TaxLegi 1.9.2023

Shipping Industry Must Navigate the EU Emissions Trading System by Simos Simou, Senior Manager, Indirect Tax - Controversy

From next year, the shipping industry will need to steer a course through the new EU Emissions Trading System requirements and their financial implications. Kasia Klaczynska Lewis of EY explores key considerations for tax and finance teams.

In less than five months, the shipping industry must contend with the EU Emissions Trading System. While it’s new for the shipping sector, the EU ETS has been in place since 2005 and covers thousands of installations across Europe, in addition to some aviation activities (also to be expanded).

Starting in 2024, the EU ETS will apply to carbon dioxide emissions from ships over 5,000 gross tonnage. Since 2019, these ships have been required to monitor, report and verify their emissions and now, as part of the EU ETS, a new financial dimension needs to be considered.
 

Summary

The EU ETS should also not be seen in isolation—changes are foreseen in the EU’s Energy Taxation Directive, which is another significant development on the horizon. Other EU initiatives as part of the European Green Deal such as the Renewable Energy Directive and FuelEU Maritime and Alternative Fuels Infrastructure Regulations should also be kept on the radar
 

Aviation and the EU ETS

The lessons learned from the inclusion of aviation in the EU ETS provided valuable insights that have guided the inclusion of maritime operations. Emissions trading was originally designed for stationary installations, and the inclusion of aviation meant different design considerations, including:

• Operations largely take place over no-man’s land of international airspace and waters.
• Business models include a variety of players involving vessel/aircraft owners, operators, managers, and charterers.
• Aviation sometimes provides the only mobility option between remote locations—which arguably warrants an exemption from the tax on emissions.
   

These same principles were taken into account for the design of the EU ETS maritime rules.

Affected businesses should be looking at effective preparation. As this is a new area of compliance for companies impacted, a first step is to determine which department within the organization will take on the responsibility.
 

Assigning Responsibility

Governments are using a variety of instruments, including taxation and incentives, to achieve sustainability objectives. The EU ETS can be seen as a charge for negative environmental externalities (emissions), like a tax of sorts.

Should the EU ETS therefore be handled by tax departments, who are increasingly navigating a wave of green taxes? Based on project experience so far, many shipping companies are turning to the tax department first, while others are opting for different approaches, with a head of legal or a chief financial officer being responsible.

Regardless of where the bulk of the ETS compliance within the organization sits, tax departments will still be affected as they will be called on to answer questions around specific tax implications of intra-group transfer of allowances, their sale, purchases, etc.

Questions around who’s responsible within the organization for complying with the EU ETS requirements reflect their multidimensional nature, which sits across various traditional professional disciplines. The complexity is illustrated through how payments for emissions are made, which is by acquisition of special allowances—European Union Allowances. These allowances can be traded in different ways—both over the counter and through dedicated exchanges such as ECX or EEX.
 

Navigating New Seas

The majority of installations currently covered by the EU ETS receive considerable amounts of allowances free of charge, but this is set to change from 2026 with the phase-out of free allowances. For the shipping sector, no free allocation is envisaged.

Instead, the EU ETS will be phased in, meaning initially only some emissions will be subject to compliance obligations. For 2024, this share will be 40%; for 2025, 70%; and from 2026 onward, shipping companies will pay for 100% of their reported emissions.

While the EU ETS will cover all emissions from intra-EU voyages and within EU ports, in the case of ships on voyages departing from or arriving to an EU port, 50% of the emissions are subject to the EU ETS.
 

For most shipping companies, the purchase and surrender of allowances might sound like an alien concept. The EU ETS is essentially a marketplace driven by supply and demand, resulting in some unpredictability regarding the underlying price of the allowances.

This feature of the EU ETS is often considered a drawback when compared to its alternative, a carbon tax. Also, unlike the relatively straightforward payment of tax, the EU ETS is a system that requires organizations to build familiarity not only with the compliance considerations but also with the market dynamics.
 

Complying with the EU ETS will also require organizations to address aspects of commercial and contractual relationships between different parties. EU policymakers recognize that ship emissions depend on factors often beyond the ship owner’s control, such as type of fuel, cargo carried, route, and the speed of the ship. However, unless the carbon costs are passed on to the entity operating the ship, incentives to implement operational energy efficiency measures are limited.
 

The EU law therefore provides that it is possible for a shipping company with responsibility for EU ETS compliance to claim reimbursement for the costs arising from the surrender of allowances from the entity directly responsible for the decisions impacting the greenhouse gas emissions of a given voyage.
 

A Starting Point

Addressing new EU ETS compliance obligations may fall to tax, legal, finance or other functions, or a combination. It’s important to develop a good understanding of the market forces—the EUA price triggers—in order to decide on purchase strategies (spot, futures, options) and whether to hedge the carbon price risk. These teams will also have to decide which price forecasts ring true in the short, mid and long term, considering that currently the EUAs don’t have an expiration date.

A recent stress test study by the European Central Bank concluded that by 2030, a carbon price of $300 (compared to the present circa $100) was needed to ensure global warming is limited to 1.5 degrees Celsius.

Simos Simou, Senior Manager, Indirect Tax - Controversy

The Cypriot Tax Department issued circular 10/2023 (“Circular”) on 13 September 2023, which clarifies the tax treatment of income received from properties rented out, via online platforms (e.g. Airbnb, Booking) or a website, as self-service resorts which are registered with the Deputy Ministry of Tourism.

More specifically, the Circular provides clarifications as to the tax treatment of such income taking into consideration the provisions of the Income Tax Law, Special Defence Contribution Law and General Healthcare System Law on the basis of a number of case examples included within the circular.

In view of this development, we encourage taxpayers who earn income from such sources  (i.e. rental income) to re-consider and confirm their current tax treatment and practices.
 

EY Cyprus is at your disposal for any information and/or clarifications required.
 

Final remarks

The information in this memorandum is only intended to provide general guidelines and is not intended to be complete or exhaustive.

This memorandum is distributed with the understanding that EY Cyprus Advisory Services Ltd is not responsible for the result of any actions taken on the basis of information included therein. EY Cyprus Advisory Services Ltd is not attempting through this memorandum to render any tax or legal advice. It is recommended to consult with professional advisors for advice concerning specific matters before making any decision. This memorandum reflects current information as of   13 September based on tax laws currently in force and tax circulars issued by the Cypriot tax authorities.

In 1989 the Central Agency for the Equal Distribution of Burdens Law (L.141/1989) was enacted. The primary purpose of the Central Agency is to undertake actions to achieve the equal distribution of the burdens resulting from the Turkish invasion and occupation.

As per the provisions of amending Law L.12/2021, applicable as of 22 February 2021 (and up until 18 November 2022 when amending Law L172/2022 was enacted), a levy is imposed in the case of transferring shares in a company which directly or indirectly owns immovable property in Cyprus, on the condition that the buyer acquires the control of the company.  Such a levy is imposed at the rate of 0,4% on the value of the property that is directly or indirectly transferred, as per the latest general valuation carried out by the Department of Land and Surveys.

As per the provisions of L.172/2022 applicable as of 18 November 2022, such a levy continues to be imposed, at the rate of 0,4% on the value of the property as per the latest general valuation made by the Department of Land and Surveys, for the relevant immovable property which is directly or indirectly owned by the transferring company, however, the following cases are exempted from the imposition of the levy:

• Transfer of shares in a company that is listed in any recognised stock exchange;
• Transfer of shares as part of an approved reorganisation; and
• Transfer of shares as part of restructuring of loans (debt-for-asset swap transaction).

It should be noted that as per Circular 2/2023 issued by the Tax Department on 31 March 2023, it has been inter alia clarified, that the following cases are exempted from the levy as of 22 February 2021:

• The transfer of shares in a company that is listed in any recognised stock exchange; and
• Transfer of shares as part of an approved reorganisation.

It is relevant to note that amending Law L.172/2022 has assigned collection rights and authority for collection of this levy to the Commissioner of Taxation, and consequently as of November 2022, such levy is being collected by the Tax Department.

The Tax Department issued an announcement on 21 November 2022 stating that for all transactions executed during the period 22 February 2021 to 18 November 2022 (for which the levy was not collected), a reasonable period of time shall be granted to the taxpayers for the settlement of the relevant obligation without the imposition of any interest and penalty charges.

On 1 September 2023, the Tax Department issued another announcement on the matter, informing taxpayers that, following the decision to grant a reasonable period of time for the settlement of the obligation without the imposition of any interest and penalty charges, it has now sent letters to affected taxpayers (who during the period 22 February 2021 to 18 November 2022 have proceeded with the transfer of shares of companies which directly or indirectly own an immovable property in Cyprus) requesting them to proceed as follows:

• Submit to the Tax Department all of the relevant documentation/information in relation to the transaction (already implemented) by 31 October 2023; and
  
• Proceed with the payment of the relevant levy by 31 December 2023. After 31 December 2023, the Tax Department will proceed with the imposition of (a) interest, (b) a penalty of 5% for payments to be made until 31 January 2024 and (c) an additional 5% penalty for payments to be made as of 1 February 2024.

Furthermore, the announcement states that taxpayers which may not receive the relevant letters from the Tax Department (but are required to proceed with the payment of the levy and Capital Gains Tax) are still obliged to submit to the Tax Department the relevant Tax Declaration Form for transferring of shares (i.e., Form T.D.402), and proceed with the payment of the levy and Capital Gains Tax.

It should be noted that no interest and penalties are imposed for any payments made up until 31 December 2023 in relation to this levy.

Regarding the Capital Gains Tax, interest and penalties are imposed one month after the date of sale. In cases where the required T.D.402 Form is not submitted to the Tax Department within one month from the date of sale, administrative fines are also imposed.
 

EY Cyprus remains at your disposal for any information or clarifications you may require.

The Ministry of Finance issued an announcement extending the deadline for the electronic submission of personal income tax returns and the settlement of the relevant income tax liability for the tax year 2022. The announcement was published in the website of the Ministry of Finance on 25th September 2023.
 

The announcement provides that the deadline for the electronic submission of the 2022 personal income tax return (Form T.D.1) for employees and pensioners, whose total gross annual income exceeds €19.500, is extended from 02 October 2023 to 31 October 2023. The extension also applies for the payment of the related income tax due, as per the submitted T.D.1, via self-assessment.
 

Additionally, the deadline for the electronic submission of the 2022 income tax return for self-employed persons (Form T.D.1 self-employed) with turnover below EUR 70,000 and who do not have the obligation to submit audited accounts, is extended from 02 October 2023 to 31 October 2023. The extension also applies for the payment of the relevant income tax due, as per the submitted return, via self-assessment.   
 

EY Cyprus is at your disposal for any information and/or clarifications required. 

With a new announcement issued on 20 September 2023 by the Tax Department, it is advised that on 13 September 2023 the Cyprus Council of Ministers approved the application of zero (0%) VAT rate on selected food and socially essential products for the period from 1 November 2023 up to 30 April 2024.

Be reminded that certain products were already subject to the zero (0%) VAT rate from a previous temporary order (i.e. started in May 2023 and ending 31 October 2023). The application of zero (0%) VAT rate on such products is merely extended up to 30 April 2024, nevertheless, new products such as coffee and sugar are also included in the new order.

Products subject to the zero (0%) VAT rate via the new order

• Bread: All types of bread fresh or frozen with or without leaven (e.g. white, black, wholegrain, multigrain, country/rustic, rye, cornbread, baguette, ciabatta, sliced bread, bread rolls, buns, pittas). Pastries, baked or dried products and any bread with additional ingredients such as raisins, nuts, aromatics are excluded from ‘bread definition’ for the purposes of zero (0%) VAT rate
• Milk: fresh milk (e.g. cow, goat, sheep), sweetened, condensed, long-life, flavored milk (e.g. chocolate, banana), plant milk (e.g. almond, soy, rice)
• Eggs
• Baby food: in powder, dry or even liquid form intended for consumption by children. Snacks such as crisps, nuts, candies, chocolates, ice creams are not subject to zero (0%) VAT rate
• Baby and Adult diapers
• Products for feminine hygiene protection (tampons, sanitary napkins and incontinence pads)
• Coffee: unroasted, roasted beans, ground, powdered, instant, flavored, caffeinated or decaffeinated in any package. Does not include ready-to-consume drinks or beverages which contain coffee and are consumed cold or hot
• Sugar: crystalline (white, brown, black), fine (powdered), coarse, cubed, in sachets

Affected Businesses need to carry out a stock counting of new products to be placed under the zero (0%) VAT rate.

Our EY VAT Team is at your disposal should you think your organisation requires assistance with the practical implications of the Order.