Money channeled into and out of so-called letter box companies in Luxembourg declined from $962bn in 2015 to $29bn in 2016.
That is a “positive” development, according to a statistician at the Organisation for Economic Co-operation and Development.
In 2016, overall OECD area foreign direct investment flows of resident special purpose entities (SPEs) decreased to negative levels for the first time since 2005, partly due to decreases in flows to and from Luxembourg SPEs.
In 2013, these resident SPEs represented more than 90% of foreign direct investment in Luxembourg.
The OECD report on FDI, issued on 15 April 2017, defines special purpose entities as follows:
Removing SPEs from the FDI calculations provides a more meaningful measure of direct investment into and out of a country, as SPEs funds simply pass through the economy on their way to other destinations.
However, Maria Borga, senior statistician at the OECD, cautioned that:
“large fluctuations are not exceptional. While there has been a general downward trend in the last few years, it is still too early to determine if this is a long-term trend or not.”
In 2016, overall FDI inflows to Luxembourg increased significantly (from $16 billion to $27 billion, excluding investments in SPEs).
But investment flows in and from Luxembourg SPEs dropped from $394 billion and $568 billion in 2015 to $11 billion and $18 billion in 2016, respectively.
Borga told Delano on 4 May that:
“flows associated with SPEs tend to be very volatile. They are often involved in individual large transactions or substantial corporate restructurings, for example, that lead to large flows in a particular period.”
The organisation added in its report that:
“The significant decline in FDI flows in Luxembourg SPEs was due to equity disinvestments in the last three quarters of 2016, combined with low levels of equity inflows in the first quarter. In contrast, intracompany debt flows increased to $67 billion in 2016 from negative levels recorded in 2015 while reinvestment of earnings in those entities remained very limited. Investment flows from Luxembourg SPEs dropped due to declines in both equity and intracompany debt outflows; equity outflows dropped to $37 billion and intracompany debt outflows were negative (at -$19 billion) in 2016.”
Equity outflow has decreased (from $50 billion to $32 billion excluding resident SPEs).
Borga explained that this is a positive development:
“From a statistical point of view, it is positive because these flows associated with SPEs can distort FDI statistics. In a larger sense, there are a wide variety of reasons that MNEs use SPEs in their ownership and financial structures. These include managing large and complex operations, reducing tax and regulatory burdens, and enabling the internal financing of the MNE. To the extent that some of these reasons can be negative, then a reduction in the use of SPEs related to a reduction in this behaviour, would be positive.”
The OECD has been working to reduce the use of SPEs as tax loops for MNEs since 2013. The Base Erosion and Profit Shifting (Beps) package refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. Although some of the schemes used are illegal, most are not.
The OECD argues that this:
“undermines the fairness and integrity of tax systems because businesses that operate across borders can use Beps to gain a competitive advantage over enterprises that operate at a domestic level. Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.”
Luxembourg is in the process of implementing some of the recommendations, mostly through the implementation of the European directive on the automatic exchange of information on tax rulings and the ATAD directive, which establish the minimum standards of Beps.
Earlier this year, DP finance minister Pierre Gramegnarepeated his call for an inclusive approach and for a level playing field in this matter and warned of losing competitiveness in a global market.
OECD: the EU does well
Below is the summary published by the OECD:
“Global FDI flows decreased by 7% to $1,613 billion in 2016 compared to 2015. Despite recovering well from a weak second quarter, FDI flows failed to reach 2015 levels.
Inflows to the EU increased by 17%, boosted by inflows to the United Kingdom largely due to Anheuser-Busch InBev acquiring SABMiller in Q4.
Inflows to the OECD area increased more modestly by just 3%, mostly due to disinvestments from Switzerland.
FDI inflows to G20 countries increased by 21%. Inflows to OECD G20 countries increased by 48%, but inflows to non-OECD G20 countries fell 21%, largely due to a decline in FDI flows to China.
China became a net outward direct investor for the first time in 2016.
Outflows from the OECD area and the EU decreased by 9% and 10% respectively, partly driven by flows from Ireland and Switzerland, which dropped from record levels in 2015.
OECD area FDI flows of resident special purpose entities (SPEs) decreased in 2016 to negative levels for the first time since 2005, partly due to decreases in flows to and from Luxembourg SPEs.
Rates of return on inward and outward FDI continued the decline started in 2011 as the downturn in commodities hurts mining and quarrying.”