May 21, 2010 06:47 PM

China Overhauls Natural Resource Tax

(Beijing) – For many years, China's oil prices and natural resource taxes were based on volume. In 2009, oil companies paid 28 yuan per ton of crude oil and total tax revenues from crude oil on a nation-wide basis last year was 5.3 billion yuan. But figures of this size are about to be considered miniscule.

If the overhaul is implemented across the country, tax revenues from crude oil are estimated by industry insiders to hit 47.3 billion yuan per year.

The State Council, the cabinet, has decided to levy natural resource taxes on crude oil and natural gas based on price. Sources say that current proposals would set the tax at 5 percent initially.

All revenues from natural resources, with the exception of offshore oil resource taxes, belong to local governments, and the reform could substantially boost the incomes of local governments. The Xinjiang Uygur Autonomous Region, abundant in oil resources, will be the first region to implement the reform.

During the May 17 to 19 Xinjiang work meeting, Premier Wen Jiabao announced the decision. The government has been seeking window for the reform since 2007.

The Ministry of Finance submitted a report on natural resource tax reforms in 2007. However, in May 2007, consumer prices soared in China and the government was reluctant to start the reform as it would fuel price hikes. In 2008, the financial crisis led to an economic slowdown in China, preventing the government from reforming natural resource taxes. In 2009, the central government raised export tax rebates seven times to stimulate the economy.

In the third quarter of 2009, China witnessed an economic recovery, creating a suitable environment for updating the natural resource tax policy. In the 2010, a government report delivered by Premier Wen Jiabao in March, stated the inflation target for the year is 3 percent, leaving space for the resource tax reform, according to several industry analysts.

Wang Jirong, deputy director of the Environment and Natural Resources Protection Committee of the National People's Congress, stated that the inflation target made room for the natural resource tax. Liu Kegu, an advisor to the China Development Bank, said 2010 was a good time to reform natural resource taxes.

Resource-rich regions will benefit from the overhaul while resource-consuming provinces will have to spend more on energy and raw materials. As the reform will boost the prices of natural resources such as crude oil, natural gas, coal, non-ferrous metals and salt, governments will have to raise the minimum income for welfare and fiscal spending is expected to be boosted.

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