By Mark Schaub, Chen Bing and Martyn Huckerby, King & Wood Mallesons
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boom in China cross-border e-commerce has been dramatic and exponential. It has led to strong share price growth of brands that have been particularly favoured by Chinese consumers.
It was always clear that the Chinese authorities would at some stage seek to better regulate cross-border e-commerce and two recent rules coupled with stronger implementation have caused concerns as to whether the e-commerce boom will continue in the future.
The first rule is the Circular on Tax Policy for Cross-Border E-commerce Retail Imports (“E-commerce Tax Circular”), which was published late last month and became effective from 8 April 2016. The E-commerce Tax Circular significantly changed the preferential tax policies that had been applied to cross-border e-commerce transactions. The changes were primarily adjustments to tax rates, introduction of an annual limit of RMB 20,000 per individual consumer and other changes that affect cross-border e-commerce but do not seek to strictly limit it. A summary of the tax changes is set out under “Note 1” below.
A second more serious challenge to cross-border e-commerce involves a so-called “Positive List”. On 7 April 2016, eleven PRC government departments (covering all major government bodies relating to business trading, food and drug control, customs and tax) jointly published a “cross-border e-commerce retail list of imported goods”. Early signs are that the Positive List may lead to outright prohibition of e-commerce sales of certain categories of goods, so this second regulatory change has the potential to have a more negative effect on e-commerce than the E-commerce Tax Circular.
What is the Positive List and its key features?
The Positive List includes eight categories of products (in total 1142 different tariff lines) and covers food and beverages, clothing, footwear, hats, home appliances and cosmetics, diapers, children’s toys and a host of other items commonly purchased by Chinese consumers on e-commerce platforms.
Although the list covers a variety of products, it is important that it excludes products requiring special licences or filings under PRC law. Those include health food products, specialty foods, and first-time imported cosmetics which require special registration.
The inclusion on the Positive List of certain key categories such as dairy, health products and alcoholic products is described in Note 2 below.
What happens to products not on the Positive List?
Although this is the key issue – the answer is unfortunately not clear from the regulations.
Legally the Positive List is an attachment to the E-commerce Tax Circular and therefore the list is not a “Yes-or-No” list of products that can be sold by means of cross-border e-commerce. Rather the Positive List should be interpreted, at least literally, as a list which determines whether or not a product will enjoy the preferential tax policies granted to cross-border e-commerce.
This legalistic view does not conform with the views apparently held by the authorities at this stage. Our consultations with various government authorities indicate that on the whole they consider the Positive List, to a great extent, to be something of a Yes-or-No list for products permitted for cross-border e-commerce. Many officials have also suggested they are unsure as to how the new policies are to be implemented and are awaiting further instructions from the central authorities.
In short, based on our informal consultations, it is likely that products not found on the Positive List will be restricted from sale via cross-border e-commerce platforms that are connected with the PRC customs supervision system. In practice, it is much less likely that products posted directly from overseas to individuals will be affected.
The following chart outlines the impact of the Positive List on the different business models typically adopted in cross-border e-commerce in China:
*please note the above chart is based on our recent informal consultation with various government authorities, while some local officials share different opinions.
Conclusions and implications
The E-commerce Tax Circular and its attached Positive List and recent actions by the Chinese authorities indicate that the PRC authorities intend both to tax cross-border e-commerce more heavily and to block products that are regularly regulated under PRC law from essentially getting a free ride and avoiding PRC scrutiny merely by being sold via bonded zones.
The likely impact of the E-commerce Tax Circular and the Positive List will be that the prices of some products will likely increase (but this is unlikely to have a major impact upon Chinese consumers as trust and availability tend to be greater motivators); but some products will likely face much greater issues in respect of accessing cross-border e-commerce as a model. It will be important to observe both from a government legislation perspective and also a local practice perspective how the regulations will be enforced. We will be continuing our dialogue with officials and will provide further updates once these perspectives become clearer.
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Note 1. Summary of E-commerce Tax Circular
Note 2. Positive List – Impact on certain products
Milk Products
Most milk products have been included in this list but:
- Fluid milk is NOT included.
- Formula is allowed, provided that registration formalities as required under the Food Safety Law have been conducted.
Healthcare Products
Most healthcare products are excluded from this list, subject to the following comments:
- The fish oil under HS Code 15042000 is allowed to be imported (except for the products which need an additional filing).
- Oleic acid, lecithin and a number of vitamins and derivatives are allowed to be imported.
Alcohol
Wine grape juices under HS Codes 20096100 and 20096900 and wine in small packages under HS Code 22042100 are included in the Positive List.
Note
[i] The products will be shipped in bulk and stored in bonded zones in China before delivering to each consumer who makes an order.
[ii] The products will be posted directly from overseas to each consumer who makes an order on websites which are connected with PRC customs. All the orders, products and payment information will be transmitted to PRC customs’ online system, which allows for smoother clearance and more efficient supervision.