Polluters targeted with new environmental protection tax

The new law comes after China finally ratified the Paris climate change agreement in September 2016, and is the latest signal that the nation is actively trying to address an urgent national issue that has its key cities suffocated by smog every winter. Its release is a result of years of discussion and compromise among legislators and industry stakeholders, as pollution control implementation efforts have long been bogged down by conflicts of interest among influential smokestack players and local government aims to meet GDP and revenue targets.

The Ministry of Environmental Protection (MEP) is in charge of monitoring the pollutants, while the State Administration of Taxation administers collection of the tax, which is calculated monthly and declared and paid on a quarterly basis. Local governments are responsible for coordinating with the agencies and establishing working groups, and have been granted the discretion to adjust the applicable tax amount on air and water pollutants within a certain range depending on the region's needs, though the changes are subject to approval by the National People's Congress.

The law temporarily exempts pollutants emitted from agricultural production, certain transportation including motor vehicles, ships and aircraft, legally established and emission-compliant urban sewage and waste treatment facilities, solid waste disposed in compliance with existing legal standards, and other sources approved by the State Council.

“Companies really need to study this law and evaluate how much they need to pay from using the listed facilities as they can directly lead to higher taxes,” said Wang, who had participated in the drafting of the law. She added that “Implementing regulations should follow to help ensure proper coordination among the authorities and to clarify issues for taxpayers.” Wang also contributed to the drafting and revision of the PRC Environmental Protection Law, and is a member of the government's working group for drafting nuclear and atomic energy legislation.

Baker & McKenzie has advised the following for enterprises in China:

• Identify if they are liable for the new tax as an entity directly discharging the specified taxable pollutants.
• Determine whether their charges could be temporarily exempt from the tax.
• Confirm the applicable tax rate in their location (which can be adjusted by the local government).
• Look out for implementing rules and measures issued by local environmental and tax authorities.
• Consider ways to reduce emissions and subsequent tax liability.

Since unveiling the 2015 Environmental Protection Law—the harshest environmental law and, in fact, only the first amendment since its original release in 1989—the government has rolled out a series of go-green measures, including granting nationwide inspection powers to the MEP, setting up an environmental tribunal at the Supreme People's Court, permitting social organizations to bring lawsuits against polluters, tightening environmental impact assessment requirements for construction and infrastructure projects, and encouraging the development of new energy vehicles such as by offering subsidies and lifting promotional and sales restrictions.

By Katherine Jo

The PRC Environmental Protection Tax Law, released on December 25, 2016, replaces the current emission fee system with a pollution tax, and is expected to have broad implications on corporate environmental compliance in China. The new law comes into effect on January 1, 2018, giving enterprises a year to prepare.

“The previous administrative regulation imposing a pollutant discharge fee was sometimes inconsistently enforced,” said Jihong Wang, partner and co-chair of infrastructure and real estate at Zhong Lun Law Firm in Beijing. “The new tax law presents clear standards with respect to application, deduction and exemption and is overall a positive sign.”

The tax is expected to effectively close loopholes that allowed local authorities and enterprises to get away with pollution, as companies with lower levels of emission will simply pay less tax. The new law puts forward a table of taxable items—covering air, water, solid waste and noise—and the environmental protection tax rate tied to each pollutant. Sulphur dioxide and chemical oxygen demand (CDO) are among the listed air pollutants, though carbon dioxide (CO2) is excluded.

The new law comes after China finally ratified the Paris climate change agreement in September 2016, and is the latest signal that the nation is actively trying to address an urgent national issue that has its key cities suffocated by smog every winter. Its release is a result of years of discussion and compromise among legislators and industry stakeholders, as pollution control implementation efforts have long been bogged down by conflicts of interest among influential smokestack players and local government aims to meet GDP and revenue targets.

The Ministry of Environmental Protection (MEP) is in charge of monitoring the pollutants, while the State Administration of Taxation administers collection of the tax, which is calculated monthly and declared and paid on a quarterly basis. Local governments are responsible for coordinating with the agencies and establishing working groups, and have been granted the discretion to adjust the applicable tax amount on air and water pollutants within a certain range depending on the region's needs, though the changes are subject to approval by the National People's Congress.

The law temporarily exempts pollutants emitted from agricultural production, certain transportation including motor vehicles, ships and aircraft, legally established and emission-compliant urban sewage and waste treatment facilities, solid waste disposed in compliance with existing legal standards, and other sources approved by the State Council.

“Companies really need to study this law and evaluate how much they need to pay from using the listed facilities as they can directly lead to higher taxes,” said Wang, who had participated in the drafting of the law. She added that “Implementing regulations should follow to help ensure proper coordination among the authorities and to clarify issues for taxpayers.” Wang also contributed to the drafting and revision of the PRC Environmental Protection Law, and is a member of the government's working group for drafting nuclear and atomic energy legislation.

Baker & McKenzie has advised the following for enterprises in China:

• Identify if they are liable for the new tax as an entity directly discharging the specified taxable pollutants.
• Determine whether their charges could be temporarily exempt from the tax.
• Confirm the applicable tax rate in their location (which can be adjusted by the local government).
• Look out for implementing rules and measures issued by local environmental and tax authorities.
• Consider ways to reduce emissions and subsequent tax liability.

Since unveiling the 2015 Environmental Protection Law—the harshest environmental law and, in fact, only the first amendment since its original release in 1989—the government has rolled out a series of go-green measures, including granting nationwide inspection powers to the MEP, setting up an environmental tribunal at the Supreme People's Court, permitting social organizations to bring lawsuits against polluters, tightening environmental impact assessment requirements for construction and infrastructure projects, and encouraging the development of new energy vehicles such as by offering subsidies and lifting promotional and sales restrictions.