Research On Legal Supervision Of Round-tripping Investment

Currently, the ratio of China’s foreign direct investment stock to China’s gross domestic product(GDP) has been far exceeding the international average level. However, since the late 20 th century, the international organizations, the Chinese authorities and professionals point out that, actually, a large amount of China’s foreign direct investment is round-tripping investment, which is not the common sense of foreign direct investment. The round-tripping investment is an extremely common phenomenon in corporate investment in China and even the whole world, while most countries show indulgence or permission to the round-tripping investment, resulting in the relevant illegal activities and contributing to the occurrence of tax avoidance. The round-tripping investment is an important portion of the international investment, and is inseparable with the offshore financial centers, which means that most round-tripping investment activities are the capital operation via offshore financial centers. There are two kinds of round-tripping investment. One is non-financing round-tripping investment for the purpose of the treatment of foreign capital, the tax avoidance, the protection of private properties and the financial speculation, and the other is financing round-tripping investment for the purpose of foreign public offering or private placement. The former kind of round-tripping investment has a negative impact on China’s economic development, financial stability and social justice, while the later kind of round-tripping investment is beneficial to the development of China’s capital market in the condition of the better supervision measures for regulating and governing.Although the Ministry of Commerce of the People’s Republic of China, the State Administration of Foreign Exchange and other government departments have successively promulgated laws and regulations on the round-tripping investment, the phenomenon that the round-tripping investment violates laws and regulations is still common. Due to the confidential regime of the offshore centers, the round-tripping investment is hidden in nature. In the case that the domestic residents apply for the registration or record-filing of overseas investment, they often conceal the fact of round-tripping investment, or even bypass the procedures of approval, which violates the original intention of laws and policies and also obscure the body of round-tripping investment. In addition, for the reason that the round-tripping investment is blended with foreign investment, the relevant authorities have great difficulties in identifying the bodies and activities of round-tripping investment. Thus, this paper focuses on the factors, operation mode, main risks and so forth of round-tripping investment, figures out the existing problems in the current regulatory system, and offers suggestions on improvement of the supervision system of round-tripping investment based on the foreign practice.The paper adopts several study methods including normative analysis, comparative study and case analysis, and focuses on the relevant revolutions of the legal system including approval, foreign exchange and taxation, and further focuses on the currently effective laws and regulations to discuss the supervision system of round-tripping investment and points out the defects of the current legal system. In view of the fact that China’s regulatory system of round-tripping investment is far looser than other developed countries in the world, it is necessary to learn from the developed countries, international organizations and even the offshore financial centers on the regulatory systems of round-tripping investment, and introduce the efficient and suitable regimes into China. Due to the lack of the complete supervision on round-tripping investment and the vacuum of law on the variable interest entities(VIE), the illegal operations and negative cases are common in practice. Therefore, the paper discusses the relevant cases to further analyze on the main risks and brings forward the methods to resolve the problems.The main body of the paper is mainly composed of four parts. First of all, the paper discusses the relationship between round-tripping investment and offshore financial centers and the reasons of implement of round-tripping investment via offshore financial centers. The paper indicates that most offshore financial centers adopt simple procedures for establishment of enterprises, provide the adequate tax incentives and set out the loose supervision system, which prompts the enterprises and individuals all over the world, especially the small and medium-sized enterprises, to establish the overseas enterprises in offshore financial centers. The paper then discusses the operation modes of round-tripping investment, including the modes of establishing new enterprises, merger and acquisition, and further discusses the derived operation modes of round-tripping investment, including the VIE mode and the trust mode, and analyzes on the procedures and the key points of each mode.Secondly, the paper mainly discusses the main risks of round-tripping investment, including capital safety, tax erosion, information disclosure, compliance of VIE and so forth, and then focuses on the current supervision regime of round-tripping investment. By means of illustrating the cases of China Chengtong, transfer pricing of a company in Guangzhou, the Muddy Waters Research shorting Chinese stocks, and Baosheng Steel’s failure to list, the paper further analyzes on the real risks. Furthermore, the paper discusses the existing regulatory problems from the perspectives of the current regulations of examination and approval, foreign exchange and taxation, including the lack of mandatory information disclosure of institutional investors, the lack of follow-up supervision of individual investors, and the lack of examination on sources of capital.Thirdly, the paper introduces the supervision system of round-tripping investment of major countries, international organizations and offshore financial centers and their changes of attitude to round-tripping investment, and discusses the major supervision systems of round-tripping investment currently in the world.Finally, the paper puts forward suggestions on improving the supervision system of round-tripping investment, including distinguishing the registration of round-tripping investment and adopting the capital control standard for determining the nationality of legal persons; regarding the round-tripped enterprises as domestic enterprises with no differential treatments; introducing the “transparency” review and focusing on monitoring the round-tripped enterprises; strengthening the examination on sources of capital and executing the regime of periodic reports; establishing the information exchange mechanism of offshore enterprises and promoting the execution of bilateral agreements; strengthening the cooperation with international organizations and broadening the accesses to information of offshore financial centers. By means of introducing the aforementioned measures, the paper aims to provide suggestions on the establishment of a complete supervision system of round-tripping investment, and promote the improvement of China’s foreign direct investment regime.Based on the research of the legal system and relevant cases, the paper analyzes on the main risks of round-tripping investment and figures out the problems and measures to improve the supervision of round-tripping investment. The paper contains at least two significance in improving the supervision of round-tripping investment. First of all, the paper appeals for the improvement of the current legal system and the addition of the new regulatory measures, and provides the feasible suggestions. Secondly, the paper appeals for the cooperation among international organizations, offshore financial centers and China to strengthen the information disclosure and the information exchange, laying a solid foundation for the cross-border supervision of round-tripping investment.