Regional Tax Reform Goes National

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After a year of experimental reformon the resource tax ratio in China’s western Xinjiang Uygur Autonomous Region, the State Council announced on September 21 to add the method of levying the resource tax ratio by value to the existing practice of levying the ratio by volume only. It will also change resource tax rates on crude oil and natural gas.
In June 2010 the reform of resource tax was first introduced in Xinjiang. According to the provisions jointly released by the Ministry of Finance (MOF) and State Administration of Taxation, the trial tax rate on crude oil and natural gas production by value was 5 percent. As of December 1 last year the reform was further expanded to 12 provinces and autonomous regions in west China.
China began to consider resource tax reform as early as 2007. However, the reform was put on the backburner for various reasons, with the most important being concerns about price hikes of resource products and further intensified inflation pressure after the tax is introduced. Particularly, the continuously growing Consumer Price Index (CPI) had blocked the progress of resource tax reform.
In August this year, when the CPI was estimated to peak and then drop, a precious window was open for reform.
Liu Shangxi, Deputy Director of the Research Institute for Fiscal Science of MOF, said it is well timed for China to expand the resource tax reform nationwide now. On one hand, China is focusing on environment protection and reducing emissions, and resource tax reform complies with this direction; and on the other, since the prices of resource products are appropriate compared with the country’s overall price level, now may be the opportune moment to promote resource tax reform.
The main reason for China to reform the resource tax scheme is that past taxation methods were unreasonable and unable to curb the waste of resources.
After the reform, tax collected per unit of resource will increase substantially. Take crude oil for example. If only taxed by volume, as is done now, an oil company needs to pay a resource tax of 8-30 yuan ($1.26-$4.71) for each ton of oil it has produced. But if taxed by value with a tax rate of 5 percent, an oil company must pay 256 yuan ($40.19) of resource tax for each ton of oil given a factory price of 5,118.7 yuan ($803.56) per ton in August this year. Unnecessary concerns
Fighting inflation is the focus of China’s economic work at present. But affected by the prices of resource products, particularly rising oil prices that have caused price hikes of related downstream products and services, the CPI has risen quickly this year. People are concerned that the resource tax will push up prices of resource products such as refined oil and natural gas and then further push up the CPI which just began to decline.
Zhou Dadi, Deputy Director of the National Energy Advisory Committee of Experts, said whether the reform will push up prices of resource products is decided by the tax rate. The present adjustment of the resource tax scheme is stable, and the government did not fix a high tax rate in one blow.
According to Zhou, current domestic oil prices are mainly adjusted in accordance with international oil prices, therefore adjustment of the resource tax scheme will not push up domestic oil prices.
Yang Zhiyong, researcher at the Institute of Finance and Trade Economics of the Chinese Academy of Social Sciences, said from the experiment in Xinjiang, the reform only increases the burden on oil and gas companies, and oil- and gas-related industries of which prices are not government regulated may be seriously affected. But, he stated, the adjustment of resource tax will not directly affect ordinary consumers.
Yang warned, however, related enterprises are unlikely to bear the tax burden without taking a hit to profits. When the burden is beyond their capacity, related government departments will inevitably raise the prices of their products.
An Tifu, professor at the School of Finance of Renmin University of China, said to make structural adjustments to the country’s tax scheme, resource tax reform is a must. Since the reform will increase the tax burden on enterprises, the government could

consider appropriately adjusting other tax items to balance the overall tax burden.
Conducive to saving energy
On September 7 the State Council issued the comprehensive working scheme on saving energy and reducing emissions during the 12th Five-Year Plan (2011-15) period, providing pricing, fiscal, taxation and financial policies to realize the goal of saving energy and reducing emissions. As for tax policies, the scheme suggests actively accelerating reform of the resource tax, adjusting the resource tax ratio on oil and gas producers by value instead of by volume and appropriately raising the tax burden on resource products.
“There are many problems in the existing price formation mechanism, and the cheap resource products do not reflect market demand and the scarcity of resources. This makes the resource tax reform particularly important,”Zhou said.
Most resource enterprises rely on the amount of mineral resources they own and the low labor cost to realize business growth.
According to the comprehensive working scheme on saving energy and reducing emissions during the 12th Five-Year Plan period, by 2015 the energy consumption per 10,000 yuan ($1,464) will be reduced to 0.869 ton of standard coal, a decline of 16 percent from the 1.034 tons of standard coal in 2010 and 32 percent from the 1.276 tons of standard coal in 2005. From 2011 to 2015, a total of 670 million tons of standard coal will be saved.
Zhou said to levy the resource tax by value means in the future resource taxes on some resource products will be linked to product prices, guiding producers of mineral products to rationally exploit and save resources with market regulation mechanisms.
Covering all resources
People are most concerned about whether the resource tax reform can cover all resource products. Today, the Chinese Government only carries out reform on crude oil and natural gas but not on coal, rare earth, water and iron ore. Bao Qing, researcher at Donghai Securities Co. Ltd., said the government should make a clear roadmap and timetable as soon as possible to strengthen public confidence on the resource tax reform.
According to Bao, in the long run, resource tax reform will help save energy, improve the utilization ratio of resources and alleviate “investment hunger” in China. However, in the mid and short run, resource tax reform will face three problems: steps of the reform, implementing the reform and the timing of reform.
Bao said the resource tax reform may go forward with both promoting and obstructing factors. Local governments will probably be an important force to push the reform, while resistance from enterprises may not be too strong. The Central Government will promote the reform step by step in accordance with the country’s actual conditions. “From the ideas we learn from the resource tax reform on oil and natural gas, we believe future reform on coal will likely start from west China, so will the reform on non-ferrous metals and other resources,” Bao said.
He said by estimating the coefficient of input and output of different industries, we can further analyze how the costs of the resource tax reform will be transmitted to the industrial chains and judge how the reform will affect the climate of different industries in the national economy. This is still under research and observation.
Bao and his team have been judging the timing for the government to promote the resource tax reform, since this helps to judge the tempo of investment.

According to their judgment, the government, when considering expanding the reform, is now concerned about inflation and the impact of profitability on downstream industries. Bao believed the timing is not right to fully implement the reform, and a proper choice is to expand the reform on oil and natural gas from the first 12 provinces and autonomous regions in west China to the whole country and then select an appropriate time to carry out the reform on other resource products.
Different voices
Some scholars have expressed different views on China’s reform of the resource tax. Wang Weihan, Secretary-General of the Research Center for Energy Economy affiliated to the University of International Business and Economics, said facing problems such as undervaluation of resource values and loss of state assets, what the Chinese Government needs may not be collecting the resource tax, but to demand full realization of property proceeds from the exploiters of resources because it is the owner of the resources.
In China, the resource tax is a kind of local tax. This actually changes a property owned by the state into the property of local governments.
“China can learn from the U.S. practice. Besides, the state of Alaska, all other states collect 50 percent of returns from oil and natural gas exploitation in the United States and the other 50 percent is collected by the federal government, so that property returns are justifiably distributed between the central and local governments,” said Wang.
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