Investment & Finance

Tax avoidance drives nearly 40% of global FDI: report

Nikkei
'Phantom' investment flows into Netherlands, Luxembourg and other tax havens

The central train station in Amsterdam: the Netherlands is one of the world's top destinations for "phantom" direct investment, a new study finds.   © Reuters

The central train station in Amsterdam: the Netherlands is one of the world's top destinations for "phantom" direct investment, a new study finds. © Reuters

Around $15 trillion flowed into tax havens in 2017 under the guise of genuine foreign direct investment, amounting to nearly 40% of global FDI that year, according to a new report co-written by the International Monetary Fund.

The research by the IMF and the University of Copenhagen gives an indication of the scale at which multinational companies seek to minimize their tax burdens, and it argues for greater international cooperation to ensure proper taxation.

"Phantom" FDI is channeled through shell companies known as special-purpose entities that have no real business activities, according to the report.

Such flows grew by roughly half over the five years to 2017, rising to 38% of total FDI from about 31% in 2010, the study finds.

Luxembourg and the Netherlands took in nearly half of phantom FDI. They are part of a group of 10 low-tax jurisdictions also including Hong Kong, Ireland and the Cayman Islands that serve as destinations for more than 85% of all these flows.

Luxembourg's roughly $4 trillion in phantom FDI inflows alone are equivalent to annual direct investment in the U.S., according to the report.

"Even if the empty corporate shells have no or few employees in the host economy and do not pay corporate taxes, they still contribute to the local economy" by using local financial services and paying fees, write the authors Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen.

The Organization for Economic Cooperation and Development is drafting new international rules to block tax avoidance, but some countries are taking their own initiative. The U.K. will impose a digital tax on technology companies like Google, Amazon.com and Facebook next year.

"No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today's globalized economic environment," write the authors of the IMF report.

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