CBBC Insights: Retail | How will China’s new e-commerce tax policy impact your business?

12/04/2016
CBBC Insights: Retail | How will China’s new e-commerce tax policy impact your business?

CBBC Insights: Retail | How will China’s new e-commerce tax policy impact your business?

NOTE: On November 15th China’s Ministry of Commerce announced that the transition period for its supervision of cross-border e-commerce retail imports has been extended until the end of 2017.

These new cross-border regulations are now expected to come into effect from January 1st 2018 onwards. CBBC continues to monitor the situation for changes and will continue to update our members on any further changes.

New policies have been announced governing cross-border e-commerce.  The Joint Circular notice issued by The Ministry of Finance, General Administration of Customs and State Administration of Taxation of China relates specifically to taxation on cross-border e-commerce imports (click here to read full circular in Chinese). CBBC member KPMG has also issued a useful ‘China Tax Alert’ on the topic (click here). The new rules came into effect on April 8, 2016.

Related to this is a so-called “Positive List” issued jointly by eleven PRC government departments including AQSIQ, MOA and MOFCOM which seems to determine those products which are permitted for sale on cross border ecommerce platforms.  This Positive List may have a more significant impact for some sellers than the tax changes as it appears to prohibit some product categories from cross-border platforms. That said, there is still a need for more clarity in this area and CBBC continues to work with partners to gain a better understanding.

CBBC’s e-commerce expert Mark Hedley, takes a look at the announcement and what it means for UK companies.

What is the new policy?
Under the original system (prior to 8th April) most E-commerce parcels shipped to China cross-border (purchased from an overseas website or a cross-border platform) were generally classed as personal items. In most circumstances, personal parcel tax would be levied - assuming the item value was less than 1000RMB and passed the test of being a reasonable amount for personal consumption. These items were not subject to VAT or consumption tax, while items that incurred less than 50RMB in duty were shipped free of duty.  Where duty rates were levied, these personal parcel tax rates were typically lower than general trade duty rates for the same category.

No.

Item

PCR (before April 2016)

1

Books, magazines, educational movies, furniture, computers, toys

10%

2

Textile and garments, video camera and other electronic home appliances, bicycles, watches and clocks

20%

3

Golf and golf appliances, luxury watches

30%

4

Cigarette, cosmetics and alcohol

50%

5

Others

10%

 

In practice, this meant that many lower cost items could be purchased by Chinese shoppers from overseas with zero tax and duty. It also meant that many items valued less than 1,000RMB (c. £100) were significantly cheaper when sold direct to cross-border consumers than products shipped to China through the traditional B2B import route. By comparison, general B2B trade imports were subject to full import duties, VAT and any consumption tax (not to mention additional costs of sales through distribution/retail channels). Under this system, items over 1,000RMB (c. £100) were classed as general trade items and taxed in the same way as traditional imports. The system therefore tended to encourage consumers to purchase lower value items.

Under the new system, any item purchased through an official E-Commerce channel, will be classed as general trade and be charged VAT and consumption tax. However, for any items purchase less than 2,000 RMB in value will only be required to pay 70% of the total value of VAT and consumption tax (i.e. so for example, 17% VAT would be reduced to 11.9%, and a 30% consumption tax would be reduced to 21%). This rule only applies to transactions made through an officially sanctioned E-Commerce platform (such as Tmall Global or one of the many other Chinese cross-border platforms) or where utilizing an express logistics firm or postal office that can provide customs with all the electronic data relating to transaction, payment and logistics. Any items that meet these criteria will be exempt from import duty altogether. There is also an annual spending limit for Chinese consumers of RMB 20,000 per year, after which full VAT, consumption tax and import duties will be levied.

However, the old system will still be applied to any parcels shipped without electronic data provided to customs (i.e. classified as personal parcels if less than 1,000 RMB, or as general trade items if over 1,000RMB). The rates of personal parcel tax have also been increased to encourage shoppers to use the officially sanctioned E-Commerce channels.

No.

Item

(after April 2016)

1

Books, magazines, educational movies, computers, digital camera and other digital products, food and beverage, gold and silver, furniture, toys, gaming products, holiday or other entertaining products

15%

2

Sports products (excluding the golf and golf appliances), fishing products, textile and garments, video camera and other electronic home appliances, bicycles 

30%

3

Cigarette, alcohol, precious jewellery and jade, golf and golf appliances, luxury watches, cosmetics

60%

4

Others

30%

 

What is the Positive List?
A couple of iterations of the Positive List or “Cross-Border Ecommerce Imported Goods List” were released in early April 2016 covering over 1000 products across eight categories. It effectively prohibits the sale of goods that require special registration or licences under Chinese Law but appears to extend beyond this in some areas. The Food and Drink sector has a number of sub-categories missing from the list which had previously been available on cross-border E-commerce platforms e.g.:

  • Infant Formula – only products from sites registered with Chinese authorities (in accordance with the China Food Safety Law)  can be sold via e-commerce
  • Health food products – many health food products are excluded, with small exceptions
  • Foods for special medical purposes are excluded from the list
  • Fresh food / produce is also excluded

It is unclear why some product categories (such as liquid milk) do not appear on the Positive List. We continue to work to seek further clarification from the Chinese authorities.

Cosmetics are also on the positive list, but it stipulates that ‘first-time’ imported cosmetics also must be registered with the China Food & Drink Administration (CFDA). Although 136,000 imported cosmetics products already have product registration with the CFDA and this will not affect widely used international brands, new-to-market brands face the additional barrier of having to go through a lengthy CFDA approval process. The current CFDA registration process includes compulsory animal testing, which is off -limits for many beauty brands for ethical reasons.

For a  legal perspective on what these regulations mean for overseas retailers, please see the latest commentary from CBBC members King Wood and Mallesons  (click here)

Why is the government introducing the change?
There are a few reasons why the government has introduced these changes:

  1. To close the Personal Parcel Tax loophole, and create a more level playing field between domestic enterprises (including foreign companies with a presence in China) and overseas retailers. The old system incentivised Chinese shoppers to buy from overseas websites, which has affected the sales of local retailers/platforms
  2. To encourage retailers and consumers to use government sanctioned E-Commerce platforms/logistics providers, thereby boosting overall tax receipts
  3. To encourage Chinese shoppers to spend more online, by making mid-priced items such as fashion, cosmetics and other premium items more affordable. The government’s  ultimate aim here is to promote greater domestic consumption 
  4. To better regulate the sector, provide customs with better visibility of products being imported and improve consumer safety.

Who benefits and who loses out?
Any item that would previously have been shipped free of duties will suddenly see a 12% hike in duties. This will mainly affect low value/high volume products, such as infant formula, diapers, mother and baby, health supplements and so on.

The big winners are those items that had higher personal parcel tax rates such as cosmetics and alcoholic drinks (effectively reduced from 50% duty to 33%). Fashion items in the £100-£200 price range should benefit from the new rules, incurring a flat VAT charge of 11.9% rate rather than the 20% duty previously levied.  
 
The new system also benefits the Chinese consumer by introducing more standardisation and regulation into the E-Commerce sector, improving product safety monitoring and creating more consumer choice for higher priced items. The new system also benefits those Chinese cross-border platforms and logistics providers that shoppers are being encouraged to purchase from.

We highlighted above that some food and drink categories will be affected by the positive list but there remains a lack of clarity about how the list will be monitored and how enforcement will be implemented. With further implementation guidelines expected soon in relation to China’s new Food Safety Law (2015), we and the market access team at UKTI in Beijing anticipate further specific regulation in relation to e-commerce, labelling as well an obligation on importers to audit more closely suppliers of food and drink products. 

What does the change mean for UK retailers?
It would be a mistake to interpret the tax changes simply as a protectionist measure designed to keep foreign brands out of the market. It represents an attempt to better regulate the sector and improve consumer safety. It will also benefits any foreign retailers with a presence in China or selling through traditional retail channels (offline or online).

That said, for companies whose products fall outside the “Positive List”, the policy change represents a significant barrier. In particular, many companies that were previously able to sell via cross-border channels may be prevented from doing so in the future do to being excluded from list or the need to be registered locally. We anticipate this will most impact suppliers of certain food categories and non-registered cosmetics brands.

The fact the government is introducing more regulation to the sector, setting up cross-border zones, and creating new cross-border platforms should, in the long-term,  lead to more opportunities for UK retailers. With an online population of around 700 million and online sales set to account for 20% of retail sales by 2018 (Source: Emarketer), China presents a significant opportunity for UK vendors in certain categories offering products appealing to the Chinese consumer.

Consumers in China are more willing than ever to pay a premium for products perceived as being high quality or unique. Apart from tax and regulatory barriers, a more significant challenge is how UK companies can better understand the needs of the Chinese consumer and promote products effectively in a fiercely competitive market.

If your company is affected by the issues raised in this piece, or if you have additional information about these policies that you would be happy to share, please do get in touch with CBBC. We are always keen to help lobby on behalf of UK companies

For more information on how to get your company involved in e-commerce in China, download our E-Commerce Guide and China Business Handbook. Companies might also find opportunities in our latest list of Export Opportunities. Get in touch with our China Business Advisers who can give more practical support.

 

For further information on this topic, please contact our China Business Adviser and e-commerce expert Mark Hedley at: mark.hedley@cbbc.org

Useful Link

http://www.emarketer.com/Article/Ecommerce-Drives-Retail-Sales-Growth-China/1013028 

 

12/04/2016