African Union, AfricanUNion, bEPS, China, FDI, Forum on China-Africa Cooperation, G20, Hong Kong, Investment, lazy susans, Macau, ODA, OECD Global Forum on Tax, round-tripping, Special Purpose Vehicles
Most of China’s pledge of $60 billion in Africa investments announced at the Forum on China-Africa Cooperation hosted in Johannesburg from December 4-5, last year; which attracted delegations from 50 African countries, and the African Union; will come in loans and export credits.
Only $5 billion is to be in the form of grants and interest-free loans.
This method does not meet the traditional definition of foreign direct investment (FDI); and differs from the OECD-defined ‘official development assistance’; since Chinese ‘investment’ is often tangled with other financial commitments.
Indeed, most of the large China-Africa deals are carried out via loans financed by Chinese policy banks. As such they are not FDI, in which a company or entity from one country invests in another country’s company or entity, and has the foreign investor owning at least “10% of the voting power of the direct investment enterprise.” Unlike other investments, such as portfolio investments, FDI includes investors actively looking to influence how the enterprises are managed.
China recently announced that its cumulative Foreign Direct Investment (FDI) into Africa from 2000 to 2014 is $30 billion. However, as of 2012, however, China has been investing a little more than $2 billion annually into Africa.
It’s not clear whether China’s official accounting includes investments from Hong Kong and Macau, which have some autonomy from Beijing but often serve to channel both official and unofficial Chinese finance back into mainland China to take advantage of tax benefits, a process called round tripping.
How China will deliver its its $60B pledge to Africa in the context of its commitment to the BEPS, as part of the G20 and the OECD, remains to be seen; especially in the context of the sub-programme within the OECD Global Forum on Transparency and Exchange of Tax Information which focuses on increasing the tax base of the these African developing countries.
Round-tripping or ‘Lazy Susan’ structures involve the channelling by direct investors of local funds to Special Purpose vehicles (SPVs) abroad and the subsequent return of the funds to the local economy in the form of direct investment.
SPVs have long been used as a means to deploy efficient, invest-friendly funds for a variety of reasons. As such they fall squarely within the ‘cross-hairs’ of BEPS.