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Following the introduction of the new regulations on consumption tax on refined oil, issues such as ticket alteration and modification are expected to be eliminated at the source, causing fluctuations in the blended oil market. Before the New Year’s Day holiday in 2018 had even ended, the **State Taxation Administration issued Announcement No. 1 of 2018 – “Announcement on Issues Related to the Collection and Administration of Consumption Tax on Refined Petroleum Products,” which caused quite a stir in the petroleum industry. The purpose of issuing this announcement is clear: to strengthen the regulation of the collection of consumption taxes on refined products such as gasoline, diesel, aviation kerosene, naphtha, solvent oil, lubricating oils, and fuel oil, to maintain a fair tax system, and to create a favorable business environment. Based on the various provisions of the announcement, it specifies how to issue invoices for refined oil products, outlines the main aspects of adjusting tax returns, details the key elements involved in comparing tax returns, and addresses issues related to continuity between different stages. However, sensitive industry insiders say that what this announcement reflects is not that simple. Reflecting the direction of reforms “This announcement reflects reforms in two important areas: one is the reform of the fiscal and tax system, and the other is the reform of the oil and gas sector.” ”Guo Jiaofeng, assistant director and researcher at the Institute of Resources and Environment Policy at the Development Research Center of the State Council, said. From the perspective of fiscal and tax system reform, the Third Plenary Session of the 18th Central Committee of the Party clearly called for deepening such reforms and establishing a modern fiscal system; it also set the goal of accelerating the reform of the fiscal and tax system in order to build a modern fiscal system. “The “Announcement on Issues Concerning the Administration of the Consumption Tax on Refined Oil Products” essentially aims to meet the requirements of the reform of the modern fiscal and tax system. The consumption tax on refined oil, as an important type of consumption tax, represents a key area in the reform of consumption taxes. The issuance of this announcement indicates that the reform of consumption tax in our country is advancing steadily. ”Guo Jiaofeng said. From the perspective of oil and gas system reform, in May 2017, the State Council issued the \"Several Opinions on Deepening the Reform of the Oil and Gas System,\" outlining key reform tasks in eight areas. Reforming the pricing mechanism for oil and gas products and effectively unleashing market vitality in competitive segments is one such aspect. “Reform of the refined oil market is imperative, and the reform of the tax on refined oil consumption is an important aspect of such reform. **The announcement issued by the Tax Administration indicates that reforms in the oil and gas sector are being accelerated. ”Guo Jiaofeng said. Targeting market disorders: \"It is undeniable that there are currently some issues regarding the policies and oversight related to the consumption tax on refined oil products in our country.\" ”Guo Jiaofeng said, “The issuance of the ‘Announcement on Issues Related to the Collection and Administration of Consumption Tax on Refined Petroleum Products’ is a necessity driven by reform, and it is also a necessary measure to address the problems existing in the current consumption tax system for refined petroleum products.” ” China’s consumption tax on refined oil is a central tax, with the revenue going to the central government. For local governments, they not only fail to benefit from this portion of tax revenue; but since the consumption tax on refined oil is an inclusive tax, they must also remit a portion of the VAT and its surcharges to the central government. As a result, local authorities have little incentive to enforce regulations. The consumption tax on refined oil is levied at the production and import stages, rather than at stages such as consumption. Therefore, the enforcement of consumption tax regulations is relatively weak, and there are some illegal producers and distributors of refined oil who evade consumption tax by means of altering invoices, swapping them, or modifying them. “This also indirectly encourages local areas to **invest in refineries. Because although local governments **cannot receive the consumption tax on refined oil, they can generate a significant amount of other local taxes, such as value-added tax. This has led to many places wanting to build oil refineries, while China already has a severe overcapacity in oil refining. ”Guo Jiaofeng said. The scope of the consumption tax on refined petroleum products is relatively narrow; only seven specific products are subject to this tax. Other chemical substances that can be used in oil blending are not taxed, while chemicals such as MTBE can be turned into gasoline or diesel after simple blending. “This easily creates tax loopholes, allowing some lawbreakers to exploit these loopholes to blatantly evade taxes, thereby causing chaos in the market. ”Guo Jiaofeng said. “Affected by these issues, in reality many shipments of refined oil are sent without invoices, or the invoices provided are not those issued by the manufacturer itself. There is indeed confusion on such tax receipts. Some oil refiners manage to evade taxes, creating a price gap between them and compliant major refineries. Consumers tend to opt for cheaper oil products, causing law-abiding tax-paying enterprises to lose out in the competition. This has undoubtedly affected the orderly competition in the refined oil market. It is necessary to propose reforms in the supervision of excise taxes on refined oil products. ”Analyst Li Yan said. To standardize the invoicing process, in response to issues arising in the administration of the consumption tax on refined oil, the “Announcement on Issues Concerning the Administration of the Consumption Tax on Refined Oil” provides detailed regulations regarding the invoicing process for refined oil. The announcement states that all invoices for refined oil products must be issued through the refined oil product invoice issuance module in the new VAT invoice management system. “This is equivalent to linking the consumption tax on refined oil to value-added tax. ”Guo Jiaofeng said. The numerous pieces of information contained in the value-added tax are directly fed into the **tax authorities’ big data system. Big data technology can be used to track the production and sales activities of refined oil operators. For example, in a refinery, it is possible to determine how much crude oil and fuel oil were imported, how much refined products were sold, and through the VAT system, it is also possible to track the payment of consumption tax. “This allows for tracking the flow of funds, goods, and invoices for those involved in the production and distribution of refined oil products, thereby preventing companies from altering invoices, falsifying them, or mixing different types of oil, and helping to stop tax evasion. ”Guo Jiaofeng said. The \"Announcement on Several Matters Concerning the Management of VAT Invoices\" issued by the State Taxation Administration on December 18, 2017, stipulates that for invoices related to gasoline, diesel, fuel oil, liquefied gas, and asphalt, the prefix \"Petroleum products\" should be used; for other chemical products such as aromatics, xylene, propylene, MTBE, etc., the prefix \"Organic chemical raw materials or basic chemicals\" should be used. The names and categories of invoices are now more specific and standardized. The “Announcement on Issues Concerning the Administration of the Consumption Tax on Petroleum Products” further stipulates that in cases where taxpayers are required to issue invoices for petroleum products, the competent tax authorities shall activate the module for issuing such invoices. Additionally, taxpayers must declare in advance the quantity of petroleum products subject to consumption tax. These measures serve to make the invoicing system for petroleum products even more stringent. “All producers and distributors of refined oil must go to the tax authorities to activate a module for issuing invoices for refined oil. Through this module, specialized and targeted management can be carried out, which essentially enables unified control over value-added tax and consumption tax on refined oil, thereby bringing about significant changes in the management approach. ”Guo Jiaofeng said. “Enabling the refined oil invoice issuance module is an attempt to regulate the market from a technical perspective. In the past, the invoicing systems for refined oil products were rudimentary and unsophisticated; there was no standardized machine-based invoicing process, and invoicing was mostly done manually. This gives too much room for manual operation. ”Li Yan said. The announcement stipulates that in the module for issuing invoices for refined oil products, the tax classification codes for goods and services must be selected correctly. The “Announcement on Several Matters Concerning the Management of VAT Invoices” has been implementing abbreviated codes for the tax classification of goods and services. “The purpose of issuing the \"Announcement on Several Matters Concerning the Management of VAT Invoices\" is self-evident: it serves as a preparation for the upgrading of supervision over the consumption tax on refined oil products. ”Analyst Li Hui said. The announcement also stipulates that the total amount of invoices for refined oil that petroleum distribution companies can issue shall not exceed the total amount of oil produced and imported correspondingly. “It will be extremely difficult to change tickets that have existed invisibly for many years. ”Li Hui said. Since most social oil refiners do not have production facilities, they still need fuel invoices to sell the refined oil externally. Thus, altered bills came into being. The profits generated from ticket changes also constitute the foundation for the existence of oil adjusters. Although in recent years the **Tax Administration has stepped up its efforts in tax invoice management and oversight, fake invoices still have a market. “According to the provisions in the announcement, first, controls are implemented right at the source when invoices are issued; second, controls are applied throughout all stages of invoice issuance; third, inspections and controls are carried out based on any anomalies in the data. Every effort should be made to prevent refined oil businesses from evading taxes, so as to bring order to the refined oil market. Otherwise, tax evasion will lead to widespread unfair competition and market chaos. ”Guo Jiaofeng said. “The greatest significance of this announcement is to prevent practices such as ticket manipulation, thereby promoting more standardized tax-related transactions involving invoices related to refined oil products in the market. ”Li Yan said. Oil refiners are hit hard. “The issuance of the announcement has no impact on consumers, and its effect on legitimate companies is also limited.” The main ones affected and hit are the unregulated enterprises involved in activities such as ticket scalping and ticket manipulation, as well as oil transfer units, plus ticket scalpers in society. ”Li Yan said, “It will have a significant impact on companies that used to make money through gray areas, while it is a great benefit for large state-owned enterprises that operate in a legitimate manner.” ” According to market feedback, the vast majority of legitimate manufacturers are operating in accordance with the regulations outlined in the announcement. “In some refineries, the strict comparison of consumption tax declarations may make it more difficult for them to sell under different names, but this has little impact on the overall invoicing process in those refineries. ”Analyst Wang Yanting said. The new regulations have a significant impact on the oil blending process. Products such as aromatics, MTBE, LCO, and alkylated gasoline are clearly labeled as organic chemical raw materials or basic chemicals on the invoices, thereby further specifying the scope of use for those invoices. Refined oil producers can neither arbitrarily change the tax classification codes for goods and services nor inflate the number of refined oil invoices issued. This significantly increases the difficulty for oil blenders in obtaining such invoices. “Most oil blending companies do not have production facilities, making it more difficult to switch from processing chemical products to issuing invoices for refined oil. Additionally, producers and distributors of refined oil each use corresponding invoice issuance modules for refined oil, with restrictions placed on the number of invoices that can be issued. This further increases the difficulty for oil blenders to alter invoices through other channels. ”Wang Yanting said. Li Yan also pointed out that the regulations on the collection and administration of consumption tax on refined oil have significantly curbed the problem of illegal refined oil invoices at the source. After the announcement on the administration of the consumption tax on refined oil was issued, the South China market showed the most obvious reaction. Gas prices in South China have seen a sharp rise, reaching a high of nearly 1,100 yuan per ton at one point. “The cost of blended gasoline has risen, remaining roughly on par with the prices of gasoline sold by the main distributors, leaving no profit margin; this situation may become the norm in the future. ”Li Hui said, “Even if consumption tax is not imposed on oil blending materials such as mixed aromatics for now, oil blenders still cannot avoid the consumption tax on refined oil, which ranges from 1,400 to 2,100 yuan per ton, if they want to continue operating.” Given the current costs of oil adjustment, operations are already operating at a loss, and the prospects for future development are even more concerning. ” Li Hui also said that local refineries are facing higher tax costs amid stricter supervision of excise taxes on refined oil products, and in order to maintain profits, they may pass these costs on to the ex-factory prices. But in that case, the advantage in competition with the main sales activities will no longer be evident. Once the announcement is truly implemented, there might be a small number of finished oil invoices leaking out through special channels in the blended oil market. “But rarity makes things valuable; oil blending companies will find it difficult to cope with the pressure imposed by high taxes, and the role of such companies in the oil market is likely to gradually diminish. Some small refineries with outdated equipment and a lack of oil sources may even be phased out as a result. ”Li Yan said. The blending oil market remains unstable. “Due to a sharp decline in the enthusiasm of blending operators, there are reportedly no large-scale transactions taking place, which has directly restricted trading activities in the blending oil market in certain regions.” ”Li Hui said, “Regarding oil blending raw materials, putting aside the impacts of factors such as ethanol gasoline, reformulated gasoline, and consumption taxes on individual products, merely from a demand perspective, the market share of blending oils like mixed aromatics and light cycle oil will also significantly decline. As a result, importers have practically ceased their operations.” ” Wang Yanting pointed out that as the difficulty and cost of having refiners issue transfer tickets increase, the advantages of using imported mixed aromatics and LCO as feedstocks for oil blending will diminish. This will significantly affect the market demand for such mixed aromatics and LCO, and it is expected that imports of these feedstocks may decrease in the future. In addition to oil blending companies, local refineries also purchase some auxiliary materials for oil blending, and most of these come with chemical-related invoices; however, it is very rare to see invoices related to gasoline production. “For refineries, the issue of balancing excise taxes is relatively straightforward; in the short term, it will not affect the demand in this sector. However, given that most refineries have already put reformation units into operation or plan to build new ones, once a large number of such units are in use, the local refineries will have sufficient supply of oil processing auxiliaries, reducing their need for purchased raw materials; as a result, the market share of imported mixed aromatics and LCOs will further shrink. ”Wang Yanting said. Overall, stricter regulation of the consumption tax on refined oil helps to maintain a fair tax system and create a favorable business environment. The standardization of the market for this tax is an inevitable trend, but it is harsh on oil blending companies and the market for blending materials. “2018 may become a turning point for the development of the blended oil market; it will be even more difficult to survive in this competitive environment. ”Li Hui said. Advancing further reforms: The issuance of the \"Announcement on Issues Related to the Collection and Administration of Consumption Tax on Refined Petroleum Products\" demonstrates an enhanced focus on the supervision of such tax. “This is to prepare for and lay the foundation for the market-based reform of refined oil products, as well as to prepare for market-based pricing of such products. ”Guo Jiaofeng said, “But we can’t be satisfied with this alone; we must also advance the overall reform plan for the refined oil consumption tax and introduce the reform plan for the refined oil consumption tax as soon as possible.” ” The announcement does not address the adjustment to the central tax status of the consumption tax on refined oil products. Local authorities **may implement a lump-sum tax system for oil refineries and finished oil product distributors. “After the tax-inclusive system was implemented, even if the regulations regarding the collection of consumption taxes on refined oil products become stricter, ineffective supervision by local authorities will still result in a significant reduction in the effectiveness of these measures. ”Guo Jiaofeng said, \"The issues regarding the relationship between the central and local governments in terms of the consumption tax on refined oil, as well as the distribution of this tax, are not addressed in this announcement, but they should be among the directions for future reforms of the consumption tax on refined oil.\" ”There are strong calls within the industry to change the consumption tax on refined oil products into a tax shared between the central and local governments, or to make it a local tax. Li Yan pointed out that in the future, the collection of consumption tax on refined oil products could make greater use of advanced technical methods such as big data and cloud computing, thereby making it more convenient for taxpayers to pay their taxes, as well as enabling tax authorities to carry out supervision in a more comprehensive and efficient manner. The collection and administration of the consumption tax on refined oil are aimed at enterprises that require invoices for such oil; however, it is impossible to enforce regulation when neither the producer nor the consumer wants an invoice. “It is undeniable that such companies exist. Departments such as tax authorities, industry and commerce bureaus, and public security agencies should step up efforts to crack down on such enterprises. ”Guo Jiaofeng said. At present, the refined oil market is continuously being regulated. However, in the long term, it remains a daunting task to establish a unified, open, and orderly market system for refined petroleum products, to create a fair and market-based mechanism for determining oil prices, and to restore oil prices to reflect their role as commodities.