Rules for cross-border e-commerce no reason for panic – Mark Schaub

The new rules on taxation of cross-border e-commerce have caused fear the government is trying to kill an increasingly lucrative industry. It was inevitable the government would start to regulate – not kill – this booming business, says Shanghai-based lawyer Mark Schaub in Lexology. The timing was a surprise, and unfortunately, regulations are not very clear, he adds.

Mark Schaub:

China cross border e-commerce has grown by leaps and bounds in the last 2 years since the PRC authorities encouraged the use of bonded zones. Some commentators have suggested the value of the business may have exceeded USD 3 trillion in 2015. The effects have not been limited to China as many international companies have seen their share price rise exponentially on the basis of the China e-commerce phenomenon. Cross border e-commerce moved from being a possible avenue to sell to the China consumer to THE only way to sell to China.

Just as everything was going so well, suddenly major concerns surfaced about the very future of cross border e-commerce in China. These concerns were due to a raft of regulations that were issued in April 2016 by a number of Chinese regulators including Ministry of Finance (“MOF”), General Administration of Customs, State Administration of Taxation, Food and Drug Administration (“CFDA”), Ministry of Commerce, General Administration of Quality Supervision, Inspection and Quarantine.

Although their motivations have not been publically announced it is likely that the PRC authorities are not seeking to stop cross border e-commerce but rather to better regulate and increase taxes from it.

Companies should bear in mind that before the issuance of the regulations in January 2016 the PRC central government approved the establishment of a new batch of pilot areas for cross-border e-commerce to expand this to 12 cities. At the time this was rightly interpreted as a sign of the PRC government’s intention to promote cross-border e-commerce.

Accordingly in the writers’ opinion the new regulations do not signal a desire to close down cross border e-commerce. Rather as cross border e-commerce became big business it was difficult for the authorities to ignore that many international companies used the model to sell commercial quantities of product into China that bypassed PRC standards and minimized tax. As cross border e-commerce grew it was always expected that regulation would be on its way.

Accordingly for most companies the expectation was that change to the current system was not a question of if but when. Unfortunately, the regulations that have been issued are vague and have been issued by a variety of regulators so that there may be co-ordination issues in respect of implementation. Accordingly the new regulations have sparked both many questions and much fear.