British Virgin Islands faces FDI blocks

07:40 | 19/08/2013
Despite being a major source of foreign direct investment in Vietnam, companies from the British Virgin Islands are in murky waters when it comes to receiving preferential investment treatment. Nguyen Dinh Nha and Bao Tri from LCT Lawyers explain the disparity and argue for a change in the interpretation of WTO guidelines.

Vietnam should afford the BVI equal treatment as any other WTO-member country to lure more FDI, say LCT lawyers

Vietnam stands out as a South East Asian nation on the rise. The factors contributing to Vietnam’s rise in Gross Domestic Product (GDP) and greater quality of life for its citizens include its geographical location, increasingly educated workforce, recent movement towards globalisation and its socialist-orientated market economy. In order for Vietnam to maintain its growth and lifestyle gains, it should continue on its path towards globalisation and build strong relationships with foreign nations. In particular, Vietnam’s future can benefit greatly from its relationship with the British Virgin Islands (BVI).

Five and a half years after joining the World Trade Organization (WTO) in 2007, Vietnam has enjoyed many gains as a result of its economic global integration. Vietnam’s legislative and economic movement towards a socialist-oriented market economy, in compliance with  WTO regulations, has improved the domestic business environment and helped the nation to realise its economic potential and attract foreign investment.

According to the World Bank’s Vietnamese Investment Report on July 19, 2013, in 2012, Vietnam’s GDP totalled $141.67 billion, almost triple the 2006 figure of $53 billion. GDP per capita has similarly blossomed from $640 in 2006 to $1,596 in 2012. This substantial economic improvement allowed Vietnam to escape its standing as one of the least developed countries and join the ranks of the world’s lower middle-income countries.

Vietnam has enjoyed significant flows of foreign direct investment (FDI) after becoming an official member of the world’s largest economic body. In a span of two years, FDI rocketed from $12 billion to a new record of almost $72 billion. Despite the global economic crisis, FDI in Vietnam has consistently remained positive. During the first five months of 2013, Vietnam attracted $8.52 billion in newly registered and additional FDI capital, up 8.9 per cent compared to the corresponding period of 2012. Experts predict this figure to reach $14 billion by the end of 2013.

Although FDI is one of the greatest contributing factors to Vietnam’s growth, recent discoveries have identified inefficiencies in its application of WTO guidelines. This has raised concerns about the implementation of Vietnam’s policies and WTO commitments. Our analysis reveals that Vietnam is losing valuable investment opportunities from BVI-invested enterprises due to a misapplication of WTO guidelines which results in disparities in how BVI companies are treated.

BVI investment in Vietnam

Historically, FDI from the BVI has profoundly contributed to Vietnam’s economic growth. Along with Japan, South Korea, and Taiwan, the BVI stands among Vietnam’s most prestigious investors. The BVI’s standing among foreign investors in Vietnam is not simply a product of its registered projects in Vietnam, but results from its rapid and efficient implementation of these projects.

Registered FDI capital in Vietnam has amounted to over $210 billion from 1988 to December 31, 2012.  FDI capital from the BVI has accounted for more than $15 billion with 510 projects underway, 35 per cent of which have now been implemented. With such high stakes, any action which restricts Vietnam’s ability to maximise foreign investment from BVI enterprises, presents a serious issue for the country.

Issues with extending WTO benefits to the BVI

In practice, there are a number of foreign investors who would prefer to incorporate their companies in the BVI in order to carry out investment projects in Asia. Despite the BVI’s significant contribution to Vietnam’s FDI capital and economic growth, BVI investment remains constrained by inconsistent policies regarding the implementation of WTO commitments from Vietnamese authorities. WTO benefits extend to investors from all member nations. However, BVI enterprises face an unfortunate paradox because many of their investors are foreign nationals. Consequently, one BVI invested company may receive WTO benefits while another BVI invested company might not. 

The WTO acknowledges that its policy should only be applied to investors from WTO member countries. However, statements from the Ministry of Planning and Investment (MPI) and the Ministry of Industry and Trade (MoIT) indicate that there is wide variation in the way this favourable treatment is applied.

According to an official instruction from the MPI dated February 1, 2013 regarding a BVI-invested enterprise from a Filipino investor in 2008, a BVI company’s investment in Vietnam may enjoy WTO member benefits if its investor is a citizen or national of a WTO-member country. Yet, the MoIT refuses to grant distribution rights to BVI investors when the company is established in the BVI, a non-WTO member country. The result of this is that one BVI invested enterprise places money into Vietnam, while the other displaces it by putting money into a more welcoming South East Asian nation. This inefficiency is allowing other countries in the region to capitalise on investment at Vietnam’s expense.

This unpredictable application of benefits has also raised concerns about Vietnam’s implementation of policies and WTO commitments. Restricting overseas territories, such as the BVI, which is governed under provisions of the British Dependent territories, the mainland of  which is a member of WTO, deviates from Vietnam’s WTO commitments. This has resulted in a prestigious investor such as the BVI exhibiting reluctance to continue its investment into Vietnam due to unequal treatment.

Should the BVI be entitled to the privileges of the WTO commitments?

Vietnam has made attempts to comprehensively implement their WTO commitments in order to develop the economy and hence, the quality of life for its citizens.

However, Vietnam has lost numerous opportunities from foreign investors despite its knowledge that the Vietnamese economy will progress much slower without their added investment. The fact that the BVI has not been recognised as a WTO member is not a sufficient reason to then barricade its companies from enjoying the benefits of the WTO commitments. While a BVI or Cayman Island company is unable to become an independent WTO member state because it is a British Overseas Territory, the United Kingdom is a WTO member and accordingly, the BVI should also be entitled to the same rights as WTO members.

In addition to the BVI’s highly attractive tax and legal system, the territory also maintains over 600,000 corporations with roughly 5,000 new companies registered every month, most of which are established by foreign investors. Extending commercial incentives to these companies provides Vietnam with access to a lucrative investor-market and will increase foreign investment.

Vietnam has also indirectly advocated for the BVI to form an integral part of the United Kingdom in the Treaty on Encouragement and Protection of Investment between the Socialist Republic of Vietnam and the United Kingdom (UK) and Northern Ireland.

Article 3(1) of the Treaty provides: “No Contracting Party shall on its territory treat other investments or income of citizens or companies of the other Contracting Party less favourably than the treatment offered to the citizens or companies of any other countries”.

Article 1(d) of the Treaty “Companies” as: “All companies, firms and associations legally established or set up in any areas or territories of the United Kingdom and Northern Ireland….”

Article 1(e) of the Treaty stipulates the “Territories” to include: “[...] The Great Britain, Wales, Scotland and Northern Ireland, and the territorial waters and any waters outside the territorial waters of the United Kingdom and Northern Ireland […]”

In light of the above, companies legally registered in any areas, even in the overseas territories of the UK such as the BVI are also included within the scope of this Most Favoured Nation Treatment in Investment. It would be easy to draw a parallel between the BVI’s status in the Treaty and that in WTO. Simply put, because Vietnam extends preferential treatment to the BVI in investment, there is no reason to deny the BVI the same WTO-based privileges as are received by the UK.


While suspicions exist over the BVI and Cayman Islands in respect of companies engaging in illegal activities such as money laundering, transfer pricing and tax evasion, the BVI is an attractive trading partner for Vietnam, so long as such partnerships do not condone or encourage illegal activities. Given the BVI’s investment activities in Vietnam, there has been a pressing need to measure the potential benefits against the disadvantages. It is for these reasons that Vietnam should afford the BVI equal treatment as any other WTO-member country, to encourage better foreign relations, improve living standards for its citizens, and continue its path to industrialisation.

By By Nguyen Dinh Nha and Bao Tri from LCT Lawyers

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