How China is Using Tax Policies to Defend Its Rare Earth Monopoly — Quartz

China’s dominance in the global rare earth industry is formidable. It accounts for nearly 60% of the world’s total critical element mining production, controls about 85% of global processing capacity, and manufactures nearly 90% of all rare-earth permanent magnets.

A key factor that has helped China establish and maintain dominance over all segments of the rare earth supply chain is carefully calibrated administrative tools, particularly tax policies and production quotas.

A Toolkit on Quotas and Taxation

China’s rare earth quota system has changed over the years. Initially, export quotas capped the amount of rare earths Chinese companies could sell to overseas buyers. However, China had to scrap the export quotas when it lost its case at the World Trade Organization in 2014, where the United States had filed complaints that the quotas were unfair trade practices. Beijing replaced export quotas with production quotas, ultimately handing out production licenses to only a handful of state-owned rare earth giants.

A new tax system has also been introduced to increase Chinese state control over the rare earth industry. At first, this took the form of a tax on resources, levied according to the quantity produced. Today, the tax is calculated according to value: a value added tax (VAT) of 13% is levied on all rare earth products.

“The production quota system, combined with the new tax system, now serves as an effective defense against international attempts to break China’s monopoly-like supply chains,” writes Per Kalvig, senior researcher at the Geological Survey of Denmark and at Greenland’s Center for Minerals and Materials, in a report published last month on global rare earth supply chains.

How Chinese VAT protects against foreign competition

Kalvig details how China is using its VAT system to tip the balance in its favor in the rare earth industry.

All rare earth products, including oxides, metals and magnets, are subject to 13% VAT. When a producer buys rare earth raw materials in China, he pays the international market price, including the 13% tax. If rare earth raw materials are exported from China, VAT is not refunded. But exports of rare earth magnets from China are eligible for VAT refund. This means that Chinese rare earth magnet producers have a 13% raw material cost advantage over their overseas competitors.

“Thus, in the upper and middle parts of the supply chains, a 13% economic competitive advantage in favor of Chinese companies has been established and an economic incentive has been created for the value addition in all parts to accrue to China. “, writes Kalvig.

Meanwhile, a foreign company seeking to sell rare earth products to China also faces duties and taxes.

If the company sells rare earth concentrates (produced when the raw ore goes through a preliminary stage of processing) to China, VAT and import duties are not applied. However, rare earth materials that have been transformed into things like oxides, carbonates and metals are subject to a 5% import duty and 13% VAT. This puts foreign rare earth projects at a disadvantage: they can only sell rare earth concentrates to China, which have low added value, because more processed products will be hit with duties and taxes and can only be competitive in China. if they sell at lower prices – an unattractive option. proposal to investors.

All of this has significant implications for countries trying to establish their own rare earth supply chains to compete with and be less dependent on China.

“Overall, China’s tax system means that without changes to VAT refund regimes, China will maintain its near-monopoly status in rare earth value chains,” Kalvig notes.

Beyond the fight against foreign competition, this tax system is helping to move the Chinese rare earth industry towards higher value-added and more technologically sophisticated activities, such as the manufacture of permanent magnets, while preserving China’s reserves of its strategic rare earth resources.

How the United States can use tax policies to rebuild its rare earths sector

Yet China is not alone in using tax policy to its advantage in rare earths. The United States is also turning to its tax toolkit.

A bipartisan bill introduced in Congress last summer would provide tax credits for domestic production of rare-earth permanent magnets. Meanwhile, analysts are calling for these production tax credits to be extended to every link in the U.S. rare earth supply chain and for rare earth mining to be eligible for the highest tax deductions. raised for the depletion of mines, wells and other natural deposits.

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