IMF shows we need a ghostbuster to capture $12trn of ‘phantom’ money

When the International Monetary Fund, the global watchdog with a reputation for advocating the free flow of capital, starts to make noises about companies hiding money in corporate shells or tax havens, then the issue is clearly flashing reds on the authorities’ dashboards.

The IMF used its monthly magazine to flag up an astonishing $12 trillion that it has calculated multinational firms have squirrelled away into what it calls empty corporate shells. This may not all be aimed at concealing the money but tax evasion is probably a major motivator and a 30% levy, say, on $12 trillion would come in handy right now.

While the research is written by two Danish economists as well as an IMF expert and the fund insists that their views may not represent those of their employers, the decision to make it the main story in their in-house publication is a pretty strong IMF imprimatur.

Publishing etiquette dealt with, the point is that this is strong stuff. The authors reveal that the $12 trillion of “phantom” investment is equivalent to almost 40 per cent of all foreign direct investment positions globally. “It is completely artificial — it consists of financial investment passing through empty corporate shells with no real activity.”

It names the guilty parties, saying that investments in empty corporate shells almost always pass through well-known tax havens. The eight major pass-through economies — the Netherlands, Luxembourg, Hong Kong, British Virgin Islands, Bermuda, Cayman Islands, Ireland, and Singapore — host more than 85 per cent of the world’s investment in special purpose entities, which are often set up for tax reasons.

The relevance of this missing money was highlighted in the figures last week from the United Nation’s trade and investment arm Unctad that found that global foreign direct investment (FDI) fell by 23 per cent in 2017 to $1.43 trillion and is expected to grow only modestly, if at all, this year. So, while phantom investment booms, conventional FDI that creates jobs and helps developing countries in particular increase their exports, is falling.

Notably, more than half of outward foreign direct investment from the UK goes through a foreign entity with no economic substance. Britain and its banks are at the heart of this behaviour.

On top of all that, private individuals also use tax havens on an immense scale. Globally, individuals hold about $7 trillion — equivalent to roughly 10 per cent of world GDP — in tax havens.

Of course, this is not a new message even though the new figures are eye-watering. The Panama Papers shone a spotlight on the politicians, their families and close associates from around the world known to have used offshore tax havens.

The Paradise Papers showed how the offshore financial system is entangled with the overlapping worlds of political players, private wealth and corporate giants, including Apple, Nike, Uber and other global companies that avoid taxes through increasingly imaginative bookkeeping manoeuvres. The Swiss leaks revealed almost 60,000  files that provided details on over 100,000 HSBC clients and their bank accounts.

Consumer boycotts can be powerful motivators for change

The international tax challenge will only grow in the coming years because of increased digitalisation and mobility of asset. So, what do about it? Governments have made half-hearted efforts, mainly through the OECD’s standards of transparency and exchange of information. In May, backbenchers forced the UK government into a U-turn that will compel Britain’s overseas territories to introduce public ownership registers by the end of 2020 or face having them imposed by the UK government.

The IMF and Danish authors suggest making countries regularly report detailed financial data broken down by instrument, domestic sector, counterparty, sector and country, currency, and maturity. They also want data on global interconnections that look beyond holdings of financial wealth across borders to find their ultimate owners.

If governments do genuinely want to get tough — and many are reluctant to avoid offending backers — they should start with the global introduction of country-by-country reporting turnover, profits, costs, employees and taxes by all multinationals. This would show the public who is paying their fair share of tax. Consumer boycotts can be powerful motivators for change.

Oxfam has come up with a couple of radical measures. First, build a public, central register of the beneficial ownership of companies, trusts and foundations — i.e. their real and ultimate owners. Second, set up a global tax body to oversee the global governance of international tax matters, while respecting democratic national sovereignty on taxing multinational companies.

The idea of a global tax regulator is interesting and it could reduce the temptation by individual governments to game the tax regulation system to attract investment.

The UN, IMF and World Bank coordinate efforts in terms of relieving economic crises and eliminating poverty and because all the member countries have to work — or at least be seen to work — together, it can be effective in sending out a strong coherent message.

When it comes to who could host such a global tax watchdog, I am sure the IMF might have a few thoughts on that subject.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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