China‘s potential naphtha tax overhaul set to increase costs, boost imports

China‘s potential naphtha tax overhaul set to increase costs, boost imports

China's planned overhaul of its naphtha consumption tax structure is set to increase costs for petrochemical producers and squeeze industry margins, as the potential framework will eliminate previous tax advantages and is expected to boost imports to avoid additional surcharges, though volumes will be restricted by existing quota limits, sources from refineries, chemical plants, trading firms and analysts told Platts, part of S&P Global Energy, on Jan. 12-15.

A plan by Beijing to transition from a "point-to-point exemption" system to a "universal levy with conditional rebate" framework to collect consumption tax on naphtha, effective from Jan. 1, has been widely talked about in China's refining and chemical sector, but there has been no official announcement as of Jan. 15.

China has encouraged chemical production and consumption, and as a result, it has adopted the current "point-to-point exemption" system for naphtha as a feedstock for chemicals. Under the current system, many petrochemical facilities have been exempt from consumption taxes when purchasing naphtha from designated domestic suppliers.

However, naphtha is also a blending material for producing gasoline, which attracts a consumption tax to discourage its consumption.

To eliminate the loophole of misusing the tax exemption on blendstock naphtha barrels and increase the government's income, Beijing initiated the universal levy approach, subjecting all naphtha transactions to the full tax burden before any rebates are applied, according to the sources and analysts.

"It will take place ultimately, as it is workable and reasonable to the government," said a Shandong-based chemical source.

Affected plants

The proposed tax policy will primarily affect state-owned refineries, where the vast majority of point-to-point supply occurs, and will disproportionately affect non-integrated petrochemical plants that strongly rely on domestic point-to-point supply, according to the sources.

"Integrated refining and chemical plants crack naphtha directly from their own crude distillation units without external transactions, so they are not subject to consumption tax," the Sinopec refiner said.

According to CERA's report, the main chemical plants affected are often joint ventures under large state-run oil firms, including large-scale non-integrated projects like Sinopec Sabic Tianjin Petrochemical, Shanghai SECCO Petrochemical, Fujian Gulei Petrochemical, CNOOC and Shell Petrochemicals, etc.

The report added that key domestic naphtha net sellers include a few Sinopec refineries -- Gaoqiao, Tianjin, Zhenhai, Jinling and CNOOC Huizhou as well as the private Fuhaichuang.

The cost disadvantage of the non-integrated naphtha route (about 11 million mt/year of ethylene capacity) could make alternative routes like ethane or LPG cracking (about 5.5 million mt/year of ethylene capacity) relatively more attractive, according to the report.