An Analysis of the Influence of Financial Institutions on the New Policy of Refined Product Tax Rebate
Recently, several financial institutions have shared their views on the "Circular on the Import Taxation of Refined Oils" issued by the Ministry of Finance.
Vertex Financial believes that the VAT refund policy will not significantly impact the losses incurred by Chinese refining companies. Based on import prices since April, the tax rebate for gasoline and diesel is approximately $23 per barrel. However, even with these rebates, selling imported gasoline and diesel domestically would still result in losses of around $12/barrel and $27/barrel, respectively. The Ministry of Finance is reportedly considering reducing the import VAT on crude oil by 75%. While this could help Sinopec achieve break-even in 2008 without additional subsidies, it may not be as beneficial for PetroChina, which faces similar refining losses but imports less crude oil. Given rising industry costs and expected long-term increases in oil prices, Vertex suggests the government should also raise the special oil revenue threshold from $40 to $60–$80 per barrel.
China Merchants Securities estimates that if the VAT refunds are fully applied in the second quarter, Sinopec could reduce its losses by 2.5 billion yuan, while PetroChina could save 1.87 billion yuan. The VAT refund policy for imported refined oil has helped alleviate losses for both companies. However, the policy only addresses the issue of imported refined oil, not the broader problem of refining losses. More comprehensive measures, such as subsidies or price adjustments, may be needed. The plan to return 75% of VAT on imported crude oil is expected to be announced before the end of April. With oil prices above $100/barrel, PetroChina is facing increasing pressure due to unadjusted domestic prices and higher special oil revenues. Additionally, large capital expenditures are straining its free cash flow. Raising the special oil revenue threshold is also likely to be discussed in the second quarter.
It is recommended that the government adjust domestic refined oil prices at an appropriate time. Most current policies focus on the supply side, but this approach is becoming increasingly challenging. For instance, recent rises in international diesel prices have outpaced those of gasoline. Factors like European demand and China’s large imports in the fourth quarter of last year and first quarter of this year have contributed to this trend. In a period of high oil prices, adjusting consumer behavior on the demand side is essential, and the most effective way is through price adjustments.
CICC notes that the VAT policy on refined oil imports was introduced to offset the losses from gasoline and diesel imports, with the government providing compensation. However, the profit from the tax rebate policy for PetroChina and Sinopec was relatively small—around 1.8 billion and 2.4 billion yuan, respectively. In the future, other subsidy measures, such as returning VAT on imported crude oil or increasing the special oil revenue threshold, may be introduced. These measures, however, could limit the possibility of near-term price hikes for refined oil. The actual impact of the policy on the performance of the two major companies will depend on how strong the policy is and when it is implemented.
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