China: China Updates Energy Tax Regulations

China has recently revised its tax policies to encourage energy conservation and the efficient exploration of natural resources. This China Practice Update briefly describes and analyzes the three major tax policy changes that will affect companies and investors engaged in the exploration, production and sale of oil and gas in China.

China Implements New Resource Tax Regulations

In September 2011, China's State Council announced new amendments to the Resource Tax Interim Regulations that would take effect from November 1, 2011. Following shortly this announcement, the Ministry of Finance (MOF) issued the revised Implementing Rules for the Resource Tax Interim Regulations on October 28, 2011 (together with the State Council's decision, the "New Resource Tax Regulations"). The State Council also promulgated at the end of September 2011 the new Regulations on Sino-Foreign Cooperative Exploitation of Offshore Petroleum Resources and the new Regulations on Sino-Foreign Cooperative Exploitation of Onshore Petroleum Resources (together, the "New Sino-Foreign Cooperative Exploration Regulations"), which change the tax payment obligations on foreign-invested onshore and offshore oil and gas fields by replacing the former royalty-based system with a resource tax system. The New Sino-Foreign Cooperative Exploration Regulations supersede and replace the prior versions of these regulations with effect from November 1, 2011.

Before the New Resource Tax Regulations took effect, resource taxes were levied on all domestically-produced crude oil and natural gas based on volumes produced with levies ranging between RMB 8-30/ton of crude oil and RMB 2-15/m3 of natural gas. Under the New Resource Tax Regulations, the Chinese government now levies a resource tax on all domestically-produced crude oil and natural gas based on the actual sales value of such crude oil and/or natural gas. The regulations provide that the resource tax is to be levied at rates ranging from 5 to 10 percent, to be set by the MOF from time to time. (Note that the new resource tax regime applies to oil and gas only; resource taxes for other natural resources such as coal and ores will continue to be levied based on the volume of such minerals produced.) The MOF has currently set the resource tax rate for crude oil and natural gas at 5 percent.

In accordance with the New Sino-Foreign Cooperative Exploration Regulations, the new resource tax regime applies to oil and gas produced from foreign-invested onshore and offshore oil and gas fields under petroleum contracts entered into or renewed after November 1, 2011; volume-based royalties are no longer levied on such oil and gas fields. See the table below.

 

New Resource Tax Regime

Royalty Tax Regime

Petroleum Contracts entered into or renewed before November 1, 2011

N/A

Applies during the contract term

Petroleum Contracts entered into or renewed after November 1, 2011

Applies

N/A, replaced by the new resource tax regime

We note that the New Sino-Foreign Cooperative Exploration Regulations do not specify whether the November 1, 2011 cut-off date refers to the signing date or the effective date (i.e., the approval date of the contracts by the Ministry of Commerce) of the relevant Petroleum Contract. No names inquiries with the relevant authorities on this question yielded inconsistent responses.

According to the Chinese government, this reform is an extension of a pilot scheme which has been in operation in a few provinces in the Northwest (e.g., Xinjiang) for a year, which is designed to raise regional government revenue while promoting resource conservation and reduction of environmental damage.

China Reduces Crude Oil Windfall Profit Tax Obligations
Since 2006, China has levied a windfall profit tax, known as the "special revenue charge" on oil producers — both foreign and domestic — selling crude oil produced in China. The windfall profit tax is calculated on a monthly basis and paid on a quarterly basis. Oil producers have to pay the windfall profit taxes on oil production based on a five-tiered rate system according to the sales price.

On December 29, 2011, the MOF issued a notice reducing the windfall profit tax obligations on crude oil production (the "Windfall Tax Notice"), effective retrospectively from November 1, 2011. The Windfall Tax Notice was released shortly after the State Council announced the national resource tax reform, as discussed in the section above, which increased the tax burdens of the oil and natural gas producers. At least to some extent, the purpose of the Windfall Tax Notice is designed to alleviate some of the increased tax burdens imposed by the new resource tax regime as energy and commodity prices continue to surge.

Without changing the other relevant rules, the Windfall Tax Notice raises the minimum threshold for the windfall profit tax payment obligation from US$40/barrel to US$55/barrel and all the other thresholds under the five-tiered progressive system as follows:

2006 Crude Oil Price Range (USD/Barrel)

New Crude Oil Price Range (USD/Barrel)

Rate

Quick Calculation Deduction (USD/Barrel)

Below 40

Below 55

N/A

N/A

40-45 (including 40 and 45)

55-60 (including 60)

20%

0

45-50 (including 50)

60-65 (including 65)

25%

0.25

50-55 (including 55)

65-70 (including 70)

30%

0.75

55-60 (including 60)

70-75 (including 75)

35%

1.5

Above 60

Above 75

40%

2.5

The amount of the windfall tax that is payable per barrel is calculated as follows: (i) (the monthly weighted average price per barrel of crude oil sold minus US$55), multiplied by (ii) the applicable Rate, minus (iii) the "Quick Calculation Deduction."

China Grants Tax Rebates for Imported Gas

In a move that emphasizes China's increased emphasis on the use of natural gas in the country's energy mix, on August 1, 2011, the MOF, the General Administration of Customs, and the State Administration of Taxation jointly issued a notice regarding granting rebates for import value-added taxes (Import VAT) on rapidly growing imports of natural gas (the "Import VAT Notice"). This policy shift has been long-awaited by Chinese state energy companies who hope to reduce their losses on the import of natural gas as gas imports continue to increase.

The Import VAT rebates apply to state-mandated natural gas pipeline projects and LNG import terminals currently in use and those to be later approved by the state, including the central-Asia pipeline venture operated by PetroChina (the "Central-Asia Project"). These rebates apply when import costs are above the regulated domestic wholesale prices, and apply to all imports during the period from 2011 to 2020, as well as prior imports under the Central-Asia Project.

According to the news commentators, this tax rebate policy will buy some time for Beijing's policy-makers to push for domestic energy pricing reform, including the liberalization of natural gas pricing mechanisms. Following the introduction of this tax rebate policy, on December 26, 2011, China authorized a pilot gas-pricing program for wholesale and retail natural gas prices in Guangdong and Guangxi provinces to liberalize the natural gas prices and help local producers and importers of gas. Please see the client e-communication entitled " China Initiates Pilot Reforms for Natural Gas Pricing Systems in Guangdong and Guangxi."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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