China Local Governments Gain Authority Over Resource Tax Rates

China enacted the country’s first comprehensive law on taxes related to the extraction of more than 160 minerals, including coal and rare earth elements, as well as classifying water as a natural resource for the first time, according to government announcements.

The Resource Tax Law will simplify procedures by unifying a variety of regulations, resource fees, and pilot programs when it goes into effect Sep. 1, 2020, officials at State Administration of Taxation and the National People’s Congress said Aug. 26.

Under the new law, most businesses will be able to file quarterly resource taxes instead of monthly or weekly payments they were required to make in the past.

This “will significantly reduce the taxpayer’s reporting frequency and effectively reduce the tax burden,” said Bu Xianglai, director of the Property and Taxation Department of the State Administration of Taxation, according to an Aug. 27 report from state-run People’s Daily newspaper.

Provincial and local governments will select tax rates within ranges stipulated in the law.

Water Added

A water resource tax, now in pilot programs in several provinces, also will be formally rolled into the tax law.

“Water was historically covered under water fees, but now this is included as a natural resource. This will lead to higher enforcement and higher compliance, which helps” with conservation, Andrew Zhu, a partner for Deloitte in Beijing, said by phone Aug. 27.

Water extracted from surface and groundwater sources is taxable, with rates based on local water resource availability. The more water-stressed a region is the higher the taxes will be.

The water resource tax pilot program first started in the water-stressed northern province of Hebei, which surrounds Beijing, in 2016 and has since been rolled out to several other provinces.

Under the new law, the pilot will continue and will eventually be rolled out countrywide.

“The pilot will be expanded and the fact that it is in the law adds more weight for it to be adopted nationally,” Debra Tan, director of Hong Kong-based think tank China Water Risk, said by phone Aug. 27.

Water will be taxed at 1% to 20% per cubic meter, or 1 to 30 yuan (14 cents to $4.20) per cubic meter, depending on the option local government choose.

Tax Rates

Under the new law, resources such as crude oil and medium and heavy rare earths will have fixed national tax rates.

Among energy resources, coal extraction tax rates will be among the highest, ranging between 2% to 10%.

Joint venture onshore and offshore oil and gas extraction projects will continue paying fees under a royalty-based system and won’t be taxed until contracts signed before Nov. 1, 2011, expire at their agreed-upon date, according to the law.

New and renewed contracts will pay taxes under the new law.

Exemptions and tax reductions also are outlined in the law for coal bed methane extraction, low-grade or depleted mines, and for areas hit by natural disasters where such policies would help in economic recovery.

Medium and heavy rare earths will likely have a lower tax rate under the law, dropping from a 27% tax rate for those materials announced in 2015 to 20%. Light rare earths will have a tax range of between 7% to 12%, registering no change from current levels.

A large variety of nonmetal minerals such as kaolinite clay, limestone, and sand are included. In this category, graphite is among the highest with rate of up to 12%.

“In the long run, certainly China’s government wants to use the tax as a tool to change behavior and protect the environment,” Zhu said. “It basically empowers the central government and local government to propose new policies in the future for taxes on water or whatever resources they want to preserve.”