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CBBC Insights: Retail | How will China’s new e-commerce tax policy impact your business?

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By Mark Hedley
China Business Advisor
China-Britain Business Council

Last week new tax policies were announced governing cross-border e-commerce. The Joint Circular notice issued by the Ministry of Finance, General Administration of Customs and State Administration of Taxation of China relates specifically to taxation on cross-border e-commerce imports. CBBC member KPMG has also issued a useful China Tax Alert on the topic. The new rules came into effect on 8 April 2016.

CBBC’s e-commerce expert Mark Hedley takes a look at the announcement and what it means for UK companies.

What is the new policy?

Under the original system (prior to 8 April) most E-commerce parcels shipped to China cross-border (purchased from an overseas website or a cross-border platform) were generally classed as personal items. In most circumstances, personal parcel tax would be levied - assuming the item value was less than RMB 1000 and passed the test of being a reasonable amount for personal consumption. These items were not subject to VAT or consumption tax, while items that incurred less than RMB 50 in duty were shipped free of duty. Where duty rates were levied, these personal parcel tax rates were typically lower than general trade duty rates for the same category.

 

No. Item PCR (before April 2016)
1 Books, magazines, educational movies, furniture, computers, toys 10%
2 Textile and garments, video camera and other electronic home appliances, bicycles, watches and clocks 20%
3 Golf and golf appliances, luxury watches 30%
4 Cigarette, cosmetics and alcohol 50%
5 Others 10%

In practice, this meant that many lower cost items could be purchased by Chinese shoppers from overseas with zero tax and duty. It also meant that many items valued less than RMB 1,000 (c. £100) were significantly cheaper when sold direct to cross-border consumers than products shipped to China through the traditional B2B import route. By comparison, general B2B trade imports were subject to full import duties, VAT and any consumption tax (not to mention additional costs of sales through distribution/retail channels). Under this system, items over RMB 1,000 (c. £100) were classed as general trade items and taxed in the same way as traditional imports. The system therefore tended to encourage consumers to purchase lower value items.

Under the new system, any item purchased through an official E-Commerce channel, will be classed as general trade and be charged VAT and consumption tax. However, for any items purchase less than 2,000 RMB in value will only be required to pay 70% of the total value of VAT and consumption tax (i.e. so for example, 17% VAT would be reduced to 11.9%, and a 30% consumption tax would be reduced to 21%). This rule only applies to transactions made through an officially sanctioned E-Commerce platform (such as Tmall Global or one of the many other Chinese cross-border platforms) or where utilizing an express logistics firm or postal office that can provide customs with all the electronic data relating to transaction, payment and logistics. Any items that meet these criteria will be exempt from import duty altogether. There is also an annual spending limit for Chinese consumers of RMB 20,000 per year, after which full VAT, consumption tax and import duties will be levied.

However, the old system will still be applied to any parcels shipped without electronic data provided to customs (i.e. classified as personal parcels if less than RMB 1,000, or as general trade items if over RMB 1,000). The rates of personal parcel tax have also been increased to encourage shoppers to use the officially sanctioned E-Commerce channels.

 

No. Item (after April 2016)
1 Books, magazines, educational movies, computers, digital camera and other digital products, food and beverage, gold and silver, furniture, toys, gaming products, holiday or other entertainment products 15%
2 Sports products (excluding the golf and golf appliances), fishing products, textile and garments, video camera and other electronic home appliances, bicycles  30%
3 Cigarette, alcohol, precious jewellery and jade, golf and golf appliances, luxury watches, cosmetics 60%
4 Others 30%

Why is the government introducing the change?

There are a few reasons why the government has introduced these changes:

  1. To close the Personal Parcel Tax loophole, and create a more level playing field between domestic enterprises (including foreign companies with a presence in China) and overseas retailers. The old system incentivised Chinese shoppers to buy from overseas websites, which has affected the sales of local retailers/platforms;
  2. To encourage retailers and consumers to use government sanctioned E-Commerce platforms/logistics providers, thereby boosting overall tax receipts;
  3. To encourage Chinese shoppers to spend more online, by making mid-priced items such as fashion, cosmetics and other premium items more affordable. The government’s ultimate aim here is to promote greater domestic consumption;
  4. To better regulate the sector and provide customs with better visibility of products being imported.

Who benefits and who loses out?

Any item that would previously have been shipped free of duties will suddenly see a 12% hike in duties. This will mainly affect low value/high volume products, such as infant formula, diapers, mother and baby, health supplements and so on.

The big winners are those items that had higher personal parcel tax rates such as cosmetics and alcoholic drinks (effectively reduced from 50% duty to 33%). Fashion items in the £100-£200 price range should benefit from the new rules, incurring a flat VAT charge of 11.9% rate rather than the 20% duty previously levied.

The new system also benefits the Chinese consumer by introducing more standardisation and regulation into the E-Commerce sector, improving product safety monitoring and creating more consumer choice for higher priced items. The new system also benefits those Chinese cross-border platforms and logistics providers that shoppers are being encouraged to purchase from.

Some commentators are also warning that the policy could change could fuel the grey market of illicit imports in those categories badly affected. There is also currently a lack of clarity on whether items shipped cross-border under the new system will be required to meet license control requirements in full, such as those approvals required for cosmetics, health foods and electronics.

What does the change mean for UK retailers?

It would be mistaken to interpret these tax changes as a protectionist measure designed to attack foreign brands. It benefits foreign merchants in many categories, and should also benefit UK businesses with a presence in China or selling through online and offline channels.

The fact that the government is introducing more regulation to the sector, setting up cross-border zones, and promoting cross-border platforms should create more opportunities in the long-term for UK merchants. It can help UK vendors to sell direct to the Chinese consumer without setting up an entity, or having to rely on a local Chinese distributor or agent. With an online population of almost 700 million and online sales set to account for 20% of retail sales by 2018 (source: Emarketer), China presents a huge potential opportunity for UK brands with products that appeal to the Chinese consumer.

Although taxes and duties are important to understand, the policy change in itself is not necessarily a game changer for brands looking to sell to the Chinese consumer. Consumers in China are more willing than ever to pay a premium for products perceived as being high quality or unique in some way. The biggest challenge for many British brands is to fully understand what the Chinese consumer wants, how to position their brand, and how to create awareness in a fiercely competitive market. For SMEs in particular, a major challenge is how to increase brand awareness without necessarily having a huge budget to spend on advertising and promotion.

For more information on how to get your company involved in e-commerce in China, download our E-Commerce Guide and China Business Handbook. Companies may also find opportunities in our latest list of Export Opportunities. Get in touch with our China Business Advisers who can give more practical support.  

For further information on this topic, please contact our China Business Advisor and e-commerce expert Mark Hedley at: mark.hedley@cbbc.org

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