Essentially, cross border e-commerce is electronic foreign trade, where product display, negotiation, and transaction are done via the internet. Buyers and sellers in different countries conduct transactions online, and deliver or receive goods through cross border logistics, most commonly by overseas shipment or airfreight.
Exporters trying to sell to the lucrative Chinese market, with or without a physical presence in the country, are well aware of the country’s booming cross border e-commerce industry, which grew over 30 percent in 2015 despite the slowing of international trade. It is predicted that cross border e-commerce trade will exceed RMB6.5 trillion in 2016, accounting for 20 percent of total trade volume. In the first quarter of this year, 28 cities in China implemented the import and export businesses of cross border e-commerce, and eight of these cities recorded import and export volumes exceeding RMB100 million. Guangzhou, in the Southern Guangdong province, ranked first in the import and export of cross border e-commerce, accounting for about 30 percent of the total of China.
There are several key factors responsible for the rise of the cross border e-commerce industry. Chinese middle- and upper-middle-class consumers increasingly aspire to buy foreign clothing and gadgets not yet available in China, and online shoppers feel more protected from fake or counterfeit goods often passed off as offshore brands.
Furthermore, the Chinese consumption pattern is changing, with many customers becoming more sensitive to quality and service rather than price. China’s rapidly increasing number of mobile internet users contributed to the growth of online shopping. China’s internet penetration rate reached over 50 percent in 2015; however, there is still room for further growth. China is already the world’s largest e-commerce market and it extended its lead in 2015. Chinese retail websites sold RMB3.88 trillion (US$589.61 billion) worth of goods in 2015, an increase of 33.3 percent from a year earlier.
Operating in the e-Commerce Industry
In cross border e-commerce, goods delivered by courier and post often faced troubles in customs clearance, settlement of exchange, and tax reimbursement. In order to solve these problems, in 2015 the State Council announced new cross border e-commerce zones in 12 Chinese cities: Shanghai, Guangzhou, Tianjin, Chongqing, Hefei, Zhengzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen, and Suzhou. The first comprehensive e-commerce pilot zone of its kind was established in Hangzhou, home to the e-commerce giant Alibaba. These special zones are designated exclusively for the development of the cross border e-commerce industry, featuring a slew of preferential tax policies and streamlined customs clearance procedures. Each of these zones has an online e-commerce platform operated by state-backed or licensed companies, where Chinese customers can view and purchase foreign goods.
Foreign merchants in these zones may choose one of the following two approaches when selling directly to Chinese consumers from a website hosted in their home market: direct shipping model or bonded warehouse model.
Companies that decide to sell their products cross border via an e-commerce platform can either sell their goods directly to the Chinese consumers from their own warehouse, or ship it to a warehouse in China. Those warehouses in China are usually in one of the bonded zones mentioned above. Platforms offering end-to-end cross border services for foreign brands help foreign companies bypass the need to either establish a local legal entity or to appoint a local distributor.
The leading e-commerce platforms in China are Tmall Global, JD, and Yihaodian. With Tmall Global, Tmall’s cross border e-commerce platform, orders can be shipped directly from abroad and payments can be settled in the preferred currency. As previously mentioned, the goods are sent directly to China by consolidated shipment or express mail delivery, and distributed through bonded warehouses. Tmall’s international cross border drop shipping specialists ensure delivery to Chinese consumers within five to eight working days.
To comply with Chinese consumer laws, foreign merchants need to offer Chinese language customer support, provide a way to handle customer returns in China, and arrange overseas shipping directly to Chinese consumers.
Taxation
For the first time in its history, the Chinese government released a circular, Cai Guan Shui [2016] No.18”, to specifically clarify import tax policies for goods imported under the cross border e-commerce model. The circular, which came into force on April 8, 2016, stipulates that consumers purchasing goods imported under both the direct shipping model and the bonded warehouse model need to pay import taxes including tariffs, import value-added tax (VAT), and consumer tax (if applicable). Following the tax rates adjustment, the Chinese government issued the Cross Border e-Commerce Imported Goods List to clarify what types of goods are allowed to be imported under a cross border e-commerce model.
An adjusted parcel tax scheme now only applies to goods brought into the country for personal use by Chinese residents with a value exceeding RMB5,000, and for personal use by non-residents with a value exceeding RMB2,000. Goods valued under these thresholds are tax exempt, and the levels of tax brackets have been reduced from four to three (15 percent, 30 percent and 60 percent). Although consumers can still enjoy a 70 percent discount on import taxes for single cross border e-commerce transactions under RMB2,000 (RMB20,000 for yearly transactions), the overall tax burden on exporters will increase and will almost certainly exceed 10 percent.
Certain low-priced consumer products, such as food and baby products, as well as luxury products valued above RMB2,000, are to be most affected by this adjustment in tax rates. Conversely, given proper pricing strategies, the costs of selling products under RMB2,000, such as cosmetics, clothing, and electronics, may fall.
A Practical Overview
As a general rule, cross border e-commerce transactions benefit from the following: 0 percent duty rate, VAT of 70 percent of VAT payable, and a consumption tax (CT) of 70 percent of CT payable (if any). Such tax advantages shall apply if two requirements are met – the single transaction or purchase value is below RMB2,000, and the person’s annual quota (total value of cross border e-commerce purchase in a year for the individual) is equal to or below RMB20,000.
On May 25, the Ministry of Finance (MOF) confirmed that the proposed regulatory requirements for cross border e-commerce will be granted a one year transition period. This means that before May 11, 2017, customs clearance forms will not be examined for online purchased bonded goods entering the 10 pilot cities (Tianjin, Shanghai, Hangzhou, Ningbo, Zhengzhou, Guangzhou, Shenzhen, Chongqing, Fuzhou, and Pingtan). In addition, initial import licensing approval, registration, and filing requirements for cosmetics, infant formula milk powder, medical devices, special food (including healthcare food and formula food for special medical purposes), and other such products will be suspended. Furthermore, goods imported under the direct sale model to all regions of China will be temporarily exempt from the initial import licensing approval, registration, and filing requirements.
Challenges
While the combination of increased incentives and growing number of online trading platforms offers many opportunities for investment, it is important to note that China’s e-commerce sector is still at an early stage of development. This exposes potential importers to vague quality standards, as well as shifting entry requirements for a number of imported products. Companies operating in the cross border e-commerce industry have to make sure that their production, tax reporting, and overseas marketing channels are well-coordinated. Furthermore, intellectual property infringements and the sales of counterfeit and poor-quality commodities are quite common in online transactions. Because IP rights are territorial and China has a “first-to-file” system, companies need to file their IP with the correct authorities.
Other difficulties can arise; it is necessary to adapt one’s business strategy and to build the consumer’s trust. Companies should make use of free Chinese web resources such as Baidu Zhidao (similar to Yahoo! and Google) and make sure to have a clear value proposition for the Chinese consumer. It is also very important to have mobile-friendly services in China. Companies must consider accessibility and ease-of-use for mobile users.
While doing business overseas can be tough, especially in China, cross border e-commerce offers many opportunities for foreign entrepreneurs. China’s cross border e-commerce chain is gradually improving. As announced in the 13th Five-Year Plan, the Chinese government is working on revising relevant policies. Cross border e-commerce is changing sales, distribution, and consumption patterns in China and in the rest of the world. Companies should be aware of this and leverage new opportunities. The cross border e-commerce model allows foreign companies to sell their products at lower prices and, consequently, create a competitive price advantage in a specific market.
About the author: Federico Paolucci is an associate on the International Business Advisory team for the Shenzhen office of Dezan Shira & Associates. Federico assists foreign companies with their investments in Asia and China, with a special focus on the Pearl River Delta. His areas of expertise include: setting up of wholly foreign-owned enterprises, joint ventures, and representative offices; corporate finance and compliance; and import&export.
