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Teapot Tax Clampdown May Slow China’s Oil Imports

China Refineries

The Chinese authorities’ recently-announced attempt to impose stricter control on taxes paid by independent refineries may potentially result in slowed short-term crude import plans, although it is unlikely to lead to substantial impacts in the longer run, according to a Platts analysis published on Monday.

Following complaints by established state-owned refinery giants that independents were not paying enough taxes, the Chinese National Development and Reform Commission (NDRC) said last week it could ban companies found to be avoiding taxes from importing crude oil for up to 12 months or in some cases, cancel their licenses to import crude.

Although the commission’s statement did not point the finger at any one company, analysts interpret it as a warning to independent refiners — the so-called teapots — to stop using loopholes in future.

One such loophole is the Chinese consumption tax on oil products, which state-held companies pay. If a refiner uses fuel oil to feedstock the production of the oil product, they don’t have to pay a consumption tax on the end oil product, because it is assumed that they had paid the tax on the fuel oil. However, if crude oil is used as feedstock – as teapots have been increasingly doing – taxes should be paid.

In addition, Platts says, teapots have been using complex accounting schemes to book crude procurements as fuel oil, and have been buying fake receipts.

And naturally, saving costs from taxes boosts independent refiners’ profit margins, much to the discontent of state-held companies, Platts noted.

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In addition, independent refiners with import quotas are not allowed to resell the crude oil. Nevertheless, a joint investigation by the commission and the Ministry of Finance has found that some teapots had been illegally reselling imported crude oil to refiners without import quotas, Platts said, quoting a source at the commission.

The market anticipates that the final result of the tightening of the tax control would depend on how strict China would be with teapots.

Since China allowed last year local refineries to use imported crude, the demand for overseas oil has been growing.

By Tsvetana Paraskova for Oilprice.com

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