EU Adopted Rules for New Carbon Border Adjustment Mechanism

Regulations Commentary

• The European Parliament on 18 April 2023 adopted rules for the new carbon border adjustment mechanism (CBAM), which is scheduled to begin its transition phase on 1 October 2023 with the full roll-out of the policy targeted between 2026-2034.
• CBAM was first introduced as a part of the European Green Deal, which serves as a guide for both tax and non-tax policy initiatives in the EU to achieve its ambitious target of becoming climate neutral by 2050. CBAM is meant to mitigate carbon leakage. 
• ‘Carbon leakage’ refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. This could lead to an increase in their total emissions globally. The risk of carbon leakage may be higher in certain energy-intensive industries.
• The EU Emissions Trading System (ETS) is the core EU mechanism that ensures industrial decarbonization in line with the Green Deal. The EU ETS works on the principle of ‘cap-and-trade'. It sets an absolute limit or ‘cap' on the total amount of certain greenhouse gases that can be emitted each year by the entities covered by the system. This cap is reduced over time so that total emissions fall. Under the EU ETS, regulated entities buy or receive emissions allowances, which they can trade with one another as needed.
• Through the CBAM, imports into the EU will be subject to an equivalent carbon price to the one EU producers pay under the ETS. As a result, the regulation will ultimately target all ETS-covered goods and encompass all direct and indirect emissions to address the full lifecycle of goods’ value chains.

Cost Commentary

• During the transitional period, from 1 October 2023 to 31 December 2025, the EU Commission will assess the efficiency of the CBAM and consider further scope expansion. As of January 2025, importing companies will be requested to apply for the status of Authorized CBAM Declarant.
• Companies failing to submit their reporting activities or apply for the Authorized CBAM Declarant will be subject to Correction Procedures by competent authorities. In case of failure to take the necessary steps during the Correction Procedure, the customs authorities shall impose penalties on the importer.
• Starting from January 2026, the EU importers will need to buy CBAM certificates from competent authorities in EU member states to offset their emissions. The number of CBAM certificates available on account (via the CBAM registry) must, at the end of each quarter, correspond to at least 80% of the embedded emissions in all imported goods since the beginning of the calendar year.

Impact Analysis

• CBAM will cover direct emissions arising from the production processes of goods and indirect emissions (for specific goods) arising from the production of electricity which is consumed during the production processes of goods. Goods currently in scope include cement, iron & steel, hydrogen, aluminum, fertilizers, and electricity.
• CBAM will not apply to (i) imports from countries that are covered by the EU ETS (i.e., EEA countries) and countries with a domestic ETS linked with the EU ETS (i.e., Switzerland), (ii) low-value shipments, and goods to be moved or used in the context of military activities.
• During the transitional period, companies will have to report quarterly on CBAM imported goods, splitting out volumes per product, producer, and country from which they import. The first quarterly CBAM report for the October – December 2023 will be due in January 2024. There is no data verification nor CBAM certificate purchase requirement. Companies will have to find ways to obtain quality data for their imports and develop reporting systems, otherwise, average emissions of the most carbon-intensive plants in the respective region producing comparable products will be taken. If this data is also not available, the emission intensity of the worst-performing plants in the EU will serve as a proxy. As of January 2025, importing companies will be requested to apply for the status of Authorized CBAM Declarant.
• As of 1 January 2026, Authorised CBAM Declarants will be allowed to import CBAM goods into the European Union. Declarants will be required to submit a yearly CBAM declaration by 31 May every year; reporting will have to be verified by an accredited verifier; CBAM certificates will have to be submitted through the CBAM registry by 31 May to declare the verified emissions from the previous year.
• The supply chain of products manufactured from in-scope materials needs to be reviewed to shift to less carbon-intensive producers where possible. This can lead to a complete overhaul of material sourcing, with new competitors throughout the supply chain showing up, and manufacturers relocating their production.

Key Takeaways 

• During the transitional period from 01 October 2023 until 31 December 2025 the obligation of importers will be limited to the reporting of information concerning imported goods. No purchase of CBAM certificates will be required. Companies importing CBAM goods will be requested to apply for the Authorized CBAM Declarant status.
• After the transition period (as from 2026), Authorized CBAM declarants will have to buy CBAM certificates to offset their emissions. 
• Screening the carbon footprint of sourced materials and engaging with suppliers may become an important activity when sourcing outside of the EU.

Compliance Commentary

• Introduction of India ‘The Customs (Assistance in Value Declaration of Identified Imported Goods) Rules (CVAR) 2023
• Why
• The amendments to Finance Act 2022 placed an additional onus on the importer in cases where the imported goods are likely to be undervalued. 
• The amendments include the rules that outline the added responsibilities of the importer regarding a class of imported goods whose values were not declared correctly while defining the criteria for the selection of such goods and the checks to be exercised for such goods. 
• The CVAR 2023 has been introduced to propose a mechanism for the government to determine the class of goods that would warrant additional obligations and checks related to undervaluation. 

Who

• All importers with import activities into India will be affected by the policy.

What

• Highlights of CVAR 2023 have been outlined below:
• The validity of the notifications covering the class of goods issued will be a minimum of one year and a maximum of two years in the first instance. 
• The notifications will be subjected to a mid-term review or if needed earlier in specific cases to ascertain the need for denotification or an extension of the validity period. 
• CAVR 2023 will not apply to a listed category of goods such as: 
• imports not involving duty; 
• goods for which tariff values have been fixed or which attract duty on a specific rate basis; 
• imports where parties are being investigated by the Special Valuation Branch (SVB) or an SVB report that already exists; 
• imports made in terms of authorization or license issued under the duty exemption scheme of the Foreign Trade (Development and Regulation) Act 1992;
• project imports; and any other imports, as specified.

Key Takeaways

• Importers will need to evaluate these rules as they have a bearing upon compliance in terms of incremental obligation on clearance of goods when value is not correctly declared. 
• Moving forward, traders also need to put in place systems and processes to ensure compliance, including justification of value declared in cases where imports are subjected to additional scrutiny and checks by Indian Customs authorities because of the notification issued under the rules. 
• Therefore, it is highly recommended for importers who are importing goods that attract higher duty or through a related party transaction to ensure that their declared values are consistent with India’s customs valuation regulations.
• Thailand HS version under the AJCEP changed from HS 2002 to HS 2017 
• Why
  • Thai Customs issued Customs Notification (CN) 46/2566 (2023) which is an amendment to the previous notification CN 230/2564 (2021) regarding the criteria and procedures for duty exemption and reduction under the ASEAN-Japan Comprehensive Economic Partnership (“AJCEP”). The notification was issued on 24 February 2023 and became effective on 1 March 2023.
• Who
  • All importers with import activities into Thailand will be affected by the policy. 
  • What
  • Most criteria and procedures for using the AJCEP duty privilege remain unchanged, except: 
  • the six-digit HS code version and the product-specific rules (“PSR”) have been changed from HS 2002 to HS 2017 
  • Any Form AJ issued from 1 March 2023 onwards must be in accordance with HS 2017. 
  • If the goods have been exported before the new PSR came into effect, Any Form AJ issued after 1 March 2023 must refer to HS 2017.

Key Takeaways

• Companies who wish to enjoy a duty exemption or reduction (either for imports or exports) after 1 March 2023 must ensure that they issue Form AJ according to HS 2017. 
• If possible, the product descriptions on the invoice and Form AJ should align with HS 2017, otherwise, the customs authorities in the country of import could reject the Form AJ and the importers would have to pay import duty at standard rates.
• China adjusts tariffs on some imports and exports from January 1, 2023.

Why: 

• The Chinese government will combine the strategy of expanding domestic demand and the structural reform of the supply side and implement a more proactive and open strategy. The Chinese government has adjusted import and export tariffs on some commodities since January 1, 2023.
• To enhance the linkage effect of domestic and foreign resources in the Chinese market, China has implemented provisional import tax rates, the tax rates are lower than the most-favored-nation rates for 1020 items of goods from January 1, 2023.
• From July 1, 2023, China will implement the eighth step of tariff reduction for the most-favored-nation rates of 62 items of information technology products. The overall tariff level will be lowered from 7.4% to 7.3% after the adjustment.
• From January 2, 2023, China will implement the RCEP agreement tax rates for some goods originating from Indonesia, which are usually lower than the most-favored-nation rates.
• To promote the industrial transformation to high-quality commodity development, China increases the export tariffs on aluminum and aluminum alloys.

Who:  

• All enterprises with import and export activities in China will be affected by the policy.

What:

• The following categories of commodities will enjoy preferential tariff adjustment policies, as noted:
• Implementation of zero tariffs on some raw materials of anti-cancer drugs, anti-novel coronavirus drugs, and painkillers for cancer pain, and reductions of import tariffs on medical supplies such as dentures, vascular stents, contrast agents, etc.
• Reductions of import tariffs on foods, such as homogenized composite food for infants and young children, frozen cod, cashew nuts, etc., and small appliances such as coffee machines, juicers, hair dryers, etc.
• Implementation of zero tariffs on potash, unwrought cobalt, etc., and reductions of import tariffs on commodities such as wood and paper products, boric acid, etc.
• Reductions of import tariffs on lithium niobate, electronic ink screens, iridium oxide for fuel cells, roller bearings for wind turbines, and other products.

Key Takeaways

• The Chinese government implemented a proactive opening strategy and lowered overall tariffs to 7.3%.
• Apply for market-oriented exclusion against the counter-tariff of US 301 measure

Why: 

• To remission the burden on import and export enterprises (including foreign-funded enterprises) in China due to China’s counter-tariffs against the US 301 measures, China Customs accepts market-oriented exclusion declaration for import declaration.

Who:  

• All enterprises with import and export activities in China will be affected by the policy.
• What:
• The consignees who have obtained the market-oriented exclusion number should select the countermeasure exclusion code “0” in the “Document Code” column under the “Attached Documents and Numbers” item of the declaration form and enter the 18-digit exclusion number in the “Document Number” column when declaring the excluded goods. The relevant commodity will no longer be subject to the counter-tariffs against the US 301 measures.
• Imported goods originating from the United States in low-value goods express (Class C express) will be automatically excluded from the counter-tariffs against the US 301 measures.

Key Takeaways

• If the consignee does not fill in the exclusion number when declaring, the relevant declaration form, goods that involve the counter-tariffs against the US 301 measures will still be subject to the additional tariffs. 
• Enterprises importing goods originating from the United States should actively check whether they meet the declaration conditions for market-oriented exclusion and apply for exclusion from the US proactively.

Cost Commentary

• Introduction of India ‘The Customs (Assistance in Value Declaration of Identified Imported Goods) Rules (CVAR) 2023
• Importers would need to review their current company polices and ensure systems and processes are in place for the justification and that values are consistent with India’s customs valuation regulations declared during the importation into India.
• Imported goods with HS code that has a higher import duty or related party transaction should be reviewed to ensure that the declared values are justifiable in the event the Indian Customs authorities want to do additional scrutiny checks.
• Thailand HS version under the AJCEP changed from HS 2002 to HS 2017
• Product descriptions on the invoice and Form AJ should align with HS 2017, otherwise, the customs authorities in the country of import could reject Form AJ and the importers would have to pay import duty at standard rates which might result in higher costs.
• China adjusts tariffs on some imports and exports from January 1, 2023
• See the attached link for the specific products and the adjustments of the related taxes and fees: www.gov.cn/zhengce/zhengceku/2022-12/29/content_5734125.htm
• Overall, the customs tariff is 0.1% lower.
• Apply for market-oriented exclusion against the counter-tariff of US 301 measure
• Enterprises in China can apply to the customs for market-oriented exclusion on their own when importing goods originating from the US, reducing the counter-tariffs against the US 301 measures, and lowering enterprise costs.
• Savings generated depends on factors such as the specific types, quantities, prices of goods, and the tariff rates imposed.
• In Q1 and Q2, 13 factories in China generated about 1.29 million US dollars in tariff savings.

Impact Analysis

• Introduction of India ‘The Customs (Assistance in Value Declaration of Identified Imported Goods) Rules (CVAR) 2023
• Importers should ensure that their current company’s transactional value policies and processes are in place.
• Review all the imported goods with HS codes that have higher import duties or related party transactions
• If there are any imported goods that fall into this category, then a financial review is advised to ensure that the declared values are justifiable.
• Thailand HS version under the AJCEP changed from HS 2002 to HS 2017
• Product descriptions on the invoice and Form AJ should align with HS 2017, otherwise, the customs authorities in the country of import could reject the Form AJ and the importers would have to pay import duty at standard rates which might result in higher cost.
• China adjusts tariffs on some imports and exports from January 1, 2023
• Import and export tariffs on aluminum and aluminum alloys are increased.
• The RCEP agreement tax rates are implemented for some goods originating from Indonesia.
• The overall tariff level is lowered from 7.4% to 7.3%.
• Apply for market-oriented exclusion against the counter-tariff of US 301 measure
• Enterprises should apply to customs for market-oriented exclusions when importing goods originating from the United States.
• Enterprises should also try to apply for market-oriented exclusions regardless of whether the product is on the exclusion list or not.
• According to the statistics from Q1 and Q2, 13 factories in China have reduced tariff costs by USD 1.29 million.