China CBEC Commodities Positive List: More Doubts than Solutions

On April 7, one day before the implementation of the new tax system for CBEC goods, China Ministry of Finance together with 11 other departments including the CFDA published the “List of CBEC Retail Imported Goods” to define the applicable scope of the new tax (see CL news on Apr 8 2016).

Although to some extent the list clears up the confusion on the commodities that are regulated under the new tax it also leaves several doubts in regards to actual implementation and may result in more negative impacts on CBEC companies and third-party platforms.

Doubt 1: “Cosmetics imported for the first time excluded”. Does this mean that CBEC platforms can only sell cosmetics imported via general channel already, or does it mean that cosmetics just need to comply with the general trade tax but can imported via CBEC?

Comment:

Situation 1: If it means that CBEC platforms can only sell cosmetics already imported via general sales channels, cosmetics companies will still have to register with the CFDA. CBEC has been a unique channel for cosmetic companies to tap into China markets and enjoy lower tax than general trade and exemptions from CFDA registration requirements. Based on the new requirements CBEC will lose its attractiveness for many companies:

Note: Skin care and hair care products are subject to no consumption tax.

Situation 2: It means that cosmetics are just required to comply with the general trade tax but can be imported via CBEC. In such cases, the impact will be less.

Doubt 2: Cosmetics excluded in the list can’t be imported via CBEC? Or just aren’t regulated under the new tax scheme?

Comment: If they can’t be imported via CBEC, it is clear that those cosmetics can only enter into China through general channels. For these manufacturers, CBEC will be similar to regular sales channels without any tax incentives and compliance simplification. If it is the second situation, although the tax is the same, registration with CFDA can be avoided in some pilot cities.

Doubt 3: According to the note “all the commodities on the list are exempt from submitting license to the Customs but inspected and quarantined in accordance with national related regulations.”, so what is the license?

Comment: It is estimated that the license is goods import license granted by Ministry of Commerce or its authorization institutions. But it still remains to be seen what it really is. In the past, CBEC commodities were subject to a simplified supervision scheme tailored by the Customs and CIQ with the aim to encourage the development of CBEC, if the goods will be inspected and quarantined in accordance with national related regulations, it is possible that the supervision will be stricter and CFDA’s approval will be a mandatory requirement.

Direct-purchasing commodities

As per the note “direct-purchase commodities are exempt from reviewing clearance sheet; for bonded commodities, clearance sheet will be examined when entering the bonded area but can exempt when leaving the area”, it can be speculated that the competent authority intends to speed up clearance. Direct-purchase commodities are subject to personal postal article tax according to the new tax scheme, 60% for cosmetics (10% increases) making the direct-purchase model a poor choice compared to the bonded model for cosmetic companies.

In summary, the new tax scheme is favorable for CBEC cosmetic companies as the tax is lower:

Whether the positive list is favorable for them depends on the upcoming official explanation concerning the above doubts.