Setting up an Online Store in China
Our previous financial article explained the Rules and regulations of E-commerce in China, This month we will be seeing how to set up an online shop in China. After a physical shop is opened in China, a foreign investor will have the ability to set up an online store through a website where sale of products is conducted. The foreign investor will first have to set up a Foreign Invested Commercial Enterprise - FICE for the physical store following which an online shop has to be created, selling the same range of products. An ICP filing has to be made, though an ICP license is not required. The online shop will not be authorized to engage in delivery and online payment in addition to selling products simultaneously. For the Online store to engage themselves in delivery a separate WFOE must be established and a transportation license must be acquired. It is a time consuming and complicated procedure. To avoid such complications, most of the online stores outsource their delivery process to freight forwarders like TNT, EMS, China Post, etc.
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So the three steps involved in setting up an online store are,
Set up a FICE (Foreign Invested Commercial Enterprise) for a physical store
Create online store, selling same product range
ICP License is not required, ICP Filing is required
Online Payment Platforms in China
Most of the online platforms in China make use of online payment platforms such as AliPay, PayPal and TenPay. This sector is not authorized for foreign investment as it is the same for financial institutions such as banks. Online payments are a very crucial aspect when it comes to ecommerce development and also to maintain the customer’s privacy and security of their online transactions. In October 2012, the China Internet Network Information Center (CNNIC), released a report which stated that upto June 2012, only 34.8 percentage or 187 million people of internet users have used online payment methods for purchasing goods online. They considered it rather unsafe or complicated. The report also stated that there was an annual 47.5 percentage of growth rate in the number of people using online payment methods from 2008 to 2011 in China, which denoted the potential for development of online payments in China. The China Internet Network Information Center report also denotes that safety and convenience were the major concerns of internet users in China when it came to online payment methods.
Just like Paypal for Ebay, Alipay is to Taobao. It is a very popular and convenient tool for making online payments in China. It was launched in 2004 and Alipay has become China’s leading third party online payment portal. As of December 2012 Alipay has close to 800 million registered accounts. Alipay processes close to 105.8 million payments every single day. Alipay has a monetary value of RMB 20 Billion about US $3.25 Billion. Alipay has also created an escrow payment service which aims in reducing the anxiety of Chinese consumers shopping online by a considerable level.
Most of the Chinese consumers prefer “escrow payments” when they indulge in online purchases. Consumers after their purchase, will put their money into an escrow account which is hosted by a third party payment platform. The payment done by the consumer is held by the intermediate escrow account and not released to the seller/vendor until the buyer gives a confirmation that the product has reached him/her safe and sound. Only after this confirmation will the third party payment platform transfer the money to the seller/vendor. This approach is normally followed when the commodity is not a virtual product, i.e when the good is something that has to be shipped and not downloaded like songs, softwares, movies etc.
This system helps to balance the risks between the buyers and sellers, in which buyers face lesser risks when compared to instant cash transfers similarly merchants face fewer risks when compared to cash-on-delivery transactions. Close to 100 domestic and global financial institutions have established cooperative efforts with Alipay, including Mastercard and Visa. Alipay is an affiliate of the Alibaba group along with Taobao and Tmall and operates transaction in 12 major foreign currencies which includes, USD, EUR, JPY, GBP, CAD, AUD, SGD, CHF, SEK, DKK, NOK and HKD.
The main advantage of Alipay is that it offers online payment solutions to merchants who are willing to sell goods directly to consumers in China, without the necessity of opening a bank account in China or setting up a company, since the settlements of payments are directly transferred by Alipay to the merchants bank account.
The available payment options by Alipay are,
Cross border website and mobile payment
Added to this there is an option to make a one time payment of US$1000 to use Alipay for cross-border payments. There is a transaction fee of 3 to 7 percentage applied for every transaction. There are many other options for domestic payment solutions in China. The transaction fee for such payments would be 0.7 percent to 1.2 percent. For more information on Alipay cross-border payment solutions, please visit http://global.alipay.com/ospay/home.htm. For further information on Alipay China payment solutions, please visit http://b.alipay.com/newindex.htm
Paypal can also be utilized for cross-border payments and settlements. Though Paypal is used worldwide, it has only a small share in the Chinese domestic market. However Chinese people prefer only to use Paypal when they purchase goods from foreign countries. There is no fees for setting up an account with Paypal, but there is a 3.9 percent transaction fee on the total amount of purchase along with a fixed US $0.30 per transaction. The process of transaction and depositing money into the Paypal account is very simple. Bank accounts can be linked with the Paypal account and the transactions can be auto withdrawn or withdrawn to the linked account without any strain.
RMB-only third party payment platforms
There are close to 20 different RMB third party platforms in China. Alipay remains to be the most leading and highly used service provider among all the other third party platforms, however Tenpay an online payment system similar to Alipay and developed by Tencent appears to be the second leading service provider in the market. Tencent are the developers of QQ and Weixin. Other leading third party payment platforms are 99Bill, ChinaPnR, YEEPAY, and IPS.
B2C & B2B
There is an option of setting up a shop on an existing platform, instead of opening an online shop from scratch. Alibaba is an existing platform for B2B online transactions. 360Buy, Amazon China, and Tmall (a Taobao-branded B2C platform) are very good choices of B2C vendors. In order to start a B2B or B2C business, the following are required for examination and approval by the online trading platform,
Identity certificates of their legal representatives
Company Bank account information
As specified by the AIC Order 49, after approval, they must display their business license information on the homepages of their websites. Following this for representative offices of foreign enterprises, the certificates of organization code certificates (or tax registration certificates) and registration which were issued by the Chinese authorities, must be submitted to the platform. In few cases where enterprises are belonging to industries like cosmetics, food industry etc, they are required to submit the relevant permits such as cosmetic or food production licenses. There are few online platforms which set up a minimum threshold level for enterprises who are listed as enterprise vendors on their respective platforms. For example, 360Buy accepts application from companies only when their registered capitals is over RMB 500,000. Few platforms require B2C vendors that are registered as enterprises at the AIC in order to pay technical service fees or commissions. In case of a breach of any service terms, it is necessary for the B2C vendors to pay a certain deposit amount to the platform.
AIC order 49
The State Administration of Industry and Commerce (SAIC) proposed the Interim Measures for the Administration of Online Commodity Transactions and Relevant Services -AIC Order No.49, “Order 49”. It was released in 2010 which regulates all the online commodity transactions and relevant services provided by online service providers and online commodity vendors all over China. This order AIC 49 also requires online commodity vendors and service providers to display clearly the information pertaining to services or products including their names, categories, quantities, prices, quality, shipping fees, forms of payment and methods, and return or exchange methods. Order 49 emphasizes that the service providers and online commodity vendors are bound by the relevant provisions of the Law on Product Quality and Law on the Protection of Consumer Rights and Interests.
In 2003, when online shopping was becoming famous in China, imposing taxes on e-commerce business activities was first discussed. This issue was brought up again by Zhang Jindong, the chairman of China’s electronics chain store Suning, at this year’s NPC and CPPCC sessions. Zhang had proposed in this year’s NPC and CPPCC that the taxation authorities should indulge in taxing the e-commerce businesses, which will help in strengthening tackling tax evasion and tax supervision.
A MOFCOM spokesman, on June 25th 2013 clarified that China’s tax law would imply uniformly to both tradition enterprises and E-commerce enterprises. The spokesman also stated that MOFCOM is in the process of researching and collecting opinions in preparation of the promulgation of the Administrative Regulations on Online Retail. Its main aim is to ensure the orderly development of the e-commerce market without dampening the enterprise’s ability to innovate. The taxes which are to paid by online businesses are the same as the taxes which are to be paid by other FIE’s in China.
Corporate Income Tax - 25% profit
Dividend Tax - 5%-10%
Value Added Tax - Usually 17%
Business Tax - 5%of turnover
Individual Income Tax - 3% - 45% taxed progressively
The Judgement for China’s first online sales tax evasion case was announced in July 2007 in Shanghai. The seller had set up an online shop under the same name of her retail shop’s company name which specialized in selling of infant products. The online store had reached sales of RMB2.8 million in roughly half a year. There were no invoices issued or any records of accounting maintained. The court discovered that the seller had evaded a total tax of RMB 110,000, the judgement was issued to her for 2 years imprisonment with a fine of RMB 160,000.
In September 2012, A Beijing court imposed an airline stewardess a period of 11 years imprisonment and a fine of RMB 500,000. She had evaded nearly RMB 1.13 million in tax by purchasing goods overseas and selling it on her online shop in China. Similarly two online shop owners in Shanghai, in February 2013, were imprisoned for one year, with one year and six months reprieve and penalties totaling RMB 181,000. They had evaded RMB 179,000 by purchasing goods overseas and selling it in their online shop.