Cross Border Commerce Taxes when selling to the US and China

Most countries embrace a VAT or GST tax system that defines how cross-border commerce works there. It is essential for entrepreneurs to get the tax rules and regulations sorted before doing business in a particular country.

Taxation for cross-border commerce in the US

United States is an OECD country that embraces a final sales tax system wherein sales tax is consumption tax based on the final transaction of the offerings – product or service.

More than 12,000 taxing jurisdictions apply sets of rules for specific products and buyer location. This makes it difficult for enterprises elsewhere to promote trade of their offerings in particular locations.

• In US tax laws, ‘NEXUS’ describes a situation that showcases an out-of-state business with a physical presence in a US state and is required to pay income taxes and collect sales taxes within a particular state.
• The Nexus determines the actions that a company needs to pursue in a state before it is supposed to pay taxes. As a foreign seller, exceeding $20,000 turnover or more than 200 orders is a requirement.

For example, if a particular buyer and seller are located in a US state, the seller can collect taxes for the buyer and remit them to the state. This applies even if both parties are in different US states, and the seller has some presence in the form of a warehouse or office in the buyer’s state. If buyer and seller are in different states, the buyer is required to pay sales tax to his state only.

Taxation for cross-border commerce in China

The Chinese Enterprise Income Tax (EIT) is levied on income gained by any Chinese enterprise that has been initiated and managed in China. This fact includes physical presence and even websites of foreign enterprises and any income sourced in the country.

China has invested in different rules related to new business dynamics so that it does not lose tax revenue. Online stores are required to register and disclose identification for taxation of e-commerce by the government.

• In general, VAT is levied in China at 17%.
• Other taxes applicable to goods sold in China include consumption tax along with taxes mentioned by PwC. One can look for a breakup of taxes from the General Administration of Customs of the People’s Republic of China website.
• The State Administration of Taxation administers VAT, while the customs collect import VAT on their behalf.

While importing goods, the taxes applicable as mentioned by Dutycalculator.com include:

• Duty Rates - Duty rates range from 0% to 100%, with average duty rate levied at 12.47%. Laptops and some electronic products are free of duty.
• Sales Tax – Imported goods are subject to VAT at 17% or reduced rate of 13% for specific products
• Minimum thresholds - Duty and VAT are charged when together they take up RMB 50 or the import is exempted from both taxes.
• Other taxes and customs fees - Consumption tax is imposed on alcohol, petrol, jewelry etc. The rates vary from 1% to 45%. The taxes are calculated based on CIF value and its duty.

In recent years, the importance of cross-border commerce in China has grown drastically thus boosting online trading in logistics, customs, and shop registration. Several barriers have been significantly eased in many respects.

• The government has launched pilot zones for cross-border e-commerce, in Hangzhou, Shanghai, and Chongqing. The Pilot Zone in Hangzhou tries to reduce online transaction costs by making use of VAT, postal tax and even export tax refund in some respects.
• The country’s regulations for foreign investment in e-commerce have been liberalized off late. The regulations council has set a deadline in 2020 for China to achieve unified, competitive, and reliable e-commerce market. The government strives to lower the barriers to market accessibility, reduced tax burdens and proper streamlining of registration processes.

The Ministry of Industry and Information Technology has eased foreign ownership restrictions in cross-border commerce according to a note in 2015. To view a detailed report and rules and regulations of promoting cross-border commerce in China, check out the PWC China website.