China will extend a regional resource tax

Source: Katarina Krempova¸ PKF Malta

The Chinese cabinet has brought forward a long-awaited comprehensive regional tax reform on domestic sales of crude oil and natural gas applicable to the whole country¸ coming in to force from November 1¸ 2011.  Simultaneously¸ the number of taxable resources has been extended and now includes coal¸ rare earth¸ salt and metals.[1]

Extending resource tax nationwide can help to cut consumption¸ limit environmental damage of the world’s No.2 fuel user and boost local governments facing financial difficulties to develop inland provinces¸ claimed China’s Cabinet. “China’s demand on oil contributed more than half of global incremental demand¸” according to the International Energy Agency¸ reported Reuters.

These reforms regarding resource tax have been postponed twice¸ firstly in 2007 because of inflation worries and secondly in 2008 from the reason of harming companies during the global financial crisis.[2] June last year¸ China introduced its first resources tax on oil and natural gas at a rate of 5 % extracted in northwest autonomous region Uygur of Xinjiang and extended it later to 12 western provinces.

Within the new regulations¸ China’s resource tax will be calculated on the basis of sales value instead of volume of production and a range of taxes is allowed¸ rather than a specific rate. “Tax had previously been applied per tonne of crude oil and per 1¸000 cubic meters of natural gas sold¸ but that was felt to be too low given the large increase in oil and gas prices.”[3]

The new resource tax on crude oil and natural gas ranging from 5 to 10 percent of sales across the country would be more appropriate for local governments to be able to benefit more from the energy and commodities prices. The Ministry of Finance said that both domestic producers and joint ventures companies will be taxed.

Taxes on other minerals will be still levied on volume of production¸ rather than values.

The Chinese Cabinet considered composing a tax of 8 to 20 yuan on every metricton of coking coal and left unchanged taxes on other types of coal in range of 0.3 – 5 yuan a ton.  China will also levy a tax of 0.4 to 60 yuan a ton on rare earth ores and a tax of 0.4 to 30 yuan a ton on nonferrous metal.[4]

The new regulation may affect the earnings of local oil giants currently enjoying big profit margins such us PetroChina Co.¸ Sinopec¸ China National Pertroleum Corp¸ Baotou Steel Rare Earths or China’s biggest offshore energy explorer Cnoos Ltd. “China’s oil and gas sector is still monopolized by state-owned companies which have enjoyed good profitability … this new tax system will shift profits from companies to governments in poorer provinces¸” said Wang Aochao¸ head of research at UOB-Kay Hian in Shanghai.

China also made changes to the taxes on foreign-invested onshore and offshore oil and gas fields¸ which would have an influence on firms such as Shell¸ Chevron¸ Conocophillips¸ BP¸ Eni¸ etc¸ reported Reuters.

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