| • 5% price-based resources tax on oil and gas produced in Xinjiang • Becomes effective June 1 • Will be broadened to include all western areas • Based on prices instead of volume |
The new 5% tax on coal, oil and natural gas introduced last month in Xinjiang, where China’s major strategic oil and gas reserves are located, will be extended to include the entire western province. But the legal industry is confident of a positive outcome.
“Plans to reform the resource tax regime have been ongoing for quite some time, but it has always been halted due the uncertainties of the Chinese economy,” said Liu Tianyong, managing partner at Hwuason, a boutique tax law firm. “Before, there was always a worry that imposing the tax would burden the growth of resource companies. But the country’s rise to prominence during the recent financial crisis has made 2010 perfect timing for the implementation.”
The new tax regime is said to be part of China’s move to raise funds to develop its most restive regions, by taking a slice of the profits of dominant conglomerates like PetroChina. “The tax regime will cause capital for resource companies to rise and their profits to decrease,” said Liu.
While most lawyers agree that the appetite for M&A in the resources sector will not be diminished, some suggest that there might be a change in its focus. “Potential investors are now going to try and tap into new regions by acquiring smaller resource-related companies outside of Western China. Therefore, we might also have to extend our legal services, including M&A and PE advice, into new areas of interest,” said Liu.
He also acknowledged new technical challenges for tax practitioners, especially as the timeframe whereby the tax will be implemented is unspecified. “Tax lawyers now have to plan strategies for their clients and make considerations for when the new tax regime will be imposed nationally,” he said. ALB
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