Car registration taxes across EU countries, MNEs’ profitability and the role of market concentration

This paper discusses the effects of one-off Motor Vehicle Registration Taxes (MVRT) and market concentration level on the profitability of multinational enterprises (MNEs) operating in the European Union motor vehicle industry. Our simple theoretical framework shows that firm profits depend on the demand function and therefore on taxes applied to prices. We overcome empirically the challenges of making informative theoretical predictions on the pass-through rate under imperfect competition. We find that Motor Vehicle Registration Taxes, - both as ad valorem taxes and as specific taxes, - have a significant negative effect on MNEs’ profitability. Our findings show a statistically significant positive effect of market concentration on profitability. Finally, our results suggest that the degree of competitiveness in the motor vehicle market moderates the effect of Motor Vehicle Registration Taxes on firm profitability only in EU countries where the MVRT is an ad valorem tax, with the negative effect of the ad valorem MVRT becoming higher as the motor vehicle market becomes less competitive.