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PRE-BUDGET SUBMISSION 2001

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					       The Society of the Irish Motor Industry




               Pre Budget Submission
                          2004
Prepared with assistance from Goodbody Economic Consultants
                               SIMI Pre-Budget Submission 2004



                                            Index



Executive Summary                                                Page 5


Chapter 1    Introduction                                        Page 10


Chapter 2    Vehicle Registration Tax                            Page 15


Chapter 3    Benefit-in-Kind                                     Page 18


Chapter 4    Scrappage Scheme                                    Page 22


Chapter 5    Fuel – Carbon Taxation                              Page 26


Chapter 6    Other Budget Proposals                              Page 32


Appendix 1   Percentage charge of Benefit in Kind on Business
             Mileage                                             Page 33


Appendix 2   The Real Effect of VRT on the Price of a Car        Page 34




                                                                           2
                                 SIMI Pre-Budget Submission 2004



                                  List of Tables & Figures
Tables
   1. Total Government revenue from motor related taxes 2002
   2. Shift in new car market in 2nd quarter 2003 as a result of the VRT change in Budget 2003
   3. Expected Benefit-in-Kind annual returns
   4. New scales for calculating Benefit-in-Kind, commencing January 2004
   5. Benefit-in-Kind rates as of 2004
   6. Benefit-in-Kind calculation assumptions
   7. Cost to employees of Benefit-in-Kind change
   8. Cost to employer of Benefit-in-Kind change
   9. Contribution of new company car sales to the Exchequer from VAT and VRT
   10. Profile of the car fleet 1990-2003
   11. Impact of scrappage scheme on Government revenue
   12. Emissions savings from car scrappage
   13. Comparison of emissions and vehicle number forecasts 1990-2010
   14. Revised estimates of emissions from passenger cars 1990 & 2001
   15. Retail price increases from the carbon tax proposal
   16. Effect of carbon energy tax on CPI
   17. EU car ownership levels
   18. The average size of new cars in Europe


Figures
   1. New car sales in Ireland 1994-2003
   2. Total taxes from motoring 1993-2002
   3. Irish consumer confidence
   4. Real household discretionary income growth
   5. Trend in used imports
   6. Volume of new cars sold under scrappage scheme 1995-1997
   7. Cars over 8 and 10 years 1994 & 2004
   8. Average age of car parc 1993-2004
   9. Average CO2 emissions from new car sales in Ireland 1995-2001


                                                                                             3
SIMI Pre-Budget Submission 2004




                                  4
                                    SIMI Pre-Budget Submission 2004


                                          Executive Summary
Introduction
In its Pre-Budget submission last year SIMI anticipated a drop in new car sales through 2003 because of:

        •   Low consumer confidence;
        •   Reduced growth in incomes and employment;
        •   The impact of the Special Savings Scheme on discretionary incomes; and
        •   An increase in new car prices arising from changes to the EU Block Exemption Regulations.
It is now clear that these factors have had their effect on the new car market. It is anticipated that new car
sales for 2003 as a whole will be of the order of 145,000 units, down 7% from 156,000 in 2002. The
increase in new car prices during 2002/3 has contributed to the decline in the market. New car prices in
April 2003 were some 5 per cent above those one year previously. Consumer confidence has been low in
Ireland for some time and this is now feeding through to consumer spending. Household income growth
is falling and is expected to fall further due to more moderate wage increases, higher unemployment
levels and increasing tax take in real terms.
The presence of these conditions means that Budget 2004 must contain positive measures to bolster the
confidence of the car purchaser and redress the downward trend in new car sales. The following SIMI
proposals will stimulate confidence and galvanise the new car market:

    •   VRT rates be cut by 2.5 percentage points to stimulate the marketplace and prevent further
        decline in the new car market;
    •   A Scrappage Scheme providing a VRT discount on new cars bought to replace cars over 8 and 10
        years;
    •   Reverse the decision in last years Budget to include 1.9 litre cars in the highest VRT band;
    •   Introduce a VAT rebate for businesses purchasing company vehicles, assess Benefit in Kind on
        the cost of the vehicle less VRT, reduce the percentage of the cost of the car that is subjected to
        BIK and increases in capital allowances to ease the impact of changes to Benefit in Kind taxation;
        and
    •   Fuel Excise duties should remain at their present levels and the proposed carbon taxes be
        dropped.

Vehicle Registration Tax
In 2004 the new car market faces fresh pressures in the form of increasing car prices, adjustment to the
changes in last years Budget, the revived threat from used imports and the proposed changes to Benefit in
Kind. Despite these pressures SIMI believes that there is an untapped demand for new cars, which needs
to be stimulated.
SIMI is confident that a dormant market exists among those who bought cars in 1999, 2000 and 2001.
Over 500,000 motorists bought their cars in these years and thousands, who have not already done so,
will trade up to a new car if offered a proper incentive to do so. The Minister can therefore halt the
decline of the new car market by reducing Vehicle Registration Tax by 2.5 percentage points.

1900cc Change in Budget 2003
The change to the band of the highest rate of VRT, from 2000cc to 1900cc, in last year’s Budget had
serious repercussions for the industry, new car purchasers and Government revenue. This change resulted
in:
• Distortion of a key segment of the new car market;
• Cost of €11.5m to the industry; and
• Negative long term impact on Government revenue from VRT.

SIMI demands a reversal of this decision.
                                                                                                            5
                                   SIMI Pre-Budget Submission 2004


Used Imports
Imports of used vehicles into Ireland are once again on the increase. This increase has come about from:
   • Declining new car market;
   • Increasing new car prices in Ireland;
   • Decreasing of new, and consequently used car, prices in the UK;
   • Strengthening of Sterling against the Euro; and
   • Block Exemption changes.

A VRT reduction at this time would help to stem the flow of used imports and eliminate their negative
impact on the new car market.

European Position
The European Commission and Parliament have both indicated that they have set their sights on Vehicle
Registration Taxes imposed by certain European countries. Their opinion that VRT should be phased out
over a period of time lends support to SIMI’s long held view that VRT is contary to the spirit of the
European single market. SIMI’s proposal for a VRT reduction will establish momentum for the
Government in preparing for the day when the EU outlaws VRT. Irish motorists welcome such a proposal
as they are bewildered as to why 30 years after joining the “common market” they are still deprived of
one of the benefits of membership, that is to purchase cars at the same price as other EU citizens.

Benefit in Kind
On the 4th of December last the Minister for Finance announced changes in Benefit-in-Kind taxation
(BIK). The changes made, which come into effect on January 1, 2004, will affect the cost to employees of
benefiting from company vehicles (and other assets). The changes will also affect the cost to employers of
providing company vehicles for employee use. As a result SIMI believes that companies will seek
alternative forms of remuneration for their employees. This move will have a disastrous impact on the
company car segment, which currently constitutes approximately 20-25% of the total new car market.

SIMI estimate that new car sales in the company car segment is worth at least €394 million to the
Exchequer. The Goodbody New Car Sales Forecasting Model indicates that an increase in the costs
associated with purchasing a company car resulting from the proposed BIK changes would reduce new
company car sales by approximately 560 cars. However this calculation cannot factor in the fact that
companies have substitute remuneration options to choose from and therefore understates the true impact
it will have on the new car market.

SIMI makes the following set of proposals to compensate companies and employees for the additional
BIK costs:

•   Provide a VAT input credit, as the EU Commission recommends, on the purchase of company cars;
•   Assess Benefit in Kind on the cost of the vehicle less VRT;
•   Increase capital allowances; and
•   Reduce the percentage of the cost of the car that is subjected to BIK, reverting back to the previous
    20% maximum.

These measures would protect Government revenue from the Benefit in Kind change whilst at the same
time limiting the negative impact it has on other sources of revenue such as VRT. Furthermore it may
encourage companies to utilise this remuneration option and therefore benefit the Exchequer in additional
VRT revenue from higher new car sales.




                                                                                                           6
                                    SIMI Pre-Budget Submission 2004


Scrappage Scheme
The previous scrappage scheme operated from July 1995 until December 1997. During that period 64,500
cars were scrapped and replaced by new cars. The scheme was beneficial in that it:

        •   Increased Government tax revenue from cars without raising tax rates;
        •   Benefited the consumer by enabling the replacement of older vehicles with new ones;
        •   Benefited the community at large by introducing safer more roadworthy vehicles into the
            fleet; and
        •   Contributed to a cleaner environment by introducing vehicles with better environmental
            characteristics.

Despite the success of the scrappage scheme between 1995 and 1997 and the further progress made in
2000 with the introduction of the National Car Test (NCT), SIMI estimate that the numbers of cars 10
years and older in the car parc will reach 208,000 in 2004, a mere 10,000 short of the numbers the year
the scrappage scheme was announced. Between 1993 and 2000 we witnessed a year on year drop in the
average age of the car parc in Ireland to reach a record low of 4.5 years in 2000. This improvement have
now ceased and the average age is again on the increase and unless addressed will continue to increase
over the foreseeable future.

To prevent the serious environmental and road safety consequences of an aging vehicle fleet and to
stimulate the market, SIMI proposes a scrappage scheme for vehicles which will provide a VRT
reduction of €1000 when a car of 8 or 9 years old is traded in against a new car and €1500 for a
vehicle 10 years or older.

SIMI estimate that this proposal will net the Exchequer €36 million. In addition to the Exchequer benefits
this proposal would have positive environmental results. Goodbody’s estimate that the emissions savings
per 10,000 scrapped vehicles, replaced with new vehicles, is 6,200 tonnes of CO2 and 2,600 tonnes of
Non- CO2.

Fuel – Carbon Taxation
For a number of years now, SIMI has been making the point that EPA calculations of the emissions from
the transport sector in general and cars in particular are too high. This point has been supported by
analysis from Goodbody Economic Consultants which indicates that the EPA figures are significant
overestimates of the real level of emissions from road transport. In particular the EPA have ignored
Ireland’s cross border fuel trade and smuggling problem.

The EPA data is provided to international bodies monitoring Ireland’s contribution to global emissions
including the European Environmental Agency and the United Nations. It is this data that determines the
1990, 2008 and 2012 emission levels in Ireland which are the measurements under the Kyoto Protocol. It
is these figures that will determine the level of fines Ireland will pay for compliance failure and the cost to
the Irish taxpayer. Current predictions estimate this cost at between €12 - €240m. In addition this data
served as the basis for the Government’s National Climate Change Strategy which is their blueprint for
tackling Ireland’s emissions problem.

If the Irish Government is serious about tackling Ireland’s emission problem they need to start at the
source. A complete review of the methodology used by the EPA in analysing emissions in Ireland needs
to be undertaken as a matter of urgency. There is scope under the EU CORINAIR methodology to employ
an alternative method of measurement. In addition both the Kyoto Protocol and the IPCC Good Practice
Guidance and Uncertainty Management in National Greenhouse Gas Inventories allow for alteration to be
made where fuel smuggling is a problem. To continue using inaccurate data will lead to unnecessary and
unacceptable costs for the Irish taxpayer in the future.

                                                                                                             7
                                   SIMI Pre-Budget Submission 2004


One such unnecessary cost for the Irish taxpayer is the proposal for carbon taxation on petrol and diesel.
The Department have suggested that a tax rate of 2.8c per litre be introduced in 2004 increasing to 7.4c
per litre over a period of 3–4 years.

SIMI believe the proposed carbon tax on fuel to be a flawed concept for several reasons:

•   The proposal is based on inaccurate EPA data;
•   The tax is not an environmental tax but a crude excise duty increase;
•   The tax will have limited environmentally positive impact on driving behaviour and patterns; and
•   It will add unnecessary and untimely pressure on the rate of inflation.

Additional Proposals
In addition to the above proposals, SIMI calls on the Minister to:

•   Abolish the 2% levy on car insurance premiums;
•   Maintain the lower VAT rate for repairs and servicing;
•   Apply the lower VAT rate to vehicle recovery services; and
•   Reject any proposals to apply Benefit in Kind tax to car parking spaces.




                                                                                                        8
SIMI Pre-Budget Submission 2004




                                  9
                                             SIMI Pre-Budget Submission 2004



Chapter 1                                          Introduction
The Society of the Irish Motor Industry
The SIMI is the official lobby for the motor industry in Ireland and is a registered as a Trade Union with
the Registrar of Friendly Societies. SIMI represents over 1,900 companies in 14 different sectors of the
industry from vehicle retailing and repairs to Petrol Retailers and Parts Wholesalers. Each year the Motor
Industry collects over €3.8 billion in motor related taxation and employs 50,000 people in good jobs, well
dispersed throughout the country.

2003 Review
In its Pre-Budget submission last year SIMI anticipated a drop in new car sales through 2003 because of:

        •   Low consumer confidence;

        •   Reduced growth in incomes and employment;

        •   The impact of the Special Savings Scheme on discretionary incomes; and

        •   An increase in new car prices arising from changes to the EU Block Exemption Regulations.

It is clear that these factors have had their effect on the new car market. It is now anticipated that new car
sales for 2003 as a whole will be of the order of 145,000 units, down 7% from 156,000 in 2002. New car
sales are now one third below their peak level of 231,000 units in 2000.


                                         Figure 1: New Car Sales in Ireland 1994 - 2003


                                                               es
                                                     New Car Sal

                              250,000
                              200,000
              New Car Sales




                              150,000
                              100,000
                               50,000
                                   0
                                        1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
                                                                   Year




                                                                                                           10
                                       SIMI Pre-Budget Submission 2004




The total contribution to the Exchequer from all motor related sources was €3.8 billion in 2002.

                     Table 1: Total Government Revenue from Motor Related Taxation 2002


              Tax Element                                         Tax Revenue 2002
                                                                        €m

              VRT on Cars                                                777.1
              VRT on Other Vehicles                                       15.5
              VAT on Motor Vehicles                                      437.0
              VAT on Repairs                                              44.2
              VAT on Fuels                                               315.4
              Excise on Fuels                                           1,514.5
              Benefit In Kind on Vehicles                                78.21
              Road Tax                                                    581

                                 Total                                  3,762.9


Since VRT was introduced in 1993, its contribution to the Exchequer has quadrupled. In 1993 the
contribution to the Exchequer from this source was €196 million, this figure reached €788 million in
2002. Over the same period excise duties on fuels have increased by 160 per cent and will reach €1.5
billion in 2003. Revenue from VAT on motor related sources has also risen dramatically since the early
1990s. VAT on vehicles, repairs and fuels totalled €213.5 million in 1993, the corresponding figure for
2002 is €796 million, an increase of 270 per cent.

                                 Figure 2: Total Taxes from Motoring 1993 - 2002

                  4500
                  4000
                  3500
                  3000
                  2500
                  2000
                  1500
                  1000
                    500
                      0
                      1993     1994    1995    1996    1997    1998    1999    2000    2001    2002




1
    Estimate of BIK revenue by the Revenue Commissioners see Chapter 3, page 17 for further analysis
                                                                                                       11
                                             SIMI Pre-Budget Submission 2004


Prices, confidence and incomes
The increase in new car prices during 2002/3 has contributed to the decline in the market. New car prices
in April 2003 were some 5 per cent above those one year previously. There is the prospect that there will
be further price increases for the remainder of 2003 and through 2004, as the European car market adjusts
to the new arrangements. In Ireland, any price increases due to price harmonisation in Europe will attract
VRT and thus Irish consumers are hit on the double.

The Irish motoring public will be impacted not only by higher prices, but also by declining consumer
confidence and a reduction in discretionary incomes.

Consumer confidence is crucial for the new car market, as car purchasers need to be assured that their
economic circumstances will enable them to service car loans. As the figure below shows, consumer
confidence has been low in Ireland for some time and this is now feeding through to consumer spending.


        Figure 3.

                                             Irish C o n su m er C o n fid en ce

           30

           20

           10

            0

          -10

          -20

          -30

          -40
            M ay-96   M ar-97      Jan -98      N o v-98        Sep -99   Ju l-00     M ay-01      M ar-02     Jan -03

                                C o n su m er C o n fid en ce             G en eric Eco n o m ic O u tlo o k




Household income growth is falling and is expected to fall further due to more moderate wage increases,
higher unemployment levels and increasing tax take in real terms.

In the last quarter of 2002 and the first quarter of 2003, personal consumer expenditure grew by 1.3 and
1.8 per cent respectively. This compares with a rate of 3.2 per cent in the previous three quarters. Despite,
the slower growth, consumption expenditure, along with public expenditure, are the only elements
underpinning GNP growth at the moment. Car sales are a very important element of consumer spending,
and any further set back to the car market will have negative consequences for consumer confidence and
spending generally.




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                                        SIMI Pre-Budget Submission 2004


        Figure 4
                                               d
                         R e a l H o u se h o l D i       o       n
                                                   scre ti n ary I co m e G ro w th
          yo y
          14%

          12%

          10%

           8%

           6%

           4%

           2%

           0%
                 1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006




Employment in the Motor Industry
Employment in the motor industry peaked at an estimated 52,000 jobs at the beginning of 2001. The
period of growth, 1994-2000, was propelled by year on year record levels of new car sales. The increase
in employment in the motor industry helped bring the benefits of the economic boom to areas that may
otherwise have felt excluded, as jobs in the motor industry are located in every town and village in the
country.

Over the last 18 months, however, the industry is experiencing redundancies on a national basis. The
primary determinant of the level of employment in the motor business is new car sales, as people are
needed not only to supply, sell and prepare new cars, but also to repair and resell cars traded in against the
new car sales. With falling new car sales, there is a real concern of heightened job losses. Any measure
that has a positive impact on the volume of new car sales will immediately stem the redundancies and
lead to increased employment.

SIMI Proposals for Budget 2004
The increase in car prices, the low level of consumer confidence and the decline in income growth mean
that Budget 2004 must contain some positive measures to bolster the confidence of the car purchaser and
redress the downward trend in new car sales. The following SIMI proposals will stimulate confidence and
galvanise the new car market:

    •   VRT rates be cut by 2.5 percentage points to stimulate the marketplace and prevent further
        decline in the new car market;

    •   A Scrappage Scheme providing a VRT discount on new cars bought to replace cars over 8 and 10
        years;

    •   Reverse the decision in last year’s Budget which brought 1.9 litre cars in the highest VRT band;

    •   Introduce a range of measures designed to ease the impact of changes to BIK taxation including;

                  o     Introduce a VAT rebate for businesses purchasing company vehicles;
                  o     Assess Benefit in Kind on the cost of the vehicle less VRT;
                  o     Reduce the percentage of the cost of the car that is subjected to BIK; and
                  o     Increase capital allowances.

    •   Fuel Excise duties should remain at their present levels and the proposed carbon taxes be
        dropped.

                                                                                                           13
                                    SIMI Pre-Budget Submission 2004


In addition the SIMI calls on the Minister to:

    •   Maintain the current favourable VRT rate for Hybrid vehicles as an environmental incentive;

    •   Abolish the 2% insurance premia as recommended by the Motor Insurance Advisory Board;

    •   Retain the lower VAT rate on repairs and servicing;

    •   Apply the lower VAT rate cent to vehicle recovery services;

    •   Postpone any proposals for Benefit in Kind taxation on parking until a proper transport
        infrastructure, including park and ride facilities, are in place.




                                                                                                      14
                                    SIMI Pre-Budget Submission 2004



Chapter 2                Vehicle Registration Tax
As we have already seen new car sales in 2003 were negatively impacted upon by a number of factors
external to the motor industry including: low consumer confidence, reduced growth in incomes and
employment and the impact of the Special Savings Scheme. These factors have not disappeared and are
likely to stifle new car sales in 2004 and beyond. In 2004 however the market faces fresh pressures in the
form of increasing car prices, adjustment to the changes in last year’s Budget, the revived threat from
used imports and the proposed changes to Benefit in Kind.

Despite these pressures SIMI believes that there is an untapped demand for new cars, which needs to be
stimulated. This demand is similar to that which existed in the mid 1990’s, when the scrappage scheme
was introduced.

This time, however, two different factors suggest opportunities for increased sales and increased
Government revenue. Firstly SIMI is confident that a dormant market exists among those who bought
cars in 1999, 2000 and 2001. Over 500,000 motorists bought their cars in these years and thousands, who
have not already done so, will trade up to a new car if offered a proper incentive to do so. The Minister
can therefore halt the decline of the new car market by reducing Vehicle Registration Tax by 2.5
percentage points. The experience here in 1994 and in the past year in Finland, where the new car market
has risen by 24% following a VRT type reduction, shows that new car demand responds very positively
to tax reductions.

In addition the EU Commission has called on Governments to phase out Vehicle Registration Taxes as
they have a negative effect on the operation of the single market. SIMI urges the Minister for Finance to
start phasing out VRT this year by reducing the three tax bands by 2.5% percentage points, leaving the
lowest rate at 20%.

1900cc Change in Budget 2003
The change to the band of the highest rate of VRT, from 2000cc to 1900cc, in last year’s Budget had
serious repercussions for the industry, new car purchasers and government revenue.

From the industry’s viewpoint the change created a distortion in the market by dividing a key segment in
two. As January 2003 vehicles were pre ordered and in many cases delivered from the manufacturer
before Budget Day, the cost of the Budget change had to be bourne by the Irish distributor and/or dealer.
SIMI estimate the total cost to the industry at €11.5m.2

To prevent a repeat of these problems SIMI requests that any future proposed changes to Vehicle
Registration Tax be discussed with the industry beforehand to assess their likely impact on the market. In
addition negative VRT changes should be implemented from 1st April to allow distributors and dealers
time to deal with existing sales contracts.

Government Revenue did not experience any negative impact on VRT returns, as a result of this change,
within the first quarter of 2003. This was because the Distributors carried the cost of the VRT change.
However this subsidisation ceased after the first quarter. It is from April to June that we can see the
negative impact this change has had on VRT returns.




2
 Number of units 1900cc-2000cc registered January to March 2003 X average VRT increase from these vehicles.
(7118 x €1615)
                                                                                                              15
                                   SIMI Pre-Budget Submission 2004


        Table 3: Shift in New Car Market in 2nd Quarter 2003 as result of VRT change in Budget 2003
           Engine CC                   April – June 2002 Registrations   April – June 2003 Registrations
           1401- 1600                               8369                              8221
           1601 – 1700                               82                                84
           1701 - 1800                              2975                              3652
           1801 - 1900                              3277                              2978
           1901 - 2000                              6051                              3851
           2001 - 2100                                20                                20
           2101 - 2200                               478                               505


The above table clearly demonstrates that car registrations in the 1901-2000 band were decimated by the
VRT change and decreased by 36% in the second quarter of 2003. While registrations in this band were
substituted mainly by smaller cars, carrying lower VRT, it is also clear that the change reduced demand in
this band.

Whilst it could be argued that Government revenue from the change was rewarded by an increase in
revenue in the first quarter of 2003, it is clear that the decision will have a negative long term effect on
sales in this segment with the negative impact seen in the second quarter of 2003 continuing into 2004 to
the detriment of car sales and Government revenue. In light of this SIMI calls on the Minister to reverse
this decision.

Used Imports
During the 1990’s used car imports were a serious problem for new car sales and Government revenue.
SIMI raised the issue in successive Budget submissions in the mid 1990’s and highlighted the role VRT
played as the driving force behind this phenomena. However the last 5 years have seen a dramatic decline
in the level of used imported vehicles coming into the country. Many factors have simultaneously
contributed to this including:

    •   High level of new car sales;
    •   Strength of the Euro relative to the Yen and Sterling;
    •   A healthy supply of quality domestic used vehicles causing price deflation in this market;
    •   A positive pre tax price differential for new cars between Ireland and the UK.

An examination of the registration figures of used imports reveals a worrying trend change. For the past
number of years we experienced month on month decreases in their levels. However since April of this
year the numbers of used imports have started to increase again. The reasons for this are a reversal of the
conditions which led to their decline in the first place:

    •   Decline in new car market;
    •   Increase in new car prices in Ireland, due to EU price harmonisation;
    •   Decrease in new, and consequently used car, prices in the UK, due to EU price harmonisation;
    •   Strengthening of Euro against Sterling;
    •   Block Exemption changes.




                                                                                                         16
                                   SIMI Pre-Budget Submission 2004


                                     Figure 6: Trend in Used Imports

                               Quarterly Used Car Imports 2000 to Present
                11000
                10000
                 9000
                 8000
                 7000
                 6000
                 5000
                 4000
                 3000
                 2000
                 1000
                    0
                         Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
                              2000               2001                2002         2003


Were these conditions to remain in the short to medium term the increase of used car imports will escalate
and seriously hamper efforts to rejuvenate the new car market in Ireland. A VRT reduction at this time
would help stem the flow of used imports and eliminate their negative impact on the new car market.

European Position
In its Communication to the Council and European Parliament on Taxation of Passenger Cars in the
European Union, the European Commission argues that Vehicle Registration Taxes should be gradually
reduced and ultimately abolished as they pose an unacceptable obstacle to the free movement of vehicles
within the European Union.

The Commission’s view has subsequently been supported by the European Parliament. In a report by the
Committee on Economic and Monetary Affairs on the Commission’s Communication, the Committee
states that it “agrees with the Commissions main conclusion that static taxes such as registration taxes
should be phased out as soon as possible”. Furthermore the Committee called on the Commission to
establish proposals for a refund system for Vehicle Registration Taxes by November 2003 where a car is
moved from one member state to another. They see this as a temporary solution pending the abolition of
Vehicle Registration Taxes.

Since then, in May 2003, the Commission published the Internal Market Strategy – Priorities 2003-2006.
This strategy outlines the Commission action plan for the next 3 years. It in particular highlights the
anomalies that are created by Vehicle Registration Taxes. The Strategy states that “the Commission
recommends that Registration Tax should be phased out over a transitional period of five to ten years. The
Commission will present legislative proposals to remove the obstacles to the free movement of cars in the
Internal Market.”

From these reports it is clear that both the Commission and the Parliament have set their sights on Vehicle
Registration Taxes imposed by certain European countries. Their opinion lends support to SIMI’s long
held view that VRT is contrary to the spirit of the European single market. SIMI’s proposal to reduce
VRT by 2.5 percentage points will assist the Government in preparing for the day when the EU outlaws
VRT. Irish motorists welcome the Commissions proposals as they are bewildered as to why, 30 years
after joining the “common market”, they are still deprived of one of the benefits of membership that is to
purchase cars at the same price as other EU citizens.



                                                                                                        17
                                            SIMI Pre-Budget Submission 2004



Chapter 3                                          Benefit in Kind
On the 4th of December last the Minister for Finance announced changes in Benefit-in-kind taxation
(BIK). The changes made, which come into effect on January 1, 2004, will affect the cost to employees
who have company cars. The changes will also affect the cost to employers of providing company
vehicles for employee use. As a result SIMI believes that companies will pursue alternative forms of
remuneration for their employees. This move will have a disastrous impact on the company car segment,
which currently constitutes approximately 20-25% of the total new car market.

Current estimates by the Revenue Commissioner place a value of €78 million on the returns from Benefit
in Kind taxation on motor vehicles. SIMI consider this figure to be seriously underestimated. The
company car market accounts for approximately 60% of the 1500cc to 2000cc market segment. In the
year 2002 this represented over 38,000 new cars. If we assume that the company cars are held, on
average, for a period of 2.5 years then the size of the company car fleet is 100,000.

                                          Table 3: Expected BIK Annual Returns
Average Price of Company Car                                        €25,000
Benefit (€25,000 x 30%)                                             €7,500
25,000 Miles per annum (Discount factor 50%)                        €3750
Income Tax @ 42%                                                    €1575
Total Fleet of 100,000 cars                                         €157.5 million

Table 3 above indicates that the annual return from BIK for the exchequer in 2003 is in the region of
€157.5m. Our assumption is that an average company car costs €25,000. We also assume an average
mileage of 25,000 miles.

Proposed changes
Employees pay income tax on their BIK charge. Currently, the BIK charge on a car is 30 per cent of the
original market value of the car3. Where an employee’s annual business mileage is over 15,000 miles, the
BIK is reduced on a sliding scale, subject to a minimum charge of 25 per cent. Appendix 1 shows the
present percentage charge by reference to the different ranges of business mileage.

The new regulations for the calculation of BIK charge are outlined in Table 4.

          Table 4: New Scales for Calculating Benefit in Kind, commencing January 2004

                                   Work Mileage                 BIK (per cent of Original
                                                                Market Value)
                  Cars                 15,000 or less                      30
                                      15,001 – 20,000                      24
                                      20,001 – 25,000                      18
                                      25,001 – 30,000                      12
                                        Over 30,000                         6
                  Vans                   All cases                          5




3
 If the employee pays any of the costs associated with the car i.e. insurance, fuel etc. the Benefit in Kind is reduced by a certain
per cent. The original market value is the cost of the car when purchased new and includes VRT.

                                                                                                                                  18
                                           SIMI Pre-Budget Submission 2004


In addition to the changes in tax cost, employees will face an additional PRSI cost at 4 per cent in many
(but not all) 4 cases and Levies at 2 per cent on the BIK charge.

Employers will face an additional cost of Employers PRSI at 10.75 per cent (with the exception of PRSI
class S company directors) on the BIK relating to all assets5. In the tables below the effects of the
proposed BIK changes to both Employees and Employers is outlined in an illustrated example.

The example looks at a company with 40 company cars with an original market value of €25,000 each.
Three individual employees, each with a different annual mileage, are examined

          Table 5: Rates as of 2004

          Rates as of 2004                                             %
          Employee Marginal rate of Tax                                42
          Employee rate of PRSI                                         4
          Employee rate of levies                                       2
          Employer rate of PRSI                                       10.75

          Table 6: Assumptions

          Assumptions
          Market Value of Cars                            25,000
          Number of Cars Provided                           40
          Year                                             2003        2004
          Business miles per Employee 1                   12,000      12,000
          Business miles per Employee 2                   24,500      24,500
          Business miles per Employee 3                   35,000      35,000

The costs for employees with low or no business mileage are higher. An employee with an annual
business mileage of 12,000 miles could be faced with paying an additional €450 in PRSI and levy charges
in 2004. Employees with business mileage at the highest end of the scale may experience a small saving.

          Table 7: Cost to Employees

        Cost to Employees                              Employee 1                  Employee 2                 Employee 3
        Tax Year (2003 is the same as                2003     2004               2003     2004               2003    2004
        2002)
        Charge to BIK (imputed income)              €7,500         €7,500       €4,125        €4,500        €1,875      €1,500
        Change in charge to BIK                                     None                       €375                     €-375
        Change in Income Tax cost                                   None                       €158                     €-158
        Change in PRSI cost (max)                                   €300                       €180                      €60
        Change in Levy Cost                                         €150                        €92                      €30
        Total net change                                            €450                       €430                      €-68




4
  Currently there is a ceiling of €40,420 on the level of remuneration that is liable to PRSI, so the additional employee charge to
PRSI as outlined below will only apply if the employee’s total remuneration (inclusive of the BIK charge) is less than or equal to
€40,420.
5
  The personal charge to PRSI for some company directors (PRSI class S) will be at 3 per cent in addition to the 2 per cent Levy
charge.

                                                                                                                                19
                                          SIMI Pre-Budget Submission 2004


In all cases the employer will have the additional cost of Employers PRSI. In this illustrated case, the
hypothetical company with 40 cars will face increased PRSI costs of up to €32,250, depending on the
level of mileage and the market value of the cars.

                                                     Table 8: Cost to Employer

            Cost to Employer                               Employee 1             Employee 2               Employee 3
            Tax Year (2003 is the same as 2002)           2003   2004            2003   2004              2003    2004
            Change in Provision of cars                          None                   None                      None
            Change in PRSI cost per car                          €806                   €484                      €161
            Change in PRSI cost for total fleet                 €32,250                €19,350                   €6,450



Impact on New Car Market
The changes to the BIK as outlined above will mean company cars will be more expensive to provide in
2004. In the above example the hypothetical company will face additional costs of €806 per car per
annum. As cars are generally kept for 2.5 years this amounts to €2005 for each company car.

This will undoubtedly have a negative effect on the sale of new company cars. SIMI estimate that the
company car market accounts for approximately 60% of the 1500cc to 2000cc market segment. Based on
the 2002 market SIMI estimate that new car sales in the company car segment is worth at least €394
million to the exchequer. This means that the total return to the exchequer, when BIK revenue is included,
from company cars is €550m.

               Table 9: Contribution of New Company Car sales to Exchequer from VAT and VRT
Units             VRT rate           Average            Average           Total VRT          Total VAT          Total Tax
                                     VRT                VAT
261876            25%                €5,853             €3,047            €153.27m           €79.8m             €233.07m
124757            30%                €9,225             €3,736            €115.08m           €46.6m             €161.68m
Total                                                                     €268.35m           €126.4m            €394.75m

So what will the impact be on new car sales?

Goodbody’s examined the impact of an increase of €806, the average increase in cost to a company, on
the new car market. An €806 increase represents a 3.2 per cent increase in the price of a company car
costing €25,000. The volume of new car sales is deemed to drop by approximately 700 cars for each
percentage increase in price. On the basis that an estimated 25 per cent8 of all new car sales are company
cars, the Goodbody New Car Sales Forecasting Model indicates that a 3.2 per cent increase in the costs
associated with purchasing a company car would reduce new company cars sales to the order of 560 cars.

At first glance this appears to be a minor reduction and would merely cost the Government €3.5million in
lost revenue from VRT and VAT had these sales occurred. However this analysis ignores the fact that
companies have substitute remuneration options to choose from and that some companies are already
trying these as the onerous taxation on company cars have made them less attractive. This means that the
analysis cannot be examined from the same perspective as a straightforward purchase decision. By
switching to alternative forms of remuneration the Income Tax revenue may remain protected in some
cases but the exchequer could lose out significantly from a drop in VRT and VAT returns from new cars.

6
    26,187 equals 60% of new car registrations between 1500cc and 1900cc in 2002
7
    12,475 equals 60% of new car registration between 1900cc and 2000cc in 2002
8
  In total approximately 145,000 new cars were sold in Ireland in 2003. Twenty five per cent of the 145,000 new car sales would
suggest 36,250 are company cars.

                                                                                                                            20
                                   SIMI Pre-Budget Submission 2004


At a maximum the Exchequer would only regain the VAT revenues provided that the alternative
remuneration is spent on normal consumer goods or services.

SIMI is already aware that several large organisations with substantial fleets are re-examining their
company car policies in light of these changes. As outlined above the Government derive over half a
billion euro from company cars. Changes in taxation over the past decade are making the promise of a
company car less attractive. The latest change is one more too far and could put a substantial portion of
this revenue in jeopardy. This is a real concern for the motor industry and should be for the Government.

There is no doubt that many employees have witnessed significant increases in BIK (factors include the
increase in VRT on 1.9 litre cars, increases in the base price of cars due to harmonised car prices). Further
increases such as those proposed could see employees pressuring management for substitutes. The
increased costs for business in this proposal, at a time of difficult trading is most unwelcome. SIMI
therefore makes the following set of compensating proposals:

•   Provide a VAT input credit, as the EU Commission recommends, on the purchase of company cars.
    Several other EU member states have already implemented such a measure including Germany,
    Luxembourg, Belgium, the Netherlands, Austria, Spain and the UK. This proposal would place cars
    in line with all other vatable items purchased by VAT registered companies and complies with EU
    VAT Directive 77/388;
•   Assess Benefit in Kind on the cost of the vehicle less VRT. The current system constitutes double
    taxation;
•   Increase capital allowances;
•   Reduce the percentage of the cost of the car that is subjected to BIK reverting back to the previous
    20% maximum.

These measures would protect Government revenue from the Benefit in Kind change whilst at the same
time limiting the negative impact it has on other sources of revenue such as VRT. Furthermore it may
encourage companies to utilise this remuneration option and therefore benefit the Exchequer in additional
new car sales.




                                                                                                          21
                                  SIMI Pre-Budget Submission 2004



Chapter 4                       Scrappage Scheme
The previous scrappage scheme operated from July 1995 until December 1997. During that period 60,500
cars were scrapped and replaced by new cars. The scheme was beneficial in that it:

       •   Increased Government tax revenue from cars without raising tax rates;

       •   Benefited the consumer by enabling the replacement of older vehicles with new ones;

       •   Benefited the community at large by introducing safer more roadworthy vehicles into the
           fleet; and

       •   Contributed to a cleaner environment by introducing vehicles with better environmental
           characteristics.


                   Figure 7: Volume of New Cars Sold under the Scrappage Scheme 1995 – 1997


                   30,000

                   25,000

                   20,000

                   15,000                                                                Units

                   10,000

                    5,000

                        0
                                  1995                1996               1997




When the Scrappage Scheme was announced by the Minister for Finance in his Budget in 1994 (to
commence in July 1995) there were 218,000 cars 10 years or older in the Irish car parc. Despite the
success of the scrappage scheme between 1995 and 1997 and the further progress made in 2000 with the
introduction of the National Car Test (NCT), SIMI estimate that the numbers of cars 10 years and older in
the car parc will reach 208,000 in 2004, a mere 10,000 short of the numbers the year the scrappage
scheme was announced.




                                                                                                      22
                                   SIMI Pre-Budget Submission 2004


                               Table 10: Profile of the Car Fleet, 1990-2002



               Year              Car Fleet       Number of Cars         Proportion of
                                                  10 years and         Cars 10 years and
                                                     Older                Older (%)

               1990               796,408             173,929                  21.8
               1991               836,583             195,396                  23.4
               1992               858,498             202,820                  23.6
               1993               891,027             209,242                  23.5
               1994               939,022             218,237                  23.2
               1995               990,384             232,145                  23.4
               1996              1,057,383            235,219                  22.2
               1997              1,134,429            227,665                  20.1
               1998              1,196,901            228,109                  19.1
               1999              1,269,245            225,716                  17.8
               2000              1,319,250            180,831                  13.7
               2001              1,384,704            203,884                  14.7
               2002              1,447,908            195,484                  13.5




                              Figure 8: Cars over 8 and 10 years 1994 & 2004
                                CARS OVER 8 & 10 YEARS OF AGE 1994 & 2004

                    450,000
                    400,000
                    350,000
                    300,000
                    250,000
                    200,000
                    150,000
                    100,000
                     50,000
                          0
                                         1994                         2004

                                        8YRS AND OVER           10YRS AND OVER




Between 1993 and 2000 we witnessed a year on year drop in the average age of the car parc in Ireland to
reach a record low of 4.5 years in 2000. This improvement has now ceased and the average age is again
on the increase and unless addressed will continue to increase over the foreseeable future.




                                                                                                    23
                                   SIMI Pre-Budget Submission 2004


                               Figure 9: Average Age of Car Parc 1993-2004

                                 AVERAGE AGE OF CAR PARC 1993 - 2004


                7.00

                6.00

                5.00

                4.00

                3.00

                2.00

                1.00

                0.00
                       1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004




To prevent the serious environmental and road safety consequences of an aging vehicle fleet and to
stimulate the market, SIMI proposes a scrappage scheme for vehicles which will provide a VRT
reduction of €1000 when a car of 8 or 9 years old is traded in against a new car and €1500 for a
vehicle 10 years or older.

Revenue Implications
The introduction of a scrappage scheme would provide a timely boost to the Exchequer.

If we assume that the scrappage scheme results in the purchase of vehicles with average cc in the range
1200 to 1400, we asked Goodbody Economic Consultants to model the impacts on the new car market of
a price reduction of €1,500 on a price of €16,000 (new Fiesta 1.4). This is a 9.3 per cent reduction. The
Goodbody model estimates that such a price reduction if applied to all vehicles would increase new car
sales by 4.3 per cent. Applying this to 195,000 owners of ten-year old vehicles suggests that for each year
the scheme operates some 8,500 extra new cars would be sold over and above that which would occur
naturally. As outlined in Table 11, 8,500 extra new cars under the proposed scrappage scheme would give
a tax yield to Government of €36m.

                       Table 11: Impact of Scrappage Scheme on Government Revenue
Average Price of New Car Under Scrappage Scheme                           €16,000
VRT @ 22.5%                                                               €3,600
VAT @ 21%                                                                 €2,152
Total Tax per Car                                                                             €5,752
Less VRT Refund                                                                               €1,500
Total Exchequer Return per Car                                                                €4,252
Estimate additional sales                                                                   8,500 units
Total Exchequer Gain                                                                           €36m

While Goodbody Economic Consultants have calculated the impact of a VRT refund on new car sales at
8,500 units per annum, this does not take into consideration incentives and marketing by the industry. The
previous scrappage scheme accounted for over 25,000 new car sales per annum. If a similar number was
achieved on this occasion Government revenue could benefit to the tune of €106m in 2004.


                                                                                                          24
                                      SIMI Pre-Budget Submission 2004


Environmental Impact
The impact of the previous scrappage scheme on emissions was very significant. Essentially, the new
vehicles purchased under the scheme would have conformed to EURO I emission standards. They would
have emission characteristics for CO at least one tenth of the level of the scrapped vehicles. Emissions of
HC and NOx would have been at least one twelfth of the level of scrapped cars.

With regard to the proposed scheme, new vehicles will be subject to EURO III standards. Table 11
presents estimates of the savings in emissions arising from the replacement of pre 1993 with new
vehicles. The calculation assumes that consumers will opt to purchase small new vehicles (less than 1.4
cc), as was the case for the last scheme. The savings per 10,000 scrapped vehicles is 6,200 tonnes of CO2
and 2,600 tonnes of Non- CO2 for each year that the scheme operates.

                              Table 12: Emissions Savings from Car Scrappage


         Emission Type            Emission Rate           Emission Rate          Savings per
                                  Scrapped Cars           New Cars             10,000 Scrapped
                                                                                     Cars
                                  Tonnes/Car              Tonnes/Car               (Tonnes)

         CO2                                3.67                 3.05                6,200

         Non- CO2                           0.37                 0.11                2,600

        Note: refers to petrol cars




                                                                                                        25
                                             SIMI Pre-Budget Submission 2004



Chapter 5                                           Fuel – Carbon Taxation
Over recent years emissions of greenhouses gases and other gases have become a key concern for overall
Government policy. The Government are, rightly, concerned about Ireland achieving its targets set in the
Kyoto Protocol, which allows Ireland an increase of 13% in emissions over 1990 levels by the period
2008-2012. The National Climate Change Strategy, published by the Government in October 2000,
outlined the Government’s action plan for controlling emissions. This Strategy was based on emission
data for Ireland produced by the Environmental Protection Agency. The EPA data is also provided to
international bodies monitoring Ireland’s contribution to global emissions including the European
Environmental Agency and the United Nations. It is this data that determines the 1990, 2008 and 2012
emission levels in Ireland which are the measurements under the Kyoto Protocol. It is these figures that
will determine the level of fines Ireland will pay for compliance failure and the cost to the Irish taxpayer.
Current predictions estimate this cost at between €12 - €240m9.

For a number of years now, SIMI has been making the point that EPA estimates of the emissions from the
transport sector in general and cars in particular are too high.

The principal reason for this is that estimates of CO2 emissions are based on fuel sales in the State and
that a high level of smuggling of fuels into Northern Ireland and cross-border purchases of fuel by
Northern Ireland residents are distorting fuel consumption statistics for the State. In a report prepared for
SIMI, Goodbody estimated that in the year 1998, some 400,000 tonnes of fuel recorded as consumed in
the State was in fact consumed in Northern Ireland.

Since the Goodbody report was finalised, the fuel consumption situation in Northern Ireland has been
analysed by the National Audit Office in the UK.10 The latter estimated that revenue loss as a result of
smuggling and cross-border shopping had had grown by 171 per cent between 1998 and 2000 to stand at
Stg380m per annum. This is equivalent to over 500,000 tonnes of fuel per annum.

Goodbody have now updated their analysis of the extent of fuel smuggling and cross border purchases.
They now estimate that the cross border movement of fuel has risen to 600,000 tonnes in 2001. As total
recorded consumption of road fuels was some 2.3m tonnes in 2002, this means that as much as one
quarter of recorded fuel consumption comprises cross-border movements. Government policy in relation
to road vehicles and the environment can no longer ignore this fact, if it is to retain credibility.

The EPA figures are replicated in international reports. For example, in 2002, the European
Environmental Agency issued a number of reports setting out trends and projections in Greenhouse gases.
11
   These reports indicate that from a 1990 base year, on current policies, greenhouse gas emissions from
transport in Ireland will have risen by 175 percent by 2010. This is almost a trebling of emission levels.
The EPA report indicates that the growth in emissions from other countries will be far less. The next
nearest country in terms of emissions growth is Spain at 75 per cent, followed by Belgium at 48 per cent.
Any reasonable observer would have to question why the growth in emissions in Ireland will be more
than double that of the next nearest country. A perspective on the Irish figure is given by the following
table which compares the EEA/EPA emissions growth with growth in vehicle numbers. It is not clear why
transport emissions, which are largely road transport emissions, should exceed growth in vehicle
numbers. The size distribution of cars is not changing rapidly, while average mileage per car may decline
at higher levels of ownership, as households acquire two or three cars. Moreover, improved CO2
emissions characteristics currently embodied in new cars will pervade the car fleet over time.

9
   Taxation Strategy Group, Proposal for a Carbon Energy Tax from the Department of Environment & Local Government discussed by the Green
Tax Group, October 2002
10
   The National Audit Office. The Misuse and Smuggling of Hydrocarbon Oils. Report by the Comptroller and Auditor General. February 2002.
11
    Greenhouse Gas Emissions and Trends in Europe,1990-2000, Topic Report7/2002 and Greenhouse Gas Emission Projections for Europe,
Technical Report, 77, 2002.

                                                                                                                                     26
                                            SIMI Pre-Budget Submission 2004


                    Table 13: Comparison of Emissions and Vehicle Number Forecasts 1990-2010


                   Measure                                           Projected Growth Rate
                                                                           1990-2010

                                                                             1990 =100

                   Greenhouse Gas                                                 275
                   Emissions

                   Car Numbers                                                    234

                   Goods Vehicles                                                 142

          Sources: See footnote12


Goodbody have now updated their findings to 2002. Using the European Environment Agency’s
COPERT III model, the consultants conclude that since 1990, emissions of Non-CO2 gases by cars have
declined by 47 per cent from 359,000 tonnes in 1990 to 190,000 tonnes in 2002. Emissions per vehicle
are now almost as low as 30 per cent of their 1990 levels, 0.13 tonnes per car as opposed to 0.45 tonnes in
1990. The reason for this reduction lies in motor and fuel industry compliance with various EU Directives
requiring improved vehicle and fuel emission standards viz. the EURO and Auto-Oil programmes.

CO2 emissions are directly related to fuel used by vehicles. Given the strength of the economy in the
1990s and the consequent rapid rise in household incomes and car ownership, it is to be expected that fuel
sales and therefore CO2 emissions would be seen to rise of over the last decade. The Goodbody analysis
confirms this and estimates that CO2 emissions from cars increased by 78 per cent in the period 1990-
2002. However, because the car fleet also increased by a similar amount, average CO2 emissions per car
reduced by a small amount from 3.70 tonnes to 3.59 tonnes. This means that over the period 1990-2002
improvements in the fuel efficiency of the car fleet have offset any tendency for car users to increase their
fuel consumption through the purchase of larger vehicles or higher levels of usage.

          Table 14: Revised Estimates of Emissions from Passenger Cars 1990 and 2001.

                                              Emissions                      Emissions per Vehicle
          Year                              ( 000 Tonnes)                          (Tonnes)

                                        CO2              Non-CO2               CO2            Non-CO2

          1990                         2,963                 359               3.70              0.45

          1998                         4,592                 274               3.80              0.23

          2002                         5,268                 190               3.59              0.13


                     Source: Goodbody Economic Consultants



12
  Emissions forecasts are from the EEA reports. Car Numbers is from Transport Demand. Goodbody Economic Consultants. 2000; Goods
Vehicle Numbers: Revised Forecast of the Size and Structure of the Commercial Vehicle Fleet, 1996-2011, 1998.

                                                                                                                                   27
                                    SIMI Pre-Budget Submission 2004


These improvements in fuel efficiency are set to continue under the commitments made by the motor
industry to the EU. In 1995/6, the industry committed to reduce average emissions of new cars to 140g of
CO2 per kilometre by 2008/9. The industry has also undertaken to consider the possibility of achieving a
target of 120g of CO2 per kilometre by 2012. As the average CO2 per kilometre for Ireland in 1995 was
180, these targets represent reductions in CO2 of 22 per cent and 33 per cent respectively. In 2001, the
CO2 per kilometre for new cars sold in Ireland fell to 169g per kilometre or by 6 per cent since 1995 (see
Figure 4).

The extent to which these gains in fuel efficiency impact on CO2 emissions depends on the level of new
car sales. The high level of new car sales of recent years has been a powerful factor in improving the fuel
and CO2 efficiency of the fleet as a whole. Any actions, budgetary or otherwise, that impact negatively on
the new car market will only serve to make the CO2 emissions situation much worse, by reducing the rate
at which new more fuel efficient vehicles are introduced into the fleet.

                   Fig 10: Average CO2 Emissions from New Car Sales in Ireland 1995-2001

                  182
                  180
                  178
                  176
                  174
           g/km




                  172
                  170
                  168
                  166
                  164
                  162
                        1995       1996       1997       1998        1999       2000       2001

        Source: Monitoring of ACEA’s commitment on CO2 Emission Reduction from Passenger Cars (1995-1999) and
        2001; Monitoring of JAMA’s commitment on CO2 Emission Reduction from Passenger Cars (1995-1999) and 2001;
        Monitoring of KAMA’s commitment on CO2 Emission Reduction from Passenger Cars (1995-1999) and 2001

If the Irish Government is serious about tackling Ireland’s emission problem they need to start at the
source. A complete review of the methodology used by the EPA in analysing emissions in Ireland needs
to be undertaken as a matter of urgency. There is scope under the EU CORINAIR methodology to employ
an alternative method of measurement. In addition both the Kyoto Protocol and the IPCC Good Practice
Guidance and Uncertainty Management in National Greenhouse Gas Inventories allow for alteration to be
made where fuel smuggling is a problem. To continue using inaccurate data will lead to unnecessary and
unacceptable costs for the Irish taxpayer in the future.

Proposal for a Carbon Energy Tax

Ireland ratified the Kyoto Protocol on the 31 May 2002, along with the EU and all other member states. It
will be legally bound to meet the challenging greenhouse gas emissions reduction target once the Protocol
enters into force. The EU has made its own internal agreement to meet its 8% target by distributing
different rates to its member states; this burden sharing agreement recognises the different economic
circumstances of each member state. Ireland’s target is restricted to a 13% increase on 1990 levels
within the commitment period 2008-2012.




                                                                                                              28
                                      SIMI Pre-Budget Submission 2004


In common with most EU countries, Ireland’s emissions are already in excess of its Kyoto
obligations. Irelands emissions in 2000 amounted to 67Mt (+23.7 per cent over 1990 levels). If current
patterns of growth in greenhouse gas emissions in Ireland are maintained, its emissions will increase well
beyond the target.

As an aid to meeting its commitments under the Protocol the Government published its National Climate
Change Strategy (NCCS), in November 2000. The NCCS sets out a ten-year framework for achieving the
necessary gas emissions levels required to ensure that Ireland complies with the Kyoto Protocol. A range
of measures across all sectors of the economy and society as set out in the strategy is intended to achieve
a reduction of over 15 million tonnes of CO2 equivalent. It is in this context that the proposal for the
introduction of a carbon energy tax has arisen. The premise underlying the carbon tax is that taxation
would be applied according to the carbon content of affected fuels.

The D/ELG proposed a carbon tax in their pre-budget submission in 2002. The Minister for Finance
stated in the budget that he intended to implement a general carbon energy tax in 2004.

Rate of taxation
While the tax has yet to be introduced, the D/ELG submission and associated analysis are indicative of
the likely rates that will be applied. The Department suggested that a tax rate of €7.50 per tonne of CO2 be
introduced in 2003 to provide an adequate environmental and economic signal. It was also proposed that
this tax should increase to €20 per tonne over a period of 3–4 years and that this phased implementation
should be announced immediately to create a dynamic incentive for long term structural change in energy
demand, production and consumption.

Effects on prices
The effects of this proposal on retail prices for transport users are estimated by D/ELG and are presented
in Table 1 below, showing the increases in the prices of energy products for transport users. The
introduction of the carbon energy tax will raise the price of petrol by 2.8 cent, representing a 3 per cent
increase in the price of motor oil.

                         Table 15: Retail Price increases from the Carbon Tax Proposal

           Fuel         Retail         Current        Price increase resulting      Price increase resulting
                        Unit           Price (€)          from €7.50 tax                 from €20 tax
                                                                €            %                 €           %
          Oil –          Litre                 0.9        0.028       3.11               0.074       8.22
          Motor

        Source: National Climate Strategy – Proposal for a Carbon Energy Tax, TAX Strategy Group, TSG/02/23

Clearly the introduction of the carbon tax could have significant consequences on the rate of inflation.
The extent to which will depend on the rate of taxation and on the coverage of the tax.

In December 2001 Petrol and Diesel together accounted for 3.09 per cent of the CPI. The impact of
applying the percentage increases in motor oil prices to the CPI is estimated in Table 2.




                                                                                                               29
                                   SIMI Pre-Budget Submission 2004


                                   Table 16: Effect of Carbon Energy Tax on CPI


                           Tax               Petrol and Diesel CPI Increase %

                          €7.50                             .10

                          €20.00                            .25


Flawed Concept
SIMI believe the proposed carbon tax on fuel to be a flawed concept for several reasons.
    1. The proposal is based on inaccurate data:
    As outlined already in Chapter 2 of this submission, SIMI and Goodbody’s have proven that the
    EPA’s analysis on emission in Ireland is inaccurate and misleading. To therefore justify the
    introduction of a new tax based on this data is to neglect the best interests of the Irish taxpayer.

    Were the Department of the Environment to force the EPA to alter their methodology to accurately
    reflect the rise in emissions in Ireland since 1990, the Irish taxpayer would be saved millions in
    penalties arising out of our failure to meeting the Kyoto targets. Furthermore it would allow the
    Government to re examine the National Climate Change Strategy and refine the policies for emission
    reduction in key sectors.
    2. Limited Impact on Driving Behaviour:
    The introduction of a carbon tax on motor fuels will lead to no change in driving behaviour, and thus
    have no positive environmental impact. Driving is a necessity not a luxury for most motorists in
    Ireland. Of the 1.4 million car owners in Ireland, 1 million live outside of Dublin. This means 1
    million car users cannot avail of a regular and comprehensive public transport service. In addition to
    this the car ownership levels and the average size of cars in Ireland are amongst the lowest in Europe.

    A carbon tax cannot and will not alter the driving habits of motorists but merely increase the already
    substantial tax burden the currently carry. This tax burden currently represents more than 60% of the
    external costs (environmental, accident and congestion) imposed by motorists.

                                    Table 17: EU Car Ownership Levels
                 Country                   Cars        Population         Cars Per 100
                 Luxemburg                275,500        417,000              66.1
                 Italy                 33,239,000      57,549,000             57.8
                 Germany               44,383,300      82,071,000             54.1
                 Austria                 4,182,000      8,086,000             51.7
                 France                28,700,000      58,639,000             48.9
                 United Kingdom         27,790,000     58,784,000             47.3
                 Belgium                4,708,600      10,188,000             46.2
                 Spain                 18,150,900      39,335,877             46.1
                 Sweden                  4,018,500      8,846,000             45.4
                 Netherlands             6,710,000     15,604,000             43.0
                 Finland                 2,146,200      5,140,000             41.8
                 Ireland                 1,447,908      3,917,336             37.0
                 Portugal                3,589,000      9,920,760             36.2
                 Denmark                 1,875,000      5,332,000             35.2
                 Greece                 3,415,200      10,522,000             32.5

                                                                                                        30
                               SIMI Pre-Budget Submission 2004




                             Table 18: The Average Size of New Cars in Europe


                        Country                     Average Engine Size
                                                           (c.c)

                        Sweden                             1,967
                        Luxembourg                         1,940
                        Austria                            1,845
                        Germany                            1,824
                        Belgium                            1,783
                        Spain                              1,751
                        France                             1,748
                        Denmark                            1,706
                        Netherlands                        1,701
                        UK                                 1,700
                        Italy                              1,552
                        Ireland                            1,526
                        Portugal                           1,458
                        Finland                              -
                        Greece                               -

                        EU                                 1,721


3. No difference to excise duty:
The revenue collected through carbon taxes will not be ringfenced for any environmental purposes. It
is therefore not different from the existing high level of excise duty on motor fuel and is a crude
means of increasing excise duty under the guise of “green taxation”. However the net effect may be
less than estimated as revenue from cross border sales will decrease.

There may be some justification for this measure if the money was used to promote sale of the most
environmentally friendly vehicles and the replacement of older more polluting vehicles with newer
more fuel efficient ones. This would then represent a positive environmental initiative.

4. Inflation:
At a time when the Government is finally getting inflation under control, the proposed carbon tax will
place unnecessary pressure on the rate of inflation.




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                                   SIMI Pre-Budget Submission 2004




Chapter 6                        Other Budget Proposals
CAR INSURANCE PREMIUMS
SIMI calls on the Government to implement all outstanding recommendations of the Motor Insurance
Advisory Board. Included in these recommendations is the abolition of the 2 per cent levy on motor
insurance premia. It is within the Minister’s compass to eliminate this in the Budget as a means of further
reducing inflation and eliminating this unnecessary burden on the motorist.

VAT ON REPAIR SERVICES
The lower VAT rate (currently 13.5%) on repairs and servicing has been of enormous benefit in reducing
black economy activity in this sector. However, the level of activity outside the VAT net is still at a high
rate. We urge the Minister to maintain the lower VAT rate for repairs and servicing.

VAT ON RECOVERY SERVICES
The recovery of breakdown or crashed vehicles is a service to the public in more ways than one. It
provides security to the broken down vehicle and improves safety by removing such cars from public
roads. We believe that the lower VAT rate (currently 13.5%) is appropriate to this service. When the
government previously reduced VAT on repairs and servicing, revenues from the sector increased; we
also believe such an increase would be forthcoming from the recovery sector if it too could enjoy the
lower VAT rate.

BENEFIT IN KIND ON CAR PARKING
In recent years, Dublin Corporation has proposed that Government impose benefit in kind tax on work-
provided car parking spaces. This would be a very radical move with unknown and possible disastrous
consequences for transport in Dublin. SIMI believes that this proposal has not been adequately researched
and assessed. There are a number of major concerns as follows:

    •   It will put the city centre at a disadvantage compared to other locations in the Greater Dublin
        Area, thereby working against the objectives of the Dublin Transportation Initiative and DTO
        policies;

    •   In the above context, it will contribute to further urban sprawl;

    •   It will penalise motorists, without providing an alternative, in that there is insufficient public
        transport capacity to cater for those who could not afford to use their car; and

    •   It will give rise to dispersal of car parking to the city centre fringes, with negative impacts on
        residential areas.

This poorly thought out proposal ignores the severe infrastructure and public transport deficits, which
force so many people to drive to work in the absence of an adequate alternative. This proposal should be
dropped and only reviewed when the proper infrastructure is in place.




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                      SIMI Pre-Budget Submission 2004


Appendix 1    Percentage Charge of Benefit-in-kind on Business Mileage

 Business Mileage
      Miles               Miles            % of Benefit-in-kind
                                                 taxable
     15,000              16,000                    97.2
     16,000              17,000                     95
     17,000              18,000                     90
     18,000              19,000                     85
     19,000              20,000                     80
     20,000              21,000                     75
     21,000              22,000                     70
     22,000              23,000                     65
     23,000              24,000                     60
     24,000              25,000                     55
     25,000              26,000                     50
     26,000              27,000                     45
     27,000              28,000                     40
     28,000              29,000                     35
     29,000              30,000                     30
     30,000             And over                    25




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                                  SIMI Pre-Budget Submission 2004


Appendix 2                    The Real Effect of VRT on the Price of a Car

 Cars under 1400cc have a VRT rate of 22.5%. However, as VRT is applied to the selling
 price of the car, it results in taxes totalling 56% of the pre-tax price of the car.

 Pre Tax Price          €9,970

 VAT @ 21%                        €2,094                                   21% of Pre Tax Value
 VRT @ 22.5%            €3,502                                      35% of Pre Tax Value
 Total Taxes                      €5,596                                   56% of Pre Tax Value

 Average Retail Price             €15,566




 Cars between 1400cc – 1900cc have a VRT rate of 25%. However, as VRT is applied to the
 selling price of the car, it results in taxes totalling 61% of the pre-tax price of the car.

 Pre Tax Price          €15,397

 VAT @ 21%                        €3,233                                   21% of Pre Tax Value
 VRT @ 25%                        €6,210                                   40% of Pre Tax Value
 Total Taxes                      €9,444                                   61% of Pre Tax Value

 Average Retail Price             €24,841




 Cars above 1900cc have a VRT rate of 30%. However, as VRT is applied to the selling price
 of the car, it results in taxes totalling 73% of the pre-tax price of the car.

 Pre Tax Price          €23,624

 VAT @ 21%                        €4,961                                   21% of Pre Tax Value
 VRT @ 30%                        €12,251                           52% of Pre Tax Value
 Total Taxes                      €17,212                           73% of Pre Tax Value

 Average Retail Price             €40,836




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SIMI Pre-Budget Submission 2004




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