Indirect Tax
European Union advances Carbon Border Adjustment Mechanism (CBAM) implementation
Excerpts from various sources
The European Union finalized the operational framework for the Carbon Border Adjustment Mechanism (CBAM) ahead of its full implementation from 1 January 2026. The mechanism will impose a carbon-linked levy on imports of carbon-intensive goods such as cement, steel, aluminum, fertilizers and electricity. Importers will be required to purchase CBAM certificates reflecting embedded emissions, aligning import taxation with EU domestic carbon pricing. Transitional reporting obligations concluded in December, marking a significant shift in customs-linked indirect taxation across the EU.
China announces reduction of import tariffs on selected goods from 2026
Excerpts from various sources
China announced plans to reduce import tariffs on approximately 935 product categories effective from 1 January 2026. The tariff reductions target advanced manufacturing inputs, medical products, and key consumer goods. The announcement reflects China’s strategy to stimulate domestic consumption and industrial upgrading while adjusting its indirect tax framework to support trade liberalization.
Belgium confirms penalty-free transition period for mandatory B2B e-invoicing
Excerpts from various sources
Belgian authorities re-affirmed that mandatory B2B einvoicing will commence from 1 January 2026, with a tolerance period until 31 March 2026 during which penalties will not be imposed for non-compliance, provided businesses demonstrate reasonable implementation efforts. The announcement provided clarity to tax-payers preparing system changes and internal controls for digital VAT compliance.
Canada publishes updated Customs Tariff 2026
Excerpts from various sources
Canada released its Customs Tariff 2026 in December 2025, out-lining duty rate changes effective from 1 January 2026. The update incorporates scheduled reductions under free trade agreements and technical amendments to product classifications, requiring importers to review compliance and pricing strategies ahead of the New Year 2026.
Transfer Pricing
Exemptions by the Australian Taxation Office (ATO) for public country-by-country reporting (CbCR) obligations Facts:
Facts
Australia’s public CbCR regime applies to entity/group that is an Australian resident or has an Australian permanent establishment with global consolidated revenue >= AUD 1 billion. The rules apply for years beginning on or after 1 July 2024 wherein affected groups are required to publicly disclose jurisdiction-by-jurisdiction tax and financial information which includes revenue, profits, income tax paid and accrued, employee numbers, and tangible assets.
- Process — To avail such exemption, entities must apply in writing, explaining the basis for an exemption and providing supporting evidence and documentation in the prescribed exemption application form. Based on the facts of the case, the Commissioner of Taxation would decide whether to grant a full or partial exemption from public CbCR for the relevant period.
- Period — The ATO staff would aim to provide response to the application exemption within 28 days of receiving all the requisite information (unless the application is complex). The ATO staff must engage with the applicant before making an unfavorable decision
- Judicial Review — The ATO will provide the basis for the exemption decision. This type of decision cannot be formally objected to under tax law. However, an entity can ask the Federal Court to review whether the ATO made the decision correctly. The Court cannot replace the ATO’s decision, but it can send the decision back to the ATO to be made again according to the law.
- National security concerns: where disclosure could affect Australia’s (or another jurisdiction’s) defense, security or law enforcement interests.
- Legal conflicts: if public reporting would breach Australian law or lawful obligations in foreign jurisdictions.
- Commercial sensitivity: where disclosure could cause severe competitive harm to the entity.
- Threshold mismatches: The extent to which public CbCR thresholds in foreign jurisdictions, fluctuations in currency exchange rates, or changes in ownership affect the entity’s obligation to comply with public CbCR requirements for the relevant period.
Proposed changes to transfer pricing guidelines for inbound distributors - Australia
Definition of inbound distributor: Inbound distributors are Australian entities within a multi-national group that purchase goods, products, or services from related foreign parties and distribute them into the Australian market. They typically perform routine distribution functions (such as sales, marketing, logistics, and customer support), do not own significant intellectual property, and bear limited commercial risk, with key strategic decisions and valuable intangibles retained off-shore.
The ATO has released its proposed changes in the Practical Compliance Guideline (PCG) dealing with transfer pricing risk and compliance for inbound distribution arrangements. The proposed changes are open for consultation and feedback from interested parties until 13 February 2026. The proposed changes include:
- Updated profit markers: The ATO proposes to reduce the Earnings Before Interest and Tax (EBIT) margins of the Life Science (category 1 and 2 only) and Information & Communication Technology (ICT) sectors with the other sectors remaining the same.
- Inclusion of distributors of digital products or services: Proposes to include businesses that only distribute digital products or services, not help create them.
- Focus on value creation: The proposed guidance includes a revision to the classification of activities that generates incremental value within the life sciences sector (including pharmaceuticals) - indicating that the ATO sees more value creation in that activity and believes it should be rewarded with a higher profit margin.
- Profit split approach: The Guidelines clarify that where the most appropriate transfer pricing method is multisided, such as a profit split, the guidance may not be relevant to the distribution arrangement.
- Introduction of “white zone”: Originally, the guidelines did not apply to entities whose arrangements were covered by Advance Pricing Agreement (APA) or had received high assurance within the last 3 years from the ATO during a review. The proposed Guidelines would cover such entities under white zone, provided the arrangement remains covered by an APA or has been reviewed in the last three years. The proposed guidance sets out the inclusion and eligibility criteria for the white zone in detail.
The proposed guidelines provide Australian inbound distributors clarity and assist them in assessing their position within the ATO’s risk framework. While many inbound distributors may be classified within the high or medium risk zones, accordingly, it is important for these distributors to revisit and confirm the arm’s length nature of their distribution arrangements and to ensure that transfer pricing documentation is prepared or appropriately enhanced to comply with ATO’s requirements.