Transcript GREENING THE DRAGON: ENERGY TAX POLICY IN CHINA – IS IT

GREENING THE DRAGON: ENERGY TAX POLICY IN
CHINA – IS IT NATIONALISM OR PROTECTIONISM?
WA L T E R WA N G
A D J U N C T P R O F E S S O R O F L AW
U N I V E R S I T Y O F S A N D I E G O S C H O O L O F L AW
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Direction
•
Facts & Figures
•
Guiding Principles
•
Moving the
Transportation
Sector Forward
•
Energy Efficiency
and Renewable
Energy
•
Nationalism or
Protectionism?
Facts and Figures
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 China is the world’s largest energy consumer
 Coal accounts for approximately 70% of total energy
consumption
 Oil consumption in June 2010 amounted to 8.98
million barrels per day (10% higher than in June 2009)
 16 of the 20 most polluted cities in the world are in
China
Guiding Principles
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 Renewable Energies Law
 Goal: Promote the development and use of renewable energy as a
means to increasing energy supply, improving the energy
structure, and ensure energy security.
 Requires electricity grid enterprises to strengthen construction
of grids
 Purchase of power from renewable energy sources is guaranteed.
 Establishment of “renewable energy development fund”
Compensates the electricity grid provider if the fixed price for
renewable energy is greater than the cost for energy from
conventional sources.
 Fund renewable energy R&D, rural projects, and equipment
manufacturing

Guiding Principles
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 Renewable Energies Law
 Financial institutions authorized to issue discounted loans
 State Council to develop tax incentives for projects listed in
renewable energy industry development guidance catalogue
Guiding Principles
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 Circular Economy Promotions Law
 Reduce resource consumption and waste generation
 Increase recycling and resource recovery
 Government is to provide tax preferences for industrial activities
that promote the circular economy
 Tax policy to be used to encourage the importation of
technology, equipment, and products that further the circular
economy
 Typical projects include:

Water conservation, energy efficiency, recycling of industrial goods,
waste treatment, and seawater desalinization
Guiding Principles
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 Energy Conservation Law
 Promotes energy conservation in manufacturing, building,
consumer products, and transportation
 Government to enact tax policies to encourage energy resource
conservation and importation of energy conservation
technologies and equipment
Guiding Principles
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 What to take away from the Renewable Energies Law,
Circular Economy Promotions Law, and Energy
Conservation Law?
Moving the Transportation Sector Forward
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 Economic Growth in the Auto Industry
 2009 action plan to restructure the auto industry
 Reduction in Vehicle Purchase Tax
10% down to 5% for passenger cars with 1.6L displacement or lower
 January 20, 2009 – December 31, 2009
 After 2009, the vehicle purchase tax increased, but only to 7.5% for
passenger cars with 1.6L displacement or lower

Moving the Transportation Sector Forward
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 Economic Growth in the Auto Industry
 Changes to consumption tax rates favor smaller vehicles and
penalizes larger vehicles
Consumption Tax on Passenger
Vehicles (2006)
Consumption Tax on Passenger
Vehicles (2009)
Engine Displacement Tax Rate
1.5 L or Less
3%
>1.5 L to 2.0 L
5%
>2.0 L to 2.5 L
9%
>2.5 L to 3.0 L
12%
>3.0 L to 4.0 L
15%
> than 4.0 L
20%
Engine Displacement Tax Rate
1.0 L or Less
1%
>1.0 L to 1.5L
3%
>1.5 L to 2.0 L
5%
>2.0 L to 2.5 L
9%
>2.5 L to 3.0 L
12%
>3.0 L to 4.0 L
25%
> than 4.0 L
40%
Moving the Transportation Sector Forward
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 Economic Growth in the Auto Industry
 Policy considerations on changes to tax structure in the auto
industry
Moving the Transportation Sector Forward
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 Finally, a fuels tax!
 Initially proposed in 1994, finally effective January 1, 2009
Tax rate = 1 yuan/liter for gasoline and 0.8 yuan/liter for diesel
 Replaces commodity tax on fuels
 Replaces certain tolls for road maintenance and management
 Higher than the U.S. (18.4 cents/gallon), but lower than the UK
($3.36/gallon)


Policy challenge: Is the government trying to reduce
consumption or are they really replacing other taxes to make
collection more efficient?
Moving the Transportation Sector Forward
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 The Shanghai Methodology
 Need to control the number of cars on the road
 Monthly new plate quota and auction
 Cost at auction can be as high as $5,905
 Perceived Success
Number of registered vehicles in Shanghai (720,000)
 Number of registered vehicle in Beijing (2.48 million)
 Fines in Shanghai are minimal (200 yuan)

Energy Efficiency & Renewable Energy
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 Preferential Treatment under the Enterprise Income
Tax


EIT standard tax rate = 25%
EIT Article 25 – Preferential treatment granted to industries and
projects which the government supports or whose development
it encourages
Environmental protection
 Energy and water conservation
 Technology transfers

Energy Efficiency & Renewable Energy
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 Preferential Treatment under the Enterprise Income
Tax

The 3 + 50% Rule
Tax holiday for the first 3 years and 50% reduced tax rate for the
following 3 years
 Enterprises engaged in the development and utilization of energy
conservation and emissions reducing technologies
 Circular 166 (2009) – This treatment applies to ESCO’s
 Applies to revenue from energy performance contracts
 Revenue is also exempt from the Business tax and VAT
 Transfer of equipment to customers will not result in deemed
income to the ESCO.

Energy Efficiency & Renewable Energy
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 Preferential Treatment under the Enterprise Income
Tax

EIT Article 34 – Enterprises who derive revenue from the
production and sale of certain energy efficiency equipment can
exclude 10% of the revenue for purposes of determining EIT
liability

Enterprises which purchase such equipment can claim a 10%
credit for such purchases
Energy Efficiency & Renewable Energy
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 Preferential Treatment under the Enterprise Income
Tax

High & New Technology Ventures
Preferential EIT rate of 15%
 Must satisfy certain requirements
 Includes enterprises engaged in new energy and energy conservation
technology ventures
 Anecdotal evidence of widespread fraud
 Shanghai supportive of new-energy automobile companies and new
energy enterprises in their efforts to qualify for preferential
treatment

Energy Efficiency & Renewable Energy
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 Preferential Treatment under the Enterprise Income
Tax

Project companies engaged in CDM projects
Benefits from the transfer of CER’s belong to both the government
and the project company in varying amounts
 2009 guidance provides that project companies may currently
deduct the government’s share of the revenues
 HFC, PFC, and N2O projects qualify for the 3 + 50% treatment
 Will this spur additional CDM related projects?

Energy Efficiency & Renewable Energy
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 Specific Measures Targeted at Wind Energy
 Reduced VAT on the sale of wind generated electricity


Refund on import duties and import VAT related on certain key
components and raw materials for developing and
manufacturing wind turbines


17% to 8.5%
Must have capacity to manufacture wind turbines with a minimum
capacity of 1.2 MW
No more import tax exemption on wind turbines with a
maximum power capacity of 2.5 MW
Encourages domestic manufacturing
 Supports domestic content policies

Nationalism or Protectionism?
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 Nationalism - “territorial ideology which is internally
unifying and externally divisive”



Guiding principles seek to galvanize the people around
economic growth in an environmentally aware state.
National focus on a goal
Not inherently bad, but in the framework of global competition,
may be externally divisive.
 Protectionism – “economic policy of restraining trade
between states”


Unequal treatment of imported wind turbines and domestically
manufactured wind turbines
WTO, where are you?