EU BT 21: Sustainability and tax – what is on the EU’s agenda?

The EU’s Communication on Business Taxation for the 21st century (EU BT 21) is an ambitious package of measures that, amongst other things, is intended to enable “fair and sustainable growth” in the EU. This builds on and complements existing EU tax initiatives that are intended to both support the green transition and help move towards a fairer tax system, through greater transparency and steps to tackle abuse. With COP26 on the horizon, we have picked out some of the key tax measures that the EU is hoping will support its sustainability agenda.

Supporting the green transition

The “EU 55” package, presented on 14 July 2021, aims to bring the EU’s environmental and energy regulatory framework in line with its goal of reducing greenhouse gas emissions by 55% by 2030 and attaining climate neutrality by 2050. From a tax perspective, the most interesting elements of this package are (i) the revision of the existing EU Emissions Trading System (EU-ETS), (ii) the proposal for a Carbon Border Adjustment Mechanism (CBAM) and (iii) the revision of the Energy Taxation Directive.

Taking these in turn:

• The changes to the EU Emissions Trading System aim to ensure that emissions from the current EU ETS sectors are reduced by 61% by 2030 (compared to 2005 levels). Measures to achieve this goal include steepening the annual emissions reduction from 2.2% to 4.2%, and gradually removing free emissions allowances for certain industries until 2035.
• Since the EU ETS only applies to emissions produced within the EU, the intention is that this will be complemented by the Carbon Border Adjustment Mechanism (CBAM) which will cover the embedded emissions in products that are imported into the EU. Like the ETS, the CBAM will be based on a system of certificates that essentially mirrors the ETS price. Importers of goods will have to register with national authorities where they can also buy CBAM certificates. Initially, CBAM will only apply to cement, iron and steel, aluminium, fertilisers and electricity, but the Commission has already reserved the right to extend its scope to more products and services after a transitional period (ending at the end of 2025).
• The amendments to the Energy Taxation Directive introduce a new structure of tax rates based on the energy content and environmental performance of certain fuels and electricity. They also broaden the taxable base by including more products in scope and by removing some of the current exemptions and reductions, e.g. for kerosene used as fuel in the aviation industry and heavy oil used in the maritime industry.

Whilst the main aim of these measures is to increase the rate at which emissions within the EU are reduced, the intention is that Member states spend the entirety of their emissions trading revenues on climate and energy-related projects. It is therefore implicitly acknowledged that these measures might also generate substantial new revenues for Member states, but it remains to be seen whether, in time, the main goal will shift from reducing emissions to raising resources.

One point to note is that these new tools bring with them new administrative challenges, especially in relation to the new CBAM system, which requires an evaluation of imported goods in terms of their embedded CO2 emissions and introduces entirely new administrative processes that taxpayers will have to comply with.

Moving towards a fairer tax system (improving transparency and tackling abuse)

Aside from the environmental measures, the EU BT 21 package includes measures that support the wider global trend towards a greater focus on ESG goals by integrating environmental, social and good governance goals into the global tax framework.

There are already a few existing initiatives that are relevant in this regard, such as DAC 7 and DAC 8. The changes envisaged by these measures will expand the information reporting requirements of the Directive on Administrative Co-operation in relation to platforms and crypto-assets. The EU Council has already approved DAC 7 and Member States are required to implement the changes with effect from 1 January 2023. The OECD has also published a set of model rules for reporting by platforms; the UK is currently consulting on the introduction of an OECD-based regime from 2023 and other jurisdictions are likely to follow suit. On DAC 8, the EU has held a consultation, with the proposals due to be adopted by Autumn 2021.

In addition, there are the EU proposals in relation to Public Country-by-Country Reporting (CBCR). The EU reached agreement on these rules that will require EU multinationals with total annual global revenues over EUR 750 million to publish a report on their website in relation to relevant tax information, such as net sales and profits, numbers of employees, income taxes paid etc.

The EU BT 21 proposal in relation to publishing effective tax rates will complement the above initiatives by requiring the annual publication of the effective corporate tax rate for certain large companies with operations in the EU, with the legislative proposal on this expected by 2022. All of these measures will boost transparency in relation to EU multinationals, helping to build trust that the tax system is fair.

Other measures looking to build trust in the tax system include anti abuse initiatives, such as the consultation into the misuse of shell companies for tax purposes. Whilst acknowledging there can be valid reasons for the use of such entities, the EU wants to take action to prevent such entities being used for the main purpose of reducing tax liabilities or disguising improper conduct of the group, particularly where there is a lack of substance or economic activity in the country of incorporation. The consultation on this runs until August and a legislative proposal will follow by the end of the year, taking into account the contributions received to this consultation. This could be an area where significant changes may be proposed, so one that should be monitored closely.

One point to note is that some of these measures bring with them new administrative challenges, especially in relation to the new CBAM system, which (for example) requires an evaluation of imported goods in terms of their embedded CO2 emissions and introduces entirely new administrative processes that taxpayers will have to comply with. However, overall these initiatives involve many positive changes to the tax system that will support the sustainability agenda, even if they also bring with them some new challenges.

For more information about this package, see our dedicated webpages: Navigating EU BT 21