Analysis
16 Feb 17

Car taxation in EU and USA: A different kind of ‘green’

Aiming at giving an exhaustive comparison between EU countries and the USA in respect to (company) car taxation in such a short article would be very presumptuous. Nevertheless, we will, through a European looking glass, try to point out some similarities and the most striking differences.

 

BIK on company car

Most of EU countries as well as the USA will consider the private use of a company car as a taxable fringe benefit in the hands of the employee benefiting from the vehicle and in the hands of the employer putting the car at disposal.

Based on publicly available information, there seem to three methods in order to determine the taxable private use in the USA (the automobile lease valuation rule, the cents per mile rule or the commuting rule) while the methods to be applied in the Europe vary (greatly) across EU Member states and other countries.

A VAT impact will also occur across EU Member States (non-deductibility of certain costs ancillary to the company car) while no VAT impact may occur in other European countries and certainly not in the USA.

 

Taxation is clearly footprint-based in EU while it seems not so clear in the USA

In the EU, the CO2 emission factor will almost systematically be taken into account for company car taxation purposes.

In the USA, company cars are apparently to be taxed for tax registration purposes on an annual basis (and possibly a ‘vehicle tax’ in some counties or municipalities) based on the weight/value/age of the car or even on a flat fee.

To this, you can add the American ‘Gas Guzzler Tax’, which seems to be the sole ‘repressive’ tax levied in the USA in view of “greening” the roads. And what a tax some may say!

Indeed the Gas Guzzler Tax, introduced in 1978, is applicable to passenger cars that fall short of USA fuel economy standards at the moment of purchase (so only once in the lifetime of the car!) and is based on fuel consumption. There you would think that the USA is actually caring about the ecologic footprint of the vehicles circulating on its roads… well, not so much. Indeed, trucks, minivans, and sport utility vehicles (SUV) are not covered because these vehicle types were not widely available in 1978 and were rarely used for non-commercial purposes… which is a bit ironic?

 

Incentives

Furthermore, tax incentives are granted in most EU countries in respect to “green” cars and aim at low CO2 emissions, hybrids or fully electrical vehicles while the USA only seems to aim at supporting the hybrids or fully electrical vehicles.

While in the USA a 2013 study published in the journal Energy Policy determined that current federal subsidies were "not aligned with the goal of decreased gasoline consumption in a consistent and efficient manner." In particular, hybrid-vehicle credit is given according to battery capacity rather than electric-only vehicle range. Across the battery-capacity and charging-infrastructure scenarios examined, the lowest-cost solution is for more drivers to switch to traditional hybrid electrics or low-capacity plug-in hybrid electric vehicles (PHEVs). Installing charging infrastructure would provide lower gasoline savings per dollar spent than paying for increased PHEV battery capacity. This has apparently in part encouraged the creation and marketing of vehicles such as the hybrid Cadillac Escalade, which gets a maximum of 23mpg on the highway.

 

No real repression?

A large number of cars on American roads would definitely be heavily taxed in view of their CO2 emission if they were circulating in the EU.

It could be inferred that the USA has disregarded the negative environmental impact caused by old, more polluting cars. Indeed old cars – thus, in principle, more polluting - are less taxed in the USA than new cars – which, in principle, pollute less. Is this a consequence of putting aside of the equation the “ecological footprint” for calculating the tax to be levied in the USA?

One of the underlying reasons of this, let us face it, is mainly cultural: while the USA remain the home of supercharged V8 manufacturers, the European  car industry is more and more focused on green, yet highly performing (cf. Porsche 918 Spyder), developments. This mainly caused by policy changes over the last couples of years and different governments that are playing a very active and supportive role, in this respect.

 

Are cars overall less taxed in the USA than in Europe?

There is no real federal road tax in the USA, although all states levy an annual registration fee, which varies considerably from state to state. Compared with the European car taxation system where several taxes are due annually and at the moment of purchase, the American system seems more favorable to company cars and passenger cars overall.

 

Future

Electric vehicles have made a big turnout in the past few years. They are meant to be the environmentally friendly alternative for carbon emitting vehicles. In the EU, the incentives related to green cars range from subsidies for purchasing electric vehicles, special allowances for company purchases, exemptions from road taxes, and more.

In respect to the USA, critics of the ‘Gas Guzzler Tax’ contend that the dominance of the modern SUV is a direct result of this tax.

On the other hand, critics also rise against electric vehicles; are they really all that good for the environment? The answer to this question mainly depends on how the environmental impact is determined (only usage taking into account or based on a cradle to the grave approach)… so maybe the “greener” image of car taxation in Europe can also be seen to be window dressing?

 

 

Erwin Boumans – Tax Partner BDO Belgium (the above text is a personal interpretation of the rules in force and is therefore not the official opinion of BDO or any of its member firms)