Chinese majors push for oil tax reforms

China's biggest refiner state-controlled Sinopec is continuing to lobby the government for reforms to the country's oil product taxes, but the prospect of any imminent changes appears limited.

Sinopec delegates to China's annual "two sessions" political meetings in Beijing have reiterated their concerns about constraints on profits resulting from China's tax system, as well as tax evasion by some of the company's smaller rivals.

Sinopec called for measures including a clampdown on illegal or tax-free product sales to create what it described as "a fair competitive environment for the refined product market". This includes the "transfer, transportation, storage, and sales of refined oil that have not obtained retail business licenses", it said.

"Refined oil smuggling and market chaos still need to be rectified," Huang He, general manager of Sinopec's Hunan sales branch, told the meetings. "China needs to establish a high-standard refined oil market system."

The week-long events, which include the Chinese political consultative conference and the National People's Congress, kicked off on 4 March and concluded today.

Sinopec is also calling for a consumption tax to be imposed on imports of diluted bitumen, as well as light cycle oil (LCO) and mixed aromatics (MA), which are used for diesel and gasoline blending respectively. Imports of these products are currently exempt from the hefty consumption taxes that are applied to road transportation fuels, reducing the competitiveness of domestic refinery output.

China's LCO imports rose by 140,000 b/d from a year earlier to 300,000 b/d in 2020, while MA imports more than doubled to 120,000 b/d.

The collapse in oil prices that began in March last year, coupled with China's product floor price mechanism that caps retail price adjustments when crude oil falls below $40/bl, made such imports profitable for private trading firms, many of which had turned to the trade for the first time.

But Sinopec may not get its way, market participants said. "The viability of imposing consumption tax on blending components such as MA and LCO is doubtful," said a products trader in east China.

Tax reforms have been mooted for years — the prospect of blending components becoming subject to the consumption tax first raised concerns among some market participants in 2017. But no new policy has yet been issued. "The huge oil blending market remains active in east and south China," the trader said.

Consumption taxes are collected mainly by the central government, giving local governments little incentive to put resources into tax collection.

Taxes represent as much as 40pc of the retail price of road fuels in China. These comprise a consumption tax of 2,110 yuan/t ($39/bl) for gasoline and Yn1,411/t ($29/bl) for diesel, 17pc value-added tax (VAT), an urban construction tax and education surcharges.

But only 10pc of the total taxes charged go to local governments. Consumption tax is considered "state tax", with 100pc going to central government coffers, while VAT is a "shared tax" that funds both central and local governments. Beijing has proposed reforming the system to give local governments a bigger share of tax receipts.

Selling products without invoices, or billing product sales as petrochemical feedstocks, has provided a loophole for Shandong independent refiners to avoid consumption taxes in recent years. This is despite the introduction of a stricter online product invoicing system in 2018.

Elusive windfall

Beijing is also facing challenges collecting the windfall tax it applies on refining profits from independent refiners, as the tax system relies on the self-declaration of sales volumes.

Some independent refiners say they have started paying this tax, which is applied under the $40/bl floor price mechanism, although the impact will be limited by the common practice of mis-labelling invoices.

State-owned oil firm CNPC's research institute the ETRI last year called for reforms of the windfall tax, either by exempting companies from these payments or redirecting the proceeds towards efforts to increase domestic energy supply.