China has adopted a special income tax on oil companies, to restrict 　　excessive monopoly profits and subsidize weak sectors
　　TAX ON OIL: China’s oil giants must pay a special oil income tax
　　On April 4, the China Petroleum & Chemical Corp., known as Sinopec, together with its holding subsidiaries Sinopec Shengli Oilfield Daming Co. Ltd. and Sinopec Zhongyuan Oil & Gas High-Tech Co. Ltd., announced that as of March 26, the state would begin imposing a special levy on any income derived from the sale of locally produced crude oil at a price exceeding $40 per barrel.
　　Meanwhile, on March 26, the National Development and Reform Commission (NDRC) announced its decision to raise the price of refined oil. Close on the heels of this announcement came another announcement by the Ministry of Finance and the State Administration of Taxation, deciding to impose a levy on refined oil and raising the sales taxes on passenger cars with an engine capacity of more than two liters, as of April 1. Again on April 10, the NDRC raised the tax on jet fuel, adding to the cost of domestic air travel once again.
　　All these moves are aimed at bringing the oil companies’ huge monopoly profits under policy control. The oil income tax is specifically designed to restrict the excessive expansion of oil companies. Such a levy in times of high oil prices can also relieve the burden on consumers.
　　China’s oil industry is a monopoly, especially in the upstream exploration area. With rising international oil prices, China’s three oil giants―China National Petroleum Corp. (CNPC), Sinopec and China National Offshore Oil Corp. (CNOOC)―earned substantial profits last year. CNPC’s net profits stood at 133.36 billion yuan, up 28.4 percent over 2004, making it the most profitable enterprise in Asia. Sinopec’s net profits were 39.558 billion yuan, up 22.6 percent over 2004, and CNOOC’s profits, 25.323 billion yuan, up 57 percent over the previous year.
　　CNPC, Sinopec and CNOOC will thus see part of their profits diverted to the special income tax, said Dong Xiucheng, Vice Dean of the School of Business Administration of China University of Petroleum. It is the hike in the price of refined oil that has contributed to the spike in oil profits and, therefore, the special income tax will not have a big impact on the total profits of the three big oil companies. However, as the three companies operate at different points in the industrial chain, the levy will affect them in different ways.
　　
　　Adverse effect on CNPC and CNOOC
　　
　　According to a report by the Shanghai Shenyin Wanguo Research & Consulting Co. Ltd., CNPC will suffer the most from the new special tax. Consultant Huang Meilong said that if crude oil output this year increases at the 2005 rate of between 1 and 2 percent, CNPC will have to pay 15.2 billion yuan in income tax in 2006, while Sinopec will have to pay 3.86 billion yuan and CNOOC, 2.31 billion yuan. In terms of after-tax earning per share, CNPC will see a decrease of 0.0568 yuan, Sinopec, 0.0299 yuan, and CNOOC, 0.0206 yuan.
　　CNOOC, as an oil exploration company, will also be affected adversely. Huang Meilong said that CNOOC’s crude oil price in 2005 was $48.2 per barrel. The price is estimated to be $52.5 per barrel in 2006. Based on a special income tax of $3 per barrel, total special income tax liability for CNOOC in 2006 will touch $3.08 billion.
　　CNOOC is mainly engaged in the upstream business and is still only exploring downstream business. In the short run, CNOOC has to bear the brunt of the special income tax alone.
　　
　　Benefit to Sinopec
　　
　　Sinopec said in an announcement, “The company’s expenditure will increase and the returns of the company will be adversely affected if the international crude oil price rises above $40 per barrel.”
　　An officer from Sinopec’s financial information department said, “Levy of the special income tax will certainly affect our company’s profitability, but our company will reduce losses by cutting costs, strengthening management and cutting expenditures. The oil price rise in March can alleviate the impact of the special income tax.”
　　Zhao Xijun, Vice Dean of the School of Finance of Renmin University of China, said that the special income tax will reduce oil profits. However, the rise in oil prices will offset losses in Sinopec’s downstream enterprises. These reduced losses will exceed the special income tax to be paid by upstream enterprises. In addition, 70 percent of the crude oil Sinopec refines is imported, for which the special income tax is not charged.
　　According to Huang Meilong, the increase in the price of refined oil on March 26 was accompanied by a slew of policy measures―subsidies have been given to downstream enterprises, and taxi, railway and air transport costs have been raised. In addition, a new pricing mechanism for refined oil is expected to be put forward soon. With the continuous increase in refined oil prices, the impact of the special income tax will be gradually offset. Thus Sinopec, with an annual oil output of 39 million tons from its upstream enterprises and refined oil of 140 million tons from its downstream enterprises, stands to benefit substantially from the new policy initiatives.
　　
　　International practice
　　
　　A tax on windfall gains in oil is common in many oil-producing countries. When oil prices go up, countries collect a windfall tax, incorporating a part of the price premium into state finances, to adjust imbalances in income distribution.
　　The current oil price in the international market of more than $60 per barrel makes exploration costs far lower than incomes. Oil companies all over the world are making huge profits with the soaring oil prices. While CNPC was regarded as the most profitable company in Asia, Exxon Mobil Corp. replaced retail giant Wal-Mart to top the list of Fortune 500 companies, with revenues reaching $339.94 billion.
　　Levy of the “windfall tax” in the wake of such huge profits is not uncommon. For example, Britain levied 5.2 billion pounds in 1997 on public utilities companies listed on the stock market. The tax thus collected was diverted to social welfare.
　　Li Guohong, a researcher at the China Galaxy Securities Research Center, said, “Levy of a ‘windfall tax’ on oil is part of the country’s reform of the refined oil pricing mechanism, indicating that our country is using tax control instead of price control to cope with high oil prices in the international market.”
　　Li said even the “windfall tax” of 30 billion yuan is an underestimation. “In my opinion, the international oil price is still fluctuating at a high level. When the price of crude oil exceeds $60 per barrel, the tax should be collected at a ratio of 40 percent. So the total amount can reach 50 billion yuan, or even 60 billion yuan.”
　　To what use will this special tax be put? According to the Ministry of Finance, the special oil income tax comes under the central budget’s non-tax revenue.The NDRC has also noted that the tax will go toward subsidizing non-profit sectors.
　　Professor Zhao Xijun said, “Giving subsidies to weak enterprises or vulnerable groups of people may be a good thing. But the more important task is to prevent the growth of monopolies and help the sound growth of the market.”
　　Ju Jinwen, Director of the Department of Microeconomics under the Institute of Economics of the Chinese Academy of Social Sciences, said the special income tax took away some of the additional oil profits and increased government finances, but there was no certainty it would actually go toward subsidizing weak groups. If enterprises’ cost caused by the tax is still transferred to the consumers, it will defeat the purpose behind the special levy.
　　Professor Zhao Xiao from the School of Business Administration of the Beijing University of Science and Technology also expressed reservations. Zhao said, “Imposing a special income tax is a trend. What is worrying is what if these monopoly enterprises transfer their cost to consumers?”
　　Zhao Xijun said the collection and use of the special income tax should be open and transparent. He suggests the government spend the revenue on building up oil reserves, subsidizing weak groups, supporting the development of agriculture, rural areas and other important fields.
　　The NDRC stated that due attention would be paid to the impact of higher refined oil prices on agriculture, fishery, forestry, and urban and rural transport. To counter the rise in agricultural inputs such as diesel oil and fertilizer, direct subsidies will be given to grain producers.

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