New research based on statistics released by the OECD and IMF suggests that some $12 trillion, representing almost 40% of all global foreign direct investment, consists of financial investment passing through empty corporate shells with no real economic activity.
The study, by senior economists at the National Bank of Denmark, the IMF, and a professor of economics at the University of Copenhagen, contrasts this with the usual perception of foreign direct investment as ‘long-term strategic and stable investment reflecting fundamental location decisions of multinational firms’, associated with ‘job creation, production, construction of new factories, and transfer of technology’.
Most of these investments (85%) pass through special purpose entities set up, often for tax reasons, in eight major jurisdictions: the Netherlands, Luxembourg, Hong Kong SAR, the British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore.
In emerging economies, such as India, China and Brazil, the figures show between 50 and 90% of outward foreign direct investment going through foreign entities with no economic substance. In advanced economies, such as the UK and the US, the share is 50 to 60%. The global average is close to 40%.
The study notes that while use of pass-through entities in tax havens does not in itself imply tax avoidance, it does create opportunities for tax avoidance and evasion. The authors claim that these statistics can help settle arguments over whether the new wave of tax enforcement policies, including FATCA, BEPS and the CRS, are ‘ambitious attempts to fix what is perceived as a broken international tax system’ or whether the ‘cost of enforcement could dwarf the benefits’.
The statistics suggest that high taxes are not necessarily associated with high levels of offshore tax evasion, notably in the Scandinavian countries. In emerging economies, use of offshore accounts may have more to do with escaping a currency crisis than with tax evasion.
The study also highlights the drop in the proportion of wealth managed by Swiss banks since the financial crisis from almost 50% to around 25% today, citing the expansion of Asian tax havens such as Hong Kong SAR, Macao SAR and Singapore.
Taken from ‘Piercing the Veil’, by Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen, published in the IMF’s Finance & Development magazine (see https://bit.ly/2Hqat1k).
New research based on statistics released by the OECD and IMF suggests that some $12 trillion, representing almost 40% of all global foreign direct investment, consists of financial investment passing through empty corporate shells with no real economic activity.
The study, by senior economists at the National Bank of Denmark, the IMF, and a professor of economics at the University of Copenhagen, contrasts this with the usual perception of foreign direct investment as ‘long-term strategic and stable investment reflecting fundamental location decisions of multinational firms’, associated with ‘job creation, production, construction of new factories, and transfer of technology’.
Most of these investments (85%) pass through special purpose entities set up, often for tax reasons, in eight major jurisdictions: the Netherlands, Luxembourg, Hong Kong SAR, the British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore.
In emerging economies, such as India, China and Brazil, the figures show between 50 and 90% of outward foreign direct investment going through foreign entities with no economic substance. In advanced economies, such as the UK and the US, the share is 50 to 60%. The global average is close to 40%.
The study notes that while use of pass-through entities in tax havens does not in itself imply tax avoidance, it does create opportunities for tax avoidance and evasion. The authors claim that these statistics can help settle arguments over whether the new wave of tax enforcement policies, including FATCA, BEPS and the CRS, are ‘ambitious attempts to fix what is perceived as a broken international tax system’ or whether the ‘cost of enforcement could dwarf the benefits’.
The statistics suggest that high taxes are not necessarily associated with high levels of offshore tax evasion, notably in the Scandinavian countries. In emerging economies, use of offshore accounts may have more to do with escaping a currency crisis than with tax evasion.
The study also highlights the drop in the proportion of wealth managed by Swiss banks since the financial crisis from almost 50% to around 25% today, citing the expansion of Asian tax havens such as Hong Kong SAR, Macao SAR and Singapore.
Taken from ‘Piercing the Veil’, by Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen, published in the IMF’s Finance & Development magazine (see https://bit.ly/2Hqat1k).
