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FINANCE: China introduces the first green tax law for environmental protection
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China introduces the first green tax law for environmental protection

By Kelvin Lee, PwC Tianjin

BT 201701 FINANCE 03In brief
On 25th December 2016, the Environmental Protection Tax Law of the People's Republic of China1 (the "EPT Law"), after two rounds of review, was finally approved at the meeting of the National People's Congress (NPC) Standing Committee. It is issued as an order of the president and will enter into force from 1st January 2018.


The approval of EPT Law is not only a milestone in China's environmental protection legislative work following the enactment of "harshest Environment Protection Law" two years ago, but also earmarks a step forward in implementing the statutory taxation principle which was put forward on the third plenary session of the 18th Central Committee of the Communist Party of China (CPC). Strictly speaking, EPT is not a new category of tax but a replacement of the existing pollutant discharge fee (PDF). Hence, the provisions in EPT Law and PDF system are linked in many respects.


Moreover, considering the downward pressure on the economy faced by Chinese enterprises recently, the replacement of PDF system with EPT Law is not intended to increase tax revenue. Therefore, in principle the tax burden of enterprises would not be increased. Meanwhile, certain preferential tax treatments are granted to encourage enterprises to take up the responsibility of environmental protection.


In this article, we will look back at the background of enactment of EPT Law, introduce the main content of EPT Law and compare it with PDF, and share our observations of the potential impact on relevant enterprises. Taxpayers subject to the existing PDF, especially those big polluters engaged in chemical industry or nonferrous metals industry, should pay close attention to it. Enterprises engaged in providing environmental protection services or developing relevant equipment can take advantage of this opportunity to promote their business.

BT 201701 FINANCE 02
In detail
Background


China has collected PDF on air pollutants, water pollutants, solid waste and noise pollution since 1979. PDF system has played an important role in reducing emission of pollutants and protecting the environment over the past 30 years. However, PDF system also has certain deficiencies with respect to the overall framework and enforcement. Hence, some local governments exploited loopholes on collection and administration of PDF.


At the third plenary session of the 18th CPC Central Committee held in 2013, the request to apply EPT Law and to implement the statutory taxation principle was underlined. In the same year, the Ministry of Finance, the State Administration of Taxation and the Ministry of Environmental Protection jointly submitted the request of recommending EPT Law to the State Council.


The First Discussion Draft of EPT Law (Discussion Draft)2 was released for public comments in 2015 and afterwards a further revised draft version (Draft Version)3 reviewed by the NPC Standing Committee was published in 2016. As a law regulated by multiple Chinese ministries, the EPT Law only went through 2 rounds of review and took only one and a half years to become a reality. It is issued as an order of the president and will enter into force from 1st January 2018.

BT 201701 FINANCE 04
Main Contents

In general, the EPT Law was established to echo the government's call to replace "fees" with "taxes". At the same time, considering the downward pressure on the economy faced by Chinese enterprises, the replacement would ensure that the tax burden will remain stable for taxpayers.


Taxpayers and tax items are basically the same as those stipulated in the existing PDF system.


EPT taxpayers are defined as enterprises, public institutions and other business operators directly discharging taxable pollutants within the territory of China and other sea areas under its jurisdiction, excluding individuals and other non-business operators. Also, some activities such as discharging pollutants to sewage treatment plants are not subject to EPT since it does not directly discharge pollutants into the open environment.


Four categories of pollution including air, water, solid waste and noise pollution are subject to EPT. Carbon dioxide, which was hotly debated previously is not included in the final taxable scope. However, the possibility to adjust the scope cannot be ruled out with China's economic development in future. In addition, EPT shall be levied on top three air pollutants, the top five water pollutants of the first class and the top three water pollutants of other classes discharged from each discharge outlet. In other words, not all of the air and water pollutants discharged are taxable.


Tax basis and tax amount are generally consistent with the existing PDF system.


EPT shall be calculated based on the volume of pollutants discharged, multiplied by the specific EPT tax amount. For air and water pollutants, the tax basis shall be determined according to their respective pollution equivalent value. For solid waste and noise pollution, the taxation basis shall be determined according to the quantity discharged and decibel level. The standard used in taxing pollutants basically follows the existing PDF system, which sets forth the minimum tax amount for each category. What is different is that EPT Law provides a range of tax amount for air and water pollutants with the upper ceiling no more than ten times of the minimum tax amount. Local governments have the discretionary power to set forth the local standard within the range specified in EPT Law. At the same time, EPT Law is also in line with the statutory taxation principle.


Additional preferential tax treatment is to be granted.


Apart from activities eligible for EPT exemption (i.e. pollutants discharged from agricultural production, motor vehicles, ships, aircrafts and urban sewage treatment plants etc. under certain conditions), there is only one single level of preferential tax incentive granted for reduction of pollutants under the existing PDF system. There are now two levels of incentive in the EPT Law:


i) if the concentration level of air pollutants and water pollutants discharged by a taxpayer is less than 30% of stipulated pollutant disposal standard, a 25% reduction on EPT payable amount will be granted;
ii) if such level is less than 50% of the stipulated pollutant disposal standard, then a 50% reduction on EPT payable amount will be granted. Additional levy based on a multiple of EPT amount for pollutants discharges exceeding the prescribed standard proposed in the Discussion Draft is not finally adopted in the EPT Law.


Collection and administration has been changed from environmental protection authorities to tax authorities.


Compared with the existing PDF system, EPT Law further standardises the tax collection and administration procedure and clarifies that EPT will be administered collaboratively by adopting the mechanism of "filing by enterprises, collection by tax authorities, coordination by environmental protection authorities, and information sharing by relevant parties". Meanwhile, it is also the first time that a single tax law in China has incorporated the collaboration working approach and establishment of information sharing platform between tax authorities and environmental protection department in China's single tax law.


In respect of legal liabilities, apart from relevant penalties stipulated in the Tax Collection and Administration Law and EPT Law for failure to pay EPT, the EPT Law also stipulates that the taxpayers shall also be liable for damages caused by the discharge of pollutants to prevent them from discharging pollutants recklessly.

BT 201701 FINANCE 05
The takeaway

Overall, as replacement of the existing PDF system, the EPT Law is not intended to increase the tax burden of taxpayers. Currently, most of the revenue collected from the PDF system is allocated to local governments. Wang Jian Fan, Director of the Tax Policy Department of Ministry of Finance, stated in a press conference that the Government is considering allocating all of the EPT revenue to local governments in future to motivate them to be more active in EPT collection4. Against the backdrop of tax reform, this arrangement will also contribute to maintaining a stable revenue for local governments.


In the long run, enactment of EPT Law is not only a milestone for cleaning up fees and implementing the statutory taxation principle, but also earmarks China's determination to carry out her economic transformation towards an environmental-friendly development. Hence, the establishment and improvement of green tax is an irreversible trend.


Under China's existing tax regime, a series of tax policies related to environmental protection have been introduced into various stages of business: exploitation, production, distribution and consumption of resources, etc. For instance, resource tax (RT) to increase cost of resource consumption, preferential corporate income tax treatments to encourage energy saving and Consumption Tax (CT) to guide reasonable consumption behaviours. The design of RT Reform rolled out over the past few years and the design of CT reform under deliberation both follows this same direction.


The release of EPT Law is an important step in the establishment of comprehensive green tax regime. Enterprises (especially those big polluters) are suggested to review their business operation in order to evaluate the EPT they have to pay on their pollutant discharges, so that they can strike a balance between paying the EPT or investing in pollutant-control equipment. They can also consider changing their business focus.


On the other hand, the purpose of EPT Law is not just simply replacing 'fee' with 'tax', it also strengthens the enforcement by authorities as it is now a 'law'. Where the EPL law is violated, non-compliance behaviours will become illegal behaviours, which will have a deterrence to taxpayers. As the first single tax law in China following the implementation of statutory taxation principle, it will also set a good model for the legislation of other tax provisions in future (e.g. value-added tax legislation) and facilitate the legislation process. Not only enterprises discharging pollutants should pay attention to this development but also taxpayers at large so as to understand the trend of development of the Chinese tax system and be prepared to enhance their compliance level.

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