China to Open up Its Import Tariff and Importation Policies for Consumer Products

PwC Tax Insights Retail and Consumer Products Industry

China to open up its import tariff and importation policies for consumer products

May 2015

In brief

China has been gradually opening up its import tariff and importation policies for commodities in recent years. A number of pilot policies have achieved remarkable results, bringing unprecedented opportunities to the retail and consumer industry. In this Article, we summarise the new policies and measures to provide our observations on the impacts and recommendations to industry players. The new policies and measures include:  Reduction of tariff rates and consumption tax reform  Establishment of more tax refund shops for overseas tourists  Promotion of cross-border e-commerce B2C and O2O businesses  Promulgation of four pilot free trade zones to advocate trial policies  Adoption of more user-friendly customs declaration and commodity examination procedures

In detail including taxable scope, products and 8.9% for applicable tax rates, etc. will be industrial products). From In the recent State Council released after the study by time to time, the GAC would executive meeting chaired by relevant authorities. announce short-term measures Premier Li Keqiang, Li urged to facilitate the growth of Concurrent to the gradual relevant authorities to foreign trade and encourage opening up of import tariff and formulate detailed policies industrial development. For importation policies by China in relating to importation and instance, temporary import recent years, a number of the exportation of consumption customs duty rates for four pilot policies have already products so as to enrich the categories of commodities were achieved remarkable results. choices for domestic consumers reduced at the beginning of These changes reaffirm the and further boost domestic 2015. They include drugs and demand. Specifically, the recent reform keynote of general consumer products Premier Li at the State Council. policies for reduced import closely related to daily living Our observations and analysis customs duty rate on a pilot (such as lipid-lowering drug, for industry players are as basis and expanded scope of macadamia nuts, single lens follows: commodities enjoying reduced reflex digital cameras, etc.); tariff will be promulgated by Import customs duty advanced technology and the end of June this year. equipment, key spare parts and China fulfilled its commitment The State will also improve basic raw materials; to lower customs duty in 2010. environmental protection current consumption tax policy According to the General to set in line with the national technology and equipment; and Administration of Customs energy-saving products. tax reform. The reform will (“GAC”), the duty rates for Most mainly focus on consumer Favoured Nations (“MFN”) goods, such as clothing and remain unchanged in 2015 with cosmetic products. The the average duty rate hovering detailed policies on the at 9.8% (15.1% for agricultural consumption tax reform,

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Consumption tax Tax refund for overseas visitors processes for imported goods purchased online in the pilot cities. Currently consumption tax is levied on Hainan Province has implemented Specifically, the actual purchase price a selective basis on luxury products VAT refund pilot programme since on electronic invoice can be used as and specific behavioural consumption, 2011. This programme allows dutiable value and the respective including various kinds of alcohol and overseas tourists (i.e. foreigners and customs duty can be computed by tobacco; cosmetics; golf equipment; compatriots from Hong Kong, Macau reference to “postal tax” rate. precious jewellery and jade jewellery; and Taiwan who stay in mainland Transaction with customs duty luxury watches; yachts; motorcycles China for not more than 183 payable of RMB50 or below can be and cars, etc. Other daily consecutive days) buying goods from exempted. consumption products such as designated VAT refund shops to apply clothing and shoes; food products and for VAT refund upon departure from Through the use of composite postal drinks; electronic products, etc., are designated departure port. Earlier in tax rate for online bonded imports, the not subject to consumption tax. the year, the Ministry of Finance import tax cost is greatly reduced for According to “Overall Plan for Further announced the roll-out of such the majority of high-demand goods Fiscal and Tax Reform” reviewed and programme to all parts of China and imported by mainland consumers. approved in the CPC Central expansion of the scope of commodities For example, postal tax rates are only Committee Political Bureau meeting eligible for VAT refund. Specifically, 10% for food products and drinks last year, one of the measures in the instead of having only 21 types of (including milk products), leather Plan to accelerate the pace of reform commodities eligible for VAT refund, clothing and accessories, and jewelry of the national finance and tax regime now all kinds of commodities (except and collectibles; 20% for ordinary is to gradually improve the those listed as prohibited or restricted watches, textiles and relevant finished consumption tax system, which from exports) can enjoy VAT refund. goods, and household appliances; 30% includes adjusting the taxable scope; In addition, the minimum threshold for high class watches; and 50% for optimising tax rate structure; for goods enjoying VAT refund is cosmetics, tobacco and alcohol improving tax collection process; and lowered from RMB800 to RMB500. respectively. These kind of new enhancing adjustment function of Currently, the VAT rate of goods import measures will increase the consumption tax. It is anticipated that purchased in China is generally 17% attraction of the above products to this consumption tax reform will (already included in retail price). consumers, and hence further substantially reduce the tax rate or Overseas tourists will be able to apply encourage cross-border e-commerce. even abolish consumption tax for for VAT refund at a rate of 11% for As a result, many cities in Mainland certain commodities having a close goods purchased in those specific China are applying to be a pilot city for bearing on people's livelihood. On the regions in which such programmes are the bonded importation model. other hand, consumption tax or implemented. The State Foreign importers can benefit from environmental tax would be imposed Administration of Taxation and GAC this new operational model in for high pollution and high energy will introduce details of the different ways, such as, a new channel consumption products. programme very soon. To plan ahead to directly reach the China market; for retail strategies for tourists, retail reduction of costs and risks pertaining However, the current import tariffs in market players should keep a close eye to establishing a company in China, China for certain commodities are still on the policy developments, including leasing retail stores, hiring sales staff relatively higher than those of adjacent list of locations qualifying for the VAT and storing inventory while at the countries. Taking the importation of refund program, the implementation same time optimising price cosmetics as an example, the import date and specific conditions for competitiveness. In addition, foreign tariffs in China include import registration as a VAT refund shop. importers can better manage their customs duty of 6.5%-15% (assuming brands and service quality so as to the MFN rates are applicable), import Development of cross-border e- combat fake and smuggled goods. consumption tax of 30% and import commerce However, foreign retail enterprises value-added tax (“VAT”) of 17%. In have to pay attention to the operating China has been providing great Singapore and Japan, the importation cost arising from the various handling support on the development of cross- is only subject to 7% import fees payable to online platform border e-commerce in recent years. consumption tax and 8% import sales providers and the logistics According to the Customs statistics, tax respectively; while there is no arrangements, etc. import tariff at all in the US. the trade volume (including imports Therefore, the recent proposal to and exports) for cross-border e- reduce import tariffs in China on commerce in pilot cities exceeded certain consumer products would help RMB3 billion last year and there to reduce spending on consumer presents a huge potential for further goods by Chinese travelling overseas, development. Since 2013, Shanghai, boost domestic consumption and Hangzhou, Ningbo, Zhengzhou, stabilise economic growth. Guangzhou, Chongqing and subsequently Shenzhen have been selected as the pilot cities to implement bonded importation for cross-border online shopping. Under the principle of “for personal use and at reasonable quantity”, mainland consumers can easily complete the customs clearance and tax settlement

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China enterprises’ brand proactive approach to manage, seek building and export and apply for the relevant competitiveness international trade facilitation measures in order to achieve a Meanwhile, China also encourages competitive advantage over their domestic enterprises to strengthen competitors. their brand building and export competitiveness. The implementation Pilot free trade zones (“FTZs”) of export tax policies for cross-border Last but not least, following the e-commerce last year facilitated the establishment of the Shanghai FTZ, VAT and consumption tax refund Guangdong, Fujian and Tianjin have application for domestic exporters also recently announced the engaged in e-commerce business. establishment of FTZs. Some of the Although this new refund application pilot policies promulgated in these measure has not yet been widely FTZs would definitely bring in new adopted by mainland enterprises, with opportunities; for example, policy for the improvement of the measure and liberalisation of trade in service among the accumulated implementation Guangdong, Hong Kong and Macao; experience, it is expected that such further relaxation in the equity ratio measure would help companies having for foreign companies investing in the manufacturing facilities in China to online data processing and transaction reduce their cost pressure, develop processing business (i.e. e-commerce O2O business, and enhance the business); establishment of bonded competitiveness for exports. trading platform in special customs Cross-border trade and supply supervision areas; and pilot run of chain management optimization parallel imports for automobiles, etc. In addition, a series of regulatory and Conclusion related reform measures have been Multinational corporations and retail published and implemented by GAC in operators should: recent years to promote China’s cross border trade and optimise companies’ 1. Follow closely on policy supply chain management. For developments in China and take instance, the new customs, inspection advantages of opportunities to and quarantine (“CIQ”) enterprise further expand their business in credit management system allows high China; and compliant ranking 2. Timely adjust their production, importers/exporters to reduce sales and supply chain customs clearance lead time and management strategies in China as minimise “hidden costs” in the supply- well as in the region. chain, as well as to enjoy various non- tariff trade facilitation programmes PwC’s Retail and Consumer Group tax offered under mutual recognition specialists will monitor the latest Authorized Economic Operators policy development and further share (AEO) scheme. Other key trade with you our insights and facilitation programmes include: recommendations. paperless declaration (e-clearance); pre-declaration/inspection; and regional customs clearance integration which forms an integrated management mechanism and operational model that covers and unifies the customs clearance processes, such as the Yangtze River Economic Integration, Guangdong regionalisation and Beijing-Tianjin- Hebei regionalisation. These new policies and trade facilitation programmes, together with the reduction in import taxes, would have significant impact to companies conducting international trade business. Notwithstanding the above, as some of the non-tariff trade facilitation measures described above require application to the relevant authorities, companies should take a

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Let’s talk

If you would like further advice or information in relation to the issues outlined above, please contact any of PwC’s Retail and Consumer tax specialists listed below:

Jenny Tsao Rebecca Wong Retail and Consumer Tax Leader Partner, China Tax and Business South China Advisory T: +852 2289 3617 T: +86 (755) 8261 8267 [email protected] [email protected]

Derek Lee Ingrid Qin Partner, Worldtrade Management Partner, China Tax and Business Services Advisory T: +852 2289 3329 T: +86 (20) 3819 2191 [email protected] [email protected]

The information contained in this publication is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Limited or any other entity within the PwC network. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC client service team or your other advisors. The materials contained in this publication were assembled in January 2015 and were based on the law enforceable and information available at that time.