Beijing charges ahead with administrative reforms to eliminate oil tax loopholes

The oil industry is keenly waiting to see the effect of tighter consumption tax regulations that China is implementing on March 1.

Beijing has been pushing for administrative reforms to close tax loopholes that have been a panacea for China's independent refiners and oil blenders.

These independent or 'teapot' refiners and oil blenders, who tend to be less efficient than their state-owned counterparts, have used the loopholes to avoid paying consumption tax in order to stay profitable.

Tighter tax administration will have implications for refiners' and blenders profitability, and this in turn will impact China's crude oil imports, refined product exports, and imports of blending materials such as mixed aromatics and light cycle oil.

This is not China's first attempt at trying to close the loopholes, but this is the first time that it is trying to eliminate a weak link in the process -- the provincial government's role -- which should make the implementation more effective.

In the past, the provincial governments have been tasked with collecting the consumption tax, but all the tax revenue has gone to the central government.

This encouraged the provincial governments to protect the independent refiners and blenders in their respective provinces to ensure continuous income and employment generation.

For example, a Zibo-based 5.9 million mt/year independent refiner in Shandong province paid Yuan 1.78 billion ($280 million) in taxes to the local government and Yuan 2.63 billion in taxes to the central government in 2017, according to local media. This refinery offers about 2,000 jobs.

There is around 173 million mt/year of independent refining capacity in Shandong province.

Last year, independent refineries took four spots in the province's top 10 independent enterprises list by revenue, according to local media.

But this time, in addition to the new tax reporting system, which comes online March 1, there are also talks that the central government is likely to share the tax revenue with the provincial government in the future.

Once that happens, the independent refiners and blenders will lose their local protection, because the new tax collecting mechanism encourages local governments to collect the tax fully in line with regulations, in order to boost their income.

Beijing has also leveraged on technology to strengthen the system this time, which will make implementation more successful.

The new tax reporting system is expected to close loopholes by monitoring the transaction chain with an updated information technology system, replacing the old manual system.

The tax reporting system has been upgraded gradually over the past few years.

Since last autumn, an increasing number of trading sources have said that it has become difficult for them to avoid paying a consumption tax due to more stringent administration.

"I cannot say that there will be no tax evasion in future, but it will become more and more difficult," a Guangzhou-based oil products trader said.