E-commerce business models Catherine Tsang Partner PRC Tax and Business Advisory 27 May 2015
Traditional Retail Business Major Features Hong Kong PRC Customs duty+ Consumptiontax+ Import VAT (note) Output VAT Overseas suppliers (HK) Goods Trading Co (PRC) Goods End Customers Goods are supplied byvendors inoverseas, eg. a trading companybased inhong Kong Customs, import VAT and consumptiontax reporting whenthe goods are delivered to China Inspectionand quarantine examinationfor imported goods (whennecessary) Hong Kong profits taxontrading income at 16.5% InChina, the sales will be subject to VAT at 17%, and the Trading Co will be subject to corporate income taxat 25% Transfer pricing policyfor related party transaction Note : cosmetics products would be subject to consumption tax at 30% 2
Latest Development on Import Duty on Consumer Goods Consumptiontaxfor cosmetics products:30% Import VAT for cosmetics products :17% Custom dutyfor cosmetics products :ranging from 5%(eg.skincare)to 18% (eg.perfume/make-up) Latest news oncut tarifs onimported consumer goods (where custom dutyonskincare product will be reduced from 5%to 2%from 1 June)..The State Council announced that it would cut taxes on a number of imported consumer goods to boost domestic and stabalise economic growth as well as to ensure employment.. The State Council announced after a meeting on 28 April 2015 that it would begin a trial reduction of tariffs on certain types of popular goods by June. It also announced an expansion of the categories of imports benefiting from tax reductions. It also called for adjusting the current consumption tax policy that importers also face on bringing in everyday items, such as cosmetics, clothing and accessories The State Council also suggested that allowing cheaper imports would boost the domestic consumer goods industry toward the medium and high-end level, Xinhua reported, by forcing domestic manufacturers to respond to increased foreign competition. 3
E-commerce Structure for China Market - Domestic Platform Major Features Hong Kong PRC ICPrecord filing $$(credit card) Overseas Suppliers (HK) Goods sold (B2B) Trading Co (withe-commerce platform) Goods sold (B2C) Order goods Goods are supplied byvendors inoverseas, eg.a trading companybased inhong Kong Customs, import VAT and consumptiontax reporting whenthe goods are delivered to China Inspectionand quarantine examinationfor imported goods (whennecessary) Hong Kong profits taxontrading income at 16.5% InChina, the sales will be subject to VAT at 17%, and the Trading Co will be subject to corporate income taxat 25% Perform ICP record filing withlocal branchof CommissionAdministration End Customers The server ofonline e-trading platform will be maintained by3rd partyoperator Transfer pricing policyfor related party transaction 4
E-commerce Structure for China Market - Cross-border Platform Major Features Hong Kong PRC $$paidvia Alipay, Tenpay, Unionpay Trading Co I/EAgent E-commerce Customs Clearance System X End Customers JD.com Amazon.com Tmall.com... etc (Note) Goods sold (B2C) Order via internet Postal Tax Note : Self-registered.com is under system validation testing stage No presence inchina for cross-border e- trading business activities Engage a designated I/Eagent to perform importationcustoms clearance via the crossborder e-commerce clearance system and local delivery(whennecessary) Qualityinspectionand quarantine to be arranged bydesignated inspectionand examinationservices provider (or mutual recognitioninthe future) Customers order goods via JD.com, Tmall.com, Amazon.com etc(or selfregistered.com inthe future) Postal taxunder B2Cvs customs duty+ import VAT under B2Barrangement (ie. general trading importation) Postal taxrefund policywill be introduced for goods returned from end-customers 5
Cross border E-trading (B2C) - Postal Tax Shanghai, Hangzhou, Ningbo, Zhengzhou, Guangzhou, Chongqing and Shenzhenare designed as the pilot cities for cross-border e-commerce arrangement Imported items should fall into the Catalogue ofpersonal Use Items issued bycustoms Bureau Imported items are for personal use onlywitha reasonable quantityfor eachtransaction Retail price showninthe web applied incalculating postal tax Postal taxrate ranges from 5%to 50% Postal will be exempted ifthe postal taxamount is less thanrmb50 6
Samples of Postal Tax Rate Product category Items Rate BabyProducts Milkpowder, Babyfoods, etc. 10% Food, Nutrition Food &beverage, Basicnutrition, etc. 10% ElectronicProducts Camera, PC, Mobile, Sound systems, etc. 10% Leather clothes &Accessories Leather jacket, Leather belt, etc. 10% Textile, garment &accessories Towel, clothes, tie, socks, etc. 20% Clock, watchand their accessories Clock, commonwatch, etc. 20% Luxurywatch(over RMB10,000) 30% Cosmetics Cream, Lotion, Essence, Facial masketc. 50% Alcohol &Tobacco White wine, Red wine, Cigarettes 50% 7
Tax Costs Illustrations Assu m ptions $ Import Value a 1 00 Mark-up b 80 Retail Price c 1 80 Customs Duty d 1 0% ConsumptionTax e 30% Import VAT/ VAT f 1 7% Postal Tax g 50% Hong Kong Profits Tax h 1 6.5% China CIT i 25% Total:$87.74 Traditional Cross-border Retail Model E-commerce $ $ Customs Duty (a)x(d) 10.00 - ConsumptionTax (a)+cd)/(1- e)x(e) 47.14 - Import VAT (a)+cd +CT)x(f) 26.71 - Output VAT (c)x(f)- Import VAT 3.89 - Postal Tax (c)x(g) - 90.00 Hong Kong Profits Tax (b)x(h) - 13.20 China CIT (b)x(i) 20.00 - Profits 60.00 66.80 8
Top 10 Online Platforms Rank Online Retail Player Category Sales (in RMB million) 1 Tmall 天 貓 Online superstore 220,000* 2 JD.com 京 東 商 城 Online superstore 110,000* 3 Xiaomi 小 米 Mobile phone 31,600 4 Suning 蘇 寧 Online superstore 21,890 5 Amazon China 亞 馬 遜 Online superstore 14,600* 6 51Buy 易 迅 網 Online superstore 12,000* 7 Yihaodian 1 號 店 Online superstore 11,540* 8 Vipshop 唯 品 會 Brands discount 10,450* 9 QQ Shop QQ 網 購 Online superstore 8,850* 10 Vancl 凡 客 Apparel 8,500* *estimated Source:CCFA Top100 retail chain stores, May2014 Note : is not responsible for any possible errors, omissions or misrepresentation of the information extracted from external sources. 9
Example 10
Example 产 地 直 销 - 自 贸 专 区 11
Example 12
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