The road to success is littered with obstacles; however, only the mediocre travel exclusively on unobstructed roads. The birth and exploration of what is new are always accompanied by challenges. The need to move boldly forward with careful reasoning applies to both business regulations and legal concepts.
Cross-border e-businesses became known to the public through the popularization of “Haitao” (overseas purchasing through another party). The year 2014 can probably be called Year Zero for e-businesses, because in that year the General Administration of Customs issued two consecutive Notices, numbered 56 and 57[i], which established the legal status of cross-border import e-businesses. Cross-border e-businesses have since accelerated into high-speed development mode and the welcome new era of e-business battles has already begun.
“Cross-border e-business” refers to international business activity, in which trading parties within different customs territories reach an agreement on a transaction, use an e-business platform to conduct payment and settlement procedures, then deliver goods through cross-border logistics to conclude the transaction. The cross-border e-business platform integrates various transaction links such as overseas promotion, transaction support, cross-border logistics, customs inspection taxes, remittance and payment, after-sales services, credit systems and dispute resolution. Because it features paperless, anonymous, borderless, cross-border and transnational legal-systems, the main legal issues are characterized by their aggregation and multi-dimensional complexity.
I. Qualifications of Cross-Border E-Business Platform Operators
In China, the VIE (Variable Interest Entity) structure started with the “Sina Model”, which at that time was used to evade the foreign investment restrictions applicable to China’s value-added telecommunications services. The development of cross-border e-businesses requires the liberalization of foreign investment market entry policies.
Since the beginning of 2015 the State Council, the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Commerce have issued a number of policies and regulations in rapid succession to encourage foreign investment in the Chinese e-business market. These reforms have eliminated the restrictions on the shareholding percentage of foreign investment in e-business services (i.e. the maximum foreign ownership is now 100%) and lowered the market threshold, thereby creating a liberal development environment for cross-border e-businesses[ii]. Consequently, foreign investors can now establish wholly foreign-owned enterprises or Sino-foreign joint ventures to engage in pilot services such as “online data processing and transaction processing services (operational e-businesses)” under Class 1 (Value Added Telecommunications Services). When domestic e-business enterprises engage in overseas financing and listing they no longer need to adopt the VIE structure, and when a “foreign invested company” using the VIE structure returns to the A-share market, the foreign investments do not need to be divested. In April 2015, Baofeng Technology (300431.SZ) became the first Internet company to eliminate the VIE structure and return to the A-share market.
It is worth noting that if a foreign-invested enterprise wishes to acquire a business license for value-added telecommunication services, it must still meet certain substantive requirements including “credit or the ability to provide users with long-term services” and “other conditions that the State may require” such as necessary premises and facilities, technical solutions and network and information security systems. The service facilities (servers) must be located within the pilot service area, and the main foreign investor(s) should possess strong performance and operational experience in value-added telecommunication services.
II. Cross-Border E-business Contracts
China has no uniform e-business law that specifically targets “foreign elements”. Currently, applicable laws and regulatory rules include the Contract Law, the Law on the Application of the Law to Foreign Civil Relations, the Administrative Measures for Internet Information Services, the (Interim) Guiding Opinions for Online Transactions, the Interim Measures for the Administration of Network Commodity Transactions and Related Service Activities and the Service Regulations for Third-Party E-Business Trading Platforms. These laws and regulations were designed to respond to the reality of the marketplace and to solve certain problems. Nevertheless, ultimately they are at a lower legislative level of authority, and their provisions are imperfect. A number of links and relationships involved in the cross-border e-business industry still languish in an unregulated legal limbo.
User registration agreements, merchant settlement agreements and transaction rules are contracts between cross-border e-business platforms on one hand and settled-in foreign branded merchants and Chinese users on the other. These important legal documents define the rights and obligations of the parties. The distribution of rights and obligations between the platforms and the branded merchants, the platforms and the users, or between the users and the branded merchants are imperfect in terms of their mutual integration; and conflicts exist in provisions concerning dispute resolution, governing law and jurisdiction. Moreover, in general practice, e-business contracts are based on standard form contracts, the interpretation and validity of which are often at issue. Since the platform transaction rules involve core issues such as the effectiveness of sales contracts, the validity of special transactions (e.g. crowd funding) and liability for breach, the issue of whether or not the processes for the formulation, promulgation, effectiveness and amendment of the rules are impartial, transparent and reasonable is closely related to the issue of the credibility of the rules themselves.
According to the judicial interpretations of the Civil Procedure Law[iii], the jurisdiction of Internet trading contract disputes for a commodity sales contract concluded via an information network is the place of performance of the contract, unless otherwise provided. Where an operator uses a jurisdiction clause in a standardized contract with consumers but does not reasonably draw the consumers’ attention to the clause, a People’s Court must uphold a consumer claim that the jurisdiction clause is invalid.
In a particular contract dispute between an individual surnamed Wang and the website Dangdang.com, a Guangzhou court held that even though the transaction terms on Dangdang’s official website provide that “All disputes shall be subject to the People’s Court where the Beijing XX website is located”, this standard clause was insufficiently conspicuous because the website did not bring this clause to the attention of consumers definite and reasonable means. Furthermore, since online shopping is commonly characterized by long distances between buyers and sellers, such a clause burdens all consumers outside of Dangdang’s jurisdiction with time and money enforcement costs that are manifestly unreasonable in comparison to the purchase price, thereby effectively preventing consumers from enforcing their procedural rights. The court dismissed the jurisdictional objection filed by Dangdang for these reasons.
Consequently, business operators are obligated to bring jurisdiction clauses in network trading agreements to the attention of consumers. When a dispute arises the court must examine whether the disputed agreement or jurisdiction clause violates the principle of fairness or whether it nullifies or restricts consumers’ substantive and procedural rights.
III. Cross-Border Intellectual Property Disputes
Cross-border e-businesses exhibit complexity in both the domestic and the overseas aspects, i.e. overseas sources for commodities and domestic channels for the receipt of commodities are both complex. Specifically, various channels are in place for purchasing commodities overseas – overseas branded factories, overseas discount shops and even overseas buyers. On the other hand, domestic channels for the receipt of commodities are more complex, and there are no rules because they usually involve personal consumption. IP-related disputes are now erupting on cross-border e-business platforms -- for example, (i) commodities that are legal overseas can become infringing after importation into China due to the territoriality of intellectual property rights, (ii) disputes arise over parallel imports via different product sales channels, and (iii) “authentic and phony licensing” takes place on e-business platforms. The appearance of the foregoing issues illustrates a transnational expansion of traditional IP-related legal issues against a background characterized by international trade and a borderless Internet.
One example of this is the “Betta” feeding bottle dispute that occurred on the vertical maternal and child care e-business platform MIA (www.mia.com). Consumers purchased Betta glass feeding bottles that were claimed to be “100% genuine products”, made in Japan and “distributed under license”. An investigation later reveled that the “Betta” trademark was first registered by a domestic company in China under a class of goods that included feeding bottles. The company then sought out a domestic foundry for manufacturing cooperation, after which point the feeding bottles were shipped from China to Japan and then imported back into China. During this process the company obtained an entire set of “apparently compliant” documents including a Certificate of Origin, a Customs Declaration Form, a Certificate of Commodity Inspection and a Certification of Transportation. The company then began selling the feeding bottles on an e-business platform. In incidents similar to this example the infringers copied the entire industrial model and licensing process, thereby acquiring registration of rights in China and placing many obstacles in the path of foreign-branded merchants who wished to counter the infringement.
In disputes similar to the foregoing example, cross-border e-business platforms that are not self-operating are inevitably Internet service providers. Under Article 36 of the Tort Liability Law, upon receiving notice from the rights owner, an e-business platform must promptly undertake necessary measures such as deletion, shielding or disconnection. Failure to do so results in joint and several liability with the infringing network merchant for any damages that arise. If the platform knows that a network merchant’s use of its services infringes another party’s rights but fails to institute necessary countermeasures, it will bear joint and several liability with the Internet merchant. In practice, the issues of whether the platform “knows” of the infringement and undertakes “necessary countermeasures” represent a further obstacle to the enforcement of IP rights by rights owners.
IV. Cross-Border Customs Supervision Models; Taxation Issues
According to Notice No.56 and Notice No.57 of the General Administration of Customs, e-business enterprises or individuals must import and export goods in cross-border transactions only through e-business trading platforms that are recognized by and cooperating with Customs and are subject to Customs supervision and control. Customs clearance formalities for all other goods (e.g. ordinary transactions, ordinary mail and express mail) are still required to comply with the traditional model. In response, Customs has initiated new models of customs clearance for cross-border e-businesses, including the direct purchase import model and the online purchase bonded import model.
- The direct purchase import model: Consumers purchase commodities from overseas through e-business platforms, and the commodities are delivered directly to domestic consumers through international transportation. The corresponding Customs supervision model is coded 9610 and is classified as “cross-border e-business”.
- The online purchase bonded import model: Overseas commodities are temporarily stored within free trade zones or bonded areas after they enter China. Since commodities within the free trade zones or bonded areas are not legally considered to have cleared Customs or entered China, no tax is levied upon them. Consequently, cross-border e-business enterprises can stock up on goods within the free trade zones or bonded areas and then distribute them based on consumer orders. These goods can also clear Customs quickly using the Customs cross-border e-business system, and can deliver the product to domestic consumers using domestic logistics. This Customs supervision model is known as “bonded e-business” and is coded 1210.
Presently, the dynamics for cross-border e-business services are a consequence of policies governing import tax on passenger luggage and postal articles. China classifies inbound commodities into two categories, articles and merchandise, upon which different taxes are levied. Specifically, import tax is levied on “articles” -- passenger luggage and postal articles, while Customs duties and import value-added tax are levied upon “merchandise”. The former represents an import tax levied by Customs on the luggage of inbound tourists as well as personal postal articles. Based on the different categories of goods, articles are divided into four tax brackets: (i) 10% (foods, computers, gold and silverware); (ii) 20% (textile products, bicycles, clocks and watches below the unit price of RMB10,000); (iii) 30% (golf balls and equipment as well as watches exceeding the unit price of RMB10,000); and (iv) 50% (tobacco, wine and cosmetics). The total import tax burden on passenger luggage and postal articles is usually lighter than the tax burden on ordinary transactions that are subject to import customs duties, value-added tax and consumption tax.
Some industry insiders believe that the serious discrepency between cross-border e-businesses and ordinary trading patterns arising from the foregoing policy will not last long, because (i) pilot areas for cross-border e-businesses will continue to expand and may some day include all of China; and (ii) Customs duties for ordinary trading will continue to decrease, and the import tax on passenger luggage and postal articles will likely be eliminated, thereby resulting in a uniform tax for the two trading patterns.
V. Cross-Border Payment; Exchange Collection and Payment Issues
Cross-border transfer and remittance channels include third-party payers, commercial banks and professional remittance companies. Third-party payers can usually meet users’ cross-border remittance needs for convenience and affordability. The State Administration for Foreign Exchange issued the Notice on Promoting Pilot Cross-Border Foreign Exchange Payment Services by Payment Institutions (Hui Fa  No. 7, hereinafter the “Notice”) to support cross-border e-business payment services.
According to the Notice, (i) pilot cross-border foreign exchange payment services by payment institutions should be implemented nationwide; (ii) the upper limits of cross-border payments has been increased to allow online purchases of up to USD50,000 each; (iii) balance settlements are permitted for the payment and collection of excess reserves; (iv) restrictions on excess reserve cooperation banks and the number of excess reserve accounts have been eliminated, which helps promote pilot cross-border foreign exchange payment services between payment institutions and a greater number of banks; and (v) emphasis has been placed on risk control -- payment institutions must report certain service information at regular intervals and determine the authenticity of their clients’ identity information. Further, the information must be archived for five years in case of an investigation. The Guiding Opinions have strengthened the administration of overseas transactions, while at the same time liberalizing overseas remittances in a manner that harmonizes strong administration and a liberalized remittance regime.[iv]
Cross-border payment services involve a number of issues such as difficulties in examining bills and certificates, matching customs declaration information with fund flows, and determining the authenticity of basic transactions. Further difficulties are increasingly likely to arise concerning the administration of foreign exchange as well as legal issues like international money laundering, misappropriation of client funds and information security deficiencies. As an example, a payment account registered using a real name might facilitate crimes such as pornography, money laundering, and terrorism financing as well as other illegal activities. By using a number of payment accounts opened under false names, a payment institution might provide payment services of several hundred billion RMB for offshore gambling interests, resulting in a enormous risk of illegal cross-border fund transfers. Some payment institutions lack adequate security mechanisms for their clients’ funds and information or lack other efficient security measures, resulting in a high risk of to the safety of consumer information and property. As another example, a payment institution leaked information about tens of million bank cards issued by 16 banks around the country, causing damages of more than 39 million RMB when fake bank cards were prepared using the stolen information. With the emergence of ever-changing service innovations, many legal risks are involved in cross-border third-party payments.
The birth and development of cross-border e-businesses is accompanied by issues such as the qualifications of the parties, Customs supervision and control, inspection and quarantine, taxation, cross-border payments and collections, payment of foreign exchange, consumer rights, transaction disputes, intellectual property rights, identity theft, and jurisdictional objections in Internet disputes among other issues. The life of innovation is endless, and the ever-changing modes of commerce and services for cross-border e-businesses reflect the multidimensional cutting edge of the law in this area. How the law can keep abreast of commercial practices is always a hot topic of discussion. The application of the law to cross-border e-businesses issues should maintain the dignity and rigor of the law, but should also reflect quick adaptation to innovation.