Unproductive financial capital parked in shell companies registered in fiscal havens reached $15trn at the end of 2017 research by the IMF and the University of Copenhagen shows. 

Phantom FDI by multinational corporations (MNCs) has rapidly grown in the past decade, reaching new heights as profits piles up in shell companies registered in tax havens across the globe.

Characterised as intra-company crossborder investment that moves accumulated profits around empty corporate shells (or special purpose vehicles) allowing MNCs to minimise their tax bills, the stock of phantom FDI has almost doubled to an “astonishing” $15trn between 2009 and 2017, according to a forthcoming paper by the IMF and the University of Copenhagen. That accounts for 38% of the $40trn making up the total stock of global FDI.

A few well-known tax havens host the majority of the world’s phantom FDI, the research highlights. Luxembourg and the Netherlands host nearly half. That duo, and Hong Kong, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland and Mauritius host more than 85% of all phantom investments.

Phantom FDI is largely considered to be an unproductive investment when compared with typical greenfield foreign investment, although corporate shells can contribute to the local economy by buying some tax advisory and other financial services. Despite a global crackdown on fiscal havens and the launch of initiatives such as the G20 Base Erosion and Profit Shifting initiative and the automatic exchange of bank account information within the Common Reporting Standard, its growth has outpaced the growth of genuine FDI through 2017, the research shows.

However, evidence suggests that the stock of global phantom FDI has deteriorated in 2018 following the White House’s Tax Cuts and Jobs Act of 2017, which offered generous tax breaks for those companies willing to repatriate profits for hundreds of billions of dollars temporarily parked in holding companies abroad for fiscal purposes. Ireland and Switzerland alone experienced net outflows of financial investment for as much as $121bn and $141bn, respectively, in 2018, according to figures from Unctad. Overall, US companies repatriated $664.9bn in offshore profits in 2018, figures from the US Commerce Department show.

Another blow to future flows of phantom FDI into host countries in the EU such as Ireland, Luxembourg and the Netherlands may come from the new president of the European Commission, Ursula von der Leyen, who has pledged to introduced a fair tax system amongst all the EU’s member states.

“I will stand for fair taxes – whether for bricks-and-mortar industries or digital businesses. When the tech giants are making huge profits in Europe, this is fine because we are an open market and we like competition,” she told the EU Parliament in July 2019 before her confirmation in the role.

“But if they are making these profits by benefiting from our education system, our skilled workers, our infrastructure and our social security... it is not acceptable that they make profits, but they are barely paying any taxes because they play our tax system. If they want to benefit, they have to share the burden,” she added. 

This article is sourced from fDi Magazine
fDi Magazine

Global greenfield investment trends

Crossborder investment monitor

fDi Markets is the only online database tracking crossborder greenfield investment covering all sectors and countries worldwide. It provides real-time monitoring of investment projects, capital investment and job creation with powerful tools to track and profile companies investing overseas.

Click here to find out more about fDi Markets

Corporate location benchmarking tool

fDi Benchmark is the only online tool to benchmark the competitiveness of countries and cities in over 50 sectors. Its comprehensive location data series covers the main cost and quality competitiveness indicators for over 300 locations around the world.

Click here to find out more about fDi Benchmark

Research report

fDi Intelligence provides customised reports and data research which deliver vital business intelligence to corporations, investment promotion agencies, economic development organisations, consulting firms and research institutions.

Find out more.