The Environmental Protection Tax Law

James Cheng
On March 15, 2015, the National People’s Congress adopted a decision to amend the Legislative Law by adding a new taxation principle to Article 8. To wit, basic tax regime matters such as the creation of tax items, determination of tax rates and the administration of tax collection can only be set by law. The Environmental Protection Tax Law (the “Law”) is thus the first stand-alone tax law submitted to the National People’s Congress for deliberation after the Legislative Law was amended. The Law was adopted during the deliberation session on December 25, 2016 and will come into effect on January 1, 2018. Consisting of five chapters and 28 articles in total, the Law contains the General Provisions, Tax Assessment Bases and Taxable Amounts, Tax Exemptions, Tax Collection Administration, and Supplemental Provisions. This article briefly describes the three tax collection aspects in the Law, including the change of pollution emission and discharge fees to pollution emission and discharge taxes, exemption policies under the Law and the collection of environmental protection taxes.
First, the general design of the Law is a switch from “fees” to “taxes,” for making a smooth transition from the pollution emission and discharge fee system to the environmental tax system under the principle of “parallel tax shifting.” The Law specifically identifies “enterprises, business organizations and others engaging in production which discharge and emit pollutants to the environment” as taxpayers and defines air pollutants, water pollutants, solid wastes and noise as taxable pollutants. The Law also sets up tax items according to the current pollution emission and discharge fees and uses the pollutant discharge volume as the basis of taxation, with the existing pollution emission and discharge fee standard serving as the minimum for environmental protection taxes. To avoid giving local authorities excessive discretionary powers, the Law also takes account of the current local pollution emission and discharge fee standards and imposes a ceiling on the tax amounts at 10 times the lowest tax amount. The tax range for air pollutants shall thus be RMB1.2 through RMB12 per pollution equivalent unit, and the tax range for water pollutants shall be RMB1.4 through RMB14. The specific applicable tax amounts shall be determined within such ranges by the various provinces (regions and cities).
In addition, to incentivize enterprises to protect the environment, provisions are made to reduce or even exempt environmental protection taxes on those that have reduced their pollutant emission volumes. For example, for air pollution emissions and water pollution discharges, taxpayers are granted with large scale tax reductions and exemptions if their emissions and discharges are lower than national and local emission and discharge standards: 30% lower means a 25% reduction in the environmental protection taxes; 50% lower would halve the environmental protection taxes to be paid. In addition, the Law also specifically provides for five circumstances where taxes are provisionally exempt: To support agricultural development, the emission and discharge of taxable pollutants in the course of agricultural production are tax exempt; since vehicle taxes and consumption taxes are already in place in the existing tax regime, taxable pollutants created by vehicles and ships are exempt from the environmental protection tax; and to incentivize the integrated use of solid wastes and reduce the discharge of pollutants, taxpayers whose integrated use of solid wastes qualify under the relevant standards are provisionally exempt.
With respect to the collection of environmental protection taxes, currently the pollution emission and discharge fees are collected and administered by the environmental protection agencies, thus after the change from fees to environmental protection taxes, they will be collected and administered by the tax agencies pursuant to the Law and the Tax Collection Administration Law, thereby enhancing the regulation and enforcement of the law. Meanwhile, since the collection and administration of environmental protection taxes are more technical in nature, the Law also stresses the need for information sharing and work coordination mechanisms among the environmental protection agencies and the tax agencies.