The New Chinese Solar Tax Break Is Illusive

Includes: FSLR, TSL, TSLA, YGE
by: Joseph Zhu

On September 29, China's Ministry of Finance announced to offer tax break of 50 percent of the value-added tax (VAT) refund to producers of solar photovoltaic (PV) power for each kilowatt-hour (kWh) sold to the grid from Oct. 1, 2013 to Dec. 31, 2015. At the first glance, this news is great to the PV manufactures that may have highly upside potential in the following two years. Looking it over again, I am aware that this VAT refund policy will benefit the current owners of PV power plant most and the PV manufacturers may only gain in a short time window for module shipment. On the other hand, it is hard for the Chinese PV manufacturers to invest and hold PV plant assets under difficult financing situation like this moment, though the Chinese PV manufacturers are extending their business to downstream of PV power plant.

The VAT refund policy

The Chinese VAT is 17%, and now it only collects 8.5% for PV power according to this VAT refund. This policy should work with the latest Chinese PV feed-in tariffs (FIT) released just one month ago. The following table shows the changes that VAT refund makes to the utility ground PV power plants.


FIT (VAT included) RMB per kWh

17% VAT off RMB per kWh

8.5% VAT off RMB per kWh

% change














PV power plants will have a 7.83% revenue increase. Here I didn't put distributed generation (DG) PV power included in the above list (RMB0.42 per kWh), which is also covered by this policy. The reason is that DGs are usually encouraged to use up all the power self-generated and the key benefit is about savings of the electricity bill. The income increment of DGs is trivial.

Apparently, the direct beneficiaries of this policy are the owners of PV power plants. The VAT refund makes the PV projects more attractive and exerts a pull on PV downstream market that leads to help the PV value chain as a whole. I haven't seen Chinese PV manufacturers like Trina Solar (NYSE:TSL) or Yingli Green Energy (NYSE:YGE) own utility-scale PV power plants in China that could immediately enjoy the gain resulting from this VAT refund policy.

Pure module sale is the main business

Pure module sale is still the main business of most Chinese PV manufacturers. Though they are trying to increase project opportunities, module sales will remain to be the hub in following years due to the combined pressure of huge capacity and long lead time of projects. In the stage of PV industry development to date, I believe, there will be no second First Solar (NASDAQ:FSLR) whose modules go with its own projects, and even FSLR has to increase third-party modules sales to enhance capacity utilization.

EPC (Engineering, procurement and construction) services come to the Chinese PV manufacturers when the margin of module sale drops. They widen their foot-print by providing EPC services to capture the additional margin along with module business

Project development is something like BOT (Build, operate and transfer). The Chinese PV manufacturers are responsible for financing and constructing PV plants. Then the PV plants may either be sold for revenue recognition right after completion, or be operated for a while and sold, or be hold as non-current assets to generate cash flow from electricity rate. While most Chinese PV manufacturers are deeply mired in debts, financing is an obstruction to roll out the project development. As capital turnover rate is vital for manufacturing business, for Chinese PV manufacturers, PV projects are most likely to be sold as soon as they are completed.

The policy impact

The VAT refund is set from Oct. 1, 2013 to Dec. 31, 2015, and those grid-connected PV plants enjoying immediate VAT refund could help no more the business of the PV manufacturers.

Assuming it may be meaningful for the new projects to enjoy one-year VAT refund, these new projects must be completed by the end of 2014. A utility PV project from development initiative to grid connection takes at least 6 months in China, so it actually leaves manufacturers approximate half-year (first half of 2014) of time rushing for volume shipment.

Unlike FIT that lasts for 20 years, the VAT refund is only available by the end of 2015 and no one knows whether this policy will be extended or not. The longer the policy will be lengthened, the more the Chinese PV manufacturers will gain. Otherwise, the Chinese PV manufacturers only benefit limitedly from the VAT refund policy


The recently announced Chinese VAT refund policy to PV power has limited influence on the Chinese PV manufacturers due to the following reasons. Firstly, the policy content is mainly for utility-scale PV power plant owners though it benefits the whole PV value chain. Secondly, it is impossible for the Chinese PV manufacturers to heavily invest project development and hold PV plant asset in long-term as Solar City (SCTY) does under the pressure of capital turnover rate. Lastly, the workable window for the Chinese PV manufacturers is only about half year of volume shipment to project developers. So the new Chinese solar tax break only has limited positive effect on the Chinese PV manufacturers in terms of module shipment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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