A new study has found that 40% of global foreign direct investment is designed to minimise tax liabilities rather than finance activities – a policy described as ‘phantom’ capital investment by the International Monetary Fund.
Researchers Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen, who carried out the study for the IMF and the University of Copenhagan, identified Ireland as one of 10 economies who together host more than 85% of phantom investments.
“Interestingly, a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments,” they wrote.
They identified almost $15 trillion dollars – or 40% of worldwide FDI – as passing “through empty corporate shells” with “no real business activities”. These transactions are widely believed to be engineered to minimise tax liabilities, as profits are declared in countries with very low or minimal corporate tax rates, such as Ireland.
“These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. Such financial and tax engineering blurs traditional FDI statistics and makes it difficult to understand genuine economic integration,” the study explains.
The authors claimed that almost two-thirds of investment into Ireland from abroad is “phantom” capital.
“In Ireland, the corporate tax rate has been lowered substantially from 50 percent in the 1980s to 12.5 percent today. In addition, some multinationals take advantage of loopholes in Irish law by using innovative tax engineering techniques with creative nicknames like ‘double Irish with a Dutch sandwich’, which involves transfers of profits between subsidiaries in Ireland and the Netherlands with tax havens in the Caribbean as the typical final destination. These tactics achieve even lower tax rates or avoid taxes altogether,” the report states.
The IMF is seeking to push “significant reforms” to international tax architecture to curb phantom foreign direct investment, and such reforms are expected to obtain the backing of key member states in the European Union who have opposed Ireland’s taxation policies which benefit corporations such as Apple, Google and other large tech and finance firms headquartered here.
Ireland’s corporation tax receipts are boosted massively by receipts from multinationals headquartered in the country, with 40% of the €10 billion in corporation tax in 2018 thought to have come from a small number of tech giants including Google, Microsoft, Apple, and Dell.