Tips for complying with new plastic taxes

Europe is the frontier of plastic taxes. The EU introduced its tax on nonrecyclable plastic packaging waste, known informally as the Plastic Packaging Tax, in 2021. The scheme calls for EU member states to pay a set amount for plastic content (0.8 Euros per kilogram) to the EU treasury each year.

Some nations have begun to administer taxes on businesses to pay this fee. Spain, for example, taxes nonreusable packaging containing plastic, irrespective of whether the packaging is empty or if is used to contain, protect, handle, distribute, or display goods. Denmark taxes plastic bags. Germany plans to roll out taxes on single-use plastics in early 2025, emphasizing levies on businesses that introduce new products, a report from EY notes. Separate from the EU, a UK plastics tax went into effect in 2022 for certain producers and importers.

Plastic taxes are not the only attempt to slow the growth of materials waste, but they are among the most concrete policy moves in play after UN talks failed in December 2024 to produce a treaty to curtail plastic pollution. And plastic taxes remain an important policy lever because of how they incentivize change, says Darren West, global head of circular economy solutions at SAP.

Plastic taxes and extended producer responsibility fees—charges companies pay in certain countries based on the types of materials they use their packaging—quickly add up. “They are reaching 0.5% to 2% of product revenue. This becomes a significant global compliance problem for our customers,” West says.

“These fees work like carrots and sticks in the system. When it’s going right, the financial benefit that comes out flows back into supporting the infrastructure of the system and ultimately supports all these businesses,” he says.

The reasoning behind plastic taxes

It’s clear why some governments are wielding heavier sticks. Plastic waste is clogging the world’s oceans. Production and disposal accounts for 3% of global greenhouse gas emissions. The flow of plastic grows, but only an estimated 9% of the world’s plastic waste gets recycled, Deutsche Welle reports. Microscopic plastic bits have entered our bodies, including through nasal passages, a September 2024 study from the Journal of the American Medical Association has found.

There is some momentum for change from industry. The Ellen MacArthur Foundation, working with the United Nations, has documented the pledges to reduce plastic waste by more than 1,000 businesses and other groups representing 20% of plastic packaging produced globally. Other efforts have also sprung up. For example, West notes the Plastic Footprint Network, a project SAP is working on with the nongovernmental organization Earth Action to develop the means for companies to report their plastic footprints.

Even with these and other efforts, the problem of plastics proliferation remains urgent.

Enter plastic taxes—a means for government policymakers to make it good for businesses to cut their expenses by reducing plastic usage. Along with new extended producer responsibility regulations that hold manufacturers responsible for the lifecycle of their products, plastics taxes pressure enterprises to act. It’s not a far-fetched idea. KPMG reports that the tax compliance challenge can incentivize businesses to undertake research and development and other forms of innovation to reduce such costs.

For businesses, complying with a materials-usage based tax calls for a new kind of focus on internal operations, experts say. Specifically, determining how much plastic they are creating and using and how much plastic they add to their products and packaging from their suppliers, and then using these measurements to calculate their tax bills in jurisdictions where they owe taxes.

IT systems can help. They provide data about materials used and their sources—that is, the plastic content in products and packages. The investment required to make these processes work well can benefit companies by lowering their tax burdens.

“Organizations with a well-structured and adaptable ERP [enterprise resource planning] system are best equipped to navigate regulatory changes, such as new material or plastics taxes. ERP systems have been improving financial, material, and information flows for over 50 years, and these tax adjustments are simply another layer of that core functionality," says West.

The potential to curb plastic use

It is possible to reduce the torrent of plastic waste and its leakage into the environment, according to researchers at the OECD. The advisory organization’s report notes “comprehensive global policies addressing the entire plastics lifecycle can reduce plastic leakage into the environment by 96% by 2040.”

“Without stronger policies, plastics production and use are projected to increase by 70%,” the organization said in an accompanying press release.

A three-step strategy for plastic tax compliance

If the theme is clear—use ERP and other systems to comply with new and developing plastic taxes in various jurisdictions—the details involved represent new wrinkles on existing business processes. Actions fall into three buckets, all of which require data and business process changes:

1. Companies need to know how much plastic their goods and packaging contain. They have to measure this content and calculate what it means for their tax liabilities in the jurisdictions in which they do business. They have to report the content and pay those taxes. The data element is straightforward in principle. After that—and here’s where the incentive could kick in—companies will look for ways to reduce their tax burden.
2. They will work to subtract plastic from their products and packages to save on tax liabilities.
3. They will monitor developing plastic regulations to ensure compliance.

West describes the three-step journey that leaders of plastic-using companies typically encounter:

Step 1: Collect data for plastic content reporting and tax compliance

While most businesses collect some data related to environmental performance and waste management, data gaps are likely. For example, material composition and classification (particularly for composite materials) will be required. Some of the data will be held by supply chain partners, which complicates the data collection picture. Understanding if plastic content (such as in packaging) changes in the trip from factory to port of entry is another challenge to manage.

All these issues require attention. The sooner leaders engage, the sooner supply chain managers can work to simplify reporting processes to comply with tax rules—and then work to lessen that bill.

Step 2: Shift design and production to reduce, recycle, or eliminate plastics

There’s another idea that follows reducing plastics content in products and packaging: eliminating it. And if that is not possible, reuse it. More than 1,000 organizations, including businesses that produce 20% of plastic packaging produced globally, have signed on to a plan organized by the UN and the Ellen MacArthur Foundation to work toward a circular economy model whereby they will reuse plastic instead of creating more waste. A 2024 report on this plan notes that progress is slow—and will likely progress more slowly if nations don’t agree on rules to limit plastic waste.

One company that has made progress is Adidas, as noted in our recent article, Turning Circular Economy Concepts Into Realities. The athletic wear company is using more recycled materials, including plastic waste recovered from beaches. It is designing products, like a recyclable running shoe with materials that can be included in a new pair with zero waste. It is also using more biodegradable materials.

In the long run, a responsible design and production strategy can help organizations increase their sustainability key performance indicator measurement and management capabilities, as well as gain better visibility into material flows across all business processes. Improved traceability helps increase the accuracy of plastic tax payments and mitigates compliance risks. This in turn can help companies improve the choice of materials to increase the reuse of existing materials.

Which, as West notes, is a goal of the tax.

“If we can provide that insight on materials as they are built into products, and as they become waste, we can combine that with understanding the CO₂ journey of that material and other sustainability factors,” says West.

“If we can provide, through our network platforms, the ability to be able to see sources of demand versus sources of supply, wherever they are in the world, and create digital connections, then we can change the price and perception of the value of waste materials and ultimately help to bring materials back into productive use,” he notes.

Step 3: Monitor plastic taxes and regulations to remain compliant

While leaders tackle the in-house challenge—quantifying their use of plastics and their tax burdens—it also makes sense to monitor regulatory activity around the globe, as well as other trends.

For example, Australia is considering new packaging standards that would phase out some chemicals and lift the use of recycled products, as Amelia Leavesley, a University of Melbourne researcher notes.

Roberta Mann, professor at the University of Oregon School of Law, said monitoring taxation trends can also help companies understand usage trends.

“It's important to begin with some level of taxation and then to adjust it as you see whether the use of the product declines, whether alternative products have been developed and put into the market,” Mann said in a 2023 podcast interview with the editor-in-chief of Tax Notes Today International.

Spain’s plastic tax enacted in 2023 motivated Zamora Company, a maker and distributor of wines and spirits including Licor 43, to act. The Madrid-based company with operations in more than 80 countries began implementing a cloud-based design and production system to support its calculations of taxes and fees. The system can also help it analyze existing packaging and consider design alternatives based on costs and environmental impact.

The company positions this move as part of a sustainability push. In 2023, the company said it had “promoted the circular economy last year by reducing the unit weight of containers, increasing their percentage of recyclable and biodegradable materials, simplifying the use of inks, and optimizing the grammage of paper and cardboard.”

Challenges ahead

The challenges involved in complying with plastic taxes all relate to their novelty. Even if ERP systems adjust to produce data for plastic reporting and tax calculation, it’s likely in these early days for the data to be incomplete. Meeting the different reporting requirements could require gap analysis and adaptations to the ERP systems to collect and store relevant data, all of which could take time.

The fact that different countries will apply their own specific tax policies adds another layer of complexity. Some enterprises may struggle to keep up with new rules that vary by location. (Though companies with global sales are familiar with managing diverse compliance regimes.) Planning for this complexity can help manage the costs associated with implementing compliance processes and plastic tax reporting in different countries.

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