As the EU Moves to a Circular Economy, Tax Teams Should Lean In

The World Economic Forum describes a circular economy as one where products, processes, business models, and consumption patterns minimize use of the world’s resources, cut waste, and reduce greenhouse gas emissions.

In 2015, the European Commission introduced its first Circular Economy Action Plan (CEAP) and few years later, the circular economy became “a pillar of the European Green Deal.” In March 2022, the commission began to formally propose legislative measures intended to bring the circular economy to life across the EU.

Industries and value chains attracting the greatest focus include:

Batteries and vehicles;
Electronics, and information and communications technology;
Plastics and packaging;
Construction and buildings;
Chemicals;
Textiles;
Food, water and nutrients.

To achieve this, businesses are being presented with “sticks” (legislation) and “carrots” (incentives). With one eye on the regulatory landscape, and the other on sustainable business transformation plans, tax directors will be better placed to aid decision-making and map out potential tax implications early on.

Legislative Measures

The European Commission’s overriding ambition is to transition from the traditional “take-make-waste” linear model to a regenerative growth model, where physical goods available in the EU are more environmentally friendly across their product lifecycles, primarily by extending the lifetime of products.

In 2022, we saw a number of developments. The EU Strategy for Sustainable and Circular Textiles and revisions to the EU Batteries Directive were announced, providing that the production of textiles and batteries shouldn’t have a detrimental effect when it comes to environmental, social and governance matters. This may mean sourcing changes, new supply and trade flows, and innovation, to name just a few potential tax-relevant impacts.

The sustainable products initiative (revising the Ecodesign Directive) introduces measures for greater durability, reusability, repairability, recyclability, and energy efficiency in products, and to mitigate risks of dangerous chemicals in products and processes. The Digital Product Passport will provide standardized information on products, such as how to repair, recycle and on their durability, and likely will play an influential role in environmentally conscious consumers’ purchasing decisions.

Revisions to the EU Packaging and Packaging Waste Directive were proposed last year to help meet CEAP’s goal that all packaging on the EU market must be reusable, recyclable in an economically viable way, or compostable in specific cases, by 2030. Across Europe, existing Extended Producer Responsibility schemes are being reviewed and strengthened. With EPR, packaging is a more visible cost demanding closer management attention and innovation.

To tackle plastic waste and to fund the EU Plastics Levy (whereby EU member states are required to pay 0.80 euros per kg of non-recycled plastics placed in respective EU markets), new plastic packaging taxes have emerged in Europe—for example, in the UK in 2022, Spain in 2023, and Italy in 2024. Requirements for EPR and packaging taxes vary across Europe, but there are several common elements. Regardless, above-market technology-enabled approaches could create significant value.

Incentives

While legislation can and will act as a catalyst for change, opportunity lies in financing and funding. The latest EY Green Tax Tracker reported over 1,950 sustainability incentives in the form of tax credits, grants, loans and others, across 46 jurisdictions worldwide.

Eligibility for research and development tax credits and capital allowances varies widely by country. The greater focus on sustainability and the need for innovation means it’s worth taking a systematic approach to scanning for opportunities and quick assessments. Collaboration with the wider business, such as the R&D department, to learn more about process and product innovation strategies and activities is key.

At the EU funding level, programs available for businesses include:

Horizon Europe: 95.51 billion euros ($105.2 billion) for Europe’s flagship research and innovation program—35% must be invested in climate-relevant projects.
Innovation Fund: 38 billion euros available until 2030 supporting innovation in energy-intensive industries, renewables, energy storage, and carbon capture, usage and storage projects.
LIFE: over 2.3 billion euros of grants available for 2021–2024 in clean energy transition, nature and biodiversity, circular economy and quality of life, climate change mitigation and adaptation.
InvestEU: loan guarantees plus advisory services for project developers/promoters and investors.

The Green Deal sets out plans for increased and faster funding at a national, EU, and private level. Cross-EU projects—Important Projects of Common European Interest incentive regimes—provide funding for beyond state-of-the-art innovation in key industrial areas, including hydrogen, health, information and communications technology, and batteries. Under the commission’s Green Deal Industrial Plan for a Net-Zero Age proposal shared in February 2023, approvals will be simplified and streamlined for new projects, and smaller projects will enjoy faster implementation.

Responsibility for funding applications may lie outside the tax department; however, understanding the interaction with tax and other non-tax incentives, and overall financial impact, is in scope.

How Can a Tax Director Help?

An era of change creates potential tax consequences in direct tax, indirect tax and transfer pricing. Below are a number of areas for tax departments to lean in to:

Monitoring the tax and regulatory environment when it comes to the circular economy and key impacted industries—mapping out potential operational, reporting, and cost impacts.
Focusing more on R&D and innovation—understanding current and planned R&D activities, systematically monitoring, assessing eligibility, and accessing financing and incentives.
Adjusting to a new marketplace and new business models—selling services instead of products, collaborating with third parties to enable circular economy models, or messaging and connecting with customers to introduce new products and business models in different ways, resulting in new intellectual property and wider tax impacts.
Directing procurement to build circular economy-focused supply chains—looking to re-balance supply chains.
Searching for targets—featuring promising circular economy-focused products, technologies, or talent, as well as spinning off businesses.
Looking for improvements—value creation and reporting across ESG indicators to support reducing the cost of capital.

Value creation underpinned by circularity principles likely will be enabled by digital transformation. This means creating more intellectual property across more decentralized, distributed, and yet highly integrated ecosystems, leading to further challenges within BEPS Pillar One.

An even greater change could result if the EU shifts from taxing labor to taxing pollution and certain resource use. This move is under consideration to aid the environment and encourage economic growth through new environmentally focused economic activities such as recycling.

Time for Tax to Lean In

Tax teams should lean in and work with key decision-makers across the business to ensure they are considering the complex tax aspects of their actions in the move to the circular economy. A sturdy set of first steps is staying apprised of governmental sustainability agendas and related policy changes, staying close to the wider business and sustainability strategy, and seeking out potential opportunities that might complement actions being taken.

When tax leans in, it can generate not only effective compliance, reduced tax risks, and costs, but also an opportunity to enable innovation and generate significant value for the business.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alenka Turnsek and Hein Brinkmann are part of the EY EMEIA sustainability tax and law services practice. Marcel Sikkema is the EY EMEIA quantitative services leader. The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.

Ingo Bunzeck, Ana Fallas Conejo, Magdalena Hilgner and Charlene Glenister of EY contributed to this article.