China to Tax Oil, Gas Production At 5%-10%

BEIJING (Dow Jones Newswires), Oct. 10, 2011

China will extend an experimental tax on oil and gas to the entire nation, taxing the resources between 5% and 10%, the State Council said Monday.

China introduced a 5% resource tax last year in oil-rich but ethnically troubled Xinjiang Uighur Autonomous Region, calculated on value rather than production volume, later extending it to 12 western provinces and regions.

The move marks a new step in China's drive to become a cleaner, more efficient growth model, less dependent on resource-intensive industry.

The choice to levy the new taxes also signals less concern about inflation. Up to now, Beijing has chosen to move slowly on the long-planned reform, as the new taxes will increase costs for businesses and could worsen inflation pressures.

The tax will be extended nationwide starting Nov. 1, the State Council said in a statement.

The two resources were previously taxed based on the volume of output, not total value. Oil was taxed at CNY8-CNY30 a ton and natural gas at CNY2-CNY15 per thousand cubic meters.

While a 5% tax was widely expected, the 5% to 10% range may hit industry players more than previously forecast.

Moody's Investors Service earlier estimated the national extension of the 5% tax rate would cost the nation's three major state-owned oil companies combined around CNY44 billion (US$6.87 billion) a year.

A 5% tax rate on oil would be roughly equivalent to $4 a barrel assuming oil prices are at $80 a barrel, Moody's analyst Kai Hu said in a note last month. That is 6 to 13 times the previous tax rate.

The statement didn't clarify how the exact tax rate would be determined within the specified range, but Moody's Hu said it would likely vary based on different grades of crude oil.

The State Council will gradually apply the reform to other resources, it said in a statement, without giving further details.

The taxes go to the provincial governments where the resources are extracted, before they are refined or processed into other products. This helps funnel cash to financially strapped local governments.

China will also levy a higher tax on rare earth ores, at CNY0.4-CNY60 a ton, the council said. The ores were previously taxed at CNY0.4-CNY3.0 a ton, depending on the type of rare earth.

Taxes on ferrous and non-ferrous metals will remain unchanged at their previous levels.

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