IMF's 'Phantom FDI' destinations and the India connection

IMF study says investments in empty corporate shells in these nations by companies' hints at tax evasion

Foreign investors make a strong comeback

In a recently released paper, the International Monetary Fund (IMF) has drawn the world’s attention to the rising menace of ‘Phantom foreign direct investment (FDI)’, defined as investment flows that pass through empty corporate shells that have no real business activity, with the intention to avoid paying taxes in their host countries. IMF’s paper states that just two tax havens – Luxembourg and the Netherlands – host more than half of the world’s $15 trillion phantom FDI. Global FDI is estimated to be around $40 trillion in 2017. 

The paper states, “Interestingly, a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 per cent of all phantom investments.”

India, meanwhile, is a major FDI recipient from these phantom destinations. In the first quarter of 2019-20, the country received $11 billion from three phantom destinations – Singapore, the Netherlands and Mauritius (See graphic). FDI from these nations accounted for 69 per cent of all inflows into the country.  Singapore was the biggest conduit, with almost $5 billion, followed closely by Mauritius ($4.7 billion) in FDI flowing from these nations to India. In 2018-19, Singapore and Mauritius channelled $16 billion and $8 billion into India, while the Netherlands contributed to another $4 billion. That’s almost two-thirds of India’s $44 billion FDI received during that year.

While phantom FDI destinations accounted for a bulk of FDI inflows, more than a third of all outward investments from India were also to these nations. Four of these so called phantom destinations figured in the top-ten receivers of foreign investment from India. From April to August this year, Singapore, the Netherlands, Switzerland and Mauritius received more than a billion dollars out of India’s $3.7 billion overseas investments. In 2018-19, these nations collectively accounted for almost $5 billion out of India’s $13 billion worth of overseas investments. 

According to the IMF, investments in empty corporate shells in these destinations suggest that domestic companies are indulging in tax avoidance. An economy’s exposure to phantom FDI increases with the corporate tax rate. The paper states that global FDI has outpaced global GDP growth since the 2008 global financial crisis and “phantom FDI has kept soaring, outpacing the growth of genuine FDI. In less than a decade, phantom FDI has climbed from about 30 per cent to almost 40 per cent of global FDI.”