IMF: 'Phantom Capital' from Tax Dodgers Makes up 40 Percent of Foreign Investment

Chris Gaetano
Published Date:
Sep 10, 2019
pepi-stojanovski-MJSFNZ8BAXw-unsplashThe International Monetary Fund (IMF) said in a recent report that up to 40 percent of all foreign direct investment (FDI) is "phantom capital," that is, money moved into empty shell companies with no real business purpose save facilitating tax avoidance. These firms do not carry out productive activities as they are typically understood but rather exist to perform activities such as conducting interim financing, managing intangible assets or simply acting as a holding company. The capital injected into them, therefore, does not go toward any sort of economic development, which the IMF said "blurs traditional FDI statistics and makes it difficult to understand genuine economic integration." 

"Prominent cases include Irish GDP growth of 26 percent 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," said the IMF. "To get better data on a globalized world, economic statistics also need to adapt." 

This phantom capital, says the IMF, amounts to about $15 trillion, larger than the GDPs of both China and Germany combined. Most of it, 85 percent, is concentrated among just 10 economies: Luxembourg and the Netherlands, which host nearly half, as well as Hong Kong, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland and Mauritius. 

The IMF came to this conclusion by comparing data from the Organisation for Economic Co-operation and Development (OECD) with the fund's own Coordinated Direct Investment Survey, which maps all bilateral investment relationships. 

The report noted that, despite attempts from nation states to curb tax avoidance, phantom FDI has only grown, going from 30 to 40 percent of all FDI over the past decade. The IMF ruled out this increase being a consequence of general global economic growth, as "FDI positions have grown faster than world GDP since the global financial crisis, whereas cross-border positions in portfolio instruments and other investments have not." 

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