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China targets teapot oil refineries in tax crackdown - sources

BEIJING (Reuters) - China’s crackdown on alleged tax evasion in the oil industry will target independent refineries and follows complaints by state energy giants, in the first major sign of growing tensions between established players and their upstart rivals.

The national flag of China flutters behind a fence of the headquarters of the National Development and Reform Commission (NDRC) in Beijing, in this picture taken July 12, 2013. REUTERS/Kim Kyung-Hoon/Files

In a statement on Tuesday, the National Development and Reform Commission (NDRC) said it will ban crude imports for up to a year or, in certain cases, cancel import licenses for any companies found guilty of tax fraud.

It did not give any further details, identify which companies it was targeting or provide the reason for the announcement.

But industry sources in China familiar with the matter say the government launched an investigation earlier this year into complaints by government-owned firms that the nation’s independent refiners, known as teapots, are not paying enough sales taxes.

Officials from the NDRC and the State Administration of Taxation have visited some teapots, they said.

“(The probe) was triggered by strong complaints from state oil companies that local refineries were paying much less fuel tax compared to them,” said a senior official with the China Petroleum & Chemical Industry Federation, a semi-official agency. He declined to be named due to the sensitivity of the issue.

Inspectors from the NDRC are also looking into allegations that refineries with import licenses are selling foreign crude oil to companies without, breaking rules set by Beijing when it started granting the quotas a year ago, according to four industry officials with knowledge of the inspections.

The complaints illustrate how the rapid rise of the teapots, which are mainly privately owned and nimbler than their state-run rivals, like Sinopec and PetroChina, has roiled the domestic industry since Beijing granted the import permits a year ago.

Any steps to curb their imports would be a major blow to this small but fast-expanding group, which have grabbed a growing slice of the domestic market by selling diesel and gasoline at discounts to state-run majors, and forcing them in turn to sell their excess into a saturated global market.

“Previously, state refiners have been (turning) a blind eye on teapots, because they are not a big enough threat. Now things have changed. Big SOEs are quite sensitive over teapots’ business practices,” Lin Boqiang, energy researcher with Xiamen University.

When asked about the probe last week, Sinopec spokesman Lu Dapeng said he had no knowledge of the government’s inspections, and would not comment further.


Rancor over taxes has been brewing for months, according to local media reports and traders.

Before they had access to foreign crude, teapots mainly refined fuel oil and whatever excess crude they could pick up from the state-owned players.

“A (teapot) plant of five million tonnes of annual capacity pays less than half of that of a state-owned refinery,” Li Tianshu, a PetroChina refinery manager was quoted as saying by the 21st Century Business Herald in July.

“Competition from teapots forced us to lower operations, they are now the biggest challenge to our profitability,” the paper cited a second state refinery official as saying.

In an apparent response to growing criticism, Shandong Dongming Petrochemical Group, the country’s largest teapot operator, last week said via a social media post that it paid a record amount of taxes totaling nearly 1.28 billion yuan ($193 million) between January and April to the government of Heze, where it is headquartered.

That’s nearly 40 percent of total tax revenue for the city of 9.6 million people, it said on wechat.

An executive with a leading teapot refiner said independents were paying lower taxes because many were configured to treat heavier crude oil that yields a smaller amount of gasoline and diesel versus more sophisticated plants.

Many produce heavier products like bitumen that are not subject to consumption levies, he added.

($1 = 6.6423 Chinese yuan renminbi)

Additional reporting by Florence Tan in SINGAPORE; Editing by Josephine Mason and Christian Schmollinger