Car registration tax

M. Scerri writes:
I want to enquire about car registration tax. Surely the hefty sums being charged are also of some infringement on EU regulations? Why do I have to pay thousands of liri to import a car from the EU?

Car registration tax is the tax we pay when we buy a new car. This is different from other taxes, such as VAT, and it is applied when cars are brought into Malta on a permanent basis.

In Malta we apply a very hefty tax on cars and I suppose that vehicle registration tax must constitute a hefty revenue for the public Treasury every year. Yet, car registration tax is legal under EU law even if many of us may consider it excessive.

EU law does impose certain limits on how this kind of tax may be applied. But the Maltese system does not fall foul of these limits. For instance, the tax does not, as such, breach the EU principles of non-discrimination.

Car registration tax is not harmonised at EU level and therefore it is up to each individual country to determine whether it should impose such a tax and, if it does, at what rate.

Many EU countries apply a car registration tax but some, such as the UK, do not. Final car prices, tax and all, still differ widely between EU countries with Poland and Belgium at the lower end and the UK at the higher end.

The European Commission estimates that about 20 per cent of the car price differentials is due to the different tax levels.

Car registration tax is normally applied on the basis of residence, that is to say in the country where you reside. If the tax is applied in that country then you should pay the tax.

Clearly, you cannot choose the country where to register your car as this would inevitably mean that everyone would register it in the country where there is a low or no tax at all. So normally, you are required to register your car in the country of residence.

So far, the EU has only got into the issue of car registration taxes indirectly, limiting itself to intervening in cases where individuals find difficulty in moving their car, either temporarily or permanently, from one EU country to another. However, none of this attacks or affects in any way the possibility of having a car registration tax system in the first place.

Of course one may argue that even if the system itself is legal, the rate of tax in Malta is so high that it is disproportionate, particularly when one takes into account our standard of living. This is an interesting issue. Yet, I do not see that it helps countering our car registration tax system. For, after all, one must bear in mind that our national Treasury has an ongoing expense with regard to the building of roads and also has responsibilities with respect to controlling environmental damage caused by cars and in controlling traffic congestion. These costs too are very high, perhaps even disproportionate on a per capita basis when one considers the small size of our country. So a disproportionate tax may well be needed to cater for a disproportionate expense.

Yet, there may be some interesting developments in sight for car registration tax systems.

Recently, the European Commission launched a consultation for the public and business on reforming EU passenger car taxation systems. This is a follow-up to the Commission's communication on passenger car taxation that dates back to September 2002. In this communication, the Commission admitted that car registration taxes do create problems to free movement and tax obstacles. However, at no point did it suggest that they were illegal.

Instead, it recommended that registration taxes should be gradually phased out and that a new tax structure linked to carbon dioxide emissions should be introduced. Rather than pay registration tax when we buy a car, we would pay taxes along the years on the basis of our use of the car. Or, to put it in different words, it would become cheaper to buy a car but more expensive to use it.

This option sounds interesting and it seems to have found favour with both industry and consumer associations. On the basis of the comments received from the public at large, the Commission is likely to issue a legislative proposal.

However, since we are here talking about a tax measure, we must remember that it would require the unanimous consent of all EU countries, including Malta. Unanimous agreement is never easy to achieve with tax measures. So one should be realistic on how soon any such changes are likely to be introduced.

Readers who would like to raise issues or ask a question to Dr Busuttil are invited to send an e-mail, making reference to this column, to contact@simonbusuttil.com