Energy-rich Provinces Advocate National Roll-out of Resource Tax

Published: 2010-06-10

News, Page 3, issue 472, June 7, 2010
Translated by Tony Liu
Original article:

The Xinjiang Uyghur Autonomous Region's move to pilot a new-look resource tax has attracted the attention of other resource-rich provinces.

China's Ministry of Finance announced on June 2 that, as of June 1, Xinjiang had begun levying a revised 5 percent tax on resources, which was being calculated according to the sale price of the resource rather than the volume.

Officials from several provinces including Inner Mongolia, Heilongjiang and Qinghai interviewed by the EO, argued that as there are no technical problems with the new resource tax, it's unnecessary to first pilot the tax in selected areas and that it should be rolled out across the whole country as soon as possible.

However, compared with the advocacy of provincial governments, large centrally-owned enterprises that dominate the energy and resource sectors still favor the previous system which levies the tax based on the volume of resources exploited.

Energy-Rich Province's Do The Math

Luan Haichuan, head of Xinjiang Uyghur Autonomous Region's Department of Finance, said the piloting of the new resource tax will contribute an additional 4 or perhaps even 5 billion yuan of revenue to Xinjiang every year.

That the tax will lead to such a large increase in government revenue has naturally attracted the attention of other energy-rich provinces and they've since begun to calculate the potential revenue that they could earn if the new tax was introduced in their province.

According to the coal-rich Inner Mongolia's conservative estimates, if it adopted the same resource tax as has just been introduced in Xinjiang, it could collect an additional 8 billion yuan in revenue.

Cheng Lihua, head of Qinghai's Department of Finance, said if his province was to pilot the new-look resource tax, it could collect an additional 600 to 700 million yuan in revenue.

Heilongjiang province, which has long been a source of oil and natural gas for the country, held that if dated from 1984, when China began to impose a resources tax, had the tax been calculated according to sale price rather than volume, the province would have collected at least an additional 100 billion yuan in tax revenue.

Qin Fengxiang, director of Heilongjiang Provincial Institute of Financial Science, suggested that
as the Ministry of Finance is preparing to unveil a scheme for the implementation of the new-look resources tax across the country, it should also consider compensating Heilongjiang for the forgone revenue that was not collected over the past twenty-plus years when the tax was simply calculated according to a percentage of volume exploited rather than sale price.

At present, local governments are concerned about when the new tax will be rolled out across the country and how it will be levied on coal.

According to a draft version of the resources tax reform plan released last year, the Ministry of Finance announced that the revised tax would be simultaneously imposed on both the volume of resources being exploited along with the price at which resources were sold.

The EO learned that as far as raw coal was concerned, the tax would likely continue to be levied based on volume, while as for refined coal, the tax would be levied in accordance with its sale price.

"If that's the case, the reform makes little sense," said an official from Inner Mongolia Department of Finance.

He said at present, most of the coal that is mined in China is the crude coal use to fuel power stations, refined coal output is extremely limited.

At present, the resources tax on coal mined in Inner Mongolia is levied at a rate of 3.2 yuan per ton. If calculated according to Inner Mongolia's total coal output for 2009 - 637 million tons - the province collected over 2 billion yuan in resource tax revenue in 2009.

The EO learned that the Inner Mongolia Autonomous Regional Government has already called on the Ministry of Finance three times, asking for permission to collect the tax according to the price at which the coal is sold for.

In its proposal, Inner Mongolia suggested that the tax rate should be set at between 5 and 8 percent.

If calculated according to a tax rate of 5 percent and in accordance with the current price of coal - 320 yuan per ton - the autonomous region's tax on coal would climb to 16 yuan per ton from the present 3.2 yuan per ton, and thus the revenues sourced from resource tax would jump to 10.2 billion yuan a year.

Resistance from Large State-owned Enterprises

Despite proposals to implement a price-based resources tax being submitted to the State Council three times over the past two years, each time it has failed to find support with the central government.

In the eyes of many local government officials, the main impediment to a nation-wide introduction of the revised resource tax is the heft of the large centrally-owned enterprises that dominate the energy and resource sectors.

These powerful companies are opposed to the new tax on the basis that it will squeeze their profits and they warn of the increase in the price of energy and resources that is likely to follow the introduction of such a revised tax.

Yang Zhiyong, a researcher at the Chinese Academy of Social Science's Institute of Finance and Trade Economics, said generally speaking, such an adjustment to the way the resource tax is calculated will unavoidably increase the production costs for the related-industries and enterprises.

However, it does help achieve the original motivations of resource tax reform - promote the conservation of resources, Yang added.

In 2009, PetroChina paid 3.2 billion yuan in resource taxes. However, if the recent revision to how the resource tax is levied in Xinjiang is introduced nationwide, PetroChina will be facing a resource tax bill of approximately 19.8 billion yuan a year.

Recently, during internal meetings, PetroChina and Sinopec discussed asking the central government to abolish the windfall profits tax, which was imposed on domestic oil giants in 2006.

In addition, many other resource enterprises also hope that after the resource tax begins to be levied according to price, the government will abolish some of the other special taxes that miners have to pay.

However, the EO has learned that the above-mentioned two points (scrapping of the windfall profits tax and of other special taxes on miners) are not mentioned in the reformed resource tax package that has just been introduced in Xinjiang.

An engineer at Baotou, a company under the Shenhua Group Corporation - China's biggest coal producer, said if the resource tax for coal per ton is raised by between 3 and 5 yuan, his company will be able to absorb the costs, but if the tax goes above 5 yuan per ton, his company will have to raise the price of the coal and pass it on to downstream enterprises.

The engineer said his company's exploitation cost stand at between 86 yuan per ton and 90 yuan per ton. He added the coal currently sold for 320 yuan per ton in the local market and between 500 and 600 yuan in the coastal provinces. The company's net profit for coal was usually around 220 yuan per ton.

A source from an Inner Mongolia power generation plant told the EO "We're currently operating on very thin margins and just breaking even, if the price of coal continues to rise, we will start making losses. Even a tiny rise in the price of coal will have a significant impact on us."

"In terms of resource tax reform, when it comes to coal, the central government will balance the demands of local governments with that of the centrally-owned enterprises," said an official from Shaanxi's Department of Finance.

An official from Ningxia's Department of Finance told the EO "The most complicated part of resource tax reform is the coal sector. First, coal is inextricably linked to power generation, steel and the aluminum industries. Secondly, coal fields are widely distributed throughout China and thus involve many different interest groups."

According to a number of unnamed scholars, the central government is likely to first allow the tax to be implemented in Xinjiang for at least six months, before a possible national roll-out in 2011.

This article was edited by Paul Pennay