October 16, 2023
EU | Compliance obligations for EU CBAM
On 1 October 2023, the transitional period of the Carbon Border Adjustment Mechanism (CBAM) entered into force. During the transitional phase, importers, their representatives and brokers and certain other parties in the supply chain are required to adhere to several compliance and reporting requirements that may vary depending on the Member State of importation.
This Alert summarizes the CBAM compliance and reporting obligations that we are aware of (to date).
An additional reporting requirement is imposed for imports of certain commodities into the EU as of 1 October 2023. The commodities are CN-code1 based and include products in the categories of iron, steel, aluminum, cement, fertilizer, hydrogen and electricity, as well as some precursors and downstream products (pipes, tubes, bolts, nuts, screws, etc.). The reporting obligation will apply during the CBAM transitional phase, from 1 October 2023 to 31 December 2025.
As of 1 January 2026, importers of CBAM goods are also required to buy CBAM certificates to offset emissions embedded in the goods imported.
Quarterly reporting obligations
During the CBAM transitional phase, at the end of the month following each quarter, starting with Q4 2023, the importer or its indirect customs representative are required to submit a CBAM report. Details on the elements to be included in this CBAM report are outlined in Annex I to the CBAM Implementing Regulation.2 These include commodity codes for the goods imported (only those subject to CBAM), country of origin, quantity (net mass and/or units) and emissions (total, direct and indirect). For the first three quarterly reports, meaning Q4 2023 through Q2 2024, the declarant is permitted to use default values to report on emissions. Default values are to be published by the European Commission and reflect average emissions.
After the first three quarterly reports, the declarant is only permitted to use default values for up to 20% of imports (complex goods). The remaining 80% of emissions data would have to be reported based on actual values, to be collected from suppliers and/or manufacturers. In this light, note that the supplier to the importer may not always be the manufacturer, potentially causing information requests to be circulated among a significant number of parties. Furthermore, not all manufacturers may be willing or able to provide this information — details around production processes may be sensitive or confidential. If manufacturers are willing and able to provide the data, they may not be willing to provide the data without an option to recharge costs associated with the collection of the data or generation of the calculations. Among those costs are authorized validation costs, applicable where validation of the emissions calculation is mandatory (2026).
Importers that are expecting or experiencing delays in obtaining the relevant emissions data from suppliers or manufacturers should at least have a data collection program designed and executed to evidence the duty of care taken to collect relevant data. This may not prevent, but could mitigate, penalties imposed for noncompliance (see below).
Import declaration requirements
Even though the CBAM Implementing Regulation does not specifically refer to further compliance and reporting obligations, these may be required on a country-by-country basis. For example, the Dutch Customs Authorities have published an additional reporting requirement for importers of CBAM goods as of 1 October 2023. In each import declaration that concerns CBAM goods, the declarant is required to add a "fictitious document code" to the document field. The code reflects either a confirmation of understanding that for these imports, (i) a quarterly CBAM compliance obligation exists (code 1200) or (ii) the CBAM goods are exempt from such reporting obligation (code 1300) — for example, if the consignment value is below €150 or it concerns goods for military use.
If the codes are not used for an import declaration concerning CBAM goods, the declaration will not be accepted, and the declarant will receive an error message. To prevent clearance delays, importers are highly recommended to instruct brokers on the correct use of these fictitious document codes.
EY is actively monitoring whether other Member States are imposing similar requirements and plans to update this Alert accordingly.
Penalties for noncompliance
The CBAM Implementing Regulation also includes a penalty regime for noncompliance, including cases where the reporting declarant has not taken the necessary steps to comply with the obligation to submit a CBAM report, or where a CBAM report is filed incorrectly or is incomplete. The penalty amounts as communicated in the CBAM Implementing Regulation are between €10 and €50 per ton of unreported emissions, subject to indexation. Higher penalties may be applied when more than two incomplete or incorrect reports have been submitted in a row or the duration of the failure to report exceeds six months.
In addition to this overarching penalty regime, some Member States are implementing their own domestic penalty regimes. For example, the Netherlands recently passed a bill outlining that the (maximum) penalty amounts instead are up to €450k or 10% of a declarant's annual turnover (in the event the annual turnover exceeds €4.5m) — per omission. The Netherlands are pegging the CBAM penalty regime to the penalty regime applicable to noncompliance with the EU Emission Trading System (ETS). Provided that one quarterly CBAM report qualifies as one omission (and not more than one omission), CBAM importers/declarants therefore find themselves exposed to an annual penalty risk of up to 40% of annual turnover. The Explanatory Memorandum to this bill states that "in practice, penalties imposed shall be lower, as penalties should be both deterrent and proportional," but it does not specify how much lower "deterrent and proportional" entails.
While the validity of having two penalty regimes (an EU and a domestic regime) may be subject to debate, CBAM importers are nonetheless cautioned that Member States may impose significant penalties for noncompliance with CBAM legislation.
Actions for businesses
In light of these developments, businesses importing goods into the Netherlands should consider:
The above is based on our interpretation of current tax legislation and case law published to date. This Indirect Tax Alert provides general information with no pretension of completeness, and it should not be considered tax advice.
EY Global Trade Contacts
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 CN is the abbreviation for "combined nomenclature," an eight-digit product classification system used in export declarations and statistical declarations for trade in the European Community. CN codes are published in the Official Journal of the European Union.
2 Commission Implementing Regulation (EU) 2023/1773 of 17 August 2023 laying down the rules for the application of Regulation (EU) 2023/956 of the European Parliament and of the Council as regards reporting obligations for the purposes of the carbon border adjustment mechanism during the transitional period.