Energy & Resources

Oil money

Changes to the resource tax look set to fill the coffers of local governments

Oil money

New resource tax is not good news for Chinese oil majors

Karamay is one of Xinjiang’s oil towns. Legend has it that in the 1940s, an aged Uighur man called Salimuhu found a mysterious black oil that could generate both heat and light, which he started distributing on the back of a donkey.

A decade later, the government established an oil well in Karamay and the town today is an important outpost of the PetroChina empire. But the oil company’s local dominance has been challenged by the growing influence of the local tax office, as the government expands an amended resource tax that should boost the treasuries of energy-rich provinces.

Taxes on oil and gas have hitherto been collected on the basis of volume. The amended tax includes value as a factor for calculation, allowing the state to benefit from the rising price of energy resources.

The new tax mechanism was first launched as a pilot scheme in Xinjiang last summer as a 5% levy on oil and gas, before being rolled out to other western provinces.

Evidently, the bureaucrats in Beijing have figured it’s a good idea.

Last week, the State Council approved the revisions of the tax, although a precise timetable for implementation has not been announced. Many expect the tax will now be rolled out nationwide, potentially at a higher rate. A senior tax official said earlier this year that it could be as high as 10%.

An important feature is that the revenues will go to the local government. This should prove to be a major boon for provinces abundant in resources. Xinjiang is a good example. In the first six months of last year, when the tax was only levied on volume, the autonomous region raised Rmb371 million. But when value was included in the calculation for the second half of the year, revenue increased sevenfold to Rmb2 billion. In 2011, the tax take is expected to rise Rmb3.2 billion ($500 million) – a decent sum for a developing province in the far west of the country.

Expanding the tax across the country fits into one of Beijing’s grand plans – broadening the tax base for local governments. That would allow for a reduced dependence on selling land to raise revenue, a situation that looks more precarious given the uncertainty over the future of the housing market.

Earlier this month, we reported on the introduction of local government bonds (see WiC 122). One of the key concerns at the central government level is that provincial governments will issue too much debt, without the revenue base to cover repayment. Measures like the amended resource tax will provide extra revenue streams, thus increasing creditworthiness.

But while raising money for the state, the tax will shrink profits for the resource companies. The China Petroleum and Chemical Industry Association predicts that the three largest oil companies – PetroChina, CNOOC, and Sinopec – will together have to pay an extra Rmb37 billion (assuming 2010 output and oil taxed at 5%). One Sinopec insider told CBN that the revised tax will scoop up almost one third of the company’s profits in Xinjiang.

Resource companies will try to make good by raising prices for end consumers. Here there is a dilemma for policymakers. In expanding the tax base for local governments, they may end up pushing up the price at the pump, rekindling this year’s economic bugbear, inflation.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.