Although world leaders have sought to keep companies from avoiding taxes, the amount avoided has actually gone up over the past decade—and a new study by the IMF shows that $15 trillion is held in shell companies across the world for that specific purpose, seriously depriving local economies of tax revenue.
The $15 trillion is 40% of the world’s foreign direct investment (FDI), a term for money transferred across borders between firms belonging to the same parent company.
FDI is designed as a way to stimulate growth and create jobs in local economies. That $15 trillion is bigger than the combined economies of Germany and China.
However, according to the study, “phantom capital” is being funneled as FDI into shell companies that have no real business activity—a type of “financial engineering” to avoid paying taxes on that money.
Even though the host countries don’t collect taxes on phantom FDI, they do make some money from performing accounting and other financial management services for the companies.
The study also found that phantom capital makes it difficult for world leaders and financial institutions to understand the impact of FDI on economic growth.
Countries with lower corporate tax rates are attractive to companies looking to save on their tax bills. And some countries set up economic policies (like extremely low corporate tax rates) to attract FDI.
Ireland, for example, has lowered its corporate tax rate from 50% in the 1980’s to just 12.5% today. The study found that ten economies, including Ireland, host nearly 85% of the world’s phantom FDI.
Forbes / ABC Flash Point News 2019.