China’s new Environmental Protection Tax Law (EPT Law) came into effect on January 1. It replaces the old Pollutant Discharge Fees System (PDFS), which had been in place, unchanged, for the past 15 years. The overhaul of the environmental taxation system is just one of many recent steps China’s central government has taken to strengthen environmental governance in an ongoing effort to significantly reduce industrial pollution.

As most manufacturing enterprises operating in China are subject to some form of pollutant tax, it is important to understand how the new tax differs from the old fee-based system, and what those changes will mean for tax amounts payable as well as broader considerations regarding investments in environmental management systems.

Our key takeaways for MNCs in China include:

• Taxation could increase, as the new law contains more flexibility and headroom for localities to set higher tax rates and broaden the number of taxable items.
• Some levelling of the playing field is possible, as the new law tries to better tackle non-compliance and tax evasion.
• Supply chain costs may be impacted, as MNC suppliers will also be under increased pressure to comply with the new rules, especially those operating in provinces where tax rates have increased sharply.

The table below summarizes the key similarities and differences between the old fee-based system and the new law. Members of The Conference Board can download a more detailed analysis of the trends outlined above and their impacts on business in China.