Much of foreign investment is aimed at tax dodging rather than job creation, study finds

Almost 40 per cent of global foreign direct investment ends up in empty corporate shells, often tasked with cutting companies’ tax bill

Luxembourg is one of the world's top recipients of "phantom" foreign direct investment. (Getty Images/iStockphoto)

Countries around the world vie to attract investment but, on average, over a quarter of foreign direct investment (FDI) is phantom in nature, creating no or few jobs and having zero impact on innovation, new research reveals.

FDI flows are cross-border investments between firms belonging to the same multinational group – for example, a foreign company opening a local factory.

Researchers at the IMF and the University of Copenhagen have found that a large share of FDI ends up in empty corporate shells with no real business activities in the host nation. Instead, their purpose is often simply to minimise multinationals’ global tax bill as companies use them to shift profits to countries with the lowest corporate taxes – as Apple has done by diverting profits to the Channel Islands, for example.

“Globally, phantom investments amount to an astonishing $15 trillion, or the combined annual GDP of economic powerhouses China and Germany,” Jannick Damgaard, Thomas Elkjaer and Niels Johannesen write in a forthcoming paper.

They estimate that almost 40 per cent of global FDI is phantom. Although a lion’s share of that is hosted by a few tax havens, most economies receive substantial investments from empty corporate shells, with phantom FDI making up over 25 per cent of total flows on average.

The benefits of traditional, brick-and-mortar FDI are well-documented. For instance, in the US 7.1 million workers are employed by affiliates of foreign companies, earning $81,000 (£66,000) a year on average, and exports by foreign-owned firms account for more than a quarter of all US goods exports. FDI has also been proven to increase innovation in host nations.

But those benefits do not apply if the investment’s main function is to sit idle outside of the firm’s home country. The researchers write that empty corporate shells still make a contribution to the local economy by buying tax advisory, accounting and other financial services, as well as by paying registration and incorporation fees.

The flip side is that empty corporate shells in tax havens “undermine tax collection in advanced, emerging-market and developing economies”.

Luxembourg and the Netherlands host nearly half of the world’s phantom FDI, the economists note. The other half includes British overseas territories – the British Virgin Islands, Bermuda and the Cayman Islands – alongside five other jurisdictions.

The UK itself was 13^th on the list of top enablers of corporate tax dodging compiled by the Tax Justice Network in May, which took into account not just tax rates but also various exceptions and transparency among other indicators.

At 19 per cent, Britain has one of the lowest tax rates on company profits in the world and it is due to fall to 17 per cent next year.