Taxation shapes markets: determining the vehicles that sell well in certain markets, and influencing vehicle size, body styles, fuel types and engine displacement. Taxation can have a bearing on the absolute size of markets, and influence production location decisions. Tax differentials also influence consumer behaviour: in the US, where there is almost no fuel duty and gasoline costs €0.37 a litre, the best-selling vehicle is the Ford F-Series pickup, more than likely fitted with a V8 engine. In the UK, where fuel duty and VAT combine to make up over 63% of the price of fuel (at €1.42 a litre) the number one selling car in 2010 was the Ford Fiesta and would most likely be sold with a four-cylinder engine of below 1.6L displacement.

 

In France, since 2008 a €1600 penalty was payable only if the car purchased emitted over 200g/km, but by 2010 the €1600 penalty became payable at anything over 190g/km. Likewise, a €1,000 bonus at introduction payable for cars emitting between 61-100g CO2/km has been scaled back to €800 between 60g and 90g/km. This approach to vehicle taxation has had its effect on the French car market. By 2010, vehicles emitting less than 120g per km of Co2 made up 47% of the market, up from 18% in 2006, while the market for vehicles over 160g per km CO2 had virtually disappeared. As well as affecting the market make-up, the scheme has also had the desired effect on total CO2 emissions of cars sold: hitting the 130g/km mark in 2010 from 149g/km when the scheme was introduced.

 

 

In 2011 about 19 countries have introduced a Co2-linked car taxation regulation. The last being added to the list was Greece. Although the driving forces behind that decision could be more then an environmental objective, “green” taxes being seen as quite socially acceptable.

Most West-European countries have updated band of Co2-emissions and the taxes linked to these in line with evolution of the supply of Co2-friendly cars. Quite logic since losing tax income on cars are not affordable for most governments still recovering from last downturn.

In Eastern-Europe, no significant changes were introduced. Latvia, Greece and Hungary do have some taxes linked with Co2-emissions or the environmental performance of the cars. In most of the CEE countries it seems that the crisis has slowed down the race to catch up with West-Europe.

2011 will be marked in history as the first introductions to the market of electric vehicles. In West-Europe, 15 of the EU27 are stimulating the demand for these hybrid or full electric cars by introducing tax incentives in form of tax reliefs, subsidies,…, ranging from €9,000 in Belgium to waiving the registration tax in Denmark (significant as in Denmark is either 105% or 180% of the purchase prices). So taxation policies will be extremely important for the future of EVs as consumers still have to be convinced to pay a quite significant price premium for a use that still has limitations in terms of range.

 

 

Understanding the dynamics of car taxes and its impact is vital to make correct decisions. An example I came across a few days ago is illustrating: A fleet contained the choice for a new luxury brand hybrid car in an important segment. With the price premium (and still some uncertainty on the residual value), the lease fee for this vehicle is about 10% higher than most of its best competitors in the same car segment. If you base decisions on the lease fee, you risk that the car is positioned in the wrong car policy segment having to compete to higher car segment cars. Secondly, if you calculate the TCO plus impact of car taxation, the hybrid car may well be more cost effective than its competitors in the same car segment.

Therefore fleet decision makers should take into account the effect of car taxes when making important decisions, certainly also including the car taxes with indirect effect not directly influencing the price on the road of a car, but influencing the total cost for the company (e.g. level of deduction, level of capital allowances, etc…).

 

Car taxes are also an important source of income for the governments. With car taxes being increasingly linked to the environmental performance of cars and with the increased supply of environmental friendly cars on the market, it is easy to understand that governments will tighten the set limits in order to secure tax income. Therefore international fleet managers should continue their effort in the quest for environmental friendly and hence cost effective cars surfing along the trend line set for the supply side of the market aiming at 130g Co2/ km by 2012-2015 evolving to 95g Co2/km by 2020. As ever, early adapters will benefit from tax incentives given and will continue to benefit from these tax incentives.

 

Fuel prices and fuel taxes seem to become an important factor in the decision making process both for governments and the car market. Diesel cars have increased their market share of the last years significantly in search for lower Co2-emissions combined with highly improved engine performance. In Belgium, a diesel car country for many years due to lower excises on diesel and its better Co2-emissions, is struggling with the particles resulting from diesel use. This effect being duplicated in a number of other countries… possibly indicating that governments may decrease the differentiation between diesel and petrol fuels (if any today). Furthermore, I was told that the room for improvement from a technology point of view is quite higher with petrol cars. Looking at both trend indicators, it may be that we should take into account a shift back towards petrol cars, eventually supported by electric engine power.

 

All the above does not only influence the fleet cars but also private cars. Therefore, not picking up the right taxation signals may influence your company car fleet double: the running cost of your fleet and residual value.

 

A warned man being worth 2, one should take into account car taxes in its decision process. This will help to position cars in a correct car policy segment, this will enable to benchmark cars properly including direct and indirect tax effects, will help to decrease (temporarily) cost, will enable to choose the right technology (EV’s, diesel, petrol, …) fit at its aimed use….. Fleet managers starting early with embedding these tax effects in their decisions will benefit from incentives.

 

Bart Vanham

Specialist International car taxation

With assistance from the PwC Automotive Network