Environmental Taxes - A brief overview of the incoming developments has been saved
Environmental Taxes - A brief overview of the incoming developments
Indirect Tax Matters | November 2021
Climate change has become a key priority on the political agenda globally and within the European Union and Ireland.
The European Commission has released the “Fit for 55 package”, a set of proposals to revise and update EU legislation with the purpose of cutting greenhouse gas emissions by at least 55% by 2030, as an intermediate step towards carbon neutrality to be achieved by 2050.
In July this year, the Irish Government enacted the Climate Action and Low Carbon Development (Amendment) Bill 2021 in order to establish a legally binding framework with clear targets and commitments to achieve a climate neutral economy by no later than 2050. Furthermore, Budget 2022, announced on 12 October 2021, also includes a number of climate and environmental measures.
Environmental taxes in these new legislative measures will play an important role to achieve the climate goals mentioned above. We have provided below, a brief overview regarding how some of the main environmental taxes currently in force in the Irish legislation will be impacted by these new measures.
Carbon tax applies to fossil fuels, based on tonnes of carbon dioxide (CO2) emitted by each fuel. The tax is levied on suppliers of fossil fuels to Irish consumers, private individuals and businesses, and covers around 50% of all economy wide CO2 emissions.
Based on the different type of fuels:
- A carbon charge, included as a component of the Mineral Oil Tax rate, applies to liquid fuels (hydrocarbon oil such as petrol and diesel, substitute fuel and LPG).
- A carbon tax called Solid Fuel Carbon Tax applies to solid fuel (e.g. coal and peat).
- A carbon tax called Natural Gas Carbon Tax applies to Natural Gas.
As provided by Finance Act 2020 and confirmed in Budget 2022, there will be a progressive increase to the annual carbon tax rate leading to a rate of €100 per tonne by 2030. The increase in 2022 will be €7.50 bringing the overall rate of carbon tax from €33.50 to €41 per tonne of carbon dioxide emitted. This increase has been applied from 13 October 2021 for diesel and petrol and will be applied from 1 May 2022 for all other fuels to allow for the winter heating season.
There are some relief schemes in place to mitigate the impact of the carbon tax for business sectors which are heavily reliant on fuel as a business input, such as haulage and agriculture. Examples of those measures are the Diesel Rebate Scheme, the reduced rate of taxation on Marked Gas Oil, and the double income tax relief scheme for farmers. As mentioned in the Climate Action and Tax Paper Tax Strategy Group – 21/09, published by the Department of Finance last September, those reliefs have been subject to criticism from an environmental perspective as they are fossil fuel subsidies. Therefore, they might gradually be removed in the near future, in tandem with the introduction of support measures which incentivise the use of greener fuels and technology. Such incentives include increased capital allowances for energy efficient equipment, lower VRT rates for electric vehicles and reduced BIK amounts for such vehicles.
Emission Trading System (ETS)
Ireland implemented the EU Emissions Trading System (ETS) a number of years ago, which is currently applicable to airlines and a wide range of energy-intensive industry sectors. Under ETS, greenhouse gas allowances are treated as a commodity or product that can be traded on the EU carbon market. The overall volume of greenhouse gases that can be emitted by all the companies covered by the ETS is subject to a cap or limit, which is set at an EU level. The EU decides how much and how quickly the total emissions should decrease. The cap or limit moves downwards each year to meet the emissions reduction target.
The European Commission has proposed to revise the EU ETS through its extension to the maritime sector over the period 2023-2025 and phasing out by 2027 the free emissions allowances that aviator operators currently receive.
In addition, the Commission has also proposed to apply emissions trading to road transport and buildings sectors by 2026. This would be done in a separate system focused on upstream fuel suppliers, putting the responsibility on fuel producers to comply with the system, rather than requiring individual households or road transport users to take part directly. As mentioned in the Climate Action and Tax Paper Tax Strategy Group – 21/09, this proposal would have a significant importance to Ireland. In fact, the expansion of emissions trading system to those sectors could impose a double taxation on the emissions associated with energy use in the transport and buildings sector, given these emissions are also subject to the domestic carbon tax.
Carbon Border Adjustment Mechanism (CBAM)
The European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM), which will put a price on third country imports of certain high-polluting goods based on their carbon content, as a climate measure that should prevent the risk of carbon leakage. This is the first carbon ‘border’ tax globally.
The aim of this proposal is to ensures that the same carbon price will be paid by domestic and imported products, while guaranteeing the compatibility with World Trade Organization (WTO) rules and other international obligations of the EU. Once approved, CBAM will be gradually introduced and initially apply to imports of cement, iron and steel, aluminium, fertilisers and electricity as these sectors have a high risk of carbon leakage and high carbon emissions.
CBAM will be based on a system of certificates to cover the embedded emissions in imported products. The CBAM certificate price will be based on the EU ETS allowance price. The intention is for a transitional period to apply from 2023, when importers will have to start reporting relevant transactions and full returns and payments will commence in 2026.
Vehicle Registration Tax (VRT)
Vehicle Registration Tax (VRT) is a tax chargeable on the registration of vehicles in the State and is levied as a percentage of the open market selling price of the vehicle. From 1 January 2021 a new VRT 20-band table replaced the previous 11 band version, changing the VRT rates range from 14%-36% to 7%-37%. The purpose was to reward low emission vehicles with reduced VRT.
Budget 2022 introduces a revised vehicle registration tax table from January 2022. The 20-band table will remain with an uplift in rates beginning with a 1% increase for vehicles between bands 9-12; 2% for bands 13-15; and a 4% increase for bands 16-20. The provision of €5,000 relief for Battery Electric vehicles is being extended to end in 2023.
The recently published Finance Bill provides for changes in relation to
benefit-in-kind for electric cars and vans. Currently an electric car or van
with an original market value of up €50,000 can be provided tax free with any
excess over a value of €50,000 attracting a BIK charge. The BIK exemption for
electric vehicles is extended out to 2025 but with a tapering effect on the
vehicle value. This measure will take effect from 2023. For BIK purposes, the
exempt element of the original market value of an electric vehicle will be
reduced from €50,000 to €35,000 for 2023; €20,000 for 2024; and €10,000 for
2025. Furthermore, the Accelerated Capital Allowance Scheme for Gas Vehicles and Refuelling Equipment, which allows taxpayers to deduct the full cost of expenditure on eligible equipment from taxable profits in the year of purchase, will be extended from its current end date of 31 December 2021 to 31 December 2024. In addition, this allowance scheme will be expanded to encompass hydrogen-powered vehicles and refuelling equipment.
Electricity Tax is an excise duty that is charged on supplies of electricity. The tax is charged on the final supply of electricity to the consumer and the liability arises at the time the electricity is supplied. Reliefs are provided in the following cases:
- Electricity for household use.
- Electricity generated from renewable sources, environmentally friendly heat and power cogeneration and on board a craft.
- Electricity used for chemical reduction or in electrolytic or metallurgical processes, for combined heat and power generation, for, or in connection with, the production of electricity.
The Climate Action and Tax Paper Tax Strategy Group – 21/09 also mentions a possible future increase to Electricity Tax rates together with a removal of the reliefs mentioned above. The reason is that, according to the Climate Action Plan and the Programme for Government aim for carbon neutrality by 2050, there will be a gradual reliance on electricity supplied as a renewable energy and consequently a loss of tax revenue from fossil fuels. Ireland currently has one of the lowest electricity tax rates in the EU.
There is also a PSO (Public Service Obligation) levy charged to all electricity customers in Ireland and supports the generation of electricity from sustainable, renewable and indigenous sources.
The levy is calculated and certified annually by the CRU (Commission for Regulation of Utilities) in line with relevant legislation. All energy suppliers are required to collect this levy from customers through bills. The new PSO levy for private customers changed on 1 October 2021 to €4.30 ex VAT per month which equates to €51.60 ex VAT or €58.57 per year inclusive of VAT. The amount of PSO for a business premises is based on your Maximum Import Capacity (MIC). The new PSO levy rates for businesses from 1 October 2021 to 30
September 2022 are:
- PSO where MIC < 30kVA = €13.63 per month (Excl. VAT)
- PSO where MIC => 30kVA = €1.63 per kVA per
month (Excl. VAT)
The European Council decided in July 2020 to introduce a new type of revenue for the EU budget (so-called own resources) based on the amount of non-recycled plastic packaging waste. From 1 January 2021, EU Member States are to pay 80 cent per kilogram of non-recyclable plastic packaging placed on their market. This tax supplements the EU revenue, to be paid by each individual EU Member State. Each Member State is free to decide how to implement/fund this new tax, some States may decide to pay the contribution to the EU from their own national budget but we expect that many will impose a new form of taxation on plastic packaging products.
In the absence of a uniform approach it will lead to different regimes across the EU. Although Ireland have yet to publish how it intends to implement/fund the new tax a number of countries have already indicated that they intend to implement measures such as Latvia, Romania, Denmark and Hungary. In Belgium, it is anticipated that the costs will be passed to producers and users of plastic packaging via increased Extended Producer Responsibility (“EPR”) compliance obligations. Other countries are further advanced as follows.
In Italy, a “Plastic Tax” will apply to the consumption of single use products, known as “MACSI”, with certain exceptions. Typically, these are “disposable” packaging made with the use, or partial use, of plastic materials consisting of organic polymers of synthetic origin and intended to contain, protect or deliver goods or food products. Semi-finished products and preforms, made entirely or partially with plastic materials and used in the production of MACSI, are considered MACSI as well. Examples of MACSI are plastic bottles, bags and trays for food (e.g. yoghurt pots) and tetrapak containers typically used for liquid food products, such as milk and soft drinks. Containers for detergents, earphones, sweaters and any other good wrappers, but also the polystyrene used to protect the packaged appliances, the bubble wrap that wraps any online purchased item, the plastic films used to wrap the materials on the pallets, the caps of bottles or jams, etc. etc.
Italy will tax those who produce or buy plastic from other European countries or import single-use plastic items at 45 cents per kilogram of plastic product. Originally this was due to be implemented in July 2021 but is now expected to be applied from January 2022.
Spain has a similar intention to impose a 45c per kilo tax on the manufacture, importation or intra-community acquisition of non-reusable plastic packaging for its final use within the Spanish market which is also expected to commence early 2022.
Although no longer in the EU, the UK had initially indicated the introduction of a plastic packaging tax (PPT) back in Budget 2018. The recent UK budget has confirmed the introduction of the PPT to apply to plastic packaging manufactured in, or imported into the UK, that does not contain at least 30% recycled plastic. PPT will be chargeable at £200 per tonne and apply to businesses that manufacture/import above a minimum threshold of ten tonnes of relevant packaging. A minimum threshold has been introduced to ensure that small businesses are not disproportionately affected by the tax.
As there are several implementation options, such as having the tax borne by producers/importers of plastic packaging or by companies whose products are packaged in plastic, or, companies which sell consumer products. Whichever way a tax is implemented in individual members states one can assume the price will trickle down to the price consumers pay.
Single Use Plastics
The EU also aims to reduce the volume and impact of specific plastic products on the environment through Directive (EU) 2019/904, referred to as the Single Use Plastics Directive. The Directive commits member states to introduce a range of measures to deal with the most common single use plastic (SUP) items and was transposed into Irish legalisation in July 2021.
Ireland has banned the following SUP items from being placed on the Irish market from 3 July 2021:
- Cotton Bud Sticks
- Expanded polystyrene single use food and beverage containers
- All oxo-degradable plastic products
Regulations to give effect to this prohibition were signed by Minister Eamon Ryan on 2 July 2021. The producers of wet wipes, tobacco products containing plastic, sanitary items and cups must ensure that the marking requirements of Commission Implementing Regulation (EU) 2020/2151 are contained on their packaging or products, as appropriate. Such products may not be placed on the market in Ireland post 3 July 2021 unless they are in compliance with this regulation
Other obligations in the Directive will result in beverage containers (bottles, cartons) up to 3 litres in size being banned from the Irish market from July 2024, unless its cap is attached to the main part of the container. Beverage producers will also be prohibited from placing any SUP polyethylene terephthalate (PET) bottle up to 3 litres in size on the Irish market from January 2025 unless it contains a minimum of 25% recycled plastic. From January 2030 these bottles must contain a minimum of 30% recycled plastic.
As a result of the above and other measures, national and EU legislation regarding environmental taxes will be subject to important changes in the short, medium, and long term. It is important that business operators are informed about these changes in order to reduce tax burdens and to plan their business activities in a new manner that should be both efficient and environmentally friendly at the same time. It goes without saying that a greener business approach gives rise to other advantages, in particular, a reputational plus.
This article provides merely a high-level overview of the main incoming changes regarding environmental taxes. If you would like to receive a more detailed analysis and discuss how these changes could impact on your business, we would be happy to assist.