The promise of China’s digital economy | KPMG | AU

The promise of China’s digital economy

The promise of China’s digital economy

The surging growth of China’s digital economy is spawning innovative new business models and leading to exciting developments in the patterns of Chinese inbound and outbound trade and investment. Tax law and practice needs to catch up with these business developments and anticipated forthcoming tax regulatory changes.


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Rapid Chinese B2C market growth

The growth of China’s business to consumer (B2C) e-commerce market in the last decade is a world recognised phenomenon. The Chinese B2C market overtook the United State's B2C market in 2013, having increased 100-fold since 2006.

In that period, the Chinese population of digital shoppers had increased 10-fold, from 30 million to 300 million people. Per the latest statistics in 2015 Chinese online B2C sales totalled RMB 3.8 trillion (AUD 780 billion), approximately half the Australian GDP and set to equal the Australian GDP by 2018. And it should be borne in mind that Chinese B2B e-commerce is 9 times the B2C volume.

The Chinese B2C market has been super-charged by a number of factors. Rapid GDP growth has driven up disposable incomes. As the economy shifts from an investment-based to a consumption-based model, the population has become urbanised, but the consumer infrastructure, in terms of shopping malls and the transport to get to them, remains underdeveloped.

Into this gap has stepped e-commerce, particularly the leading online shopping platforms such as Alibaba’s TMall and Taobao, as well as These have leveraged Chinese consumer openness to adoption of new technologies, highly popular online payment platforms (e.g. Alipay, Wechat Pay), and the continuing cheapness of courier labourers (continuing to flow from the country to city) to rapidly construct e-commerce empires. The pollution in many Chinese cities also encourages home purchases.

Cross-border e-commerce opportunities

Cross-border inbound B2C makes up a mere 4 percent of the Chinese B2C market, but a range of regulatory changes and new business platforms are feeding a surge in growth. Equally, the Chinese e-commerce giants are now bringing their e-commerce models into new markets, notably in South East Asia.

An array of tax policy issues are thrown up by these developments and Chinese tax policymakers are working on innovative digital economy tax nexus rules, drawing on the G20/OECD Base Erosion and Profit Shifting (BEPS) work. Equally, China’s CFC rules are seeing a radical overhaul, tailored to cover e-commerce activity in line with the BEPS proposals.

Developments, both commercially and in terms of tax law and administration, are moving quickly in the Chinese e-commerce space.

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