Direct investments to and from tax havens

A number of different types of legal constructions can be relevant when placements are made in or from tax havens. In many cases, it will be appropriate to establish a company in the tax haven. The value of this company will be regarded as a direct investment regardless of whether it pursues production or is simply a shell entity.

UNCTAD produces statistics for direct investment over national boundaries. All the major tax havens report data to UNCTAD. Countries such as the UK, Hong Kong, Switzerland and Luxembourg come high up the list for the size of both inward and outward direct investment. However, it is only when the investment figures are compared with the size of the various economies that a number of the tax havens really stand out.

Figure 6-7 shows that Iceland is the only one of the 10 jurisdictions with the largest inward direct investment which could not be regarded as a tax haven. All the others would be defined as tax havens.⁷⁷ Inward direct investment to the British Virgin

76 The specified countries and country groups are: The United Kingdom (UK) Japan (JP), USA, Africa (AF), America except USA (WH), Europe (EU), Asia and Oceania (AP), Middle East (ME) and unallocated (UA). The tax havens are grouped in (1) Europe, Middle East and Africa (EU+ME+AF), (2) America (WH) and (3) Asia (except Middle East) and Oseania (AP)  

77 The Netherlands falls outside a number of definitions of tax havens and related terms. However, this country has established a form of shell company with virtual freedom from tax, which has contributed to a number of companies registering their head offices there – often without having employees in the Netherlands.

103 Islands corresponds to USD 2.7 billion (almost NOK 18 billion) per capita. While the Cayman Islands and Hong Kong also stand out from all the others, they are

nevertheless far behind the Virgin Islands.

Figure 6-7: The stock of inward direct investment. In USD thousands per capita. The 10 countries with the highest direct investment per capita.

0 500 1 000 1 500 2 000 2 500 3 000

Netherlands Ireland Gibraltar Singapore Luxembourg Belgium Anguilla Hong Kong Cayman Islands British Virgin Islands

Thousands US $

Source: UNCTAD.

Direct investment to and from offshore companies, exempted companies, trusts and the like will probably be substantially under-reported. Governments in tax havens normally lack good information about activities in these structures. Section 7.5.5 on pass-through of capital in Mauritius shows, for example, that while outward direct investment from this country totalled USD 285 million at 31 December 2007, data from India indicate that direct investment from Mauritius to India alone can be estimated at more that USD 38 billion at the same date.

The scale of direct investment in the Virgin and Cayman Islands must primarily reflect purely financial operations rather than production activities. It is fairly inconceivable that capital per job in a whole economy should amount to several million kroner. Another way of illustrating the scale of direct investment is to view it in relation to the size of the economy. This is presented in Figure 6-8. Inward

investment to Vanuatu corresponded to 102 per cent of GDP. The comparable proportion for Norway is about 20 per cent.

104

Figure 6-8: The stock of inward direct investments in percent of GDP. All countries and jurisdictions where the stock exceeds GDP.

0 1 000 2 000 3 000 4 000 5 000 6 000 7 000

British Virgin Islands

Bermuda Cayman Islands

Hong Ko

ng SAR Mo

nserrat Dominica St. K

itts an d Nevis

Luxembo urg

Gibralta r

Antigua and B arb

uda Singapor

e

St. V incent

and the Gr

ena dine

s Gren

ada St. Lucia

Seychelles Vanuatu

Source: UNCTAD

Most of those who establish a company in such jurisdictions channel its capital on in the form of financial claims or direct investments in other countries. As a result, tax havens have large direct investments not only inward but also outward. Figure 6-9 shows that tax havens also dominate among countries with the highest direct outward investment per capita.

Figure 6-9: The stock of outbound direct investments. USD thousands per capita. End 2007.

0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000

Singapore Sweden Netherlands Belgium Switzerland including Liechtenstein Iceland Hong Kong Luxembourg Cayman Islands British Virgin Islands

Thousand US $ per capita

Source: UNCTAD

105 Where outward direct investment is concerned, Iceland and Sweden as well as eight areas which can be defined as tax havens have the largest per capita holdings. The Virgin Islands stand out even more markedly here, with outward direct investment corresponding to almost USD 7 million or NOK 45 million per capita.

When inward and outward investment in the Virgin Islands are compared, the latter can be seen to be much larger than the former. It seems inconceivable that the

population of these islands and the companies they own should have assets which can explain the difference between inward and outward direct investment. Moreover, it will emerge below that the Virgin Islands does not have a particularly large banking sector. The Commission takes the view that a possible explanation could be that a lot of capital enters the Virgin Islands through trusts and the like, and that much of it flows out again in the form of direct investment.

Figures for the Netherlands do not include special financial institutions (SFIs). These are special structures suitable for tax planning. Dutch tax regulations and an extensive network of tax treaties make this country attractive as the location of holding

companies. The majority of these are shell companies, even though they formally have an address and management in the Netherlands. However, the management can often be regarded as front persons. The real leadership is located in other countries.

However, the Dutch tax rules have also contributed to attracting a number of genuine head offices – in other words, ones where the company management sits. Excluding the SFIs, the Netherlands had direct investments abroad totalling EUR 606 billion at 31 December 2008. When the SFIs are included, this figure rises to EUR 2 227 billion or almost USD 200 000 per capita. Including the SFIs, the Netherlands comes a close second to the USA at the top of list of nations with the largest outward direct

investments.⁷⁸

Figures for direct investment can also be put in perspective by looking at the number of companies registered in the various jurisdictions. No international statistics are available with a standardised methodology in this area, and many companies do not publish figures. However, the Commission is not aware of any national figures for the three jurisdictions with the largest inward direct investment in relation to GDP (confer Figure 6-8). The number of companies per 1 000 inhabitants in these countries were:

− Virgin Islands: 17 917

− Cayman Islands: 1 815

− Bermuda: 213.

By comparison, Norway had 40 enterprises with limited liability per 1 000 residents.

Including sole proprietorships would more than double this figure.