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Finance: Will enterprises pay more for pollutant discharge with the Environmental Protection Tax Law?
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Will enterprises pay more for pollutant discharge with the Environmental Protection Tax Law?

By Kelvin Lee, PwC Tianjin

In brief

WBT201510_140_Finance__002During the third plenary session of the 18th Central Committee of the Communist Party of China (CPC) (the “Third Plenary Session”), it was proposed that the current pollutant discharge fee (PDF) be replaced by an environmental protection tax (EPT). With the aim to implement the statutory taxation principle, promote energy conservation and protect the industrial structure of the ecological environment, the Ministry of Finance, the State Administration of Taxation and the Ministry of Environmental Protection jointly drafted the “Environmental Protection Tax Law”, taking into account the opinions from relevant bodies. On 10 June 2015, the Legislative Affairs Office of the State Council released the “Environmental Protection Tax Law of the People’s Republic of China (Discussion Draft)” (the “EPT Law”) and its interpretation to solicit public comments.

According to the EPT Law, the criteria and calculation method for EPT collection are basically similar to those stipulated in the prevailing PDF rule and regulations. Nevertheless, the major changes under the EPT framework are specific regulations regarding multiple levy, reduced levy and exemption treatment of EPT according to the degree of pollutants discharged. It is also stated in the EPT Law that taxpayers who have paid EPT are no longer liable to PDF.


China has enjoyed rapid economic growth and achieved notable progress since the introduction of economic reforms and the opening-up policy. However, as a result, environmental problems have also developed into a major issue. With the determination to improve the resources and environment tax system in China’s 12th Five-Year Plan, the proposal to replace PDF by EPT, as well as the requirement in this year’s “Prime Minister’s Government Work Report” to legislate the EPT Law, implementation of the EPT in China has become imperative.

Taxpayers and scope of taxation

WBT201510_140_Finance__003EPT taxpayers are defined as enterprises, public institutions and other business operators directly discharging taxable pollutants within the territory of China and other sea areas under its jurisdiction. It is stipulated in the EPT Law that five categories of the pollutants are subject to EPT, namely air pollutants, water pollutants, solid waste, noise pollution (including construction noise and industrial noise) and other pollutants. The specific taxable items shall follow the “Schedule of Tax Items and Tax Amount on Environmental Protection Tax” (Appendix One) attached to the EPT Law2. For air and water pollutants, EPT shall be levied on the top three pollutants (or top five heavy metal pollutants) discharged from each outlet and calculated based on their respective pollution equivalent value3. Local governments at the provincial level have the discretionary power to increase the category of taxable pollutants at each discharge outlet based on their specific circumstances.

Calculation method

The EPT payable shall be calculated based on the volume of the pollutants discharged, multiplied by the specific tax amount prescribed in Appendix One. The taxation basis for each pollutant varies.

For air and water pollutants, the taxation basis shall be determined according to their respective pollution equivalent value.

For solid waste, the taxation basis shall be determined according to the quantity discharged.

For construction noise, the taxation basis shall be determined according to its total construction acreage.

For industrial noise, the taxation basis shall be determined according to the excess decibel level over the prescribed standard.


Preferential tax treatment

The EPT Law has a specific chapter on “preferential tax treatment”, detailing EPT exemptions for the following:

· Pollutants discharged from agricultural production (excluding the large-scale cultivation industry)

· Pollutants discharged from transportation machineries, such as motor vehicles, locomotives, off-road mobile machineries, ships and aircrafts, etc.

· Pollutants discharged from urban sewage and household waste treatment plants, provided they are within the national disposal standard

At the same time, the EPT Law also introduced a “reduction” tax treatment. If the concentration level of air pollutants and water pollutants discharged by a taxpayer is less than 50% of the pollutant disposal standard stipulated by the national or local authorities, and is within the total pollution disposal quota, the local government has the authority to reduce the EPT payable by half within a certain period of time.

Multiple levies

The EPT amount shall be multiplied if the disposal of taxable air pollutants and water pollutants exceeds the prescribed standards.

· Where the concentration of the pollutants discharged exceeds the national or local pollutant disposal standard, or the volume of pollutants discharged is higher than the stipulated disposal quota, the EPT shall be levied at two times of the applicable tax amount.

Where the concentration of the pollutants discharged exceeds the national or local pollutant discharge standard, and the volume of pollutants discharged is higher than the stipulated discharge quota, the EPT shall be levied at three times of the applicable tax amount.

Collection and administration

EPT is administered over a mechanism of, “filing by enterprises, collection by tax authorities, coordination by environmental protection authorities, and information sharing by relevant parties.”

Timing of tax obligation – The date on which the taxpayer begins to discharge taxable pollutants.

In-charge tax authorities – Taxpayers shall perform EPT filing with the competent tax authorities at the location where the relevant pollutants are discharged.

Tax filing and payment – The EPT shall be levied on a monthly, quarterly or yearly basis as determined by the competent tax authorities depending on the specific conditions. Where the tax payment cannot be calculated over a fixed period of time, it can be filed on a transaction basis. Taxpayers shall report and pay the EPT within 15 days after the filing is due.

WBT201510_140_Finance__001Administration by taxpayer category – Under the EPT Law, taxpayers falling into the 14 key pollution industries as well as key monitoring enterprises in other pollutant discharge industries are classified as key monitoring (pollutant discharge) taxpayers4. There are significant differences between the key monitoring (pollutant discharge) enterprises and non-key monitoring (pollutant discharge) enterprises in terms of administration. For key monitoring (pollutant discharge) taxpayers, as they submit their filing documents on the types and amount of taxable pollutants, the in-charge tax authority shall forward them to the competent environmental protection authority and request it to review and verify the documents, and the latter shall issue its official verification opinions. For non-key monitoring (pollutant discharge) taxpayers, their in-charge tax authority and competent environmental protection authority shall jointly review their documents and publish the verification result.

Legal liabilitiesWhere a taxpayer fails to pay EPT to the tax authority following the provisions, it shall be punished in accordance with the “Tax Collection and Administration Law” EPT Law and other relevant laws and regulations.

The takeaway

WBT201510_140_Finance__004The tax amount and calculation method as prescribed in the EPT Law are basically similar to those stipulated in the current PDF. As taxpayers who have paid EPT will not be liable for PDF, it means that the tax burden of taxpayers previously subject to PDF is not likely to significantly increase after the implementation of EPT. However, enterprises which are not previously liable to PDF shall review their business operation in order to evaluate whether they have pollutant discharge activities that may give rise to additional EPT liability. In addition, where taxpayers fail to pay EPT in due course, the tax authority shall impose a penalty in accordance with the provisions in the “Tax Collection and Administration Law” and it is comparably higher than that under the PDF system.

Before the “PDF to EPT transformation” the environmental protection authority is in charge of the PDF collection. After the introduction of EPT, the tax authorities will be responsible for its administration and collection. It is anticipated that the efforts to collect EPT will be strengthened, reinforcing the statutory taxation principle and preventing local governments from exercising too much discretion in the collection. Nevertheless, as the assessment on pollutant discharge is considerably technical, tax authorities are unlikely be able to complete the verification independently without the assistance and cooperation of environmental protection authorities. As such, it has created the need to establish a mechanism to coordinate and share information among the governmental bodies. As a new type of tax, EPT will provide a brand new experience for the local-level tax officials. Taxpayers are advised to maintain close communication with the relevant competent authorities.

The EPT Law was open for public comments until the middle of July 2015. It will be further amended after taking the public comments into consideration. It is anticipated to take some time before the EPT Law is promulgated after receiving the approval by the National People’s Congress. We will closely monitor the development and share with you more insights in due course. Please stay tuned.


1. The EPT Law (Chinese language) can be accessed at the official website of the Legislative Affairs Office of the State Council P. R. China.


2. Please refer to Appendix One of the EPT Law.

3. The equivalent value of the taxable air pollutants and water pollutants shall be calculated on the volume of the pollutant discharged divided by a specific rate for each pollutant. Please refer to Appendix Two of the EPT Law for details of the specific rate of each taxable pollutant.

4. The 14 key pollution industries include: thermoelectricity, steel, cement, electrolytic aluminum, coal, metallurgy, construction materials, mining, chemical industry, petrochemical, pharmacy, light manufacturing (brewing, paper-making, fermenting, sugar, vegetable oil processing), textile and leather industry, etc.


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