. Motor tax is charged by reference to engine size. Ideally, the Commission wants to see taxes being charged by reference to CO2 emissions from the vehicle. While there is generally a correlation between engine size and level of emissions, we accept there may be scope to examine this further. However, the design and administration of such a system would not be without difficulty.
The Commission strongly supports the capacity of individuals to move cars between member states and stresses that car registration taxes cannot discriminate between those bringing their cars from another member state and those purchasing cars in Ireland. Ireland complies with these principles in that an individual importing a car into Ireland will pay the same VRT that would have been paid if it had been purchased in Ireland. Alternatively, if the individual owned the car for more than six months in another member state, no VRT charge applies. While the tax rules in place concerning private importation arrangements appear to satisfy the Commission and the European Court of Justice, the Commission now seeks in the proposed directive to ensure cars exported from Ireland would be subject to a refund of VRT in order to avoid double taxation. The Commission wishes to see such refunds operational immediately.
As far as Ireland is concerned, we treat VRT as a once-off tax on registration. Therefore, the question of refunds does not arise. The car industry has lobbied for this for a number of years. There is a feeling among the industry that there is an oversupply of used cars which are impacting on the values that some might achieve on a trade-in. Car dealers point to potential Exchequer gains from facilitating the export of used cars as VRT refunds obtained would be fed into new cars. However, where used cars exported are simply replaced by other used cars, any such Exchequer benefits would be negated. This is the kernel of the issue since it is possible that the end result of such a scheme will be that the stock of used cars will be made up of cars of a reduced age. This may be environmentally positive, with the industry churn being facilitated and financed by the Exchequer. It is also worth noting that while the industry points to low second-hand car prices and the problems that this creates, this set of circumstances is of benefit to prospective first-time car purchasers who generally buy older second-hand cars.
This proposal was discussed at official level by the 25 member states in October 2005. There was no great support evident for the proposal to abolish vehicle registration taxes. Some countries, including Ireland, stated that such an issue is a matter for countries to decide by themselves. A number of member states drew attention to the role that registration taxes play in discouraging car purchase and its abolition could result in increasing car numbers and emissions. Incorporation of a CO2 element in the structure of car taxation was received slightly more warmly but serious questions were raised about how practical this might prove to be, given the different systems in place.
There is some support for action on double taxation and the refund element of the proposal. The Austrian Presidency is expected to convene a second meeting to discuss the proposal in the coming months but it is clear that the directive may be the subject of discussions for some time.
The Minister for Finance has stated previously that we are willing to enter into the debate with the European Commission and other member states of the EU about the merits or otherwise of this proposal. However, he has pointed out that VRT is a national tax that falls within the national competence.
We accept that the Commission in its proposal is attempting to design a structure which ideally would go some way towards incentivising behaviour that reduces carbon emissions and as discussions progress we will be interested in the further views of the Commission in this area in conjunction with the views of other member states as well as the views of this committee. However, designing a system that is fiscal-neutral, as proposed by the Commission, is not without difficulty. It is worth pointing out there is an acceptance that the tax system can assist in reducing emissions in the transport sector as borne out by the existing incentives for purchasing hybrid cars and the initiatives in the area of flexible fuel vehicles and the promotion of biofuels.
We are happy to answer questions that committee members may have subject to the usual constraints applying to civil servants at this forum which I hope will not prevent a full discussion.
