Effective 1 January 2018, the Environmental Protection Tax Law of PRC (hereinafter the law) ushers in a new tax regime to fight the dreadful pollution in China. The tax burdens are unevenly shared out, but all business will risk being overwhelmed if it fails to take actions immediately.
Collective Responsibility has been closely tracking the development and implementation of the law. Last month, we publish an article explaining the basics about China’s environmental tax. To learn more about how it might affect the business, we attended the Dialogue with State Administration of Taxation (SAT) on Implementing Regulations of the Law on Environmental Protection Tax, a working group meeting hosted by the European Union Chamber of Commerce in China on 8 February 2018. At the meeting, Sun Qun, Deputy Director General at the Department of Property and Behavior Tax of SAT, gave a thorough interpretation of key clauses and the relevant enforcement policies, followed by a roundtable discussion.
Although such discussions to some extent help enterprises unpack the sophisticated tax scheme, a lot of questions still permeate. Here are some we’ve repeatedly heard.
- About pollution auditing: How could a company determine the appropriate method of calculating its emissions, to install monitoring devices or to outsource to third parties? If the latter, who has the credibility and authority to undertake the work?
- About tax benefits: What incentives does the government provide? What are the eligibilities for receiving these benefits?
- About access to information: What information exchanged by Ministry of Environmental Protection (MEP) and State Administration of Taxation would be available to the enterprises as well as the public? Where can a company find the updates on its tax declaration?
Whilst these questions should be examined case by case, we can clearly identify 3 major pain points most enterprises are facing: insufficient technical capacity, stringent compliance requirement, and lack of information. As the first tax season (1-15 April 2018) is approaching, business needs to prepare themselves as soon as possible.
Insufficient technical capacity
Under the discharge fee system, only highly polluting enterprises have to pay and they often rely on the environmental protection agencies to calculate the emissions. By contrast, the tax applies to everyone who directly releases taxable pollutants into the environment. It also puts taxpayers under an obligation to determine the amount of pollutant, which means business operators must fully understand the requirements and have suitable equipment and process of monitoring, measuring, and recording emissions at the right outlet or location.
Business can choose from a variety of options to gather emissions data and decide the tax payable. The process can be performed either by entrusting a reliable environmental consulting service, self-auditing the emissions under official measurement standards, or using monitoring devices that can transfer real-time data to environmental protection agencies, although the latter is prioritized according to Mr. Sun. In this regard, small and medium-sized enterprises will face unprecedented challenges as they often lack adequate in-house resources or simply cannot afford to do so.
Even for large enterprises that were subject to the fee-based system, the transition is a huge test. Different from the previous scheme, the environmental tax entails professional requirements and the calculation process is complicated. Tax-related personnel has no general ledger to count on; instead, they must master a set of technical skills and knowledge necessary to prepare the tax. As environmental monitoring is likely to become a normality, business operators should improve the technical capacity in line with corporate objectives, strategies, and different functionalities in order to minimize the potential impacts caused by a surging tax rate or stricter environmental standards.
Stringent compliance requirement
The introduction of environmental taxes has created a more stringent regulatory environment for business operating in mainland China. Under the fee-based regime, failing to pay on time or receiving reductions, exemptions, and other benefits by fraudulent means may result in a fine up to 3 times the pollution fee and a temporary suspension — merely administrative punishment. However, enterprises and their staff who violate the new law will be held accountable in accordance with the Law for the Administration of Tax Collection and other relevant laws and regulations. This means they will face not only administrative penalties, but also criminal charges if unable to file tax declarations promptly or are involved in tax evasions.
The Chinese government is also mainstreaming its Golden Tax system to crack down cheats and frauds. The most recent version, Golden Tax 3.0, has been successfully running online across the country. It includes more comprehensive reporting requirements and requests taxpayers to disclose more basic information. Consequently, business will face the enhanced scrutiny of tax reporting, information collection, and legal compliance.
Lack of information
The law marks the first legislation of PRC that mandates information sharing and interdepartmental collaboration. Particularly, SAT’s Department of Property and Behavior Tax will collect the basic information and verify the data reported by taxpayers, whereas MEP’s Environmental Inspection Office will facilitate its administration and provide technical support. Yet no policy document has been issued regarding the specific responsibilities of each department. Compounded by the technical requirements already, business operators are grappling with where to find the correct information, worse, what to follow when the information between different departments is unmatched.
Not all enterprises have to pay the tax and for some of those who do, there may be tax exemptions and policy supports for corporate investments in environmental monitoring and pollution control practices. To date, such information is largely unavailable to the enterprises or varies by geographic locations. Some are even beyond the administration of SAT and MEP. For instance, standards on waste resource recovery are still in planning by National Development and Reform Commission and Ministry of Industry and Information Technology, thus farmers that have already used anaerobic digestion to manage the manure may still be considered a waste producer.
Besides the incentives, how to accurately measure emissions that are admissible to SAT lies at the center of all concerns. Yet national and local standards are still absent in a multitude of industries. Enterprises in 17 highly polluting industries including coal-fired power, paper, and steel, can reference the calculation methods issued by MEP. The standards for the remainder remains elusive, although Mr. Sun claimed SAT is collaborating with MEP to formulate supporting policies and measures.
For more than 5 million enterprises deemed polluter, the clock is ticking on tax declarations. Starting January, the environmental tax shall be calculated on a monthly basis and declared quarterly within 15 days following the end of each calendar quarter. Despite the prevailing uncertainties, business has to start recording their emissions from the New Year’s Day and file the tax first time in April unless it can refrain from discharging pollutants.
But the full implications of China’s environmental tax will take months or even years to unfold. Apart from individuals that have been clearly exempted from taxation, the list of business winners and losers is looming. And the bigger prize, expediting the economic transition towards a sustainable growth model, is still unfathomable. We will provide more insights into the how the regulation overhaul affects mainland enterprises as the first tax season closes in.
Should you have any questions about how this law may apply to your business, feel free to contact us at [email protected].
Feature Image Credit: Flickr user leniners.