These measures are designed to clamp down on the quick growing number of online resellers selling overseas products, according to a customs bureau spokesman. This market will reach a size of 1.03 billion yuan in 2010, claims a research report by China Ecommerce Research Center.
Intangible Benefits
The new rules have had an impact on the e-commerce industry for tangible products. However, it has done nothing to slow the trillion-dollar industry for intangible products. A variety of products that are delivered via the Internet, including software, net services, images, advertising design, database, credit card centers, information content services, digital media and telecommunications services, are not subject to Customs supervision and are suitable for offshore outsourcing.
For transactions of intangible products, many OHO and smallsized companies are still accustomed to the mode of setting up an international business company in an offshore jurisdiction, that is not subject to a business tax. And many medium- and large-sized enterprises, consider using a low tax territory as its regional headquarters if they hope to explore business on a certain continent. Establishing in such places as Cyprus in Europe, Hong Kong in China and Delaware in the U.S., can lower costs of doing business on those continents considerably.
Tangible Returns
On the other hand, the e-commerce industry for tangible products has also been developing rapidly. This market combines large-scale local inventory with a small-scale store network and the online platform working as the main sales channel. Such a mode can help reduce store rentals and staff expenditure and has already achieved a success in books, audio and video products as well as game software. Products including cosmetics, perfume, toys and even daily necessities have gradually stepped into this market.
Chinese manufacturers who are striving to promote their own brands, often prioritize direct control over end-user retail channels in developed countries, but utilizing an offshore e commerce solution can drastically increase profit margins for Chinese manufacturers producing products for other brands. These companies can realize a profit margin of 20%, or 20 yuan, for selling products with costs of 100 yuan to brand owners, intermediary firms or retailers. However, the final prices of these products on the end-user markets will double or triple to 200 yuan or even 300 yuan. If Chinese manufacturers can sell the products at prices 20% lower than those on the end-user markets via their self-operated B2C websites, conduct reasonable transfer pricing arrangements and tap low-tax adv antages, such as Cyprus 10% corporate tax, they are very likely to have their profits double, triple or grow even more after deducting storage, logistics and advertising costs, which account for only 10% of product prices.
Looking Abroad
A growing number of Chinese businessmen operating in Europe have shifted their focus to countries like the Netherlands, Switzerland and Luxembourg after taking regional human resources, storage and taxation policies into consideration. From there they can set up regional headquarters with an aim to build a sales network that covers all of Europe. These businessmen will mainly consider the advantages of the VAT rate and double taxation treaties.
But when corporate management and business transactions mainly rely on the Internet as a platform for communications, large-scale internet cooperation methods such as cloud computing changes the whole equation. E-commerce has already brought down production and transaction costs significantly, while competition to attract these businesses is likely to make tax incentives increasingly attractive.
Offshore and tax-free international business companies will play a more important role in facilitating the establishment of the shareholding structure and trade activities among small-sized business entities. A growing number of low-tax territories will provide more nshore offshore services via a more complicated and multi-layer mode combining tangible products with the Internet. As the number of netizens exceeds 600 million and the e-commerce industry exceeds 20 trillion dollars across the world, offshore e-commerce is a market ready to take off.
