China is now the world’s second largest luxury consumption market after Japan. However, China imposes high taxes on imported luxury goods. Import taxes mainly include a customs duty tax (CDT), a consumption tax (CT) and a value added tax (VAT), adding up to 30-60% in additional cost to consumers in China. The chart below is a simplified illustration showing the tax variations in China, France and USA for luxury goods.
As a result of the high tax rates on imported luxury goods in China, we are witnessing an increasing number of consumers who buy luxury products while travelling outside the country, including Hong Kong and elsewhere. According to the World Luxury Association, Chinese consumers spent a record USD 7.2 billion abroad (up 29.0% y-o-y) purchasing luxury goods during the Spring Festival holiday this year.
Last June, the Ministry of Commerce (MOFCOM) reportedly proposed a reduction in the customs duty tax rate and consumption tax rate on imported luxury goods. Although no further details have been announced since then, lowering the luxury tax would bring mainland luxury prices much closer to their overseas counterparts, leading to more Chinese people making those purchases onshore rather than while traveling abroad. This, therefore, could provide a sizeable boost in sales for ground floor tenants in prime shopping areas in many Tier I and Tier II cities where luxury retailers have a strong presence. If it does happen, we expect to see additional rental growth for retail malls, particularly in the country’s top luxury shopping destinations, such as Nanjing West Road in Shanghai and CBD in Beijing.
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