Cross-border e-commerce has become increasingly popular amongst Western brands and retailers looking to enter the China market for the first time. China’s large market of 500 million online shoppers presents an irresistible opportunity, with an estimated 25% of shoppers buying through cross-border online. And the country’s sustained economic growth has powered an upgrade in consumption levels that global businesses cannot afford to ignore.
However, there are many risks and uncertainties involved, and entering the China market has required a significant amount of time and investment historically. The development of the cross-border e-commerce model has presented a light-weight approach to a China market entry for the first time, and brands and retailers can now expand to China without having to set up local China entities or go through complex registration processes.
But what exactly does the cross-border e-commerce model entail? What are the challenges associated? How can Western brands and retailers leverage this model to maximize sales? Don Zhao, co-founder of Azoya and a noted China cross-border e-commerce expert, shares some of the most commonly asked questions and his thoughts on this innovative new model, which he believes will revolutionize the retail & e-commerce industry.
1. What is cross-border e-commerce?
Cross-border e-commerce, in a broad sense, entails the act of selling products online across national borders, to customers in a different country or territory.
In China it is commonly used to sell quality overseas products directly to Chinese consumers through online stores; the products are shipped across borders by international courier companies. The products are typically stored in an overseas warehouse or in one of China’s free trade zones, and are only shipped to Chinese consumers after they have already clicked on a purchase order.
2. What are common approaches to launch products via cross-border e-commerce in China?
There are generally three legal avenues for products to enter China via cross-border e-commerce; generally the best option depends on the location of the warehouse where the goods are stored.
For brands and retailers with warehouses located in their home countries, the products can be delivered by national postal companies or international couriers.
Postal service companies can deliver parcels under the UPU (Universal Postal Union) agreement, where they typically handle first-mile pick-up and cross-border transportation, while China Post typically takes care of local delivery in mainland China.
While not all parcels are inspected at customs, if and when they are, customers have to pay a postal tax at the nearest post office before retrieving their parcels. What is unique about postal delivery is that the customs clearance process does not require the customer’s ID card number. Because of this, the postal method is commonly used by C2C personal shopping agents, or daigou agents.
International courier companies generally clear products through the Business Commercial clearance model, which is significantly faster than the postal clearance model. However, this model has more stringent requirements; customs clearance requires that each order be accompanied by the payment serial number, order serial number and customer’s ID card number. Last mile delivery in China is carried out by a designated express delivery service provider.
For international brands and retailers with inventory stocked in Chinese free trade zones, they can send their goods to China through the bonded import model. Upon receiving online orders and payments from customers, brands & retailers can dispatch goods from bonded warehouses in Chinese free trade zones and pay import taxes & duties to customs at that point in time. Last mile delivery within China is also handled by local express delivery providers.
3. What are the specified tax rates for each model?
a. UPU Postal Delivery Model
For the postal delivery model, customers typically pay a postal tax of 15%, 30%, or 60%, depending on the type of product they buy. Below is a table that provides more details. Notice that if the applicable tax comes out to be under 50 RMB, customers are exempt from having to pay it.
|Tax rate: 15%
Metal products, food and beverage, telephones and other small electronic devices, furniture, recording devices and digital storage, earphones, computers and computer parts, books, magazines, prints, educational materials, games, stationery, toys
|Tax rate: 30%
Footwear, non-luxury watches, clocks & related parts, diamond jewelry, personal care, skin care, hair care, deodorant, cleansing products, textiles, clothes, textile accessories, home textiles, leather-made clothes & accessories, bags, suitcases, luggage, electrical appliances & parts, cameras (non-digital), camera accessories, art collections, sports products & related equipment, bicycles & bicycle parts
|Tax rate: 60%
Alcohol and alcoholic drinks, cigarettes, luxury watches, luxury jewelry (pearls, non-diamond gems), perfume, toilet water, cosmetics (lips, eyes, face, foundation, nails, powder, injected cosmetics), golf and related accessories
b. Bonded Import Model & Business Commercial Model
The bonded import model (aka B2B2C model, as the products are first stored in bonded zones before being shipped to customers) and business commercial import model (aka B2C import model) share the same tax policies as they are both regarded by China customs as cross-border e-commerce import channels. Each parcel that enters China through these two routes has to be taxed before it can be cleared by customs.
|Tax rate: 11.2%
Baby formula, mom & baby products, nutritional supplements, food and beverage, accessories, watches, perfume (non-luxury), cosmetics (non-luxury), personal care products (non-luxury), home appliances, and most other categories
|Tax rate: 25.5%
Cosmetics (luxury) for lips, eyes, and foundation make up, perfume (luxury), skin care (luxury)
*luxury products refer to products with a customs value greater than 10 RMB/ml(g)
Most products face lower import duties when imported via cross-border B2C e-commerce, compared with those of general trade imports. According to new tax rates that came into effect on 1 May 2018, products that enter the country through the general trade import model face a 16% duty.
For high-value products such as luxury cosmetics goods, the general trade model makes more sense as such goods typically face a 17% general trade duty, compared to 25.5% under the cross-border e-commerce model.
4. Who will get the VAT refund?
The VAT refund refers to the VAT exemption that the brand/retailer is entitled to in its home country. For example, when a retailer in the UK sells a £99 product to a China-based customer and delivers the parcel to China through an international courier, the retailer can apply for a VAT exemption of £16.67 (20% VAT rate).
To apply for the VAT exemption, brands and retailers must provide evidence that the products are being sold to an end customer in another country; typically, such evidence is provided to the respective authorities by the courier companies.
On the customer side, Chinese customers do not collect tax refunds for cross-border purchases, though they do benefit from the reduced prices.
5. What are the general regulations and restrictions for cross-border import?
For the postal import model, each parcel can maximum contain 6 items, or have a combined value of over 2000 RMB. However, if the package contains only one item, there is no restriction on the value of the item (brands and retailers should, however, consider whether postal services can guarantee the delivery of high-value products). Keep in mind that products cannot be on the list of banned items published by the respective national postal service or China customs.
Under the cross-border model, retailers are not required to find a China-based importer with a registration filing or import permit from China customs. However, product details and the recipient’s information are still required for customs declaration purposes.
6. Do I need to invest a significant amount of capital to sell products to China via cross-border e-commerce?
Entering the China market via cross-border e-commerce can actually save brands and retailers a significant amount of money and preserve cash flow.
Generally, decision makers who choose to enter the market via cross-border e-commerce need to invest in these specific areas:
· Cloud storage and IT capabilities
· WMS/OMS/ERP systems
· Warehousing and inventory
· Cross-border shipping services
· Marketing expenses
· China payment integration
· Daily operations
Typically, if a business wants to enter China through cross-border e-commerce with a proper, localized approach, the typical cost structure would be as follows:
a. Logistics: 10-15%, depending on the supply chain strategy used
b. Customs taxation: For the personal parcel approach, taxes can range from 15 to 60%. For the cross-border e-commerce approach, they can range from 7 to 25.5%, depending on the item categories.
c. Operational costs: Dependent on sales channels and manpower required.
d. Marketing budget: Typically ranges from 5% to 30%, depending on the marketing strategy used and the product’s margins.
Get in touch with Don on LinkedIn to learn more about Azoya and China cross-border e-commerce.