Tax Breaks Likely to Boost Global Interest in Crude Oil Futures
China will waive income tax for foreign investors trading the country's new crude oil futures contract for three years so as to attract more overseas capital for the launch, the Ministry of Finance said.
Foreign brokers will also be exempt from paying income tax on commissions from dealing in Shanghai crude oil futures, the finance ministry said.
China will launch the crude oil futures contract at 9 am on March 26 at the Shanghai International Energy Exchange.
The trading margins for the futures have been set at 7 percent of the contract value, while the upward and downward trading limits will be 5 percent, with the trading limits on the first trading day set at 10 percent of the benchmark prices.
Analysts believe the tax exemption is a bonus for the much anticipated launch of crude oil futures in the country.
"The exemption of income tax and individual income tax will help in the promotion of the crude oil futures," said Li Li, energy research director at ICIS China, a consultancy that specializes in the energy market.
"Foreign investors that trade in China's new crude oil futures contract will keep an eye on its future influence and scale, as well as the potential of the Chinese market, while the tax incentives are like an icing on the cake."
The crude oil futures will also help the country develop its own benchmark for oil pricing in addition to current global benchmarks, she added.
The Asia-Pacific region has surpassed America and Europe in crude consumption, but a benchmark with high recognition has been missing.
Li said the launch of the crude oil futures contract will help fill in the gap and more accurately reflect the oil prices in Asia, giving companies in the real economy a bargaining tool while importing crude. She said if the trading in Shanghai goes well, China could help cut down the premium in Asian countries.
Wang Lu, an Asia-Pacific oil and gas analyst at Bloomberg Intelligence, said the tax incentive could help increase the number of participants in trading.
"More participants can generate higher liquidity, which is the foundation to form an effective and influential pricing of the crude futures," she said.
"The price of crude futures will reflect market expectations of global supply and demand balance, geopolitical risks, macroeconomic situation and some regional factors such as China's crude imports, refineries' run rate and refining margins."