Things to know on the Chinese pricing tag

China - 03 / 20 / 2019

Corporate China Commentary

To the retail operators, administrative penalty imposed on price cheating is one of the most common administrative penalties they would face in their daily operation. Price Cheating, as provided in the Pricing Law of the People's Republic of China (the “PRC”[1]) and Regulations on Prevention of Price Cheating, refers to the act of a business operator cheating or misleading consumers or other business operators to trade with him in a false or misleading pricing form or with a false or misleading method.

As provided by relevant laws and regulations[2], activities of business operators which would be recognized as Price Cheatings include but not limit to the following:

In daily life, it is noticed that risks for companies to be recognized as “Price Cheating” are mainly related to promotion activities. For example, a company that plans to initiate a promotion activity might be investigated for a “Price Cheating” case due to the misunderstanding of the definition “Original Price”.

According to the PRC laws and regulations, there are two scenarios to determine the “Original Price”:

Scenario I

If any product was sold within 7 days in the trading place before the reduction of price, the lowest transaction price of the sold product in the trading place shall be used to label the original price, and the business operator shall keep the receipt to proof the existence of such transaction and transaction price.

Scenario II

If the product was sold but was not within 7 days in the trading place before the reduction of price (e.g. two month ago before the reduction of price), and the business operator intends to use “original price” for promotion purpose, the last transaction price shall be used to label the original price.

The retail operator shall pay close attention to the definition of “trading place”, which shall refer to the same place where the current product is selling. For example, if a brand has one store on Nanjing Road East, Shanghai, the other stores, neither the offline store next door to it, nor the online store in TMall or the brand’s own APP, shall be regarded as the same “trading place”.

Therefore, if a product has never been sold in the same trading place, business operators shall not use “original price”, “original selling price”, “transaction price” or other similar concepts to mislead consumers to believe there have been transaction records for the product in the same trading place. Otherwise, the business operator shall be regarded as a “Price Cheating” by presenting false original price. Based on the practice and unofficial opinion of the in-charge authority, the retail operators could consider using “Label Price” instead of “Original Price”.

For any activities recognized as a Price Cheating, the business operator shall be imposed with administrative penalties in accordance with the PRC Pricing Law, among which based on the existence of the illegal gains, such operator might face different administrative fines as following:

Where the business operator has illegal gains, such illegal gains shall be confiscated, and such operator may also be fined with the amount no more than five (5) times of the illegal gains;
If there are no illegal gains, such operator shall be given a warning and may also be fined. Provisions on Administrative Sanctions Against Price-related Illegal Activities issued by the State Council further details the amount of the administrative penalty under such circumstance as more than RMB 50, 000 and less than RMB 500, 000.

The definition of illegal gains is provided by the Measures for the Recognition of Illegal Gain for the Administrative Penalty Imposed by Administrative Authorities for Industry and Commerce issued by State Administration for Industry and Commerce[3] effective from January 1, 2009, with a general principal as the illegal gains shall be the total income derived by a party concerned from manufacture and/or sale of goods or from provision of services minus the reasonable expenses for direct operations by the party concerned, as well as special calculation methods for some specific circumstances. For instance, illegal gain obtained by sales of goods shall be the revenue of illegal sale of goods deducted the purchase price of said goods.

However, in practice, the standard for the identification of “illegal gain” and “no illegal gain” adopted by the Chinese government is not clear; therefore the competent authority might have different opinions case by case.

Take Shanghai as an example, after checking publicly announced administrative penalty decisions regarding pricing issues made in Shanghai since January 1, 2018 to now, it is noticed that competent authorities tend to deny the existence of illegal gains and impose the administrative penalty pursuant to the clauses for “no illegal gain” directly.

Except above, based on our previous experiences in similar Price Cheating cases, it is noticed that the local in-charge authority might also have some internal rules which would directly deny the application of the concept of “illegal gains” in Price Cheating cases. Although legally speaking, the laws and regulations especially those with administrative penalty clauses shall be publicly available and approved in writing as law or administrative regulation, internal rule is widely used in daily operation by the administrative authorities in China.

Based on the above, considering the amount range of the administrative fine might be different subject to the existence of illegal gains under the Price Cheating cases, for companies that investigated by the competent authorities, the recommendation would be:

Duly keeping the sales data and copy of receipt, this would be helpful to argue the existence of Price Cheating activities.

The concerned company shall first participate positively for the initiated investigation and keep good communication with the competent authority in order to gather as much information as possible to avoid the actual recognition of Price Cheating.

If the Price Cheating is recognized and a penalty would be imposed, with the positive participation and the gathered information, especially internal rules and guidelines, the company shall:

Decide to take the proper action in order to avoid the imposing of the heaviest administrative penalty and to achieve the implementation of the lenient or mitigated penalty. For example, the company could take the initiative to correct its activity, refund the payment or provide compensations to the customer as to eliminate or mitigate the harmful consequence of the investigated activity;

Take the initiative to estimate the amount of potential administrative penalty and choose whether it is applicable to lower its loss with the application of the “illegal gains” concept and try to convince the in-charge authority accordingly.

Not to miss any right and/or procedural remedy you may have before the administrative decision is made, which includes and not limited to the right to state your cases and to defend yourself, the right to request the in-charge authority to reexamine the facts, grounds and evidence put forward by you, and in certain circumstance, the right to request a hearing.

After a decision on administrative penalty has been made in accordance with law, apply for administrative reconsideration or bring an administrative lawsuit if the business operator refuses to accept the decision on administrative penalty.

It is highly recommended for the retail operators to regularly review and update the pricing related compliance policies and monitor the implementation of said compliance policies, which would be cost-saving methods to be taken to support the development of your business.

[1] For the purpose hereof, excluding Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan Area.

[2] Mainly stipulated in the Regulations on Prevention of Price Cheating issued by the National Development and Reform Commission, effective from January 01, 2002.

[3] Due to the reform of the State Council in 2018, the State Administration for Industry and Commerce has been replaced by the State Administration for Market Regulation, with all its functions to be performed by the latter.