Indirect Tax update

The European Union’s new Regulation establishing a Carbon Border Adjustment Mechanism (CBAM) entered into force on 17 May 2023. Currently, the CBAM Regulation applies to specified imports of goods (identified by their CN code) into the European Union within the following six emissions-intensive sectors: electricity, iron and steel, cement, aluminium and fertilisers and hydrogen.

The CBAM has a transitional period that commences on 1 October 2023 and runs until 31 December 2025, the purpose of which is to collect data that will help fine-tune the shape of CBAM in view of its definitive phase from 2026. During the transitional period, the obligations of the importer shall be limited to reporting obligations only, without paying any financial adjustment.

Each importer, having imported CBAM goods during a given quarter of a calendar year must, for that quarter, submit a CBAM report containing information on the imported quantity of CBAM goods, the direct and indirect emissions embedded therein (initially indirect emissions only for cement, electric power and fertiliser), as well as carbon pricing already paid in the country of production. The first quarterly report, covering the quarter ending 31 December 2023, is due by 31 January 2024.

On 13 June, the European Commission published a draft Implementing Regulation for the Carbon Border Adjustment Mechanism (CBAM) regarding the specific transitional period reporting obligations for public consultation. This draft Regulation sets rules in respect of the following:

  • The CBAM reporting data requirements, which is to include information such as:
    • Quantity of imports
    • CN Codes of goods
    • Country of origin
    • Installation where goods were produced
    • Production routes
    • For steel goods, the ID of steel mill for the batch of steel goods
    • Specific direct emissions of goods (CO2 per tonne)
    • Indirect emissions data for:
    • Electricity consumption
    • Use of actual or default values
    • Corresponding emission factors
    • Amount of indirect emission of goods (CO2 per tonne)

Reporting declarants may request the producer of goods to use an electronic data template provided by the European Commission.

  • The methods for the calculation of embedded emissions:
    • To provide for some flexibility during the first year of implementation, companies will have the choice, until 31 December 2024, of reporting in one of three ways:   
      • full reporting according to the new methodology (EU method);
      • reporting based on equivalent third country national systems;
      • reporting based on reference values.
    • As of 1 January 2025, only the EU method will be accepted, whereby embedded emissions are to be monitored using either a calculation-based approach (where emissions from source streams are determined on the basis of activity data) or a measurement-based approach (consisting of a continuous measurement of the concentration of the relevant greenhouse gases themselves).
  • Information in respect of the carbon price paid in the country of origin, which is to include:
    • The form of carbon price
    • Any rebate or other form of compensation available
    • The provision of a legal act providing for the carbon price
    • The quantity of embedded emissions covered by the carbon price and the rebate or other form of compensation
    • The monetary amount
  • CBAM reports:
    • Reports are to be submitted in the CBAM Transitional Registry no later than one month after the end of that quarter
    • Modifications may be made to the reports until two months after the end of the relevant reporting quarter (for the first two reporting periods, CBAM reports may modified until the submission deadline of the third CBAM report)
    • A CBAM report is incorrect if:
      • the data in the submitted report do not comply with the requirements;
      • the declared embedded emissions deviate from the default values without any justification; or
      • the declarant has submitted wrong data.
  • Penalties:
    • Will be imposed if reporting declarants haven’t taken necessary steps to comply with obligations to submit a CBAM report or correct a CBAM report to comply with the obligations.
    • Will be between EUR 10 and EUR 50 for each tonne of unreported embedded emissions, increasing in accordance with the European index of consumer prices.
  • A CBAM Transitional Registry, which is a standardised electronic database containing common data elements for reporting in the transitional period that will enable information exchange between the European Commission, the competent authorities, customs authorities of the Member States and reporting declarants.
  • A CBAM Trader Portal, which is a component of the CBAM Transitional Registry through which reporting declarants are to:
    • submit CBAM reports;
    • receive notifications related to their CBAM compliance obligations.

The CBAM Trader Portal can be used to store information about third country installations for later re-use.

The European Commission has opened a public consultation for feedback on the draft Implementing Regulation. Business, academia, civil society and the general public can provide their feedback online until 11 July 2023. The final rules will then be adopted by the Commission.

For more information on this new Regulation or for assistance with impact assessments and compliance guidance, please contact one of our CBAM experts.

How can KPMG assist?

Should you require further assistance regarding the system Tax For All (TFA), please contact our trusted advisors in the Indirect Tax Department at KPMG Cyprus.

KPMG’s Indirect Tax team provides advice and assistance at the Cyprus and international level. We structure our effort to dovetail with your business issues and strategy. Our focus is on supplying value adding and pragmatic advice rather than just a list of recommendations.

Our tax professionals are able to review your company’s current tax position and provide relevant advice and planning on a range of indirect taxes, including VAT, customs duties and excise taxes (such as tax audits, reorganizations and acquisitions, etc.). Furthermore, we can help your company with its administrative obligations and contacts with administrative bodies.   

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