Offshore

IMF Slams Low-Tax, Offshore Centres

Tom Burroughes, Group Editor, 10 September 2019

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The IMF has fired a set of broadsides at low-tax jurisdictions.

The International Monetary Fund claims that as much as $7.0 trillion – equal to 8 per cent of global gross domestic product – is “hidden” in offshore centres and that improved revenue-raising efforts could bring in $1.0 trillion of fresh money for collectors. It also claims that about $15 trillion of global foreign direct investment is merely “phantom capital”.

“These numbers shine a light on the hidden corners of the global economy, the money that escapes the reach of tax collectors, regulators, and law enforcement. These are the ill-gotten gains of graft, the proceeds of regulatory arbitrage, and the profits from tax domiciles that some consider to be the equivalent of tax evasion,” the IMF said in an article published on its website. “The rise of digital finance, crypto assets, and cybercrime adds to the challenges. Consider the so-called dark web, a hidden marketplace for everything from stolen identities to arms and narcotics.”

Such harsh language might well provoke a sharp response from international financial centres such as Switzerland, Singapore, Hong Kong, the UK, various Caribbean hubs and others. With the notable exception – ironically – of the US, scores of jurisdictions, including IFCs, have signed up to a network of information-sharing pacts to catch tax evaders. The agreements are collectively known as the Common Reporting Standard. Swiss bank secrecy, in international terms, is now defunct. 

The IMF also claims that almost 40 per cent – equating to a figure of $15 trillion - of the world’s foreign direct investment is “phantom capital” that reduces how much tax is paid by multinational firms. The report, written by the IMF and University of Copenhagen, takes aim at low-tax jurisdictions such as Luxembourg, a member state of the European Union. (As this publication knows, EU states that impose low taxes on corporates, such as Luxembourg and Malta, dislike being branded as “offshore”). 

In his tax measures of late 2017, President Donald Trump introduced a low-rate, one-off charge on businesses repatriating earnings from foreign centres. Large US firms, such as Amazon and Starbucks, for example, have held non-US profits offshore in centrs such as Luxembourg. This happened at a time when the US corporate tax rate had been, on some measures, about double the average for developed countries, around 22 per cent. 

The IMF said collective moves by governments to stem “phantom” FDI aren’t keeping pace with use of the practice.

“Despite targeted international attempts to curb tax avoidance - most notably the G20 Base Erosion and Profit Shifting (BEPS) initiative and the automatic exchange of bank account information within the Common Reporting Standard - phantom FDI keeps soaring, outpacing the growth of genuine FDI,” it said. The IMF argued that in less than a decade, “phantom FDI” has climbed from about 30 per cent to almost 40 per cent of global FDI. 

In one case, the IMF said this of Luxembourg: “According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out at $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. So is something amiss with official statistics or is something else at play?” 

(Editor's note: Without getting into the weeds over the specific figures used by the authors of these various IMF comments, it is worth asking why the IMF thinks that it should be attacking international financial centres for their low-tax status and registration of such companies at all. The IMF's role is surely to foster global financial stability; it is arguable whether this sort of attack is taking it into outright politics. The IMF may counter that its role today is also about helping poorer nations grow and combat poverty. If so, it surely makes more sense to advocate policies that might encourage wealth and asset owners to invest in those places, and the most important factors in play are political stability, the rule of law and secure property rights.

If countries levy low taxes to encourge firms to register there, that is ultimately up to the electorates there to decide, not an unelected global NGO - which is essentially what the IMF is. In a world of open capital markets, rather than strict exchange controls, the IMF's ability to curb such flows is limited.)

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