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Cosmetics

F
Industry-Specific Issues

Introduction
igures from the China Association of Fragrance, Flavor and Cosmetic Industries (CAFFCI) indicate rapid growth in cosmetics consumption in China in 2010. According to CAFFCI statistics, the cosmetics industry in China recorded total sales of RMB 153 billion (US $23.3 billion) in 2010, up 9.3 percent compared to 2009. Total imports and exports in 2010 were US $997 million (RMB 6.5 billion) and US $1.62 billion (RMB 10.6 billion), up 42.4 percent and 24.6 percent respectively compared to 2009. Despite this significant growth in demand, the industry is greatly hampered by taxes and tariffs that result in retail prices that are 30 percent higher than those in other markets. Further, approvals for new cosmetics are impeded by a lack of transparency in the regulatory process as well as inconsistent and at times conflicting regulations.

Regulatory Focus on Safety

The State Food and Drug Administration (SFDA) promulgated several new laws and regulations, reflecting a shift in regulatory focus from hygiene to safety. For example, the SFDA now requires companies to run safety assessments and has a stronger assessment of hazardous substances. In response to several issues creating widespread public concern over the quality of cosmetics, the SFDA pushed for improved cosmetics safety and informed consumption. We encourage SFDA, however, to maintain the quality of its regulations by giving adequate time for consultation with industry regarding new regulations before they are implemented.

Amendments to the Advertising Law

Amendments to Chinas Advertising Law are currently in progress, led by the State Administration for Industry and Commerce (SAIC). The government has sought public comments on the amendments on several occasions. AmCham-China applauds this increase in transparency.

Significant Developments
AmCham-China would like to thank all departments of the Chinese government for significant progress in ensuring the healthy and safe development of the cosmetics industry. Several examples of positive recent developments are outlined below.

Specific Issues
Regulations Concerning Hygiene Supervision of Cosmetics
The Regulations Concerning Hygiene Supervision of Cosmetics (Regulations) and their implementing guidelines have been in force for more than two decades, since 1989 and 1991 respectively. While the Regulations and guidelines are the primary instruments governing Chinas cosmetics industry, they fail to sufficiently meet industry needs in terms of regulation and development. We urge the State Council to amend the Regulations as soon as possible to simplify the administrative procedures for product registration. Amendments should also standardize the safety benchmarks for raw materials used in cosmetics production, consolidate production and health licensing, and establish a risk monitoring and evaluation system. We hope such amendments to the Regulations will unify regulatory functions and eliminate current regulatory overlaps. In particular, amendments could combine the current AQSIQ system for administering cosmetics production with the health monitoring and administration currently

Ingredient Labeling
The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) began requiring the cosmetics industry to adopt full ingredient labeling on June 17, 2010. The new labeling requirements are a major milestone for Chinas cosmetics industry. They not only indicate that Chinas cosmetics labeling practices are increasingly in line with international practice, but they are also a significant step towards protecting consumer rights and interests, strengthening corporate standards and facilitating governmental supervision. We have also noticed that the National Cosmetics Standards Committee, which reports to AQSIQ, has made significant progress in shifting focus from promulgating a large quantity of standards to increasing the quality of new standards.

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performed by the SFDA. Amendments should also enhance the safety orientation of the regulatory system and introduce a unified licensing system for cosmetics safety. We further believe that the much needed amendments could change the current regulatory approach by: enhancing selfregulation in the industry, strengthening corporate responsibility, simplifying administrative licensing and replacing administrative licensing prior to product launches with supervision following product launches. Introducing such amendments would help increase efficiency in the market. It would also improve the efficiency of government supervisory processes and save government resources.

Implementing the above measures will contribute to a stronger cosmetics market in China by shortening product lead-times. China is likely to benefit from allowing products to more quickly reach the market as this may improve the competitiveness of domestically manufactured cosmetics.

Imported Non-Special Purpose Cosmetics

According to the Notice on Simplifying the Licensing Procedures for the Import of Non-Special Purpose Cosmetics issued by the Ministry of Health, imported non-special purpose cosmetics are subject to administrative filing and review processes, and are exempt from technical, scientific review processes. However, in practice the SFDA continues to require technical reviews conducted by authorized scientific testing centers. These technical reviews are based on the original information provided by the importing company. Companies are not able to provide additional information to assist the technical review. Rather, if a company needs to update or supplement the information provided, it must submit a new application (and the original application will be rejected). As a result, companies report that the process for registering non-special purpose cosmetics can be more complicated and time-consuming than the process for registering special-purpose cosmetics. AmCham-China strongly suggests removing the requirement for technical reviews of non-special purpose cosmetics. We recommend a time limit be imposed on administrative reviews, so that if importers provide the appropriate information in the correct format, a certificate approving the product will be granted within five working days. To the extent that technical reviews continue to be required, procedures should allow the importing company to provide supplementary information upon receipt of technical review comments. After receiving any supplementary information, the licensing center should then conduct a further review within a stipulated time frame.

Simplifying Product Registrations Domestically Produced Special-Purpose Cosmetics

At present, domestically produced special-purpose cosmetics (those cosmetics defined as special-purpose according to the SFDAs classification system) must be evaluated and approved by provincial SFDA agencies as part of the registration process, in accordance with current health criteria for manufacturing enterprises. The process usually takes two months. These procedures at a provincial level duplicate the registration requirements applying to all manufacturing enterprises when obtaining health permits from the SFDA at a central level. Further, SFDA requirements stipulate that cosmetic health permit evaluations at a central level may not commence prior to the completion of provincial-level evaluations and approvals. New provisions concerning registrations provide that the legal representative of a Chinese company declaring responsibility for imported cosmetics is authorized to sign registration documents on behalf of the company. Such legal representatives may also delegate to another person the authority to sign on behalf of the company. However, in the case of a domestic manufacturer of special-purpose cosmetics, the legal representative is prohibited from delegating its power in this way. This creates difficulties for manufacturers whose legal representatives may not be based in the same location as the manufacturing facility. In our view, both Chinese manufacturers as well as Chinese companies declaring responsibility for imported specialpurpose cosmetics should be able to have legal representatives delegate signing authority. AmCham-China urges the abolition of provincial-level evaluations and approvals for domestically produced specialpurpose cosmetics. Until this is achieved, AmCham-China suggests separating licensing evaluations from provincial examinations and approvals of health conditions. Provincial examinations and approvals for cosmetic licenses should precede provincial health evaluations and approvals. Finally, we suggest that the legal representative of a domestic manufacturer of special-purpose cosmetics should be allowed to authorize another person to sign registration documents binding the manufacturer.

Industry-Specific Issues

Improve Online Reporting System and Review

The online system for registering cosmetics products is a powerful tool with potential to improve the efficiency of the registration process. Standardizing licensing procedures allow enterprises to track progress and contribute to more open administrative procedures. However, the online reporting system is not being utilized to its full effect by authorities. In many cases, the online system is only one component of the registration process and companies must still submit hard-copy forms at some stage. We hope the SFDA will improve the online reporting system to enhance regulatory efficiency.

Set Clear Timeframes for Review Meetings

At present, general review meetings for cosmetic approvals are held on a monthly basis. However, there is no clear timeframe for when supplementary information or product

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changes will be reviewed. Similarly, there is no time limit on when comments following a review meeting will be provided to the importing company or manufacturer. Accordingly, we suggest the SFDA standardize the timing of review meetings and timeframes for comments. We also recommend that review meetings be held more frequently, and that the SFDA provide guidance on the time within which a company may provide further information to be considered at a review meeting.

laboratories that use alternatives to animal testing. We also suggest that China gradually work on legislation to support the establishment of laboratories and recognition of test results that use alternatives to animal testing. Introducing such policies in line with best-practice standards in safety testing will help build a strong and globally competitive cosmetics sector in China.

Taxation Corporate Income Tax

We are grateful to the State Administration of Taxation and the Ministry of Finance for considering industry requests and suggestions. This includes raising the pre-tax deduction for advertising and business promotion expenses to 30 percent of annual sales in its 2009 Notice on Policies on Pre-Tax Deduction for Advertising and Business Promotion Expenses of Certain Industries (the Notice). However, we have also come to understand that this provision is only applicable to cosmetics manufacturers and does not benefit companies that import and sell products manufactured overseas. In reality, most cosmetics companies separate production and sales, and importing and sales companies are also responsible for advertising and promoting cosmetics. Such companies contribute significantly to employment and both national and local tax revenue. The Chinese government supports growth and development of the services industry through a strategic focus on optimizing and upgrading Chinas industrial structure. It is also working to create a fair, standardized and transparent set of standards for market access. AmCham-China understands that authorities are now considering extending the Notice. We urge the authorities to take into account the actual needs of importing and sales companies and allow them to enjoy the 30 percent deduction. This will foster a level playing field between manufacturers and importers, creating a more competitive market.

Standardization of Approval Procedures for Registration of New Ingredients

Currently, the SFDA relies on an internally circulated list of cosmetics ingredients in determining whether an ingredient is new and requires testing. This list was first circulated in 2007, and contains only around 12,000 ingredients. Companies report that there are many ingredients used in cosmetics which are not included on this list. As a result, some ingredients which have a long history of safe use are subject to testing as new ingredients by the SFDA. In order to further standardize and simplify registration of new cosmetics ingredients, AmCham-China proposes that the latest List of Standard Chinese Names of International Cosmetic Ingredients (2010 version), issued by the SFDA, be referred to when categorizing new ingredients. This is a more up-to-date list of ingredients used in cosmetics and includes around 15,000 ingredients. AmCham-China also suggests that any ingredient with a demonstrable history of safe use be partially exempted from requirements applying to new ingredients.

Industry-Specific Issues

Alternatives to Animal Testing

With recent developments in science and technology, and particularly developments in the fields of molecular and cellular biology and new toxicology tests, animal testing is no longer the only option for chemical safety assessments of cosmetics. As such, the US and European countries have banned unnecessary animal testing and are seeking to promote safety tests for cosmetics that involve animal substitutes, except for cosmetics for which animal testing is still necessary. China, however, requires animal toxicology laboratory reports to be provided prior to licensing a cosmetic product. Not only does this impede the export of Chinese cosmetics and raw materials, but it also damages the image of Chinese cosmetics brands in foreign markets, such as those in the US and Europe. This requirement increases the burden on cosmetics producers. Cosmetics companies are forced to disregard existing safety data and conduct toxicology tests using animal subjects in order to gain the appropriate approvals to enter the Chinese market. We urge the SFDA to acknowledge testing data from foreign

Cosmetics Consumption Tax

The current tax system in China has resulted in retail prices for cosmetics that are as much as 30 percent higher than in other markets. Increasing numbers of Chinese consumers are buying their cosmetics overseas, draining consumption from China to other markets. The 30 percent consumption tax on cosmetics, including fragrance products, is of particular concern to the industry. As cosmetics have become a daily necessity for Chinese consumers, categorizing them as luxury goods for tax purposes greatly curbs consumption, resulting in a heavy burden on the cosmetics industry as well as an economic burden on consumers.

Standardizing Benchmarking and the Advertising Law

Presently, laws that apply to domestic cosmetics adver-

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tising include the Advertising Law (1995), Administrative Measures on Cosmetics Advertising (1993), Administrative Measures on Print Advertising (2005) and the Anti-Unfair Competition Law (1993). Under these multiple laws, one region may apply the Advertising Law to determine standards and penalties applicable for cosmetics advertising, while another applies the Administrative Measures on Cosmetics Advertising. As the penalties differ from law to law and some of the provisions are ambiguous, there is much subjective interpretation and discretion in their execution. The penalty for advertising of the same kind may vary by a factor of ten or more. AmCham-China urges the government to unify the advertising law applicable to the cosmetics industry, so that one set of rules applies across the whole country. This will alleviate confusion and assist corporate compliance. AmCham-China appreciates the efforts of SAIC in amending the Advertising Law and Administrative Measures on Cosmetics Advertising. We urge SAIC to take the opinions of the industry into full account during the amendment process. We hope that the amendments provide clear principles to clarify the conflicting regulations in this area.

Recommendations
Industry-Specific Issues

Amend the Regulations Concerning Hygiene

Supervision of Cosmetics to simplify the administration of the industry and to ensure that safety is a priority in both cosmetics administration and licensing. Improve management of new ingredients, and use the latest List of Standard Chinese Names of International Cosmetic Ingredients (2010 version) issued by the SFDA when distinguishing new ingredients. Simplify registrations for domestically produced special-purpose cosmetics by abolishing provincial evaluations and approvals. Expand the scope of the 30 percent pre-tax deduction for advertising and business promotion expenses to apply to importing companies. Amend the tax provisions that list cosmetics and fragrance products as luxury goods and lower the tax rate on these products. Recognize a broad range of scientific testing for cosmetic chemical safety assessments and support the establishment of laboratories that use alternatives to animal testing.

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