4 April, 2016
China's e-commerce sector is booming. Domestic e-commerce platforms such as Taobao have led the way for domestic sales. Cross-border e-commerce platforms, such as Tmall International and JD Worldwide have also flourished, attracting interest from a variety of foreign sellers.
Over the last few years, Chinese consumers have benefited from cross-border e-commerce, enjoying lower import taxes and more flexibility in terms of product compliance. These benefits are under pressure, and may soon end, as the Chinese government increases regulatory efforts to appease traditional cross-border trade players, and to address rocketing consumer complaints about defective imported products.
We explore below recent regulatory developments targeting cross-border e-commerce.
I. Diminished tax benefits
From 8 April 2016, customers importing high-value products or a high-volume of products via cross-border e-commerce will be subject to full import customs tariffs, import value-added tax and consumption tax (i.e., the rates currently applicable to products imported into China through traditional import channels). Specifically, the full rates will be applicable if:
- the price of a single purchase exceeds RMB2,000; or
- the aggregate amount of an individual's yearly purchases exceed RMB20,000.
- If these amounts are not met, then the customer need only pay 70% of the applicable value-added tax and consumption tax (and no customs tariff). These changes were introduced by China's Ministry of Finance in a new circular issued 24 March 2016 ("e-Commerce Tax Circular").
Currently, products imported into China through cross-border e-commerce are subject to postal tax (which can be at a rate as low as 10%). The e-Commerce Tax Circular goes some way toward leveling the playing field for both offline and online players.
II. Product quality regulated
Products bought via cross-border e-commerce have previously enjoyed a loophole in terms of China’s product-quality regulations. This loophole is now closing.
On 17 March 2016, the State Administration for Industry and Commerce ("SAIC") issued regulations targeting product quality (including for cross-border e-commerce) and protecting consumer rights. Among other things, the new regulations provide that:
All imported products must state the product name, country of origin, and the name and address of the importer or general distributor; the information must be shown in Chinese.
Chinese-language manuals must be included for products that are likely to impact health or safety, or if there are special
requirements for the repair or use of the products.
The new regulations also reiterate that, unless otherwise agreed, consumers are entitled to demand a refund for products within 7 days of purchase via an e-commerce platform (a right previously granted by China's Consumer Protection Law).
The SAIC's latest regulations deliver a clear message to e-commerce players that doing business on the Internet is not a "lawless realm". Sellers may need to improve their manufacturing, distribution and after-sale practices in order to comply with the new requirements. Cross-border e-commerce operators based in China may also be impacted.
III. Proposed new requirements for imported food
Food importation into China is generally subject to customs inspections and quality control. The importation of small amounts of food via cross-border e-commerce, however, has challenged the traditional model. In some cases, food ineligible for importation via the traditional model has found its way into the Chinese market.
The Administration of Quality Supervision, Inspection and Quarantine ("AQSIQ") issued draft Provisions on Supervision and Administration on Safety of Food Imported through Bonded Cross-Border E-Commerce Model ("Draft Provisions") in September 2015. The Draft Provisions would make food imported via bonded cross-border e-commerce (the most typical e-commerce import model) subject to the same administration system and requirements as for food imported through traditional import channels. This means that the stricter requirements under the recently amended food safety laws and regulations will be applied to food imports via cross-border e-commerce, including:
- all imported food must be subject to a tracing and recall regime;
- health food imported into China for the first time (except for nutrient supplements) must be subject to a registration system (see previous article here); and
- advance registration, filing and inspection must be sought for certain special categories of food (e.g., food without a national standard in China).
The Draft Provisions also propose more flexible food labeling requirements as compared to traditional food imports. Food imported via e-commerce would be permitted to choose between an electronic label (on the e-commerce platform) and a physical label. Infant formula milk powders, however, would still be required to have a physical label prior to importation.
It remains to be seen whether the Draft Provisions will be substantially amended prior to final issuance.
IV. Our observations
The new regulations (especially the tightening of preferential tax policies) may have a negative short-term impact on cross-border e-commerce model. With some adjustment, however, sellers engaged in cross-border e-commerce can benefit from a more regulated market.
More legislative changes can also be expected. For instance, China’s legislative body at the national level has expressed an intention to formulate and promulgate a comprehensive law on e-commerce covering an even wider range of topics. The new law is expected to set out the responsibilities of the e-commerce operators, and requirements for transaction safety, data protection and fair market competition.
Foreign companies wishing to catch the "high-speed train" of the Chinese market will need to closely monitor the changing regulatory landscape for cross-border e-commerce, and adjust their business model and daily operations as needed.
For further information, please contact:
Nanda Lau, Partner, Herbert Smith Freehills