40% of the world’s stock of foreign direct investment (FDI) is “phantom” capital, designed to minimise companies’ tax liabilities rather than financing productive activity, according to research.
The Financial Times reports that worldwide FDI is worth a total of $15tn and 40 % of it “passes through empty corporate shells” with “no real business activities”.
The study was carried by the IMF and the University of Copenhagen by researchers Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen found.
The research said that FDI is being a vehicle for financial engineering, “often to minimise multinationals’ global tax bill”
The findings come at a time when governments are trying to clamp down on multinational corporate tax avoidance.
The report says that nearly half of the phantom FDI the researchers identified was in Luxembourg and the Netherlands. Other countries in which less than half of FDI is “genuine” included Malta, Ireland, Switzerland and a number of British overseas territories and crown dependencies, according to the study’s authors.
The report quotes Alex Cobham, head of the Tax Justice Network, a campaigning organisation, saying that efforts to reduce “profit-shifting” to low-tax jurisdictions earlier in the decade because of “fiscal and political pressures after the crisis” had, perversely, led to even “more aggressive avoidance behaviour”.
“Profit shifting has gone from a marginal feature of the global economy to a systemic feature,” he said. “This is just the way of doing business now.”
Via Financial Times