Wealthy mainlanders are increasingly sending their offshore income home via the British Virgin Islands to avoid paying tax in a trend that has entrenched the Caribbean haven as China's second-biggest source of foreign investment, experts say.
Strict corporate secrecy laws in the BVI, the abbreviation by which the British overseas territory is also known, allows mainlanders to send funds from export sales or company listings in Hong Kong or overseas back home disguised as foreign investment, which is untaxed.
'The reason for this strong link between China and the BVI is a very simple form of tax avoidance,' said Steve Dickinson, Qingdao-based head of American law firm Harris & Moure's China practice.
This inflow of fake foreign investment has emerged as a serious loss of revenue for mainland tax collectors and a threat to economic stability as the authorities seek to curb an influx of so called hot money headed for speculative ventures.
China's economic planners need to be able to distinguish between Chinese money and genuine foreign investment, says Geng Xiao, director of Columbia University's Beijing-based Global Centre for East Asia, who has studied the round-tripping of Chinese capital.
BVI companies last year accounted for about US$10.5 billion of new foreign direct investment into China, or 10 per cent of the total, according to official mainland figures.
This was more than foreign investment from the US, Britain, France and Canada combined.
Hong Kong was the biggest source of foreign investment, accounting for almost 60 per cent of the total.
The mainland taxes capital gains at 20 per cent for individuals and 25 per cent for companies. Income tax rates can reach 45 per cent.
China has in turn become the BVI's biggest foreign investor because its entrepreneurs often shift ownership of their assets to the Caribbean haven, a practice counted by statisticians as offshore investment.
Since 2005, mainlanders have needed permission from the State Administration of Foreign Exchange (SAFE) to bring money from offshore companies back to China and this has been granted rarely, according to lawyers familiar with the process, but the BVI's share of inbound foreign investment has remained high.
In a February report, SAFE made a rare admission that mainlanders rather than foreigners were responsible for much of the US$35.5 billion in 'hot money' that came into the country without permission in 2010.
SAFE officials did not respond to telephone calls and faxed questions seeking comment.Topics: China China International Taxation Island Countries Offshore Finance Business