BETTER POLICIES FOR BETTER LIVES

POLICY HIGHLIGHTS

Under-taxing the benefits of company cars

A driver of social costs

The environmental and social costs of car use – air pollution and congestion for example – are not well reflected in the costs of driving. Those problems are made even worse when countries subsidise the purchase and use of company cars. These subsidies mean more cars are purchased and they are more heavily used than would otherwise be the case. Policy makers need to ask whether subsidising the commercial use of vehicles is a good use of resources given the costs we already know car use imposes on society.

Simon Upton, OECD Environment Director

“2 . © OECD UNDER-TAXING THE BENEFITS FROM COMPANY CARS

September 2014

Overview

• Transport, which accounts for roughly one-quarter of carbon dioxide

emissions in most OECD member countries, is a significant source of

local air pollution, carbon emissions, congestion and accident costs. In

many of these countries, company cars form a large proportion of the

car fleet, and also influence the make-up of the wider vehicle fleet. Since

commuting distance and mode of transport are key factors of travel by

individuals, the personal income tax rules applying to these areas are

fiscally and environmentally important.

• The tax treatment of company cars and commuting expenses can

encourage users to drive these cars more often. If the taxable benefit

associated with personal use of a company car does not vary with

distance driven, for example, the tax system provides an incentive to

travel greater distances. This results in more emissions of air pollutants

and other costs linked to travel, such as congestion and accidents.

• Most OECD member countries treat only 50% of the personal benefit

to employees from company cars as taxable. In situations where

employers cover fuel expenses, employees in many countries face

no additional costs when they drive more for personal purposes in a

company car. Across the countries considered, the fiscal cost of current

company car tax settings was estimated at EUR 26.8 billion in 2012.

• The current under-taxation of company car benefits, and particularly

the absence of tax consequences of driving farther in many countries,

has high environmental and other social costs. These include increased

contributions to climate change, local air pollution, congestion and road

accidents. Among the countries studied, environmental and social costs

were estimated at EUR 121 billion, which are significantly higher than the

estimated tax expenditure: the loss to society is thus far greater than the

gain by a few “winners”.

• Based on the proposed benchmark for the neutral tax treatment of

company car benefits relative to cash wage income, environmental

and social outcomes across the OECD would be greatly improved by

ending the under-taxation of company cars, particularly the “distance”

component.

This Policy Highlights is based on the OECD Working Papers: Personal Tax

Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal

and Environmental Costs (2014); and Environmental and Other Social Costs of

the Tax Treatment of Company Cars and Commuting Expenses (2014).

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The tax treatment of company cars is, quite literally, a

driver of negative fiscal and environmental consequences

in OECD member countries. Perverse incentives

encourage employees to use company cars for personal

use, and to drive longer distances than they might do

otherwise. The implicit favourable tax treatment of

company cars and commuting expenses have significant

impacts on the environment and society. These include

more air pollution, traffic accidents, congestion and

noise, as well as increased greenhouse gas (GHG)

emissions that contribute to climate change.

The OECD paper, “Personal tax treatment of company

cars and commuting expenses: Estimating the fiscal and

environmental costs” (2014), examines policy in 27 OECD

member countries and one partner country. It compares

tax settings for company cars and commuting expenses

with a stylised “benchmark” tax treatment that estimates

the full value of the benefit received by employees with

company vehicles. Among other findings, it shows that

employees in most countries paid no additional tax for

additional distance driven.

Building on this analysis, “Environmental and other

social costs of the tax treatment of company cars and

commuting expenses (2014)”, explores the following

questions:

• How does the tax treatment of company cars and

commuting expenses impact the environment?

• Which particular features of the current tax rules

have the largest environmental impact?

• How could tax rules be changed to modify these

impacts?

A driver of negative fiscal and environmental consequences

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Box 1: Equity, company cars and tax systems

Treating different forms of employment income in different ways creates imbalances that can both

fuel inequity and lower tax revenue. If income received in the form of a company car is lower-taxed,

it creates incentives for employees to receive income in this form rather than as wages, which may

increase the fiscal cost to a country over time. Inequities creep into the tax system when employees

with similar total remuneration are taxed differently depending on the form of their income. Moreover,

those with higher incomes may be more likely to enjoy the tax perks of fringe benefits and therefore

will disproportionately benefit from the under-taxation of company cars. Among other impacts, this

decreases the efficiency of the tax system and creates a competitive advantage for larger or more

established firms that can offer fringe benefits like company cars.

How do company cars benefit employees financially? Since commuting distance and mode of transport are key elements

of travel by individuals, the personal income tax rules applying to

these areas are fiscally and environmentally important. Across the

OECD, company cars represent an important sub-set of vehicles.

In the European Union, for example, company cars make up about

half of new registrations and about 12% of total car stock.1 While

employees use company cars for business, they use them more

often for personal travel. A Netherlands study showed employees

used company cars for personal use more than three-quarters of the

time.2

Employees enjoy two types of financial benefits from using a company

car. A “capital” benefit results from savings in the fixed costs of

depreciation, financing, taxes, registration and insurance that the

employee would otherwise have to pay.

“Most OECD member countries significantly under-calculate the benefit employees receive from the private use of company cars. On average, only 50% is taxed. This results in a significant tax expenditure.

Notes

1. For data on the EU, see Shiftan, Albert and

Keinan, 2010 and 2011.

2. Naess-Schmidt and Winiarczyk, 2010.

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A “distance” benefit results from savings in the variable costs of fuel,

repairs and maintenance. Ideally, country tax systems will include the

value of both of these benefits as taxable income to the employee.

Many countries under-calculate the capital benefit to employees from a

company car, and pay no attention to distance driven for personal use.

All told, the countries studied were estimated to include only 20% of

the distance benefit as taxable income compared to 60% of the capital

benefit. The few countries that measure the distance benefit for tax

purposes apply a fixed per-kilometre rate regardless of fuel efficiency.

Thus, they fail to capture the cost of additional fuel consumed by less

fuel-efficient cars.

Based on the benchmark, tax systems treat on average no more than

50% of the personal benefit to employees from use of company cars as

taxable income. Figure 1 shows the proportion of the lower, midpoint

and upper-bound benchmarks captured by country tax systems: the

untaxed amount of taxable income from company cars was

EUR 64.3 billion at the midpoint estimate in 2012.3 The same year, given

their current tax rules, this resulted in a total tax expenditure of

EUR 26.8 billion and an estimated subsidy per company car of around

EUR 1 600 per year.

“Many countries under-calculate the capital benefit to employees of a company car, and pay no attention to distance driven for personal use.

Box 2: A benchmark for neutral tax treatment of personal benefits

Full taxation of the benefit received from company cars would level the playing field with equivalent cash wages. In other

words, individuals should be required to include in their taxable income an amount equal to the cost of purchasing

equivalent goods and services. Such tax treatment would make employees indifferent to receiving compensation as

in-kind or cash.

As a compromise between accuracy and simplicity, the benchmark tax treatment used to estimate the full value of the

benefit received by employees from personal company car use has two components:

• A capital component that reflects the benefit the employee receives from having a company car that they did not

have to pay for themselves. Because the employee would otherwise pay the full capital costs of the car, the taxable

base uses the full value of the car. It includes depreciation costs, as well as insurance, finance, annual taxes,

registration and interest costs, estimated by reference to a fixed percentage of the vehicle’s depreciated value.

• A distance component that reflects the benefit the employee receives from not having to pay the costs that vary

with distance travelled (assuming the employer pays or reimburses them), set as a value per kilometre travelled for

personal purposes, including commuting.

Note

3. This estimate does not consider possible

behavioural changes that would occur if tax

systems were changed to replicate the proposed

benchmark.

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Figure 1: Proportion of benchmark captured by country tax systems

Source: OECD (2014), Personal Tax Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal and Environmental Costs, 10.1787/5jz14cg1s7vl-en.

CA

N

NO

R

AU

S

FIN

ISL

SW

E

DN

K

NLD

US

A

AU

T

GB

R

SA

F

ES

P

SV

N

LUX

NZ

L

ES

T

BE

L

DE

U

ITA

SV

K

CH

E

FRA

PR

T

HU

N

ME

X

0%

20%

40%

60%

80%

100%

120%

Lower bound estimate

Upper bound estimate

Midpoint estimate

Percentage of benchmark captured by tax system

Mid-point estimate

Upper range of estimates

Lower range of estimates

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The financial benefits from using a company

car have different impacts. Under-taxation of

the capital benefit, for example, can influence

the initial decision to accept a company car. It

may also lead to a choice of larger cars, with

environmental implications.

When it comes to the impact of under-taxing

company cars, however, evidence suggests the

taxation of the distance driven is more important

to environmental outcomes than the taxation of

the capital benefit.

When the distance driven for personal purposes

is untaxed, it creates a strong incentive for

employees in many countries to drive more.

What happens when fuel is “free”Where the employer pays fuel and other variable

charges, the employee’s marginal cost of driving

is reduced to zero. This encourages the use of

company cars and, in turn, the growth of two-car

households. All this tends to increase the number

of cars on the road and the number of kilometres

driven.

“When employers cover fuel expenses, employees in most countries face no additional tax consequences when they drive more for personal purposes in a company car. This policy encourages increased travel in the company car.

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Country experience shows the impact of under-taxing the distance benefit. In the past, the marginal cost of driving a company car in the United Kingdom was not merely zero, but negative. In other words, employees were not simply untaxed when using a company car: they actually enjoyed a financial advantage from doing so.4 First, employees would benefit from a reduced tax liability, or scale charge, upon reaching certain thresholds in mileage. This gave drivers a perverse incentive to reach that threshold. Second, in exchange for unlimited free fuel from the employer, employees would incur an additional tax liability known as the fuel-scale charge. This liability, however, was fixed, regardless of how much fuel was used. Consequently, the policy encouraged high mileage since free fuel only made sense if enough was consumed to justify the fuel-scale charge.

Over the past two decades, the United Kingdom has reduced or eliminated these perverse incentives in the tax system. By 2002-03, the government had eliminated tax incentives for reaching mileage thresholds. And by the early 2000s, it had more than doubled in real terms the tax liability for fuel.

Between 1995-96 and 2009-10, for example, the number of car users in the United Kingdom electing to receive free fuel and pay the fuel-scale charge dropped from 48% to 28%. This took place against a 16% reduction in company cars that were not receiving free fuel and thus remained unaffected by changes to the fuel-scale charge. Still, changes to tax laws that removed the attractions of “free fuel” have largely driven the reduction in both company car ownership and usage.

The weight of this evidence, coupled with lessons from the larger passenger transport market about point-of-use charges, strongly suggests the environmental impact of the distance component surpasses that of the capital component.

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“If the taxable benefit from company cars matched the true value of the benefit, evidence from country experiences suggests that a high proportion of current company car users would be willing to give up the car.

Box 3: Taxation rates matter

While under-taxation of the distance benefit has more

environmental impact, the capital benefit should not

be forgotten. Norway, for example, does not tax

distance, but captures 100% of the capital benefit.

Conversely, Germany measures both the distance

and capital benefits for tax purposes, but captures

only low proportions of each. At EUR 240 per year,

Norwegian subsidies for company cars are the

second lowest of the surveyed countries. German

subsidies, estimated at EUR 2 246 annually, are the

third highest.

Note

4. Le Vine and Jones (2012).

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The environmental impact of cars has been

monitored continuously since the European

Commission’s Green Paper of 1995.5 While

each step of a vehicle’s lifecycle generates an

environmental impact, actual use is the most

significant factor. After all, cars are not usually

produced for the showroom alone or parked as

examples of street art: they are made to be driven,

and the demand for their use drives demand for

both production and parking spaces.

A list of impacts from the presence of cars on the

road could include:

• demands on scarce resources such as oil

• CO2 emissions and the resulting contribution to

climate change

• emissions of local air pollutants

• traffic accidents

• congestion.

“The current under-taxation of company car benefits, and particularly the absence of tax consequences of driving farther in many countries, means these tax settings have high environmental and other external costs. These include contributions to climate change, local air pollution, congestion and road accidents.

These impacts, in turn, are influenced by the

total distance driven (number of cars multiplied

by distance driven per car); the environmental

characteristics of cars (fuel efficiency, emissions

intensity, safety features); and the distance driven

in peak periods at particular locations.

What are the environmental and social impacts of the taxation of company cars?

Note

5. EC 1995. See in particular the Commission’s 2011 White Paper (EC, 2011).

10 . © OECD UNDER-TAXING THE BENEFITS FROM COMPANY CARS

Company cars are an integral part of the passenger transport market.

Indeed, across many countries, the annual mileage per car is much

higher for company cars than for the rest of the car population.6

For example, before reforming its tax treatment of company cars,

company car users in Britain drove nearly three times the distance

as those in private cars.7 Another study identified that company car

users in Australia drove 30 000 km annually compared to 10 000 km

for private car users.8 In the Netherlands, several studies between

2002-09 indicated that users of company cars drove much greater

distances than those in private cars.9

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Table 1: Impact of tax systems on environmental and other social outcomes

Number of cars Fuel type and fuel efficiency of vehicle stock

Distance driven

Ability of each actor to respond to tax systems

Impact of personal tax treatment

Theoretical benchmark for environmental impacts

Employer: Chooses when and how to provide the company car

Employee: chooses household response to the provision of a car; may influence employer decision

Employee: Will depend on household response; company cars could be additional to or a substitute for private vehicles

The fuel type and fuel efficiency per car that would be purchased in the absence of tax preferences for the company

Employer: responsible for choice of company car and therefore it’s fuel efficiency

Employee: may respond by changing the private car stock or substituting transport toward/away from company car

Employee: failure to tax the employee for the benefit received may have less impact if the employee cannot affect the purchasing decision; secondary impacts for private car stock

The distance driven in both personal cars and the company car if the employee had to fully pay costs of company car use

Employer: Limited impact; policies restricting private use may have some impact

Employee: Chooses distance driven in company car; may also vary distances driven in private vehicles

Employee: May substitute toward the company car and away from the personal car if the cost per kilometre is not internalised; relative environmental effect will therefore depend on the difference in fuel efficiency between the two vehicles

May substitute car use for other forms of transport that would be cheaper in the absence of the tax preference or increase overall travel

The number of cars that would be driven were there no tax preferences to either the employee or employer

Notes

6. Scott, Currie and Tivendale (2012).

7. Le Vine and Jones (2012).

8. Collingwood et al. (1997).

9. Wilmink et al. (2002); Graus and Worrell

(2008); Berning (2009).

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“Environmental outcomes across the OECD would be greatly improved by ending the under-taxation of company cars.

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The impact of company car tax settings on environmental and other

social outcomes will depend on a range of factors. Does the company

car substitute for another vehicle or mode of transport? If so, is that

vehicle or mode of transport more or less fuel efficient? In addition to

encouraging individuals to increase the distance driven in company

cars, tax settings tend to provide a greater subsidy to less fuel-efficient

company cars.

Systems in Belgium, the Netherlands and the United Kingdom

explicitly vary the taxable benefit based on the level of a vehicle’s

emissions per kilometre. Even in these cases, however, the taxable

benefit estimated under actual tax rules was generally less than the

full value of the benefit. What’s more, it was insensitive to distance

driven.

Across all countries studied, environmental costs were estimated at

EUR 116 billion, which are significantly higher than the estimated tax

expenditure: the loss to society is thus far greater than the gain by a

few “winners”.

From country experience, as well as the larger body of analysis

available, four main conclusions can be drawn about company car

taxation and the environment:

• Current company car tax rules increase distance driven. The under-taxation of company cars will likely

result in a disproportionately large increase in total distance driven, made up of an increase in both

the number of cars driven and distance driven per car per year. Conversely, corrections to company car

taxation policy will likely result in a disproportionately large reduction in total distance driven – and a

corresponding mode shift to public transport.

• Increased driving resulting from company car tax rules harms the environment. Because of its

disproportionate impact on total

distance driven and its components,

the under-taxation of company cars

will likely result in disproportionately

large impacts on most relevant

environmental variables. Conversely,

corrections to company car

taxation are likely to result in

disproportionately large reductions in

the sum of social costs.

• Non-taxation of distance driven is the most harmful feature of most company car tax systems. Widespread

and multi-faceted under-taxation

of the distance component is more

harmful to environmental and other

social outcomes than the under-

taxation of the capital component.

Based on these conclusions, environmental

outcomes across the OECD would be

greatly improved by ending the under-

taxation of company cars, particularly the

distance component.

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Table 2: Parameters used in benchmark calculation of taxable benefit in a given year

Fixed costs

Variable costs

Depreciation

Insurance, registration, annual taxes, interest

Repairs, maintenance, tires

Fuel costs

Depreciated vehicle value (based on list price at purchase, less 5%)

Depreciated vehicle value (based on list price at purchase, less 5%)

Kilometres travelled for personal use

Kilometres travelled for personal use

Lower estimate: 18%Midpoint estimate: 24.5%Upper estimate: 31%

Midpoint estimate: 9%

Lower estimate: EUR 0.02 per kilometreMidpoint estimate: EUR 0.04 per kilometreUpper estimate: EUR 0.06 per kilometre

Cost of fuel per kilometre travelled, using each vehicle’s fuel type and fuel efficiency rating, and country-specific fuel costs

Type of costsComponent Base Rate

Source: Based on Table 7 and the formula on p.20 of “Personal Tax Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal and Environmental Costs”, OECD Taxation Working Papers, No.20, OECD.

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References

Berning, E. (2009), The Price of Going the Extra Mile, Erasmus University, Rotterdam, www.autoleasewereld.nl/files/20091026%20Total%20cost%20of%20ownership%20mobiliteit.pdf.

Collingwood, V. (1997), “Promoting the safe driving policy in NSW fleets of twenty or more vehicles”, Ninth Report, Joint Standing Committee on Road Safety of the 51st Parliament of New South Wales, Sydney.

EC (2011), “Road map to a single European transport area – Towards a competitive and resource efficient transport system”, White Paper, European Commission, Brussels.

EC (1995), “Towards fair and efficient pricing in transport: Policy options for internalizing the external costs of transport in the European Union”, Green Paper, European Commission, Brussels, http://europa.eu/documents/comm/green_papers/pdf/com95_691_en.pdf.

Graus, W. and E. Worrell (2008), “The principal–agent problem and transport energy use: Case study of company lease cars in the Netherlands”, Energy Policy, Vol. 36, Elsevier, Amsterdam, pp. 3745-3753, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0144:FIN:EN:PDF.

Le Vine, S. and P. Jones (2012), “On the move: Making sense of car and train travel trends in Britain”, report commissioned by RAC Foundation, Office of Rail Regulation, Independent Transport Commission and Transport Scotland, RAC Foundation, London, December, www.racfoundation.org/assets/rac_foundation/content/downloadables/on_the_move-le_vine_&_jones-dec2012.pdf.

Naess-Schmidt, S. and M. Winiarczyk (2009a), “Company car taxation: Subsidies, welfare and environment”, Taxation Working Paper, No. 22, European Commission, Brussels.

Naess-Schmidt, S. and M. Winiarczyk (2009b), “Company car taxation: Subsidies, welfare and environment”, Appendix to Taxation Working Paper, No. 22, European Commission, Brussels.

Harding, M. (2014), “Personal Tax Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal and Environmental Costs”, OECD Taxation Working Papers, No. 20, OECD Publishing, Paris, http://dx.doi.org/10.1787/5jz14cg1s7vl-en.

Scott, R., G. Currie, and K. Tivendale (2012), “Company cars and fringe benefit tax – Understanding the impacts on strategic transport targets”, Research Report, No. 474, New Zealand Transport Agency, Wellington, February, www.nzta.govt.nz/resources/research/reports/474/docs/474.pdf.

Shiftan, Y., G. Albert and T. Keinan (2011), “The impact of company-car taxation policy on travel behaviour”, Transport Policy, Vol. 19, Elsevier, Amsterdam, pp.139-146.

Shiftan, Y., G. Albert and T. Keinan (2009), The Effect of Employer Provided Car and Its Taxation Policy on Safety, Ran Naor Foundation, Hod Hasharon, www.rannaorf.org.il/webfiles/files/The%20Effect%20of%20Employer%20Provided%20Car%20and%20Its%20Taxation%20Policy%20on%20Safety.pdf.

Wilmink, I., et al. (2002), Cars at the beginning of the 21st century, Instituut voor Verkeer en Vervoer, Logistiek en Ruimtelijke Ontwikkeling, TNO, Delft.

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BETTER POLICIES FOR BETTER LIVES

For more information:www.oecd.org/taxwww.oecd.org/environment/greening-transport/

This Policy Highlights is based on two OECD Working Papers issued in 2014:

Personal Tax Treatment of Company Cars and Commuting Expenses:

Estimating the Fiscal and Environmental Costs (2014); and

Environmental and Other Social Costs of the Tax Treatment of Company

Cars and Commuting Expenses (2014).

September 2014