International health food companies and infant formula food suppliers rejoiced when on March 17, 2017, China Ministry of Commerce (“MOFCOM”) confirmed on an official news release that the current supervision model will likely be adjusted for cross border e-commerce retail import (“CBEC”) after January 1, 2018. The release advised that the new model will apply to 15 pilot zones.

The mood was markedly different back in April 2016, where several PRC authorities jointly and officially issued new policies regulating cross border e-commerce. The most concerning aspect of the April 2016 measures was that a range of products including health food, infant formula, cosmetics and medical devices would need to be registered or filed with the PRC authorities.

The April 2016 polices caused panic on the market and resulted in a sharp drop (almost one third) of CBEC business revenue. A later notice in May 2016 granted a grace period for the implementation of the registration and filing requirements until May 2017. Then in November 2016, MOFCOM made a further announcement that the grace period will be extended to the end of 2017.

More than a Grace Period

It should be noted that the news release by MOFCOM did not only confirm a further extension of the grace period for registration and filing until 1 January 2018 but also contained a number of other positive nuggets of potential changes that would cheer up CBCE exporters. These potential changes include:

1. Products sold through CBEC will be temporarily treated as personal items

It has been a long debate whether the products sold through CBEC should be treated as goods under general trade or items of personal import. The importance of making such differentiation is that, goods under general trade is of commercial nature therefore should subject to strict regulation and higher tax rates, while items of personal import is more of contingent and personal use nature therefore is not necessary to be strictly regulated, the taxes rates for personal items are also lower and with exemption amount.

Although the April 2016 new CEBC polices have set a separate tax regime for CBEC, which is a comprehensive tax method with certain tax rate discounts, and such tax regime is currently not changed, the recognition of personal item nature of CBEC product may rightly be interpreted as the authority intending not to regulate goods imported under CBEC as strictly as goods imported under general trade. This also raises the hope that the registration and filing requirement on these special products may not be imposed on CBEC products in the end.

2. Authority intents to maintain the stability of CBEC

In the news release, the authority stated the notion of promoting the health and stable development of CBEC, and maintaining a stable supervision of CBEC. This sends a signal that the authority might reconsider whether the registration and filing requirements imposed by April 2016 CBEC policy is too rigid, and whether the adverse impact on CBEC caused by such requirements would be worthy.

The registration and filing requirements has raised chaos among CBEC participants, because the application for registration and filing for special products is difficult and time consuming, sometimes even impossible due to different standards of foreign manufacturing country and China. A strict implementation of such requirements might result in stop of CBEC business of some foreign companies.

What is certain?

After this this news release by MOFCOM, the followings are certain:

  • The registration and filing requirements on special product will not be imposed on CBEC products until December 31, 2017;
  • Starting from January 1, 2018, the CBEC products will temporarily be treated as personal items;
  • The comprehensive tax regime will still apply to CBEC sales until further actions by relevant authority;
  • The current “white list” for products that can be sold through CBEC still remains in effect.
  • The 15 CBEC pilot zones will be the experimental areas for trial of new supervision mode to be implemented by PRC authorities after January 1, 2018, including Hangzhou, Tianjin, Shanghai, Chongqing, Hefei, Zhengzhou, Guangzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen, Suzhou, Fuzhou and Pingtan.

What is uncertain?

  • Formal legal status of CBEC products. Despite the positive signals, the recognition of CBEC products as personal items has only been provided for in the form of a press release. No formal rules have been released. Besides, even according to the press release the recognition of personal items is only a temporary treatment without clear timeline.
  • White list and specific registration requirements for CBEC products. Whether the white list model would still be adopted after January 1, 2018 is unclear. It should be assumed that there is still a high risk that the authorities will use a white list or black list to screen products sold through CBEC.
  • Registration requirements for CBEC products. Although the news release this time has sent some positive signals about changing previously issued policies on CBEC, however, to what extent such policies will be changed remains to be seen. Despite the wishes to promote CBEC economy, Chinese authorities also bear huge responsibility on consumer’s safety. It would not be an easy decision for the authority to balance the two consideration, therefore it is still not definite whether the previous policy will be completely overruled.

Summary

  • It would be prudent to bear in mind that the news release is relatively informal and although MOFCOM takes the lead on foreign trade and commerce it is not the only stakeholder in this debate. The various Chinese authorities and stakeholders will need to balance the promotion of CBEC’s economic development against the responsibility to provide for consumer, to balance the interests of major online retailers against the interests of local manufacturers and also take into consideration the concerns of PRC authorities such as customs and tax.
  • In our opinion, this is good news for international companies seeking to access the China market by way of CBEC. However, we do caution companies from reading too much into the news release – we assume that is so often is the case that much of the devil would be in the detail. Accordingly, companies would be well advised to continue to prepare for filing and registration for their products if such product is being shipped in commercial quantities and to monitor the situation regularly.

Please find below a translation of the 17 March, 2017 MOFCOM news release provided by us:

On 17 March 2017, the Spokesman of MOFCOM announced post grace period supervision arrangements of products imported through cross-border e-commerce.

In May 2016, approved by the State Council, China issued policies regarding the grace period for the supervision requirements of products imported through cross-border e-commerce. In November 2016, the grace period was extended until the end of 2017. In order to ensure smooth transition of after the grace period, and accord with the requirements of the State Council, MOFCOM, together with the National Development and Reform Commission (NDRC), Ministry of Finance (MOF), General Administration of Customs (Customs), State Administration of Taxation (State Tax), General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and China Food and Drug Administration (CFDA), by conducting extensive researches, considering the opinions of local governments, industries and enterprises, and taking into consideration of the trade nature as well as the personal use and relatively low value nature of products imported through cross border e-commerce, have been actively developing a supervision mode which fits such nature of cross-border e-commerce.

For the smooth development of cross-border e-commerce, and to maintain the stable supervision of cross-border e-commerce, as approved by the State Council, at current stage, cross-border ecommerce products shall be treated as personal items temporarily for supervision perspective. Based on this, the responsibilities of e-commerce entities will be emphasized and the supervision measures will be optimized, quality safety control will be adopted. A risk emergency processing mechanism will be established. With regards to the import products which have a relatively greater quality risk, further measures will be taken. In the future, the supervision will be further updated as necessary based on the E-commerce Law and the development of the cross-border retail import.

In order to promote the “first act and first trial” of cross-border e-commerce and to control risk, the new supervision mechanism will be implemented within the approved pilot cities of cross-border e-commerce retail imports and the cross-border e-commerce business comprehensive pilot zone, which includes 15 cities (Hangzhou, Tianjin, Shanghai, Chongqing, Hefei, Zhengzhou, Guangzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen, Suzhou, Fuzhou and Pingtan).

The above supervision mechanism will be implemented from 1 January 2018. The supervision policies for grace period will still applicable until then. Relevant authorities shall issue the detailed enforcement regulations based on its functions to promote the health development of cross-border e-commerce.