While this EC ruling could cost the Portuguese state billions of euros in unduly claimed and future taxes, the government has, since the ruling, opted to maintain total silence on the matter.

The EC this week found registration tax should not be included in the taxable amount of VAT.

This move by Brussels comes in the shape of a reasoned opinion (which is the second step of an EU infringement procedure).

Portugal includes the amount of its car tax (Imposto Automóvel) within the taxable amount of VAT, which the EC says constitutes a tax of a tax.

The EC bases its findings on a ruling by the European Court of Justice against Denmark for a similar offence.

The Court ruled that, in the context of a contract of sale, providing the dealer supplies a vehicle registered for a price, which includes the registration tax (RT) he paid before supplying the vehicle, the amount of that duty must not be included within the taxable amount of the VAT charged on the sale of the vehicle.

This is because, firstly, the RT is charged by reason of the registration of the vehicle and not by reason of the supply and, secondly, because the RT is paid by the supplier of the vehicle on account of the purchaser.

The Commission explains that the car taxes levied in Portugal, despite some minor or ancillary differences, are basically identical to the Danish one examined by the Court. Thus, all of them are one-off taxes which are payable on the acquisition of the motor vehicle or as a condition for bringing it into use on the terri tory of the member state concerned.

The rules on the taxable amount of VAT having been harmonised at EU level, the uniform application of those rules is an essential condition for the proper operation of the VAT system. The EC has taken the view that the criteria of the Court in the case against Denmark must be applied to the car taxes levied in Portugal.

The Association of Automobile Commerce (ACAP) has welcomed the EC ruling, arguing that the current model followed in Portugal is "contrary to European law". The association added that it has already sought legal advice to confirm the illegitimacy of the car tax law, and will be presenting its position to the Ministry of Finance.

With the new road tax coming into force on Monday, sales in June were dramatically distorted.

Despite claims by the government that cars would be cheaper by an average of ten percent, the arrival of the new car tax resulted in a rush to purchase new vehicles.

Commercial vehicle sales soared by 104.3 percent, while sales also jumped for people carriers and larger saloon vehicles.

Meanwhile, the ANECRA car association has said that buying a new car will be cheaper by between 1.26 and 7 percent, were the government to be forced into complying with community legislation.

However, respected tax expert Manuel Teixeira Fernandes has warned that the government will find ways to recover lost VAT revenue. He predicted, "The government will probably increase the car tax to compensate a loss in revenue".

But the consumers who stand to gain most from the EC's ruling this week are those who have al ready purchased vehicles and were forced to pay ‘tax on a tax'.

A former state secretary for fiscal affairs said that taxpayers "will have a legitimate right to question the charging of VAT on car taxes, in court".

Another tax expert, Diogo Ortigão, in comments to the press, explained that "consumers will have a legal right to claim back VAT", a situation which could leave the taxman's coffers in a desperate state.

The chairman of the Association for Portuguese Consumer Rights (APDC) has, meanwhile, lamented that it has taken the country "so long to wake up to this illegality".

"It needed the European Commission's intervention for socalled tax experts to take note of this scandalous problem", he added.

Another consumer rights group, DECO, has pledged its support for any motorist wishing to claim back VAT paid on vehicles, should the Portuguese state lose its case in the European Justice Tribunal.

News of the EC's position against Portugal comes in the week that new car tax legislation came into force.

Under the new law, cars with engine capacities ranging from 1250cc to 1750cc, and who emit between 120 and 180 grams of CO2 emissions per kilometre will pay an average of €125 a year in road tax. Due to this higher figure in road tax, list prices have fallen by around two to three percent.

In some cases, the cost of a car has risen by €8,000 in real terms.

Older and more polluting cars will continue to pay lower taxes than those of new, hybrid cars, despite the government's insistence that the new legislation is essentially "environmentally friendly".

The Portugal News