$15 trillion in 2017: Phantom capital surges, skews global FDI data

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New Delhi | Published: September 11, 2019 7:11:41 AM

The share of such investments in reported FDI has shot up by roughly seven percentage points since 2010 and serves to skew the global FDI data, shows the study by the IMF and the University of Copenhagen.

The surge in these investments reflects the failure of increasing global efforts in curbing tax avoidanceThe surge in these investments reflects the failure of increasing global efforts in curbing tax avoidance

About $15 trillion, or 38%, of the world’s foreign direct investment (FDI) in 2017 was “phantom capital” that was tailor-made to trim tax bills of multinational corporations, and tax havens were being used to funnel these investments, according a study put out by the International Monetary Fund.

The share of such investments in reported FDI has shot up by roughly seven percentage points since 2010 and serves to skew the global FDI data, shows the study by the IMF and the University of Copenhagen. To put it in perspective, phantom capital in 2017 was equivalent of the combined GDP of China and Germany in that year.

The surge in these investments reflects the failure of increasing global efforts in curbing tax avoidance.

Roughly a half of the phantom FDI — “investments that pass through empty corporate shells” with no real business activity — passes through just Luxembourg and the Netherlands. Once Hong Kong, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius are added to the list, these 10 economies host more than 85% of all phantom investments, the study finds.

These nations typically have low tax rates.

“FDI is often an important driver for genuine international economic integration, stimulating growth and job creation and boosting productivity,” the report said. However, phantom capital is typically “financial and tax engineering” that “blurs traditional FDI statistics and makes it difficult to understand genuine economic integration”.

“Luxembourg, a country of 600,000 people, hosts as much FDI as the US and much more than China,” the report says. At $4 trillion, that’s $6.6 million for each Luxembourger. “FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy,” it adds.

The phantom FDI phenomenon affects “virtually all economies”, no matter their size or level of development. Across all economies, the average outflows towards overseas shell firms represents 25% of the total FDI.

“Globalisation creates new challenges for macroeconomic statistics. Today, a multinational company can use financial engineering to shift large sums of money across the globe, easily relocate highly profitable intangible assets, or sell digital services from tax havens without having a physical presence. These phenomena can hugely impact traditional macroeconomic statistics—for example, inflating GDP and FDI figures in tax havens,” the report says. “Prominent cases include Irish GDP growth of 26% in 2015, following some multinationals’ relocation of intellectual property rights to Ireland, and Luxembourg’s status as one of the world’s largest FDI hosts. To get better data on a globalised world, economic statistics also need to adapt,” it adds.

Although this report is not specific to any particular economy, FDI data in India have already come under heightened scrunity of analysts. Last year, a study by KS Chalapati Rao and Biswajit Dhar for the Institute for Studies in Industrial Development pointed out some inconsistencies. For instance, in October 2007, Keyman Financial Services issued Rs 75 crore of shares to a foreign investor; eight years later, this was reported as inflows of Rs 7,500 crore in India’s FDI statistics. Similarly, Serene Senior Living was reported as having received $2.3 billion from the US in FY16, while its filings don’t reflect these inflows, don’t talk of projects in India and its paid-up capital was just Rs 1.5 crore in FY16.

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