January 31, 2013 7:58 am

Chinese cities put tax heat on steel mills

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Cash-strapped local governments in China have started demanding taxes from the country’s steel mills up to two years in advance, an unusual practice that highlights how desperate some cities have become for funds.

Chinese mills, which produce nearly half the world’s steel, have traditionally been cash cows for local governments. But last year, as China’s economy slowed, profits at the country’s biggest steel mills dropped 98 per cent from the previous year, according to the China Iron and Steel Association (CISA). Losses reported by unprofitable mills increased more than sevenfold.

Yet that did not stop municipalities in northern and northeastern China – also feeling the pinch from the economic downturn – from pressuring some mills to pay tax up to two years ahead of time, according to Zhang Changfu, CISA secretary-general. Uncooperative companies have found themselves subject to audits, investigations, and often big fines.

Cities struggling to meet their tax revenue targets had turned to additional taxes on mills to extract more funds, said CISA senior accountant and deputy secretary-general Qu Xiuli. If a mill did not make any taxable profits in 2012, the local government might ask it to pay its 2013 tax in advance, she said. If the city still could not meet its target, it might ask for 2014 taxes as well.

The early collection of taxes from steel mills is one of several ways in which local governments have squeezed companies for additional revenue. Analysts said last year that some cities had reneged on promised preferential tax rates. Chinese media also carried reports of officials who threatened to fine companies that failed to pay more than their fair share of taxes.

Chinese fiscal revenue growth slowed to 12.8 per cent last year, nearly half the average rate of 21.9 per cent over the previous five years.

“The unreasonable tax collection programmes have created a heavy burden for the companies,” Mr Zhang said on Thursday.

“The government is saying that we need to reduce the tax burden on companies, but that is not really happening,” said Tao Ran, an expert on the Chinese fiscal system at People’s University in Beijing.

“Local governments accumulated a lot of debt in the past that they have to pay back now, so they have collected taxes in advance,” he added. “That’s of course not sustainable.”

Mr Zhang painted a gloomy picture for the steel industry this year. “2013 demand [for steel] will be better than last year but challenges still cannot be underestimated,” he said. “Demand growth for steel in downstream industries will be slow.”

Last year, prices for iron ore – a key ingredient in steel and crucial to the profits of major miners such as BHP Billiton, Rio Tinto and Xstrata – plunged more than 40 per cent as the Chinese economy slowed. They have since recovered, in January hitting a 15-month peak of $158.5 per tonne of benchmark 62 Fe content ore, according to The Steel Index.

Additional reporting by Gwen Chen in Beijing

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