China has issued two “Positive Lists” for cross-border e-commerce. The lists are intended to set out the scope of products to which China’s recent cross-border e-commerce tax rules will apply. Industry players, however, are cautious as the “Positive Lists” may create new barriers for cross-border e-commerce. It remains to be seen how the lists will be implemented in practice and consequently how existing cross-border e-commerce practices will be impacted.
The first Positive List was jointly issued by 11 Chinese authorities, led by the Ministry of Finance (“MOF”), on 7 April 2016, one day before China’s new tax policy for cross-border e-commerce came into effect. (See our e-bulletin dated 31 March 2016.) A follow-up explanation regarding baby milk formula and cosmetics was issued by the MOF on 13 April 2016. And two days later, 13 Chinese authorities promulgated a supplementary Positive List.
The Positive Lists
The Positive Lists set out more than 1,293 product types to which the new cross-border e-commerce tax rules will apply. Most consumer products, from food and beverages to cosmetics and electronic appliances, are included in the lists.
The Positive Lists do not specify how unlisted product types will be treated. However, statements made at governmental press conferences suggest that unlisted products cannot be sold into China via cross-border e-commerce. Some merchants who run cross-border e-commerce stores on Chinese platforms (such as Tmall International) have started to remove unlisted products from their websites due to difficulties with the products clearing the Chinese’s customs.
For some products, the Positive Lists state additional requirements. For example, baby formula products (under line No. 158 of the first list) must be registered with the State Food and Drug Administration (“SFDA”) pursuant to the PRC Food Safety Law; otherwise, they will be excluded from the Positive Lists. The SFDA registration requirement is not a new requirement, though it was previously unclear whether it would apply to products sold via cross-border e-commerce.
On 13 April 2016, China’s Ministry of Finance issued a limited clarification on two items from the first Positive List: baby milk formula and cosmetics:
- SFDA registration requirements for baby milk formula products are tentatively postponed until 1 January 2018. The postponement was in part due to industry concerns and in part because the SFDA is still working on the detailed rules on how to carry out the SFDA registration for products imported through cross-border e-commerce.
- Cosmetics being imported into China for the first time via cross-border e-commerce must be approved (if used for special purpose) or be subject to filing (if not for special purpose) with the SFDA. This is similar to the treatment of these products imported through traditional channels.
Products that arrived in a bonded area in China, or that were shipped to China, on or before the effective date of the new cross-border e-commerce tax rules (i.e., 8 April 2016) may still be imported into and sold in China, regardless of whether the products fall within the Positive Lists or not. This is according to an internal notice of the General Administration of Customs in China (GACC) reportedly circulated on 18 April 2016 to lower level customs authorities, the contents of which have not been officially published.
Further clarification needed
While the purpose of the Positive List is to clarify the scope of application of the new tax policies and products that may be sold into China via cross-border e-commerce, the list itself creates uncertainties that require further clarification.
One issue is how customs clearance will work. Positive Lists require customs clearance forms for verification of products imported via bonded zones (as opposed to products directly shipped to customers from overseas). Customs clearance forms, however, have to-date typically only been issued by China’s inspection and quarantine authorities in the context of importation via traditional channels. It is not clear how the authorities will implement this new requirement for cross-border e-commerce sales.
In addition, while the government has stated that the Positive Lists will be updated from time to time, it is not clear how frequently future updates will be issued. The standards and process for listing or de-listing a particular type of product are also not clear.
The Positive Lists have been issued by a broad range of authorities, including China’s most powerful (i.e., the MOF, the People's Bank of China, the Ministry of Commerce, the National Development and Reform Commission, and the Ministry of Industry and Information Technology, among others). Such a range of authorities is unusual for this level of regulation, and indicates that implementation will be consistent and may be aggressive.
While further clarification is still necessary for certain technical aspects (such as the customs clearance requirements), the general trend of the regulatory reforms is to bring cross-border e-commerce sales in line with the legal requirements for the traditional importation model. This trend is evident not only from a tax perspective, but also more generally from an industrial standards perspective.
Going forward, cross-border sales will lose their attractiveness if those sales have relied on lower tax or the avoidance of domestic product standards. However, cross-border e-commerce sales may remain attractive if the products for sale meet domestic standards and remain competitive even after the payment of importation taxes. To remain competitive, cross-border e-commerce sellers will need to comply with Chinese product quality standards while improving customer experience.