‘Phantom’ FDI tops $15 trillion

Almost 40% of global foreign direct investment (FDI), totalling some $15trn, is so-called ‘phantom’ capital intended to minimise a company’s tax liabilities rather than finance productive activity, according to research by the IMF and the University of Copenhagen

The study acknowledged that FDI is often an important driver for genuine international economic integration, stimulating growth and job creation and boosting productivity through transfers of capital, skills, and technology.

However, not all FDI brings capital in service of productivity gains and the researchers found that ‘much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill.’

The researchers calculated that Luxembourg and the Netherlands host nearly half of this phantom FDI. They point out that according to official statistics, Luxembourg, a country of 600,000 people, hosts as much FDI as the US and much more than China. Luxembourg’s $4trn in FDI comes out to $6.6m a person.

If Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85% of all phantom investments.

The report stated: ‘Globally, phantom investments amount to an astonishing $15trn, or the combined annual GDP of economic powerhouses China and Germany.

‘And despite targeted international attempts to curb tax avoidance—most notably the G20 Base Erosion and Profit Shifting (BEPS) initiative and the automatic exchange of bank account information within the common reporting standard (CRS)—phantom FDI keeps soaring, outpacing the growth of genuine FDI.

‘In less than a decade, phantom FDI has climbed from about 30% to almost 40% of global FDI. This growth is unique to FDI.

IMF report The Rise of Phantom FDI in Tax Havens is here

By Pat Sweet

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