China Bonded Warehousing and Cross-border eCommerce Tax Reform

TMO Group
Chinese logistics

In the past, an underdeveloped and inefficient logistics infrastructure brought great challenges to any foreign merchant wishing to sell in China. However, more recently the explosive growth of eCommerce and the government’s series of five year plans have resulted in huge advances in Chinese infrastructure. As of now, China has a modern logistic infrastructure (see image) including 230 airports and an extensive high-speed rail network.

 

China Logistic Infrastructure

 

China Logistics Infrastructure

 

Hence, foreign merchants must realise that Chinese consumers have grown accustomed to and expect reliable and quick delivery. Particularly in the east of the country, where many online consumers are concentrated in the major cities, products are more and more likely to get delivered within 24 hours.

Getting your goods from A to B in China is no longer very difficult. It is, however, quite challenging to find the most optimal logistics solution to serve your Chinese consumers. Therefore, this fifth article in our series “2018 China eCommerce Insights 2018” will aim to develop your understanding of import models and the benefits which bonded warehousing may bring for merchants engaging in cross-border eCommerce.

Cross-border eCommerce Bonded Warehousing

As the eCommerce ecosystem in China is continuously changing, so are the logistic solutions that come with it. The main complexity for logistic solutions are import customs clearance and regulations. Once again, it is not difficult getting your product from A to B, but due to the required import licenses product registrations, and changing regulations it is not that easy and straightforward.

Cross-border eCommerce started mainly via sales of Chinese individuals living abroad, and offering foreign products on Taobao. In response to the outburst of this semi-legal cross-border shipments from overseas individuals, the Chinese government assigned 6 cross-border eCommerce comprehensive pilot cities in 2012. These comprehensive pilot zones are designated areas, generally near large trading ports, which provide a favourable business environment and infrastructure for cross-border eCommerce. The main feature of these pilot zones are the so-called bonded warehouses.

In total, from 2016 onwards China counted 12 cross-border eCommerce pilot zones as you can observe from the figure down below.

China Bonded Warehousing

Then, in 2018 there were 22 new zones proposed as follows: Beijing, Hohhot, Shenyang, Changchun, Harbin, Nanjing, Nanchang, Wuhan, Changsha, Nanning, Haikou, Guiyang, Kunming, Xi’an, Lanzhou, Xiamen, Tangshan, Wuxi, Weihai, Zhuhai, Dongguan and Yiwu.

Import Models

Currently there are two main import models for cross-border eCommerce, namely: the bonded imports model and the direct purchase imports model. Where the bonded imports model may be further divided into the bonded warehouse model and the direct mailing model. Before we can explain the recent cross-border eCommerce tax reforms it is crucial to create awareness into bonded warehousing and the differing import models.

A bonded warehouse is a building or secured area in a special customs supervision area in China in which dutiable goods are stored before payment of duties. This usually ensures products arrive more quickly.

Under the bonded warehouse model products are imported in bulk into approved cross-border eCommerce warehouse zones in China. After which, the products clear customs once Chinese consumers place an order on a registered cross-border eCommerce site/platform. Products which are listed on the Positive Lists may be imported and the benefit is that faster product registration and easier customs clearance will apply. Additionally, foreign merchants can postpone import duty and VAT charges till a more convenient time – at time of actual sale. The image below presents a graphical overview of the processes in the bonded warehouse model.

Bonded Warehouse Model

 

On the other hand, under the direct mailing model, Chinese consumers will first place an order on a registered cross-border eCommerce website/platform. After which, these platforms will submit the records of the order, shipment, and payment to the custom. After VAT and customs duties have been paid the goods will be released from an overseas warehouse via direct mailing, where they will pass through customs more efficiently before the last-mile delivery (as graphically represented by the image below).

Direct Mailing Model

 

The graphical illustration above also represents the direct purchase imports model, which is applicable to products that are not on the positive lists and must also be shipped directly from overseas merchants via the postal and courier system. One difference however is the speed as products sent through direct purchase imports might be subject to more difficult product registration and customs clearance.

Cross-border eCommerce Tax Reforms

Cross-border eCommerce was recognised as a special import channel, which was created by establishing several pilot zones by the General Administration of Customs in 2014. However, in cooperation with the Ministry of Finance the policy was revised on April 8, 2016.

Prior to the policy revision, purchases through cross-border eCommerce for ‘personal use’ were subject to personal parcel tax. The parcel tax was exempted if if the tax payable amount was below 50 RMB.

However, on March 24, 2016, the “Tax Policy for Cross-Border E-Commerce Retail Imports” was issued. After which, consumers who purchase goods through cross-border eCommerce, of which the electronic information can be accesses by customs, must pay import taxes including tariffs, VAT, and consumption tax.

Currently, the aforementioned products enjoy a reduced VAT and consumption tax rate, which is charged at 70% of the taxable amount under general trade. Furthermore, although tax exemptions are no longer available under the legislation, single transactions under 5.000 RMB and yearly transactions under 26.000 RMB enjoy a temporary 0% tariff.

On the other hand, if customs is unable to access the electronic information of goods imported through cross-border eCommerce, the goods will be subject to new parcel tax rates. The parcel rates were changed to 15%, 30%, and 60% after April, 2016, with exemptions still available for payable tax amount below 50 RMB.

Due to a new round of policy extensions announced by the State Council Executive Meeting on September 20, 2017, the temporary reduced VAT and consumption rate as well as the 0% tariff will be in effect.

Positive Lists

In combination with the tax policy reform the Chinese authorities published two versions of the “Positive List”, replacing the previous “Negative List”, which limits the scope of goods that can be sold through cross-border eCommerce. In accordance with the positive lists only goods with HS codes can be imported and sold via CBEC, whereas all other goods must be imported under the general trade model.

These lists contain a total of 1.293 product categories which can be imported into one of 15 approved, and aforementioned, bonded warehouse zones across China or can alternatively be shipped from an overseas distribution centre linked to Chinese customs without applying for an import license or an import certificate. Check whether your product is on the Positive List by clicking here.

Would you like to know more about the impact of the new cross-border eCommerce tax reforms for your business? Or would you like to know what eCommerce strategy would fit you best taking into account these reforms, then please check our services for strategy development.

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