BETTER POLICIES FOR BETTER LIVES

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

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September 2014
Overview
• Transport, which accounts for roughly one-quarter of carbon dioxide
emissions in most OECD member countries, is a significant source of
local air pollution, carbon emissions, congestion and accident costs. In
many of these countries, company cars form a large proportion of the
car fleet, and also influence the make-up of the wider vehicle fleet. Since
commuting distance and mode of transport are key factors of travel by
individuals, the personal income tax rules applying to these areas are
fiscally and environmentally important.
• The tax treatment of company cars and commuting expenses can
encourage users to drive these cars more often. If the taxable benefit
associated with personal use of a company car does not vary with
distance driven, for example, the tax system provides an incentive to
travel greater distances. This results in more emissions of air pollutants
and other costs linked to travel, such as congestion and accidents.
• Most OECD member countries treat only 50% of the personal benefit
to employees from company cars as taxable. In situations where
employers cover fuel expenses, employees in many countries face
no additional costs when they drive more for personal purposes in a
company car. Across the countries considered, the fiscal cost of current
company car tax settings was estimated at EUR 26.8 billion in 2012.
• The current under-taxation of company car benefits, and particularly
the absence of tax consequences of driving farther in many countries,
has high environmental and other social costs. These include increased
contributions to climate change, local air pollution, congestion and road
accidents. Among the countries studied, environmental and social costs
were estimated at EUR 121 billion, which are significantly higher than the
estimated tax expenditure: the loss to society is thus far greater than the
gain by a few “winners”.
• Based on the proposed benchmark for the neutral tax treatment of
company car benefits relative to cash wage income, environmental
and social outcomes across the OECD would be greatly improved by
ending the under-taxation of company cars, particularly the “distance”
component.
This Policy Highlights is based on the OECD Working Papers: Personal Tax
Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal
and Environmental Costs (2014); and Environmental and Other Social Costs of
the Tax Treatment of Company Cars and Commuting Expenses (2014).
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The tax treatment of company cars is, quite literally, a
driver of negative fiscal and environmental consequences
in OECD member countries. Perverse incentives
encourage employees to use company cars for personal
use, and to drive longer distances than they might do
otherwise. The implicit favourable tax treatment of
company cars and commuting expenses have significant
impacts on the environment and society. These include
more air pollution, traffic accidents, congestion and
noise, as well as increased greenhouse gas (GHG)
emissions that contribute to climate change.
The OECD paper, “Personal tax treatment of company
cars and commuting expenses: Estimating the fiscal and
environmental costs” (2014), examines policy in 27 OECD
member countries and one partner country. It compares
tax settings for company cars and commuting expenses
with a stylised “benchmark” tax treatment that estimates
the full value of the benefit received by employees with
company vehicles. Among other findings, it shows that
employees in most countries paid no additional tax for
additional distance driven.
Building on this analysis, “Environmental and other
social costs of the tax treatment of company cars and
commuting expenses (2014)”, explores the following
questions:
• How does the tax treatment of company cars and
commuting expenses impact the environment?
• Which particular features of the current tax rules
have the largest environmental impact?
• How could tax rules be changed to modify these
impacts?
A driver of negative
fiscal and environmental
consequences
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Box 1: Equity, company cars and tax systems
Treating different forms of employment income in different ways creates imbalances that can both
fuel inequity and lower tax revenue. If income received in the form of a company car is lower-taxed,
it creates incentives for employees to receive income in this form rather than as wages, which may
increase the fiscal cost to a country over time. Inequities creep into the tax system when employees
with similar total remuneration are taxed differently depending on the form of their income. Moreover,
those with higher incomes may be more likely to enjoy the tax perks of fringe benefits and therefore
will disproportionately benefit from the under-taxation of company cars. Among other impacts, this
decreases the efficiency of the tax system and creates a competitive advantage for larger or more
established firms that can offer fringe benefits like company cars.
How do company cars benefit
employees financially?
Since commuting distance and mode of transport are key elements
of travel by individuals, the personal income tax rules applying to
these areas are fiscally and environmentally important. Across the
OECD, company cars represent an important sub-set of vehicles.
In the European Union, for example, company cars make up about
half of new registrations and about 12% of total car stock.
1
While
employees use company cars for business, they use them more
often for personal travel. A Netherlands study showed employees
used company cars for personal use more than three-quarters of the
time.
2

Employees enjoy two types of financial benefits from using a company
car. A “capital” benefit results from savings in the fixed costs of
depreciation, financing, taxes, registration and insurance that the
employee would otherwise have to pay.

Most OECD member
countries significantly
under-calculate the
benefit employees
receive from the
private use of
company cars. On
average, only 50%
is taxed. This results
in a significant tax
expenditure.
Notes
1. For data on the EU, see Shiftan, Albert and
Keinan, 2010 and 2011.
2. Naess-Schmidt and Winiarczyk, 2010.
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A “distance” benefit results from savings in the variable costs of fuel,
repairs and maintenance. Ideally, country tax systems will include the
value of both of these benefits as taxable income to the employee.
Many countries under-calculate the capital benefit to employees from a
company car, and pay no attention to distance driven for personal use.
All told, the countries studied were estimated to include only 20% of
the distance benefit as taxable income compared to 60% of the capital
benefit. The few countries that measure the distance benefit for tax
purposes apply a fixed per-kilometre rate regardless of fuel efficiency.
Thus, they fail to capture the cost of additional fuel consumed by less
fuel-efficient cars.
Based on the benchmark, tax systems treat on average no more than
50% of the personal benefit to employees from use of company cars as
taxable income. Figure 1 shows the proportion of the lower, midpoint
and upper-bound benchmarks captured by country tax systems: the
untaxed amount of taxable income from company cars was
EUR 64.3 billion at the midpoint estimate in 2012.
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The same year, given
their current tax rules, this resulted in a total tax expenditure of
EUR 26.8 billion and an estimated subsidy per company car of around
EUR 1 600 per year.

Many countries under-
calculate the capital benefit
to employees of a company
car, and pay no attention to
distance driven for personal
use.
Box 2: A benchmark for neutral tax treatment of personal benefits
Full taxation of the benefit received from company cars would level the playing field with equivalent cash wages. In other
words, individuals should be required to include in their taxable income an amount equal to the cost of purchasing
equivalent goods and services. Such tax treatment would make employees indifferent to receiving compensation as
in-kind or cash.
As a compromise between accuracy and simplicity, the benchmark tax treatment used to estimate the full value of the
benefit received by employees from personal company car use has two components:
• A capital component that reflects the benefit the employee receives from having a company car that they did not
have to pay for themselves. Because the employee would otherwise pay the full capital costs of the car, the taxable
base uses the full value of the car. It includes depreciation costs, as well as insurance, finance, annual taxes,
registration and interest costs, estimated by reference to a fixed percentage of the vehicle’s depreciated value.
• A distance component that reflects the benefit the employee receives from not having to pay the costs that vary
with distance travelled (assuming the employer pays or reimburses them), set as a value per kilometre travelled for
personal purposes, including commuting.
Note
3. This estimate does not consider possible
behavioural changes that would occur if tax
systems were changed to replicate the proposed
benchmark.
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Figure 1: Proportion of benchmark captured by country tax
systems
Source: OECD (2014), Personal Tax Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal and
Environmental Costs, 10.1787/5jz14cg1s7vl-en.
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120%
Lower bound estimate
Upper bound estimate
Midpoint estimate
Percentage of benchmark captured by tax system
Mid-point estimate
Upper range of estimates
Lower range of estimates
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The financial benefits from using a company
car have different impacts. Under-taxation of
the capital benefit, for example, can influence
the initial decision to accept a company car. It
may also lead to a choice of larger cars, with
environmental implications.
When it comes to the impact of under-taxing
company cars, however, evidence suggests the
taxation of the distance driven is more important
to environmental outcomes than the taxation of
the capital benefit.
When the distance driven for personal purposes
is untaxed, it creates a strong incentive for
employees in many countries to drive more.
What happens when fuel is “free”
Where the employer pays fuel and other variable
charges, the employee’s marginal cost of driving
is reduced to zero. This encourages the use of
company cars and, in turn, the growth of two-car
households. All this tends to increase the number
of cars on the road and the number of kilometres
driven.

When employers cover fuel expenses,
employees in most countries face
no additional tax consequences
when they drive more for personal
purposes in a company car. This
policy encourages increased travel in
the company car.
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Country experience shows the impact of under-taxing the distance
benefit. In the past, the marginal cost of driving a company car in
the United Kingdom was not merely zero, but negative. In other
words, employees were not simply untaxed when using a company
car: they actually enjoyed a financial advantage from doing so.
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First, employees would benefit from a reduced tax liability, or scale
charge, upon reaching certain thresholds in mileage. This gave drivers
a perverse incentive to reach that threshold. Second, in exchange
for unlimited free fuel from the employer, employees would incur
an additional tax liability known as the fuel-scale charge. This
liability, however, was fixed, regardless of how much fuel was used.
Consequently, the policy encouraged high mileage since free fuel only
made sense if enough was consumed to justify the fuel-scale charge.
Over the past two decades, the United Kingdom has reduced or
eliminated these perverse incentives in the tax system. By 2002-03,
the government had eliminated tax incentives for reaching mileage
thresholds. And by the early 2000s, it had more than doubled in real
terms the tax liability for fuel.
Between 1995-96 and 2009-10, for example, the number of car users
in the United Kingdom electing to receive free fuel and pay the fuel-
scale charge dropped from 48% to 28%. This took place against a
16% reduction in company cars that were not receiving free fuel and
thus remained unaffected by changes to the fuel-scale charge. Still,
changes to tax laws that removed the attractions of “free fuel” have
largely driven the reduction in both company car ownership and
usage.
The weight of this evidence, coupled with lessons from the larger
passenger transport market about point-of-use charges, strongly
suggests the environmental impact of the distance component
surpasses that of the capital component.
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If the taxable benefit
from company cars
matched the true
value of the benefit,
evidence from
country experiences
suggests that a
high proportion of
current company
car users would be
willing to give up
the car.
Box 3: Taxation rates matter
While under-taxation of the distance benefit has more
environmental impact, the capital benefit should not
be forgotten. Norway, for example, does not tax
distance, but captures 100% of the capital benefit.
Conversely, Germany measures both the distance
and capital benefits for tax purposes, but captures
only low proportions of each. At EUR 240 per year,
Norwegian subsidies for company cars are the
second lowest of the surveyed countries. German
subsidies, estimated at EUR 2 246 annually, are the
third highest.
Note
4. Le Vine and Jones (2012).
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The environmental impact of cars has been
monitored continuously since the European
Commission’s Green Paper of 1995.
5
While
each step of a vehicle’s lifecycle generates an
environmental impact, actual use is the most
significant factor. After all, cars are not usually
produced for the showroom alone or parked as
examples of street art: they are made to be driven,
and the demand for their use drives demand for
both production and parking spaces.
A list of impacts from the presence of cars on the
road could include:
• demands on scarce resources such as oil
• CO
2
emissions and the resulting contribution to
climate change
• emissions of local air pollutants
• traffic accidents
• congestion.

The current under-taxation
of company car benefits, and
particularly the absence of tax
consequences of driving farther in
many countries, means these tax
settings have high environmental and
other external costs. These include
contributions to climate change, local
air pollution, congestion and road
accidents.
These impacts, in turn, are influenced by the
total distance driven (number of cars multiplied
by distance driven per car); the environmental
characteristics of cars (fuel efficiency, emissions
intensity, safety features); and the distance driven
in peak periods at particular locations.
What are the environmental and social impacts
of the taxation of company cars?
Note
5. EC 1995. See in particular the Commission’s 2011 White Paper (EC, 2011).
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Company cars are an integral part of the passenger transport market.
Indeed, across many countries, the annual mileage per car is much
higher for company cars than for the rest of the car population.
6

For example, before reforming its tax treatment of company cars,
company car users in Britain drove nearly three times the distance
as those in private cars.
7
Another study identified that company car
users in Australia drove 30 000 km annually compared to 10 000 km
for private car users.
8
In the Netherlands, several studies between
2002-09 indicated that users of company cars drove much greater
distances than those in private cars.
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Table 1: Impact of tax systems on environmental and
other social outcomes
Number of cars Fuel type and fuel
efficiency of vehicle stock
Distance driven
Ability of each actor to
respond to tax systems
Impact of personal tax
treatment
Theoretical benchmark
for environmental
impacts
Employer: Chooses
when and how to provide
the company car
Employee: chooses
household response to
the provision of a car;
may influence employer
decision
Employee: Will depend
on household response;
company cars could
be additional to or a
substitute for private
vehicles
The fuel type and fuel
efficiency per car that
would be purchased
in the absence of tax
preferences for the
company
Employer: responsible
for choice of company
car and therefore it’s fuel
efficiency
Employee: may respond
by changing the private
car stock or substituting
transport toward/away
from company car
Employee: failure to tax
the employee for the
benefit received may
have less impact if the
employee cannot affect
the purchasing decision;
secondary impacts for
private car stock
The distance driven in
both personal cars and
the company car if the
employee had to fully
pay costs of company
car use
Employer: Limited
impact; policies
restricting private use
may have some impact
Employee: Chooses
distance driven in
company car; may also
vary distances driven in
private vehicles
Employee: May
substitute toward the
company car and away
from the personal car if
the cost per kilometre is
not internalised; relative
environmental effect
will therefore depend
on the difference in fuel
efficiency between the
two vehicles
May substitute car
use for other forms of
transport that would be
cheaper in the absence
of the tax preference or
increase overall travel
The number of cars that
would be driven were
there no tax preferences
to either the employee or
employer
Notes
6. Scott, Currie and Tivendale (2012).
7. Le Vine and Jones (2012).
8. Collingwood et al. (1997).
9. Wilmink et al. (2002); Graus and Worrell
(2008); Berning (2009).
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Environmental outcomes
across the OECD would
be greatly improved by
ending the under-taxation
of company cars.
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The impact of company car tax settings on environmental and other
social outcomes will depend on a range of factors. Does the company
car substitute for another vehicle or mode of transport? If so, is that
vehicle or mode of transport more or less fuel efficient? In addition to
encouraging individuals to increase the distance driven in company
cars, tax settings tend to provide a greater subsidy to less fuel-efficient
company cars.
Systems in Belgium, the Netherlands and the United Kingdom
explicitly vary the taxable benefit based on the level of a vehicle’s
emissions per kilometre. Even in these cases, however, the taxable
benefit estimated under actual tax rules was generally less than the
full value of the benefit. What’s more, it was insensitive to distance
driven.
Across all countries studied, environmental costs were estimated at
EUR 116 billion, which are significantly higher than the estimated tax
expenditure: the loss to society is thus far greater than the gain by a
few “winners”.
From country experience, as well as the larger body of analysis
available, four main conclusions can be drawn about company car
taxation and the environment:
• Current company car tax rules increase distance driven. The under-taxation of company cars will likely
result in a disproportionately large increase in total distance driven, made up of an increase in both
the number of cars driven and distance driven per car per year. Conversely, corrections to company car
taxation policy will likely result in a disproportionately large reduction in total distance driven – and a
corresponding mode shift to public transport.
• Increased driving resulting from
company car tax rules harms
the environment. Because of its
disproportionate impact on total
distance driven and its components,
the under-taxation of company cars
will likely result in disproportionately
large impacts on most relevant
environmental variables. Conversely,
corrections to company car
taxation are likely to result in
disproportionately large reductions in
the sum of social costs.
• Non-taxation of distance driven is
the most harmful feature of most
company car tax systems. Widespread
and multi-faceted under-taxation
of the distance component is more
harmful to environmental and other
social outcomes than the under-
taxation of the capital component.
Based on these conclusions, environmental
outcomes across the OECD would be
greatly improved by ending the under-
taxation of company cars, particularly the
distance component.
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Table 2: Parameters used in benchmark calculation of taxable benefit in a given year
Fixed costs
Variable costs
Depreciation
Insurance, registration,
annual taxes, interest
Repairs, maintenance,
tires
Fuel costs
Depreciated vehicle value
(based on list price at
purchase, less 5%)
Depreciated vehicle value
(based on list price at
purchase, less 5%)
Kilometres travelled for
personal use
Kilometres travelled for
personal use
Lower estimate: 18%
Midpoint estimate: 24.5%
Upper estimate: 31%
Midpoint estimate: 9%
Lower estimate: EUR 0.02 per kilometre
Midpoint estimate: EUR 0.04 per kilometre
Upper estimate: EUR 0.06 per kilometre
Cost of fuel per kilometre travelled, using
each vehicle’s fuel type and fuel effciency
rating, and country-specifc fuel costs
Type of costs Component Base Rate
Source: Based on Table 7 and the formula on p.20 of “Personal Tax Treatment of Company Cars and Commuting Expenses:
Estimating the Fiscal and Environmental Costs”, OECD Taxation Working Papers, No.20, OECD.
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BETTER POLICIES FOR BETTER LIVES
For more information:
www.oecd.org/tax
www.oecd.org/environment/greening-transport/
This Policy Highlights is based on two OECD Working Papers issued in 2014:
Personal Tax Treatment of Company Cars and Commuting Expenses:
Estimating the Fiscal and Environmental Costs (2014); and
Environmental and Other Social Costs of the Tax Treatment of Company
Cars and Commuting Expenses (2014).
September 2014