The motor industry continues to press for the abolition of Ireland's Vehicle Registration Tax (VRT). Indeed, this call is again the essence of the Society of the Irish Motor Industry's pre-budget submission.
However, this year, the industry's request for a gradual phasing out of VRT over the next decade - culminating in its eventual abolition - has the full backing of the European Commission.
At a recent meeting with Minister for Finance Brian Cowen, industry representatives pressed for a 2.5 percentage point reduction in all three VRT bands. This would bring the lowest band, which applies to vehicles below 1.4-litres, down to 20 per cent and the highest, which applies to vehicles above 1.9-litres, down to 27.5 per cent. Although such a reduction seems small, it would indicate that the Government is finally addressing the VRT issue and might therefore eventually abolish it.
However, such a move is unlikely, as VRT is a significant and rising income for the Exchequer. In 2004, €946m was paid in VRT, up from €819m in 2003. With the rise in new car sales this year, VRT will be higher again.
But the Government is under increasing pressure to abolish the tax. European Commissioner Liszl-Kovics, stated that VRT presents a significant barrier to free trade and must be reduced and eventually abolished.
However, Irish motorists do not yet have cause to celebrate. The Government is resisting efforts to abolish VRT, and when it eventually begins the process, it is likely to replace VRT with an
increase in annual road taxes, fuel taxes and an emissions-based tax. So, although VRT may disappear, the tax burden faced by motorists would remain the same.
There is a large variation in the fiscal importance of VRT in the 16 EU countries that impose a registration tax, and Ireland's VRT rates are not the highest. Irish levies are below those charged in Denmark, Finland or Poland.
The European Commission rates Ireland as applying only a medium level of VRT, although when VAT is added, the total tax on a 2.0-litre car amounts to 76 per cent of retail price.
Nine EU countries; France, Germany, Luxembourg, Sweden, Czech Republic, Slovakia, Estonia, Lithuania and Britain do not impose any registration tax making up the shortfall with higher road, fuel and emissions-based taxes.
To replace VRT without an alternative tax would require, for example, an increase of two percentage points in the standard rate of Income Tax. The Minister for Finance has indicated that such an increase would be contrary to Government policy and he is unlikely to introduce such a change.
Indeed, all present indications are that Minister Cowen is unlikely to reduce VRT at all, such is the substantial income that is generated by the tax. This argument is likely to be further strengthened in 2006/2007 when the Government's SSIA saving schemes mature, leading to an increase in new car sales of another 10 to 12 per cent over 2005.
But, Cyril McHugh, SIMI chief executive says if Mr Cowen reduced VRT now, the Exchequer would profit. "If the Government introduced the 2.5 per cent reduction we're asking for, it would still get more money from VRT because of the resulting increase in new car sales. This increase will be further fuelled by the maturing of the SSIAs," he said. "Reducing VRT, and thus incentivising new car purchases, is an ideal way for the Government to retain SSIA money in the Irish economy."
While the motor industry puts forward a convincing argument in favour of replacing VRT, the Government appears to be unconvinced. Although the Department of Finance will not comment on VRT so close to Budget 2006, which takes place on December 7, it has previously stated that it has no intention to phase-out the tax.
Even the motor industry is far from optimistic that the Minister will act, as Eddie Murphy, managing director of Ford Ireland, explained. "There is little to suggest any positive move from Government on VRT. I do believe there is a momentum building to address the emissions issue, which will hopefully see favourable tax treatment granted to environmentally friendly vehicles," he said. "I cannot see this being extended to the point where taxation is correlated with emission levels generally, at least not this time round."
But the Government must bear in mind that Ireland is required to restrict growth in greenhouse gas emissions, including carbon dioxide emitted from vehicles, under the Kyoto Protocol. Road transport currently represents 84 per cent of all transport-related CO2 emissions, of which more than half is accounted for by passenger cars. The Climate Change Strategy said VRT and road tax should be further rebalanced to favour the purchase of more fuel-efficient vehicles.
It was agreed in 2001 that the Irish government would examine options for restructuring of VRT with this aim in mind but nothing has yet been announced.
Meanwhile, Irish motorists continue to purchase new vehicles in high numbers. As Anthony Neville spokesperson for importers of Jaguar, Seat and Saab, said. "Irish motorists are just not vocal enough when it comes to VRT."