New Tax Rules Set to Overhaul China’s Cross-Border E-Commerce Business

May 6, 2016

As an incredibly booming sector estimated to grow at 40% annually, cross-border e-commerce industry in China is often criticized as a grey zone that is hardly regulated.  One of the key questions often asked is whether the products handled by e-commerce enjoy some type of special deal, such as reduced import duty or market access.  Recently, Chinese government announced a new tax regime on retail sales over cross-border e-commerce platforms, in the name of heralding a shake-up for the industry.

Ministry of Finance, State Administration of Tax and General Administration of Customs jointly promulgated the Circular on Tax Policy for Cross-Border E-commerce Retail Imports (the Circular) which became effective as from April 8, 2016.  Prior to these new rules, goods bought through cross-border e-commerce channel were subject to a much more favorable postal tax which treats such purchases as personal items rather than trades.  The postal tax rate is between 10 to 50 percent when the payable tax was at least RMB50.  However pursuant to the new tax regime, e-commerce imports will no longer take advantage of the preferential postal tax and will be subject to a complex tax rate equivalent to 70% of the traditional import products.  Alongside the Circular, two batches of White List designating approximately 1,294 items that e-commerce retailers can import into China (with reduced duty privilege), were released respectively on April 7 and 15.

Until now, the new series of tax policies have triggered mixed feelings among the players of the industry.  In general, there are two kinds of cross-border e-commerce businesses to buy goods from overseas: one is individual “daigou” and the other is corporate e-tailers.  Though daigoui may have benefited from the previous policies for easily slipping through the tax net, more expect the authorities to crack down the daigou’s “smuggle” business model.  For the big corporate cross-border e-commerce players, the two batches of White List seem to concern them even more.  Prior to the release of the second batch of White List on April 15, many goods that are off the first batch had been stranded at the bonded zones and several major platforms hastily scrambled to cut inventories by campaigning big promotions on their websites, fearing that their stock will not make it to the White List.

The new customs procedures ensuing the new tax policies also draw much attention as the required clearance for goods to enter the bonded areas has been reported hardly practical.  Such requirement will undoubtedly undermine the competitive advantages of cross-border e-commerce in logistic efficiency as opposed to traditional trade.  As such, the new tax rules may curb China’s exponentially booming cross-border e-commerce in the short run.  Yet in terms of the long term development of the industry, the changes could serve as an impetus for the platforms to update their service systems and user’s experience, leading the grey business to a well-regulated sector.

It should be noted that the new changes also manifest the uncertainty of tax levy and adjustment in China because only the National People’s Congress is entitled to make or amend laws concerning “establishment of tax categories and determination of tax rates” pursuant to the PRC Legislative Law.  However, this seems to be an issue that concerns the PRC authorities least.