• Import Taxes & VAT in China: A Guide for Cross Border E-Commerce

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    The Chinese government has finally confirmed what we’ve long waited for: there won’t be an introduction of the so called positive lists. Or any other constraints to cross border E-Commerce for that matter.

    Instead, China will continue to favor the cross border sales model by reducing taxes, streamline clearance procedures, and expand cross border operations to a number of other Chinese cities.

    Along with this, we’ve also seen a reduction in import taxes, which should be of interest of course.

    In this article, I explain how China’s new tax policies affect cross border sellers and how much you can expect to pay if falling into this category.

    Definition of cross border E-Commerce

    First, let’s have a look at what cross border E-Commerce means practically and in terms of shipping. It’s important for you to understand this before we dig into numbers.

    In short words, you list your products on an E-Commerce platform, like Tmall Global or JD Worldwide, or a standalone website. Chinese consumers order products in small volumes, often one by one.

    The products are either shipped from overseas or stored in a bonded warehouse in China.

    Simple as that.

    Yet, a core part of the cross border model is that the platforms are connected with the Chinese customs. This is needed for orders to be registered and tracked digitally.

    Before the package can be sent, the Chinese customs need information about the following:

    • The shipment
    • The payment
    • The order

    A question many people ask is also whether you need to register with the CIQ when shipping cross border.

    Well, it depends.

    With the B2C direct shipping model and the bonded warehouse model, your goods need CIQ clearance. The personal parcel route (e.g. China Post, Royal Mail) and EMS do not need CIQ clearance.

    Problems prior to the Chinese E-Commerce era

    Looking back just some years ago, the Chinese E-Commerce market was not as mature and buyers often turned to grey sales channels, like Daigou, often buying products smuggled into China.

    The Chinese government could hardly track all the goods that entered China at the same time as it lost much tax revenue.

    The smuggling and imports through grey channels still exist, you can read more about it in this article.

    Tax rates for different shipping models and product types

    You will be taxed differently depending on how you ship your products and what kind of products you sell. First, let’s have a look at what shipping options you have.

    There are three different shipping models that are used by cross border sellers, namely:

    • Direct shipping – The personal parcel route and EMS
    • The bonded warehouse model
    • Direct shipping B2C (Business Commercial clearance)

    1. Direct shipping – Personal parcels and EMS

    With the personal parcel (e.g. when using CN Post, DHL) and the EMS model, you ship your products directly from overseas.

    A clear distinction and benefit with the direct shipping model is that packages don’t necessarily need to be checked or taxed.

    That will only happen in case the customs do a random check and spot the package. A VAT will then be passed on to the end customer at the local post office, before the package can be collected.

    Some of the benefits of the direct shipping model are:

    • Packages are just randomly checked
    • Taxes only apply occasionally
    • No stock in China is needed
    • Tax exemption if value < RMB 50
    • No CIQ clearance needed

    Clearly, there are some disadvantages by shipping via the personal parcel route. Shipping packages one by one from overseas results in higher costs and longer shipping lead times, that normally takes between 7 – 30 days.

    Still, some Chinese buyers are happy with direct shipping as it reduces the risk of receiving fake products.

    Yet, as short shipping lead times play a vital role in Chinese E-Commerce, you should aim for a better long term solution.

    Tax rates for the personal parcel and EMS model

    Products shipped with direct shipping, like China Post or EMS, are taxed in the same way. As of January 1st, 2019, you’ll enjoy lower tax rates set to 15%, 25%, and 50%, depending on the products you plan to sell.

    Let’s have a look at how the tax rates apply for different product types.

    Tax rate 15%

    Metal products, food and beverage, telephones and other small electronic devices, furnitures, recording devices and digital storage, ear phones, computers and parts, books, magazines, prints, education materials, games, stationery toys.

    Tax rate 25%

    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 50%

    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.

    2. The bonded warehouse model

    An increasingly popular option is to ship products in bulks from overseas to bonded warehouses in China.

    The basic requirement here is that the warehouse needs to be located in a Free Trade Zone. Being able to store and clear goods without the necessity of registering or filing with Chinese authorities is a clear advantage.

    Products can move freely in the free trade zones and be transported back overseas without the necessity to pay any taxes. Duties are only paid before customs clearance.

    The tax rates for the bonded model are comparably low to traditional imports as you can enjoy a 30% ‘discount’ of the traditional import rates.

    Even if the bonded model reduces shipping lead times significantly, down to 2-4 days, it’s more suitable in case you have a narrow product segment and understand your sales volume in China.

    Not to forget, the bonded model requires CIQ clearance. Using the direct shipping model at a start is a preferred choice to get a grip of the sales volumes.

    Tax rates for the bonded warehouse model

    The tax rate is normally set to 9.1% as of 2019 and for products like: 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.

    How to calculate the tax:

    VAT x 70% = 13% x 70% = 9.1%

    Occasionally, exporters need to pay an extra consumption tax of 10-20% for cosmetics (luxury) for lips, eyes, and foundation makeup, perfume (luxury), skin care (luxury).

    The consumption tax is applied when the value exceeds RMB 10 per gram or milliliter.

    How to calculate the tax:

    (VAT + Consumption tax) / (1 – Consumption tax) x 0.7 = (13% + 15%) / (1 – 15%) x 70% = 23.1%

    3. Direct shipping – B2C (Business Commercial model)

    Many shipping companies use the Business Commercial model which was introduced by the Chinese government a couple of years back. Interestingly, this shipping model is solely dedicated for direct shipping with cross border E-Commerce.

    The benefits with this model is that you can ship from overseas, but with a significantly faster clearance process, and enjoy lower import taxes (same as the bonded warehouse model).

    Using the direct shipping B2C model still requires that you provide more information about your customers to the Chinese customs, at the same time as CIQ clearance is required.

    Tax rates for the direct shipping B2C model

    The tax rates are the same as for the bonded warehouse model. Hence, you need to pay a tax of 11.2% for products such as: 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.

    A consumption tax of 15% is added for high-end products like cosmetics (luxury) for lips, eyes, and foundation makeup, perfume (luxury), skin care (luxury).

    As mentioned, a 30% discount applies to the bonded warehouse model and for direct shipping B2C.

    Changes in limitations to values of shipments in cross border E-Commerce

    Previously, Chinese consumers could buy products with a maximum value of RMB 2,000 at a time, the yearly limit was set to RMB 20,000. However, with new regulations in place, the limits have increased to RMB 5,000 per transaction and RMB 26,000 per year.

    Sellers and buyers of high-end products, like watches, will benefit the most of this change.

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