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The OECD are watching

Written by | Posted on 02.12.2014
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watching man

Drive a company car? If so, the Organisation for Economic Cooperation and Development (OECD) is watching you. They’ve released a couple of papers this year – one in July, the other in September – investigating how company cars are taxed across 27 OECD countries as well as South Africa. Their findings are officially summarised here, but the even shorter version is this: they think that the environmental and social costs of company car use are inadequately reflected in the tax system. They want to rectify that via your pay cheque.

The OECD’s argument rests on two types of financial benefit that company car drivers can enjoy. The first is what they call a ‘capital’ benefit: employees can avoid various expenses, such as those to do with registration, insurance and depreciation, simply by not having to acquire a car in the usual manner. The second is a ‘distance’ benefit: employees can save on those motoring costs, such as fuel and maintenance, that normally go up with a car’s odometer reading. So far, this is all very uncontroversial. We know that there are benefits to having a company car, otherwise we wouldn’t have them.

Yet what irks the OECD, in part, is that these benefits aren’t properly taxed by governments around the world. ‘Ideally,’ they say, ‘country tax systems will include the value of both of these benefits as taxable income to the employee.’ But this isn’t what is happening. On their account, for the countries they studied, only 60 per cent of the capital benefit is treated as taxable income. That figure falls to just 20 per cent for the distance benefit. ‘Under-taxation’ is what they call it.

Why is the OECD eager for more taxation? They supply a few reasons. One is that it could help bolster government’s finances. Another is that it could smooth out certain ‘imbalances’ in the system, i.e. ‘when employees with similar total remuneration are taxed differently depending on the form of their income.’ But the main reason is the environmental and social cost of company car use. The OECD’s concern is that lenient tax regimes mean more company cars driving more miles, with knock-on effects for traffic, accidents and pollution. They estimate the cost of this as €121 billion.

At which point, it should be said that the United Kingdom is far from the OECD’s worst performer in this regard. Against the organisation’s proposed ‘benchmark’ for the taxation of company cars, the UK already captures about 65 per cent of the revenues it might; which may not be as high as Canada’s 98 per cent, but it’s way ahead of Portugal’s 17 per cent. And, what’s more, the efforts of our politicians to tighten the tax regime are highlighted in these reports. ‘Over the past two decades, the United Kingdom has reduced or eliminated these perverse incentives in the tax system.’ Gold star for us.

Or perhaps that should be a silver or a bronze star. For 65 per cent still is still 35 per cent below the OECD’s benchmark standard. And that standard is effectively higher taxes for company car users. As they put it: ‘individuals should be required to include in their taxable income an amount equal to the cost of purchasing equivalent goods and services.’

As much as our wallets may squeal at the prospect, higher taxes shouldn’t be dismissed out of hand. There is, as we have pointed out on this blog recently, a debate to be had about the revenues raised from and then spent on motorists. But, that said, there are some problems with the OECD’s prospectus. Which politician would, at a time when prices are still increasing faster than wages, advocate a severe crackdown on one of employment’s little perks? And, if they did, what would be the effect on the economy? In 2013, some 54 per cent of all first car registrations were made by companies. The trees may be glad if that figure goes down. Manufacturers would be less so.

But the biggest question mark hanging over these OECD analyses could also be a solution. They approach the problem from one angle: to mitigate against the €121 billion social and environmental costs, we must raise taxes to both make up some of the cash and reduce company car use. But there’s another angle too: making company cars cleaner. Bring on the electric revolution.

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