Nearly 40% of worldwide foreign direct investment (FDI), amounting to $15trn, "passes through empty corporate shells" with "no real business activities", a study by the IMF and the University of Copenhagen reveals.
According to the report, ten economies including Luxembourg, the Netherlands, Hong Kong, BVI, Switzerland, Singapore, Ireland, the Cayman Islands and Mauritius host more than 85% of those $15trn phantom investments.
Luxembourg's roughly $4trn in phantom FDI inflows alone are equivalent to annual direct investment in the U.S., according to the report.
Even if the empty corporate shells have no or few employees in the host economy and do not pay corporate taxes, they still contribute to the local economy"
"Even if the empty corporate shells have no or few employees in the host economy and do not pay corporate taxes, they still contribute to the local economy" by using local financial services and paying fees, write the authors Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen.
"Phantom" FDI is channeled through shell companies known as special-purpose entities that have no real business activities, according to the report.
Such flows grew by roughly half over the five years to 2017, rising to 38% of total FDI from about 31% in 2010, the study finds. To put it in perspective, phantom capital in 2017 was equivalent of the combined GDP of China and Germany in that year.
The findings come at a time when governments are trying to clamp down on multinational corporate tax avoidance.
The Organization for Economic Cooperation and Development is drafting new international rules to block tax avoidance, but some countries are taking their own initiative. The UK will impose a digital tax on technology companies like Google, Amazon.com and Facebook next year.
"No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today's globalized economic environment," write the authors of the IMF report.