Mr.Believer
posted on 02/04/2024
According to a recent study by the International Monetary Fund and the University of Copenhagen, approximately 40% of global foreign direct investment is what's known as "phantom capital." This amounts to roughly $15 trillion, equivalent to the combined annual gross domestic product of China and Germany. Over the past decade, phantom investment has grown from 30% to 40%, outpacing the growth rate of global GDP.
While foreign direct investment can be highly beneficial for countries, phantom FDI—investments passing through empty corporate shells—poses challenges.According to the report, 85% of this phantom capital flows into 10 global economies, including Luxembourg, the Netherlands, Hong Kong, British Virgin Islands, Bermuda, Singapore, Cayman Islands, Switzerland, Ireland, and Mauritius. Nearly 50% of it is directed towards Luxembourg and the Netherlands, renowned tax havens worldwide. This practice, often used for financial and tax engineering, distorts statistics and undermines true economic integration.
Despite the potential benefits of attracting FDI, countries offering low or no corporate tax rates may inadvertently attract phantom FDI. These shell companies, while contributing minimally to taxes and employment, still stimulate local economies through purchasing financial services and paying registration fees.
However, heavy investment in foreign empty shells suggests efforts by both domestic and foreign multinationals to evade taxes. The study emphasizes that an economy's exposure to phantom FDI correlates with its corporate tax rate, highlighting the importance of tax policy in regulating such practices.
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