New China tax aimed at revenue, resource efficiency

October 13, 2011
International resource efficiency comparison

China's State Council announced on Monday that it will tax all natural resource products starting November 1, extending the resource tax on domestic sales of crude oil and natural gas from some regions to the entire country.

Yesterday, the list of taxable resources widened from crude oil and natural gas to coal, rare earth, salt and metal. Sales of crude oil and natural gas nationwide will be taxed at a rate of between 5 and 10 percent of their sales value.

The regulations impose a sales tax ranging from 8 yuan (USD1.25) to 20 yuan per metric tonne on coking coal and from 0.40 to 60 yuan per metric tonne on rare earth, while other resources will be taxed at different levels based on their production volume.

Local revenue

"Local governments have taken very little in revenues from energy production, so it is necessary for the government to introduce such a measure to redistribute the social wealth and help poor areas," Guan Qingyou, a former professor with Tsinghua University who specializes in energy economy, told the Global Times.

From January to November last year, sales of oil and gas nationwide reached some 910 billion yuan, up 34 percent from the same period the year before, according to a report by CIConsulting, a Shenzhen-based consulting firm.

The current resource tax is levied based on production volume as opposed to sales value, preventing the government from benefiting from energy and commodity price increases, while energy giants and mining companies such as PetroChina and Sinopec have enjoyed large profit margins on the sale of resources under the current tax scheme, according to the Xinhua news agency.

An experimental resource tax on oil and natural gas was introduced at a rate of 5 percent in Northwest China's Xinjiang Uyghur Autonomous Region on June 1, 2010 before being extended to 11 other provinces in December last year.

Profit hit

Xinhua said last year that the oil tax in Xinjiang could bring in 4 to 5 billion yuan a year. Energy companies such as PetroChina and Sinopec are expected to experience a profit decline as a result of the new tax rule.

Anna Yu, an energy analyst with Industrial and Commercial Bank of China International Research Ltd, said the change will slash their earnings forecast for PetroChina and Sinopec by 2 percent in 2011 and 11 percent in 2012, Bloomberg reported.