The new policies and the historical pace of their application lead to ambitious targets for reducing the use of plastic. For years, international agencies have prioritized carbon footprint to address environmental effects. This broad approach to emissions narrows, with governments targeting the production, use/reuse and disposal of plastics, often using tax policy as ammunition.
Businesses need to follow the related tax proposals, but also need to understand the overriding objectives set out in order to have perspective on the likely tax disruptions.
Fiscal and financial functions need to consider “plastic taxes,” with many local governments and countries passing laws on items such as plastic bags, ranging from a tax on single-use bags to outright bans and simple. The corporate tax function has the ability to shield the business from risk, guide it to incentives, and align it with key consumer and investor trends.
Keep goals in sight
The world is facing a huge plastic pollution problem and governments are introducing new approaches to reduce it. A key measure is the “plastic tax”, which is applied by different jurisdictions at different rates, in different ways.
Despite global meetings and discussions, such as the COP26 conference, these taxes are still uncoordinated, and the tax functions of multinational corporations may face a challenge trying to keep pace with their potential risk exposure. Tax functions at all levels face a complex task in complying with a growing maze of laws. Plastic packaging taxes in the UK are the start. The effective dates for the new taxes in Italy and Spain are delayed but are expected to come into force in 2023. Poland and Sweden have announced that they will also implement new legislation. These seem to be just the beginning of such changes in Europe.
Each new rule has the ability to challenge traditional business operations and stems from goals set by international communities, countries and local jurisdictions. The European Commission’s strategy for plastics in a circular economy, for example, aims to make all plastic packaging reusable or recyclable by 2030. The EU will also require member states to produce drink bottles made of polyethylene terephthalate (PET) containing at least 25% recycled plastic. by 2025. This figure will increase to at least 30% by 2030.
The European “plastic tax” legislation at a glance:
Updated summary of EY webcast on plastics and packaging taxes
For example, one of the most progressive new taxes is the UK government’s plastic packaging tax, which promotes the use of recycled plastic rather than new plastic in packaging to stimulate increased levels of recycling and collection of plastic waste destined for landfill or incineration. . The UK’s proposed minimum recycling targets for six types of packaging, including plastic, equates to a recycling rate of almost 75% by 2030. According to UK government reports, the fees imposed by England for single-use plastics have reduced their use by more than 95% since 2015.
Each new environmental policy can mean both increased costs and operational headaches for businesses. All necessary organizational implications should be considered with engaged stakeholders ahead of 2022, when many taxes will come into force, but with government targets as a clue to future challenges.
In response, companies can innovate and attract consumers and investors with a stronger environmental, social and governance (ESG) policy. They can reduce the supply chain of plastic-heavy packaging in collaboration with industry partners.
These new goals don’t just mean increased costs and operational headaches for businesses. The prospect of a heavy plastic supply chain becoming more expensive is pushing companies to work with industry partners to explore new ways to make packaging so it includes less plastic.
There are, however, advantages for businesses. First, there is the opportunity to win over consumers and investors by displaying a bold and decisive approach to ESG policy. It is also possible to benefit from a wide range of economic incentives offered by governments to encourage companies to adopt new production habits.
In 2018, economic incentives, including tax rebates, were proposed by the United Nations Environment Program in a sustainability roadmap, addressing single-use plastics. At the same time, Extended Producer Responsibility (EPR) policies encourage better recycling design by making producers responsible for funding and operating post-consumer waste collection and recycling systems.
Such production innovation drives recycled content for consumer packaging, consumer plastics and industrial plastics. The UK first introduced an EPR system in 1997, which is credited with increasing recycling of packaging waste from 25% at the time to 63.9% in 2017. An update day of the EPR system for packaging is expected by the Department for Environment Food & Rural Affairs in 2023.
The path to follow
In the short term, the pandemic has caused companies to rethink their supply chains, operating models and exposure to risk, including investments in technology and innovation. As forward-looking companies adapt, their designs are more durable to future-proof their operations for long-term value.
Long-term operational and manufacturing innovation must also reap economic benefits, otherwise the expiration of incentive programs could lead to environmental setbacks. The measurement of this benefit should include intangible assets such as innovation and brand, both of which allow investors to look beyond a company’s book value as it covers initial investments.
Even before ESG trends and before the pandemic, an EY report on measuring long-term value found that 80% of a respondent company’s market value could be read off the balance sheet in the past, falling to just under half by 2019.
Environmental sustainability goals have become a staple of government, with taxes, economic incentives and new laws tackling everything from carbon emissions to landfills. Taxes on plastics and packaging have become the latest tool to spur behavior change while replenishing drained government coffers.
Tax teams need a complete, current, and in-depth picture of the “tax on plastic” landscape to quantify the impacts on their business, integrate this information into their systems to ensure accurate reporting models and costing, and adjust prices accordingly. Only with the right expertise and technology will they be able to navigate the complex maze of plastics and inform other functions of the potential for organizational change.
It’s a rapidly changing picture and tax teams are struggling to keep up. But those who can will have the opportunity to be a strategic partner for the company: to help avoid risk, seize new incentives and align with changing consumer and investor tastes.
The views expressed in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Kate Barton is EY’s Global Vice President for Tax.