Editor's note: With the development of trade globalization, cross-border e-commerce has ushered in a booming development. According to the Economic Daily News, China's cross-border e-commerce import and export of 1.22 trillion yuan in the first half of 2024, an increase of 10.5% year-on-year, higher than the overall growth rate of China's foreign trade in the same period of 4.4 percentage points; in 2023, China's cross-border e-commerce import and export increased by 1.2 times compared with 2018. As one of the new modes of export, the development of cross-border e-commerce can not be separated from the support of tax policy, but also faces many tax risks, both to do a good job in the export business of the various types of tax compliance, but also to face the different tax jurisdictions of legal supervision, if you fail to do a good job in the construction of the compliance, easy to tax treatment, penalties, or light to face the economic loss, or the existence of a heavy criminal risk. This article combines the recent cases of cross-border e-commerce, inventory and analyze the common tax risks, and put forward the tax compliance opinions for the benefit of readers.

I. Observations: Several cross-border e-commerce companies were penalized by domestic and foreign tax penalties

(I) Case 1: A cross-border e-commerce company was recovered sales tax and penalties totaling U.S.$2.37 million by the U.S.

On January 11, 2024, Guangdong Star Emblem Precision Manufacturing Company Limited (“Star Emblem”) issued the “Announcement on the Receipt of Notice of Tax Payment by Subsidiary to the U.S. Tax Authorities”, stating that Shenzhen Zebao Innovative Technology Company Limited (“STK”), a wholly-owned subsidiary of Star Emblem, has established a subsidiary in the State of California, the United States. STK Company, STK Company mainly conducts business in Amazon platform. The notice of payment issued by the U.S. tax authorities determined that there was an underpayment of sales tax by STK for the years 2016-2021, and that the total amount of recovered taxes and penalties amounted to USD2,378,403.18.

(Ⅱ) Case 2: Cross-border e-commerce revenue was not accounted and was characterized as tax evasion and penalized

An electromechanical equipment enterprise sold electric motors by issuing receipts from January to June 2022, and the payment was collected through cash, and the total unrecorded and undeclared sales amount was 9,920.17 (excluding tax). ebay sold electric motors through the cross-border e-commerce platform from January to June 2022, and the payment was collected in U.S.D through the third-party collection company, ****Ying, and the equivalent RMB was not recorded and undeclared sales amount was Total 129784.62 (excluding tax). The above total undeclared sales amounted to RMB 139,704.79 (excluding tax).In April-May 2022, the unit obtained incremental tax retention and refund. The tax authorities believe that the unit's concealment of income from January to June 2022 is related to the incremental tax retention refund received from April to May 2022, and that $9,887.52 of its tax retention refund should be recovered.

The tax authorities held that the unit's failure to list or understate its income in its books of accounts actually resulted in non-payment or underpayment of VAT and urban maintenance and construction tax, and its behavior constituted tax evasion. According to Article 63 of the Law on Administration of Tax Collection, a fine of 19,432.94 Yuan was imposed.

(III) Case 3: export of non-refundable goods not regarded as domestic sales, characterized as tax evasion penalties

Certain import & export company incurred cross-border e-commerce export foreign trade business during the period from 2021 to 2022, in which it obtained cross-border e-commerce export foreign trade revenue of U.S.D 1828064.02 in December 2021, and U.S.D 519,607.45 in January 2022, and the export foreign trade revenue of U.S.D 519,607.45 in January 2022, respectively. According to the Detailed Table of Export Information on Not Applicable to Export Refund (Exemption) Policy provided by Longwan District Tax Bureau, some of the export business of the unit in the aforesaid income belonged to the export of non-refundable (exempted) commodities, with a total amount of U.S.D532,831.37, which amounted to RMB339,520,230.93 after conversion into RMB respectively, and the value-added tax should be recovered and paid.

The tax authorities considered that the above tax-related behaviors violated the provisions of Article 63 of the Tax Collection and Administration Law and constituted tax evasion, and decided to impose a fine of 80% of the above underpaid tax, totaling RMB 39,773.88.

(IV) Case 4: Cross-border e-commerce enterprises fraudulently obtaining export tax rebates by falsely issuing VAT special invoices

According to the criminal judgment of the second instance made by Ningbo Intermediate People's Court, from May 2015 to June 2017, Jin Mouhua (sentenced), in order to fraudulently obtain national export tax rebates, agreed on export cooperation business with a certain Import & Export Company Limited and a certain Cross-border E-commerce Service Company Limited, agreeing to export goods under the name of the abovementioned companies with Jin Mouhua bringing his own clients, bringing his own sources of goods, bringing his own invoices and declaring customs clearance on his own. It was agreed that Jin Mouhua would bring his own customers, sources of goods, invoices and customs declaration, and export goods in the name of the above companies, and the above companies would handle the export tax refund business.

In December 2015, Jin Mouhua contacted Defendant Bao Mouhai, requesting a knitting limited company operated by Bao Mouhai to falsely issue VAT invoices to the above company designated by Jin Mouhua, and giving Bao Mouhai a certain percentage of the invoicing benefit fee. Eventually, Jin Mouhua utilized 56 of the VAT invoices falsely issued by Bao Mouhai to declare tax refund to the tax department, and fraudulently obtained export tax refund amounting to RMB 863,690.1 Yuan.

(V) Summary: Growing Tax Risks of Cross-border E-commerce

Cross-border e-commerce, as an emerging export business model, has a simple process, strong policy preferences, relies on informatization and digital technology, low operating costs, a broad market, and a large space for development compared with the business of general trade exports. However, cross-border e-commerce, as an export business, is still faced with certain risks in terms of input VAT invoices in the domestic procurement process, customs business compliance in the export clearance process, and the application of cross-border e-commerce export tax exemption policy and even tax rebate policy. Therefore, this article follows the inventory of common tax risks of cross-border e-commerce and puts forward the key points of compliance.

Ⅱ. Cross-border e-commerce common tax risk summary

(Ⅰ) Tax rebate risk of cross-border e-commerce export overseas warehouse

With the development of cross-border e-commerce export overseas warehouse business model, China has introduced a series of policies to support and encourage. However, due to the late emergence of overseas warehouse mode, corresponding export tax rebate/exemption policies have not yet been introduced, but rather apply the existing export tax policies to be managed, so there are a series of risk points:

First, it is confused with the export model stipulated in the Notice of the Ministry of Finance and the State Administration of Taxation on Tax Policies for Cross-border E-commerce Retail Exports (Cai Shui [2013] No. 96). In fact, Cai Shui [2013] No. 96 only applies to the case of cross-border e-commerce retail exports. Exporting to overseas warehouses is generally not a retail sale, but a general trade export.

Second there is a risk in the application of tax refund and exemption policy because the time of sale of goods is later than the time of export. For self-operated overseas warehouses, e-commerce enterprises export the goods overseas and then sell them on overseas e-commerce platforms one after another, thus leading to delayed sales behavior. According to the Circular of the Ministry of Finance and State Administration of Taxation on the VAT and Consumption Tax Policies for Exported Goods and Services (Cai Shui [2012] No. 39), the production enterprises and foreign trade enterprises are required to wait for the goods to be sold, issue export invoices, and confirm the collection of foreign exchange. If e-commerce enterprises declare export tax rebates in advance, or through the forgery of false sales certificates, foreign exchange settlement information, there is a risk of tax fraud.

(Ⅱ) Disguising general trade export business as cross-border e-commerce retail export business

Compared with the complex export tax refund (exemption) declaration, filing documents and other formalities in the general trade export business, cross-border e-commerce retail export can significantly simplify the export process and the filing obligation of business information. The Circular of the Ministry of Finance and the State Administration of Taxation on Taxation Policies for Cross-border E-commerce Retail Exports (Cai Shui [2013] No. 96) stipulates that e-commerce enterprises can apply the export tax exemption policy if they meet the following conditions: (1) the e-commerce export enterprise has applied for tax registration; (2) the exported goods have obtained the export goods declaration form issued by the customs; (3) the purchased exported goods have obtained the legal and valid importation Vouchers.

Some foreign trade enterprises do not meet the conditions for cross-border e-commerce exports of e-commerce enterprises, but in order to apply the preferential policies or easy conditions for cross-border e-commerce exports, through cooperation with cross-border e-commerce platforms to adopt the so-called “push order” mode, the goods that should be imported in the form of general trade are falsely declared to be imported by means of cross-border e-commerce trade, which may constitute the crime of smuggling.

(Ⅲ) Cross-border e-commerce “push orders” contains a smuggling risk

The smuggling risk of “push order” is concentrated in the import link of cross-border e-commerce. Cross-border e-commerce “push order” refers to the fact that domestic consumers do not actually place orders on e-commerce platforms connected with customs, but place orders on ordinary e-commerce platforms and web pages. Subsequently, the ordinary platform, web page will be the order information pushed to the cooperation of the cross-border e-commerce platform, the cross-border e-commerce platform to match the payment order, logistics orders, orders, and ultimately to realize the goods to cross-border e-commerce retail delivery of goods into the country.

Guangzhou Intermediate People's Court of Guangdong Province (2019) Guangdong 01 Criminal Judgment No. 167 of the first instance ruled on a “push order” business, holding that the essence of the push order business is the importation of goods at low tax by means of fictitious transaction orders and the conduct of secondary sales for profit, which is the misrepresentation of goods imported by means of general trade as cross-border e-commerce trade, constituting the importation of goods by means of cross-border e-commerce trade. The import of goods that should be imported by way of general trade is falsely declared as imported by way of cross-border e-commerce trade, which constitutes the crime of smuggling general goods.

(Ⅳ) Non-compliance of export operations and inapplicability of export tax exemption policy

Even the simplest process of the comprehensive test area cross-border e-commerce “no ticket tax-free” export policy, there are certain conditions, if the violation of the relevant provisions, can not be applied to export tax-free policy. As for e-commerce enterprises to implement general cross-border e-commerce export business, more need to comply with the export.

“Tax Exemption Policy for Retail Exports without Tickets in Cross-border E-commerce Comprehensive Pilot Zones” refers to the ‘Circular of the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce, and the General Administration of customs on Taxation Policies for Retail Exports of Goods in Cross-border E-commerce Comprehensive Pilot Zones’ (Cai Shui [2018] No. 103), which provides that e-commerce exporters in the comprehensive pilot zone of cross-border Comprehensive Pilot Zone for E-commerce is registered and established, and registers the date of export, the name of goods, the unit of measurement, the quantity, the unit price, and the amount on the online comprehensive service platform for cross-border e-commerce at the place of registration; the exported goods go through the e-commerce export declaration formalities through the customs at the location of the Comprehensive Pilot Zone; and the exported goods do not belong to the goods for which the Ministry of Finance and the General Administration of Taxation have explicitly canceled the export rebates (exemptions) pursuant to the State Council's decision, and they are eligible for the export tax exemption policy without invoice.

However, as in Case III in Part I, if the cross-border e-commerce company does not meet the conditions for tax-free export and still enjoys the tax exemption policy, it may be treated as domestic sales to recover the output tax and may even be characterized as VAT evasion.

(Ⅴ) Inability to obtain compliant invoices for small goods purchased from retailers

As in Case 4 in Part I, in addition to the retail export policy of “export without invoice” in the Pilot Comprehensive Zone, cross-border e-commerce enterprises still need to obtain legal proof of purchase (i.e., VAT invoice) in order to enjoy the policy of tax exemption for export. If they want to apply for export tax rebate, they must obtain VAT invoices that are consistent with the information in the export declaration. Therefore, there are some cross-border e-commerce enterprises that violate the law by falsely issuing VAT invoices, and even constitute the crime of false invoicing.

(Ⅵ) Tax evasion risk of obtaining foreign exchange income and government awards and subsidies not recorded in the accounts

Cross-border e-commerce companies, due to their operation on offshore platforms, can temporarily retain the foreign currencies settled by the platforms outside the country through third-party institutions, thus realizing the unrecorded income. In addition, according to recent tax audit cases, some cross-border e-commerce companies have obtained government awards and subsidies that were not accounted for, and were also characterized as tax evasion.

For example, Wenzhou Municipal Tax Bureau Second Inspection Bureau Wen Tax Second Funeral Penalty ﹝2024﹞77 “Tax Administrative Penalty Home Decision” states, “Upon inspection, your unit on November 2, 2021 obtained Wenzhou City Longwan District business Bureau business Award Subsidy of 980,300 yuan, not in accordance with the provisions of the truthful tax declaration.” Constitutes tax evasion.

It is necessary to remind the majority of taxpayers, all the income of the enterprise should be declared for tax payment, even if it is the government's financial awards and subsidies. According to the Circular of the Ministry of Finance and the State Administration of Taxation on the Enterprise Income Tax Treatment of Fiscal Funds for Special Purposes (Cai Shui [2011] No. 70), an enterprise may treat fiscal awards as non-taxable income for the purpose of enterprise income tax if the enterprise simultaneously meets the following three conditions: (a) the enterprise can provide the documents stipulating the special purpose of the funds for the funds to be disbursed; (b) the financial department or other disbursed funds government department has special fund management methods or specific management requirements for the funds; (iii) the enterprise accounts for the funds and the expenditures incurred with the funds separately. If the above conditions are not met, the financial subsidy income obtained by the enterprise from the government department shall be included in the total income and calculated for the payment of enterprise income tax.

Ⅲ. Cross-border e-commerce domestic export tax compliance

(Ⅰ) Legitimate application of preferential policies for cross-border e-commerce exports

In order to encourage and support the development of cross-border e-commerce, the Ministry of Finance and the State Administration of Taxation have issued a series of preferential policies. Enterprises should actively understand the relevant policies and ensure that they are eligible to enjoy these preferential conditions. As mentioned above, eligible cross-border e-commerce exports can be treated as “tax-free exports without invoices”. At the same time, enterprises should pay attention to the latest policy information released by the State Administration of Taxation in order to adjust their business strategies in a timely manner.

(Ⅱ) Retaining business information of exporting goods in the whole process

In practice, enterprises need to establish a perfect business record system to ensure that each batch of export goods have detailed records. This includes, but is not limited to, procurement contracts, purchase invoices, logistics documents and so on. Such information not only helps the enterprise to carry out internal management in daily operation, but also serves as an important document to deal with tax inspection in the future.

(Ⅲ) Mastering domestic and overseas tax policies and filing tax returns in accordance with the law

Cross-border e-commerce involves complex domestic and foreign laws and regulations, so enterprises must familiarize themselves with the relevant tax policies and ensure that tax declarations are completed on time and in accordance with regulations. In specific practice, this involves corporate income tax, value-added tax, customs duty, and sales tax, value-added tax, and other local tax items outside of China. Regularly attending tax training or consulting professional tax law advisors can help enterprises better understand and apply these policies.

(Ⅳ) Actively respond to tax risks and cooperate with tax and customs authorities in investigations

As the cross-border e-commerce export business faces many links and the applicable rules are complex, it is inevitable to encounter risks in tax and customs business even with normal operation. When the risk of tax and customs business arises, you should communicate with the relevant departments in time, provide the required materials and information, and actively cooperate with the investigation. At the same time, you should actively seek the help of professional lawyers to protect your legal rights and interests when necessary.

IV. Tax Compliance for Cross-border E-commerce Extraterritorial Operation

Against the backdrop of the cross-border e-commerce fever of “buy global, sell global”, more and more enterprises are going overseas to seek new opportunities. However, due to the lack of understanding of each country's tax system, cases of violation of overseas tax compliance occur from time to time. At present, domestic cross-border e-commerce sellers operate cross-border e-commerce mainly through the e-commerce platforms such as Amazon, ebay, tiktok, etc., or set up their own operation of the independent station in two ways. This article only introduces the tax risks of cross-border e-commerce transactions through e-commerce platforms.

(Ⅰ) Tax compliance points in the U.S. region

The U.S. tax system is complex, with different federal and state tax collection policies and a wide range of tax items, which poses a considerable challenge to Chinese sellers with U.S. cross-border business. Due to the existence of the Effective Connected Income (ECI) rules, the main body of cross-border e-commerce transactions through online platforms, even if they are not directly engaged in local trade and business activities in the U.S., such as renting warehouses, receiving and dispatching of goods, etc., as long as they receive a return from trade with the U.S., they may trigger the ECI rules and thus trigger the tax obligations.

Chinese cross-border e-commerce sellers in the U.S. are mainly involved in two types of U.S. taxes - income tax and sales tax.

1. Income Tax

Generally speaking, the principle of income tax payment is to pay in the place where the enterprise is registered and managed, cross-border e-commerce companies do not need to pay locally if they do not have an entity outside the country, but the United States is more special. The U.S. corporate income tax needs to be paid at the state level and the federal level. At the state level, the corporate income tax rate has a single rate and a progressive rate, which is usually calculated based on the federal taxable income to be paid after state law tax adjustments multiplied by a certain percentage of the apportionment of the income tax paid in the states in the calculation of the federal corporate income tax can be deducted, but there are some states that do not levy corporate income tax.

As for the federal corporate income tax, cross-border e-commerce operators established in China are non-U.S. tax resident enterprises, and their income derived from cross-border trade is income that is effectively connected with their trade and business activities in the U.S., and is subject to federal corporate income tax in accordance with the provisions of the general federal corporate income tax. Effective in 2017, this tax rate was changed from an overly progressive rate to a fixed proportional rate of 21%.

2. Sales Tax

Sales tax is a local tax levied on a sliding scale based on the sales price of the type of goods or services, and is usually collected from the seller at the time of the sale of the goods or services. Sales tax is the tax that is most likely to violate local tax compliance in practice. If a Chinese cross-border e-commerce seller has a business entity in a state, such as an office, a store, a warehouse, etc., or if the amount of sales or the number of transactions in a state exceeds a certain limit, it will trigger the sales tax nexus and be subject to sales tax.

Amazon, Ebay and other e-commerce platforms usually fulfill the obligation to withhold and pay consumption tax, but withholding does not mean that sellers are exempt from the obligation to file, but also need to file tax returns according to the sales situation and state laws. The frequency of filing is determined by the sales volume, monthly, quarterly or annually, and a U.S. federal tax ID number must be applied for before filing. The filing procedures and tax rates vary from state to state, except for five states, such as Oregon and Delaware, which do not levy excise tax, and usually determine the tax rate according to the principle of applying the tax rate, and collect excise tax according to the tax rate of the place where the consumer receives the goods or the place where the seller ships the goods. The excise tax is collected at the rate of the place where the goods are received by the consumer or shipped by the seller. For cross-border e-commerce, most states apply the place of receipt principle.

(ii) Tax Compliance Points in European Region

The new EU tax reform regulations have been implemented since July 1, 2021, which has had a considerable impact on e-commerce enterprises, and e-commerce enterprises in China need to focus on the value-added tax (VAT) when doing the European site. European site sellers in the sale of goods into the EU member states, the need to pay import VAT along with tariffs, sales in the EU region, the need to pay sales VAT. for the value of goods does not exceed 150 euros, cross-border e-commerce sellers to pay VAT can be simplified through the IOSS system to declare and pay.

Similar to the U.S., when selling within the EU countries, the platform will withhold and pay on behalf of the seller if the conditions are met, but the seller still has to file in the countries where they need to file. Sellers who do not make a sale in a country that requires reporting during a reporting period can choose to make zero declarations. Once a sales operation has occurred, they need to choose to file a normal declaration. Even if the platform has been all the withholding can not directly choose zero declaration, the seller still need to upload the normal sales, the system will calculate the tax payable, if it has been paid in full, the system will recognize and show the amount of payment of 0 yuan. For cases where the platform does not withhold and pay on behalf of the seller, for example, for self-issued goods with a value of more than 150 euros in the direct mail mode, the seller has to declare and pay the VAT on his own, or else it will lead to tax risks.