China Kicks off National Resource Tax Reform

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Resource companies to face heavier tax burdens

Oct. 13 – After being delayed twice, China’s resource tax reform is finally going national. Starting on November 1, crude oil and natural gas will be taxed based on sales rather than the amount of production, and coking coal as well as rare earths will be subject to higher tax rates.

Based on the “Interim Provisions on Resource Tax of the People’s Republic of China (State Council Decree No.139)” released back in 1993, China’s State Council issued Decree No.605 on September 30 and announced the new amendments to the regulations. While the Chinese government says the reform is mainly for the purpose of resource conservation and environmental damage reduction, Western analysts believe the move will also cause a larger portion of resource companies’ profits to flow to local governments’ pocket.

Crude oil and natural gas
The amended provisions stipulated a new calculation method for the taxation of crude oil and natural gas. While currently taxed based on their production volume (RMB8-RMB30 for each ton of crude oil and RMB2-RMB15 for every cubic kilometer of natural gas), crude oil and natural gas will be taxed based on their sales value at a rate ranging between 5 percent and 10 percent starting next month.

The tax collection from foreign-invested onshore and offshore oil and gas fields will also follow the newly amended provisions, according to State Council Decrees No.606 and No.607 released on September 30. The two documents clarified that foreign energy companies – which engage in Sino-foreign cooperative onshore and offshore oil and gas exploration – will be liable for the payment of resource taxes, rather than royalties.

Experts believe the reform – which comes at a time when energy and commodity prices have been surging – will largely increase oil companies’ tax burdens. Kai Hu, Moody’s senior analyst, says the resource tax levied on a barrel of crude oil priced at US$80 will be 6 to 13 times more than the current tax rate. Kai estimates an extended resource tax could cost China’s top three oil companies a combined RMB44 billion a year.

China started its first resource tax reform on crude oil and natural gas in its northwestern province of Xinjiang on June 1 last year and later extended the reform to 11 other provinces in December.

Coal and rare earth ores
According to the amended provisions, taxes on coal and non-ferrous metal ore will remain volume-based with tax rates on coking coal and rare earth ores increasing. Coking coal will be taxed at a rate of RMB8 to RMB20 per ton, while tax rates on other types of coal will remain the same at RMB0.3 to RMB5 per ton. Tax rates on rare earth ores will stand between RMB0.4 and RMB60 per ton, compared to the lower rates on other types of non-ferrous metal ores, which range between RMB 0.4 and RMB30 per ton.

The government did not explain why tax rates on rare earths will vary by such a wide range, but analysts say heavy rare earths, which are scarcer, may be subject to higher tax rates.

The maintenance of the volume-based taxation on coal has relieved the market’s previous concern that coal may also be subject to a 3 percent to 5 percent sales tax, but the increased rate may still make many coal giants suffer.

Highlighted in China’s Twelfth Five-Year Plan, the country’s resource tax reform has been delayed twice. The first delay was in 2007 when there were concerns that higher tax burdens may add to inflationary pressures, and the second delay took place in 2008 when the government wanted to avoid hurting companies during the Global Financial Crisis.

The sales value-based resource taxes will be extended to other types of resource products in the future when “the time is ripe,” according to China’s Ministry of Finance.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises with their tax obligations. For advice, please email, visit, or download the firm’s brochure here.

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