20 June 2016
Cross-Border E-Commerce: Platform Operator’s Response to China Policy Update
Interview with Daniel Chan, CEO of 24x7 Outlet
Under the new tax policy for cross-border e-commerce imports and the positive list for import commodities implemented by the Chinese government from April 2016, the personal postal articles tax is no longer levied on mainland consumers when they shop on cross-border e-commerce import platforms. Instead, online shoppers are subject to an integrated tax. Only goods on the positive list can be imported under the cross-border e-commerce tax system and sold on cross-border e-commerce platforms. Other goods must be imported under the general trade system. Daniel Chan, the CEO of 24x7 Outlet, an operator of cross-border e-commerce, explains the operating model of his company, assesses the impact of the new policy on cross-border e-commerce platforms and mainland consumers, and shares his views on the future trends of this business.
The 24x7 Outlet Models
24x7 Outlet officially began operating in 2015. They operate three sales models: "bonded imports", "direct purchase imports" and "duty-paid imports". "Bonded imports" and "direct purchase imports" are only displayed at its experience stores. Customers place their orders at the cashier or place orders and settle payment on the 24x7 Outlet website. They cannot take their purchase home right away. The goods have to go through customs and spot-checking by the inspection and quarantine authorities before delivery. In general, the goods will be couriered to customers in a few days.
"Duty-paid imports" are imported under the general trade system and have already paid the tariff, VAT and consumption tax due. Customers can take their purchase home after making payment at the experience stores. To keep the payment system simple, customers must pay with a credit card, charge card, WePay or other forms of electronic payment. Cash is not accepted.
Experience Store: Main Considerations
In addition to online sales, 24x7 Outlet has also set up experience stores at the Funsens Xiamen Cross-Border Direct Shopping Experience Centre and the Hangzhou Xiacheng Cross-Border E-Commerce Industrial Park for O2O displays and sale of duty-paid goods to allow mainland customers to buy items. There are currently 10 pilot cities for cross-border e-commerce on the mainland. Chan says "customer flow" and "purchasing power" are his main considerations for setting up experience stores. His aim is to expose his products to as many customers as possible and promote online sales and O2O business.
On the other hand, local customer preferences and spending power should not be ignored. For example, there is a great demand for mass-appeal goods in Xiamen. With good supporting facilities nearby, the experience store has attracted many middle-class customers with high spending power. The Hangzhou experience store is located at the central business district with a high concentration of mid- to high-end white-collar workers who are looking for unique import goods of high quality. Direct cooperation with brands or their sole agents makes it possible for 24x7 Outlet to cut down intermediary and logistics costs and sell "duty-paid goods" at a cheaper price than similar goods sold at general retail stores. The experience stores will also launch sales promotions to increase store traffic and draw customers' interests to other goods as part of their O2O sales strategy.
Brand/Agent Selection Criteria
According to Ministry of Commerce data, there are more than 5,000 enterprises operating different kinds of cross-border platforms on the mainland. In Chan's opinion, cross-border e-commerce platforms must have the following three distinguishing features to out-perform rivals: clear-cut web positioning, unique product varieties and excellent product quality. Since competition is keen among mainland e-commerce platforms for mother and baby products and profit margin is ever shrinking, 24x7 Outlet mainly deals in famous Hong Kong healthcare brands such as Vita Green, Ma Pak Leung and Hin Sang. Products other than health supplements include skincare products and cosmetics, food, mother and baby goods and watches. At present, about 60% of the brands/agents that 24x7 Outlet are working with are from Hong Kong, with the remainder coming from Japan, Taiwan, South Korea, Europe and North America.
24x7 Outlet mainly deals in first- and second-line brands but is also interested in up-and-coming brands. Chan said: "Our main consideration is the nature, distinctive features and selling points of the products as well as their difference with similar products available on the mainland." Since Korean cosmetics and Taiwan food are very popular on the mainland, 24x7 Outlet is actively adding new brands of these product categories from these two places to enhance its competitive edge.
Brand/Agent Collaboration Model
24x7 Outlet mainly works with brands/agents on a consignment basis and offers a range of supporting services. It will file all necessary records with the Chinese Customs for brands/agents at a cost of Rmb500 per stock-keeping unit (SKU). These brands/agents may store the "bonded imports" at the designated bonded warehouses of 24x7 Outlet at Nansha or Hangzhou after getting customs approval for import. "Direct purchase imports" are stored in 24x7 Outlet's warehouse in Hong Kong. Brands/agents must provide photos and descriptions of the products for uploading on its website. 24x7 Outlet will arrange customs clearance and delivery after mainland customers have bought online. It will not charge brands/agents for storage and advertising and will only charge commission after products are sold in order to reduce management costs.
Chan has the following recommendations for brands/agents interested in venturing into the mainland retail market via cross-border e-commerce platforms:
Products must have an expiry date of at least 1-2 years from the date of purchase: since it takes time for products to go through filing before being sent to the bonded warehouses, if there is too short an expiry date, there will be unnecessary pressure on trying to sell. If they are not selling well, the e-commerce platform will still have time to adjust its marketing strategy and increase publicity.
New brands should only keep small stocks of their products in bonded warehouses: since no can say for sure what can sell, it is better for new firms to begin by keeping small stocks of products in the bonded warehouses. They can increase their stock if sales are good and offer discounts to promote sales if sales are sluggish. Flexible control of inventory is an effective way to control cost.
Select suitable products for sale on cross-border e-commerce platforms: fast-moving consumer goods such as food and daily necessities are suitable for sale on cross-border e-commerce platforms. Clothing and shoes are not so suitable because demand can be affected by season and trends. The need to store stocks of different colours and sizes also increases cost.
Impact of New Tax System
In the past, mainland customers buying foreign goods via cross-border e-commerce platforms could go through customs clearance according to "personal postal articles tax" regulations on the principle of "reasonable quantities for personal use" if the order value was under Rmb1,000. After 8 April, cross-border e-commerce is no longer subject to personal postal articles tax but is levied an integrated tax (import tariffs, VAT and consumption tax). According to the Circular on Tax Policies for Retail Import in Cross-Border E-Commerce, a maximum value of Rmb2,000 is set for each transaction and a maximum of Rmb20,000 per person per year is allowed in cross-border e-commerce retail imports. If the value of a single transaction does not exceed the maximum value, tariff is temporarily set at 0%. Exemption of import VAT and consumption tax is abolished and a levy equivalent to 70% of the statutory payable amount is temporarily set.
"After switching to the new tax system, most items sold via cross-border e-commerce platforms are subject to an integrated tax with a tax rate of 11.9%. Depending on the price and tax rates applicable, some items may ultimately cost more than before when the personal postal articles tax was levied. However, the opposite may be the case for other items. There is no hard and fast rule," said Chan.
For example, an item of packaged food priced Rmb200 imported through a cross-border e-commerce platform was levied a 10% personal postal articles tax (Rmb200 x 10% = Rmb20) in the past, but the duty payable was waived by Customs because it amounted to less than Rmb50. The consumer only had to pay Rmb200 for this item. Under the new integrated tax, the same item is subject to import tariff (temporarily set at 0%), VAT (Rmb200 x 17% x 70% = Rmb23.8) and consumption tax (no consumption tax for food = 0%). The consumer ultimately has to pay Rmb223.8. This example shows that the consumer ultimately pays a higher price for the same item under the new tax system.
In another example, the consumer actually pays less for the same item under the new tax system. An imported cosmetic product priced Rmb200 was subject to a 50% personal postal articles tax (Rmb200 x 50% = Rmb100) in the past and full payment was required because the duty payable exceeded Rmb50, meaning the consumer had to pay Rmb300 for the product. Under the new integrated tax, the same item is subject to import tariff (temporarily set at 0%), VAT (Rmb200 x 17% x 70% = Rmb23.8) and consumption tax (Rmb200 x 30% x 70% = Rmb42), meaning that the consumer pays only Rmb265.8.
In Chan's opinion, the tax reform will have a bigger impact on inseparable items and accessible luxuries with a value of over Rmb2,000. In the past, if a consumer bought a single inseparable item (such as pram or handbag) at a price exceeding the Rmb1,000 limit, the product could still go through customs clearance in accordance with personal postal articles tax regulations if Customs determined that it was for personal use. Although the limit for single transactions is raised to Rmb2,000 under the new tax system, if the price of one single article exceeds Rmb2,000, it will have to go through Customs under the general trade system and pay tariff, VAT and consumption tax in full. This means consumers may prefer to make their purchase at brand shops or department stores because prices there are similar to those sold on cross-border e-commerce import platforms.
"Positive List" Good for Market’s Long-Term Development
Before the implementation of the new policy, goods imported via cross-border e-commerce platforms were subject to simpler inspection and quarantine procedures than under the general trade system. Goods not on the cross-border e-commerce "negative list" can generally be imported without trouble. After the Chinese government announced the List of Cross-Border E-Commerce Retail Imports and List of Cross-Border E-Commerce Retail Imports (Second Batch) on 7 April 2016 and 16 April 2016 respectively, only goods bearing the HS codes shown on the list can be imported under the tax system for cross-border e-commerce and sold via cross-border e-commerce platforms. Other goods must be imported under the general trade system.
24x7 Outlet noted from their experience that it took about two weeks to file general commodities for the record with customs in the past, but the same process takes about one month after the implementation of the "positive list", but this is still faster than submitting application for imports under the general trade system. At present, cross-border e-commerce platforms still need to file imports for the record at the local customs offices. For example, if a brand/agent wishes to store goods of the same model at the bonded warehouse of 24x7 Outlet at Nansha or Hangzhou, they need to file details at the Nansha or Hangzhou customs office.
Chan noted that the "positive list" clearly indicates the types of goods that can be handled by cross-border e-commerce import platforms. The Chinese government also made it clear that the list may be adjusted from time to time according to the development of cross-border e-commerce, changes in consumer demand and other factors. Although record filing takes a longer time than before, the "positive list" should contribute to the development of cross-border e-commerce import platforms in the long run.
According to media reports, many e-commerce platforms tried to sell their stock as quickly as possible by offering price cuts or postage and tax inclusive prices before the implementation of the new tax system and positive list for cross-border e-commerce imports. There were also reports that mainland consumers would likely return to overseas online shopping and making purchases through purchasing agents under the new tax system. 24x7 Outlet have not launched any such sales promotions ahead of the implementation of the new policy. Chan is convinced that premium imports have a definite advantage. There is not much change in his company’s sales performance before and after the implementation of the new policy, he added.
Chan is optimistic about the future of cross-border e-commerce imports because mainland consumers have an increasing demand for good quality foreign products that are novel and safe. Moreover, since goods sold on cross-border e-commerce import platforms are subject to Customs supervision, consumers can trace the origin of products and liability of manufacturers, making them safer than those purchased via overseas online shopping or through purchasing agents. The new policy implemented since April 2016 will strike a balance between cross-border e-commerce imports and imports under the general trade system, create a level playing field for new and traditional business models, and promote the healthy development of the mainland retail market.
 For details, please see: Circular on Tax Policies for Retail Import in Cross-Border E-Commerce which took effect on 8 April 2016.
 For details, please see the List of Cross-Border E-Commerce Retail Imports which took effect on 7 April 2016 and the List of Cross-Border E-Commerce Retail Imports (Second Batch) which took effect on 16 April 2016.
 Pilot cities for cross-border e-commerce are: Shanghai, Hangzhou, Ningbo, Zhengzhou, Chongqing, Guangzhou, Shenzhen, Tianjin, Fuzhou and Pingtan.
 These include (B2B and B2C) import and export cross-border platform enterprises.
 "Personal postal articles tax", also known as luggage and postal articles import tax, is a kind of import tax levied by Chinese Customs on the luggage of incoming passengers and personal postal articles. It includes import VAT and consumption tax.
 The "negative list" covers commodities that may not be imported or sold by way of cross-border e-commerce. Examples are radioactive products, dangerous chemicals, and waste and used articles.
 The list covers 1,142 commodities under the 8-digit HS code.
 The second batch covers 151 commodities under the 8-digit HS code.