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Oil companies should pay their social dues
2006-04-11
China Daily
The central government began imposing a special profit tax on oil companies from March 26 if prices of domestically produced crude oil exceed US$40 per barrel. This is an essential way to make oil companies shoulder their social responsibilities.
According to the State Council and the Ministry of Finance, the graduated tax rate starts at 20 per cent and rises with the barrel price. A maximum 40 per cent tax is charged for barrels that are US$60 and higher. It will be calculated every month, and companies are required to make quarterly payments.
An estimated total of 30 billion yuan (US$3.7 billion) is to be collected every year from China's largest three oil companies Sinopec, CNOOC and PetroChina.
Undoubtedly, when the crude oil price exceeds US$40 in the international market, the expenditure of oil companies will go up and proceeds will be affected. Thus they should prepare a contingency plan to minimize the impact of such external risks.
Oil companies should realize that it is the State's policy target to collect the special profit tax.
Energy price reform plays a vital role in the implementation of China's 11th Five-Year Plan (2006-10). Its impact on China's economic development will be huge. The country needs to adopt market-oriented policies and measures. At the same time, it should try to reduce the negative impact of the market economy on social stability and harmony.
When conducting energy price reform, the State will also provide subsidies to the public sector and to vulnerable groups. That is part of the country's reform on the oil products pricing system and a part of China's energy strategy. The primary issue to be solved for establishing a subsidy system is the source of funding. And the special profit tax on oil companies is the country's first choice. Oil companies should recognize this situation.
Under such a premise, oil companies should establish a risk and resolve system as soon as possible.
The companies should take into consideration the possible operational and financial risks that might arise when the international crude oil price surges and the special profit tax is collected and they should make emergency plans to cope.
The prices of crude oil and other resources will fluctuate over the long term and oil companies will have to pay the special windfall tax. But how will they solve the problems of falling profits and share values, and insufficient reinvestment ability? And how can they adjust investment proportion within enterprises? The answer to these questions lies in setting up an early warning system, which oil companies can use to deal with problems when they come up later.
In fact, it is the social responsibility of oil companies to pay the special profit tax. In recent years, the public has been increasingly calling on State-owned enterprises (SOEs) to perform their social duties.
The Organization for Economic Co-operation and Development (OECD) published a report on the management of SOEs in 2005. It pointed out that the basic difference between SOEs and private companies is that SOEs should be held to a much higher standard in performing social responsibilities and implementing public policies. It is a special, compulsory and legal mission for SOEs.
State-owned and State-holding enterprises, as well as other enterprises whose shares are partly owned by the State, should all shoulder such responsibilities; while private companies should shoulder similar duties under special conditions, such as in social emergencies like wars and disasters.
China's oil companies are enterprises with strong administrative colours. On the one hand, they are State-owned monopoly enterprises; on the other hand, they are listed companies or parent corporations of listed companies. They are playing the dual roles of both government and enterprise.
State-owned monopoly enterprises shoulder certain social responsibilities such as guaranteeing the domestic crude oil supply and maintaining the stability of oil product prices. Listed companies pursue maximum profits for their shareholders. In certain conditions, the two roles may be conflicting.
We admit the dual status of the oil companies and recognize their behaviour to pursue maximum profits for shareholders. But the regulation of their State-owned monopoly enterprise status is far from enough.
Thus when the international crude oil price soars, State-owned monopoly enterprises should work together with the government to stabilize the domestic oil price and protect the domestic market. When the State is adjusting the prices of finished oil products, oil giants should assist the government to subsidize disadvantaged groups and public sectors.
What's more, rational arrangements should be made for the use of State resources by oil companies. Currently the resource tax is collected at a rather low rate based on a fixed cost price. It is paid to local governments as a method to adjust fiscal relations between the central and local governments. It is not a resource tax by strict definition; the low taxation rate cannot compensate the resource regions. And related tax laws have not regulated the behaviour of companies in this aspect.
So it is a fairly good way to collect the special profit tax and the oil companies have due social responsibility to pay.
The author Guan Qingyou is a PhD candidate of the Institute of Asia-Pacific Studies under the Chinese Academy of Social Sciences.
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