China’s State Council is cracking down on Internet companies that evade taxes and sell counterfeit luxury goods.

Even the Chinese Government Is Pissed About Fake Louis Vuittons From China

Even the Chinese Government Is Pissed About Fake Louis Vuittons From China

The fiction, the friction, and the facts from China.
May 1 2015 6:27 PM

Made in China No More

China, known for its counterfeit luxury goods, is now cracking down on other countries’ luxury goods. 

Counterfeit Goods.
A Chinese policeman walks across a pile of fake medicines seized in Beijing in 2013.

Photo by STR/AFP/Getty Images

This post originally appeared in Caixin.

BEIJING—Overseas shopping by Chinese consumers through the Internet, which analysts say generated more than 100 billion yuan ($16 billion) in sales in 2014, has been booming in a regulatory gray zone. Those days may be over.

The State Council, China’s Cabinet, on April 9 ordered China Customs and other government agencies to crack down on imports of counterfeit goods and products that violate intellectual property rights sold through online outlets. Customs officers were expected to respond by stepping up inspections of parcels shipped to China from abroad. And they're not only focusing on parcel content but also making sure that all taxes and import tariffs have been paid.

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The tightening effort could have a significant impact on imports of luxury goods and drugs, which an increasing number of Chinese consumers have been buying through the Internet or by means of intermediates who work through websites to buy goods overseas and deliver them to Chinese customers. Some experts say these imports have hurt sales of domestically manufactured consumer products. Others say the importers can sell at bargain prices because they skirt tax regulations.

The e-commerce data provider 100EC.cn said Chinese consumers bought 76.7 billion yuan worth of goods through overseas-based online retailers in 2013, up 58 percent from the previous year. Purchases exceeded 100 billion yuan in 2014 and could reach 200 billion yuan this year.

A recent report by management consulting firm Bain & Co. said that 70 percent of the luxury products bought by Chinese consumers in 2014 had been purchased during trips abroad or through overseas-based online retailers. Foreign-made generic drugs also have been popular.

The trend drew special attention early this year when a prosecutor in the central province of Hunan charged leukemia patient Lu Yong with “disrupting credit card management” by buying low-cost generic drugs via online orders from India for himself and other patients. After a public uproar, though, the case was dropped.

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Lawyers such as Wang Bingjie, an associate at Zhejiang Brighteous Law Firm in Hangzhou, said government officials behind the latest campaign are primarily interested in catching tax evaders. In addition, he said, they're responding to complaints from shoppers who've received damaged or counterfeit products purchased through online services.

Wang said the order mainly targets individual buyers and companies, not e-commerce platforms such as JD.com and Tmall.com, which officials say for years have complied with China's e-commerce regulations.

The most common shopping channels for Chinese consumers who want to buy overseas products are Chinese e-commerce websites that already enjoy good relations with the government. These include JD.com, Alibaba Group's Tmall and Taobao websites, and the Walmart affiliate Yhd.com, each of which has non-Chinese vendors offering goods to Chinese clients through its platform.

Another option chosen by some Chinese consumers is to arrange for friends or relatives living overseas to shop for them and ship goods to the mainland. Yet another consumer option—the one that's drawn special attention from government officials concerned about tax evasion—are small businesses run by individuals or companies that function as shopping intermediates. These businesses buy from overseas vendors on behalf of Chinese customers, handle the shipping and import processes, and then deliver the goods.

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Luxury-brand handbags, cosmetics, baby care products, and baby formula are among the most popular items imported for Chinese consumers from foreign vendors. “Chinese consumer demands are not fully met” by domestic companies, said a manager at JD.com. “Overseas shopping services appeared on the scene to meet their needs.” Sun Jinlin, a lawyer at Broad & Bright Law Firm in Shanghai, said most businesses that arrange overseas shopping are run by individuals or small companies that the government has had trouble monitoring.

A woman who runs an overseas cosmetics shopping business told Caixin that even after factoring in international shipping costs and currency exchange rates, her profit margin is about 20 percent. However, her business faces pressure from competitors who sell counterfeit products and can earn even more. “Some people sell authentic products at the beginning but start to sell counterfeit later,” the woman said.

These flip-floppers include vendors who sell fake, overseas-branded goods that are actually made in China. These vendors are unlikely to be affected by the government's latest campaign, the woman said, while legitimate importers pay a higher price. “Strengthening (customs) controls will only make it harder for authentic products from overseas to get to the market,” she said.

Previous efforts by the government to clamp down on tax-dodging online-shopping companies have had limited effects, according to several business operators who spoke with Caixin. Some said they've never paid import tariffs nor reported data for tax purposes. They said they get away with breaking the rules because customs officers inspect parcels at random, and even when a violation is discovered, the punishment is usually light.

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In hopes of ending tax evasion through overseas shopping, the General Administration of Customs in 2010 cut the tax-free limit for the value of personal parcels shipped from overseas to 50 yuan from 500 yuan. And since August, the administration has required that e-commerce companies, individual traders, online payment service providers and logistics companies report all cross-border business data to customs officials.

Zhang Bowei, director of the international economics and trade department at Nankai University in Tianjin, said tariffs on most imported products have declined significantly since China's accession to the World Trade Organization in 2001. But some tariffs that were high in the pre-WTO days are still high.

Some of these tariffs were originally designed to protect domestic companies, Zhang said, while others are still based on old ideas about what constitutes a luxury item.

Indeed, China's tariff rates for imported consumer goods vary. Cosmetics, for example, are classified as luxury goods and thus are subjected to taxes equal to 50 percent of a product's value. The tax on imported electronic products and watches is 30 percent.

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Chinese e-commerce companies usually get preferential treatment when importing goods for Chinese consumers. The JD.com manager, for example, said items imported for sale through his company's website are subject to postal taxes, which are lower than import tariff fees.

But imported drugs are subject to steep fees. Health care industry professionals blame import tariffs and distribution procedures for the fact that imported medicines available through hospitals to cost up to 10 times more than those purchased online.

To fight tax evasion and control customs supervision costs, Zhang said the government should consider adjusting taxes in ways that close the gap between domestic and international prices. Such a move would “reduce the motivation for tax evasion and lower supervision costs,” he said. “At the same time, it will benefit domestic consumers.”

For now, though, the State Council's latest guidelines have focused attention on how customs agents handle their new mandate to make sure that taxes are paid and imported goods are real.

The woman with the shopping business said she's willing to follow the rules and pay all tariffs, no matter how strict. She's also thinking about moving her business into one of China's free-trade zones. But the woman thinks many companies like hers will continue operating in the gray zone. Some cannot afford to move into a free-trade zone, and others will be trying to avoid customs agents who she said do not enforce rules fairly.

One trading company representative complained that customs officers can be biased about which overseas shopping services to target for tax inspections. Companies that have the right government connections can receive special treatment, she said, and these connections can help them avoid paying taxes altogether.