Chang Jiwen, Xu Junxiang, Yu Keli, Feng Yuxia, Chen Weixing

The recycling and utilization industry of renewable resources has achieved certain development in China and has become an important lever for building a green, low-carbon, and circular economy system. Taking 2020 as an example, the total amount of recycled resources in major categories such as scrap steel, scrap non-ferrous metals, scrap plastics, scrap tires, waste paper, waste electrical and electronic products, scrapped motor vehicles, waste textiles, waste glass, and waste batteries in China reached 372 million tons. Due to the long-term ineffective resolution of income tax and value-added tax issues in the recycling and processing of renewable resources, the standardized development and transformation of the industry have been constrained, and it is urgent to carry out tax reform guided by problems.

1、 The current situation of tax policy construction in China's renewable resources industry

Since 1995, China's tax policies for the renewable resources industry have undergone several changes. In response to the problem of excessive tax burden on enterprises engaged in the recycling of waste materials, the government has successively implemented preferential policies such as value-added tax collection before refund, exemption from value-added tax, and 10% input tax deduction for processing links based on the purchase invoice of waste materials. Due to the lack of effective regulatory measures, there have been a large number of instances of issuing and reselling invoices during the implementation process, which led to the cancellation of tax incentives for recycling and processing in 2008. As a transitional measure, the value-added tax on renewable resource recycling operations will be subject to conditional first collection and then deferred. In 2011, the government cancelled the tax incentives for the recycling industry of waste materials. The recycling process of renewable resources does not enjoy value-added tax benefits, and only includes waste batteries, waste plastics, etc. in the scope of resource comprehensive utilization products and labor preferential policies in the processing process. For processing enterprises that meet the conditions, they can enjoy a preferential policy of 50% immediate refund of the value-added tax paid. However, for recycling enterprises, they cannot enjoy any tax incentives or support policies. In 2015, the Ministry of Finance and the State Administration of Taxation released the "Catalogue of Value Added Tax Preferential Policies for Resource Comprehensive Utilization Products and Services", which expanded the scope of value-added tax preferential policies for processing and utilization processes and resource comprehensive utilization products, implementing value-added tax refund policies ranging from 30% to 70% for different varieties, and transmitting tax incentives to the recycling process. In 2016, the Ministry of Finance and the State Administration of Taxation issued a notice on comprehensively promoting the pilot program of replacing business tax with value-added tax in the renewable resources industry.

2、 The main problems of tax policies in China's renewable resources industry

At present, there are the following issues in the formulation and implementation of tax policies for the renewable resources industry that urgently need to be addressed.

One issue is the lack of input invoices, which makes it difficult to offset value-added tax and significantly increases the cost for recycling enterprises. The main sources of raw materials for renewable resource recycling enterprises are: firstly, purchasing renewable resources from numerous consumers, mobile vendors, and individual businesses, which account for about 90% of the proportion of renewable materials. Recycling enterprises are unable to deduct input tax due to the inability to obtain value-added tax invoices. Secondly, purchase renewable resources from waste producing enterprises. Due to some waste producing enterprises not issuing value-added tax special invoices as required, recycling enterprises are unable to offset input taxes and fees. Taking the scrapped car recycling and dismantling industry as an example, currently about 40% of individual operators cannot provide input invoices, about 40% of state-owned enterprises cannot issue tax deduction invoices, and the remaining about 20% of enterprises can issue general taxpayer special invoices when scrapping vehicles. Taking the dismantling of discarded electrical and electronic products as an example, the tax rate for value-added tax invoices issued by recycling companies is 13%, and the tax rate for value-added tax invoices issued by individuals is 3%. Some suppliers who cannot issue invoices will go to the tax bureau to issue invoices on their behalf, but these invoices are ordinary invoices and cannot be deducted. Disassembling enterprises need to pay higher input taxes and fees. After the reform of business tax to value-added tax, the annual income of small-scale taxpayers will be adjusted to no more than 5 million yuan. Due to the high proportion of waste electrical appliances from social sources reaching 90%, the value-added tax invoices and taxes issued by recycling companies are still borne by the dismantling enterprises after transmission. In order to solve this problem, some cities in provinces such as Jiangsu, Jiangxi, and Zhejiang allow recycling enterprises to issue purchase invoices or vouchers within their own province for deduction of input tax. Due to concerns about companies issuing false invoices, this practice has not been promoted nationwide. When recycling enterprises sell recycled resources to downstream processing enterprises, they can only pay a 13% value-added tax based on the total sales amount, plus local additional taxes, resulting in a total tax burden much higher than that of general industry enterprises.

The second issue is that the scope of tax incentives for processing is narrow and the conditions are harsh, making it difficult to meet the actual development needs of the industry. As stipulated in the "Catalogue of Value Added Tax Preferential Policies for Products and Services for Comprehensive Utilization of Resources", when an enterprise's comprehensive utilization products are "metals and alloys (excluding iron and its alloys) produced by smelting and purification", only when more than 70% of the raw materials come from the listed resources and corresponding qualifications are obtained, can it enjoy a 30% tax refund; When the comprehensive utilization product produced by the enterprise is "steelmaking furnace material", only when more than 95% of the raw materials of the product come from the listed resources, the steelmaking furnace material meets the technical requirements of "Waste Steel" (GB4223-2004), and the production and operation meet the conditions listed in "Access Conditions for Waste Steel Processing Industry", can the enterprise enjoy a 30% tax refund; Enterprises that meet the conditions for comprehensive utilization of waste plastics, waste polyvinyl chloride products, and waste aluminum-plastic (paper aluminum, paper plastic) composite paper packaging materials will receive a 50% tax rebate. However, in practice, the conditions for directory setting are strict and the standards are high, with only a few renewable resource processing enterprises meeting the requirements. Taking the processing of waste plastics as an example, the catalog emphasizes that "100% of product raw materials come from listed resources". However, due to the fact that processing and utilizing waste plastics listed in the product catalog generally requires the addition of additives, it is difficult to enjoy income tax benefits. Less than one-third of waste plastic processing enterprises in the country can enjoy tax refund policies. Taking waste tires as an example, the catalog stipulates tax preferential conditions and ratios for tire retreading, recycled rubber, and rubber powder, but does not provide preferential measures for the pyrolysis of waste tires, and requires the proportion of rubber powder in recycled rubber to reach 95%, which is extremely strict. In addition, if a company incurs an environmental administrative fine of 10000 yuan or more, it will lose its right to a three-year tax refund.

Thirdly, tax incentives for the processing of renewable resources are difficult to transmit to legitimate enterprises in the recycling process. Although tax incentives for the renewable resources industry are targeted at the processing and utilization of renewable resources, the original intention of policy design is to encourage comprehensive development of enterprises and transmit tax incentives from the processing stage to legitimate enterprises in the recycling stage. In practice, due to the long industrial chain of recycling and processing of renewable resources, and the detailed division of labor in recycling, storage, sorting, dismantling, and deep processing, it is difficult for a single enterprise to complete all the work in each link. At present, the threshold for recycling is relatively low, with a large number of mobile vendors and informal enterprises entering. According to the 2021 report from the Central Ecological and Environmental Protection Inspection Group, there have been illegal recycling and dismantling of waste cars in some places for over 30 years. Research has found that over 85% of waste electrical equipment dismantling and processing enterprises have illegal dismantling points near them, with an average of more than 10 points around each enterprise, most of which are recycling and dismantling outlets without any procedures. Due to not paying taxes, informal operators raise prices to purchase renewable resources from waste producers, forming two pricing systems: "no ticket price" for informal recyclers and "with ticket price" for formal recycling enterprises, squeezing the survival space of formal recycling enterprises. Due to the high tax burden and the cost of standardized operation, legitimate enterprises dare not offer high prices when recycling renewable resources, resulting in the loss of price competitiveness. Some have to stop production or even switch careers.

Fourthly, the current tax policies have led to an inverted price of renewable resources, which damages their price competitiveness relative to primary resources. After recycling and processing, renewable resources become renewable raw materials. Compared with native resources, the quality of renewable resources is close to or even better in some categories, but there are also problems such as unstable supply. At present, the high tax burden of renewable resource industries such as scrap steel, paper, and plastic has significantly increased the cost of recycling and reduced their price advantage compared to primary resources. Enterprises are often unwilling to choose to use recycled raw materials, which is not conducive to the development of circular economy. Taking plastic as an example, in August 2020, the price of PET virgin plastic was around 6000 yuan per ton, while the price of recycled plastic pellets reached over 10000 yuan per ton. The formation of this price inversion phenomenon cannot be underestimated due to the role of tax burden. At the same time, the continuous increase in taxes, environmental protection costs, management costs, labor costs, etc. of enterprises has led to a high overall production cost of recycled plastics. Taking car dismantling as an example, legitimate scrap car recycling and dismantling enterprises need to comply with legal requirements such as site hardening, environmental impact assessment, and taxation, resulting in high overall costs. On the other hand, small workshop style dismantling enterprises evade these responsibilities, resulting in low overall costs and leading to the phenomenon of bad money driving out good money, which not only disrupts market order but also pollutes the ecological environment. Taking metal processing as an example, if processing enterprises use scrap aluminum, there is no value-added tax input deduction, while using electrolytic aluminum has input deduction. Therefore, enterprises often choose to use electrolytic aluminum, which leads to a decrease in the utilization rate of scrap aluminum and is not conducive to the development of circular economy.

Fifth, there are significant differences in tax policies among different regions, and the market competition environment is unfair. At present, China has not yet formulated a unified tax policy that is compatible with the development needs of the renewable resources industry, and policies formulated and implemented in different regions are inconsistent, resulting in some chaos. In order to develop the industry of recycling and reusing waste materials, provinces such as Shandong, Anhui, and Henan have formulated financial support policies and implemented varying proportions of refunds for the locally retained value-added tax, forming a tax depression in the industry. Although these policies have reduced the burden on some renewable resource enterprises, they have widened the gap in local tax policies. For example, some local tax departments have different understandings of what constitutes the processing stage when applying the "Catalogue of Value Added Tax Preferential Policies for Resource Comprehensive Utilization Products and Services". Based on this, the distribution of waste material recycling enterprises has shown significant regional differences since 2009, with large-scale enterprises gradually gathering in areas with fiscal and tax preferential policies. The different tax policies in different regions not only undermine the fair competition environment within the recycling and utilization industry of renewable resources, but also easily lead to the Matthew effect between regions and enterprises. In order to reduce taxes, some companies specifically choose to register their companies in tax havens, without conducting actual business, only conducting invoicing business. Remote invoicing not only brings operational risks to enterprises, but also significant tax losses to the country.

3、 Suggestions for Reforming Tax Policies in China's Renewable Resources Industry

The comprehensive utilization of renewable resources can not only save primary resources and energy, protect the ecological environment, but also reduce greenhouse gas emissions. Therefore, tax policies, as an important macroeconomic regulation tool, should be given special support. Based on the particularity of the renewable resources industry, it is recommended that the country formulate a unified tax preferential policy as soon as possible, dynamically adjust the tax preferential catalog, establish a comprehensive service platform for the entire supply chain informationization, and improve the supporting tax preferential implementation system and mechanism.

One is to allow enterprises that meet regulatory requirements to issue purchase invoices or be exempt from value-added tax on their own. With the development of the renewable resources industry, innovation in information technology, and improvement in regulatory measures, China has emerged a group of leading enterprises in the fields of scrap car dismantling and comprehensive utilization, waste electrical appliance dismantling and comprehensive utilization, which have good technical level and management ability in the recycling, processing and utilization of renewable resources. The development of some fields is at an advanced level in the world. Therefore, it is recommended to carry out pilot projects in areas with good regulatory conditions such as scrapped cars and waste electrical appliances, allowing recycling enterprises to issue purchase invoices on their own, and the state to provide a certain percentage of preferential or even exempt value-added tax for them. In the future, this policy can be extended to renewable resource recycling enterprises with general taxpayer qualifications, while prohibiting receipt without a ticket. When recyclers sell waste materials to enterprises that meet regulatory requirements such as "three streams in one", they can enjoy tax incentives. This can reduce the overall tax burden and cost of the industry, and significantly improve the recycling and processing utilization rate of legitimate enterprises.

The second is to establish a dynamic adjustment mechanism for the preferential catalog, expand its scope of application, and increase the tax incentives for processing links. It is suggested that the National Development and Reform Commission take the lead in organizing or entrusting relevant associations to conduct research to comprehensively understand the processing, utilization, and reprocessing technology level of various categories of recycled raw materials in the renewable resources industry. Implement dynamic management of the "Catalogue of Enterprise Income Tax Preferential Policies for Resource Comprehensive Utilization" and the "Catalogue of Value added Tax Preferential Policies for Resource Comprehensive Utilization", update, revise and expand the scope of preferential enterprises in a timely manner, refine and optimize the provisions of the catalogue, control the tax burden of renewable resource utilization enterprises within a reasonable range, reduce the processing and use costs of renewable raw materials, and maintain their price competitive advantage. In addition, increase the proportion of value-added tax levied and refunded immediately in the processing stage, such as implementing a preferential policy of 70% value-added tax levied and refunded immediately for all; The environmental administrative penalty for enterprises losing their three-year tax refund rights will be increased to 50000 to 100000 yuan. Only in this way can we enhance the competitiveness of legitimate enterprises in the renewable resources industry and improve the recycling and utilization rate of various renewable resources.

The third is to strengthen industry informatization and credit supervision work, and improve supporting systems related to taxation. In order to enhance the concentration of the renewable resources industry and facilitate regulation, it is recommended to develop market access standards for different industries, specifying conditions such as operating sites, facilities and equipment, and management requirements. Those who do not meet the market access conditions shall not enjoy tax incentives. Enhance the informatization level of the renewable resources industry, promote the use of enterprise resource planning systems (ERP) throughout the industry, strengthen the supervision of the flow of renewable resources in the recycling, storage, and processing stages, and create conditions for the transmission of tax incentives between legitimate enterprises in the front and back stages. Give full play to the self-discipline and supervision role of social organizations and industry associations, increase tax supervision and punishment for illegal activities. Establish a blacklist system for illegal enterprises, and legally recover the outstanding taxes owed by illegal enterprises such as tax evasion, cancel their tax preferential qualifications, and include their illegal records in the social credit system for joint punishment, effectively changing the phenomenon of high compliance costs and low illegal costs.

The fourth is to build a public recycling platform and standardize the tax assessment and collection work in various links. It is suggested that the National Development and Reform Commission commission relevant associations to take the lead in establishing a public service platform for the supply chain of renewable resources, in response to practical problems such as difficulty in determining the authenticity of business operations in the recycling industry, difficulty in verifying enterprise income, easy falsification of invoices, and difficulty in issuing invoices for waste producing enterprises. The platform uses modern information technology such as bank card, WeChat, Alipay and other third-party online payment, blockchain, visual logistics, enterprise resource planning system, etc. to collect real-time transaction data of upstream and downstream enterprises, supply individuals, drivers, banks, third-party payment platforms and other subjects in the supply chain, and connect with enterprise resource planning system (ERP), vehicle trajectory collection APP, third-party payment system, tax supervision information platform, to prove the authenticity of business, clarify the actual input tax of processing enterprises, and realize the informatization and standardization of the whole process of tax verification and collection. Only by using the platform to conduct business can one enjoy corresponding value-added tax preferential policies and issue value-added tax electronic ordinary invoices. The establishment of the platform should adopt OFD format that complies with national unified standards, achieving unified format, safety and reliability, and convenient operation. In this way, it not only promotes the standardized development of the industry, but also reduces the overall tax burden of the industry.

The fifth is to strengthen national unified deployment and coordination, eliminate tax havens, and create a fair competition market environment. Suggest that the Ministry of Finance and the State Administration of Taxation conduct research to comprehensively understand the specific tax preferential policies implemented in various regions for the renewable resources industry. On the basis of grasping the current situation, we will unify and introduce nationwide tax preferential policies, cancel inconsistent industry tax policies, eliminate tax loopholes, and prohibit remote invoicing behavior that has not engaged in actual business; Cultivate a fair and reasonable industry market competition environment. It is recommended to clarify the specific meaning of "processing" based on thorough discussions within the industry, in order to eliminate any ambiguity in the application of the "Catalogue of Enterprise Income Tax Preferential Policies for Comprehensive Utilization of Resources" and the "Catalogue of Value added Tax Preferential Policies for Comprehensive Utilization of Resources" regarding the processing links that are subject to different understandings among various parties in the tax preferential directory.

Author affiliation:

Chang Jiwen - Deputy Director and Researcher of the Institute of Resources and Environmental Policy at the Development Research Center of the State Council

Xu Junxiang - Chairman of China National Resources Recycling Association

Yu Keli, Feng Yuxia, Chen Weixing - China National Resources Recycling Association