Fascinating times, also from a taxation perspective
The automotive industry is at the beginning of a journey of significant changes within the next years. These changing times are driven by major topics such as electric vehicles, autonomous driving, connected car innovations and impact of political challenges like Brexit. Interestingly, all these topics will not only influence the industry itself and the management of fleets, but also car taxation. In the long run, the developments of these topics will change car taxation materially.
All car makers are working on the development of full-electric or plug-in hybrid cars and many of them already offer a few models for sale. Moreover, billions of euros are slated to be invested in the development of electric cars. Governments are supporting e-mobility by various measures like CO2-related car taxation, tax incentives or tax exemption for electric and hybrid cars and direct subsidies for purchases.
However, the reality is that only some 220,000 of more than 14.6 million newly-registered cars in Europe have been electric or plug-in hybrid cars in 2016. By 2030, PwC Autofacts predicts, every third newly-registered car in the EU could be an electric car and plug-in hybrid cars could account for 47% of the total. This forecast has been made under the assumption that current issues with battery capacity, insufficient installation of charging points and high prices for electric and plug-in hybrid cars will be solved. In our view, it is only a matter of time before governments will reevaluate tax benefits for electric and hybrid cars to absorb decreasing tax income from car taxation. In the meantime, fleet managers should study the use of electric and hybrid cars where reasonable to decrease tax costs, which are often between 15% and 20% of the overall cost of a car.
Autonomous driving is still at a very early stage. Unsolved technical and legal issues are preventing a faster development of this application. Currently, in almost all European countries the laws provide that a car must be driven by an individual driver. Also, the question of liability and legal consequences in case of accident are the subject of controversy. Finally, the sensor and positioning technique must still be improved. Thus, nobody at this point in time can say when self-driving cars will become common on the road. Once introduced, autonomous driving will definitively reduce transportation cost as well as car taxation cost. Without a driver, a company car can be used for business purposes 24 hours and 365 days a year – at least theoretically. Car-sharing and car-pooling formulas will become easier as car usage will be less dependent on the individual driver. Consequently, tax cost would be reduced due to longer company usage of the car, since taxation of private use of company cars may be minimized.
Connected car services will change the whole automotive industry. Drivers around the world are getting used to the increasing amount of digital technology in their cars. Many of the standard features of a car like monitors of performance data like speed, fuel efficiency, and petrol tank levels, heating and air conditioning, and the audio system have been digitised to provide more detailed information and make the handling more convenient. The car — including the smartphones and other devices carried on board by drivers and passengers — now reaches out to the surrounding world for music streamed from the cloud, real-time traffic information, and personalised roadside assistance. Recent innovations enable automobiles to monitor and adjust their position on a highway, alerting drivers when they are drifting out of their lane, and slowing down if they get too close to the car in front of them. According to Strategy&’s Connected Car Report 2016, tomorrow’s cars will represent a step change in form and function, compared to what’s being offered now. There will be new levels of connectivity among vehicles, enabling new services inside and outside the car. No surprise that car makers and automotive suppliers, but also software companies and other potential players are working on business models to sell the usage of the data collected, analysed and transferred in and around a car. As a natural consequence, these developments are raising questions about the taxation of such services, especially in case of cross-border data exchanges.
Just imagine the following: A French automaker sells connected car services to a company resident in Germany using the connected car services for company cars at its subsidiary in Switzerland. What are the VAT implications? What is the correct transfer price between Germany and Switzerland? Who is the IP owner of the data (if any)? Which country has the right to tax the profits derived from the connected service and which part of the profit is allocated to which country? Does the connected car service have any influence on private-use taxation of a company car or is the connected service deemed a taxable benefit itself? The answers to all these questions are quite complex and may vary in the different countries involved. In fact, governments have only recently started to think about new measures for taxation of the internet and this will have direct influence on the taxation of connected car services. For an indefinite period of time, suppliers and users may be exposed to double taxation of their income. For fleet managers, it is recommended to have the connected car service contracts and usage reviewed carefully by tax experts to minimize unfavorable tax surprises.
Brexit is not a single act but rather a process with a period of political negotiations and uncertainty. The formal negotiation period is assumed to end after two years in mid-2019, but it is likely that the negotiation of the future relationship between UK and the EU will take much longer. PwC Autofacts has analysed three different scenarios – EEA membership, bilateral agreement and no agreement providing only World Trade Organisation rules. An EEA membership would be contrary to the objectives of Brexit and is therefore less likely from a political standpoint. The other scenarios would most likely establish customs and other trade barriers which would more or less increase the cost of vehicles both imported to UK and exported to the EU. As some 45% of all cars built in the UK are exported to the EU, a shift of production from the UK to the EU is expected to avoid increasing cost of customs and other trade barriers. This could mean that plants in the UK will be closed.
Difficult to say how the British government would react to mitigate the effects of a potential crisis in the UK automotive industry. From a tax point of view, luxury taxes on imported (premium) cars, tax benefits for company cars, car taxation benefits for UK cars and similar measures could be adapted to increase consumption of UK-built cars. In any case, UK fleet managers would need to have UK-built cars as their first choice to avoid increasing cost. Fleet managers in other EU countries may not be hit by Brexit (except for their UK operations) as long as their country remains part of the EU. The upcoming elections in France, Netherlands and Germany should give first indications whether further exits from the EU are to be expected.
Isn’t it fascinating to live in changing times?