Energy & Resources

Undermined

Why China’s following Australia’s lead with a resources tax

Their job just got more taxing

The meek shall inherit the earth” has always seemed a rather optimistic prediction – the bashful are hardly well known for asserting their rights, after all. But their cause was given a hand last week by the Chinese government’s plans to change how natural resource companies are taxed. Premier Wen Jiabao told senior officials that Xinjiang would soon become the first province to adopt reforms that will amount to a major tax hike. The move comes at a similar time to Australian proposals to impose a new resources tax on minerals companies.

In China, the measure promises to have dramatic implications for the country’s resource-rich but worse-off western provinces, as taxes from inland oil, gas and minerals would belong more to local governments. Most resource companies are state-owned but their profits don’t go to the provinces, which are tasked with paying for important services like healthcare reform and social security.

China’s subterranean treasures are also taxed by volume under the existing regime, something that started to look dubious as commodity prices shot up. The new scheme would tax resources by value instead – and looks likely to start at a 5% tariff. That may seem small but Caixin magazine estimates that local government revenues could grow from Rmb5 billion to Rmb47 billion ($6.88 billion) as a result.

Although first suggested in 2007, the tax policy was put on hold until the economy was thought to have rebounded from the global economic crisis. As GDP growth hit targets last year, and inflation looks just about in check, officials are finally making their move.

As in Australia, the reforms are likely to face stiff resistance from energy and mineral firms. This could be part of the reason why Xinjiang was chosen to pioneer the new tax. One expert told Accounting Message magazine that, although the province is rich in mineral resources, few major sites have been developed, meaning “the interests involved there are relatively small.”

Xinjiang suffered a series of major riots last year too, and the new tax should give the provincial government more resources for poverty relief. “The current distribution of the benefits from natural resources is very uneven,” explained the Southern Metropolis Daily recently, “the majority of people in resource-rich provinces are still living in pre-industrial poverty.”

Beijing will also be hoping the new tax helps to wean local governments off a dependence on raising funds through property development.

Another goal of the new tax structure is to force mining and energy firms to become more efficient. It’s a real issue in China where energy consumption is reportedly 3-4 times higher than developed countries per dollar of GDP and the recovery rate from mines is 20-30% less than international averages. The idea is that higher taxes will push out less competitive players and force the survivors to invest in improving their operations. If resource prices continue to go up over the longer term, Chinese industries as a whole will have an additional incentive to reduce waste of their own.

Shanxi and Inner Mongolia could be next in line to adopt the tax, which is expected to be rolled out nationally in 2-3 years, according to the China Daily.

So how will the changes affect China’s not-so-meek state-owned giants?

The Securities Times thinks that PetroChina will be the biggest loser, at least initially, since it gets 23% of its oil and gas from Xinjiang (versus just 15% for Sinopec). CNOOC, which drills for all of its oil offshore, will be spared for now.

The meek might not get all of the promised 5%, however. Resource firms are bound to look for loopholes in the new regulations, and it will be interesting to see how rigorously they are enforced. So not quite a case of inheriting the earth yet. But it’s a start, nonetheless.


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