How Will China’s New Environmental Protection Tax Affect Your Sourcing?

Presented by Brian Ho, EY Sustainability Leader, Climate Change and Sustainability Services Director, Asia Pacific

China’s changing environmental regulations continue presenting challenges to business. Brian Ho of EY, a global leader in assurance, tax, transaction and advisory services, provided valuable insights for businesses on navigating the latest Environmental Protection Tax Law (effective January 2018).

Highlights:

• The main points and changes brought about by the Environmental Protection Tax Law

• Challenges facing businesses in maintaining environmental compliance in China

• Key questions companies must ask themselves to manage compliance risks in their supply chains

China’s new Environmental Protection Tax Law

China’s strictest ever environmental protection law was implemented in January 1, 2015, followed by a series of accompanying regulations, such as Water, Atmospheric and Soil Pollution Prevention and Control Law, the Pollution Discharge License system, the Environmental Protection Tax Law and the Green Finance Implementation Method. The Environmental Protection Tax Law or came into effect on January 2018, with the first tax return period in April 2018.

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One of the innovations of the new law was the transformation of pollutant discharge fees (PDF) into the environmental protection tax (EPT), calculated based on pollutant type and quantity, as well as factory region. The EPT applies to all enterprises and manufacturers directly discharging taxable pollutants (air, water, solid waste, and noise) to environment within the territory of mainland China (including land and sea areas). The new list of taxable items is more extensive than before, although a number of specific exemptions and preferential treatments apply.

The law also establishes the acceptable measuring methods of discharged pollutant, including:

• Installation of automatic pollutant monitoring equipment

• Engaging a monitoring organization to collect pollutant monitoring data

• Pollutant discharge coefficients and material balance method

• Sampling-based measuring method

The EPT is calculated on the monthly basis, with filing completed per quarter or per discharge. The agencies responsible for its administration and collection are local tax bureaus and the Environmental Protection Bureau.

Challenges facing businesses in maintaining environmental compliance

1. Potential tax burden rise

   , due to change of tax basis, and potentially loose enforcement of pollutant discharge fees previously (it is not uncommon for companies to see a 100% or higher rise of tax burden). The regional difference of the tax rate is a major factor.

2. Potential non-compliance risk

   , because a business may not have accurate information about pollutant discharge levels, which are used as the basis for EPT calculation. The use of previous figures used for PDF payment can create significant noncompliance risks

3. Potential publicity risk

   : underpayment of EPT, if disclosed to the media, may create reputation risk. Given the government’s tightening policies on environmental protection, there is a real chance of under-payment cases being publicized by the authorities.

Navigating the Environmental Protection Tax

Ultimately, dealing with more compliance requirements translates to higher compliance related risks. In order to navigate the new system, businesses must have clear answers to the following questions:

• How can the environmental compliance risk be integrated in the overall management of your company?

• Who is responsible for internal control and cross-checking of relevant data? Do your engineering division (providing pollutant data) and your finance department (providing tax data) speak the same language?

• If you have invested in capacity building projects for your suppliers, are you seeing the desired impact and/or return on investment? Are they sufficient to maintain compliance?

• What opportunities and incentives can you leverage through energy recycling, waste reduction and green development?

• How can you combine environmental risk management, information management, and valuation into an integrated approach to supply chain management?