About that IMF "40% of multinational FDI is tax avoidance" figure.... (which having been on the front page of the @FT is now going to be quoted as a confirmed fact for ever after...). What does it actually mean?
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It comes from an article in the
@IMFNews magazine Finance & Development by Jannick Damgaard, Thomas Elkjaer and Niels Johannsen, based on a forthcoming paper https://www.imf.org/external/pubs/ft/fandd/2019/09/the-rise-of-phantom-FDI-in-tax-havens-damgaard.htm …pic.twitter.com/XUeedXRPri
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We can't read the paper but, but there is a previous working paper which was trailed by the IMF in 2018, and it appears to be an earlier version of the same research https://www.imf.org/en/Publications/WP/Issues/2017/11/17/The-Global-FDI-Network-Searching-for-Ultimate-Investors-45414 … https://www.imf.org/external/pubs/ft/fandd/2018/06/inside-the-world-of-global-tax-havens-and-offshore-banking/damgaard.htm …
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This study looks at statistics on FDI and finds that they are unreliable, because ultimate investment (in a factory or a mine) in one country is double counted with on-paper investment in the holding company which owns the company that owns the factory or mine.
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While the Danish research trio make reference to BEPS & the potential for holdcos to be used in profit shifting for tax avoidance, this is not what they are studying. What they are studying is why the statistics are unreliable as a measure of whats going on in the real world
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And so, back in the 2018 someone comes with the subtitle about "phantom investment", this is probably not the studies authors, because article authors don't usually write the headline. But its popular, and they adopt it into their text in the 2019 article.pic.twitter.com/QGrL36TqZw
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But to be clear: what they have found is not 'phantom investment' as in underhand, dodgy, not reported to the tax authorities, but 'phantom' as in the international statistics are misleading.
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And the really important point: What they call 'phantom investment' is not capital 'parked' in the Netherlands or Luxembourg or BVI, not creating real value in the real economy somewhere. Its just numbers that are double counted in the international statistics.
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So yes, fixing the international statistics is important. But it doesn't mean that this capital could be freed up to do something else, because it is ALREADY doing something else (i.e. in the factory or mine or wherever that is the ultimate asset)
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So what is the 40%? 40% of what?? They find that 'phantom FDI' is $15 tn out of total recorded FDI of $39 tn = 38%. That maths is straightforward. But why would you make $39 trillion the denominator, if your research shows that $15tn of this is double counted?pic.twitter.com/TLsS29CI2n
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It would make much more sense to do the fraction as a percentage of "genuine FDI". i.e. if actual FDI is $24tn then their estimate is that 62% goes through holding companies in intermediate jurisdictions showing up as double counting in the statistics.
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So you could say "62% of global FDI flows into the real economy are facilitated by international financial centres" ! This makes more sense than reporting it as a percentage of measured FDI which the research says is not meaningful.
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Of course this is what you would say if you were a PR for the financial centres (which I am not). But the point is between the underlying research & the PRs wanting to use it to advocate for 'IFCs are bad!' or 'IFCs are good!' there is a missing middle of appetite for analysis
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The big Q is to what extent does putting investment through these financial centres usefully facilitate investment in the real economy (by providing legal systems, tax neutral spots for combining capital from different places, enabling international biz to run smoothly) ...
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...or to what extent is it motivated by profit shifting? The Danish trio's research as far as we know doesn't shed further light on this question. So you can colour their numbers in with your existing perceptions.
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But if you are the
@IMFNews or the@FT or the various funders of the@TAInitiative I would hope you would do better. Because the answer to the question really matters, and the attraction of the easy headlines corrupts your mission.Show this thread
End of conversation
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