Companies to begin paying China’s new environmental protection tax in April

March 29, 2018

This article was written by David Liu, a partner of FuJae Partners, and first published on MNE Tax, Multinational Tax & Transfer Pricing News.

Businesses that directly discharge pollutants into the environment will begin paying China’s tough new environmental protection tax on April 1.

This new tax law, and the Administrative Measures for Pollutant Discharge Licensing, which came into effect on January 10, mark the end of a period when enterprises could rely on Chinese government authorities’ lack of strict enforcement of environmental protection law.

The new Law on Environmental Protection Tax, signed into law on December 2016, is not designed to put yet another burden on manufacturing and industrial companies. Rather, the environmental protection tax is intended to be a replacement for China’s pollution fee. Following the enactment of the new tax, the pollution fee, previously administered and levied by the local Environmental Protection Bureaus, will be abolished.

The tax rate, subjects, and coverage of the environmental protection tax are roughly the same as under the pollution fee regime. However, affected enterprises and industries widely anticipate a rise in their production costs due to this new tax and stricter enforcement.

Key terms

The environmental protection tax is levied only upon entities which directly discharge pollutants into the environment; individuals are not subject to this tax.

According to the new law, discharging pollutants into legally established waste processing centers or landfills or similar facilities are not regarded as directly discharging pollutants into the environment.

The tax will be calculated based on the equivalent quantity of pollutants discharged which includes noise, solid, and water waste, as well as air pollutants. The equivalent quantity of pollutants, in turn, would be calculated based on assessed data and conversion methods set out in the law’s appendix.

One innovative feature of the environmental protection tax is that it expressly incentivizes enterprises to go green. Those discharging 30% or 50% less than a preset standard will get a 25% or 50%, as the case may be, discount on their taxes due.

Procedure-wise, the new law mandates collaboration between the environmental protection authorities and the tax authorities.

Specifically, environmental protection authorities shall provide the tax authorities with all data on waste-discharging enterprises (EPT taxpayers), including their licenses, past violation of environmental protection regulations, and past pollutant discharge data.

The tax authorities on the other hand will timely inform environmental protection authorities of the tax administration status of EPT taxpayers which directly discharge pollutants into the environment, and any discrepancy between data declared by these enterprises and the data environmental protection authorities provided on the same taxpayer.

The tax authorities are also required to provide the environmental protection authorities with tax assessment information on EPT taxpayers and pertinent environmental risks. This is perhaps the most significant change that the environmental protection tax brings in respect of Chinese government’s control of worsening environment.

Previously, pollution fee charges are criticized by many as “toothless.” This was because environmental protection authorities had little power or incentives to punish polluters as long as they are contributing to the local economy.

However, things are completely different under the environmental protection tax. First of all, violation and evasion of the environmental protection tax could trigger serious and sometimes criminal consequences.

Secondly, China’s authorities are much more powerful and effective than the environmental protection authorities in terms of law enforcement. Last, but not the least, it is more difficult for an EPT taxpayer to evade environmental protection law enforcement through undue influence or blatant corruptive practices.

Paths forward

Even though the environmental protection tax law brings many good changes and conforms to the government and now constitutional policy of developing a green economy, the effectiveness of the tax-environmental protection joint enforcement remains to be seen. Tax officials know little about pollutants and chemicals, while the environmental protection authority may be reluctant to pour huge resources to assist the tax authorities amid central government agencies’ re-organization, which will take considerable efforts and divert the attention of environmental protection officials.

To avoid miscommunication and low-efficiency, which usually takes place in inter-agency co-operations, local officials from both government authorities will need to work seamlessly as a team going forward.

Enterprises should approach this tax and other recently-issued environmental protection regulations with extra caution and seek professional assistance where necessary.

Environmental compliance has become particularly critical as the Chinese government has made it clear that environmental protection is one of its top priorities.

This is evidenced partially by China’s reorganizing the former Ministry of Environmental Protection into a new and more powerful government agency and by putting the green economy into the Constitution as one of China’s objectives.