A plan to slash input VAT deductions on company cars that are also used for non-business purposes has raised the ire of the automotive retail industry, but the government is not budging.
In remarks at a business breakfast organized by the law firm Sorainen on October 22, Finance Minister Jürgen Ligi defended a proposal to halve VAT deductions on leased or purchased cars that are not exclusively in use for business purposes, saying that there are thousands of idle companies that have such cars on their balance sheets, Postimees reported.
He said officials would like to get even tougher on how fringe benefits are taxed in Estonia, and look into "electronics, furniture and curtains," but said that was beyond the power of the government.
"Most European countries do not view passenger cars as a production input," Ligi said, saying that 21 member states had restrictions on input VAT deductions on cars and that Finland did not allow them at all, except on resale, taxi and student vehicles, and vehicles used exclusively for business. Nor does Estonia have a car tax.
In its latest newsletter, AMTEL, the association of Estonian car dealers and service enterprises, said the decision would reduce new car sales by 10-15 percent and exert a negative impact on the economy over the long term, including knock-on effects such as increased pollution levels from the greater proportion of used cars. It would also increase tax avoidance, the association warned.
Today, many companies use the same vehicle for business and private trips, which the association said can be viewed as the same sort of stimulus for business as Estonia's lack of corporate income tax, and other measures. "If the principles for assessing VAT change, some companies will start using cars for only internal consumption and employee transport matters will be left up to the employees, meaning that two cars will enter the picture instead of just one," the organization was quoted by uudised.err.ee as saying.
AMTEL said it found a CO2-based vehicle tax an acceptable alternative.
The government approved the proposed changes to the Income Tax Act and VAT in late September along with the new state budget, and it says reforms will bring 40 million euros a year into the state treasury, including 20 million euros next year (the bill would become law on July 1).
From that point on, companies would only be able to claim 50 percent of the VAT paid on new cars as input VAT, and no more than 2,000 euros per vehicle. To get the full deduction, the cars could only be used for business, and the company would have to establish a way of checking this, such as with GPS systems and parking records. Exceptions would also apply for taxis, instructional vehicles and cars for resale.
Currently only private use is taxed, and input VAT can also be deducted in full on automotive goods related to the car.