On 25 December 2016, China’s National People’s Congress (NPC) announced the "PRC Environmental Protection Tax Law" (EPT Law) will go into force 1 January 2018. With the idea of "replacing fees with taxes" as its guiding principle, market experts believe the EPT Law is set to further standardise the management of environmental protection efforts.

When the EPT Law goes into effect next year, and the idea of replacing fees with taxes becomes a reality, taxpayers will be confronted with significant changes in both tax collection and tax administration. Tax obligations accrue from the date of discharge and tax returns shall be filed on a quarterly or timely basis. Beginning in 2018, polluters nationwide will face a levy (EPT Law) of between CNY 1.2 to CNY 12 (EUR 0.15 to EUR 1.5) for every 0.95 kg of nitrogen oxide, sulphur dioxide or other atmospheric pollutants they release, and a levy of CNY 1.4 to CNY 14 for each equivalent of water pollutant released.

The Chinese government established a nationwide pollutant discharge fee system in 1979, but monitoring pollution discharge throughout China’s vast territory has proven difficult, and no companies paid any pollutant discharge fees prior to the 1990s. Because the environment has deteriorated rapidly in the past two decades, the government felt it necessary to upgrade its regulatory framework.

According to government statistics, the total pollutant discharge fee from 2003 to 2015 amounted to CNY 211.6 bn, including CNY 17.3 bn in 2015 alone. Discharge fees were not enough to cover the costs of pollution treatment.

A study of 200 enterprises in Guangdong province, undertaken by the Department of Environmental Protection of Guangdong Province (www.gdep.gov.cn/eng), found that pollution treatment costs for the atmospheric pollutants sulphur dioxide and nitrogen oxide were CNY 3.6 per equivalent weight and CNY 20.9 per equivalent weight, respectively. These amounts were 3.0 times and 17.4 times greater, respectively, than the amount of the discharge fees collected. The pollution treatment cost for water pollutants, measured by chemical oxygen demand (COD), and ammonia-nitrogen waste water was CNY 7.4 per equivalent weight and CNY 31.4 per equivalent weight, respectively, and these amounts were 5.3 times and 22.4 times greater, respectively, than the discharge fees collected.

Total environmental protection tax collections are expected to be over CNY 100 bn per year. Tax revenues for atmospheric and water pollutant discharge could reach over CNY 36.5 bn per year when the charge rate reaches 80% and tax revenues for industrial solid wastes could reach CNY 58.5 bn per year when the charge rate reaches 50%. Add to these numbers the tax revenue from sound pollution, and overall environmental protection tax collections could then exceed CNY 100 bn per year.

Thermal power stations, cement plants, steel plants, as well papermaking, dyeing, dining and entertainment, chemical (including plastics producers) and petroleum facilities are the eight groups that have paid the highest level of pollutant discharge fees in the past.

According to research in Guangdong province, the average tax load (overall tax/overall revenue) in 2016 was 5.7%, 0.47% and 3.37%, respectively, for thermal power stations, steel plants and cement plants. The new policy of replacing fees with taxes will increase the tax rate of these facilities by 0.1%, 0.09% and 0.11%, respectively. The average tax rates for pharmaceuticals, dyeing and papermaking plants will increase by 0.08%, 0.06% and 0.04%, respectively; while the petroleum and chemical industries will each increase by 0.01%. The law will drive up the total cost of manufacturing in China, but the increase is not great and the impact is not expected to be significant.

The market will be paying considerable attention to how the EPT Law is enforced, especially as the pollutant discharge fee was difficult to collect in the past. In the case of the EPT Law, provincial governments are enacting different standards for executing the new law.

"Cities like Beijing, Shanghai and Tianjin, and provinces like Jiangsu and Hubei set pollutant discharge fee levels that were 2 to 8 times higher than those in other regions and it is possible that these cities and provinces will set tax rates within the scope of the new law but higher than those set in other provinces. Some provinces might use the tax rates of other provinces as a reference in setting their own rates," said one market source to Plasteurope.com. "It is better for manufacturers to upgrade their technologies and adopt facilities that reduce pollutant discharge. Whether companies upgrade technologies and facilities or pay more environmental protection tax, the new law will drive up the cost of manufacturing. However, if the increased costs bring back blue skies and clean water, they will be worth it."