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Trillions sheltered from taxes via 'phantom investments,' report shows

Brittany De Lea

About $15 trillion worth of global foreign direct investments are being funneled to shell companies, allowing multinational corporations to lessen, or erase tax liabilities, according to a new report from the International Monetary Fund.

That is equal to the combined annual gross domestic product of China and Germany.

Phantom investments refer to those that pass through empty shell companies, or special purpose entities. These entities generally have no business activity.

These types of transactions have climbed to 40 percent of global foreign direct investments, up from 30 percent less than a decade ago.

“Investments in foreign empty shells could indicate that domestically controlled multinationals engage in tax avoidance,” IMF researchers wrote. “Similarly, investments received from foreign empty shells suggest that foreign controlled multinationals try to avoid paying taxes in the host economy.”

According to the IMF, Luxembourg and the Netherlands host nearly half of the world’s phantom foreign investments. FDI. Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland and Mauritius are the other top eight destinations. Altogether, the IMF said these 10 economies host 85 percent of all phantom investments.

Even though these companies aren’t creating jobs or paying taxes, they are beneficial to the host country’s economy. They pay registration and incorporation fees, researchers noted, and they also buy tax advisory, accounting and other financial services.

Researchers concluded that an economy’s exposure to phantom investment is correlated to their corporate tax rate.

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