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Special> Global Financial Crisis> Beijing Review Exclusive
UPDATED: April 13, 2009 NO. 15 APR. 16, 2009
Oil, Gas and Ore
The government is weighing the timing of readjusting its tax policy on fossil fuels

What if the resource tax on minerals was lifted? "It might dampen the performance of resource-related enterprises, giving rise to more operational problems," said Wu Qiang, a professor at Beijing Technology and Business University.


WESTERN OIL: The Qinghai Golmud Oil Refinery could feel the pressure of higher crude oil prices from the tax reform (HOU DEQIANG) 

Concerns such as Wu's are looming over the government's determination to reform the resource tax system. After two years of discussion, resource tax reform, which has already taken shape, has failed to be launched on a large scale nationwide. Instead, it has been implemented only as a pilot program.

According to industry insiders, the Ministry of Finance and the State Administration of Taxation decided to first reform the resource tax of the mining industry in the Xinjiang Uygur Autonomous Region and Qinghai Province.

Wu said Xinjiang and Qinghai are rich in mineral resources but relatively underdeveloped. He said even if the resource tax added pressure on some enterprises, the burden would not be unbearable and would not affect the overall development of the Chinese economy.

Reform plans

On February 6, the State Administration of Taxation pointed out in its 2009 work guidelines that details on resource tax reform would be launched at a proper time. A month later, Premier Wen Jiabao stated in his government work report that one of the government's objectives this year was to reform the pricing mechanism of resource-related products and improve the resource tax system.

The main goal of reforming the resource tax is to lift the threshold of fossil fuel energy and mine resource taxes and tax-related enterprises on the basis of resource price instead of quantity. Although no specific rates have been set, industry insiders estimate the government will impose a 10-percent tax on resource sales.

In 1984, China started to collect resource taxes on four commodities-crude oil, natural gas, coal and iron ore. When it launched a large-scale tax reform program 10 years later, resource tax was charged on all mineral resources. In 2004, the government moderately raised the tax on coal in 18 provinces.

With increasing demand for fossil fuels and other natural resources to propel the country's rapid economic development, economists and experts have expressed discontent and criticism over the low resource tax rate, arguing the quantity-oriented tax-collecting mechanism has failed to live up to the goal of effective utilization and conservation of resources and has not meshed with the government's goal of establishing a resource-efficient society. They point out that the amount of resource tax only accounts for a very small portion of overall taxation categories.

In accordance with economists' appeals, the government decided to reform the resource tax in 2006, which meant it would collect the tax on the basis of price instead of quantity so that the tax revenue could be pegged to the resource product's price. The new taxation system could not only readjust resource utilization, but also help boost government tax revenue. The goal was to use natural resources most efficiently and ensure the fair distribution of proceeds from selling resources.

Jia Kang, Director of the Institute of Fiscal Science under the Ministry of Finance, said readjusting the resource tax could spur resource conservation and reduce energy consumption.

Timing is key

At the beginning of 2007, the government intended to launch a resource tax reform. But inflation started to pick up momentum in 2007 and the first half of 2008. Fearing that surging consumer prices might be pushed higher if it imposed the resource tax, the government decided to put the reform plan on hold.

In the fourth quarter of 2008, the world economy quickly entered a recession. The U.S. mortgage crisis triggered the worst global financial crisis in half a century, leading to a sharp decline in various economic indicators and figures in China. Consumer price index also started to come down. The prices of resource products, which had soared in times of inflation, began to fall with the economic tide. Since then, concerns over the negative effects of resource tax hikes seemed to have disappeared, and the State Administration of Taxation announced resource tax reform on February 6.

But new challenges have emerged. The economic slowdown has taken its toll on the profits of resource-related enterprises and their downstream companies, some of which have suffered severe losses, posing a serious predicament for resource tax reform.

"Prudence with resource tax reform is understandable," said He Liping, an economics professor at Beijing Normal University.

As mineral resources are on the upstream of the industrial chain, the fluctuations of mineral resource prices might trigger sharp ups and downs in downstream enterprises. Against the backdrop of the global economic downturn, the government must weigh the gains and losses of reforming resource taxes and will be more cautious in adopting new tax reform measures, He said.

Because of the chain effect, when resource taxes are increased, the prices of resource products such as coal, crude oil and iron ore must be raised accordingly, He said. Related industries such as power, petrochemical, iron and steel, as well as the automobile, shipping, light and nonferrous metals industries will suffer from the rising costs brought about by the increase in resource prices. More noticeably, those industries are all included in the revitalization packages promulgated by the government.

Currently, the domestic crude oil price is about 1,500 yuan ($220) per ton, of which the resource tax is about 22 yuan ($3.22) and 14 yuan ($2.20) for crude oil of varying quality. But if a 10-percent tax is levied on resources, crude oil producers will have to pay 150 yuan ($22) in resource tax, and they will soon pass the price difference to downstream buyers.

"At present when the government is slashing taxes to reduce company burdens, the timing to carry out the resource tax reform seems a little inappropriate," He said.

As soon as possible

In contrast to the government's prudence, Liu Kegu, advisor to the National Development Bank, said it was the right time to reform the resource tax system. During a group interview in March he emphasized that the current global financial crisis offered an opportunity for reforming the country's resource tax. Liu believed the first half of this year was the best time to reform the resource tax. With eased inflationary pressure, the resource tax hike would not deal a blow to consumer prices, he said.

Currently, the country's economic growth is running in low gear with decelerated demand, which has led to big drops in oil and coal prices. Liu said the Central Government should seize the golden chance to reform the resource tax system, initiate an environmental protection tax, and modify its economic development model by readjusting the tax system and economic structures.

While some argue the resource tax hike might be contradictory to the structural taxation reform proposed by the Central Government, Liu sees it differently. He said the current structural tax reduction might lead to a 500-billion-yuan ($73 billion) drop in tax revenue for the government, but the tax increment stemming from resource tax hike is estimated to be around 10 billion-30 billion yuan ($1.46 billion-$4.4 billion)-a small portion of the proposed tax reduction. This would still allow for an aggressive fiscal policy, he said.

Jia Kang said in the midst of the current global financial crisis where China has accelerated its pace in economic restructuring, the falling resource prices provide a golden chance for increasing the resource tax. He said the country's consumer prices have fallen considerably due in part to the global financial crisis. The falling consumer price and producer price indexes have eased concerns over inflationary pressure.

The government chose the coal mining industry to be the first to undergo reform. Jia said while the resource tax hike could deal a blow to some coal producers, it was also a good thing, because it could eliminate incompetent producers from the market and thereby help upgrade the industrial structure. In addition, the resource tax increase is relatively mild compared with the nationwide tax cut efforts, he added.

Current Resource Tax Items and Rates

Item   Tax rates 
Crude oil    8-30 yuan per ton
Natural gas    2-15 yuan per thousand cubic meters
 Coal   0.3-5 yuan per ton
 Other non-metal ore

0.5-20 yuan per ton or cubic meter

Ferrous metal ore   2-30 yuan per ton 
Nonferrous metal ore   0.4-30 yuan per ton 
Solid salt   10-60 yuan per ton 
Liquid salt   2-10 yuan per ton 
Source:   State Administration of Taxation 

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