Ex ante evaluation of the reform of company car taxation in Belgium [ Working Paper 06-22 - 12/10/2022]

  PDF & Download

• Publication (en - 2.17 Mb)
• Publicatie (nl - 1.47 Mb)

  Authors

Laurent Franckx (A)
 
A : Author, C : Contributor

  Publication type

Working Papers

The Working Paper presents a study or analysis conducted by the Federal Planning Bureau on its own initiative.

Executive summary

In Belgium, the Law on Fiscal and Social Greening of Mobility of 25 November 2021 eliminates corporate tax deductibility for all company cars except those with zero CO2 emissions. In addition, the deductibility for electric company cars is reduced over time.

While the new rules do not end the favorable income tax and parafiscal treatment of company cars, it is hoped that they will encourage an accelerated transition to an all-electric company car fleet.

To estimate the impact of these measures on fleet composition and tax and parafiscal revenues up to 2040, we compare two scenarios using the Belgian CAr Stock MOdel (CASMO) developed by the Belgian Federal Planning Bureau. The reference scenario is based on decided policies (except for the decided changes in company car taxation), namely the successive tightening of the low-emission zone in the Brussels-Capital Region and the planned European ban on placing cars emitting CO2 on the market from 2035. In the scenario with tax reform, we also consider the changes resulting from the law of 21 November 2021.  Both scenarios are based on the most recent World Energy Outlook of the International Energy Agency (IEA, 2021).

For our analysis, we assume that the rapid increases in market shares of electric and gasoline plug-in hybrid cars (PHEVs) observed in 2020-21 reflect a fundamental trend change that will continue in the future.

The tax reform accelerates the electrification of the company car fleet

Our projections show that sales of gasoline PHEVs and of electric company cars will then grow rapidly, even without the tax reform for company cars. Initially, sales of gasoline PHEV grow faster than those of electric cars, reaching a market share of nearly 50% company cars by 2030. From 2028 onwards, sales of electric company cars grow faster and from 2029 onwards their market share even exceeds that of gasoline PHEVs.

At the same time, sales of diesel and gasoline cars are declining rapidly, and from 2030 gasoline PHEVs and electric cars completely dominate the company car market, with a total market share of over 85%.

The general ban on the sale of internal combustion engine cars within the European Union from 2035 has as obvious effect that, from that date on, only electric cars will be sold.

Compared to this scenario without tax reform, the main effect of tax reform is a very sharp decline in gasoline PHEV sales starting in 2026, mainly in favor of electric cars. The market share of electric company cars rises rapidly to above 50%, reaching more than 75% before 2030.

With the rapid renewal of the company car fleet, changes in the composition of sales also translate relatively quickly into changes in the composition of the fleet: by 2040 the company car fleet will be almost entirely electric, with or without tax reform. In other words, the tax reform mainly leads to an acceleration of the electrification of the fleet.

The accelerated electrification of the company car fleet leads to a decrease in tax revenues from the ownership and use of company cars compared to a scenario without reform

For the impact on tax and parafiscal revenues, we must consider that, from a tax standpoint, there are at least three categories of company cars:

• All company cars benefit from a corporate tax deduction. In addition, company cars are subject to all the taxes to which cars owned by private individuals are also subject: vehicle registration tax, annual road tax, etc.
• All company cars used for private purposes without full reimbursement of these expenses by the user (the "salary cars in the broad sense of the word") are subject to a tax on the benefit in kind in the income tax. Part of the benefit in kind granted is additionally a non-deductible expense for corporate income tax purposes.
• Company cars offered to employees for private use without full reimbursement of these costs by the user (the "salary cars in the strict sense of the word") are additionally subject to an employer’s solidarity contribution to social security.

In presenting the results, we should also make the distinction between tax receipts determined by the ownership and use of company cars, and those resulting from the purchase of company cars.

The first category consists of (a) the indirect taxes on the consumption of fuel and/or electricity (b) the solidarity contribution to social security (c) the tax on the benefit in kind in the income tax (d) the non-deductible expenses for corporate taxation deductibility of the benefit in kind offered to employees (e) the annual road tax.

All these taxes depend on the total consumption of energy or on the CO2 emissions per km of cars. Consequently, a faster electrification of the car fleet will lead to a decrease in these revenues. Around 2035, the total revenue foregone as a result of the tax reform peaks at around 1 billion euros, mainly due to lower revenues from the tax on the benefit in kind and from indirect taxes on fuel and electricity. Thereafter, the difference between the scenario with or without tax reform gradually decreases following the European ban on the sale of new cars with internal combustion engines.

The accelerated electrification of the company car fleet leads to higher corporate tax revenues compared to a scenario without reform

Regarding the taxes levied on the purchase of company cars, the deduction of car costs in corporate taxes is particularly important: the higher the deduction, the higher the revenue foregone for the government. In addition, the purchase of a car also involves the payment of a registration tax and VAT – we will discuss these in a later section, but here we will first deal with corporate tax deductions.

The expected sharp increase in sales of gasoline PHEVs in the years before the tax reform comes into force will lead to a significant increase in corporate tax revenue losses: from less than €1 billion per year in the current situation to more than €3 billion per year in 2030. Indeed, these cars enjoy a relatively large deduction due to their low CO2 emissions. It should be noted though that the emission coefficients used for tax purposes are based on the test cycle, and emissions in real driving conditions can be significantly higher.

With a certain time lag, the foregone revenues as a result of the purchase of electric cars (which enjoy deductibility in corporate tax that decreases through time) will then also increase rapidly to more than 2 billion euros on an annual basis.

As a result of tax reform, the revenue foregone falls to zero for all car models (except fully electric models) starting in 2026.

For electric cars, however, the total effect on tax expenditures is not determined a priori: the per-car tax deduction decreases (leading to lower tax expenditures), but also entails increased sales of electric cars (leading to higher tax expenditures). In the first years of the reform, the second effect dominates, but this changes around 2030. After the European ban on the sale of new combustion engine cars has come into force, only the first effect remains. In the long run, as a result of the tax reform, lost revenues decrease by about 1 billion euros: in other words, corporate tax revenues increase by about 1 billion per year compared to a scenario without tax reform.

In the transition period between 2026 and 2035, the substitution of gasoline PHEVs by electric cars also plays a role. As a consequence, the additional revenues are much higher during that period, even peaking at almost 4 billion per year between 2030 and 2035.

However, the total revenue foregone after the reform still remains much higher than in the current situation, amounting to about 2.5 billion euros by 2040.

The accelerated electrification of the company car fleet has a net positive impact on public finances compared to a scenario without reform

The reform also leads to a decrease in VAT receipts on car sales. Since VAT receipts are proportional to the purchase price of these cars, this means a shift towards cheaper car models.

The effect on revenue from the registration tax is very small. These effects are reduced to almost zero from 2035 onwards.

The net effects on public finances are summarised below. The overall effect of the reform is an increase in annual net tax revenues of about 1 billion on an annual basis beginning in 2026, except in 2026 and 2031, when the foregone revenues from the ownership and use of company cars slightly outweigh the increase in corporate tax revenues. Without the reform, the foregone corporate tax revenues would be much higher, due to the (autonomous) increase in the shares of gasoline PHEVs and electric cars in the company car market.

The accelerated electrification of the company car fleet leads to an accelerated reduction in CO2 emissions compared to a scenario without reform

Finally, we looked at the impact on CO2 emissions from company cars. Due to the European ban on new internal combustion engine cars from 2035, the emissions of the company car fleet decrease very rapidly after 2034, both with and without reform. The major difference is in the years between 2026 and 2035, where the tax reform clearly leads to an accelerated decline in CO2 emissions, peaking at about 1 million tons of CO2 annually in the first half of the 2030s.