This paper explains the changes in the composition of the source countries or regions of FDI in China from the perspective of taxation. Based on FDI data from 2003 to 2012, the empirical test, employing the difference-in-differences (DID) model, shows that, after the implementation of the tax agreement between themainland and Hong Kong in 2007, FDI from Hong Kong increased significantly. After the integration of domestic and foreign-funded enterprise income tax systems in 2008, Hong Kong capital inflows increased even more drasti-cally. The extended analyses show that, the substantial increase in Hong Kong capital after the implementati-on of this bilateral tax agreement was partly related to the diversion effect of investment. MNCs might have diverted investment from other tax havens to the mainland via Hong Kong, resulting in a sharp increase in the amount and proportion of Hong Kong investment, whereas those of FDI from other tax havens have declined.
