Resource Tax Reform in Full Swing after 1 July

The Ministry of Finance and the State Administration of Taxation jointly announced on 10 May their plan to roll out the resource tax reform across China starting from 1 July 2016. This is another major tax reform announced by the Chinese government after the commencement of the pilot full-scale replacement of business tax with value-added tax (VAT) on 1 May.

According to the Circular on Promoting Full-Scale Resource Tax Reform issued by these two government departments, (for details in Chinese, please see: ( http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201605/t20160510_1984613.html), China will start a pilot reform on water resources, with Hebei setting the pace. The tax-for-fee method will be adopted, with the scope of taxation covering both surface and underground water. Taxation according to quantity will be implemented and a higher tax rate will be imposed on industries with high water consumption, above-quota water usage and exploitation of underground water in areas already suffering from excessive exploitation of underground water. Charges on normal production and domestic water usage will remain unchanged. On the basis of summing up the experience of this reform, the Ministry of Finance and the State Administration of Taxation will gradually expand the pilot scheme to other places and roll out full-scale reform across the country when conditions are ripe. Other natural resources will also be included in the scope of taxation step by step.

The circular proposes to fully implement ad valorem taxation. On the basis of the ad valorem tax reform on six categories of resources, including crude oil, natural gas, coal, rare earth, tungsten and molybdenum, the present reform will extend this practice of taxation according to price to most mineral products. In order to facilitate tax collection and management, taxation according to quantity will still apply to a few mineral products, such as clay and sand, which are traded in cash in a fragmented market and hard to control.

The circular also proposes to fully clean up charges and funds to solve the problem of corporate tax overlapping. The present reform will reduce to zero the resource compensation rates of all resource items, stop collecting contributions to the price regulation fund, and abolish items of charges and funds illegally imposed by the local governments on mineral resources so as to reduce the burdens of enterprises.

Due to disparities in the resource endowment and economic development of different regions, the central government will set a unified tax rate range for mineral products to prevent the possibility of a unified tax rate adding to the structural burdens of enterprises. Within the prescribed tax rate range, the provincial people's government may propose a suitable tax rate for major taxable products, which will be reported to the Ministry of Finance and the State Administration of Taxation and implemented upon their approval.

In order to promote the comprehensive utilisation of resources, this reform will offer tax concessions to comprehensive utilisation of resources that are difficult and costly to exploit. For example, qualified mineral resources from mines exploited by means of cut and fill or in the exhaustion stage are eligible for a resource tax reduction of 50% and 30% respectively. Provincial people's governments will be authorised to decide for themselves whether or not to reduce or exempt resource tax on mineral products extracted from low-grade minerals, wastes, tailings, slags, waste water and exhaust gas whose utilisation is encouraged according to actual conditions so that they can accurately suit measures to local conditions.