The Chinese cross-border e-commerce industry will soon account for 20% of China’s foreign trade.

With over 5,000 platforms, the Chinese cross-border e-commerce industry is predicted to exceed RMB6.5tr in 2016 (reflecting annual growth close to 30%) and will soon account for 20% of China’s foreign trade. China’s recently implemented tax regulation changes for cross border e-commerce will impact the industry, bringing both opportunity and challenges for those wanting a piece of the huge Chinese consumer market.

China’s updated tax regulations

Two regulations affecting cross-border e-commerce came into effect on 8 April 2016.

  1. Circular of the Ministry of Finance, General Administration of Customs and State Administration of Taxation on the Tax Policy for Cross-border E-commerce Retail Imports (announced on 24 March 2016)
  2. Circular of the Customs Tariff Commission of the State Council on Issues Pertaining to the Adjustment of Import Tax for Imported Articles (announced on 16 March 2016)

China’s previous tax regulations

Previously, consumer purchases of goods imported via a cross-border e-commerce zone were treated as personal postal articles (as long as they were of a reasonable monetary amount and non-trade) and only subject to a special parcel tax (ranging from the most common 10%, up to 50%) which was generally much lower than ordinary customs duties. This offered consumer price advantages for cross-border online purchases and created tax burdens for foreign goods imported under the general trade model.

In additional, there was a tax exemption for imported goods where tax payable was under RMB50.

What are the main changes to China’s tax regulations?

  1. Retail goods purchased online will be treated as imported goods, subject to import tariff, import VAT and consumption tax.
  2. An interim import tariff rate of 0% will be applied to cross-border e-commerce retail goods within the personal limit of RMB2,000 for a single transaction and a cumulative yearly personal transaction limit of RMB20,000. Transactions above the personal limit will be levied as general trade items (refunds of tax paid and adjustments to the annual personal limit are possible for returned goods).
  3. The import tax rates have been divided into 3 categories and adjusted:
    • Category I – 15% tax rate – includes books, video games, computers, digital cameras, gold and silver, food and beverages and toys.
    • Category II – 30% tax rate – includes sporting goods, textiles, some electrical appliances and goods not included in Categories I and III.
    • Category III – 60% tax rate – includes alcohol and tobacco, valuable accessories, golf balls and clubs, luxury watches and cosmetics.

What is the likely impact of China’s tax regulations changes?

The changes will mean a tax increase for some cross-border e-commerce retail imports, with low price cosmetics (under RMB100 in value) being the most affected (likely increase of around 47%). Conversely, high price cosmetics are likely to actually decrease in import costs (likely decrease of around 3%). The same trend exists in clothing, electronics, watches and bikes – items below RMB250 are likely to increase by around 11.9% and items above RMB250 likely to decrease by around 8.1%. There will also be minor changes to commodities such as baby formula and skincare products. Although we would observe that the Chinese consumer market is not particularly price sensitive in relation to some of the categories where prices are likely to increase slightly, such as baby formula.

The changes, although necessitating short term adjustments to some business models, will, in the long run, create more opportunity on a more level tax playing field. Utilising tax rate differences between general trade, cross-border e-commerce retail imports and imported articles will become more difficult but a fairer and more certain business environment is likely to emerge.

The introduction of a clearer and more certain tax rate structure will be helpful in removing one of the major obstacles impairing long term development of the industry, and large enterprises previously holding back due to the immature and unsustainable tax system can now make medium and long term decisions in relation to development of an e-commerce business in China.

Recommend next steps

  • Companies currently importing/exporting goods to China should consider the impact of the policy changes and make strategic and operational adjustments as necessary.
  • This is an optimal time for enterprises with the goal of engaging in cross-border e-commerce trade to begin market research and specific planning.
  • The List of Imported Cross-border E-commerce Retail Goods (released on 6 April 2016) should be considered in relation to wording of the business scope for potential entities or where current the business scope requires amendment.
  • There are still uncertainties in the sector as further details are awaited on the examination and approval process and the quality inspection, control and quarantine process. Interested companies should remain regularly updated on upcoming changes.
  • We are helping a number of clients assess whether to increase consumer prices on some items in order to reflect the increases in import costs, or whether to accept a squeeze on profits rather than pass on any cost increase. For those that do choose to pass on any cost increases, it would be prudent to consider how the price increase is messaged to the Chinese consumer on the website and also consider whether existing terms and conditions should be reviewed.