China Readies New Rules to Govern Cross-Border E-Commerce

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By Mark Melnicoe

March 28 — The Chinese government is moving on several fronts to regulate cross-border electronic commerce in a bid to gain control over the fast-growing sector, including an important tax change for imports that will take effect April 8.

The aim, officials and practitioners say, is to facilitate imports and exports through improved efficiencies by creating a unified tax structure, streamlining customs procedures, facilitating payment systems and setting up bonded warehouses, from where products can be shipped to Chinese consumers.

The new rules, being set up in so-called cross-border e-commerce (CBEC) zones, allow consumers to receive overseas orders within two weeks, instead of what is now often a two-month process, the official Xinhua news agency reported.

The new rules should make market entry simpler for U.S. and other foreign companies. The government last summer allowed wholly owned foreign enterprises, not just joint ventures, to operate e-commerce companies in China, giving them the chance to directly access China's Internet community now estimated at 680 million people.

“This is the start of an intent to regulate the e-commerce import sector,” Steve Dickinson, a partner with the Seattle-based Harris Moure law firm with long experience in China, told Bloomberg BNA in an e-mail. “In that sense, it is significant.”

Bright Spot Amid Slowing Trade

The government is taking the steps amid falling trade and slowing growth in the world's second-largest economy. Total trade fell 8 percent last year from 2014 levels, to $3.96 trillion, according to the U.S. Bureau of Labor Statistics.

Cross-border electronic commerce, however, is another story. Chinese consumers, most of them using their smartphones, are snapping up cosmetics, children's and baby products, food, clothing and other items at rapidly increasing rates. The Commerce Ministry predicts that cross-border e-commerce this year will reach $1 trillion and soon will comprise one-fifth of China's total foreign trade.

Nevertheless, a report released this month by New York-based McKinsey & Co. about Chinese consumer behavior says companies must look at the market carefully.

“The days of broad-based market growth are coming to an end as consumers become more selective about where they spend their money,” it said. “Spending is shifting from products to services and from mass to premium segments.”

“Our research suggests that winning in the China market will become more challenging for consumer goods companies,” said McKinsey, which interviewed 10,000 Chinese consumers face-to-face in 44 cities across the country. “For those that get it right, however, the reward will be substantial.”

VAT, Consumption Tax

The new tax law, released March 24 by the Ministry of Finance, dumps the parcel tax on imports via e-commerce and substitutes a value added tax plus a consumption tax, then discounts the total by 30 percent.

“Parcel tax is not for trade purposes, which is exactly what online retailing is,” said Zhang Bin of the Chinese Academy of Social Sciences Xinhua. “It is unfair to conventional importers and domestic producers.”

The rule will allow consumers to make individual purchases of up to 2,000 yuan (about $300) per transaction, with a maximum of 20,000 yuan a year. Purchases exceeding those figures will be levied at the full general trade tax rate, the Finance Ministry said.

Effect on Products Not Yet Known

The tax move stands to lower the prices of some items while raising them for others, but the exact effect is not yet fully known because a detailed list of the tax rates for each product has not been released.

“It's too early to identify winners or losers,” Xu Sheng, co-founder of Bolome, a cross-border e-commerce company, told Bloomberg BNA in a telephone interview. “For the companies that used to cash out a lot under the previous policy, the door is closed,” he said, referring to companies that evaded taxes in an e-commerce gray market that the new rules are meant to eradicate.

Cosmetics, which have faced a 50 percent import levy under the current parcel tax rules, figure to be among the winners, especially those at the higher end. Some personal-care products entering China through e-commerce will see a tax cut of more than 38 percent, said an analysis by the China E-Commerce Research Center, based in Hangzhou.

Leading foreign brands in China include L'Oreal, Shiseido, Mary Kay, Estee Lauder, Olay and, for children's skin-care, Johnson & Johnson, according to the Hong Kong Trade Development Council.

The government also unveiled customer service regulations for cross-border e-commerce March 22, asking for public comment. The Commerce Ministry's draft “Business Services Specification for Cross-Border Commodity E-Commerce” stipulates rules that companies must abide by when buyers want to return items or get them repaired, and for the protection of buyers' personal information.

Easing Cross-Border Trade

The slew of new cross-border e-commerce rules are designed to give China's growing consumer class an easier path to products from around the world while providing better export opportunities to the nation's manufacturers. They also target widespread fraudulent practices, including companies offering counterfeit products online—a big factor in the general lack of trust in many Chinese products.

The effort got off the ground in October 2013, when the General Administration of Customs authorized a large trial in seven pilot cities for specialized CBEC zones with their own set of rules. The list of cities, which includes Hangzhou, Shanghai and Guangzhou, was expanded in January 2016 to include 13 cities in all. The State Council, China's highest administrative body, announced in January that more CBEC zones are coming in the continuing quest to boost foreign trade .

Higher Quality Also Factor

One reason Chinese consumers want foreign products is their perceived higher quality, according to Anna Kostense, managing director for greater China at Digital Jungle, an e-commerce marketing firm with offices in Beijing and Shanghai.

Her thesis is backed by the overwhelming tendency of China's wealthy and increasingly its middle class to shop abroad for luxury and other consumer products.

“The majority of our clients want to open stores and promote these as original products from overseas,” Kostense told Bloomberg BNA in a phone interview. “They don't want to do the Chinese labeling and the Chinese localization. That risks them being perceived as Chinese products.”

She cited the rules in the CBEC zones that give importers the difficult choice of using international shipping, which allows them to be clear about the foreign origin of the products, or going through bonded warehouses that have more stringent regulations.

“The thing they're battling—on the one hand, there are regulations on the products' packaging, information and labeling and all of that,” she said. “If they don't want to do that, then they're forced to use international shipping. So the bonded warehouse on the one hand offers the advantage of much shorter shipping time, because the goods are already in China and can reach the customer quickly. The downside is the branding is going to be perceived as local Chinese, which will have a big influence on the consumers' trust.”

To contact the reporter on this story: Mark Melnicoe in Shanghai at correspondents@bna.com

To contact the editor responsible for this story: Jerome Ashton at jashton@bna.com

For More Information

The Finance Ministry's “Notice of Cross-Border E-Commerce Retail Import Tax Policy (Caiguanshui No. 18)” is available in Chinese at http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201603/t20160324_1922968.html.

The McKinsey & Co. report, “Here comes the modern Chinese consumer,” is available at http://www.mckinsey.com/industries/retail/our-insights/here-comes-the-modern-chinese-consumer.