In theory, foreign direct investment (FDI) flows in a straight line, from a company’s home country to the one where it is committing capital. In practice, the path is often far more circuitous, obscured by a practice known as “round-tripping.” This complex maneuver, involving a web of disparate tax systems, globe-spanning multinationals, and historical legacies, effectively makes it harder to track where money is actually going – and who truly owns it.
The term “round-tripping” is somewhat misleading, according to Daniel Haberly, a lecturer at the University of Sussex who researches FDI. “It implies money is actually moving,” he explains, “but that’s not necessarily the case.” Instead, round-tripping describes a situation where a country’s own firms and citizens utilize offshore structures to hold assets at home. It’s a tactic that can obscure the origin and ultimate ownership of investments, creating a “black box” around global capital flows.
Whereas often associated with tax avoidance, round-tripping isn’t always illegal. Still, the practice has been linked to a range of illicit activities, including money laundering and the funding of criminal groups. According to data from the International Monetary Fund, roughly two-thirds of global FDI flows either originate in, or pass through, jurisdictions known for their permissive shell company structures.
A Global Phenomenon, Not Just a Developed-World Problem
It’s a common assumption that round-tripping is primarily a feature of developed economies. However, Haberly’s research reveals a more nuanced picture. Developing countries, particularly those with a history of socialist structures, exhibit similar levels of the practice. He points to the transition to privatization in countries like Russia as a key factor. “There was a search for more solid, especially common law jurisdictions, where things can be registered,” he said, as nascent legal frameworks struggled to keep pace with rapid economic change.
In China, capital controls create a unique dynamic. Companies seeking to list overseas often require offshore structures, driving round-tripping activity. A significant portion of recorded FDI inflows into China are routed through Hong Kong and Macau, allowing Chinese companies greater flexibility and access to tax breaks and financial incentives, as reported by the South China Morning Post here.
The drivers of round-tripping vary by region. Prior to the 2017 Tax Cuts and Jobs Act (TCJA) in the United States, a surge in “tax inversions” saw US companies re-domiciling in lower-tax countries like Ireland. The TCJA significantly reduced these incentives. In Europe, the growth of private equity, particularly in Luxembourg, has fueled round-tripping practices.
The Distortion of Data and its Consequences
The most significant consequence of round-tripping is the distortion of FDI data. “Official data just doesn’t tell you what the world economy actually looks like – it is sort of a black box,” Haberly explains. “It makes it really difficult to build policy decisions.” Studies attempting to assess the economic impact of FDI may be based on flawed data, leading to inaccurate conclusions about how the global economy operates.
Beyond the data distortion, round-tripping likely results in substantial tax losses, though quantifying these losses is challenging. While some revenue may be recovered at the investor level, developing countries are particularly vulnerable, lacking the capacity to effectively enforce tax compliance.
Haberly has spent over a decade building an FDI database to map the sources and pathways of offshore investment, aiming to shed light on these obscured flows. This research, along with similar initiatives, represents a crucial step towards a clearer understanding of the global financial landscape.
As policymakers grapple with the complexities of international finance, addressing the challenges posed by round-tripping will be essential. The next step in improving data accuracy and transparency will likely involve increased international cooperation and stricter regulations on shell companies and offshore financial structures.
What are your thoughts on the impact of round-tripping on the global economy? Share your comments below.
