Taxation rates of the use of employer-provided vehicles for private purposes should depend on the value of vehicle
16.05.2011
Mart Nõmper, sworn auditor, member of the Management Board of Rödl & Partner Audit OÜ
Whether you like the Procedure for the Taxation of the Use of Employer-Provided Vehicles for Private Purposes which is currently valid in Estonia or not, it most certainly can be considered to be a simple one.
Simplicity is also the greatest drawback of the current procedure – namely, the values of vehicles differ tens if not hundreds of times, but the price of fringe benefit is the same and does not depend on whether the private trips are made by a 20 year old Russian engineering achievement or a brand new luxury car.
The use of the employer-provided vehicle for private purposes free of charge is subject to taxation also in many other countries besides Estonia. Due to the Estonian unique tax system this benefit is taxed in Estonia as a fringe benefit provided by the employer to the employee, in other countries, however, generally as the employee’s income.
The supreme court for financial and customs matters of the Federal Republic of Germany has analyzed in its recent decisions the treatment of personal income tax in the case when a company vehicle provided to the employee by the employer is used for private trips between the employee’s residence and usual place of employment. The opinions presented in these judicial decisions may be of interest to the Estonian taxpayers and tax policy designers too.
Taxpayer must have freedom of choice
Until now the use of the employer-provided vehicle for private trips between the employee’s residence and usual place of employment was taxed as financial income in Germany and the monthly income amount was determined to be 0.03% from the price of the automobile, regardless of how often the employer-provided vehicle actually was used for private purposes. The Supreme Court, however, decided that there should be a possibility to maintain separate records based on actual trips made i.e. a so-called individual method should be allowed, according to which only the actual trips would be subject to taxation. Of course, the implementation of the individual method brings about an additional documentation requirement for the taxpayer, but upon the acceptance of this additional burden of proof the taxpayer should also have the possibility to tax only the actual private trips occurred.
The tax amount of the fringe benefit for employer-provided vehicles should also depend on the value of vehicles
Compared to the Estonian procedure the taxation of the employer-provided vehicles implemented in Germany is definitely fairer as the tax amount depends on the value of the automobile which is used for private purposes. I do not think that the taxation of automobile fringe benefits should be abolished in Estonia. Quite the opposite – this is a benefit and it should be subject to taxation! But the Estonian oversimplified procedure for the taxation of automobile fringe benefits actually places a much bigger tax burden on smaller and less wealthy or more frugal entrepreneurs, who much rather use practical than vain automobiles.
Let’s now take a look at the procedure for the taxation of automobile fringe benefits in Estonia.
Below a reminder of the tax rates related to the use of the employer-provided vehicles in Estonia:
1. The use of a vehicle of the employer for activities not related to business (use for private purposes).
1.1 If no records are maintained on the use of automobiles for private purposes:
VAT to be declared and paid is 42.67€ per month for each automobile used.
Income tax on fringe benefit is 68.05€ per month for each automobile used.
Social tax on fringe benefit is 106.94€ per month for each automobile used.
1.2 If records are maintained on the use of automobiles for private purposes:
Taxes are determined depending of the amount of kilometres driven for private purposes, but even upon maintaining the records the maximum liability of VAT, income and social tax shall not exceed the amounts specified in article 1.1.
If a vehicle is used for private purposes for less than 500 kilometres per month, the tax amounts payable are decreased respectively.
For example: Pursuant to the records the use of a vehicle for private purposes totaled 200 kilometres per month.
VAT is determined: 200 x 0.30€ (cost per kilometre)= 60; 60 :1,2 x 0,2=10€ per vehicle per month.
Income tax on fringe benefits is 15,95€ (60:0,79 x 0,21) per vehicle per month.
Social tax on fringe benefits is 25,96€ (60 + 15,95 ) x 0,33) per vehicle per month.
This article has been published in Estonian in the Business and Law Blog of Rödl & Partner in the website of Raamatupidaja.ee
