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Oct. 4 — Multinational cosmetics companies and their Chinese consumers received a holiday present, as the government cut the cosmetics consumption tax either in half or to zero effective Oct. 1, the start of week-long National Day celebrations.
The Ministry of Finance and State Administration of Taxation jointly announced on the eve of the holiday that the consumption tax on higher-end products—many of which come from foreign manufacturers such as L'Oreal and Chanel—would be reduced from 30 percent to 15 percent. For cheaper makeup products, most of them produced domestically, the tax was cut to zero.
Now, with the consumption tax on non-luxury beauty and makeup products plunging to zero, domestic firms may get more of an opening, as price differentials will increase between foreign and domestic brands.
Representatives of L'Oreal, Estee Lauder and Chanel didn't respond to e-mailed inquiries from Bloomberg BNA.
Cosmetics are still subject to value-added tax of 17 percent in China. The consumption tax comes in addition to VAT and any applicable import taxes, leading some analysts to conclude that the ultimate effect on price won't be too great.
“The reduction in consumption tax would help to improve demand for imported cosmetic products moderately, and is unlikely to be significant as the price differential between China and overseas cosmetic products remains high due to other taxes—import tax, VAT—and mark up,” Jefferies said in a report.
Deloitte China took another view, saying in a tax brief that “the costs of beauty and makeup products are expected to be significantly lowered,” and advising companies to take actions accordingly.
The news was not all good on the tax front, as the government imposed a consumption tax on some luxury skin-care products, previously in a grey area, without a consumption tax being charged despite a 2006 law authorizing it.
Higher-end skin creams, facial masks and the like, a fast-growing segment and one with the lion's share of cosmetics sales in China, are now subject to a 15 percent consumption tax.
In China's slower-growth economic environment, some analysts question whether or how much retailers will be able to increase skin-care prices.
Noting that consumption tax plays a big role in the cost structure of cosmetics, Li Qun Gao and Dolly Zhang, partner and director of tax and business advisory services for Deloitte China in Shanghai, respectively, said they understand many companies in this sector are “very keen” to understand the new consumption tax regime.
“It's a very big part of their costs,” Zhang told Bloomberg BNA in a phone interview. “Whether or not the change will translate into retail pricing is a question because under the current economy it will be very difficult for them to have a price increase without losing the client.”
“If you look at consumer habits, not many people will buy very expensive cosmetic products in the shops, so they go to Hong Kong or buy it overseas.”
Cosmetics sales have been surging in China, as the younger generation in particular adopts the habits of people in industrialized countries amid China's modernization. Retail sales of cosmetics topped $30 billion in 2015 for the first time, up 130 percent since 2010, according to data from China's National Bureau of Statistics.
The market is far from saturated, with segments including skin-care products, makeup and anti-aging agents primed for further rapid growth, the Hong Kong Trade Development Council (HKTDC) said in an industry report in July.
The move by the government reflects the continuing push to move China's economy to a more consumer-driven model amid slowing but still substantial economic growth. Another factor is the high price of luxury products in mainland China, a reason tens of millions of people take foreign trips every year and load up on cosmetics and other products that can be far cheaper overseas.
By lowering the price, the Finance Ministry and SAT are striving to keep more sales of these products in China, analysts say.
Even though foreign companies, mainly multinationals, dominate cosmetics sales in China, there were 4,542 domestic enterprises qualified to make cosmetics at the end of November 2015, said a report by the HKTDC.
“Looking at the cosmetics market as a whole, domestic brands mostly concentrated in the mid- to low-end segments, while foreign-invested enterprises and joint ventures dominated the high-end segment,” the report said. “It is understood that foreign brands account for nearly 60 percent of the total sales of cosmetics in China, with sales value making up nearly 90 percent.”
The main foreign competitors include brands such as L'Oreal, Shiseido, Mary Kay, Estee Lauder and Olay.
The report noted that domestic firms such as Chinfie, CMM, Houdy, Longrich, Herborist and Chando “are catching up fast with their international counterparts and have built up reputations in the domestic market.”
The import regime for cosmetics also changed Oct. 1, under a separate announcement from China's General Administration of Customs that gives guidance for import declarations and sets up 27 ten-digit HS code items.
“We think there might be a period where everyone needs to get used to it and modify what they declare to Customs,” Zhang told Bloomberg BNA. “From an importer's perspective, they need to get a lot more detailed information for formal importation papers to Customs in order to determine the correct tax.”
Calling the consumption tax reform “one of the key tasks of the fiscal and tax reforms of China's 13th Five-Year Plan,” Deloitte said it expects the government to introduce more consumption tax changes “in terms the scope of taxation, point of tax, tax rates, etc.”
“The adjustments reflect the government's intention to guide rational consumption,” it said.
Examples in the main categories of cosmetics with the consumption tax rate dropping to 15 percent (all prices are at the point of sale by the manufacturer or importer, and thus are the prices before VAT is applied):
The consumption tax on such products priced at lower levels drops to zero. Skin-care products such as facial masks, on the other hand, shift from no previous consumption tax to 15 percent if they are priced at 15 yuan ($1.50) per piece or higher. An example is a typical 10-pack of facial masks, where the price cutoff for the tax would be 150 yuan.
Deloitte has advised affected companies to:
To contact the reporter on this story: Mark Melnicoe in Shanghai, at email@example.com
To contact the editor responsible for this story: Penny Sukhraj at firstname.lastname@example.org
The announcement of consumption tax change, in Chinese, is at http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201609/t20160930_2430843.html.
The announcement on import consumption taxes for cosmetics, in Chinese, is at http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201609/t20160930_2431059.html.
The China customs office announcement on import procedures for cosmetics, in Chinese, is at http://www.customs.gov.cn/publish/portal0/tab49661/info821979.htm.
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