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October 9, 2024
2024-1848

EU Deforestation Regulation; Insights into 12-month delay and recent updates

  • The European Union (EU) Commission has proposed several new documents pertaining to the EU Deforestation Regulation (EUDR).
  • The documents, pending approval by the European Parliament and EU Council, would extend the EUDR's effective date until 30 December 2025 and provide substantial additional guidance.
  • Affected companies should consider commencing essential preparatory actions for compliance without delay.
 

After extensive international dialogue, scrutiny and input from various stakeholders regarding the complexities and global implications of the EU Deforestation Regulation (EUDR), the EU Commission unveiled a suite of documents on 2 October 2024.

These documents, pending approval by the European Parliament and the EU Council, are designed to streamline the adoption and execution of the new regulatory measures:

  1. A proposal for a Regulation that would extend the EUDR's date of application by 12 months
  2. Formal guidance on the EUDR
  3. An updated Frequently Asked Questions (FAQ) document
  4. A strategic framework for international cooperation engagement

Five key takeaways from the releases

  1. If the extension is approved, the EUDR will become applicable on 30 December 2025 for large companies and 30 June 2026 for micro- and small-enterprises (SME).
  2. The detailed guidance document featuring specific scenarios and the 40 new FAQs clarify:
    • Some key definitions (e.g., as to "in-scope" products)
    • Legality requirements
    • Roles and responsibilities in different supply chain operating models
    • Obligations of non-EU legal entities exposed to EUDR requirements
    • Requirements for packaging materials
    • Traceability obligations
    • The use of geolocation polygons
    • Information technology (IT) systems specifications
    • Potential penalties
    • The applicable transition period
    • The annual reporting obligation timeline for non-SME operators, set to 30 December 2025 until the proposed extension is ratified
  1. A strategic framework for an international cooperation engagement proposal — also subject to approval — outlines the funding principles, priority areas of actions and general principles on the country benchmarking methodology. Under the revised schedule, the categorization of countries as low- or high-risk is set to be disclosed by 30 June 2025 and guidance for the interim period should be considered.
  2. In the second half of October 2024, the EU will hold online training for the Information System through which businesses will register their due diligence statements.
  3. The 12-month extension period provides a last chance to ensure readiness, which will require intensive preparation. The EU Commission emphasized that the "extension proposal in no way puts into question the objectives or the substance of the law." The EU IT systems have passed the testing phase and will be ready even before the EUDR's entry into application.

These clarifications effectively emphasize the need to continue with the preparation for becoming EUDR-compliant. This is based on the reality and complexity of the EUDR, as the objectives of the regulation remain unchanged. As a reminder, consequences of noncompliance could be severe and can include significant fines, temporary exclusion from the EU market and public procurement processes or, in certain countries, personal liability for managing directors (non-exhaustive).

Insights beyond the proposed 12-month extension

As mentioned above, the guidance and FAQ documents recently released clarify various scenarios and uncertainties, such as:

  • The traceability of composite products and whether all relevant commodities and products should be the object of due diligence
  • The obligations of non-EU based operators and their access to the Information System
  • The use of relevant products in an organization's own business and conditions to qualify as "being placed on the market"

Despite the extensive additional guidance provided, certain questions of great practical significance (e.g., regarding the types of packaging material and their qualification as "in" or "out" of scope,) remain unanswered.

A path to readiness

Although the "revised" deadline of 30 December 2025 (still to be approved by the EU Parliament and EU Council) may appear distant, the past year has shown that readiness can only be achieved by taking immediate action, beginning with a comprehensive impact assessment to ascertain the extent to which the EUDR affects the existing business model. While this 12-month "phasing in" period will allow companies to put in place the right supply chain strategy, backed up by effective systems and processes to protect value, companies falling within the scope of the EUDR should consider that it could take them substantial time to achieve traceability across relevant supply chains and to onboard suppliers into a respective system.

In this respect, affected companies should consider giving priority to end-to-end solutions fitting into the IT architecture of organizations within and outside the EU over "silo solutions." The recent releases also highlight the overlap between the EUDR and other due diligence legislation, particularly the forthcoming Corporate Sustainability Due Diligence Directive (CSDDD). They clarify that compliance initiatives can be streamlined, and efforts should not be unnecessarily duplicated.

Given the EU's dedication to combating climate change and biodiversity loss, with deforestation and forest degradation contributing significantly to these issues, it is reasonable to anticipate that maintaining supply chains free from deforestation and compliant with legal standards will remain a fundamental expectation.

Therefore, companies should consider:

  • Commencing essential preparatory actions for compliance without delay or continuing their efforts toward EUDR compliance and readiness
  • Fostering internal collaboration and coordination across supply chains to prevent redundant activities and maximize the efficiency of their compliance processes

For background on the EUDR, listen to the replay of EY webcast, "What EU Deforestation Regulation compliance readiness looks like." EUDR contacts are listed below for those who need additional information or support during their EUDR readiness journey.

* * * * * * * * * *
Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Law GmbH Rechtsanwaltsgesellschaft (Germany), Mannheim

Ernst & Young Ltd. (Switzerland)

Ernst & Young Advisory (France), Marseille

Ernst & Young LLP (United Kingdom), London

EY Belastingadviseurs BV (Netherlands), Amsterdam

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
 
 

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