Daily Management Review

Experts: 40% of foreign direct investments are tax evasion


According to a study conducted by experts from the IMF and the University of Copenhagen, about $ 15 trillion of foreign direct investment is fictitious, and their only goal is to minimize tax deductions from companies, not to support productive activities. This amount is almost 40% of the total foreign direct investment in the world.

401(K) 2012 via flickr
401(K) 2012 via flickr
Having studied the data on the volume of foreign direct investment (FDI) in different countries of the world, experts from the IMF and the University of Copenhagen came to an interesting conclusion. Often, FDI, which should help strengthen the productive activities of the countries in which they are invested, turns out to be just another cross-border investment tool between companies in the same group. The funds are simply siphoned out through numerous nominal companies. These companies, called target or specialized, are not engaged in real business, but only in financial engineering and often, among other things, are looking for ways to minimize corporate taxes.

The volume of FDI in Luxembourg, a country with a population of 600 thousand people, is equal to US FDI and far exceeds the volume of foreign direct investment in China. If you divide the entire volume of FDI in this country per capita, you get $ 6.6 million per person, and this does not correspond to the actual production of Luxembourg. In Ireland, in 2015, GDP grew by 26% just after large international corporations transferred their intangible assets there or began to use this country with low taxes as a base for the sale of digital services without real activities there.

According to the experts, it is notable that a significant part of such fictitious FDI is concentrated in the well-known tax havens of the world, such as Luxembourg, Netherlands, Hong Kong and others.

Luxembourg and the Netherlands account for almost 50%, and the top ten account for more than 85% of all fictitious direct foreign investments, the volume of which is estimated at $ 15 trillion with a total world FDI of $ 40 trillion.

Among countries where more than half of FDI is not real, experts also call the UK, Cyprus, Malta and Hungary.

At the same time, against the background of regulators' recent efforts to deprive international corporations of the opportunity to deduct profits from taxation by registering branches in a country with lower taxes, the share of fictitious FDI has been growing steadily as the total volume of foreign direct investment has also been going up. At the end of 2010, fictitious FDI amounted to 31% of the total investment, and it was already 38% by the end of 2017. Those $ 15 trillion that, according to the authors of the study, are accounted for fictitious FDI now, are equal to the combined annual GDP of China and Germany.

The study’s authors conclude that the principles of conducting economic statistics must change to take this picture into account in order to meet the challenges that globalization poses.

source: imf.org