Economic Instruments - Charges and taxes

Motor Vehicle Tax (Denmark)

Motor Vehicle Tax, Denmark

 

Background

There are two types of taxes levied on motor vehicles: a Registration tax and an annual circulation tax. The registration tax (or passenger car tax) is a tax on the purchase price of new motor vehicles (Speck et al., 2006).

If the vehicle is used for freight transportation (for example delivery vans or heavy-duty trucks) they are exempt from the passenger car tax. A lower registration fee is charged for these vehicles and this tax is based on the weight of the vehicle (Speck et al., 2006).

 

Introduced

1997 and applies to all new vehicles.

 

Aims

The main and original purpose of the registration tax and the annual vehicle tax is to raise revenue. It is to ensure vehicle owners bear some of the costs of road maintenance and construction. The registration tax also aims to reduce the number of vehicles in Denmark and to provide an incentive to use smaller vehicles with better fuel economy.

 

Design

Scope

The annual tax is paid by the registered owner via the Central Registration to the Department of Customs and Excise.

 

Coverage

The taxes on motor vehicles comprises of:

A registration tax paid when the vehicle is purchased (heavy trucks are excluded)

An annual tax based on the fuel economy of the vehicle.

 

Tax Rates

In 2005, the Danish registration amounts to 105% of that part of the value of a new passenger car that is below DKK 62,700 and 180% for the rest. The basis for calculation includes 25% VAT, custom duties and profits to the retailer. Vehicles equipped with air bags and ABS systems are entitled to a reduction in the tax level to encourage safer cars.

Registration tax rates for passenger cars (euros)

 

1985

1990

1996

2000

2002

2005

105% tax of value below:

2295

2342

4674

7110

7725

8428

180% of tax of value above:

2295

2342

4674

7110

7725

8428

Source: Speck et al., 2006

 

In 2005, non-passenger vehicles weighing below two tonnes are charged with a 95% duty for the value above 15,100DKK, while the value below 15,100 DKK is free of charge (Speck et al., 2006). Trucks weighing above two tonnes are charged 60% for the value above 12,100 DKK while the value below 12,100 DKK is free of charge (Speck et al., 2006).

 

Before 1997, the annual vehicle tax was based on the weight of the car. All vehicles sold before 1997 are liable to the annual weight based tax, lighter vehicles paid a lower duty than heavy vehicles. In 2005, owners of vehicles registered before 1997 weighing below 600kg are facing an annual vehicle tax of 1,700DKK while a vehicle weighing between 1501 and 2000kg pay a tax of 4780DKK tax (Speck et al.2005).

For vehicles registered after 1997, a tax, known as "the owners green tax", is paid based on the fuel economy rather than the weight of the car (that is the number of kilometres driven per litre of transport fuel). In 2005, the annual tax rates are as low as 520DKK (€70) for petrol driven vehicles driving more than 20km/l and as high as 18,460DKK (€2,477) for petrol driven vehicles driving less than 4.5km/l. For diesel driven vehicles, the lowest yearly tax rate is 160DKK (€21) for vehicles driving more that 32.1 km/l and the highest tax rate is 25,060DKK (€3,362) for vehicles driving less than 5.1km/l (Speck et al., 2006).

 

Exemptions

As part of the government’s green energy agreement in 2008, it was decided that electric vehicles would not be subject to normal vehicle registration tax of 180 percent until 2012. In 2009 it was announced that the exemption may be extended by the government until 2015. DONG Energy, (72 percent is state-owned) called for an extension to the registration free period until at least 2020. The company plans to launch 500,000 electric cars in Denmark within the next decade (The Copenhagen Post Online, 2009).

 

 

Institutional Arrangements

The Department of Customs and Excise collects the registration tax from the retailers. After the first registration the car may be sold freely without any additional taxes.

 

Expectations (Ex ante Analysis)

The taxation of motor vehicles is being shifted gradually from the registration tax to annual taxation, which should influence the fuel economy of vehicles purchased. Car ownership in Denmark is at the lower end of the EU Scale (338 per 1000 inhabitants), and the fuel economy of Danish vehicles is high compared to other European Countries (Danish EPA, 2000).

 

Performance

There has been much debate over the high registration tax on passenger cars in Denmark. This tax has been accused of being non-environmentally-friendly and not creating enough economic incentives for individuals to behave in an environmental way. This occurs because these more environmentally-friendly cars tend to be more expensive yet there are no tax credits given for the increased pro-environmental impact. The higher tax payment acts as a deterrent for buyers, and therefore politically the registration tax system is seen as non-environmentally-friendly and not supporting the "greening" of the Danish car fleet (Speck et al., 2006). Even with this drawback, the significant amount of tax revenue that the government receive from the tax (18 billion DKK (2.42 billion) projected for 2005) implies reluctance exists to change the system (Speck et al., 2006).

 

Revenue from transport related taxes and charges (million DKK)

Transport related taxes

 

1990

1995

2000

2002

2005*

Weight duty

4363

4404

6930

7943

8320

Registration tax

8007

14967

14122

14487

17740

Total transport

12370

19371

21052

22430

26060

Total environmental taxes

 

27567

42474

58873

62846

67072

Transport tax as % of Total environmental tax

44.9

45.6

35.8

35.7

38.9

Source: Speck et al. 2006.

 

 

Drawbacks

It could be argued that the high registration tax reduces the incentive to replace old cars with new ones. However, the better fuel economy of new cars may counteract this.

 

References

 

The Copenhagen Post Online, 2009. Dong Satisfied with Electric Car Relief. http://www.cphpost.dk/business/119-business/45732-dong-satisfied-with-electric-car-tax-relief.html

 

Economic Instruments in Environmental Protection in Denmark,2000, www.mst.dk

http://www.skm.dk/foreign/english/taxindenmark2006/section10vatpayrolltaxandenvironmentaltaxes/#104 info on tax rates in Denmark

 

Speck, S., Skou Andersen, M., Nielsen, H.O., Ryelund, A., and Smith, C., 2006, The Use of Economic Instruments in Nordic and Baltic Environmental Policy 2001-2005, TemaNord 2006:525, Nordic Council of Ministers, Denmark.

 

Posted by admin on 09/06/08

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