China’s e-commerce market, with an annual turnover of more than 3.8 trillion yuan last year, has become the largest in the world. The various laws and regulations that were enacted by different authorities at different times can no longer keep up with the new issues and new challenges. With the foregoing background, Chinese lawmakers recently posted the draft China E-Commerce Law (the “Draft E-Commerce Law”). The Draft E-Commerce Law was submitted to the National People's Congress Standing Committee for first review on December 19, 2016.
Highlights of the Draft E-Commerce Law
The Draft E-Commerce Law, when passed by the National People’s Congress, will be China’s first comprehensive law in the realm of e-commerce. It (i) emphasizes duties and obligations of third-party platforms; (ii) stipulates utilization and protection of e-commerce data and information; and (iii) regulates electronic contracts and payments, package delivery and logistics services, and cross-border e-commerce. Below, we highlight several key aspects of the Draft E-Commerce Law.
All e-commerce operators, companies or individuals, will have to obtain necessary business licenses and pay taxes.
Under the Draft E-Commerce Law, all e-commerce operators must file business registrations with the proper government authority. In other words, e-commerce operators, like traditional businesses, must hold a business license to conduct online business. There are some exceptions to this requirement, such as individuals who use personal skills to provide services, sales of family handicraft, sales of self-produced agricultural products, etc.
Individual e-commerce operators have an obligation to acquire business licenses and pay taxes. This provision seems to be the prelude for a more comprehensive taxation system in the future under which individual sellers on e-commerce platforms, such as Taobao.com (the biggest online shopping platform under Alibaba), will be taxed as well.
It is further stipulated that, when an individual conducts e-commerce business through third party platform, such individual must provide the name, address, ID certificate, contact information, etc., to the e-commerce third party platform.
The obligations and liabilities of an e-commerce third party platform are clarified.
The Draft E-Commerce Law clarifies the obligations and liabilities of e-commerce third party platform: (1) to review and supervise operators on its platform; (2) to make and enforce open and transparent platform rules; (3) to record and keep important information; and (4) to allow exit from platforms.
Under the Draft E-Commerce Law, when a consumer’s right is violated, the consumer is entitled, under certain circumstances, to claim for damages against the third party platform. Correspondently, the Draft E-Commerce Law also legalizes the practice of “consumer rights deposits”, which is effectively a “performance guaranty” agreed upon between the third party platform and the e-commerce operator to protect consumers’ rights.
Online payment service providers will be liable for the losses caused by unauthorized payments.
To secure the safety of online payments and prevent financial risks, the Draft E-Commerce Law sets forth the liabilities and obligations of online payment service providers, which is a major breakthrough in online payment law in China. Under the Draft E-Commerce Law, if an online payment service provider violates any related statutory requirements for financial information security management, the service provider will be liable for the corresponding losses. In addition, for any losses caused by unauthorized payment, the online payment service provider will automatically be held liable, unless the online payment service provider can prove that such losses are caused by the recipient of the online payment service.
Behaviors harmful to e-commerce credit evaluation are prohibited.
The Draft E-Commerce Law explicitly prohibits behaviors that may damage the e-commerce credit system. Examples include:
- using fake transactions
- deleting unfavorable ratings/evaluations
- buying favorable ratings/evaluations or exchanging for favorable ratings/evaluations through other methods in order to promote business credibility for oneself or others
- using malicious ratings or evaluations contrary to the facts to damage others’ business credibility
- harassing or threatening the transactional party to urge him/her to make, amend or delete ratings or evaluations of products or services against the transactional party’s own will
- tempering credibility records or disclosing credibility records selectively
- publishing false evaluation information.
E-commerce operators may face a fine of up to RMB 500,000, and could have their business licenses revoked, for violations.
Enhancement of protection of personal information security.
E-commerce operators must establish sound internal control system and technology management measures to avoid information leakage, loss or damages, and to ensure the safety of e-commerce data. Any collection of personal information must be based on the user’s consent. It is prohibited to collect personal information through illegal transactions, illegal intrusions, fraud, coercion or other unauthorized methods.
In addition to e-commerce operators, third party platforms, e-payment service providers, and logistics service providers must also be responsible for personal information security. Violators may face a fine of up to RMB 500,000, and could have their business licenses revoked.
Package delivery and logistics service providers must indemnify users when the deliveries are delayed.
During the performance of express and logistics service, if the e-commerce trading item is delayed, lost, damaged or incomplete, the package delivery or logistics service provider must indemnify the customers. The standard of on-time delivery is not regulated in the Draft E-Commerce Law, but it is regulated in other national standards, i.e. three (3) calendar days within the same city, and seven (7) calendar days to a different city within Mainland China.
Cross-border e-commerce is encouraged and promoted.
To support, promote and ensure the development of cross-border e-commerce, the Draft E-Commerce Law explicitly provides that:
- the government encourages and promotes the development of cross-border e-commerce;
- the government promotes the establishment of a suitable supervision and management system for cross-border e-commerce, in order to improve customs clearance efficiency, safeguard trade security and promote trade facilitation;
- the state promotes the digitalization of customs clearance, tax payment, inspection and quarantine and other sectors of cross-border e-commerce activities; and
- the government promotes the exchange and cooperation of cross-border e-commerce among countries.
Impact of the Draft E-Commerce Law
The existing special provisions in the realm of e-commerce remain unaffected.
In recent years, China has issued several laws and regulations on e-commerce, including:
- in 2014, the government released the Internet Trading Measures, which aimed to improve customer rights and discourage the sale of fake or damaged goods;
- in 2010, the Administrative Measures for the Payment Services of Non-financial Institutions was released to promoting healthy development of the payment service market, regulating the payment service of non-financial institutions, guarding against payment risks, and protecting the lawful rights and interests of parties concerned;
- in April 2016, the government published the List of Products Eligible for Cross-border E-commerce (known as the "Positive List" by the industry). Through the Positive List, products that can or cannot be imported through cross-border e-commerce are clarified. The Positive List and related cross-border e-commerce rules in 2016 completely changed the regulatory landscape of cross-border e-commerce and brought significant changes to the industry, such as requiring approvals for special foods and cosmetics, as well as medical devices. It was postponed to take effect until May 2017;
- in 2015, the government released draft Regulations for the Safety Supervision and Administration of Cross-border E-commerce of Imported Food via Bonded Warehouse Model, which raised the regulatory bar for distributing food via cross-border e-commerce.
The Draft E-Commerce Law will not change the above and other existing special rules. In addition, the Draft E-Commerce Law is not applicable to any financial products and service, online audio and video programs and online publishing, etc.
Difficulties in taxing individual online sellers.
The Draft E-Commerce Law requires all e-commerce operators to pay taxes and acquire necessary business licenses. However, it is unclear how this can be enforced. For example:
- Residences do not qualify as business addresses for business registrations.
Under the current business registration system, a business address is necessary for the application of a business license, while a residential address does not qualify, except in certain cities. Since the majority of individual e-commerce operators conduct their business in their own residence, it is quite difficult for them to file registration with a competent authority. Without duly registering as a business, it would be difficult to tax such an individual.
- Individual e-commerce operators may increase the price of products and services due to the taxation.
The current main e-commerce models include: B2B, B2C, O2O and C2C. For the first three models, since the sellers are registered enterprises, the tax bureau where such enterprise is registered has the authority to impose taxes. Therefore, the comprehensive taxation requirement targets unregistered individual e-commerce operators. The extra cost of taxation will reduce the profits of individual operators, or even turn profits into losses. The only choice for individual operators is to increase the price of products and services.
- Taxation may reduce the entrepreneurial confidence of individual e-commerce operators.
The taxation issue for individual e-commerce operators is a worldwide issue, not only in China. But China now is still at the developing stage, requiring a more open environment. The economic development and job opportunities as well as other related benefits brought by non-taxation may matter far more than the taxation itself.
Cross-border e-commerce will be more closely regulated.
Cross-border e-commerce allows sellers outside China to directly sell to Chinese consumers without going through middlemen. By doing so, many foreign companies have been able to legally bypass a number of Chinese laws and regulations applying to the sale of goods.
Although the Draft E-Commerce Law encourages development of cross-border e-commerce, some issues have yet to be further clarified. For instance: what is the suitable quality standard for the goods imported—is it a China standard or a foreign standard? Do the Chinese labeling standards apply? What are the requirements for parallel importation?
We see a trend toward narrowing the gap between regulations for goods imported through cross-border e-commerce platforms and those for goods imported under traditional modes.
The Draft E-Commerce law is expected to be officially promulgated next year. While this is only a draft, we do not expect to see many changes in the final version of the law. However, we expect to see some debates over the above issues, particularly the business registrations and taxation of individual online sellers.