By: Elizabeth Leclaire, Dezan Shira&Associates
After decades of devotion toward economic and industrial development, China is beginning to address the environmental concerns that have pained the nation in recent years. China’s Environmental Protection Law, which came into force early 2015 and increased factory liability for pollution, may soon by followed by a new “Environmental Protection Tax” (EPT). China’s EPT is in its exposure draft stage until July 9, 2015, during which the public may submit comments.
The EPT is a culmination of the efforts of China’s Ministry of Finance, State Administration of Taxation, and Ministry of Environmental Protection. Companies operating within China should take caution to remain current on EPT draft policy, as it imposes strict tax regulations on polluting companies, as well as harsh penalties for violators.
As it stands now, the EPT is to further increase company responsibility for pollution within China, whether in the form of air, water, solid, or noise pollution. Minimum taxation amounts for pollution will be established on a national level. However, provincial governments will have the discretion to raise tax minimums to better mitigate the environmental concerns of the particular province.
Calculating Pollutant Tax
In order to accurately measure the quantity of pollutant emitted, companies will be permitted to install a State-approved pollution discharge monitoring device. The pollution discharge quantities recorded by the machine will be used to later determine the appropriate pollution tax amount to be imposed on the company.
In the event that a company does not purchase a pollution discharge monitoring device, a State-approved pollution monitoring institution will calculate pollution emission amounts.
Pollutant Equivalent Values
Pollutant Equivalent Values (EPVs) are numerical constants used in calculating EPT. Each different pollutant type is assigned its own EPV. For example, pollution through mercury emission has an EPV of 0.0005, while the EPV of carbon monoxide pollution is 16.7. Companies should familiarize themselves with relevant EPVs in order to anticipate the effects of the pending EPT legislation.
Companies can calculate individual air and water pollutant emission tax by dividing the quantity of the pollutant discharged by the corresponding EPV. The number produced is referred to as the “pollution equivalent” and is then multiplied by specific tax rates set by the government.
For example, a company looking to calculate tax on 1000 kg of mercury would divide the 1000 kg by 0.0005 (mercury’s EPV). This calculation equates to a pollution equivalent value of two million, which is then multiplied by mercury emission current tax rate of RMB 1.2. After multiplying two million by RMB 1.2, the final tax on 1000 kg of mercury emission would total RMB 2,400,000.
Noise pollution due to construction is calculated at a rate of RMB 3 per one square meter of construction. However, pollution due to industrial noise is calculated based off the number of decibels the industrial noise exceeds standards established by the government. Industrial noise tax can range from RMB 350 per month (one decibel above standard) to RMB 11,200 per month (18 decibels above standard).
Solid waste taxation is determined by the amount produced, and ranges from RMB 5-30 per ton depending on the specific solid pollutant emitted.
It is important to note that not all pollutant discharges within a company will be subjected to the new taxation. Water pollutants will be divided between heavy metals and remaining toxins, and only the five highest heavy metal pollutant equivalents and three highest remaining toxin pollutant equivalents will be taxed. Similarly, only a company’s air pollutants with the three highest pollutant equivalents will feel the effects of taxation.
Additionally, any company which empties pollutants in urban wastewater treatment plants or urban domestic waste treatment plants is exempt from the EPT. Pollution produced from vehicles, ships, trains, and planes, and agricultural production (except large scale) is not covered either.
The current EPT draft states that tax collection should occur at the location where the pollution is discharged. China’s tax authorities have the discretion to choose how frequently the tax will be collected, either on a monthly, quarterly, or annual basis.
In the event that a company emits pollution irregularly, the tax will be collected on a case by case basis.
Taxpayers must be careful to strictly follow tax collection procedures, as violations can lead to fines of up to five times the tax amount unpaid. China’s environmental protection departments also maintain the right to investigate and review any suspicious activities of companies operating within China at their own discretion.
As China turns its attention toward environmental protection, companies must be sure to stay current on China’s most recent legislation. The pending EPT is likely another step in the process to restore China’s environment, and companies unprepared for the adjustment may find themselves struggling to adapt to the changing industrial climate.
This article was first published on China Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.