China s Fifth Tax Law

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1 China s Fifth Tax Law Issue No.CTIN Environmental Protection Tax Law will take effect from Year Jan 2017 After six years of studies and discussions and through two rounds deliberations, the Standing Committee of the National People's Congress of the People s Republic of China (PRC) finally passed and promulgated the Environmental Protection Tax Law of the PRC (EPT Law) with the Chairman Order [2016] No.61. The EPT Law is the fifth tax law in China and will take effect from 1 January Background To promote environmental protection in China, the Chinese State Council announced its green tax plan in 2008, proposing to introduce a new Environmental Protection Tax (EPT) which will replace the prevailing Pollutant Discharge Fees (PDF). As early as in June 2015, the first draft of the EPT Law (the First Draft ) jointly developed by three ministries, i.e., the Ministry of Finance (MOF), the State Administration of Taxation (SAT) and the Ministry of Environmental Protection (MEP) was published by the State Council for public consultation. Subsequently in September 2016, the Standing Committee of the National People's Congress (NPC Standing Committee) conducted the first round deliberation on the First Draft and published a further revised EPT Discussion Draft for public consideration (the Discussion Draft or, the Second Draft ). (For more details of the First Draft and the Second Draft, please refer to our previous editions of China Tax & Investment News No and No ) The Discussion Draft was submitted for the second round deliberation at the 25th session of the 12th NPC Standing Committee. After six years of various studies and discussions and through the aforesaid deliberations, the NPC Standing Committee finally passed and promulgated the EPT Law of the People s Republic of China (PRC) (EPT Law) with the Chairman Order [2016] No. 61. This constitutes the fifth tax law in China 1. The EPT Law will take effect from 1 January Note: 1. The other four tax laws in China refer to: the Tax Collection and Administration Law, the Corporate Income Tax Law, the Individual Income Tax Law and the Vehicle and Vessel Tax Law. China Tax & Investment News 1

2 Major contents and changes in the EPT Law The EPT Law is divided into five chapters with 28 provisions, which provides details on EPT taxpayers, tax basis and tax rates, EPT reduction, exemption as well as its collection and administration. The EPT Law clearly reflects the principle of Legalization of Taxation by stipulating that any local governments EPT policy proposals (including preferential treatments, reduction and the increase of EPT rate) shall be applied to the standing committee of the local NPC at the same level for final determination and submitted to the NPC Standing Committee and the State Council for record filing purposes. The major changes in the final version of EPT Law as compared with its Second Draft are mainly the provisions regarding the legislation process of the increase of EPT rate, EPT reduction and exemption. Taxpayers According to the EPT Law, EPT taxpayers include enterprises, public institutions and other producers and business operators directly discharging taxable pollutants within the territory (land and coastline) of the PRC. The taxable objects and tax basis The EPT Law stipulates that EPT shall be imposed on pollutants generated from urban sewage and household waste treatment plants which exceed the State s or local disposal standards. In addition, the storage or disposal systems regarding solid waste by enterprises, public institutions and other operators failing to meet the relevant State or local standards shall be subject to EPT. Under the EPT Law, taxable pollutants are divided into four categories: air pollutants, water pollutants, solid waste and noise. Increase in tax rates by local governments The Second Draft empowers local governments to increase the tax rate on taxable air or water pollutants. However, it did not mention the specific standards for making increment. The EPT Law provides a tax rate range in its annexed EPT Taxable Items and Tax Rates. EPT rates for the air pollutants and water pollutants are RMB1.2 to 12 and RMB 1.4 to 14 per PEW 2 respectively. Local governments are allowed to adjust the tax rates within such range, provided that the adjustments are approved by the standing committee of the local NPC at the same level and are submitted to the NPC Standing Committee and the State Council for record filing purposes. EPT reduction and exemption Under the EPT Law, the previous wording preferential EPT treatments as stated in the Second Draft has been revised to EPT reduction and exemption. The provisions on EPT exemption as prescribed in the EPT Law remain unchanged as compared to that in the Second Draft. The applicable scope of EPT exemption is same as what had been provided in the Second Draft. For EPT reduction, the Second Draft proposed that qualifying taxpayers may be entitled to 50% reduction of EPT payable, while the EPT Law adds an additional category for preferential treatment, i.e. if the concentration rate of atmospheric or sewage pollutants discharged by a taxpayer is less than 30% of the State or the local government standards, the taxpayers shall be entitled to 25% reduction of EPT payable. Note: 2. Pollution equivalent weights (PEW) China Tax & Investment News 2

3 EPT filing deadlines and the relevant filing requirements An EPT obligation arises on the date when a taxpayer discharges taxable pollutants. The EPT shall normally be calculated monthly and filed on a quarterly or transaction-by-transaction basis. For quarterly filing taxpayers, they shall declare and pay the EPT to local in-charge tax authorities within 15 days after the end of each quarter; for taxpayers who conduct EPT filing on a transaction-by-transaction basis, they shall declare and pay the EPT to tax authorities within 15 days from the date when the tax obligation arises. Taxpayers are also required to submit the relevant documentations detailing the types and quantum of taxable pollutants discharged along tax filing returns. For your easy reference, we compare the EPT Law with the Second Draft and list the major changes in the following table: Major changes Items The Second Draft 3 September 2016 The EPT Law 25 December 2016 Air pollutants Water pollutants RMB1.2 per PEW RMB1.2 ~ 12 per PEW RMB1.4 per PEW RMB1.4 ~ 14 per PEW Solid waste RMB5 ~ 1,000 per ton, depending on the category of solid waste Per unit rate Tax payable Noise Increase of per unit rate Air pollutants Water pollutants Solid waste Noise RMB350 ~ 11,200 per month, depending on the decibel level Provincial-level governments may increase the EPT rates for pollutants based on the EPT rates as prescribed in the Table of EPT Taxable Items and Tax Rates, and shall submit to the standing committee of the local NPC at the same level for determination and submit to the Standing Committee of the national NPC and the State Council for record filing purpose Total PEW tax rate Total PEW tax rate The quantity of disposed solid wastes applicable tax rate Provincial-level governments may adjust the EPT rates for air pollutants and water pollutants within the range of EPT rates as prescribed in the Table of EPT Taxable Items and Tax Rates, and shall submit to the standing committee of the local NPC at the same level for determination and submit to the Standing Committee of the national NPC and the State Council for record filing purpose Applicable tax amount China Tax & Investment News 3

4 Major changes Items The Second Draft 3 September 2016 The EPT Law 25 December 2016 EPT reduction and exemption Tax Collection and Administration EPT exemption EPT reduction EPT collection authority Monitoring authority The time when the tax obligation arises Term of taxation Tax filing deadline Other filing requirements Four specific circumstances under which taxpayers are eligible for EPT exemption; Other circumstances approved by the State Council (shall report to the Standing Committee of NPC for record filing) If the concentration value of atmospheric pollutant and sewage pollutants discharged by a taxpayer is less than 50% of the value stipulated by the State or the local governments, taxpayers are entitled to 50% reduction of taxable income Tax authorities located where the relevant pollutants are disposed of The competent environmental protection administrations The date when the taxpayer discharges taxable pollutants Calculate monthly, declare and pay quarterly; or On a transaction-by-transaction basis Within 15 days from the date when the term of taxation expires If the concentration value of atmospheric pollutant and sewage pollutants discharged by a taxpayer is less than 30% of the value stipulated by the State or the local governments, taxpayers are entitled to 25% reduction of taxable income If the concentration value of atmospheric pollutant and sewage pollutants discharged by a taxpayer is less than 50% of the value stipulated by the State or the local governments, taxpayers are entitled to 50% reduction of taxable income For taxpayers who conduct EPT filing on a quarterly basis, they shall declare and pay the EPT to tax authorities within 15 days after the end of each quarter For taxpayers who conduct EPT filing on a transaction-bytransaction basis, they shall declare and pay the EPT to tax authorities within 15 days from the date when the tax obligation arises - When conducting EPT filing, taxpayers are also required to submit the relevant documentations detailing the types and quantum of taxable pollutants discharged along tax filing returns. China Tax & Investment News 4

5 Our observations EPT vs Pollutant Discharge Fees (PDF) As early as in 1979, China set up PDF, which has ever since been imposed on four types of pollutants including air pollutants, water pollutants, solid waste and noise. EPT is a new kind of tax designed also for environmental protection purposes. However in terms of substance, it is not stranger to taxpayers as it may be seen as a substitute for PDF. According to the EPT Law, taxpayers who are subject to EPT will no longer be liable to PDF from the effective date of the EPT Law (i.e., 1 January 2018). The taxable object, scope and rate for EPT are all basically similar to those stipulated in the prevailing PDF regulations. Nevertheless, whether the tax burden of individual taxpayer will remain unchanged is yet to be analyzed according to the respective taxpayer s facts and circumstances. The EPT Law stipulates that the EPT rates for the air pollutants are ranging from RMB1.2 to 12 per PEW and for water pollutants, from RMB1.4 to 14 per PEW. In addition, RMB5 to RMB1,000 per ton of EPT are to be imposed on respective categories of solid waste. EPT on noise is to be charged at a fixed amount, ranging from RMB350 to RMB11,200 per month. The National Development and Reform Commission, the MOF and the MEP jointly released Fagaijiage [2014] No ( Circular 2008 ) in year 2014 to adjust the minimum charge rates of PDF 3. And in practice, the PDF in certain provinces/municipalities including Beijing, Tianjin, Shanghai and Jiangsu has already been increased to a few times more of the prescribed minimum charge rates. The EPT Law, whilst stipulates that, the EPT rates on air pollutants and water pollutants shall be increased to no more than ten times of the minimum charge rates. On the other hand, Circular 2008 states that enterprises are entitled to 50% reduction of PDF if the concentration rate of atmospheric or sewage pollutants discharged is less than 50% of the State or the local government standards. While under the EPT Law, qualifying taxpayers will be entitled to 50% or 25% reduction of EPT under different circumstances 4. It is therefore not unreasonable to expect that relevant taxpayers would not increase their costs under EPT, provided local governments would not adopt the top line of the rate range and would not increase other local charges to supplement PDF revenue. Whether EPT revenue shall be exclusively used for defined purposes The director of the tax policy department under Ministry of Finance clarified in a news conference recently that although the EPT revenue will not be exclusively used for environmental protection purposes, the government will ensure it be managed and used effectively to combat pollution and promote environmental protection 5. Previously for PDF revenue, the revenue allocation ratio between China central government and local governments are 1 to 9. While according to the director, the EPT revenue will be fully designated to local. Note: 3. By the end of June 2015, all provinces (autonomous regions and municipalities directly under the central government) shall adjust the PDF standards as follows: PDF charged on sulfur dioxide and nitrogen oxides in exhaust gases shall be no less than RMB1.2 per PEW PDF charged on chemical oxygen demand, ammonia nitrogen and five major heavy metals (lead, mercury, chromium, cadmium and metalloid arsenic) in wastewater shall be no less than RMB1.4 per PEW Source: 4. If the concentration value of atmospheric pollutants and sewage pollutants discharged by a taxpayer is less than 30% of the value stipulated by the State or the local governments, taxpayers are entitled to a 25% reduction of taxable income; if the concentration value of atmospheric pollutants and sewage pollutants discharged by a taxpayer is less than 50% of the value stipulated by the State or the local governments, taxpayers are entitled to a 50% reduction of taxable income. 5. Source: China Tax & Investment News 5

6 EPT collection and administration and other relevant matters After the conversion of PDF to EPT, tax authorities shall take the responsibilities for the collection and administration of EPT. While it is expected that an information sharing platform will be established between tax authorities and environmental protection departments as stated in the EPT Law, to increase effective information utilization and to enhance tax and environmental compliance. Besides all of the above, the EPT Law also states that, in addition to EPT payment, EPT taxpayers are still legally liable to the Environmental Protection Law and other related laws/regulations for the damage to environment caused by their pollutants discharge. Which is to say, paying EPT will not waive taxpayers from other legal liabilities associated with damaging environment. Conclusion Upon the effectiveness of EPT Law in 2018, related compliance obligations and issues would arise. Enterprises are encouraged to make preparations beforehand to cope with the new EPT compliance requirements. After the promulgation of EPT Law, a corresponding implementation rules should be formulated and promulgated, which generally would provide more details and interpretations. In addition, since the relevant local governments are empowered to decide applicable EPT rates and the scope for taxable pollutants, the related local regulations would also be further introduced. We will keep you posted if there is any further development. With the rapid growth of the globe today, environmental protection becomes a real urgent task to every single person. Let us all do good as a global citizen and work together to reduce pollution and care for our environment, for the benefit to ourselves and for the benefit of our future generations. China Tax & Investment News 6

7 Contact us For more information, please contact your usual EY contact or one of the following of EY s China tax leaders. Office Tax Leaders Martin Ngai (Beijing) martin.ngai@cn.ey.com Fisher Tian (Tianjin) fisher.tian@cn.ey.com Samuel Yan (Dalian/Shenyang) samuel.yan@cn.ey.com Lucy Wang (Qingdao) lucy-c.wang@cn.ey.com Joanne Su (Xi an) joanne.su@cn.ey.com Vickie Tan (Shanghai) vickie.tan@cn.ey.com Raymond Zhu (Wuhan) raymond.zhu@cn.ey.com Audrie Xia (Suzhou) audrie.xia@cn.ey.com Andrew Chen (Nanjing) andrew-jp.chen@cn.ey.com Patricia Xia (Hangzhou) patricia.xia@cn.ey.com Chuan Shi (Chengdu) chuan.shi@cn.ey.com Clement Yuen (Shenzhen) clement.yuen@cn.ey.com Rio Chan (Guangzhou/Changsha) rio.chan@cn.ey.com Jean Li (Xiamen) jean-n.li@cn.ey.com Tracy Ho (Hong Kong) tracy.ho@hk.ey.com Heidi Liu (Taipei) heidi.liu@tw.ey.com Service Line Tax Leaders Andrew Choy (International Tax & Transfer Pricing) andrew.choy@cn.ey.com Paul Wen (People Advisory Services) paul.wen@hk.ey.com Kenneth Leung (Indirect Tax) kenneth.leung@cn.ey.com Becky Lai (Tax Policy) becky.lai@hk.ey.com David Chan (Transaction Tax) david.chan@hk.ey.com Samuel Yan (Global Compliance & Reporting) samuel.yan@cn.ey.com Sector Leaders Henry Chan (Financial Services) henry.chan@cn.ey.com Alan Lan (Energy & Resources) alan.lan@cn.ey.com Martin Ngai (Technology, Media, Telecommunications) martin.ngai@cn.ey.com Vickie Tan (Life Science) vickie.tan@cn.ey.com Gary Chan (Real Estate) gary.chan@cn.ey.com Audrie Xia (Consumer Products) audrie.xia@cn.ey.com Walter Tong (Automotive & Transportation) walter.tong@cn.ey.com Raymond Zhu (Government& Public Sector) raymond.zhu@cn.ey.com Greater China Tax Leader Henry Chan henry.chan@cn.ey.com Author China Tax Center Jane Hui jane.hui@hk.ey.com China Tax & Investment News 7

8 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young (China) Advisory Limited. All Rights Reserved. APAC No ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/china