Intellectual Property China Client Alert China: Major Policy Changes to Cross-border E-Commerce Program and the Implications on Sale of Unregistered Products In the end of March, China’s Ministry of Finance (“MOF”), General Administration of Customs (“GAC”) and State Administration of Taxation jointly promulgated the Circular on Taxation Policy on Cross-Border E-Commerce Retail Importation (Circular Cai Guan Shui  No. 18, or “Circular 18”). Circular 18 entered into force as of April 8, 2016. Circular 18 has two major implications: (a) new types of taxes are to be levied on goods imported under the cross-border e-commerce program (“Program”), and (b) the regime changes from a previous negative list to a positive list of goods permissible under the Program. Within 10 days, two positive lists (“Positive List I” and “Positive List II”) were issued by the tax, customs and quality supervision authorities under Circular 18’s framework, together with two clarifications to the positive lists issued by the CFDA. On top of those, the GAC further circulated a notification to explain certain practices under the new regime. Highlights of the changes are summarized below, and full English translations to the series of regulations are attached. New Categories of Taxes Applicable Previously, Personal and Parcel Article Tax (“PPT”), a duty designed to facilitate importation of personal articles for personal consumption by postal and courier services or carry-on luggage, was applicable to the Program. This has caused an unfair price advantage on goods sold under the Program and the same goods imported under normal commercial channel because goods would be subject to import duty and VAT under the normal commercial import. One of the objectives is to remedy the situation by changing the tax payable under the Program. Under Circular 18, goods under the Program are subject to other import taxes instead, specifically: (a) customs duty, (b) value-added tax (“VAT”), and (c) consumption tax. The rates of these taxes vary depending on the product’s tariff classification under the Tariff Schedule. For a parcel valued lower than RMB2,000 (approximately USD320), the customs duty will be exempted, and a 30% discount will be given to the VAT and consumption tax. In the meantime, the tax authorities also amended the current PPT schedule, providing for substantially higher tax rates. Under the revised May 2016 Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC T: +86 10 6535 3800 F: +86 10 6505 2309 Hong Kong 14/F Hutchison House 10 Harcourt Road Central, Hong Kong T: +852 2846 1888 F: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC T: +86 21 6105 8558 F: +86 21 5047 0020 2 Baker & McKenzie | May 2016 schedule, PPT will continue to be applied to “personal articles” but are not imported under the Program. By increasing PPT rates, China intends to divert sales from unregulated foreign websites to the approved and closely supervised e-commerce platforms under the Program. Positive List System Perhaps the biggest change is the positive list system. Previously, it was a negative list regime where all goods could be imported under the Program if the goods were not listed on the negative list. Circular 18 created a “positive list” system where only goods listed on the Positive List can be imported under the Program. • Two Positive Lists The first Positive List (“Positive List I”) was issued on 6 April 2016, and then on 15 April a second Positive List (“Positive List II”). Positive List I contains 1,142 goods items and Positive List II contains 151 items. Positive List II was widely seen to clarify the position on health food products and also widen the list to include certain fresh food products. The lists are based on the Harmonised System Code (“HS Code”), the universal system for customs authorities to classify goods. The way to interpret the Positive Lists is to first check the goods in question and find the most appropriate HS Code(s) from the HS Code database system and then check against the Positive Lists I and II to see if the relevant HS Code is there. If it is listed on the Positive List, then one will have to check if there are additional requirements listed on the specific HS Code. • CFDA Clarifications Shortly after Circular 18 was effective, CFDA issued two Clarifications - one on April 13 focusing on infant formula milk, cosmetic and formula food for special medical purpose; one on April 15 on health food and medical device products. Below is our short analysis and understanding of how the following products would be treated under the Program. • Infant Formula Infant formula was listed under HS Code 19011010 on Positive List I. But there is a note on the HS Code which says: “excluding infant formula which are required to be registered under the Food Safety Law but has not been registered”. This was widely interpreted to mean that while infant formula milk code is listed, only those that have already been registered can be imported under the Program. In the April 13 CFDA Clarification, CFDA reiterates the registration requirement but at the same time acknowledged that the procedures to register infant formula have not been finalized yet, which means that it is not possible to obtain any such registration at this time or in the near future. As a result, a grace period until January 1, 2018 has been granted May 2016 | Baker & McKenzie 3 where infant formula without registration can still be imported under the Program until then. • Cosmetics Cosmetic products are covered by a number of HS Codes under Positive List I (e.g., 33030000 for “perfume”, 33042000 for “eye make-up preparations”, and the catch-all code 33049900 for “other beauty or makeup preparations”). However, under Positive List I, all those Codes have a note stating “excluding cosmetics imported for the first time”. In the CFDA April 13 Clarification, CFDA stresses that product registration/recordal requirement is needed. And since the registration/ recordal system has been in place for many years (with some 136,000 registrations / recordals already on the CFDA’s database), CFDA saw no reason to exempt the requirement. This means that effective immediately, all cosmetic products must have been registered/recorded with CFDA before they can be imported under the Program. • Formula food for special medical purposes Formula food for special medical purposes may be covered by various food-related HS Codes, e.g., 19011090 for baby food. The CFDA in its clarification treats formula food for medical use similar to infant formula. The CFDA recognized that registration should be required under the Food Safety Law, but the registration procedures will not take effect until July 1, 2016. Therefore, a grace period until January 1, 2018 was granted. • Health food The HS Code system does not contain a general code for health food or nutritional supplements. Depending on the nature of the product and the ingredients contained, different health food products may be listed under different HS Codes. For example, vitamin products are under HS Codes 2936 class and its subclasses whereas fish oil would be under HS Codes 15043000 (animal oil and fat, oil from marine mammal) or HS Code 1506 (oil or fat from other animals). This means that for health food, one will have to check the product and its ingredients to see which HS Codes the product should be classified, and then cross-check if such HS Codes are on the Positive Lists. For many other health food products such as vitamins and fish oil, Positive List I contains a remark – “excluding food products that are not general food products, or are special food products which registration/recordal is legally required” – in the relevant HS Code column. This exclusion note was interpreted to mean that the all products would be excluded if there is a local registration/recordal requirement. Then Positive List II and a second CFDA Clarification were issued in a few days’ time to clarify the situation with health food. Positive List II repeated the HS Codes relevant to health food already on Positive List I. While Positive List II removed the exclusion note previously on Positive List I, it referred to a few general notes. Note 2 further refers to the April 15 CFDA Clarification. In that Clarification, CFDA confirmed that the 4 Baker & McKenzie | May 2016 CFDA’s administrative measures for health food registration or recordal will come into force as of 1 July 2016. The CFDA stated that at that time (July 1), registration or recordal with the CFDA should be obtained for all health food products imported into China, including those products sold under the Program. It has been interpreted by industry that CFDA implied a grace period until 1 July 2016, but this is not confirmed one way or the other by CFDA or the local CIQ. What seems to be clear is that registration/recordal will be required for health food products after 1 July 2016. That said, we would like to point out that there may be some nutritional supplement products that could still be allowed as they are not subject to registration / recordal requirements. For example, whey protein, a popular nutritional supplement, is under HS Code 040410 (whey protein, concentrated or not) on Positive List I, and there is no exclusion note attached. So presumably, it is a product which could be allowed without involving any registration / recordal with the CFDA. • Medical devices Positive List II contains some HS Codes that may cover medical devices (e.g., 30059090 for “sterile suture materials and sterile tissue adhesives for surgical wound closure” and 90184990 for “other instruments and appliances, used in dental sciences”). The CFDA acknowledged that the HS Codes used on Positive List II cannot exactly mirror the classification of medical devices under China’s regulatory framework. If any goods should be considered as medical devices under PRC law, they should be registered or recorded with the CFDA before they are allowed to be imported. Again, this means that product registration/recordal requirement is necessary for medical device products. Goods Shipped Before April 8 Exempted Circular 18 and the Positive Lists caused huge impact on the cross-border e-commerce operation. Local inspection and quarantines authorities (“CIQ”) basically stopped all imports of above-mentioned products during the initial stage. Many vendors were caught by surprise and pleaded to the authorities on more lenient treatment of the goods already shipped before Circular 18 came into effect. Then GAC on April 18 issued a notification to local CIQs which essentially allows goods not on the Positive Lists but already in the bonded zones to continue being sold until the inventory is exhausted. For shipments already dispatched before April 8, CIQs would also allow them to enter the bonded zones as long as the bill of lading of the shipment is dated before 8 April 2016. And once in the bonded zones, CIQs should allow the products to be sold. The situation is far from settled at this point. We are closely monitoring the development. There may be further changes near 1 July 2016 when the new health food registration/recordal system becomes effective. We will keep you informed of any major developments. www.bakermckenzie.com Should you wish to obtain further information or want to discuss any issues raised in this alert with us, please contact: Clement Ngai +86 21 6105 5960 firstname.lastname@example.org Isabella Liu +852 2846 1689 email@example.com Andrew Sim +86 10 6535 3916 firstname.lastname@example.org This publication has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this publication is not an exhaustive analysis of the area of law discussed. Baker & McKenzie cannot accept responsibility for any loss incurred by any person acting or refraining from action as a result of the material in this publication. If you require any advice concerning individual problems or other expert assistance, we recommend that you consult a competent professional adviser. 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