We’ve probably all heard about the lengths the U.S. government will go to in order to collect unpaid taxes. This is especially the case when it comes to money held abroad. The U.S. has not only made it mandatory to disclose foreign assets of $50,000 or more, but it has also negotiated treaties with countries all around the world to prevent banking secrecy that allows tax evasion.
Yet a recent study by the International Monetary Fund (IMF) found that, worldwide, $15 trillion — more than the combined economies of Germany and China — is being held in shell companies for the purpose of evading taxation.
Companies are using foreign direct investment to hide money
Foreign direct investment (FDI) is simply a term describing funds that are transferred across borders between two companies with the same parent organization. Many companies seek FDI, as it was created to stimulate growth in local economies. For FDI to be legal, however, it must be real — the company receiving the money cannot be a shell company.
The IMF’s study found, however, that 40% of the world’s FDI is actually “phantom capital,” transferred into companies that perform no actual business activity. This is done primarily to avoid taxation.
Forbes contributor Lisette Voytko notes that a number of countries have lowered their corporate tax rates in an effort to attract companies that are seeking lower tax bills. For example, Ireland dropped its corporate tax rate from a 1980s level of 50% to 12.5% today.
The IMF’s study determined that Ireland and nine other countries are the destination for 85% of the world’s phantom FDI capital.
If you are an FDI decisionmaker, you should tread carefully. While FDI is not itself illegal, phantom capital created for the purpose of tax evasion is. Before you engage in any creative schemes to lower your tax bill, talk to an experienced tax attorney.