FDI round-tripping has become an increasingly important issue in the world economy, with significant implications for tax revenues, regulatory frameworks, and economic policy. Little is known about its importance and characteristics from a country of origin perspective, and thus economic policies are ill-prepared to address it. This study analyzes the determinants of round-tripping in OECD countries and highlights the urgency of addressing it. Key findings reveal that factors such as economic development, tax burdens, institutional quality, and globalization levels significantly influence round-tripping. The results emphasize the need for coordinated international policy efforts to curb the distortions caused by round-tripping and promote transparent investment flows. Addressing round-tripping FDI is essential for ensuring equitable taxation and strengthening the integrity of global financial systems.
Policy implications
- Round-tripping is a global phenomenon that involves at least two countries, making international coordination essential for its reduction.
- One of the key consequences of round-tripping is fiscal erosion. Governments can mitigate this by reducing incentives for round-tripping—such as by strengthening domestic institutions—or by implementing regulatory measures like controlled foreign company (CFC) rules.
- Differences in overall tax burdens between the home country and the intermediary country play a significant role in round-tripping. International tax coordination, including measures like the global minimum tax, can help reduce these incentives.
- In the case of round-tripping foreign direct investment (FDI), domestic capital is reintroduced into its home country as foreign capital, allowing what is in fact a domestic investors to benefit from favorable treatment, such as legal protections and incentives granted to foreign investors. To prevent such abuse, governments can enhance their efforts to investigate and identify the ultimate controlling owner of FDI.
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