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All coal-to-oil demonstration projects are facing operational difficulties; the industry needs differentiated tax policies. Author/Source: Date: 2018-04-02 Clicks: 6 The \"2018-2023 Business Plan for Barrier Material Projects\" is a specialized plan developed exclusively by CIC Research for project investment and financing consultation services. The plan is available in two versions: a general industry version and a professionally customized version. The industry standard version is developed by CRI PRH based on the average standards of the industry… As part of China’s strategy to replace petroleum with alternative fuels, coal-to-oil technology has seen over 30 years of development; the demonstration plants have been in operation for many years now and are ready for commercialization and further development. However, under the dual pressures of low oil prices and high taxes, the project faces significant profitability challenges. Across the country, several officials from coal enterprises have called for the rapid improvement of consumption tax policies in order to stabilize the development of the coal-to-oil industry. Just how heavy is the consumption tax on coal-to-liquid fuel? Following losses in 2016, the Yitai Coal-to-Liquid project incurred losses once again in 2017. On March 21, the 2017 annual report released by Yitai’s B-share shares showed that the coal-to-oil company achieved sales revenue of 898 million yuan, with a net loss of 4.4958 million yuan. This is not an isolated case. In the previous two years, a sharp drop in international crude oil prices led to a significant reduction in domestic refined oil prices, which in turn resulted in a substantial increase in consumption taxes. As a consequence, all domestic coal-to-oil demonstration projects encountered operational difficulties, severely affecting the implementation of **energy strategy projects. Half of the price of petroleum products is used to pay taxes. Since the second half of 2014, in an effort to offset falling oil prices, the Ministry of Finance issued orders three times – in November and December 2014 and January 2015 – to raise the consumption tax on refined petroleum products (including those produced from coal). It is understood that during the adjustment of the consumption tax, given that refined oil prices are linked to crude oil prices, oil refining companies can offset the impact of the consumption tax hike on their profits through a significant decrease in crude oil costs. Unlike oil refining companies, when crude oil prices fall, coal-to-oil companies not only fail to benefit from this situation; moreover, falling prices of refined oils and rising consumption taxes lead to increased production costs, further reducing the profit margins for these oils. Coal-to-oil: the raw material is coal, and the product is oil. On the surface, the market conditions for coal-to-oil conversion are influenced both by coal prices and oil prices. However, according to the reporter’s understanding, the fixed asset costs, financial costs, and administrative expenses related to coal-to-oil projects account for about 80%; of the remaining 20%, the cost of coal raw materials constitutes only 13%–14%. Therefore, given that coal is readily available as a raw material, oil prices become the most important factor determining whether coal-to-oil enterprises can be profitable. When international crude oil prices rise, the profit margins of coal-to-oil companies increase; whereas when international crude oil prices fall, their profit margins decrease. According to Shi Xianping, deputy director of the Petroleum and Chemical Industry Planning Institute, the break-even point for coal-to-oil production is generally around $50–$60 per barrel of oil; in some cases it even reaches $70. However, this depends on how the calculations are done, especially regarding the price of coal. If coal is purchased from the market, producing oil at a price of $50 per barrel results in no profit. “Under low oil prices, the profitability of coal-to-oil production is poor; coupled with high taxes and fees, it is difficult for companies to bear such costs. ” According to Sun Qiwen, deputy general manager of Yankuang Group and chairman of Shaanxi Future Energy Chemical Co., Ltd., following the three successive increases, the consumption tax on diesel is 1,411.2 yuan per ton, while the consumption tax on naphtha is 2,105.2 yuan per ton. According to calculations, the diesel tax burden accounts for 47.32% of the product’s selling price, while the tax burden on naphtha is as high as 76.85%. “In other words, half, or even more than half, of the price per ton of oil products goes toward taxes. ”Sun Qiwen said, “After normal production operations begin, Future Energy will have to pay 1.655 billion yuan in consumption tax, 264 million yuan in value-added tax, and 192 million yuan in additional taxes each year. The total amount of various taxes and fees amounts to 2.111 billion yuan, resulting in a comprehensive tax burden of 53.34%.” ” △In the view of Zhai Deyuan, deputy general manager of Yitai Group, for coal-to-oil projects that are already in operation, raising the tax rate on refined oil consumption, amid a sharp drop in crude oil prices, is a proper use of fiscal measures to curb excessive oil consumption and to promote environmental protection, energy conservation, emission reduction, and energy substitution. “Coal-to-oil conversion plays a positive role in improving the clean and efficient utilization of coal, and the oil products produced contribute to the upgrading of refined oils. As an industry that bears the important responsibility of ensuring energy security, it should not be ‘harmed’ by high taxes. ” The industrial growth phase calls for differentiated tax policies. The \"13th Five-Year Plan for the Development of Advanced Coal Processing Industries\" states that the moderate development of this industry is not only necessary for building strategic technical and capacity reserves in the energy sector, but it is also an important measure to promote the clean and efficient use of coal and ensure energy security. Industry insiders point out that as a crucial component of the coal deep-processing industry, although China has achieved significant breakthroughs in coal-to-oil technology, with fairly notable demonstration results, this sector remains in its early stages of development. As an emerging industry, it requires policy support to fully exert its demonstrative role. It should not be burdened by excessive taxes; otherwise, it loses its significance as a model for the coal-to-oil industry. “Based on the operational experiences of several current pilot projects, it can be seen that even at low oil prices, and as long as there are no excessive tax burdens, coal-to-oil production can generate decent profits. This indicates that the development of coal-to-oil technology is feasible; what is needed now are relatively favorable fiscal and tax policies. ”Zhai Deyuan said. In the view of Jia Runan, general manager of Baotou Coal Chemical Company, considering the purposes for which consumption tax is imposed, it is primarily applied to consumer goods that are characterized by high energy consumption, high pollution levels, and high consumption. Since coal-based oil production contributes to more efficient and cleaner utilization of coal, it should not fall under the scope of taxes targeted by consumption tax. Sun Qiwen suggested that relevant authorities should fully consider the special characteristics of the coal-to-oil industry, change the practice of imposing oil consumption taxes on such enterprises, and adopt differentiated tax policies. “Reference can be made to other **support policies for emerging industries and high-tech industries; corresponding tax reductions or exemptions, as well as financial subsidies, can be provided to ensure the healthy development of the coal-to-oil industry. In countries like South Africa, where the coal-to-oil industry is well-developed, when international oil prices fall, **subsidies are provided to companies based on changes in oil prices and their profit thresholds; this approach is worth emulating. ” Jia Runan believes that as a high-tech industry, the coal-to-oil sector is still in its early stages of development in China and constitutes an infant industry. We should draw on the fiscal, tax, and financial support policies provided by developed countries for high-tech industries, rather than imposing high consumption taxes on them as if they were ordinary petroleum-based products. “It is imperative to introduce policies to reduce or exempt the consumption tax on coal-based oil products promptly, in order to mitigate the impact of low oil prices on the coal-based oil industry and ensure its healthy development. ” Chang Jiwen, deputy director of the Institute of Resources and Environment at the Development Research Center of the State Council, suggested considering the imposition of an energy security tax on imported oil products to fund subsidies for domestic coal-to-oil demonstration projects. “It is necessary to implement tax incentives for model enterprises during periods of low oil prices, but such policy support is only a temporary measure for low oil prices and the early stages of development of this industry. To fully overcome their difficulties, coal-to-oil companies must make efforts on their own and actively explore ways to increase the added value of their products. ”Shi Xianping said. In this regard, Wang Jiming, an academician of the Chinese Academy of Engineering, proposed that the coal chemical industry should develop in integration and complementarity with the petrochemical industry, and move toward the production of high-end chemical products, so as to address the challenges it faces.