China's Environment Protection Tax Law (EPT Law) is now in effect, and China will soon be collecting the Environment Protection Tax (EPT). The first collection is expected in April 2018.

The EPT Law was passed by the National Congress in December 2016. Based on the EPT Law, the Implementation Rules were released by the State Council on December 25, 2017, as guidelines for implementing the Chinese EPT. Both the EPT Law and the Implementation Rules came into effect on January 1, 2018.

Replacing Pollutant Discharge Fee

The EPT replaces the erstwhile Pollutant Discharge Fee (PDF), which has been in place since 1979. PDF has been widely criticized by enterprises for being overly burdensome, inconsistent at the local level and inefficient in preventing pollution. EPT has therefore been introduced as a new and green taxation system to strengthen pollution control and to encourage environmental protection.

EPT taxpayers

The EPT Law and Implementation Rules target four types of pollutants: namely, air pollutants, water pollutants, solid waste and noise. Generally, Chinese enterprises directly discharge these pollutants into the natural environment. Under the EPT Law, discharges exceeding the limits prescribed under national and local pollutant discharge standards will be subject to EPT.

The Chinese tax authority identifies EPT taxpayers based on the list of pollutant discharge enterprises provided by the environment protection authority. Reportedly, over 260,000 enterprises around the nation have been formally identified as EPT taxpayers. It is generally expected that more enterprises will be included in the coming years as EPT taxpayers.

Taxable items, tax calculation

The EPT Law and the Implementation Rules include a table of taxable items and the amount of EPT, which provides in detail the taxable pollutants, unit of measurement for each type of pollutant and tax amount per pollutant unit.

Taxpayers' discharge of pollutants is monitored and measured by automatic equipment. While the taxpayers should file tax returns with the tax authority based on their pollutant discharge records, the relevant data will also be automatically provided to the Environment Protection Bureau for review and verification.

Provincial rates

The EPT Law allows the provincial governments to suggest and implement adjustment on the tax amount applied to certain pollutants. Therefore in practice, the EPT payable for the same pollutant discharged could differ from province to province.

As regards the local tax amount, EPT for air pollutants and water pollutants in Beijing, Tianjin, Hebei, Jiangsu, Shanghai and Shandong has been set at (or close to) the maximum tax amount allowed under the EPT Law. On the other hand, Liaoning, Jilin, Anhui, Jiangxi, Shanxi, Gansu, Qinghai, Ningxia, Xinjiang and Fujian employ the minimum tax amount within that range.

Tax exemption and reduction

Under the EPT Law, discharge of pollutants by agricultural productions (except for large-scale livestock raising), automobiles and vehicles, waste treatment facilities and activities utilizing solid waste are generally exempt from EPT. At the same time, EPT payable on air and water discharges may be reduced when the pollutant concentration is found to be 30 percent or 50 percent lower than the standard.

Filing and legal liability

Taxpayers are obliged to file their tax returns quarterly under the EPT Law and will be held responsible for the completeness and authenticity of the reported information.

Taxpayers who fail to fulfil their obligation under the EPT Law could be subject to penalties or fines up to five times the unpaid EPT, as well as for the late payment interest. In the worst case, the taxpayer may be required to stop operation for rectification; at the same time, the taxpayer could be blacklisted for environment protection investigation.

Key takeaways

As the first filing period is approaching, the Chinese tax authorities have arranged rounds of introductory seminars and consultation meetings to help EPT taxpayers understand and comply with the EPT Law and the Implementation Rules. However, there are still practical issues pending for clarification by the tax authority and for exploration by the taxpayers.

For example, the information/data-sharing mechanism between the environment protection authority's monitoring system and the tax authority's filing system is still not available in some localities. Taxpayers likely will experience a heavy administrative burden for raw data collection and EPT filing, while the tax authority may not have a sufficient basis to verify the information filed by the taxpayers.

EPT is a tax that requires both technological analysis and accounting calculation, which taxpayers' financial managers may find very difficult to accomplish by themselves. Taxpayers will need to set up an EPT team composed of experts in finance, tax and environment, health and safety to ensure full compliance, including dealing with:

  • setting up pollutant monitoring equipment and system as part of the manufacturing process, and test its reliability
  • setting up internal pollutant data collection procedure
  • setting up an internal EPT related information sharing procedure between pollutants monitoring and tax filing practice and
  • conducting self-assessment on EPT relief or exemption opportunities.

Contact any of the authors if you need more information about the Chinese EPT or any help on setting up the EPT team.