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China’s tax reforms focus on shaping future consumption patterns

The State Administration of Taxation of China reduced the consumption tax for cosmetics from 30% to 15% in October and changed the 'cosmetics' category to 'luxury cosmetics'. These tax reforms signal a shift for Chinese consumption towards more affordable luxury purchasing patterns.

Revenue from cosmetics in China last year was 204.9 bn yuan (29.7 bn dollars), a 230% increase since 2010, as stated in a recent article by the South China Morning Post. In its analysis of transactions from the 11.11 Global Shopping Festival (or Singles' Day), Syntun, a leading data analysis company in China reported that cosmetics products reached 21.2 bn yuan (2.9 bn dollars) in revenue during the one-day event, with over 50% revenue being made by foreign companies and joint ventures.

According to Bloomberg, China's largest cosmetics import countries are France, Korea and the US. Bloomberg also reports that 18.4% of the revenue of Amorepacific, a leading beauty and cosmetics conglomerate in Korea, originates from China, its larger overseas market. The South China Morning Post reports that the October cosmetics tax cut will have a greater effect on western cosmetics companies rather than Korea's: western beauty brands have a better overall reputation and, being generally more expensive than those from Korea, they are going to benefit more from the reduced tax. European cosmetics brands are particularly better off, compared to their American counterparts, because of recent decreases in the British pound and euro with respect to the dollar.

Bloomberg also states that a large amount of cosmetics sales in Korea are to Chinese tourists. So much so, that retailers are hiring more Chinese speaking shop assistants to target these customers. But, because of the tax cut and the drop of the yuan compared to the won, shoppers might be better off purchasing the imported Korean beauty products at home. In mid-November, NetEase group's Kaola, one of the leading cross-border e-commerce platforms in China, published the 2016 Cross-Border Consumption Trends report. Among the findings, the top three fastest growing categories are digital home appliances (+3600%), clothing (+3000%), and cosmetics (+2436%) year-on-year.

There are tax reforms happening at the other end of the spending spectrum too. From the beginning of December, the State Administration of Taxation of China increased by 10% the consumption tax for luxury cars, ie those with a retail price before VAT over 1.3 million yuan (180,000 dollars). This will deter Chinese consumers away from big-ticket items and is a statement to try to curb pollution in big cities.

China’s taxation reform proposals have been under increasing scrutiny, according to both Bloomberg and Securities Daily that reported consumption tax reform is an important part of this round of fiscal regulation changes, with China adjusting tax for different categories to regulate consumer behaviour.

Global Blue takeouts

● In China the cosmetics tax has been cut by 15%, but the consumption tax for luxury cars has increased 10%; it will encourage people spend more on small luxury products rather than big ticket items like cars.

● While Korean cosmetics have a strong position in China, the tax cut will likely benefit more western brands, that have higher price points.

● Chinese spending on cosmetics is growing significantly, but not as quickly as digital home appliances and clothing.

● China tax reforms to focus on macro-controls for consumer spending.