The future is green: EPT in China
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The future is green: EPT in China

In accordance with China’s 13th five-year economic development plan, which commenced in 2016, new policy tools such as the environment protection tax (EPT) and a reformed resources tax (RT) are being used to promote a ‘green development philosophy’. Jessica Xie, Flora Fan, William Zhang, and Maria Mei explore these new developments and what they mean for China’s greener future.

The vision of sustainable growth underpinning the Chinese government's 12th five-year plan (from 2011 to 2015) is being further advanced with the 13th five-year plan (from 2016 to 2020). This sets out a development philosophy that focuses on innovation, coordination, greenness, openness and inclusiveness, with the core goal of improving the quality and efficiency of growth. Quality improvement of the ecological environment is one of the seven main development objectives for these five years, and is elaborated as a 'green development philosophy'.

To this end, set out in a separate tax chapter of the 13th five-year plan, the Chinese government explains how it plans to use green tax policy tools, such as EPT, RT and consumption tax (CT), to control energy and resources consumption and encourage a "green production model and lifestyle norms".

The EPT was instituted in late 2016, replacing the previous pollution discharge fees, and will apply from January 1 2018. The EPT is expected to increase the cost burden of polluting behaviour, and is intended as a significant deterrent for polluting emissions.

Effective from July 1 2016, an expansion of the scope of RT provided for the taxation of almost all mineral resources to shift to an ad valorem basis from a volume basis. This aims to increase the cost of resource consumption and encourage the efficient utilisation of resources. A pilot programme for introducing RT on water resources was also initiated in Hebei Province at the same time in July 2016.

Policymakers have also been seeking to promote green lifestyle norms. Consumption tax was expanded to cover certain batteries and coatings, starting from February 2015. This aimed to control pollution caused by the production of certain batteries and the emission of volatile organic compounds. Moving in the other direction, CT exemption was granted to environmentally friendly batteries and coatings to promote their use.

Such measures are not intended to radically increase tax revenue in the near future. Policymakers recognise that additional tax burdens may impair the profitability and competitiveness of taxpayers and are seeking to carefully balance the long-term environment protection goal of taxation reforms and the immediate impact on the economy. The essence of EPT legislation and RT reform is 'levy-to-tax conversion', and thus the fiscal burden will not be significantly increased in the short term (the historic fiscal impositions on polluting behaviour are variously termed 'fees', 'levies', 'fund contributions', 'charges', etc.).

Both the RT reform rules and the EPT legislation grant provincial governments the power to determine the detailed tax rates, to set an expanded scope for the taxes, and to modify specific aspects of the implementation rules. The local governments can tailor RT and EPT policies to local economic circumstances and environmental goals. In addition, the RT and EPT revenue flows directly to local treasuries after the reform, while a portion of the previous fees went to central government. This should enable and motivate local governments to apply these policy tools in the manner most suitable for their local districts.

Enforcement of the EPT

The Chinese government has demonstrated a strong ambition to tilt the balance between economic growth and environmental protection in the direction of the latter. The Environment Protection Law (EP Law), after the amendments in 2015, was called "the strictest in China's history". Furthermore, it is not just the wording of the law that has been strengthened: since 2016 the Ministry of Environmental Protection (MEP), from central government level, commenced enforcement of the strictest level of environmental supervision and examination in China's history. In the past two years, millions of businesses were closed or penalised for non-compliance with the EP Law. When the prevailing 'environment protection storm' starts to blow over, it is anticipated that more stable and routine policy tools will be introduced to strengthen the daily administration and control of pollution emissions.

On December 25 2016, the Law of the People's Republic of China on Environmental Protection Tax (EPT Law) was approved by the National People's Congress (NPC). From January 2018 local taxes imposed under the EPT Law will replace the existing pollution charges levied by local branches of the MEP. The taxable scope of EPT, and the types of taxpayers subject to EPT, are basically the same as under the previous pollution discharge fees. Carbon dioxide emissions are outside the scope of EPT (see Table 1).

Table 1


Enterprises, public institutions and other persons engaged in production, or any other business operations, that release pollutants into the environment directly in the territory of China, as well as in the sea waters under its jurisdiction

Taxable objects and tax base

• Air pollution: CNY 1.2 to CNY 12 ($0.18 to $1.80) per pollution unit

• Water pollution: CNY 1.4 to CNY 14 per pollution unit

• Disposal of solid wastes: based on the kind of the solid wastes (e.g. dangerous or other), tax rate ranges from CNY 5 to CNY 1,000 per ton

• Noise pollution: dependent on decibel, tax rate ranges from CNY 350 to CNY 11,200 per month

The EPT legislation seeks to ensure that, at least initially, the tax burden will not be increased after the transition from pollutant discharge fees to tax. This is achieved by adopting the existing standards for pollutant discharge fees, as well as treating the payers of pollutant fees as taxpayers of EPT. It should be noted that while most of China's taxes are still based on regulations issued at State Council (i.e. cabinet) level, the EPT has the status of a law, passed by the NPC; the fifth Chinese tax law. Consequently the EPT Law will, technically speaking, have a more binding force for EPT taxpayers than most other tax regulations. Another consequence of the status of the EPT as a law is that the regime and its enforcement mechanisms should remain stable over time, since any significant change would require NPC approval.

Although the EPT Law adopts the existing standards for pollutant discharge fees as a lower range, provincial level governments now have the authority to determine detailed tax rates within the statutory range, which may go higher. For example, in the case of air pollution and water pollution, the EPT Law provides the minimum tax rate and provincial level governments can raise tax impositions up to 10 times where the environmental situation in their districts merits this. By the end of September 2017 several provinces had determined, or at least proposed, the applicable taxable items and the specific EPT rates that would be used in their districts. Provincial legislatures at Fujian and Guizhou have already determined the detailed tax rates, while Zhejiang, Jiangxi, Jiangsu and Guangdong are still gathering public opinions on their proposals. In Guangxi and Sichuan, their tax plans are still being deliberated by municipal governments and local companies.

The approach to EPT localisation taken by localities in practice can be seen to be driven by (i) the carrying capacity of the local environment; and (ii) the previous pollution discharge fees level, which varies significantly across provinces. Some provinces like Fujian, Jiangsu and Zhejiang have decided to continue, under the EPT regime, with the same level of imposition as the earlier pollutant discharge fees. Guangdong and Guizhou have proposed to lift the tax rate above the level of the previous pollutant discharge fees in view of their limited environmental carrying capacity. Even with this, the EPT rate applicable in Guangdong and Guizhou is still much lower than that applicable in Jiangsu, which had higher pollutant discharge fees under the prior regime.

The EPT reform transfers an important government revenue source from the MEP, into the hands of the local tax authorities. Rather than training the tax authorities in EPT assessment and collection, the MEP has been putting its collection experience and professional technical knowledge in the administration on pollutant discharge fees, at the disposal of the tax authorities. In June 2017, the Ministry of Finance (MOF), the State Administration of Taxation (SAT) and the MEP jointly issued the draft Implementation Regulations for the Environmental Protection Tax Law (draft regulations) to solicit public comments. The draft regulations noted that the SAT will work with the MEP to set up a tax-related information sharing platform, and that the MEP will support the SAT in conducting tax audits for EPT. It is expected that the draft regulations will be formally issued by State Council by the end of 2017.

At the execution level, the SAT and MEP signed a cooperation memorandum on EPT collection on July 31 2017. The memorandum clarifies that the SAT and MEP will work together, inter alia, on the following:

  • Publishing standards on EPT collection;

  • Formulating EPT relief policy and its implementation rules; and

  • Setting up the tax collection system and tax-related information sharing platform.

It is the first time that two government agencies have worked so closely together on tax collection and administration. Some local branches of the MEP have started passing profiles of entities paying pollution discharge fees on to the tax authorities. The cooperation mechanism could maximise the experience and knowledge gained by the MEP and smooth the transition from pollution discharge fees to EPT.

Milestones achieved with resource tax reform

Similar to other major economies in the world, the mining tax regime in China is complicated. On top of the ordinary corporate income tax (CIT), VAT and other taxes, RT has been imposed on the extraction and sale/use of mineral resources since 1984. Since 2010, the government had gradually moved forward a series of RT reforms, with four key objectives: expansion of the taxable scope, change of the tax base, adjustment of the tax rate and rationalisation of resources-related levies. As a result, a series of RT regulations has been issued since 2011.

Resource tax reform started from the change of the tax base on crude oil and natural gas resources, then coal and rare earths. Effective from July 1 2016, the Chinese government has been expanding the taxable scope of the RT, transitioning it from a volume basis tax to an ad valorem basis tax, abolishing local charges and fund contributions, determining a unified tax rate range of mineral products as well as setting tax incentives.

The objective of "fully expanding the taxable scope" has been largely achieved. Coal bed methane (CBM) extracted from the ground has been included into the taxable scope of RT since July 2016, with a simultaneous abolition of the mineral resource compensation fee previously levied on CBM. However, a lower RT rate is applied for CBM than for natural gas and coal, with a view to encouraging the development of CBM production. In addition, the pilot programme for water resource reform was initiated in the Hebei Province in July 2016. Provincial governments can decide, at their own discretion, to expand the RT scope to include the exploitation of forests, pastures and shoals (e.g. logging), subject to the approval of the State Council.

By making RT levels more sensitive to the pricing of resources on markets, with the move to ad valorem taxation, it is hoped that enterprises will be encouraged to improve their usage of resources. Particular encouragement is given to the more efficient use of resources through the special incentives and reductions in RT for use of certain grades of resources.

Similar to EPT, RT reform is also a 'levy-to-tax conversion' reform. Due to the lack of flexibility of the pre-reform (volume basis) RT, local governments had sought to impose various local levies on the exploration of mining resources, to supplement local revenue collection. However, since July 1 2016, the mineral resources compensation fee rate has been lowered to zero, the levying of the price regulating fund has ceased, and various improperly levied local charges, and contributions to mineral resources funds (not sanctioned by central government), have been prohibited.

The RT reform is not, of itself, intended to radically increase tax revenues. The post-reform RT rates have been set so as to provide local governments with the revenue they previously obtained from the mineral resources compensation fees, and local levies, before their elimination.

Considering the expected decline of local financial revenues after VAT reform (this abolished business tax that was a key local government revenue raiser), RT is likely to remain a local tax in the medium term. In the long term, it remains to be seen whether the allocation of revenues between the central and the local governments will be adjusted.

Overall, the RT reform in 2016 was intended by the government to have a positive impact on the mining industry. The ad valorem based calculation method aims to build up an automatic adjustment mechanism and promote the utilisation efficiency of resources, together with the effect of relevant tax incentives. The abolition of various local charges and funds is intended to achieve a rationalisation of resources-related levies.

Looking to the future

There are three years remaining to fully implement the 13th five-year plan. The RT reform in 2016 was a solid start, and the release of the EPT Law draft regulations in 2017 has sustained the momentum behind China's emerging green development philosophy. In his keynote address to the 19th Chinese Communist Party National Congress on October 18 2017, President Xi Jinping stated that the Chinese government would accelerate ecological reforms to build a "beautiful China". Following reform of RT and EPT, the focus turns to CT changes, with the existing administrative regime for oil set to be reformed to encourage lower consumption of non-renewable energy resources thereby limiting air pollution emissions. Continuing the drive towards greater 'rule of law governance', additional policy measures in this space are expected to take the form of new laws, as with the EPT.

Jessica Xie


Partner, Tax

KPMG China

8th Floor, Tower E2, Oriental Plaza

1 East Chang An Avenue

Beijing 100738, China

Tel: +86 10 8508 7540

Jessica Xie specialises in advising clients on tax issues concerning the energy and natural resources industry as well as the manufacturing industry.

Jessica has also been active in assisting many foreign companies in designing their corporate and operational structures in China to meet their business objectives. She also focuses on providing M&A tax services to foreign companies and assists in tax due diligence, transaction structuring, post-acquisition structuring as well as setting up various forms of legal entities for acquisition or operational purposes.

Jessica also provides advice to multinational companies in the areas of company regulations, foreign exchange and customs issues.

Flora Fan


Director, Tax

KPMG China

8th Floor, KPMG Tower, Oriental Plaza

1 East Chang An Avenue

Beijing 100738, China

Tel: +86 10 8508 7611

Flora Fan is a tax director of the energy and natural resources line of business at KPMG China. She has been providing various China tax advisory and compliance services to multinational enterprises and Chinese domestic companies since 2005.

Flora has been actively involved in advising clients on various issues such as M&A, corporate restructuring and cross-border transactions, based on Chinese state regulations and special local rules, policies and practices. She is experienced in delivering innovative and practical solutions, and planning ideas which not only cover tax but also regulatory, customs, and foreign exchange issues. She also has extensive experience in providing tax services to clients in the oil and gas industry as well as in the mining and infrastructure industries.

Flora has bachelor degrees in law from Peking University. She is a member of the Chinese Institute of Certified Public Accountants (CICPA) and is a Chinese Certified Tax Agent.

William Zhang


Partner, Tax

KPMG China

26th Floor, Plaza 66 Tower II

1266 Nanjing West Road

Shanghai 200040, China

Tel: +86 21 2212 3415

William Zhang is the practice leader for research and development (R&D) tax and for international corporate tax in central China and is the national tax leader for the auto industry. William has been providing business, tax and legal consultation and planning ideas for various multinational enterprises since 1997.

His experience covers a range of areas, from assisting multinational enterprises s in formulating expansion strategies into China, setting up and structuring their business operations in China, fulfilling relevant registration and filing requirements, up to the stage of working out practical solutions to various tax issues and exploring possible tax planning ideas.

In particular, William has assisted quite a number of multinational enterprises in industrial markets in, for example, high and new technology enterprise (HNTE) application review assessments, R&D bonus deduction applications and tax planning for restructuring transactions and cross-border fund repatriation arrangements.

William was seconded to the international corporate tax group of KPMG's London office for one year, during which he was substantially involved in various international tax projects for European companies.

He is a member of the China Institute of Certified Public Accountants and the China Institute of Certified Tax Agents.

Maria Mei


Partner, Tax

KPMG China

12th Floor, International Plaza

8 Lujiang Road

Xiamen 361001, China

Tel: +86 (592) 2150 807

Maria Mei is the senior partner in charge of the KPMG Fuzhou/Xiamen offices. Maria has over 20 years of working experience in the tax area. She has provided professional services to multinational enterprises, state-owned enterprises and private-owned enterprises in various industry sectors including the consumer market, and the energy and real estate sectors, etc.

Maria joined KPMG's Beijing office in 2005 and was on secondment at the KPMG New York office in 2008. Before joining KPMG, Maria worked at the Xiamen Local Tax Bureau for 10 years.

Maria has extensive experience in providing professional services in tax value chain management, strategic tax planning, M&A for IPOs and tax dispute resolution. She is a Certified Tax Agent of China.

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