China's VAT rebate reduction to discourage clean oil product exports in 2025

China's clean oil product outflows overseas will be discouraged in 2025 by the value-added tax rebate cut for exports, which will be effective on Dec. 1, trading sources and analysts said Nov. 17.

Analysts and policy researchers said the move was evidence of Beijing's effort todirect earnings inward for domestic development while allowing exports when they are profitable to Chinese enterprises.

The country's Ministry of Finance and the State Taxation Administration announced a reduction of tax rebate on exporting gasoline, gasoil and jet fuel to 9% from the current refund of 13%, according to a statement released Nov. 15. Beijing-based tax specialists said this refundable tax component actually represents VAT.

Clean oil products attract 13% VAT and consumption tax for domestic sales. To encourage exports, Beijing has exempted outbound barrels from consumption tax and made VAT fully refundable. These are considered indirect government subsidies for Chinese exports that keep their goods competitive in the global market and aid the country's economic growth.

The same reduced rebates will apply to photovoltaics, batteries, and non-metallic mineral products, while the VAT relief will cease for exports of aluminum, copper, and biofuel feedstock, the finance ministry and taxation administration statement said.

These developments come as the finance ministryannounced a set of supportive policies to help ease local governments' mounting hidden debts in late October while signs of a more protectionist approach emerged from its global trade counterparts.

"The primary aim of the rebate cut is more likely to increase the government income rather than respond to the protectionist approach as trade corresponding authorities, such as the Ministry of Commerce, are not involved," a Beijing-based senior policy researcher with a state-run oil giant said.

There will be other specific countermeasures when there is a trade conflict or even a trade war, the researcher added.

VAT incomes are evenly shared by the central and local governments.

Tax adds challenges

Industrial sources, including some executives with state-owned majors, were surprised by the sudden policy change and said the 4% VAT on exports would cap their export margins.

A source with a leading refinery under Sinopec estimated the reduction in VAT rebate for gasoline exports would cut their profit by Yuan 200/mt ($3.25/b), while China-based analysts with trading companies said the tax cost for gasoline, gasoil and jet fuel would be between $2.8/b and $3.4/b.

"The tax cost will make outflows next year more challenging, while the [volume of] exports in December has been fixed, [and is] less impacted," a Beijing-based product trader said.

Market sources previously expected China's clean oil product exports in 2025 to stay largely unchanged from volumes of about 41 million mt in 2024, including jet fuel barrels used for bonded refueling at China's international airports. The expectation assumes steady annual export quota allocations.

China controls oil product exports through quotas and the government has prioritized meeting domestic demand in allocating supplies while avoiding higher emissions from producing oil products for exports.

Quota holders usually arrange their exports to balance domestic supplies and maximize profits within the allowance limits.

"In the best case, we hope the government would use the tax as a tool to manage clean product exports quality [for profits] and relax the quota control on quantity," the researcher said.

China's gasoline, gasoil, and jet fuel exports have fallen 11% year over year to 31.45 million mt (819,000 b/d) in the year's first 10 months,customs data showed.

Processing trade in favor

China allows oil product exports via two routes -- the processing trade route and the general trade route -- and issues separate quotas for each.

The VAT rebate cut mainly affects exports under the general trade route, which are usually the cargoes shipped overseas, while the clean products that are exported under the processing trade route, known as the tolling trade route, will continue to be tax-free and excluded from the new policy, a Beijing-based tax specialist said.

Therefore, "we are swapping some of our quotas under general trade route to processing trade route to minimize the tax cost, and will try to apply for more processing trade quota next year," said a second refining source in southern China.

Almost all of the clean products export quotas had been under the processing trade route until November 2016, when the government encouraged exports under general trade route, offering more flexibility and less administrative work.

In 2024, Beijing released 7.93 million mt in export quotas under the processing trade route, all for jet fuel, to several refineries. All these jet fuel barrels are set to be sent to China's international airports for bonded refueling of international flights.

Under the processing trade route, there are no applicable taxes on the product but there is almost no flexibility during the importing, producing and exporting processes.

The exported products have to have been refined from imported crude oil, must come from a specific refinery that has won an export quota, and the seller of the crude oil must be the buyer of the oil product, although it can resell it to others.

Under the general trade route, state-owned trading companies are free to export oil products from the domestic market, regardless of whether they have been produced from domestic or imported crude oil.

As no restrictions are set, these products attract taxes, including VAT and consumption taxes, although the consumption taxes are exempt when the barrels are claimed for exports under this heading, while VAT is refundable.

The government allocated 33.07 million mt in export quotas under the general trade route this year.