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Taxing Times for China’s Cross-border e-Commerce Sector

Time for a change: cross-border e-commerce goods adjust to new tax regime
Time for a change: cross-border e-commerce goods adjust to new tax regime

Haitao is a term frequently used in e-commerce circles. It refers to the growing practice of Chinese mainland consumers who shop from overseas-based websites and receive their goods via cross-border delivery services. A new tax regulation introduced earlier this year directly impacts businesses in this sector, including companies that exhibited at the 2016 Cross-Border E-Commerce Industry Exhibition, held in Guangzhou in July.

Introduced last April, the new policy specifies a maximum tax-free allowance of Rmb2,000 for each transaction and a maximum of Rmb20,000 worth of imports per person per year.

Only goods specified on one of two lists: the List of Cross-Border E-Commerce Retail Imports and the List of Cross-Border E-Commerce Retail Imports (Second Batch), can be deemed to be bonded imports. In the case of goods not on the lists, these are covered either by the relevant general trade policy or are considered liable under the personal postal articles tax.

The changes to the tax regime have proved to be a challenge for the mainland’s cross-border e-commerce industry. Overall, it was the small- and medium-sized operators that were hit hardest. If the goods they specialised in were not on either list, they were obliged to import any such items under the general trade system. This inevitably requires the presentation of a substantial number of documents, including contracts, invoices and certificates of origin. In some cases, it may not be possible for the importing company to obtain such documents from overseas sellers. Some small businesses have reportedly only taken goods out of – not into – bonded storage, resulting in a sharp fall in the number of orders after the tax changes were introduced.

Following approval by the State Council, a one-year transitional period was subsequently introduced. During this time, it was agreed that bonded imports entering the bonded zones in 10 cross-border e-commerce pilot cities would be exempt from customs clearance certificates checks. The 10 designated pilot cities were: Tianjin, Shanghai, Hangzhou, Ningbo, Zhengzhou, Guangzhou, Shenzhen, Chongqing, Fuzhou and Pingtan. It was also agreed that import permits, registration or filing would not be required for first-time imported cosmetics, baby formula, medical equipment or special food products.

Customer Experience and Trust

While this one-year transitional term has given the mainland cross-border e-commerce operators a grace period, fundamental changes to the industry appear unavoidable. "The implementation of this new legislation allows us to see our way forward more clearly,” said Huang Xiaoyan, a spokesman for Guangdong Funsens Network Technology. “We have already launched several new initiatives in response to the changes outlined in the policy, including setting up a distribution centre for foreign goods in Guangzhou's Nansha district."

Korean skincare products
Korean skincare products
Overseas-sourced milk powder
Overseas-sourced milk powder

Funsens' direct purchase store has adopted the O2O model of having both an offline experience centre and an online purchase platform, the first such operation to open on the mainland. This set-up provides customers a hands-on experience of overseas-sourced goods prior to purchasing online.

At the experience centre, goods are designated as either overseas-sourced or “duty-paid.” While purchasers can take away duty-paid goods immediately, they must register in advance and place orders online for overseas-sourced goods. These are then dispatched to them later from the company's bonded warehouse.

Buying via the Funsens platform is seen as a guarantee of reliability, which is considered especially important for sought-after items such as baby formula. The system also allows buyers to trace goods back to their point of origin via Smart Inspect, a cross-border e-commerce quality-tracking platform operated by the Nansha Entry-Exit Inspection and Quarantine Bureau.

Less directly affected by the legislative changes was Senda International Trade Co. According to Zhou Guoping, the company's Marketing Director, the new tax policy has had little effect on its operations as its goods typically enter the mainland market via the general trade system. He also noted that maintaining a high level of service was important for cross-border e-commerce, while it was equally crucial to offer a wide variety of value-for-money goods.

Direct Delivery

A Korean cosmetic range
A Korean cosmetic range

Some mainland consumers have concerns that the revised tax policy will inevitably entail paying more for online goods. Mr Huang, however, pointed out that as the tax rate now varies across different goods categories, certain purchases are now actually cheaper.

Before the tax changes, haitao shoppers typically only bought goods priced below Rmb100. This was because items such as imported cosmetics that cost more than Rmb100 were subject to a 50 per cent personal postal articles tax. Since the tax changes, a lower overall rate of 32.9 per cent now applies to imported cosmetics. Consumers buying products priced above Rmb100 now actually get a better deal. In the past, consumers largely bought overseas-sourced cosmetic products via overseas shopping agents. In light of the changes, these agents no longer have a real price advantage. Additionally, direct consumers are now assured of a high-level of after-sale service and proper resolution of any issues related to faulty products bought via cross-border e-commerce platforms.

While prices for a number of maternal and infant products have increased as a result of the tax reforms, Mr Huang believes the sector remains robust. This is largely because many mainland consumers are keen to make quality purchases, with a premium price acceptable to them.

According to Mr Huang, many mainland consumers also prefer the overseas direct delivery model because goods dispatched directly by foreign companies are more reliable. It also means they will not be affected by the new policy in the short term and remain subject to the personal postal articles tax.

In line with this, many stores on the Funsens platform still offer an overseas direct delivery service. However, while this model has a price advantage compared to delivery from bonded warehouses, it is somewhat slower.

 

Toothpaste and dental products
Toothpaste and dental products
Mainland companies, however, are not unique in providing an overseas direct delivery service. Indeed, several Australian companies are well aware of mainland consumers' keen demand for this service. One Australian exhibitor, Premium International, conducted market research into the issue, subsequently determining that many mainland consumers actually prefer overseas direct delivery.

Premium International acts as an agent for several professional healthcare products, as well as Australian-sourced mother-and-child brands. It also sources direct from a wide range of international suppliers. At present, it offers direct delivery from its overseas warehouses, with a guaranteed seven to 10 days turnaround time.

Despite the changes, Senda, a specialist in global cross-border purchasing, exporting and wholesaling, has enjoyed rapid growth, According to Mr Zhou, the wholesale value of its trade increased from Rmb8 million at the beginning of January 2016 to Rmb20 million by the end of June. He sees this as a clear indication that the new tax policy has not diminished mainland consumers' appetite for overseas-sourced goods.

Expanding Ranges

Beck's Sante eye-drop range
Beck's Sante eye-drop range
Horse oil from Beck
Horse oil from Beck

The reliable sourcing of goods and efficient logistics are most important when it comes to cross-border e-commerce. Access to the primary sources ensures a continuous supply and helps to maintain product quality.

According to Mr Zhou, Senda handles more than 1,000 brands and 50,000 individual items from 30 countries and regions. To manage the goods, it has established a multi-function logistical system consisting of a duty-paid warehouse, an overseas warehouse and a bonded warehouse for overseas goods. As part of its process of providing goods to customers, the company looks to collect their feedback, adjusting its product mix in line with changing market demands.

Changing demands have also led to several overseas brands previously unknown to mainland consumers venturing into the market for the first time. This has partly been driven by demand from younger consumers for more tailored products.

The Vitaman men's toiletries range
The Vitaman men's toiletries range

One particular beneficiary has been Beck, a Japanese supplier of optical products. According to Dong Chun, the company's mainland representative, suppliers must continually source good quality products in order to meet changing consumer demands.

In addition to so-called cosmeceuticals, demand for men's skincare products has also been growing across the mainland. According to Euromonitor, retail sales of men's skincare products and cosmetics in China will enjoy an average annual increase of 13.5 per cent between 2016 and 2019, compared with a global average of 5.8 per cent. By 2019, the mainland market is estimated to be worth some Rmb1.9 billion.

Hong Kong's Warwick International is the sole agent across Greater China for Vitaman, an Australian brand of 100 per cent natural men's skincare products. According to staff manning the company's stand, male consumers across the mainland now have increased spending power, which has led to growth in demand for male cosmetic products. The company now sees clear business opportunities ahead and plans to introduce a wider range of products to mainland consumers.

For more China market opportunities, please visit: http://research.hktdc.com.

Content provided by Hong Kong Trade Development Council
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