Extracts from: Why do so many Chinese companies use the British Virgin Islands (BVI)?
By Nicholas Shaxson – author of Treasure Islands, a book about tax havens. He writes for the Tax Justice Network [TJN].
Naomi Rovnick of the South China Morning Post published an excellent article in 2011 looking at the use by Chinese companies of British Virgin Islands (BVI) vehicles
She reported that ten percent of all “foreign” investment into China comes from the BVI, in fact – and growing explosively. Why so? Well, the reporter met quite a lot of obfuscation. The lawyers didn’t want to tell her; one Scottish corporate lawyer merely said ‘ask the Chinese clients’. But she extracted this telling quote from U.S. lawyer Steve Dickinson, which says it all!
“The reason for this strong link between China and the BVI is a very simple form of tax avoidance. If you take the money straight back into China you pay capital gains [or income] tax. If you leave it in the BVI, wait a while then send it back, it can be made to look to the authorities like it is a foreign investment, and you don’t pay tax on that.”
Mr Dickenson failed unfortunately to distinguish between “tax avoidance – which by definition involves getting around the law without actually breaking it, and tax evasion, which is a criminal activity. What he was is in fact talking about is Chinese interests pretending to be foreign – essentially escaping tax, illegally, through offshore deception. This is illegal. It is tax evasion.
Chinese interests pretending to be foreign – essentially escaping tax, illegally, through offshore deception. This is illegal. It is tax evasion.
And this process of so-called round-tripping – where you take your money offshore, dress up in financial secrecy, then return back home to illegal harvest the tax breaks available only to foreigners – is one of the key raisons d’etre of many tax havens, worldwide. No wonder the BVI hosts over 900,000 corporations. And in case anyone suggests that this is just anecdote – the article also describes, lower down, how the (Chinese) regulator made a rare admission that mainlanders, not foreign investors, were responsible for much of this inflow.
It’s not just about tax, and not just about China. There’s the fraud element too, as Offshore Alert has noted:
“At least 10% of Chinese companies that have gone public on stock exchanges in the United States are engaged in fraud. The deals often involve establishing offshore holding companies in the British Virgin Islands, Cayman Islands, Samoa or another offshore jurisdiction in order to conceal illegal conduct. . . . although the companies are listed on U.S. markets, their business operations are in China and their holding companies are in a third country, creating a maze of regulatory and jurisdictional conflicts.”
So how significant are tax havens with respect to outward investment from China? Well, the US-China Economic and Security Review Commission recently stimated that:
“In 2009, Hong Kong, the Cayman Islands, and the British Virgin Islands collectively received 79 percent of China’s net, nonfinancial FDI outflows. . . this makes the ultimate destination of Chinese overseas investment especially difficult to track.”
And these aren’t the only tax havens Chinese investors use – Singapore is another big one – so the true offshore figure must be even higher than that.
…. offshore financial services industries [in BVI] act as gigantic artificial shams, designed to help Chinese (and other) elites get around their own laws and taxes, in order to get ordinary Chinese (and other) citizens to pay the taxes and costs, and shoulder the risks. Offshore secrecy creates elite impunity, which in turn leads to (and is a feature of) poor governance and authoritarian tendencies.
As with Cayman companies, BVI companies don’t have to say who their shareholders are.
“The vast majority of HK listed companies say in their annual reports that they have BVI incorporated structures, but they usually do not disclose what these subsidiaries hold”
A TJN senior adviser responded for some reasons why one might use a BVI company instead of a Cayman one:
(1) NON-LISTED COMPANY
If the investor is a China based person, the use of an offshore company permits “round tripping” and theoretically hides the identity of the beneficial owner from the Chinese authorities. As you know, the volume of “offshore capital” of persons from China is extremely large. The British Virgin Islands is used most frequently as a place of incorporation in such situations because incorporation in BVI can be done very rapidly, relatively inexpensively, and that jurisdiction is English based and does not have the stigma of “lawlessness” that Panama had.
From a tax point of view, the British Virgin Islands does not offer any tax benefits different from the tax benefits offered by other offshore jurisdictions.
(2) LISTED COMPANIES
The reasons for a British Virgin Island company being in the chain of ownership is not always easy to determine. One primary reason why one might use a BVI company instead of a Cayman one: is that the Group may want an intermediate offshore holding company in order to be able to hold other assets, or engage in offshore transactions, without the use of the Hong Kong Listed Company.
The British Virgin Island company could be used by the Group in this situation without having possible corporate law/securities law issues/problems of using the Hong Kong company. For example, the Group might want to carry out other business ventures, or hold other investments, which it does not want at the level of the Hong Kong company).
[Note: minor changes made for clarity]
From the blog of the Task Force on Financial Integrity.
First published 23 May 2011
Reposted by author to:
About the Author – Nicholas Shaxson
The views expressed in this article are those of the writer and those he quotes and do not necessarily express the views of any member of SPCS.