Calls for years have gone unheeded; why is it so difficult to grant exemptions from the tax on coal-based oil consumption?

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Calls for relief have gone unheeded for years – why is it difficult to grant exemptions from taxes on coal-based oil? Author/Source: China Energy News Date: 2020-04-02 Clicks: 25 Due to the recent continuous fluctuations and sharp drops in international oil prices, as well as the impact of the COVID-19 pandemic, many companies that produce oil from coal are currently facing operational difficulties. “Most companies are operating at a loss or at break-even. ”A responsible official from a domestic coal-to-oil company told reporters that oil prices would need to reach 65 dollars per barrel for the company to stop incurring losses, and it is especially important at this time to seek reductions in the tax on coal-to-oil production. As of the close on March 24, the WTI crude oil price and the Brent crude oil price closed at $24.01 and $29.74 respectively. 　　Calls within the industry for a reduction or exemption of consumption taxes on coal-to-oil enterprises have gone unheeded for years; why is it so difficult to implement such exemptions? What measures should these enterprises take to mitigate risks in the absence of such tax reductions? Policy support is needed as a means of building technical capabilities. Multiple sources confirmed to reporters that relevant departments have proposed tax reform plans on several occasions and submitted them, but no action was taken regarding the issue of reducing consumption taxes on coal-to-oil products. In fact, there has always been controversy regarding whether to reduce or exempt the consumption tax on coal-to-oil products. 　　Some industry insiders believe that the \"13th Five-Year Plan for Demonstration Projects in the Advanced Coal Processing Industry\" designates coal-to-oil as a key project for upgrading and demonstration; given its strategic significance as a model project, it should receive appropriate support during the initial stages of development. As both are refined petroleum products, differences in raw materials, technology, and production processes result in higher production costs for coal-based oil, which reduces the competitiveness of the final product; moreover, the consumption tax accounts for nearly 40% of these costs. “As an emerging industry with technical capabilities, it hopes to receive support; tax collection can be gradually reinstated once it has reached a certain level of development. ” 　　In response, several industry insiders told reporters, “It isn’t necessarily logical to provide exemptions specifically for coal-to-oil production.” Although new industries need support, it makes no sense to reduce subsidies for some products while keeping them in place for others. ”Some even said outright: \"The desire for tax reductions is, in effect, a way of asking for subsidies; if the consumption tax can be reduced, it’s equivalent to receiving a subsidy of over 1,000 yuan per ton of product.\" ” 　　The reporter learned that the current consumption tax on refined oil was established in 1993. In 2009, as part of the reforms to refined oil prices and taxes, fees such as those for road maintenance were incorporated into the consumption tax on refined oil, while the tax rates for various categories of refined oil were significantly increased, thus giving shape to China’s consumption tax system for refined oil. 　　Zhu Binbin, deputy head of the Energy and Chemicals Division at the Petroleum and Chemical Industry Planning Institute, told reporters: “China’s consumption tax is primarily applied to consumer goods that need to be restricted or regulated, such as luxury goods and products whose excessive consumption is harmful to health or the environment.” The original intention behind introducing a consumption tax on refined oil was to control consumption of such oil at levels that are beyond what is appropriate for the given stage. The current formula for pricing refined oil already takes the consumption tax into account; from this perspective, the lower profitability of oil produced from coal cannot be simply attributed to the consumption tax. ” 　　Scale is a prerequisite for exemptions. Despite controversies, many industry experts believe that it is still necessary to consider exempting coal-to-oil consumption taxes in the context of significant fluctuations and drops in oil prices. 　　Why isn’t a way found to reduce or exempt consumption taxes? Xu Liang, vice president and secretary-general of the China Coal Construction Association, believes there are many reasons for this. On the one hand, oil price fluctuations are primarily influenced by international factors; the extent and duration of these fluctuations are not under control, and their impact on coal-to-oil conversion is also uncertain. On the other hand, there is no standard for calculating the break-even point, and costs vary greatly depending on the different coal-to-oil conversion technologies, which is why various estimates are produced for oil prices at 60 dollars per barrel, 70 dollars per barrel, and so on. Whether a unified reduction can be implemented requires further investigation. “Unified tax reductions could also lead to repeated construction of new coal chemical projects such as coal-to-oil facilities, and even result in overcapacity. ” 　　Xu Liang further analyzed and pointed out that according to relevant plans, **the proposal to carry out industrialization demonstrations for coal-to-oil production by 2020 means that coal-to-oil is used primarily as a technical reserve for such demonstrations, rather than entering a phase of large-scale industrial production. “Tax reform is a product of the market; tax reforms are considered only when taxes arising in the market affect costs, and this is applicable only under the conditions that production takes place on a large scale on a societal level and there are lasting impacts. ” 　　The industry generally believes that whether reductions or exemptions are necessary is closely related to **the role assigned to coal-to-oil production, but the reasons for this vary. A senior industry expert believes that if it is positioned as a strategic reserve to ensure energy security, tax exemptions should be granted; if it is considered a competitive industry, normal taxes should be imposed. 　　In response, Zhu Binbin said, “The fact that no decision has been made so far also reflects, indirectly, that **there is still no consensus at the relevant levels regarding whether to use strong industrial policies to promote the development of the coal-to-oil industry. ” 　　Increase investment in technological innovation to boost competitiveness. In 2019, the State Council issued the \"Plan for Advancing the Reform of Revenue Allocation between the Central and Local Governments Following Larger-Scale Tax Cuts and Fee Reductions,\" adopting the measure of \"shifting the collection stage of consumption tax forward and gradually transferring it to local authorities\" as a key reform strategy. The plan called for, in line with the requirements for improving the local tax system, shifting certain currently taxed goods at the production (import) stage gradually to the wholesale or retail stage, thereby expanding local revenue sources and helping local governments improve the consumer environment. The specific items for adjustment are thoroughly evaluated, submitted for approval item by item, and then implemented steadily. ” 　　“This measure has not yet been put into effect; if, in the future, the consumption tax on refined oil is shifted and moved to the point of consumption, then the option of exempting coal-based oil from this tax will naturally no longer exist. ”Zhu Binbin believes that the study of industrial policies for coal-to-oil projects within the planning framework should not be limited to tax reductions; it should take into account various factors such as investment and financing policies, price policies, fiscal and tax policies, as well as fair access to the oil product market. The core objective of industrial policy is to establish stable profit expectations for the coal-to-oil industry, thereby preventing fluctuations in oil prices from affecting the ongoing progress of planned projects. 　　Regarding tax policies specifically, Zhu Binbin pointed out that it is necessary to take into comprehensive consideration factors such as tax principles, methods of reduction or exemption, the necessity for such reductions or exemptions, their effectiveness, and the difficulty of collection. For example, VAT reduction is also one of the options that can be considered. “Compared to oil refining, the main difference in coal-to-oil production is its heavy asset structure, which results in a higher value-added tax burden per ton of product compared to oil refining. Furthermore, value-added tax is a tax that is shared between the central and local governments; in other words, both the central and local authorities contribute to it. **This provides additional means to ensure energy security, while local governments promote economic development – thus, each party makes contributions and receives benefits in return. ” 　　When there is no possibility of reducing or exempting consumption tax, how can companies mitigate risks? Xu Liang told reporters that from a corporate perspective, on the one hand, it is necessary to develop such products as part of a strategy to build up a portfolio of new products and technologies; on the other hand, it is important to analyze the market in advance and establish mechanisms for early warning. 　　“At the **level, it is recommended that for new technological products, tiered tax policies or differentiated tax relief incentives be established based on the level of profitability of those products. If the quality of coal-derived oil products meets certain standards, and if environmental protection measures are effective and contribute to local sustainable development, appropriate financial support such as reduced loan interest rates can be provided to help retain good projects and technologies. ”Xu Liang emphasized the need to strengthen policy research, strictly control project approvals, and stabilize market capacity. 　　Furthermore, the aforementioned industry veterans believe that \"coal-to-oil production, which lacks industrial competitiveness, should not be developed on a large scale; the focus should be on technological breakthroughs, with efforts directed toward laboratories and demonstration projects, rather than large-scale industrial development.\" We can consider industrial development after breakthroughs in core technologies; once there is industrial competitiveness, the issue of consumption tax on coal-to-oil production will no longer be a problem. ”