A Glimpse of FTP – Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets Establishing an advanced and simplified low- As part of the overall FTP development plan, system is essential to the construction of Hainan aims to build an international tourism Hainan Free Trade Ports (FTPs), which is the consumption centre that embraces key driving force and foundation for attracting independent fiscal and taxation systems as talents and enterprises, as well as promoting well as fosters a free, convenient atmosphere the development of free trade. Compared with for investment and trade. Duty-free Singapore, Dubai and other international consumption, as an important channel to FTPs, Mainland has a more complicated attract overseas consumption and upgrade taxation system with more tax categories. domestic consumption in the post-pandemic Therefore, the issuance of FTP tax policies era, is undoubtedly the focus under the being in line with international standards would arrangement of ‘Dual Circulation’. Since the underpin Hainan’s duty-free reform that issuance of the pilot policies in 2011, Hainan underlines the importance of ‘blazing a trail, has been relaxing its duty-free shopping making audacious attempts and embracing policies. In 2020, total sales of Hainan changes’. duty-free shops (including tax-included sales) were RMB 32.7 billion, increased by 127% YOY. The duty-free economy has become a new driving force behind Hainan's consumption growth.

This article will provide a snapshot of the duty free economies and future market trends in Hainan, together with a high level comparison to duty-free business in other popular cities such as & Singapore.

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 1 There are four duty-free models in Hainan province, among which, the offshore duty-free model is currently the major channel for duty-free shopping

Duty-free models Duty-free policies Key operators

Hainan Free Trade Port (FTP)

45 specified categories of products are exempted from Import Customs Duties China Duty Free Group Co., Ltd. Airport duty-free (CD), VAT and Consumption Tax (CT); (CDFG) subject to license management

Products in the positive list (pending) Duty-free shopping for consumed by Hainan residents are NA local residents exempt from import CD,VAT and CT

Large duty-free shopping centres such as CDFG, Hainan Duty-free Offshore duty-free 45 specified categories of product are Co., Ltd. (Hainan DF) controlled by (For visitors leaving Hainan island but exempt from import CD, VAT and CT; CDFG, Shenzhen State-owned Duty not China) subject to license management Free Commodity (Group), Co., Ltd. (Shenzhen DF), Hainan Development Holdings Co., Ltd. (HDH), etc.

11%/8% VAT refund (excluding Designated departure tax refund restricted products 1) for foreigners shopping malls: Capital Outlets, and Hong Kong, Macao and Taiwan Departure tax refund Grand Shopping Centre, residents who live in mainland China Hainan Shengsheng International for not more than 183 consecutive Shopping Centre, etc. days

Hong Kong (duty-free across the entire region)

Airport duty-free No tariff, VAT and CT Shilla, CDFG, etc.

Large duty-free shopping centres: No tariff, VAT and CT on general Harbour City, etc. Duty-free shopping for local import (excluding tobacco, spirits, Duty-free shops: fuel, etc.) no license restrictions DFS, etc. Small duty-free shopping stores: Sasa, etc.

Singapore (traditional duty-free model)

Airport duty-free No tariff, VAT and CT DFS and Shilla

Refund of 7% Goods and Services City tax refund Tax (GST) (excluding tobacco and Mainly DFS alcohol, etc.) for foreigners

1 Excluding items prohibited or restricted from leaving the country, VAT-exempted items, and other items specified by the Ministry of Finance, the General Administration of Customs, and the State Taxation Administration.

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 2 Compared with famous international FTPs, The degree of openness for duty-free duty-free shopping in Hainan has less consumptions after 2025 is yet to be coverage and more restrictions clarified

There are mainly four duty-free models in According to the Master Plan of Hainan FTP, Hainan, including the traditional ‘airport after the independent operation of customs duty-free’, ‘duty-free shopping for local came into effect throughout the entire Hainan residents’ similar to Hong Kong, the unique island, goods (subject to the negative list) can ‘offshore duty-free’ in large shopping malls, be freely imported/exported and exempted and ‘departure tax refund’ similar to Singapore. from import duties; VAT, CT while other However, the restrictions on duty-free products turnover will be consolidated into a new under the four models still far exceed those of tax, i.e. sales tax. That is to say, the sales tax Hong Kong and Singapore. Hainan should will still exist and it is not clear whether Hainan benchmark against famous international FTPs, will adopt the same duty-free model as Hong further relax restrictions on consumers and Kong, i.e. no tariff, VAT and CT on general product types, and convert the current positive imports (excluding tobacco, spirits, fuel, etc.) list management into negative list for purchases in Hong Kong (regardless management, i.e. all products that are not on whether the purchaser is resident or the list, by default, can be purchased duty-free. non-residents, domestic or overseas visitors, etc.). This will largely depend on the policy Offshore duty-free has become the main relaxation on consumers, product categories, channel for duty-free consumptions and is as well as the overall maturity of the regulatory also the key focus for Hainan’s future system. duty-free economy

As mandated in the internal meeting of Department of Commerce of Hainan Province in January 2020, prior to the independent customs operation throughout the entire Hainan island in 2025, the duty-free shopping for local residents may be limited to routine consumer goods; at the same time, the scale of ‘departure tax refund’ is relatively small now and inbound tourists only account for about 2% of total tourist visits. Therefore, the offshore duty-free category which covers middle and high-end products remains as the main channel for duty-free consumptions. At present, under the new policies, the quota for annual purchase has been raised from RMB 30,000 to RMB 100,000, and there are no limits on the number of purchases. The formats of selling offshore duty-free products are also evolving. Although the duty-free shopping policies for local residents after Hainan has become a completely independent customs zone is still unclear, it is still anticipated that a prosperous Hainan‘s duty-free economy would emerge, especially with the promotion of ‘domestic circulation’ by the central government.

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 3 Competition between domestic and foreign players arises. Brand management is now the key focus for domestic operators

New policies allowing more participation of Summary of Hainan duty-free shops and retail diversified entities, and promoting operators competition (CDFG related) (non-CDFG related) 2011 Implementation of offshore duty-free policies Since the implementation of the pilot offshore Haikou Meilan Airport Duty-Free Shop duty-free policy in 2011, CDFG has directly Operator: Hainan Duty Free 51% (Hainan Duty opened or controlled duty-free shops in Free is controlled by CDFG), HNA 49% airports and large shopping centres, including Haikou Meilan Airport Duty-Free Shop, CDF 2014 International Duty-Free Shopping Mall Haitang Bay. CDFG has occupied a Compex Phase I CDF Mall Haitang Bay Operator: CDFG dominant position in Hainan duty-free market, − and set out the market standard of integrating duty-free shops with shopping malls. At the 2019 Haikou Mova Plaza Duty-Free Shop end of June 2020, the Announcement on Operator: Hainan Duty Free controlled by CDFG Offshore Duty-Free Shopping Policies for Hainan tourists was released, according to Downtown Duty-Free Shop in Boao which, business entities with qualifications for Operator: Hainan Duty Free controlled distribution of duty-free goods can participate by CDFG in the offshore duty-free operation in Hainan in accordance with the regulations, thereby 2020 Competition is encouraged under new encouraging moderate competition. So far, offshore duty-free policies operators including China Service Duty Free, Downtown Duty-Free Shop of China Service Hainan Duty-free, Shenzhen Duty Free have Duty-Free in Sanya entered Hainan. The addition of four more Operator: China Service Duty Free duty-free retail operators to the original one Downtown Duty-Free Shop of Hainan (CDFG) has gradually led to the emergence of Tourism Investment & Development in Sanya a new market structure. At present, eight Operator: Hainan Tourism Investment & duty-free retail operators (CDFG, Hainan Duty Development Free controlled by CDFG, CNSC, Shenzhen Duty Free, Zhuhai Duty Free, Wangfujing, Sanya Phoenix International Duty-Free Shop Hainan Tourism Investment & Development, Operator: CDFG and HDH) have been licensed in Hainan and are qualified to distribute duty-free goods. 2021 HDH Haikou Mova Plaza Duty-Free Shop Operator: HDH

Downtown Duty-Free Shop of Shenzhen Duty-Free in Mission Hills, Haikou Operator: Shenzhen Duty Free

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 4 International operators are keen to enter In addition to the duty-free policy, the new the Hainan duty-free retail market, while preferential policies for goods originating licensing is the key restriction from Hainan province are creating opportunities for brand operators Wang Lu, Secretary-General of Haikou Real Estate Association, says in an interview that According to the Master Plan of Hainan FTP, the Hainan provincial government is goods manufactured in Hainan by Hainan FTP negotiating with several international duty-free enterprises with a minimum 30% increase in retail giants and have invited them to start the value are exempted from import duties operations in Hainan. Hainan's duty-free retail when sold to other areas of mainland China. market is a ‘big prize’ for both Chinese and In other words, by leveraging this preferential foreign operators. The likelihood of policy, imported materials and components international operators obtaining licenses will might enter into the wider mainland China become an important determinant of the future market tariff free. With proper value chain duty-free retail market landscape in Hainan. arrangement, business in different sectors Furthermore, it is not clear whether the such as e-commerce, retail, transportation and licensing restriction will be lifted - as it was the logistics, etc. can jointly develop a business case in Hong Kong - after the independent ecosystem that breeds integrated growth. customs operation came into effect. Hainan can serve as a good and new entry point for brands and enterprises that drive Compared with international operators, consumption upgrading and improve Chinese domestic operators’ brand management people's livelihood. capabilities still have room for improvement

International leaders such as Dufry and DFS, as the most established and well-known duty-free retail operators, have rich experience in brand management, procurement, selection of products, display of products and logistics. Their entry into the Hainan market will undoubtedly have a huge impact on Chinese operators. Compared with international operators, the weakness in brand management is obvious among domestic operators. In contrast to well-established international peers that have accumulated a lot of brand resources, Chinese duty-free retail operators still have a long way to go. Obtaining the operating right for an up-market brand takes 6-12 months from negotiation to opening, while for a top luxury brand it may take more than 1.5 to 2 years. The requirements on store layout and decorations, etc., are also relatively high. Chinese operators are catching up fast to seek partnership with up-market and luxury brands, while the central government has also provided tremendous support to Hainan FTP in this regard.

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 5 Hainan will host the first China International Consumer Products Expo, presenting an important opportunity for brands to connect with domestic operators

‘Opening China From Hainan’ – China The upcoming China International International Consumer Products Expo, as Consumer Products Expo is an important the first national exhibition, will take place opportunity for up-market global brands to in Hainan province this May set foot on Hainan and the broader market in mainland China, let alone an important China International Consumer Products Expo - occasion for duty-free retail operators to the first national exhibition of consumer goods liaise with up-market brands - will be held in Hainan province. The expo will last from 7th to 10th May 2021, during which no The Chinese market has become a ‘gold mine’ tariff will be imposed on transactions of the for up-market brands as well as a new growth exhibits. With well-known exhibitors and catalyst for them. The recently issued financial potential buyers coming together, it will also be results of several international brands show an important event for leading enterprises and that the outbreak of COVID-19 has dealt a duty-free retail operators to develop new heavy blow to their global sales. However, markets, negotiate on ways of cooperation and Mainland China is the first market recovering enhance their market influence. from the pandemic. Meanwhile, the preferential policies in support of the development of the Leading brands and duty-free retail Hainan FTP, such as the visa-free policy, and operators will gather in the first China the preferential tax system and foreign International Consumer Products Expo exchange policy, will be the key focus of up- market brands. The expo is an excellent So far, it has been confirmed that the opportunity for duty-free retail operators to exhibition area will be 70,000 square metres connect with brands and explore prospects of and the exhibitors will include leading global cooperation. It will also be crucial for Hainan to brands, such as L'OREAL and Pernod Ricard attract foreign up-market brands and develop of France, Johnson & Johnson, Dell and Tesla into a pioneer of nation-wide opening-up of of the US, Swire of the UK, Blackmores of FTP. as well as Shiseido, Kao, and Omron of .

Leading enterprises from more than 10 countries and regions will participate in the expo, and nearly 80% of the exhibition area is designated for overseas brands. In addition, duty-free retail operators, large physical supermarkets & shopping malls and e-commerce giants, such as CDFG, Wangfujing Group, Shenzhen Duty Free Group, China Service Duty Free, Suning International and JD.com, will attend this event, engage in procurement activities, and connect with leading global brands.

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 6 The success of Hainan will provide a useful reference for the subsequent rollouts of duty-free economy in other Chinese cities

Riding on the central government’s promotion the duty-free economy in many cities. Although of duty-free economy, led by Beijing and the city-level duty-free shops in many cities Shanghai, many cities have laid out local mainly serve travellers entering and leaving policies and work plans for the development of the country, Hainan's successful attempts at duty-free businesses. Duty-free operators have preferential duty-free policies, customs also penetrated markets outside of Hainan. For supervision, supply chain management and example, CDFG has opened downtown service consumption, will provide valuable duty-free shops in Beijing, Shanghai and experience for the development of city-level Dalian, etc. CNSC has opened more than 10 duty-free retail at a broader scale in other duty-free shops in Beijing, Shanghai and major cities. How the duty-free economy of Qingdao targeted at returning citizens from Hainan FTP can further integrate with the retail overseas trips. With the back flow of overseas and duty-free economy in other cities will also consumption and promotion of ‘domestic be a key consideration going forward. circulation’, city-level duty-free shops have become an important means for developing

How PwC can help

As the first international professional service provider having business presence in Hainan, PwC Hainan Office will continue to eye on the latest developments of Hainan FTP, work closely with local governments and enterprises to provide all-round supports for the innovative development of Hainan FTP.

Strategy Structure & modeling design • Entry model analysis & feasibility study • Corporate structure review & planning • Sharing of industry knowledge and best • Business model planning practice • Supply chain optimisation • Transfer pricing analysis

Location study Business model setting up • Exploring local investment incentives • Documentation review • Industry benchmarking • Negotiation support • Obtaining special approval • Tax and regulatory compliance

Cash and treasury management advice Human Resources planning and compliance

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 7 Contact Us

Consumer Markets Industry Team

Michael Cheng Jennifer Ye Asia Pacific, Mainland China & Hong Mainland China Consumer Markets Kong Consumer Markets Industry Leader Industry Leader +852 2289 1033 +86 (21) 2323 3325 [email protected] [email protected]

Jenny Tsao Jane Wang Hong Kong Consumer Markets Mainland China Consumer Markets Tax Leader Tax Leader +852 2289 3617 +86 (21) 2323 2896 [email protected] [email protected]

Roger Liu Waldemar Jap Mainland China Consumer Markets Hong Kong Consumer Markets Deals Leader Deals Lead Partner +86 (10) 6533 8863 +852 2289 1892 [email protected] [email protected]

Steven Zhong Phil Lai Mainland China Consulting Partner Mainland China Consulting Partner +86 (21) 2323 5349 +86 (21) 2323 5347 [email protected] [email protected]

Jaelyn Kwan Hong Kong Consulting Partner +852 2289 1812 [email protected]

Hainan Services Team

Amy Cai Cathy Jiang Mainland China and Hong Kong Mainland China Tax and Business Managing Partner - One Firm Services Advisory Services, Southern China +86 (21) 2323 3698 Domestic Market Initiative Lead Partner [email protected] +852 2289 5659 [email protected]

Ken Gao Tao Han Mainland China One Firm Services Mainland China Tax and Business Advisory Partner Services Partner +86 (21) 2323 3207 +86 (898) 6860 8830 [email protected] [email protected]

Lauren Feng Theresa Cai Mainland China One Firm Services Mainland China Tax and Business Advisory Director Services Senior Manager +86 (21) 2323 3694 +852 2289 1494 [email protected] [email protected]

A Glimpse of Hainan FTP - Tapping on business opportunities arising from Hainan’s International Duty-Free Economy for Consumer Markets 8 www.pwccn.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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