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EU-wide reforms threaten Finnish vehicle tax regime

A European Union programme to introduce harmonisation and cross-border recognition of vehicle registrations could spell trouble for the collection of vehicle taxes from motorists in Finland. If the reform is pushed through it could become easier for motorists -- and car rental and leasing companies - to shop around for more favourable vehicle tax rates in different countries.

Autoja marraskuisessa Helsingissä.
Image: Yle

One of the basic principles of the EU’s reform plan is to promote cross-border trade in vehicles, partly by freeing up the registration process and allowing motorists to register their vehicles in the country of their choice.

Currently motorists who import cars from outside of Finland must register them for an initial six months of use, after which they must pay an annual vehicle tax. According to the transport safety watchdog Trafi, Finland collected close to two billion euros in taxes from first-time and imported as well as recurring vehicle registrations. The agency added that liberalisation of the registration market could at worst leach 100 million euros from the vehicle tax take.

Countries such as Finland, Ireland, Malta and Denmark, which all charge motorists hefty vehicle taxes, have objected to the draft regulation, saying it does not take into account taxation effects. Officials fear that potential car owners will be even more tempted to make their purchases in countries with lower taxes.

“Our fear at this time is that it could encourage so-called tax shopping, but we are sure that’s not what the Commission would want, so we hope that they will have another look at the proposal,” said lead specialist Nelly Rontti of the Finnish Transport Safety Agency Trafi, which is responsible for vehicle registrations and tax collection.

Finland’s association of automobile owners Autoliitto said it expects the proposed reform to reduce registration bureaucracy in many countries. All the same association chair Pasi Nieminen recognizes the inherent temptation for tax shopping.

“In Finland we have high vehicle and re-registration taxes. Of course there would be a temptation to avoid paying such high taxes if possible. Another point is that the Commission is proposing that officials should have a better exchange of information about vehicle registrations, so that we could avoid this kind of registration inspection,” Nieminen pointed out.

Out-of-country registrations for rental and leased cars?

The proposed changes have fueled action by large car rental and leasing companies to move their rolling stock around in the EU. In Finland, the new playing field could make it possible for such companies to register their vehicles in Estonia, where vehicle tax rates are lower.

“Naturally we will operate according to the regulations and practices laid down by the regulators. The primary goal of the Commission’s proposal surely isn’t to facilitate this kind of tax planning, where a car registered in one country can be driven in another. I believe that this option will be ruled out,” said Petteri Pihlas, chief executive of the leasing company Leaseplan.

Benefits for Finnish car rental customers

President of the Finnish Car Rental Association Matti Holopainen said that there could be repercussions, particularly among large international players.

“Market forces will ultimately lead to a situation where the stock will be located where it’s cheapest to keep it,” said Holopainen, who also works with the rental company Europcar.

He added that the situation could also see Finnish rental providers moving their vehicles abroad.

“In the end Finnish rental customers are the ones who will benefit,” he declared.

New taxation model ready to be deployed

The European Commission is still currently re-evaluating the taxation repercussions of the proposed new model. If the reforms are implemented in spite of objections by countries like Finland, officials already have an alternative approach in their back pockets.

“At such time the process will most likely be that we would issue a notification of implementation, when we would collect taxation data and we would conduct taxations as usual, “ said Trafi’s Nelly Rontti.

Door open to cross-border insurance, inspection and repair services

Motorists can expect to see a slew of other changes if the proposed reform is pushed through. There could be increased cross-border competition for vehicle and motor insurance. By the same token businesses in neighbouring Estonia could challenge Finnish car inspection and repair companies for customers.

From a safety perspective authorities are concerned that Finland will see a constant stream of vehicles coming from other countries where mandatory inspections are fewer and which are consequently in poor condition.

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