By Mark Schaub and Chen Bing King & Wood Mallesons’ Corporate Securities Group
In recent months there has been great concern, indeed bordering on panic, in some quarters arising from the issuance of dramatic but vague PRC cross-border e-commerce rules that were issued in April 2016.
However, the PRC authorities have now addressed, at least to some extent, most of the major pressing concerns on 24 May 2016 when the General Administration of Customs of PRC (“PRC Customs”) issued a Circular on Relevant Matters Concerning Implementation of New Supervision Requirements on Cross-border E-commerce Retail Imports (“Circular”).
What does the Circular contain?
The Circular grants a one-year grace period for implementation of the new e-commerce rules. It specifically provides that, until 11 May 2017, in the 10 cross-border e-commerce pilot cities (namely, Shanghai, Hangzhou, Ningbo, Zhengzhou, Guangzhou, Shenzhen, Chongqing, Tianjin, Fuzhou, Pingtan), the supervision of cross-border e-commerce will follow existing requirements and not the new cross-border e-commerce rules.
Specifically, the Circular provides that the following requirements under the April 2016 new rules will not be enforced in the pilot cities:
- Provision of Customs Clearance of Entry Commodities (“Clearance Form”) under bonded zone model when products enter the bonded area. The Clearance Form is a form issued by the competent inspection and quarantine authority (“Q&I Authority”) which certifies the product has passed Q&I Authority inspection. Such examination will usually require provision of certificate of origin, certificate of inspection and quarantine, and other documentation to evidence the product satisfies Chinese requirements and standards. These new requirements in respect of the clearance form can rightfully be interpreted as signaling that supervision of cross-border e-commerce products will not differ from supervision of products imported under general trade. The fact that the Circular exempts using such Clearance Form means that products imported under the cross-border e-commerce route will for the time being still not be required to strictly comply with Chinese product standards.
- Registration and filing requirements for cosmetics, infant formula milk powder, medical devices, health food and food for special medical purposes (“FSMP”). The Circular provides that for both bonded zone model and direct shipping model, the registration requirements for the above listed products will not be enforceable until 11 May 2017. Previously, the Positive Lists required that cosmetics, infant formula milk powder, medical instrument, health food and FSMP would all need to follow the same registration or filing requirements required for products imported through general trade or that are manufactured within China. This registration was a major concern for most cross-border e-commerce players as such registrations or filings could be time consuming and may even be difficult to obtain.[i]
What remains unchanged?
It is important to note that the Circular only postpones implementation of Clearance Form requirements and registration and filing requirements for specific types of product.
Companies will need to keep in mind that a number of changes heralded by the April 2016 new rules will come into force:
- Tax Changes – Tax policy for cross-border e-commerce. One of the main purposes of the E-commerce Tax Circular was to adjust tax rates for cross-border e-commerce transactions. The relevant taxes were changed from postal tax to a comprehensive tax which includes customs duty, value added tax and consumption tax (as applicable). We understand that the new tax policy has already started to be enforced – indeed immediately after issuance of the E-commerce Tax Circular, and it is not affected by the Circular.[ii]
- Positive Lists Still Matter – Products sold via cross-border e-commerce must fall within the Positive Lists. Although not explicitly stated in the new regulations, on balance most authorities appear to consider the Positive Lists to be a Yes-or-No list of products that are qualified to be imported via cross-border e-commerce. Although the Circular has not clarified this point we believe it is highly likely that the Positive List will continue to be treated as a Yes-or-No list.
What will happen in the future?
Supervision tightening or loosening? – In the long term we expect that supervision will be tightened and the good old days of limited supervison are likely gone forever. Accordingly, international companies should very much consider the Circular to be a reprieve not an encouragement to continue with their old habits.
Before issuance of the E-commerce Tax Circular and Positive List there was very little in the way of national level regulations in respect of cross-border e-commerce. In particular there was an almost complete lack of regulations that dealt with practical implementation issues. At that time, supervision of cross-border e-commerce insofar as it occurred was mostly based on rules issued by individual local authorities or unpublished “practical rules” adopted by local authorities for their internal purposes. As the Circular does in many ways brings back supervision of cross-border e-commerce to the old status it is likely that local authorities will again enjoy wide discretions as to how to implement the new regime. This will be especially important when determining whether or not a product falls within the Positive List. In addition, we note that several pilot cities have issued or are in the process of issuing local policies and rules in terms of cross-border ecommerce. These policies will likely vary from place to place. The most likely areas of variation will be enforcing regulations in respect to labeling, qualification of offshore manufacturers and practical measures.
What will happen after 11 May 2017? – The grace period granted by the Circular will end on 11 May 2017. Probably the issuance of the E-commerce Tax Circular and Positive Lists was considered as being too hasty and the timelines too ambitious for the authorities to properly implement the changes. Accordingly it is likely that the grace period was not only provided to enable companies to have time to adopt to the new policies but also perhaps more importantly to provide the authorities with time to rethink and re-evaluate the effects caused by such policy as well as to allow for registrations and filings to occur. It is likely the authorities will use the grace period to consider how best to implement the changes after 11 May 2017 – accordingly it is likely that further guidance will be provided in advance of the expiry.
Summary
The good news is that it appears that international companies engaging in cross border ecommerce in cosmetics, infant formula milk powder, medical devices, health food and FSMP product have a reprieve until at least 11 May 2017. This means they will not be required to obtain registration or filing nor to strictly comply with the same Chinese product standards as products imported under general trade or domestically manufactured products. The new tax rate will continue to be enforced and the Positive Lists are likely to continue to serve as a Yes-or-No list. However, on this point it is likely that some local authorities may exercise their discretion as to how to interpret such list. We expect increased shopping around by international companies in respect of PRC entry points for their products especially for those which have products that may not fall within the scope of the Positive Lists. However, at least for now, most international companies will be rejoicing that they have one more year to continue with their current cross-border e-commerce but they would be well advised to consider this as a reprieve only and should continue to move forward with registrations and filings.
[i] For details of the registration and filing requirements for specific product, please refer to our another article: http://www.kwm.com/en/au/knowledge/insights/china-changing-rules-cross-border-ecommerce-trade-20160510
[ii] For details of the new tax policy, please see our another article: https://www.chinalawinsight.com/2016/04/articles/corporate/new-challenges-in-china-cross-border-e-commerce/