Role of investment hubs in global FDI flows: unknown, unloved?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

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Serge Krancenblum

On May 22, the Investment Facilitation Forum (IFF) organises an event that seeks to clarify the role of investment hubs and explore how their activities are linked to the EU tax agenda, financial regulation and the assistance to developing countries.

Ahead of the event, the President of IFF, Serge Krancenblum, shares his view on the importance of distinguishing between investment hubs and tax havens. For more information on the event, and to register, visit the event page.

Fight against tax abuse and tax havens is crucial and justified. At the same time, policymakers should distinguish investment hubs and acknowledge their valuable role in the global economy  

High profile media revelations (SwissLeaks, LuxLeaks, Panama Papers, etc.) and increasing pressure by the OECD, G20 and the public at large have led European decision-makers to take a number of unprecedented steps to tackle tax abuse and increase transparency in the international financial system.

New transparency rules for tax advisers have been agreed upon. Public country by country reporting of taxes paid by companies is happening. The proposals for a common consolidated tax base are under discussion. Uncooperative tax jurisdictions are now named, shamed and face sanctions, whilst the tax benefits offered by EU member states are increasingly under investigation.

The fight against tax abuse and tax evasion is high on the political agenda, and rightfully so. Potential tax evaders should be discouraged to engage in any unlawful scheme. Increasing reporting requirements, transparency and regulatory supervision is one part of the solution.

Tackling harmful practices in tax havens is another part. However, in order to do so effectively, sensationalism in the political rhetoric and public debate must come to an end.  The ‘catch-all’ approach proposed by some policymakers is producing an increasing threat for cross-border investments through investment hubs – countries that facilitate the flow of international investments thanks to a stable legal and political environment, a sound financial infrastructure, and a highly professional ecosystem.

A debate in need of nuance

The main problem here is the lack of nuance in the political and public debate. There are about 50 jurisdictions that are mentioned on various lists of tax havens. Another 20 additional jurisdictions are listed as having tax haven characteristics.

This means that, out of a total of 190 countries, more than a third can therefore be regarded as tax havens. It goes without saying that this list is extremely diverse, ranging from small developing countries such as Panama and the Bahamas, or financial centres such as Hong Kong and Dubai, to developed countries like Switzerland, Belgium and the United States.

To tar all these countries with the same brush does not only seem simplistic, it also ignores some crucial differences between them. The ‘catch-all’ approach fails to acknowledge that some of these countries have a crucial role as conduit countries for Foreign Direct Investment.

The Netherlands and Luxembourg, for example, are exemplary in this regard. Although they only represent 1.1% of the world’s GDP, they account for 25% of global inward Foreign Direct Investment, and 31% of global outward direct investments. This clearly shows their function as true ‘investment hubs’.

Hubs for development 

More importantly, a number of these jurisdictions play a crucial role in facilitating investments to developing countries, as they offer the much-needed financial infrastructure and legal certainty to invest in places with an unstable political situation or where a strong business climate is missing.

Notable in this regard is the role of Mauritius as a gateway for investors to Africa. Around 79% of outward investments from Mauritius benefit developing countries. Singapore fulfils a similar role in Asia, with around 67% of outward investments flowing to countries in south-east Asia.

The examples mentioned above perfectly illustrate the difference between tax havens, on the one hand, and investment hubs, on the other. Whereas with tax havens the money that flows in to the jurisdictions is destined to stay there, this is not the case for investment hubs. With investment hubs, the capital only flows through and is put to productive use.

Policymakers should acknowledge the role of hubs

There are a lot of reasons why investors might decide to go through an investment hub, rather than investing directly into a country.

One of them is mentioned above: in some cases, hubs offer the financial infrastructure that is absent in the country of destination.  In other cases, investors prefer to set-up the investment vehicles in a neutral third country to avoid the other party having a competitive advantage, as is often the case with a merger or an acquisition.

Thirdly, as investment hubs benefit from a stable legal framework and a highly professional ecosystem, they offer the highest possible level of legal and financial certainty. This also explains why they are widely used by various investors, such as pension funds and insurance companies.

They heavily depend on investment hubs to protect the investment capital and increase the returns on this capital, for pensioners and beneficiaries of insurance policies.

In conclusion, the fight against tax evasion should be continued and intensified. In order for this fight to be effective, however, politicians need to move away from discrediting a broad array of countries as tax-havens. This ‘catch-all’ approach will inevitably have an adverse effect on investments and development cooperation.

The fight against tax evasion can only be won by identifying, with the help of intermediaries, which practices are truly problematic and harmful, and take appropriate actions. Only this approach will create a fair and effective international tax system, without decreasing valuable investments.

 

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