Challenge and Opportunity - China is to Modify Its Cross-border eCommerce Tax Policy

by Azoya

Rumour has it that China is to make significant changes to its cross-border e-commerce tax policy. Although the official documents haven’t yet been issued, some authoritative sources in the cross-border e-commerce sphere have speculated that from April 8th, a new tax policy on import e-commerce will be enacted.

Before looking at the new policy, overseas retailers need to know the import models that Chinese cross-border e-commerce companies are employing. There are two main models: the bonded warehouse model and the direct shipping model.

The bonded warehouse model (B2B2C) sees retailers import goods in bulk from overseas and store the goods in the bounded area in China’s customs. After Chinese customers place orders through cross-border e-commerce sites, the goods are dispatched from the bounded area and sent directly to customers.

The second is direct shipping model (B2C), which consists of three shipping routes.

1. Formal B2C import: This route requires three purchase records to be in accordance. That means when Chinese customers purchase goods from overseas retailers through cross-border e-commerce sites, the records of order, shipment and payment must be synchronized to China customs administration. Only when these three records of a single purchase are in accordance can the parcel be released.

2. UPU postal shipping: This shipping route is used mainly by personal correspondence between countries and is usually provided by state-owned postal companies in various countries. This is standard mail shipping (e.g. when you send a postcard to a friend in another country, you are using this shipping route). Although it’s mainly for non-commercial use, many cross-border e-commerce companies choose this route to send their parcels.

3. Personal parcel shipping: Cross-border express companies like UCS, FedEx provide this shipping route. Parcels being shipped through this route usually declare tax initially.

The rumored changes to China’s cross-border e-commerce tax policy are expected to only apply to the bonded warehouse model and formal B2C import model. Tax rules on UPU postal shipping and personal parcel shipping will remain unchanged.

The new policy is expected to raise the tax-free price limit of inbound parcels from RMB 1,000 to RMB 2,000. However, one Chinese citizen can only buy RMB 20,000 worth of goods in total in a year. If a Chinese citizen buys more than RMB 20,000 of goods within a year, or more than RMB 2,000 in one purchase, the excess will be levied using import tariffs that are applied to general trade.

If the price of one inseparable article (i.e. one single unit) exceeds RMB 2,000, then it will be levied using the general trade tariff in full price.

The new policy is also to levy value-added tax (VAT) and consumption tax regardless of the price. However, goods imported through cross-border e-commerce are only required to pay at 70 percent of the domestic VAT and consumption tax rate. For example, if an imported article is required to pay both VAT and consumption tax, then the tax rate applicable is 32.9 percent [(VAT 17 percent + consumption tax 30 percent ) x 70 percent].

The new policy is also said to impose commodity inspection on the bonded warehouse model, which will make this model less favorable for cross-border e-commerce. Commodity inspection carried out by the China customs administration can be complicated and time consuming. To pass the commodity inspection, Chinese labels are required. For food products, manufacturers are required to stamp Chinese labels in the production line abroad. If you sell cosmetics through this model, the cosmetics will have to pass animal testing, which is against some manufacturers’ ethical principles.

The UPU post shipping route will continue being applied to the old tax policy.

Tax rates for items shipped through UPU post shipping route are much lower than the rates of duty and VAT levied on imports under general trade. For articles with an import duty payable amount of RMB 50 or less, tax will even be waived. Currently, four tax rates apply to UPU post shipping route: 10%, 20%, 30% and 50%. Taking a bottle of vitamin pills selling at RMB 130 bought on a cross-border e-commerce platform as an example, by applying the “personal postal articles” tax rate of 10%, the amount of tax payable is only RMB 13, which is less than RMB 50 and therefore waived. If, instead, 4 bottles of vitamin pills are bought in the same transaction, the personal postal articles tax of RMB 52 (RMB 13 x 4) must be paid. The lower tax rate will remain as an incentive to encourage Chinese overseas online shoppers buying more through personal postal shipping model.Under personal postal shipping model, Chinese customs will calculate the tax by applying the “reasonable quantity for personal use” principle. If order value is under RMB 1,000, products can go through customs clearance according to “personal postal articles” tax regulations, but if the order exceeds RMB 1,000, these products will be regarded as goods imported under general trade, duty and VAT will be levied. Where the value of a single integral item such as a handbag or a pram exceeds RMB 1,000, as long as Customs determines that it is for personal use, such product can still go through clearance in accordance with personal postal articles tax regulations.

The impact of the potential new policy

Good news:

1. This change will encourage Chinese cross-border online shoppers to buy more products priced between RMB 1,000 to RMB 2,000. Therefore, the average price of inbound parcels will likely increase.

2. For some certain articles, applying the new tax policy will cut the tax rate. For example, the tax rate for cosmetics under personal parcel shipping is 50 percent. If the new tax policy is enacted cosmetics will only be levied with 32.9 percent VAT and consumption tax.

3. Tax rules for UPU postal shipping and personal parcel shipping will remain the same. Products impaired by the new tax policy, such as pharmaceuticals, can continue being sold to China via the two B2C direct shipping routes.

Bad news:

1. The suitability of the bonded warehouse model will become very limited. In addition to requiring commodity inspection, the new policy will impose a lot of restrictions on the items retailers can sell.

2. Products that draw a lower tax rate under personal parcel shipping would face a higher rate under the new tax policy.

3. The new tax policy requires three purchase records (order, payment and shipment) to be in accordance for a single purchase so that shopping behaviour is transparent and traceable on an individual level. This will affect some agent buyers, who are also big clients of cross-border e-commerce sites. To circumvent the regulations on tax-free limits, these agent buyers will have to borrow more individual Chinese ID cards and AliPay accounts to ensure the purchases are attributed to individuals, rather than the agent buyers.

The new policy is expected to be trialed at Guangzhou customs. Whether it will be applied nationwide is uncertain. However, getting a clear understanding of the current tax policy and its most likely change will prepare overseas retailers should the change come into place across China.

Many Aussie retailers, such as Pharmacy Online, sell to China via their own Chinese-version online stores, rather than selling via Chinese cross-border e-commerce platforms, since the former is more flexible in choosing shipping routes, meaning that retailers are better able to adapt to a new tax policy.


Suggested Reading

Updates on 2016 Chinese E-Commerce Policies

3 Impacts of China's Positive List on Import eCommerce

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