China increases taxes on cross-border e-commerce retail imports

Tax Update

által:

On 24 March 2016, the China Ministry of Finance, together with the General Administration of Customs and the State Administration of Taxation, announced in a new circular, Cai Guan Shui [2016] No.18 (New Circular), that a raise of taxes on cross-border e-commerce retail imports would become effective from 8 April 2016. This announcement has been reported by some media outlets as "the action terminating the preferential tax treatments for crossborder e-commerce retail import" and "the end of happy tax holiday for cross-border ecommerce retail import". 

While most cross-border e-commerce service providers remain optimistic and positive about the market and tax environment, it is without question that this change will have a substantial impact on Chinese individuals purchasing from overseas retailers through e-commerce, and that some cross-border e-commerce service providers may suffer.

The background

Development of cross-border e-commerce has been phenomenal in China in the past few years. According to the Information Website of the China State Council DevelopmentResearch Center, the value of cross-border e-commerce transactions reached RMB 4,200 billion (or USD 650 billion) in 2014 and is continuously growing. As part of this vibrant cross-border e-commerce economy, millions of Chinese individuals are buying numerous items directly from overseas retailers through e-commerce service providers in China. This is generally referred to as Cross-border E-commerce Retail Import (CERI). 

There are various different CERI operation models depending on the locations of e-commerce service providers, the way the commodities are reported for customs clearance, and whether bonded warehouses are used. From a customs duty and tax point of view, all of the imported items should fall within one of the following two scenarios. 

  • If the item is identified as imported for general trade, it should be subject to customs duty, import VAT and consumption tax (if applicable) (the Standard Import Tax Treatment), or 
  • If the item is identified as a personal postal item, then it may enjoy a favourable composite rate (the Postal Composite Rate or PCR) instead of the Standard Import Tax Treatment, and may also enjoy an exemption if the composite tax amount is less than RMB 50. 

There has been a lot of public debate as to whether CERI commodities may enjoy the PCR (on the basis that the importation is initiated by an individuals' purchasing behaviour), or should be subject to the Standard Import Tax Treatment (given that the amount of importation can be huge and the e-commerce service providers may build up bonded inventory as if it is a general trade). In mid-2014, China customs issued Announcement No. 56, confirming that CERI items may enjoy PCR treatment, on the condition that the e-commerce service provider's platform was connected with the customs system, and they were able to report consistent transactions, payments and logistics information. This is considered a major incentive for CERI and has greatly boosted the increase of e-commerce service providers in the market. 

Increase of tax costs for CERI 

Before the New Circular, CERI enjoyed the following PCR designed for personal postal items, which were generally lower than the tax rates applicable to general trade. 

No.  Item  PCR (before 8 April 2016) 
Books, magazines, educational movies, furniture, computers, toys   10%
     
2 Textile and garments, video camera and other electronic home appliances, bicycles, watches and clocks  20% 
     
Golf and golf appliances, luxury watches  30% 
     
Cigarette, cosmetics and alcohol  50% 
     
Others  10% 
     

Exemption for low-value items: Exemption will be provided if the composite tax calculated based on the applicable PCR is less than RMB 50.

According to the New Circular and starting from 8 April 2016, CERI will be treated as general trade, and be subject to customs duty, import VAT and consumption tax (if applicable) based on the retail price but with a quota based exemption and reduction. 

Transaction value  Customs duty Import VAT Consumption tax
Transaction value < RMB 2,000 and accumulatively within the annual quota of RMB 20,000 for each individual Chinese buyer  0%  70% of the standard rate (ie about 11.9%)  70% of the applicable rate (eg 21% for cosmetics) 
       
Transaction value > RMB 2,000, or accumulatively over the annual quota of RMB 20,000 for each individual Chinese buyer  Payable at standard rate (eg 10% for cosmetics)  The standard rate 17%  The standard
rate (eg 30% for
cosmetics) 

Take cosmetics as an example and assume that the net retail price (inclusive of insurance and freight) a cosmetic is RMB 500, a comparison of the tax costs will be as follows:

  • Total tax cost before the New Circular will be [RMB 500 x PCR 50%] = RMB 250.0;
  • Total tax cost after the New Circular (with a transaction value lower than RMB 2,000 and within the annual quota of RMB 20,000) will be RMB 235.0 including:
    • Custom Duty = RMB 500 x 0% = RMB 0
    • Consumption Tax = RMB 500 x (1+0%) /(1-30%) x 21% = RMB 150.0
    • Import VAT = RMB 500 x (1+0%) /(1-30%) x 11.9% = RMB 85.0 

  • Total tax cost after the New Circular (when the individual buyer's accumulated purchase has exceeded the annual quota of RMB 20,000) will be RMB 419.6 including:
    • Custom Duty = RMB 500 x 10% = RMB 50
    • Consumption Tax = RMB 500 x (1+10%) /(1-30%) x 30 % = RMB 236
    • Import VAT = RMB 500 x (1+10%) /(1-30%) x 17% = RMB 133.6 

Base on the above comparison, there may not be increase of tax cost for CERI cosmetics, if a transaction is below RMB 2,000 and within the annual quota of RMB 20,000. In some cases, the tax cost may actually be lower because of the 0% customs duty rate, and the reduction in VAT and consumption tax. However, the increase could be very significant once the transaction value goes above RMB 2,000 or exceed the annual quota for individual buyers. If an e-commerce service provider is dealing with expensive or luxury items and wants to maintain or increase their sales, they will have to focus on the expansion of customer number instead of increasing total purchase from each individual customer. Individual customers on the other hand may find the retail prices of luxury items on cross-border e-commerce websites much less attractive when they reach the quota.

It is worth mentioning that the increase in tax costs is largely attributable to the consumption tax, which is applicable to cosmetics, alcohol, cigarettes, golfing equipment and some other particular items. For non-consumption tax items, such as books, computers, toys, textiles and garments, the tax increase may not be as dramatic as for cosmetics and other consumption tax items, even if when the transaction value is above RMB 2,000 or when the individual buyer's accumulated purchase has exceeded the annual quota. In other words, the increase in tax costs would not be universal for all CERI items. The New Circular will discourage individuals from purchasing cosmetics, golf equipment and luxury items that are subject to consumption tax, especially purchase of such items over the quota, but may not necessarily supress purchasing of non-consumption tax items.

Parallel adjustment of PCR 

It should be noted that in parallel with the New Circular, a notice was issued by the State Council Custom Duty Commission to adjust the PCR. As shown in the table below, the PCR will be raised to either 15%, 30% and 60% starting from 8 April 2016. 

No.  Item PCR (after 8 April 2016)
Books, magazines, educational movies, computers, digital camera and other digital product, food and beverage, gold and silver, furniture, toys, gaming products, holiday or other entertaining products  15% 
     
Sports product (excluding the golf and golf appliances), fishing product, textile and garments, video camera and other electronic home appliances, bicycles  30% 
     
Cigarette, alcohol, precious jewellery and jade, golf and golf appliances, luxury watches, cosmetics  60% 
     
Others  30% 

This raise in the PCR, will to some extent, reduce the tax cost difference between personal postal items and CERI items. However, as the tax cost of personal postal items would still be significantly lower than that for CERI items, a lot of CERI items may be disguised as personal postal items for importation. In this regard, it would not be surprising that China customs authority also release new rules in the near future for identification of real personal postal items.