Cross-border E-commerce Faces Tax Compliance Risks

The main tax risks faced by cross-border e-commerce export enterprises currently involve value-added tax (VAT), corporate income tax, and personal income tax.

01

Lack of VAT Input Invoices Hinders Normal Export and Collection of Foreign Exchange

According to the "Interim Regulations of the People's Republic of China on Value-Added Tax" and the relevant regulations of the tax authorities, if there are no VAT input invoices in the export process, not only can a tax refund not be claimed, but a 13% VAT must also be paid. Many cross-border e-commerce enterprises, for goods purchased without invoices, are unable to declare customs for export and collect foreign exchange normally. They can only resolve the export customs clearance issues by using methods such as 0110 invoice payment for export or market procurement 1039.

02

Evasion of Corporate Income Tax by Remitting Foreign Exchange to Personal Accounts

As stipulated by the "Corporate Income Tax Law of the People's Republic of China," resident enterprises should pay corporate income tax on their income derived from both domestic and foreign sources. The corporate income tax rate is 25%. Currently, some cross-border e-commerce businesses evade high tax burdens by remitting foreign exchange to domestic personal accounts through third-party payment institutions, thus avoiding corporate income tax. This practice is a typical act of tax evasion and will face significant tax risks in the future.

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03Non-compliant tax declaration and payment of personal income tax

According to the provisions of the Individual Income Tax Law of the People's Republic of China, residents are required to pay personal income tax on income derived from both within and outside China. The tax rate for comprehensive income such as wages and salaries ranges from 3% to 45%; the tax rate for business income is between 5% and 35%; and the tax rate for other income is 20%. Currently, many cross-border e-commerce enterprises directly deposit their income into personal accounts, but the personal income is not declared and taxed as stipulated.

04

Significant risks in tax collection and administration

Article 63 of the Tax Collection and Administration Law of the People's Republic of China stipulates that taxpayers who forge, alter, conceal, or destroy accounting books and vouchers without authorization, or who overstate expenses or underreport or fail to report income in their accounts, or who refuse to declare or make false tax declarations after being notified by the tax authorities, and who do not pay or underpay the taxes due, are considered tax evaders. For tax evaders, the tax authorities shall recover the unpaid or underpaid taxes, late fees, and impose a fine of not less than 50% but not more than five times the amount of unpaid or underpaid taxes; if a crime is constituted, criminal responsibility shall be pursued according to law.

Recently, the Beijing Municipal Tax Service has been investigating tax issues of merchants on Tmall and JD.com, which is also a common problem faced by cross-border e-commerce export enterprises. The book sales are huge, but the declared sales data and the amount of tax paid are very small. In the era of digital transactions, data accumulation and transparency are fundamental characteristics. If certain measures are not taken, tax risks cannot be mitigated.

II

Solutions to tax compliance risks

In 2019, the total value of cross-border e-commerce retail exports increased by 60% year-on-year. In the first five months of 2020, cross-border e-commerce retail exports grew against the trend, with a year-on-year increase of 12%. The cross-border e-commerce sector holds significant strategic importance for the country. The state should encourage and support enterprises to gradually become compliant, and reduce the tax burden under compliant conditions. Using the customs declaration modes 9610/9710/9810 is the primary prerequisite for enjoying policies of tax exemption without invoices and assessed collection.

Tax exemption without invoices solves the value-added tax issueIn accordance with the provisions of the Notice on the Tax Policy for Retail Export Goods in Comprehensive Pilot Zones for Cross-border E-commerce (Finance and Taxation [2018] No. 103), by handling e-commerce export declaration procedures through the customs office located in the comprehensive pilot zone, it is possible to exempt export value-added tax and consumption tax.

Addressing Corporate Income Tax Issues through Presumptive Tax Collection

Referring to the Announcement on Issues Related to Presumptive Tax Collection for Corporate Income Tax of Retail Export Enterprises in Comprehensive Pilot Zones for Cross-border E-commerce (State Taxation Administration Announcement No. 36 of 2019), cross-border e-commerce enterprises within the comprehensive pilot zone that are subject to presumptive tax collection should accurately account for the total income and use the taxable income rate method to determine the corporate income tax. The taxable income rate is uniformly set at 4%.

III. Case Analysis

A cross-border e-commerce enterprise has sales of 50 million, with an actual profit of 10 million. According to tax regulations, it is required to pay a corporate income tax of 25%, which amounts to 2.5 million. If the remaining 7.5 million is distributed as dividends to shareholders, a 20% personal income tax must be paid, which is 1.5 million. Currently, by using methods such as buying invoices for customs declaration and personal accounts for remittance, they evade taxes totaling 4 million (including 2.5 million in corporate income tax and 1.5 million in personal income tax). According to legal provisions, in addition to making up for the 4 million in taxes, they also need to pay late fees at a rate of 0.05% per day, amounting to 18.25% per year; the minimum penalty is 0.5 times, which is 2 million. If they do not actively cooperate with the tax authorities' notice to make up for the taxes and penalties, they also face the risk of criminal liability.

If they follow the new tax policy for cross-border e-commerce as mentioned above, with sales of 50 million and a taxable income rate set at 4%, their taxable income would be 2 million. By also applying the preferential tax policies for small and micro enterprises, they would only need to pay 150,000 in corporate income tax, with a tax rate of only 0.3% of sales revenue, which is a significant advantage compared to the previous general trade.

In summary, enterprises need to pay constant attention to compliance risks during their development process. Cross-border e-commerce enterprises, through comprehensive planning and using customs clearance methods such as 9610/9710/9810, can enjoy policies of tax exemption without invoices and presumptive tax collection, and by combining with other tax preferential policies, they can optimize their tax burden in a compliant manner.