The boom in China cross-border e-commerce has been dramatic and exponential. It has led to strong share price growth of brands that have been particularly favoured by Chinese consumers.

It was always clear that the Chinese authorities would at some stage seek to better regulate cross-border e-commerce and two recent rules coupled with stronger implementation have caused concerns as to whether the e-commerce boom will continue in the future.

The two regulatory changes

The first rule is the Circular on Tax Policy for Cross-Border E-commerce Retail Imports (E-commerce Tax Circular), which was published late last month and became effective from 8 April 2016. The E-commerce Tax Circular significantly changed the preferential tax policies that had been applied to cross-border e-commerce transactions. The changes were primarily adjustments to tax rates, introduction of an annual limit of RMB 20,000 per individual consumer and other changes that affect cross-border e-commerce but do not seek to strictly limit it. A summary of the tax changes is set out in “Note 1” below.

A second more serious challenge to cross-border e-commerce involves a so-called “Positive List”. On 7 April 2016, eleven PRC government departments (covering all major government bodies relating to business trading, food and drug control, customs and tax) jointly published a “cross-border e-commerce retail list of imported goods”. This list was further updated and expanded by a “cross-border e-commerce retail list of imported goods phase 2” which was published on15 April 2016 by the same authorities (the first list and second one, collectively, "Positive List"). Early signs are that the Positive List may lead to outright prohibition of e-commerce sales of certain categories of goods, so this second regulatory change has the potential to have a more negative effect on e-commerce than the E-commerce Tax Circular.

What is the Positive List and its key features?

The Positive List includes eight categories of products (accounting for 1,293 different tariff lines in total) and covers food and beverages, clothing, footwear, hats, home appliances, cosmetics, diapers, children’s toys and a host of other items commonly purchased by Chinese consumers on e-commerce platforms.

Although the list covers a variety of products, it is significant that it excludes products requiring special licences or filings under PRC law. Those include a number of health food products, specialty foods, medical devices, and first-time imported cosmetics which require special registration.

Positive List impact on certain products

We summarise below the Positive List’s treatment of certain key categories.

Milk Products

Most milk products have been included in this list but:

  1. Fluid milk and cream under HS Codes 04011000, 04012000, 04014000, 04015000, 04021000, 04022100 and 04022900 are included.
  2. Formula is allowed, provided that registration formalities as required under the Food Safety Law have been conducted. According to further explanation by PRC Customs last week, the registration of infant formula milk products will be required from 1 January 2018. Until then, formula products can be sold through cross-border ecommerce without such registration.

Healthcare Products

Most healthcare products are excluded from this list, subject to the following comments:

  1. Cod-liver oil, fish oil, and the oil of other animals under HS Code 15041000, 15042000, 15043000 and 15060000 are allowed to be imported under Model 1 (except for products which need an additional filing).
  2. Oleic acid, lecithin and a number of vitamins and derivatives are allowed to be imported.

From 1 July 2016, healthcare products and health products which are imported for the first time should be registered or filed with the CFDA before being imported into China. No exceptions for cross-border e-commerce will be provided.

Alcohol

Wine grape juices under HS Codes 20096100 and 20096900 and wine in small packages under HS Code 22042100 are included in the Positive List.

Cereal

The following cereal is allowed to be imported. The cereal under HS Codes 10061099, 11010000, 11031100, 11022000 and 11042300 is allowed to be imported under Model 1 only.

  1. Rice under HS Codes 10061099, 10062010, 10063010, 10063090 (subject to an accumulated annual amount of 20 kilograms under these HS Codes)
  2. Rice powder under HS Code 11029019 (subject to an annual amount of 20 kilograms under this HS Code);
  3. Wheat under HS Codes 11010000, 11031100 (subject to an accumulated annual amount of 20 kilograms under these HS Codes);
  4. Corn under HS Codes 11022000, 11042300 (subject to an accumulated annual amount of 20 kilograms under these HS Codes);
  5. Other cereal powder under HS Code 11029090.

Please note that the cereal is subject to the import quota of the PRC Customs.

What happens to products not on the Positive List?

Although this is the key issue – the answer is unfortunately not clear from the regulations.

Legally the Positive List is an attachment to the E-commerce Tax Circular and therefore the list is not a “Yes-or-No” list of products that can be sold by means of cross-border e-commerce. Rather the Positive List should be interpreted, at least literally, as a list which determines whether or not a product will enjoy the preferential tax policies granted to cross-border e-commerce.

This legalistic view does not conform with the views apparently held by the authorities at this stage. Our consultations with various government authorities indicate that on the whole they consider the Positive List, to a great extent, to be something of a Yes-or-No list for products permitted for cross-border e-commerce. Many officials have also suggested they are unsure as to how the new policies are to be implemented and are awaiting further instructions from the central authorities.

In short, based on our informal consultations, it is likely that products not found on the Positive List will be restricted from sale via cross-border e-commerce platforms that are connected with the PRC customs supervision system. In practice, it is much less likely that products posted directly from overseas to individuals will be affected. The Positive List has caused much chaos in a short time, particularly for those products that have already been shipped to PRC bonded warehouses, but are not on the list. We have noticed PRC Customs are circulating internal instructions to instruct how these goods will be handled and we anticipate further guidance will be issued to bring greater clarity.

The following chart outlines the impact of the Positive List on the different business models typically adopted in cross-border e-commerce in China:

Click here to view the table

*please note the above chart is based on our recent informal consultation with various government authorities, while some local officials share different opinions.

Implications for international businesses

The E-commerce Tax Circular, its attached Positive List, and recent actions by the Chinese authorities indicate that the PRC authorities intend to both tax cross-border e-commerce more heavily and to block products that are commonly regulated under PRC law from essentially getting a free ride and avoiding PRC scrutiny merely by being sold via bonded zones.

The likely impact of the E-commerce Tax Circular and the Positive List will be that the prices of some products will likely increase (but this is unlikely to have a major impact upon Chinese consumers as trust and availability tend to be greater motivators); although some products will likely face much greater issues in respect of accessing cross-border e-commerce as a model. It will be important to observe both from a government legislation perspective and also a local practice perspective how the regulations will be enforced. We will be continuing our dialogue with officials and will provide further updates once these perspectives become clearer.