With the Implementation Rules for the Provisional Regulations on Resource Tax of the PRC amended and adopted jointly by the Ministry of Finance and State Administration of Taxation coming into effect on 1 November 2011, the levy of resource tax on a “specific basis” across-the-board in the past is gradually moving towards an “ad valorem
basis”.
However, judging from the implementation rules on the new resource tax, the “ad valorem basis” has still not been rolled out fully. Only petrol and natural gas are taxed on an ad valorem basis, coal is still taxed on a specific basis, while adjustment in the non-ferrous metals industry is limited, applying only to rare earth resources.
Analyses by a number of institutions show that where the direction of adjustment is concerned, implementation of the new resource tax has only increased the tax burden of oil and gas companies, while the impact on listed coal and non-ferrous metals companies is limited. But in the long run, the main direction of levying resource tax on an ad valorem basis will not change and it is expected that in the future the scope of the tax will be expanded and the tax amount will be adjusted upward.
Resource tax on two petrol giants already on the rise
By levying the new resource tax on an ad valorem basis, resource tax on crude oil and natural gas has been adjusted from Rmb30 per tonne and Rmb7-9 per cubic metre respectively to a flat rate of 5% of the sales of the product. Meanwhile, for the time being resource tax on heavy oil, high pour-point oil, high sulphur natural gas and tertiary oil is subject to a consolidated reduced rate under the resource tax reduction policy.
Actually, the two petrol giants Petrochina and Sinopec already “experienced” resource tax adjustment last year, especially Petrochina. Under the relevant regulations, on 1 June and 1 December 2010, resource tax reform for crude oil and natural gas was implemented in Xinjiang and 12 provinces in the western region respectively, whereby resource tax is levied at 5% on an ad valorem basis. As a result, resource tax paid by Petrochina rose from Rmb4.083 billion in the first half of last year to Rmb9.098 billion in the first half of this year. As for Sinopec, resource tax paid in the first half of this year rose Rmb700 million over the same period last year to Rmb1.144 billion.
This 5% ad valorem tax rate is applied across the country. Zhou Jiping, president of Petrochina, pointed out that based on the current international oil price trend, after the launch of the resource tax reform, Petrochina has to pay an estimated Rmb25 billion more in resource tax a year. The company’s 2010 financial statement shows that its resource tax payment amounted to Rmb9.796 billion.
Operating cost of chemical industry may rise
As resource tax on petrol and natural gas is transformed from a specific basis to an ad valorem basis, the tax costs of Petrochina and Sinopec are set to go up significantly. Although Petrochina expressed its hope that the government would raise the threshold for special oil gain levy and consolidate resource-type taxes and fees, it is only a “hope” and it seems that the only way out is to shift the increased tax burden downstream. Hence, it is likely that the chemical industry in the downstream of the oil and gas industry will have to face the problem of higher cost.
Where listed companies are concerned, natural gas downstream enterprises, such as chemical fertiliser production enterprises Sichuan Chemical and Sichuan Meifeng, have already felt the pressure of rising natural gas prices in the first half of this year. Major problems faced by Sichuan Chemical include tight supply of natural gas, low-load operation of main production installations, decline in product output, and increased product cost due to price adjustment of natural gas. As for crude oil downstream enterprises including chemical enterprises Weifang Yaxing Chemical and Chlor-Alkali Chemical, which are listed companies sensitive to the cost of raw materials such as petrol, their cost will also rise after the adjustment in resource tax.
However, if these chemical enterprises can shift the increased cost to other parties, the rise in product prices may turn adversity into blessings, especially in sectors where market demand is strong.
Coal and non-ferrous metals not affected yet
The latest adjustment in resource tax mainly targets oil and gas. For coal and non-ferrous metals, the adjustment is minor. Coal is still taxed on a specific basis, with a nationwide uniform tax on coke set at Rmb8 per tonne, while tax on other types of coal varies from province to province, ranging from Rmb2 to Rmb4 per tonne. According to the sensitivity analysis of coal resource tax made by China International Capital Corp, the impact of the Rmb8 per tonne tax on the net profit of Kailuan Energy Chemical Co Ltd, Pingdingshan Tianan Coal Mining Co Ltd and Xishan Coal & Electricity Power Co Ltd will not exceed 5%.
Before the implementation of the new resource tax, the market was worried that resource tax on coal would be levied on an ad valorem basis as a tax rate of 5% would mean a drop of 10% to 20% in the net profit of listed companies in the industry. In the amended opinions on resource tax issued in mid October, it was proposed that resource tax on coke should be levied at Rmb8-20 per tonne while tax on other types of coal should be capped at Rmb5 per tonne. This led to a sharp drop in the value of the coal sector. But the new resource tax introduced in November turns out to be lower than the standards in the amended opinions. CITIC Securities pointed out that this development means that the profit margin of the short-term policy cost of the coal sector has bottomed out and the value of this sector is likely to rebound.
