China Changes Tax Rules For Overseas Online Purchases

By Casey Hall

SHANGHAI — China on Friday implemented a new taxation system for products purchased from online e-tailers overseas that are delivered to customers on the Mainland.

The move, which treats these incoming packages essentially more like commercially imported products subject to import, customs and VAT charges — rather than a separate category subject to a single rate of “package tax” — could potentially dent the fast-growing cross-border ecommerce business in China. The Chinese Ministry of Commerce estimates this crossborder business will reach 6.5 trillion yuan, or $987 million at current exchange, this year. The ministry’s research said crossborder e-commerce could account for as much as 20 percent of China’s foreign trade in the coming years.

“Alibaba, JD.com and Amazon are all staking their futures on cross-border commerce,” Tompkins International Consulting principal Michael Zakkour said.

At first glance, potentially charging more for a number of categories that are subject to higher levels of import, customs and VAT taxes seems like a way of shackling the fledgling cross-border e-commerce market. But Patrice Nordey, the Shanghai-based chief executive officer of digital inception agency Velvet, said that is not the case. Instead, the new tax regime is an effort by the Chinese government to close a loophole through which so-called “daigou” agents and parallel importers had been able to operate for years, essentially paying very little tax on the goods they buy overseas and ship back to Chinese consumers, who purchase them on consumer-to-consumer platforms such as Taobao, or on WeChat shops, he said.

Daigou importers would be disproportionately impacted because they are often dealing in luxury goods that are purchased overseas, where ticket prices are significantly less than in China, where high rates of VAT and other tariffs are applied to luxury goods in particular. If daigou agents, or their customers, have to pay these taxes anyway, it would act as a major disincentive for consumers in China to use this gray-market back door.

“We have seen, until now, there is a blurred line between B2B imports, B2C imports and C2C imports, which is what we call the daigou agents, or parallel importers,” Nordey said. “This is a way of drawing a line. This new rate on all categories, we think this will continue to be tested and adjusted. It’s clear to me the Chinese government is encouraging the cross-border [e-commerce], but they want it to be more regulated, and going through professional channels.”

According to both Nordey and Zakkour, the new taxation system will do little to dampen desire for global products from an insatiable Chinese consumer base, across a vast number of categories.

Many of the products consumers have rushed to buy from cross-border e-commerce platforms have come from brands that don’t sell, or are hard to access, in the Mainland market, or are food- or health-related products that are perceived as safer because they haven’t been implicated in the food and safety scandals that have plagued Chinese-made products.

Cross-border e-commerce has been facilitated in China by the opening of free trade zones — first in Shanghai, then in other parts of the country. These make it possible for e-commerce platforms to bring in products from overseas without a lot of the red tape that made importation a headache in days gone by.

“The changes will have a minimal net impact on e-commerce and cross-border sales. Many product categories such as cosmetics and body care will benefit [as they are subject to lower rates of import tax and VAT anyway]. Others will see an increase in taxes, such as certain food and beverage products, but overall it is not going to dampen growth of cross-border commerce,” Zakkour said.

“The desire for foreign products in China is continuing to grow. Chinese consumers are willing to pay a premium for foreign products, for reasons of trust, authenticity and safety. What will amount to a small increase in tax on these products will not dampen the desire,” he said.

China’s major e-commerce platforms are taking a wait-and-see approach to the new system, although neither Alibaba nor JD.com seem particularly concerned with the potential impact the new tax will have on their long-term cross-border prospects.

“Within the new policy, we believe that Chinese consumers will continue to show strong demand for a wide selection of high-quality overseas products and merchants will continue to tap into the growing opportunity,” an Alibaba spokesman said.

“Demand for JD.com’s cross-border e-commerce offer has been very strong, as consumers seek greater access to authentic imported products, and we do not anticipate the new regulations to impact that long-term trend,” a JD.com spokesman said.

This attitude is the smartest approach, according to Nordey, who believes the government will continue to observe and tinker with its tax policy in regard to crossborder e-commerce purchases from overseas.

“They are testing, learning and continuing to change, and they have flexibility to change regulations,” he said. “For now, I think the effect for companies is they should monitor closely what’s happening, but they don’t need to worry.”

Source: WWD