In 2013 Chinese government created the first Free Trade Zone, an area under special regulations aimed to test new type of legislation in the field of international trade and investments. In 4 years the FTZs became 11, with the last 7 approved only in March 2017: Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan e Shaanxi. Each FTZ has its focus: e.g. Chongqing will be related to One Belt, One Road project; Fujian FTZ focuses on trade with Taiwan; Henan on international transport and logistics.
Shanghai FTZ is the example of the success of these districts: almost 48.000 corporates are present in its area. 81 decided to establish their regional headquarters here. According to Shanghai City Commission, since the creation of the Zone high-tech, finance, and research and development sectors have sensibly increased.
A new Negative List on investments in FTZs has been decided in June 2016. The list specifies the industries where investments by foreign companies are prohibited or restricted. In order to invest in some of these sectors enterprises were needed to acquire special approval or enter in a joint venture with a Chinese partner. In the new list 27 special administrative measures have been removed: of these 10 relate to manufacturing, 4 to finance. Overall, the new negative list reduces restrictions in over 20 sectors, including railway transport equipment, pharmaceuticals, road transport, insurance, accounting and audit, and other commercial services. Foreign investors will no longer be forced to enter into a JV when engaging in rail transport equipment or civilian satellite manufacturing.
FTZs offer a significant opportunity to e-commerce: on goods traded online the Chinese government applied a parcel tax: a substitute of conventional custom duties that in many cases resulted to be cheaper. Until April 2016, depending of the product, there were 4 levels of taxation (10%, 20%, 30%, 50%). Moreover, products with a taxable value of less than 50 RMB were tax-free.
Now, retail goods purchased online will be treated as imported goods, subject to import tariff, import VAT and consumption tax. An interim import tariff rate of 0% will be applied to cross-border e-commerce retail goods within the personal limit of RMB 2,000 for a single transaction and a cumulative yearly personal transaction limit of RMB 20,000. Transactions above the personal limit will be levied as general trade items (refunds of tax paid and adjustments to the annual personal limit are possible for returned goods).
But for deals above the cap, consumers will get no tax discounts and will also need to pay customs tariffs.
The import tax rates have been divided into 3 categories and adjusted: Category I – 15% tax rate – includes books, video games, computers, digital cameras, gold and silver, food and beverages and toys. Category II – 30% tax rate – includes sporting goods, textiles, some electrical appliances and goods not included in Categories I and III. Category III – 60% tax rate – includes alcohol and tobacco, valuable accessories, golf balls and clubs, luxury watches and cosmetics. This means that custom duties now affect e-commerce too.
The changes will mean a tax increase for some cross-border e-commerce retail imports, with low price cosmetics (under RMB100 in value) being the most affected (likely increase of around 47%). Conversely, high price cosmetics are likely to actually decrease in import costs (likely decrease of around 3%). The same trend exists in clothing, electronics, watches and bikes – items below RMB250 are likely to increase by around 11.9% and items above RMB250 likely to decrease by around 8.1%. There will also be minor changes to commodities such as baby formula and skincare products.
The new policy aims to level competition between online platforms and traditional brick and mortar import stores, and it is in no way to be seen as a protectionist measure used by the Chinese government. On the contrary, it demonstrates the maturity of the Chinese model and chinese market more oriented on creating good way for quality products with good structured system, more and more open to the world, that the government updates to make it more efficient and well controlled as part of international business environment with awareness of leading role.
The move also comes as China is stepping up efforts to boost domestic consumption, especially for quality, high-end items. The government said last month it will open 19 new duty-free shops across the country to meet consumer’s growing appetite for high-quality overseas products.
The recent speech of Xi Jinping at the opening of XIX Congress of the Communist Party of China is quite clear on this point: “No country can retreat to their own island, we live in a shared world and face a shared destiny,” he said alluding to the choices of Trump administration.
The Chinese government frequently make use of pilot or experimental legislation. Once a new policy has been tested and evaluated then it is simply corrected. The parcel tax is no exception: it will no more benefits certain goods, but trade in FTZ will continue to be facilitated. The Cross-border E-commerce Retail Import Commodity List is a demonstration: it can be defined as a White List containing a vast number of goods that will be free from submission of license to the customs, the inspection and quarantine supervision. This will shorten delivery time.
The introduction of a clearer and more certain tax rate structure will be helpful in removing one of the major obstacles impairing long term development of the industry, and large enterprises previously holding back due to the immature and unsustainable tax system can now make medium and long term decisions in relation to development of an e-commerce business in China.
This is an optimal time for enterprises with the goal of engaging in cross-border e-commerce trade to begin market research and specific planning.
Companies desiring to invest in China should look very closely at the new opportunities offered by Chinese Model, because the Asian country is no longer merely the place where to invest in low-cost labour: according to a 2016 Euromonitor International research Chinese labour costs in manufacturing are now almost equal to those of Portuguese ad Greek workers (who are considered among the least salaried in Europe). The Pudong Innovation Research Institute of Shanghai has confirmed the analysis, certifying in 2016 an increase of 9% in labour cost. The increase is stronger in centre-western provinces where salaries are still lower in respect of the rest of the country, while cities like Beijing and Shanghai register a 10% rise.