On 26 August 2010, the General Office of China's Ministry of Commerce ("MOFCOM") issued a circular to further delegate approval power for foreign-invested enterprises engaging in online sales and sales via vending machines to MOFCOM's provincial-level branches. The circular, entitled Circular on the Relevant Issues Pertaining to the Administration of Approvals with Respect to Sales by Foreign-invested Enterprises through the Internet or Vending Machines (the "Circular"), came into force upon release. The Circular is part of a series of MOFCOM rules implemented in recent years to simplify the implementation of the Foreign-invested Commercial Sector Enterprises Administrative Procedures (the "Procedures") issued in 2004, and is stated to be issued as part of a wider campaign under the State Council Several Opinions on Further Improving Work on Deploying Foreign Investment (No. 9 of 2010) to reduce the items requiring administrative approvals.
The most important of this series of measures is the MOFCOM Circular on the Delegation of Approval Items Involving Foreign-invested Enterprises (the "2008 Delegation Circular") issued on, and effective as of, 12 September 2008. This provided that the approvals for the establishment of all foreign-invested commercial enterprises ("FICEs" or "外商投资商业企业") which are retail or wholesale distributors of third party goods was to be delegated down to provincial-level MOFCOMs subject to record filing with central-level MOFCOM, except for those involving television, telephone, mail order, internet vending machine or other such like non-shop-based sales models, or those involving audio-visual products manufacturing, books, newspapers or periodicals, where the approval powers remained at central MOFCOM level.
For foreign investors, the Circular means newly-established and existing FICEs with a distribution model and newly-established or existing manufacturing foreign-invested enterprises ("FIEs") with a distribution model involving sales channels other than the Internet will have an automatic right to sell products online, as well as simplified approval procedures and a consequently shortened approval timeline for those FIEs seeking approval to engage in pure online sales. Sales via vending machines including new establishment approvals and adding to existing business scope will still remain subject to provincial-level MOFCOM approval. However the Circular also imposes certain requirements which relate to the permits needed and operations involving online sales and sales via vending machines: investors need to bear these in mind and communicate them to their operational personnel in China as appropriate.
1. Legal Framework
The Procedures were issued to implement China's World Trade Organisation commitments to open up the distribution services market to foreign investors. They lay out the basic legal framework for establishing FICEs and the scope of business that FICEs can engage in in China. Under the Procedures, FICEs are permitted to engage in commission agency business, wholesaling, retailing and/or franchising (although the latter is subject to separate rules not discussed further here). Retailing is defined as "the activity of selling goods for consumption and use by individuals or groups, and providing related services from a fixed location or by way of television, telephone, mail order, the internet or vending machines and so forth and related auxiliary services".
The Procedures allow MOFCOM to delegate the authority to approve FICEs to provincial-level MOFCOMs. MOFCOM has done this by issuing a series of rules since the enactment of the Procedures, including the 2008 Delegation Circular. Indeed, it can be seen from the 2008 Delegation Circular that even before the Circular was issued, most of the approval powers with regard to the establishment of FICEs had already been delegated to provincial-level MOFCOMs, with MOFCOM only retaining the power to approve FICEs within a limited scope of circumstances (including those engaging in online or vending machine sales). The Circular is simply a further example of how this power has been exercised over time and in a gradual manner, with the central-level approval power with regard to FIEs engaging in pure online sales and/or involving sales via vending machines being delegated to provincial-level MOFCOMs, and the liberalisation on online sales being simultaneously extended to all existing or future FICEs or manufacturing FIEs, except those engaging exclusively in online sales.
2. No separate approval now needed for online sales by existing FIEs
The Circular takes the line that online sales are in nature an "extension of an enterprise's sales activities on the internet", meaning that online sales are nothing but a new form of sales activity, therefore existing lawfully approved, established and registered FICEs or foreign-invested manufacturing enterprises can directly engage in online sales without obtaining a separate approval from MOFCOM or its local branches. Specifically what this means is that manufacturers without trading rights (pure manufacturers) will automatically have the right to sell self-produced products online; manufacturers with trading rights will automatically have the right to sell self-produced products and products produced by others online (the latter subject to the scope of third party products previously approved by the relevant MOFCOM.)
That said, however, an FIE which applies for establishment approval still needs approval from provincial-level MOFCOM if it intends to engage purely in online sales (e.g. an online book club), which may complicate matters where the original FIE could otherwise have been approved at a lower level. This presumably reflects additional concerns about consumer protection, security and fraud for companies operating only in the virtual universe.
It is encouraging that MOFCOM has come to the realisation that online sales are not different from traditional sales channels by way of "bricks and mortar" storefront, and therefore, FICEs and foreign-invested manufacturing enterprises that have the right to engage in distribution should have the intrinsic right to sell the same goods via the internet.
In contrast, MOFCOM does not apply the same logic to distribution via vending machines. Under the Circular, newly-established FICEs seeking to use the vending machine sales channel or other existing enterprises wishing to add sales by means of vending machines to their business scope will still need to obtain additional approval from provincial-level MOFCOM. The reasons for drawing this distinction are unclear, but clearly there remain unresolved issues or sensitivities with respect to this type of sales model in China.
3. Delegation of approval authority
As noted above, the key feature of the Circular is that the power to approve distribution by means of internet (on an exclusive basis) and via vending machines has been delegated from central-level MOFCOM to its provincial-level counterparts. Previously, an application for the right to distribute through online and vending machine sales had to first go to the relevant provincial-level MOFCOM. After a preliminary examination, the provincial-level MOFCOM would transfer the application to central-level MOFCOM in Beijing for further review and final approval within one month of receipt of all the required documents. MOFCOM would then decide whether to grant approval within three months from the date on which all the required application documents were received.
Having provincial-level MOFCOMs approve applications for distribution rights to online sales (on an exclusive basis) and sales via vending machines is clearly an improvement over the cumbersome two-step process as outlined above, and should bring down approval timelines substantially.
4. Specific operational rules for online sales and sales via vending machines
The Circular does, however, impose some requirements on FIEs when making online sales and sales via vending machines, though these are not entirely new and actually already exist in some area-specific laws and regulations.
(a) Value-added telecoms services (VATS) operating permit
According to the Circular, if an FIE provides an online platform through which other parties can transact with each other (e.g. the eBay or Taobao model), a VATS operating permit from the Ministry of Industry and Information Technology ("MIIT") would be needed; but if such FIE provides an online platform only for its own use to engage in direct sales of products, no VATS operating permit would be required and the FIE would only need to record file the relevant information with local MIIT. This suggests that third party sites such as eBay or Taobao are categorised as "经营性" or revenue-generating/operational websites alongside online gaming – with the logic being presumably that these are "pay-to-play" websites, as opposed to simple sales platform websites. One of the more curious aspects of this Circular is that it clearly impacts upon areas under the regulatory purview of MIIT, but does not mention any MIIT involvement in the drafting of the Circular, nor does it make any reference to whether the contents have been pre-agreed with MIIT, which is quite critical given that under the main State Council regulations relating to foreign investment in telecoms services, the Foreign-invested Telecoms Enterprise Administrative Regulations effective 1 January 2002, MOFCOM and MIIT are the joint approval authorities and MIIT issues all telecoms business operating permits.
(b) Obligation to disclose relevant licences and information
Where it engages in online sales, an FIE must publish its business licence on its website homepage or in a prominent place on its website. Furthermore, if the FIE engages in distribution of products requiring special approval such as pharmaceuticals, books and magazines, crude oil and so forth, the additional approval certificates in the form of a clear photo-image or the relevant links to them must also be provided online. In the case of sales via vending machines, the seller must clearly mark on the vending machine the name, address and phone number of the seller and the procedures for lodging complaints.
(c) Maintenance of internal systems and compliance
The Circular requires FIEs engaging in online sales to establish reasonable return and refund systems, to keep sales records, to strictly maintain the confidentiality of personal data and trade secrets where these are relevant.
For vending machine sales, a clear operating model, product quality management and dispute resolution systems need to be put in place by the operator and the operator must comply with the People's Republic of China Protection of Consumer Rights and Interests Law (the "CPL") and the People's Republic of China Product Quality Law (the "PQL"). The fact that these laws are mentioned by name perhaps indicates where the main regulatory concerns lie with vending machine sales as there is no physical premises to which complaints can be brought.
(d) Consumer protection and product quality
Under the Circular, an FIE engaging in online sales must, like any other business operator offering goods or services, comply with the PQL and the CPL and must not sell online products, the trading of which is prohibited by these or other laws, regulations and rules. Where an FIE engaging in online sales involves products or services requiring pre-approval, the approval must be sought and obtained from the relevant government departments and registration carried out with the relevant State Administration of Industry and Commerce branch before registering for online sales business.
In conclusion, the Circular makes it easier for foreign investors to access the China market by lowering the administrative hurdles for engaging in online sales and by allowing FICEs which have already obtained or will obtain distribution rights and existing or future FIE manufacturers (other than those engaging exclusively in online sales) to be automatically qualified for online sales.
Foreign investors establishing FIEs specialising in online sales channels or wishing to add vending machine sales to their business scopes can now expect a faster turnaround of approvals, as provincial-level MOFCOMs such as in Shanghai tend to be quicker than the central level.
The Circular is very much in line with MOFCOM's step-by-step, piece-by-piece approach to delegating approval rights in this area. Whilst MOFCOM seems to have now got its head around the compelling arguments for treating online sales as merely different types of sales (as opposed to requiring special attention and approvals) and hence the express approval requirement has now been removed, the same cannot be said for the relatively new mode of sales through vending machines: it may be some time before MOFCOM feels confident that it has understood and addressed all the issues raised by such sales mode (bearing in mind that some vending machines in China do sell certain sensitive products like pharmaceuticals, unlike in other jurisdictions) and hence feels comfortable delegating approval authority in this area down to below the provincial level or dropping the approval requirement completely.