In recent period, some stabilized light hydrocarbon producers around the world have been subjected to tax inspections and required to pay huge amounts of consumption tax on their stabilized light hydrocarbon products. China's consumption tax policy on refined oil products is relatively complex, and there are differences in the understanding of the relevant policies between tax enterprises and the two sides. In particular, there is a big controversy in practice as to whether stabilized light hydrocarbons and other ancillary products of the petrochemical industry should be included in the scope of naphtha excise tax levy. This paper analyzes whether stabilized light hydrocarbons belong to naphtha and whether consumption tax should be levied on them from the perspectives of production process, nature and application of stabilized light hydrocarbons, combined with recent typical cases.

I. Stabilized Light Hydrocarbon Production Process, Properties and Applications

The essence of whether or not consumption tax should be levied on stabilized light hydrocarbons lies in whether or not stabilized light hydrocarbons belong to naphtha. In order to answer this question, it is necessary to start from the production process and nature of stabilized light hydrocarbons and their specific applications in the industrial chain to determine whether there is a fundamental difference between stabilized light hydrocarbons and naphtha.

(I) Production process of stabilized light hydrocarbons: physical separation

The main raw material for the preparation of stabilized light hydrocarbons is mixed light hydrocarbons, and the sources of mixed light hydrocarbons include two kinds: firstly, the associated gas produced in the process of extracting crude oil in oil fields, and the liquid hydrocarbons obtained by deep-cooling separation, and secondly, the associated gas condensate produced in the process of extracting natural gas in gas fields.

After collecting mixed light hydrocarbons from oil and gas field enterprises, the stabilized light hydrocarbon producers mainly utilize the difference in volatility of light and heavy components in mixed light hydrocarbons, and realize the separation of mixed light hydrocarbons through operations such as heating, pressurization and cooling. Specifically, mixed light hydrocarbons as raw materials from the middle of the separation tower to start feeding, under the action of high temperature, the lighter part rises to the upper part, mainly including liquid ethane, propane mixture (liquefied petroleum gas), etc., and the heavier components (pentane and heavier hydrocarbons) in the lower part of the convergence of the lower part of the continuous or indirect extraction and other purification work, the preparation of stable light hydrocarbons. The separation process for mixed light hydrocarbons is shown roughly in the figure below:

Commonly used crude oil separation process methods include negative pressure flashing, positive pressure flashing and distillation process, these separation processes are the use of the different physical properties of the components of the mixture of physical separation, the entire operation process does not occur in the chemical reaction, does not change the chemical composition of the various types of substances.

(II) Nature of stabilized light hydrocarbons: crude oil products

According to the current national standard GB9503-2013, stabilized light hydrocarbons refer to liquid petroleum products extracted from natural gas condensate or crude oil with pentane and heavier hydrocarbons as the main components. Combined with the aforementioned production process of stabilized light hydrocarbons, the extraction of stabilized light hydrocarbons from mixed light hydrocarbons only applies physical methods, and has not yet been subject to deep processing, which neither involves the blending of light hydrocarbons with additives such as methanol and ethanol, nor chemical processes such as catalytic cracking, cracking, reforming, etc., and the separation from mixed light hydrocarbons is still a mixture of various types of alkanes, and does not change the attributes of its crude oil, and is an intermediate product in the production of crude oil products.

(III) Application fields of stabilized light hydrocarbons

Stabilized light hydrocarbons can be divided into No. 1 light hydrocarbons and No. 2 light hydrocarbons according to the range of vapor pressure. In terms of application, No.1 light hydrocarbon can be used as petrochemical raw material, while No.2 light hydrocarbon can be used as petrochemical raw material as well as raw material for the production of automobile gasoline blending. Stabilized light hydrocarbons after subsequent catalytic cracking, cracking, hydrogenation refining and catalytic reforming and other chemical deep processing, in which the relative molecular mass and hydrogen-carbon ratio is changed, the operation process components cracking, hydrogenation, condensation or isomerization and other chemical reactions, in which the hydrocarbon molecules rupture and rearrange into a new molecular structure, generating a new substance or component, can be used for the production of solvent oil and other finished products such as oil products, but also can produce It can be used to produce finished oil products such as solvent oil, chemical raw materials such as benzene, and also natural gasoline, which can be blended with methanol, ethanol and other additives to synthesize automobile gasoline. Specific applications are shown in the figure below:

II. Stabilized light hydrocarbons do not belong to naphtha, the preparation of stabilized light hydrocarbons does not exist taxable production behavior, should not be levied consumption tax

(I) Stabilized light hydrocarbons do not belong to naphtha

Stabilized light hydrocarbons have a clear national standard, i.e. GB9053-2013 Stabilized Light Hydrocarbons, while there is no national standard for crude oil naphtha in China at present, and only Sinopec and other enterprises have a corresponding enterprise standard for petroleum naphtha, i.e. Naphtha (Q/SHR005-2000). In addition, there are two national standards for coal-based naphtha, "Coal Direct Liquefaction Naphtha (GB/T 36566-2018)" and "Coal-based Fischer-Tropsch Synthetic Naphtha (GB/T 36565-2018)".

By comparing the national standards of two kinds of stabilized light hydrocarbons, two kinds of coal naphtha and the enterprise standard of Sinopec naphtha, it can be found that there are big differences between stabilized light hydrocarbons and naphtha in terms of their nature and usage, and stabilized light hydrocarbons do not belong to naphtha.

According to the Notice of the Ministry of Finance and the State Administration of Taxation on Increasing the Consumption Tax Rate of Refined Products (Cai Shui [2008] No. 167) and other tax policies, naphtha adopts the definition of "generalization + enumeration", i.e., "naphtha, also known as chemical light oil, is a light oil processed and produced from crude oil or other raw materials and used as chemical raw materials. Naphtha is also known as chemical light oil, which is produced by processing crude oil or other raw materials and is used as light oil for chemical raw materials. The scope of naphtha levy includes all kinds of light oils except gasoline, diesel oil, aviation kerosene and solvent oil. Off-specification gasoline, reformed generation oil, pull-out oil, pentane feedstock oil, light cracking materials (decompressed diesel VGO and atmospheric diesel AGO), heavy cracking materials, hydrocracking tail oil, and aromatics pumping residue are all light oils and fall within the scope of the naphtha levy." In its enumeration, there is also no provision that naphtha includes stabilized light hydrocarbons.

(II) Preparation of stabilized light hydrocarbons does not belong to the production of taxable consumer goods

According to the Provisional Regulations on Consumption Tax, the object of consumption tax is the production behavior of taxable consumer goods, namely:

1. Producing taxable consumer goods with non-taxable consumer goods;

2. Production of taxable consumer goods B from taxable consumer goods A.

As mentioned above, the preparation of stabilized light hydrocarbons from crude oil is the separation of mixed light hydrocarbons by physical methods, which does not cause any change in the molecular structure of the components, does not generate new substances, and does not change the properties of the crude oil, so it belongs to the production of stabilized light hydrocarbons from mixed light hydrocarbons of nondutiable consumer goods, and does not belong to the production of dutiable consumer goods. Processing of crude oil and other raw materials to produce refined oil, raw material composition of the chemical reaction, changing the original composition and properties of the substance, resulting in new substances, and new substances in line with the national standards for gasoline, diesel and other refined oil, is a non-taxable consumer goods crude oil production of taxable consumer goods diesel.

For stabilized light hydrocarbons produced by coal chemical enterprises, although hydrogenation and liquefaction, Fischer-Tropsch synthesis and other chemical reactions are generated, the substances produced still belong to stabilized light hydrocarbons, which are quite different from naphtha and other refined oils in terms of their nature and usage, and they also belong to the production of stabilized light hydrocarbons of non-taxable consumer goods by non-taxable consumer goods coal, and do not belong to the production of taxable consumer goods.

Therefore, the separation of stabilized light hydrocarbons from coal or mixed light hydrocarbons does not constitute the conversion of non-taxable consumer goods into taxable consumer goods or the production of taxable consumer goods, even though the raw materials have been treated to a certain extent.

III. Naphtha consumption tax regulations and production of stabilized light hydrocarbons by the common circumstances of tax adjustment

(I) Naphtha Consumption Tax Levy Regulations

According to the Announcement of the State Administration of Taxation on Relevant Policy Issues of Consumption Tax (Announcement of the State Administration of Taxation No. 47 of 2012), products produced and processed by taxpayers from crude oil or other raw materials that are in liquid state (except for asphalt) under normal temperature and pressure (25℃/one standard atmospheric pressure) are classified as to whether or not to levy consumption tax according to the following principles:

(1) If the products meet the provisions on the levy of gasoline, diesel oil, naphtha, solvent oil, aviation kerosene, lubricating oil and fuel oil, the consumption tax shall be levied according to the corresponding provisions on gasoline, diesel oil, naphtha, solvent oil, aviation kerosene, lubricating oil and fuel oil;

(2) Products other than those stipulated in item (a) of this Article shall not be subject to consumption tax if they are in compliance with the corresponding provisions of the national standards or petrochemical industry standards for such products (including the name of the products and the quality standards are consistent with the corresponding standards); otherwise, they shall be treated as naphtha for the purpose of levying consumption tax.

According to the Announcement of the State Administration of Taxation on Relevant Management Issues after the Cancellation of Two Consumption Tax Approval Matters (Announcement No. 39 of 2015 of the State Administration of Taxation), where a taxpayer produces products in compliance with national standards or petrochemical industry standards, no consumption tax will be levied starting from the month in which it obtains the certificate of quality inspection of the relevant products issued by the quality and technology supervision department at or above the provincial level (inclusive).

Therefore, whether or not consumption tax is levied on crude oil products such as stabilized light hydrocarbons, not only should we pay attention to whether or not they are in essence refined oil products, but we must also examine whether or not they comply with the national standards, whether or not they have obtained the quality inspection certificates, and when they have obtained the quality inspection certificates. Given that stabilized light hydrocarbons are "products produced and processed from crude oil and other raw materials in liquid form under normal temperature and pressure", although they do not belong to naphtha, they must also meet the requirements of "conforming to the national standards or the corresponding provisions of the standards of the petrochemical industry" and "obtaining quality control certificates at or above the provincial level". "obtain the certificate issued by the quality supervision department at or above the provincial level" in order to be excluded from the scope of consumption tax.

(II) Common cases of tax adjustment for production of stabilized light hydrocarbons

At present, there are three common situations in which the production enterprises of stabilized light hydrocarbons are subject to consumption tax:

1. Production of stabilized light hydrocarbon without obtaining quality inspection certificate

As mentioned before, the production of stabilized light hydrocarbons can be exempted from consumption tax only if the qualified quality inspection certificate is obtained, and consumption tax must be levied in accordance with naphtha if the quality inspection certificate is not obtained. At present, some enterprises in the production of stabilized light hydrocarbon products, did not obtain the quality inspection certificate, or obtain the quality inspection certificate later, the competent tax authorities so on the enterprise to obtain the quality inspection certificate before the production of stabilized light hydrocarbon products to recover consumption tax.

2. Problems with the qualification of the organization that issued the quality inspection certificate

According to the Announcement of the State Administration of Taxation on Supplementary Provisions on Relevant Policy Issues of Consumption Tax (Announcement of the State Administration of Taxation No. 50 of 2013), the "quality inspection certificate of the relevant products" refers to the inspection certificate issued by the testing organization which has been granted the qualification recognition of laboratory by the National Certification and Accreditation Administration or the provincial quality and technology supervision department according to law. The relevant products meet the national or industry standards of the inspection certificate, and the testing capacity of the testing organization for the relevant products is within the scope specified in the schedule of its qualification certification.

Therefore, the issuer of the quality inspection certificate needs to meet two conditions:

1. by the National Certification and Accreditation Administration or the provincial quality supervision departments recognized;

2. the certificate of accreditation contains the monitoring capacity of stabilized light hydrocarbons.

In practice, some companies have obtained quality inspection certificate, but the quality inspection certificate issued by the commercial inspection and testing organizations, did not obtain the relevant departments of the qualification certification, but also not for the record according to law. There are also enterprises to obtain quality inspection certificate, but the unit issued by the quality inspection certificate only has the ability to detect other products such as agricultural products, and does not have the ability to detect stable light hydrocarbons. These circumstances will lead to the issuance of quality inspection certificate does not meet the conditions, and thus be levied consumption tax.

3. Production of stabilized light hydrocarbons is still characterized as naphtha for taxation even after obtaining quality inspection certificates

In practice, there are still some enterprises that have obtained qualified quality inspection certificates for their production of stabilized light hydrocarbons in accordance with the law, and have formally put into production only after obtaining the quality inspection certificates, but the local tax authorities still levy excise tax on stabilized light hydrocarbons on the grounds that they are light oils. In this kind of situation, it is essentially a deviation in the understanding of tax policy between the tax authorities and enterprises. If the enterprises cannot fully prove that the stabilized light hydrocarbons do not belong to the chemical light oils stipulated in the tax law, they still need to bear the obligation of excise tax payment.

Ⅳ. Impact and risk response to the imposition of consumption tax on stabilized light hydrocarbon producers

(I) Impact of the consumption tax levied on stabilized light hydrocarbon production enterprises

1. Stabilized light hydrocarbon producers will bear unreasonable consumption tax costs

According to Article 1 of the Provisional Regulations on Consumption Tax, consumption tax is levied on units and individuals that produce, commission process and import the consumer goods specified in the Regulations within the country. Therefore, the link for levying consumption tax on refined oil products should be the production link of refined oil products. As mentioned above, stabilized light hydrocarbons do not belong to the tax item of refined oil, nor do they belong to other taxable consumer goods, and they still belong to the category of crude oil in terms of nature. In the process of producing refined oil from crude oil, stabilized light hydrocarbons are in the upstream of refined oil production. Since the stable light hydrocarbon producer neither implements the blending of light hydrocarbon components nor carries out catalytic reforming and other deep processing, the fractionation of mixed light hydrocarbons to obtain stabilized light hydrocarbons does not belong to the consumption tax taxable behavior, and should not generate consumption tax obligations. When the downstream enterprises of stabilized light hydrocarbons continue to use stabilized light hydrocarbons to prepare refined oil products, they are the production of refined oil products and should pay consumption tax.

In accordance with Article 2(1) of the Announcement of the State Administration of Taxation on Issues Relating to Consumption Tax on Refined Products (Announcement No. 65 of 2014 of the State Administration of Taxation), taxpayers who recover gasoline, diesel oil, naphtha, fuel oil and lubricating oil by outsourcing, importing and entrusted processing for continuous production of taxable refined products are allowed to deduct the consumption tax paid on taxable oil products from the taxable amount of consumption tax on refined products. If consumption tax is levied on stabilized light hydrocarbons, it will lead to the downstream enterprises producing and processing finished oil products that should bear consumption tax can obtain the benefit of deducting consumption tax, while consumption tax is actually borne by stabilized light hydrocarbons producers, and in the case that the relevant tax costs can not be counted in the product price to be passed on, it will lead to stabilized light hydrocarbons producers that do not need to bear consumption tax to bear the consumption tax costs unreasonably, affecting the normal production and operation of the enterprises. The normal production and operation of the enterprises will be affected.

2. Consumption tax on stabilized light hydrocarbons may disturb the market order.

From the perspective of market economy, if consumption tax is fully levied on stabilized light hydrocarbons, given the limited profit margins of stabilized light hydrocarbons producers, it is difficult for them to increase the sales price of their products, and they may choose to evade the consumption tax obligation by hiding their revenues or issuing invoices of other product names. For downstream enterprises, which are unable to obtain invoices that meet the conditions for deduction but still need to enjoy consumption tax deduction, they may take the risk of accepting falsely issued invoices for refined oil products for deduction, and the proliferation of false invoicing behavior will also cause damage to the market order.

(II) Tax-related Risks and Responses to Stabilized Light Hydrocarbons Produced by Petroleum and Coal Chemical Enterprises

Although the intermediate products of crude oil products do not belong to the scope of consumption tax from the perspective of production process and product nature, petrochemical enterprises are still facing tax-related risks in view of the different understanding of the law enforcement authorities. If the competent tax authority determines that the intermediate products of crude oil products are naphtha, the tax authority will levy consumption tax on such products. According to Article 32 of the Tax Collection and Administration Law, taxpayers who fail to file tax returns in a timely manner may also face the risk of being charged consumption tax and late payment fees. If a taxpayer fails to declare and pay the tax after the tax authorities' notice ordering the payment of the tax by the deadline, the taxpayer will also be recognized as a tax evader and will be held legally liable for a fine of 0.5 to 5 times of the underpaid tax. If it constitutes a crime, it will also face the criminal risk of tax evasion.

In addition to oil and gas fields, petrochemical plants and other enterprises, with the significant development of coal-to-oil technology, coal-based light hydrocarbons also have an important position in the separation of stabilized light hydrocarbons and the subsequent production of refined oil products in the process. Stabilized light hydrocarbons separated from coal also belong to the intermediate products in the process of production of refined oil products, and should not be subject to excise tax, but coal chemical enterprises are also facing the risk of excise tax.

It is recommended that the relevant enterprises actively look for professionals and timely take legal remedy procedures, including but not limited to administrative reconsideration, administrative litigation, review of regulatory documents, etc., to appropriately respond to and resolve consumption tax risks and safeguard their legitimate rights and interests.