According to the International Monetary Fund (IMF), which carried out an analysis in cooperation with the University of Copenhagen, two-fifths of all global direct investments are “phantom capital” and serve tax evasion.
In an article in “Finance & Development”, economists Jannick Damgaard, Thomas Elkjaer and Niels Johannesen noted that around 15,000 billion dollars lie in “empty company envelopes with no business activity.” The researchers analysed data on foreign direct investments (FDI) in recent years. A frightening number, considering what that means.
If money is invested abroad, that’s not bad at first. It promotes added value and brings jobs. The figures already suggest that there is something wrong with this ideal idea. According to Damgaard, Elkjaer and Johannesen, Luxembourg, which has 600,000 inhabitants, has as much foreign investment capital as in the entire USA. At four trillion dollars, 6.6 million dollars come to every inhabitant – a huge number.
The majority of the phantom capital lies in only ten places
“Investment” often simply means moving money from one part of the company to another, as a loan to a subsidiary in Ireland, for example. From there it may go to the Bahamas and is there in a bank account of another letterbox company. The billions are not productive, but cheap. In the country of origin, they have disappeared from the balance sheet and the subsidiary is an empty shell. It has few to no employees and generates no sales. That is why it pays little tax.
And this is usually where taxes are cheap anyway. The majority of “phantom investments” are located in a few tax havens, almost half of them in Luxembourg and the Netherlands. Together with Hong Kong, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Mauritius, Switzerland and Ireland, ten locations hold 85 percent of the global phantom capital.
This does not really bring much benefit to the economy of these places, but countries like Ireland have made a business model out of it. After the reduction of corporate taxes in the 1980s, GDP there rose by leaps and bounds. The inactive companies are now paying less, but many came. The company covers pay fees, fees and consulting services. In some tax havens, these items make up a good part of the so-called economic output.
This financial shambles puts pressure on the tax system of the countries from which the money comes. They not only lose billions, but are also forced to cut taxes themselves. On an international average, corporate taxes have therefore fallen from 40 to 25 percent since the 1990s. The share of phantom capital in global investments has risen from 30 to almost 40 percent in the last decade. In addition, there are the possibilities of the global economy, which make it possible, for example, to provide IT services from a tax haven. In the end, this situation harms all other – “normal” –taxpayers.
The EU is now taking action against tax evasion in particularly brazen cases. Nevertheless, the global tax architecture urgently needs a revision, the authors write in their analysis. The Danes have already announced a follow-up work that will better separate “real” investments from phantom activities and trace the ways of phantom money.