Company car tax system repair required

Kadri Hansalu
, majandustoimetuse juhataja
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Photo: Mihkel Maripuu / Postimees

The new value-added tax system applied to company cars last December failed to yield desired results – instead of the €47m expected, mere six million euros have been harvested at half year mark.

As admitted by Tax and Customs Board (MTA) helmsman Marek Helm, the system is not working and needs fixing as entrepreneurs aren’t satisfied and MTA officials would come under excessive load trying to execute the checks. 

At the moment, businesses declare a third of company owned cars as fully in enterprise-use, and the rest partially so. «The enterprises have confessed that their bookkeeping related to cars (travel diary – edit.) is often only seemingly correct,» said Mr Helm.

«The cars declared as in solely company use are about 23,000, checking the use of each car retrospectively would prove extremely resource-intensive for entrepreneurs and tax officials.»

Mr Helm told business daily Äripäev he thinks one way would be lowering the fringe benefit tax as paying the current rate is not acceptable for entrepreneurs. Meanwhile this would spell extra pressure on state budget – the politicians hard pressed as it is to keep it balanced.

According to car dealers and service firms association AMTEL chief Sulev Narusk altering said rate would fail to significantly improve the situation.

«Probably, a cars-related tax should be discussed, like one based on CO2 and thus more fairly applicable according to brand, model and size of the vehicles,» thinks Mr Narusk.

On several earlier occasions, AMTEL has sounded an alarm regarding the new system as one that does not work and spawns additional fraudulent schemes. «In our estimation, there currently exist several schemes to avoid car VAT – especially at the moment of purchase. For instance, in addition to private persons, enterprises have become increasingly eager to buy a car without VAT. Thus, mainly the vehicles are purchased from a neighbouring country,» described Mr Narusk.

Via press rep Liisi Poll, finance ministry said it is premature to pass judgement on the effect of tax change. «MTA may not be aware of all cars and the related costs; neither has the practice of declaration been settled as yet. Furthermore, costs related to certain vehicles appear with delay i.e. the statistics of initial months will not show the full picture and the situation will clear up by year’s end,» explained Ms Poll.

She said part of the costs may be seen in the overall increase of VAT collection; also, income and VAT revenues have increased from fringe benefits.

Pursuant to the rules enforced last December, company cars must be declared according to use (100 percent for enterprise or partly for private travel). From costs related to cars in private use, up to 50 percent of input value added tax may be subtracted.

Less tax collected

-The state supposed a much higher percentage of entrepreneurs would be avoiders – in reality, the picture was not so bad at the moment.

-They did away with fringe benefit VAT from own use, the income of which thus ceased.

-Use of travel diaries has increased; as a result of that, VAT and fringe benefit is not paid.

-With added tax load on enterprises (essentially, a car tax has been introduced), obviously the amount of avoiders has gone up.

-The tendency is for enterprises to do away with car fleet i.e. private persons own the cars and the costs are compensated some other way.

-Buying habits have changed – if possible, N1 group i.e. utility vehicles are purchased.

Source: AMTEL