China: China Promulgated the Environmental Protection Tax Law

Last Updated: 26 January 2017
Article by Hong (Julie) Cheng and Yong (Z.) Zhou

After collection of pollutant discharge fee for about 30 years, China promulgated the PRC Environmental Protection Tax Law ("EPT Law") on December 25, 2016 under the principle of "replacing fee with tax". Pursuant to EPT Law, environmental protection tax shall be levied from January 1, 2018, and the pollutant discharge fee shall no longer be applicable.

EPT Law is the fifth tax law after the promulgation of the PRC Tax Collection and Administration Law, the PRC Enterprise Income Tax Law, the PRC Individual Income Tax Law and the PRC Motor Vehicle and Vessel Taxes Law.1 Environmental protection tax is the 19th category of taxation in China. 

We set forth below a brief introduction to EPT Law and our comments from the perspectives of comparing the difference between pollutant discharge fee regulation and EPT Law and the difference between collection of the environmental protection tax and other major taxes.

I. Taxpayer and Taxable Pollutant 

Compared with the Administrative Regulation on Collection of Pollutant Discharge Fee, EPT Law provides for a more specific definition of "taxpayer" and "taxable pollutant".

The "taxpayer" under EPT Law means "the enterprises, institutions and other manufacturing and business operators who discharge pollutants directly into the environment within the territory of the PRC and within sea area under the administration of the PRC". Such definition retains "the enterprises, institutions and other manufacturing and business operators who discharge pollutants directly into the environment" and adds the geographical limit of "within the territory of the PRC and within sea area under the administration of the PRC". The limitation defines the places where taxable pollutants are discharged more precisely.

The definition of "taxable pollutant" not only keeps the four pollutant categories, including air pollutant, water pollutant, solid waste and acoustic noise, but also provides a technical approach to determine whether certain pollutant belongs to the "taxable pollutant" in  the List of Taxable Pollutants and Their Equivalent Volume  annexed to the EPT Law.

EPT Law clearly distinguishes taxable activities from nontaxable ones with respect to the discharge of sewage, household refuge and solid waste. The Administrative Regulation on Collection of Pollutant Discharging Fee provides that pollutant discharge fee is not applicable to discharging waste water into sewage treatment plants and disposal of solid waste since the establishment or renovation of solid waste treatment facilities. EPT Law provides that discharge of taxable pollutants into legally established centralized sewage treatment plants and household refuse treatment plants and storage and disposal of solid waste in treatment facilities that comply with national and local environmental protection standards are not deemed as discharging pollutants directly into the environment and thus not subject to environmental protection tax. The law further stipulates that if those waste treatment plants then discharge taxable pollutants into the environmental beyond the statutory criteria, or the storage or treatment of solid waste by tax payers do not comply with national standards, environmental protection tax shall be levied.  Apparently, the provisions of the EPT Law is more scientifically and environmentally friendly.  

II. Tax Amount and Tax Base

EPT Law imposes restriction on the local government's right to determine the range of the taxable amount. It abandons the previous regulations that "the provincial government may determine the local standard if the national standard is silent" and provides that the local government may make a proposal regarding the tax amount in accordance with the range specified in the List of Tax Categories and Tax Amount and report to the local standing committee of people's congress for its approval. The EPT Law also provides more operational guidelines on the tax base of the taxable pollutants, such as specifying that the taxable discharge volume of air pollutant and water pollutants shall be calculated with the converted actual discharge volume, and specifying the calculation method and the List of Taxable Pollutants and their Equivalent Volume. Though this converting practice was adopted when calculating pollutant discharge fee in practice, it was not clearly stated in the pollutant discharge fee regulations.

III. Tax Collection and Administration

Upon the realization of "replacing fee with tax" by the launch of EPT Law, taxpayers are confronted with a significant change from the tax collection and tax administration perspective. The environmental protection tax shall be collected by tax authorities in accordance with the Tax Collection and Administration Law and EPT Law. The tax obligations arises from the date of discharge and tax returns shall be filed on quarterly or timely basis. Taxpayers subject to quarterly filing shall file tax returns within 15 days after the end of each quarter, and taxpayers subject to timely filing shall file tax returns within 15 days after occurrence of the discharge.

The tax authorities may punish the taxpayers for their failure to pay environmental protection tax according to the Tax Collection and Administration Law.

The above change for the tax collection and administration is not only helpful to the implementation of the "rule by law" principle, but also helpful to eliminate flexible and discretionary tax collection practice and inference by ministries and local government.

IV. Tax Deduction

The most attractive part of EPT Law is the two-level tax deduction mechanism applicable to the discharge of air pollutant and water pollutant. Under this mechanism, taxpayers may enjoy 25% discount off on their tax amount if the concentration of their air or water pollutants is 30% lower than the national or local benchmark standard, and 50% discount on the same if the concentration of their air or water pollutants is 50% lower than the national or local benchmark standard. Comparing to the 50% discount previously applied to pollutant discharge fee, this two-level mechanism is obviously more effective to reduce pollutant discharge.

V. Collaboration between Tax Authorities and Environmental Protection Authorities for Collection of Environmental Protection Tax

Unlike collection of other taxes, which is mainly dependent upon the enforcement efforts of the tax authorities and based on financial data of the taxpayers, the effective collection of environmental protection tax shall largely depend on data monitoring of environmental protection authorities and collaboration between the two authorities. As provided in EPT Law, tax authorities and environmental protection authorities shall cooperate with each other while playing their own roles respectively for the tax collection purpose.

Firstly, tax authorities shall be responsible for tax collection, while environmental protection authorities shall be responsible for monitoring and administration of pollutant discharge.

Secondly, an information sharing platform for tax-related information shall be built up as part of the collaboration mechanism. Relevant information will be shared regularly. Environmental protection authorities shall regularly provide tax authorities with the information relating to pollutant discharge permit of each discharging entity, discharge data, violations of environmental protection law and administrative punishments. Meanwhile, the tax authorities shall regularly provide environmental protection authorities with information relating to the taxpayers' tax declaration, tax payment, tax deduction, unpaid tax and issues that are relevant to collection of environmental protection tax.

Thirdly, the environmental protection authorities shall provide technical support to tax authorities in two phases.  One phase is the original determination of the discharge amount. Taxpayers are liable to voluntarily provide the discharge category, discharge amount and concentration data of air pollutant and water pollutant to the tax authorities when filing tax returns.  In case taxpayers haven't installed meters or when the circumstances are not suitable for measuring, the environmental protection authorities shall determine the discharge amount using methods specified in law.  The other phase is the verification of the data filed by taxpayers. Tax authorities need to compare the data reported by taxpayers with those provided by environmental protection authorities in order to supervise the tax declaration. When there are questions about a taxpayer's declaration, or a taxpayer fails to make tax declaration within the specified time period, the tax authority may request the environmental protection authority to review, which shall provide its opinion within 15 days. The tax authority shall adjust the tax amount of the taxpayer based on the data reviewed by the environmental protection authority. 

VI. Our comments

1. Will EPT Law increase or decrease the tax burden of the enterprises? 

Though one of the legislation principle of EPT Law is shifting the tax burden evenly from fee to tax, it does not mean that the pollutant discharge burden for the enterprises shall remain the same after the imposition of the tax. Firstly, due to the change of tax deduction mechanism from one level to two levels, some enterprises that are not eligible for deduction of pollutant discharge fee may have chances to benefit from the deduction of the environmental protection tax. Secondly, the upper limit of the tax amount is ten times of the lower limit, while current amount of pollutant discharge fee in many provinces has been set as several times higher than the national bottom limit, and whether it will stay unchanged after the enforcement of the EPT Law remains to be seen. Therefore, whether the pollutant discharge burden of the enterprises will increase or not depends on whether the enterprise may enjoy the tax preferential treatment and the actual range of the tax amount in each locality.  

2. Will the taxable pollutants be limited to the list provided in EPT Law?

Let's see one example, a significant pollutant, VOCs2The Pilot Measures on Collection of Pollutant Discharge Fee on VOCs (Caishui [2015] No.71) was released in June 2015, yet VOCs is not included in the list of taxable pollutants annexed to EPT Law, not even carbon dioxide which was widely discussed by the public during the legislative process. We believe that the current list of taxable pollutants might be expanded and certain significant harmful pollutants might be included in the taxable pollutant categories in the future with the accumulation of the environmental monitoring experience and mature of the monitoring technology.  

3. Will taxpayers be free of other legal liabilities after environmental protection tax is duly paid?

It is clearly stipulated in Article 26 of EPT Law that in addition to payment of environmental protection tax pursuant to law, the entities and other business operators that directly discharge pollutants to environment shall be liable for damages pursuant to law. Based on the foregoing, we believe that the payment of environmental protection tax does not exempt the taxpayers from civil liability, administrative responsibility and other legal liabilities due to discharge of pollutants.


1. The term "law" specified herein refers to a legislation with the top level of effectiveness in PRC legal system. Among 19 categories of taxation, 4 are stipulated in a law, others are stipulated in administrative law and regulation or other forms of legislation with lower level of effectiveness.

2. VOCs is a joint name for volatile organic compounds which include NMHC,nitro-organic compounds, nitrogenous compounds hydrocarbons and sulfur compound. VOCs is the main precursor when generating PM2.5 and O3, and its damage to air environment is with the same degree with sulfur dioxide, oxides of nitrogen and other components of waste gas.

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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