Seeking Truth from Fact: Rationale and Use of Offshore Jurisdictions in the PRC
Author | Kristian Wilson |
Pages | 206-237 |
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206 TSINGHUA CHINA LAW REVIEW [Vol. 6:205
SEEKING TRUTH FROM FACT:
RATIONALE AND USE OF OFFSHORE JURISDICTIONS IN
THE PRC
Kristian Wilson
I. INTRODUCTION
In 2013, inflows of foreign direct investment (“FDI”) to the
People’s Republic of China (“PRC”) amounted to US$127 billion,
making the PRC the world’s second largest recipient of inward FDI
after the United States.1 Slightly behind the PRC were the British
Virgin Islands (“BVI”) which had received FDI inflows of US$92
billion, making the BVI fourth in the world.2 It is noteworthy that
not only are the PRC and the BVI among the top four recipients of
FDI, there is also a strong relationship between the two jurisdictions
in terms of FDI flows. For instance, the BVI is frequently cited as
one of the top three sources of FDI into the PRC (together with the
Cayman Islands (“Cayman”) and Hong Kong). In 2010, the BVI was
the second-largest investor in the PRC, providing US$10.4 billion
(9.1%) of total inward FDI into the PRC.3
The question then arises as to why a small island located in the
Caribbean should be both a significant recipient of global FDI and a
leading contributor of FDI into the PRC. This paper will look at the
reasons behind this phenomenon, by examining the role of the BVI
in structuring inward investment into the PRC and considering how
the BVI is used to structure outward investment by PRC enterprises.
This paper will also consider other offshore jurisdictions, as well as
the role of Hong Kong and Macau (which are often considered to be
quasi-offshore jurisdictions) in Chinese FDI.
This article will focus on the use of offshore jurisdictions from a
legal perspective and consider the interplay of offshore structures
with PRC law. This paper is divided into seven parts. Part I provides
an overall introduction. Part II examines key definitions and
1 U.N. Conf. on Trade and Dev., 15 Global Investment Monitor 5, U.N. Doc.
WEB/DIAE/IA/2014/1 (Jan. 28, 2014).
2 Id. at 6 (Interestingly, the BVI would have been higher, if not for the fact that FDI flows to Russia
rose 83% to US$94 billion, causin g Russia to be ranked third. The rise in Russian FDI was
“predominantly ascribed to the large acquisition by BP (United Kingdom) of 18.5% of Rosneft (Russia
Federation) as part of Rosneft’s US$57 billion acquisition of TNK-BP, which is a company registered
in the British Virgin Islands”).
3 Ken Davies, China Investment Policy: An Update (OECD Working Papers on International
Investment 2013), available at http://www.oecd.org/china/WP-2013_1.pdf.
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perspectives. Part III looks at the economic development of the PRC
and the context in which the use of offshore structures has emerged.
Part IV looks at how offshore structures are used to finance PRC
enterprises. Part V looks at how offshore jurisdictions have been
used by PRC enterprises to structure their outward investment. Part
VI will look at the future role of offshore jurisdictions in the PRC.
Lastly, Part VII will make some concluding remarks.
II. DEFINITIONS AND METHODOLOGY
Before looking at the role of offshore jurisdictions in Chinese
FDI, it will be useful to clarify what is meant by “FDI” and
“offshore.” We will investigate the nature, purposes and use of
offshore jurisdictions in the PRC from a legal perspective.
A. Foreign Direct Investment
There are many ways of measuring economic activity, but when
considering the role of offshore jurisdictions in the PRC, the concept
of FDI is frequently used. FDI is a useful concept for understanding
the extent of economic activity involving offshore jurisdictions, but
only when well-defined.
The Organization for Economic Co-operation and Development
(“OECD”) provides the following definition of FDI:
“FDI is defined as cross-border investment by a resident
entity in one economy with the objective of obtaining a lasting
interest in an enterprise resident in another economy. The
lasting interest implies the existence of a long term relationship
between the direct investor and the enterprise and a significant
degree of influence by the direct investor on the management
of the enterprise. Ownership of at least 10% of the voting
power, representing the influence by the investor, is the basic
criterion used.”4
An interesting feature of this definition of FDI is that the focus is
not on the financial nature of the investment. Instead, the key
attributes of FDI relate to influence, ownership and voting power.
These attributes necessarily engage legal concepts, as they concern
property rights and voting rights.
4 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, OECD FACTBOOK 2013:
ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS 86 (2013).
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B. Offshore
Many terms are used to describe offshore jurisdictions,5 but for
the sake of clarity and consistency, this article adopts the term
“offshore” which is widely used and also defined by the OECD. The
OECD defines offshore financial centers as:
Jurisdictions with financial centres that contain financial
institutions that deal primarily with nonresidents and/or in
foreign currency on a scale out of proportion to the size of the
host economy. Nonresident-owned or controlled institutions
play a significant role within the centre. The institutions in the
centre may well gain from tax benefits not available to those
outside the centre.6
This is a broad definition and also captures such jurisdictions as
the United Kingdom, Hong Kong and Singapore. However, an
International Monetary Fund (“IMF”) working paper suggests that
the definition should also include “centres which provide some or all
of the following services; low or zero taxation; moderate or light
financial regulation; banking secrecy and anonymity”7 as well as
providing services such as banking services, fund management,
insurance, trust businesses, tax planning and company incorporation.
Again, this definition can still include many jurisdictions that are
considered onshore. This is a fundamental point in thinking about
offshore centers, as activities that are considered offshore, such as
banking, fund management, and tax arbitrage, also take place
onshore, just at a different level of intensity.
However, for the purposes of this article, the primary focus will
be on the BVI and Cayman, which are Caribbean offshore
jurisdictions that offer a number of the services described by the
IMF. In particular, each jurisdiction specializes in some of these
activities. The BVI specializes in company incorporation, being the
world’s leading offshore incorporation jurisdiction, whereas the
5 Other terms includ e ‘tax havens’ and ‘international finance centers.’ Neither term is particularly
useful to the analysis as the first term is pejorative and excludes other uses of offshore jurisdictions
(such as legal structuring) and the second term is so ambiguous that it risks becoming meaningless.
Therefore this article uses the term ‘offshore’ which is familiar to most readers.
6 OECD Glossary of Statistical Terms – Offshore Financial Center Definition, http://stats.oecd.org
/glossary/detail.asp?ID=5988 (Jan. 4, 2006).
7 Int’l Monetary Fund [IMF], Monetary and Exchange Affairs Dept., Offshore Financial Centers
IMF Background Paper, http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm (June 23,
2000).
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