Interpretation of China’s Cross-border E-commerce Regulation

Winnie Xu

ChemLinked,China

In China,cross-border e-commerce (short for“CBEC”) is a completely separate,official and statesanctioned trade channel for imported goods.Unlike the general trade that requires strict compliance with Chinese cosmetic regulations,CBEC offers an excellent market access route for international cosmetic stakeholders to circumvent animal testing and mandatory general trade registration and notification requirements.Therefore,it is a fast track for overseas brands to try out the Chinese market.

1 The history of cbec and its regulatory policies

1.1 CBEC

The prototype of CBEC originated in the early 2000s when there’s a trend that many Chinese people studying,working,or traveling abroad bought foreign goods for their relatives or friends in China.Some people found it lucrative and turned it into a business.Later in around 2007,big platforms such as Taobao global sprang up.During that period,a conventional buyer’s market and a seller’s market were formed.As a result,the consumption channels of cross-border online shoppers gradually shifted from overseas online shopping sites and Daigou,to import CBEC platforms.

2014 was the year of the outbreak of import cross-border e-commerce.The cumbersome overseas online shopping process gave birth to the emergence of import CBEC.Since 2015,with policy changes and social and economic development,import CBEC stepped into an accelerated stage and began to be standardized.In 2019,China formally implemented the new CBEC policy and E-commerce Law.Import CBEC has accordingly ushered into a new phase of development with compliance.Its industry environment has been continuously optimized.

1.2 CBEC policies

For a long time in the past,this new trade pattern had been operating in a legal gray aera.In 2014,the Chinese government issued policies specific to CBEC for the first time to regulate this uprising business model and remedy tax loss.The policies stipulated that CBEC-imported commodities were supervised as personal goods and subject to personal postal articles tax.

In 2016,the government introduced stringent CBEC rules to mainly address three key issues:taxation,positive list,and supervision method.However,the rules faced a backlash from the industry.The government then granted a grace period and extended it twice till the end of 2018.During that period,registration or notification requirements for first imported cosmetics,infant formula,medical device,special foods,were temporarily not put into effect.At the end of 2018,China announced a new CBEC policy that will take effect on 1 January 2019 coupled with a series of follow-up supporting measures.As of the beginning of 2019,the CBEC industry begun to fall under the oversight of the new policy.

2 Current CBEC policy

2.1 Definition of CBEC

As per the current CBEC regulatory scheme,cross-border e-commerce refers to the online purchase of a selected list of goods that are imported from overseas countries via China governmentsanctioned third-party e-commerce platforms through bonded warehouse mode or direct mail mode.

Notably,the third-party e-commerce platforms shall connect their platforms to the General Administration of Customs of the People’s Republic of China (GACC) network to facilitate the management of transaction,payment and logistics sheets.

2.2 Supervision method

The imported CBEC retail commodities (except products from endemic regions or related to severe quality safety risk) shall be supervised as products for personal use.They can be exempt from customs import license,and are not subject to registration or notification requirements.

2.3 Imported commodities scope

China has developed a CBEC retail import commodity list (also known as the “positive list”),which sets out a total of 1,413 commodity categories,covering cosmetics,dairy products,beverages,etc.Only products whose harmonized system code (HS Code) are listed on the positive list are allowed to be imported through CBEC channel.At present,there are 26 kinds of cosmetic categories on the list,such as masks,shampoos,and perfume.

In addition,before import via CBEC,particular attention shall also be paid to the “remark” column,where some additional restrictions are specified on the listed items,as shown in Table 1.

Table 1.CBEC cosmetic categories with additional restrictions

Wild Fauna and Flora Import/Export Commodity Catalogue is a list of plant and animal products prohibited from being carried in person or mailed into the country as they have quarantine risks.Hence,only those listed on the positive list and excluded from this catalogue can be imported through CBEC.

2.4 Recognized CBEC import channels

Under the current policy,China recognizes two import channels for CBEC,including:

Bonded Warehouse Mode (Code 1210):Bonded warehouse is a special administrative zone subject to the supervision from the customs.Under this mode,large quantities of overseas products are transported to the approved bonded warehouses in bulk through international logistics in advance.Those products will be stored in the bonded warehouse until online consumer places a purchase order through CBEC platforms.After declaration and clearance,the corresponding products will then be removed from the stock and delivered to consumers in small packages.

Direct Mail Model (Code 9610):Through this channel,the overseas products are often stored in the country of production or overseas warehouses and mailed directly to Chinese consumers package by package after receiving online ordering requests.

It is also worth noting that,in either way,the transaction data including digital order,payment sheet,and logistics sheet shall be shared with the customs for clearance.

2.5 Preferential taxation

CBEC imports can enjoy a preferential tax rate.Generally,the tax rate equals import tariff plus valueadded tax plus consumption tax.According to the CBEC tax scheme,within a transaction limit of 5,000 CNY per transaction and 26,000 CNY per person per year,CBEC products are exempt from import tariffs and are levied at a 30% discount on value-added tax and consumption tax.

However,if a single transaction of an indivisible product is over 5,000 CNY but within the annual limit of 26,000 CNY,it is allowed to be imported via CBEC but is subject to full tax.Any excess beyond the annual limit will be regulated as general trade.

On the CBEC platforms,the preferential tax is usually called CBEC comprehensive tax.The following table lists several cosmetic categories and their CBEC comprehensive tax rates(Table 2 and 3).

Table 2.Tax categories and rates for cosmetic products

Table 3.CBEC Comprehensive Tax Rates for Cosmetic Products

2.6 Pilot cities

CBEC import is subject to region restrictions.In November 2018,six departments including the Ministry of Commerce unveiled the "Cross Border E-Commerce Retail Import Policy," which was implemented in 37 pilot cities.In 2020,CBEC pilots increased to 86 cities and Hainan island.On March 22,2021,CBEC pilots were further expanded to all cities with pilot free trade zones,CBEC comprehensive zones,comprehensive bonded zones,import trade promotion innovation demonstration zones,or bonded logistics center (B type).

Compared with non-pilot cities,pilot cities enjoy preferential customs clearance procedures for CBEC retail imports,as shown in the Table 4.

Table 4.Comparison of customs clearance requirements between CBEC pilot cities and non-pilot cities

2.7 Company responsibilities

The current CBEC policy clarifies the responsibilities of various parties involved in CBEC trade,including CBEC enterprises (overseas goods owners),CBEC third-party platform operators,domestic service providers,and CBEC consumers.In particular,CBEC enterprises shall shoulder the following responsibilities:Bear the primary responsibility of product quality and safety;Entrust an enterprise in China to complete the business registration in GACC.Protect consumers’ rights and interests,including informing product information,providing return and refund service,establishing a recall system,etc.;Implement the notification obligation to consumers with a risk notice,including specifying technical standards of safety,hygiene,etc.,on product pages,and posting e-labels on the website for consumers to check the information.Establish a quality safety risk control system and product traceability system;Share transaction data with the customs.

3 Major CBEC platforms and rules

The mainstream CBEC platforms in China are commonly divided into two tiers.The tier one platforms include Tmall global,Kaola,JD,Suning,etc.,which take the largest proportion.Among them,Tmall global,Kaola,and JD are more recommended.But these three platforms may ask more expensive fees from business proprietors and stricter requirements for products.Tier two includes Miya,Red,etc.,with a small market share.

Regarding platform rules,China’s mainstream CBEC platforms have less regulation in the past.Since the implementation of the new CBEC policy,the platforms have gradually raised compliance standards and increased scrutiny for cosmetics sold on the platform.

Take China’s top CBEC platform Tmall Global for instance.It announced that CBEC imported cosmetics released on its platform shall comply with the requirements of prohibited and restricted ingredients under the Safety and Technical Standards for Cosmetics 2015.It means they are subject to the same regulation as the cosmetics imported via general trade.If any illegal addition of those ingredients in the products is found by Tmall Global,the merchants will be punished depending on the seriousness of the circumstances.Besides,multiple cosmetic quality management rules have been introduced by Tmall Global to improve product quality and safety in 2020,including:

Standard for Tmall Global Cosmetics Platform(implemented on June 22,2020);Technical Specifications for Cross-Border Cosmetics on Tmall Global (implemented on May 29,2020);Tmall Global’s Prohibited and Restricted Ingredients Standard (implemented on September 17,2020);Implementation Rules for the Conformity Spot Check on Cosmetics Goods on Tmall Global (implemented on December 16,2020).

4 Other points for attention

4.1 CBEC vs.general trade

CBEC and general trade differ significantly in the distribution channel,import product category,pre-market approval,tax rate,capital investment,etc.(Table 5).

Table 5.Comparison of CBEC and general trade

4.2 CBEC vs.animal testing

From May 1,2021,China has officially exempted animal testing for general cosmetics provided that the production enterprise has obtained GMP certifications from its local government and the product safety assessment results can adequately verify product safety.

However,special cosmetics,general cosmetics without recognized GMP certificates,and cosmetics that fall under three exceptions for animal testing exemption (i.e.,infant and children cosmetics;cosmetics using new ingredients during the monitoringperiod;cosmetics whose notifier/responsible person/manufacturer is listed as a key supervision target by China’s National Medical Products Administration)are still required to be animal tested.For international stakeholders who intend to circumvent animal tests or mandatory general trade registration requirements considering ethical issues or expedited market access,CBEC is the most convenient method.Cosmetics imported through this channel are regulated as personal articles and exempt from registration and notification.Thus,no matter special or general cosmetics,animal testing is not required.

4.3 CBEC vs.CSAR

According to the Cosmetic Supervision and Administration Regulation (CSAR),e-commerce platforms,including CBEC platforms,shall be supervised under China’s new cosmetic regulations.They shall establish an operation quality management system and assist in monitoring adverse reactions and product recalls.Otherwise,they will be subject to punishments.

Obligations stated in CSAR:The e-commerce platform operators shall register the real name of the cosmetics operators on the platform and assume the management responsibilities of such cosmetics operators.In case of finding any cosmetics operator on the platform who violate CSAR,the e-commerce platform shall promptly stop it and report to the medical products administration departments of the local government of the province,autonomous region,or municipality directly under the Central Government;in case of serious violations,it shall immediately stop providing e-commerce platform services to the illegal cosmetics operators.The cosmetics operators on the platform shall disclose the information of the cosmetics they operate in a comprehensive,truthful,accurate,and timely manner to the public.

Punishments stated in CSAR:Where the operators of e-commerce platforms fail to perform the management obligations such as real-name registration,suppression,reporting,and cessation of providing e-commerce platform services as prescribed herein,the medical products administration departments of the government of the province,autonomous region,or municipality directly under the Central Government shall give punishment in accordance with the provisions of the E-commerce Law.