IMF: The Rise Of Phantom Foreign Direct Investments And The Fall Of Global Tax Enforcement

Jannick Damgaard, Thomas Elkjaer & Niels Johannesen (IMF), The Rise of Phantom Investments: Empty Corporate Shells in Tax Havens Undermine Tax Collection in Advanced, Emerging Market, and Developing Economies:

According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. So is something amiss with official statistics or is something else at play?

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. Therefore, many countries have policies to attract more of it. However, not all FDI brings capital in service of productivity gains. In practice, FDI is defined as cross-border financial investments between firms belonging to the same multinational group, and 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. Such financial and tax engineering blurs traditional FDI statistics and makes it difficult to understand genuine economic integration.

• Bloomberg News, Tax Dodgers’ ‘Phantom’ Cash Makes Up 40% of Foreign Investment
• Financial Times, More Than Third of Foreign Investment Is Multinationals Dodging Tax
• IMF, The Rise of Phantom Investments