The International Monetary Fund (IMF) recently revealed that a huge chunk of foreign direct investments (FDIs) across the globe are multinational firms looking to minimize the tax they pay. The Financial Times noted that these FDIs are “phantom” investments that aim to reduce tax payments rather than “financing productive activity.”

A study by the IMF and the University of Copenhagen found that around $15 trillion or almost 40% of the world’s FDIs are facilitated by “empty corporate shells” that do not actually have any “real business activities.” These firms are merely used for “financial engineering,” which aims to escape global taxes.

According to the study, phantom capitals had been increasing from 31% in 2010 to 38% in 2017. Almost 50% of these organizations are found to be in Luxembourg and the Netherlands. Moreover, markets such as Ireland, Malta, and Switzerland were discovered to have more than 50% of phantom FDIs.

In the United Kingdom, the number jumped from a mere 3% in 2009 to 18% in 2019. Belgium and Sweden experienced a fall in phantom investments from around 30% to single-digit figures.

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The research was conducted in light of various governments crafting policies to prevent multinational companies from avoiding their tax liabilities. This is why G7 countries are making tax reform efforts. This comes with France’s unilateral action urging G7 members to put taxes on global technology companies and groups in the nation.

The Organization for Economic Co-operation and Development is tasked with determining which steps to take to achieve this goal. A solution is expected by 2020.

Meanwhile, Tax Justice Network head Alex Cobham remarked that “profit-shifting” of multinational companies have been becoming more aggressive in the past decade, making it a feature of these types of firms. Cobham noted that this is due to “fiscal and political pressures.”

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