By Shirley Zhang, Yao Lu and Eunice Ku
Aug. 9 – In 2012, the number of China’s internet users rose by 10 percent to 564 million, and its e-commerce market increased by 66.5 percent to RMB1.3 trillion (US$190 billion) worth of transactions. These transactions accounted for 6.1 percent of total retail sales of consumer goods that year, compared to 5 percent in the United States. Further, 242 million internet users in China purchased goods online in 2012, up 21 percent from the 203 million recorded a year earlier, and this figure is expected to reach 310 million by the end of 2013. This rapid growth can be partly attributed to the growing use of mobile devices to browse e-commerce merchandise, in addition to the continued development of popular Chinese social media platforms, such as weibo (literally “microblog,” the equivalent of Twitter in China), which are helping to increase the exposure of goods and drive e-commerce sales.
Meanwhile, continuing improvements in online credibility, payment services and express delivery methods have created a beneficial environment for the growth of e-commerce in China. Nonetheless, the legal framework of e-commerce in China is still far from comprehensive, and the applicable laws and regulations are either out of date or vague, and lack executive force. Intellectual property infringements and the sales of counterfeit and poor-quality commodities are quite common in online transactions. Further, deficient dispute resolution mechanisms in China make it difficult to deal with e-commerce disputes. To resolve these issues and construct an environment that promotes further growth, China is now in the process of setting up a centralized monitoring system for e-commerce activities, which aims to be operational by the end of 2013.
Current Policy and Legislative Framework
The 12th Five-Year Plan for E-commerce Development (2011-2015) sets forth the aim of significantly increasing the contribution of the e-commerce industry to the national economy by 2015, with goals of doubling e-commerce turnover, increasing corporate online purchases and sales, significantly improving the level of e-commerce services, and successfully attracting an array of internationally influential e-commerce enterprises and service brands.
Currently, most of the previous legal restrictions on foreign investment in the online retail sector have been lifted as part of the country’s WTO commitment to realize an “open market.” With the introduction of the Measures for Administration of Foreign Investment in the Commercial Sector in 2004, foreign investors are allowed to engage in China’s online retail business through a foreign-invested commercial enterprise (FICE).
In August 2010, China’s Ministry of Commerce (MOFCOM) issued the Circular on Several Issues Concerning the Approval and Administration of Foreign Investment in Online Sales and Automatic Vending Machines (shangzizi  No. 272, “Online Sales Circular”), which further clarifies that online sales are an extension of an enterprise’s sales activities. Therefore, existing foreign-invested manufacturing enterprises and FICE can directly undertake online sales in China without approval from MOFCOM.
Furthermore, the Online Sales Circular relegated the decision to approve new foreign-invested enterprises (FIEs) that exclusively engage in online sales down from the central commerce department to the various provincial commerce departments. This, in turn, has resulted in the speeding up of the approval process, and has effectively increased competition among regional administrations to capture foreign investment.
An FIE that intends to provide network services to other trading parties with its own online platform needs to apply to the Ministry of Industry and Information Technology (MIIT) for an Internet Content Provider (ICP) license. Meanwhile, enterprises that directly engage in product sales through their own online platform need only to report to the telecommunications administration authorities for record-filing. This means that foreign investors can engage in online sales without an ICP license from the MIIT provided that their online platform is not open to any third-party vendors. They will, however, still need to apply for an ICP filing number.
If a FICE allows third-party vendors to use its online platform, it must hold an ICP license from the MIIT. In China, telecommunications services are divided into basic telecommunications services and value-added telecommunications services (VATS). Providing online trading services to third parties constitutes VATS. According to the Provisions on the Administration of Foreign-Invested Telecommunication Enterprises (State Council Order No. 534), an FIE must satisfy the following conditions in order to engage in VATS in China:
- The FIE must be a joint venture with foreign investment capped at 50 percent;
- The primary foreign investor of the FIE should have a good track record of, and operational experience in, operating value-added telecommunications services;
- FIEs that provide value-added telecommunications services nationwide or across provinces are required to have a minimum registered capital of RMB10 million. Enterprises engaged in such business within only one province need a registered capital of only RMB1 million; and
- The FIE must meet any other relevant requirements as stipulated by the Telecommunications Regulations and any relevant laws and administrative regulations.
The Circular requires an FIE engaging in online sales and related services to display its business license prominently on its main webpage or the webpage on which the operational activities take place. Further, they are required to establish a reasonable system for the return and exchange of goods, maintain sales records, and strictly protect consumers’ privacy and commercial secrets. They should also abide by the Law on the Protection of Consumer Rights and Interests, and the Law on Product Quality.
ICP Filing Under State Council Order 292
The Telecommunications Regulations (State Council Order No. 291), promulgated on September 25, 2000, entrenched the MIIT as the government department overseeing all telecommunications and related activities in China. Meanwhile, the Administrative Measures on Internet Information Services (State Council Order No. 292, “Order 292”), released on the same day, is the first administrative regulation to address profit-generating activities conducted through the Internet, and sets the cornerstone for future laws and regulations governing e-commerce in China.
Internet information service (IIS) refers to the service of providing information to internet users through the Internet. Order 292 categorizes IIS into commercial and non-commercial services, and stipulates that all commercial IIS providers (those who provide information or webpage creation services to internet users for profit) must apply for an ICP license from the MIIT or the relevant local telecoms administration authorities prior to conducting business registration. Order 292 also requires commercial IIS providers who acquire any investments from or cooperate with foreign investors to obtain approval from the MIIT in advance. Non-commercial IIS providers who share information free of charge only need to file their records with the MIIT or the local telecoms administration authorities. Both commercial and non-commercial IIS providers should display their ICP license or filing codes at a conspicuous place on their homepage.
Currently, the prevailing interpretation deems Order 292 to be consistent with the above-mentioned Online Sales Circular, meaning that FIEs engaging solely in the online sales of their own products without providing internet services or platforms to third parties are deemed non-commercial IIS providers that do not require an ICP license. However, they are required to conduct an ICP filing (备案) if any relevant website content is hosted in China. This is why the phrase “ICP 备” appears on many Chinese websites.
Aware of the need to modify their existing regulations to reflect the changes in China’s online business environment, which has evolved dramatically since 2000, the MIIT and the State Internet Information Office jointly released the Revision Draft of Administrative Measures for Internet Information Services (“Revision Draft”) to solicit public opinions in June 2012. The core principle of the Revision Draft is to enhance information security requirements for IIS providers, and to clarify the respective rights, obligations and responsibilities of IIS providers, internet access service providers, government administrative departments, and internet users. The provisions of the Revision Draft have not yet been adopted as of the date of publication of this article.
At the end of 2012, the Standing Committee of the National People’s Congress (NPC) promulgated the Decision on Strengthening Network Information Protection, which reiterates and reinforces the Revision Draft by indicating that internet service providers will be expected to take on more responsibilities in the future with regard to ensuring network security.
Electronic Signature Law
The Electronic Signature Law was released in 2004 by the Standing Committee of the NPC and entered into effect on April 1, 2005. It is considered the first law in China’s e-commerce legislation, and it establishes the concept that an electronic document is as valid as a paper document – which cleared the biggest legal obstacle for the development of e-commerce in the country. The law also regulates the application and acceptance of electronic signatures.
Standards and Regulations Governing Online Transaction Services
In 2005, the China E-Commerce Association (CECA), a non-profit national organization under the supervision of MIIT and the Ministry of Civil Affairs, released the Standards for Online Transaction Platform Services (“OTPS Standards”), an industrial code of practice that clarifies the general comprehensive standards for e-commerce in China, especially the obligations of online transaction platform providers. The OTPS Standards define the following key terms:
- Online transactions: Transactions concluded through online communication, including business to business (B2B), business to consumer (B2C), and consumer to consumer (C2C) transactions.
- Online transaction platform: An online system that provides the space, technology and transaction services for various types of online transactions.
- Online transaction platform provider: A legal person that operates an online transaction platform and provides transaction services to transaction parties.
- Online transaction services: Information distribution and conveyance, contract signing, storage and maintenance, and other services necessary for transaction parties to conclude contracts for online transactions.
- Online transaction auxiliary services: Services that improve the transaction environment and promote online transactions, including secure authentication, online payment, and transaction insurance services.
According to the OTPS Standards, an online transaction platform provider is required to establish transaction rules that comply with the Contract Law and should not infringe upon the legal rights of its consumers or other parties. They should also comply with Order 292 discussed above, and adopt necessary technologies and measures to maintain the operation of the platform in addition to supervising information released through the platform.
The OTPS Standards also suggest that online transaction platform providers could cooperate with organizations that provide reasonable credibility evaluation systems for transaction parties. Online transaction platform providers must protect the safety of transactions conducted though their platforms, including protecting the interests and the privacy of users, and controlling spam. They should also take steps to protect intellectual property rights in online transactions.
MOFCOM Announcement 21
Based on the OTPS Standards, MOFCOM issued Announcement 21, which consist of the Specifications for E-Commerce Model and Standards of Online Transaction Services (“OTS Standards”), and entered into force on December 1, 2009. They provide more detailed guidance for B2B, B2C and C2C transaction models.
The OTS Standards stipulate the operating requirements for online payment platform providers: they must be equipped with the ability to provide payment settlement services for e-commerce transactions via banking institutions or non-financial business entities approved by the relevant State departments, and must ensure the safety and effectiveness of online payments. They must also build effective rules and systems to ensure the security of their payment system, manage user registration data, safeguard accounts and funds, supervise information, handle complaints, and administer payment data storage and backup systems.
In addition, the OTS Standards require online transaction parties to use their real identities in transactions, and provide authentication information (such as business licenses and tax registration certificates) for verification purposes. Their physical address of operation and any necessary contact information should be disclosed as well.
The OTS Standards also stipulate that online transaction platform providers should create an online dispute handling mechanism and complaint-filing channel. Further, online transaction platform providers, payment platform providers, and auxiliary service providers should actively assist with obtaining evidence and cooperation when disputes arise.
Although both Standards establish the code of conduct for online transactions, they do not provide any punitive measures for violations.
AIC Order 49
The State Administration of Industry and Commerce (SAIC) promulgated the Interim Measures for the Administration of Online Commodity Transactions and Relevant Services (AIC Order No. 49, “Order 49”) in 2010, which regulates online commodity transactions and relevant services provided by online commodity vendors and online service providers in China.
Online commodity vendors are defined as legal persons, other economic organizations or natural persons who sell commodities online, while online service providers refer to those who offer commercial services online, including website operators who provide online transaction platform services.
Order 49 reiterates the OTS Standards by stipulating that the real-name system applies to network transactions, requiring online transaction platform service providers to examine the identity and status of online commodity vendor applicants. For applicants who are individuals, and thus not eligible to register with the AIC, online transaction platform providers are required to build archives to record the real identities and relevant information of these individuals and to verify and update the archives on a regular basis. Legal persons, other economic organizations, or sole proprietorships registered with the AIC must display their business license information or the link to their business license at a conspicuous place on their homepage or the webpage where they conduct business when engaged in trading goods or providing services through the Internet.
Order 49 also requires online commodity vendors and service providers to clearly display information pertaining to products or services, including names, categories, quantities, quality, prices, shipping fees and methods, forms of payment, and return or exchange methods. Order 49 emphasizes that online commodity vendors and service providers are also bound by the relevant provisions of the Law on the Protection of Consumer Rights and Interests and Law on Product Quality.
Online platform service providers should establish a monitoring system and review the commodities and service information released by their vendors and service providers. When anything violating the laws, regulations and rules are discovered, they are obligated to report them to the local AIC department, take immediate measures to stop such violations, and cease to provide online trading platform services if necessary. They are also responsible for maintaining user identity information and transaction records for at least two years. Platform service providers should also disclose the registration information of the vendors or service providers to their consumers when the lawful rights or interests of the consumer are harmed and actively assist in restoring the consumer’s legal rights.
In order to better implement Order 49, the SAIC further released the Notice on Accelerating the Establishment of Online Business Operators Database (gongshangshizi  No. 87) to keep track of enterprises, sole proprietorships, and other economic organizations engaged in online business.
MOFCOM Announcement 18
On April 12, 2011, based on the above-mentioned laws and regulations, the Service Standards for Third-Party E-Commerce Trading Platforms (MOFCOM Announcement  No. 18, “Announcement 18”) came into force as a supplementary guidance for the administration of online trading platform providers.
Announcement 18 reiterates the requirements for online transaction platform providers as stated in the previous regulations. In addition, targeting large e-commerce players that act as both online transaction platform providers and participants, Announcement 18 requires them to maintain independence between the proprietary business and their platform service, and disclose any relevant information on the platform in order to ensure fairness.
It also requires platform providers to administer platform participants in respect of vendor registration, providing guidance on platform transaction contracts, establishing a code of conduct for vendors, managing transaction information, supervising transaction orders, dealing with transaction errors, returning and exchanging of commodities, and protecting intellectual property rights.
Further, Announcement 18 provides additional provisions to further protect the interests of consumers, such as encouraging platform providers to set up a “cooling-off period” mechanism, during which consumers are allowed to cancel an order unconditionally.
Imposing taxes on e-commerce business activities was first discussed in 2003 when online shopping first started to become popular in China. Further, at this year’s NPC and CPPCC sessions, this issue was brought up again by Zhang Jindong, chairman of China’s electronics chain store Suning. Zhang proposed that the taxation authorities should tax e-commerce businesses, thereby strengthening tax supervision and tackling tax evasion.
On June 25, 2013, a MOFCOM spokesperson clarified that China’s tax laws apply uniformly to both traditional enterprises and e-commerce enterprises. He 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 in order to ensure the orderly development of the e-commerce market without dampening enterprises’ ability to innovate. The taxes payable for online businesses are the same as those applicable to other FIEs in China:
The authorities have begun cracking down on e-commerce business that are operating outside of these regulations, as evidenced by these recent cases:
- July 2000: The judgment for China’s first online sales tax evasion case was announced in Shanghai. The seller had set up under her company’s name an online shop specializing in the sales of infant products. The shop reached roughly RMB2.8 million in sales volume within half a year. No invoices were issued nor accounting records kept. The court found that the seller evaded RMB110,000 in tax, and sentenced her to two years imprisonment with two years reprieve and a fine of RMB160,000.
- September 2012: A court in Beijing imposed an 11-year sentence alongside a RMB500,000 penalty on an airline stewardess who purchased goods overseas to sell on her online shop in China after finding that she evaded RMB1.13 million in taxes.
- February 2013: Two online shop owners in Shanghai who also purchased goods overseas to sell on their online shops were found to have evaded RMB179,000 in tax and were imposed one-year imprisonment with one year and six months reprieve, and penalties totaling RMB181,000.
Portions of this article came from the July 2013 issue of China Briefing Magazine titled, “E-Commerce in China,” which is available as a complimentary PDF download on the Asia Briefing Bookstore until the end of this month. In this issue of China Briefing Magazine, we cover the current laws pertinent to the e-commerce industry in China, as well as introduce the steps involved in setting up an online shop in the country in order to help provide foreign investors with an overview of the e-commerce landscape in China.
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