Offshore financial centers are almost never the final destination of the foreign direct investment (FDI) they receive. A large part of these investments are phantom FDI, which ultimately flow to third countries or return back to the source country, in a process called round-tripping. This paper develops a model in which heterogeneous onshore countries compete internationally with tax instruments to attract capital from abroad in the presence of an offshore financial center, which encourages phantom FDI. We show that the presence of offshore financial centers is beneficial to the most technologically advanced countries, while countries hosting less profitable industries will lose. Finally, we use this framework to analyze the effectiveness of Controlled Foreign Company (CFC) rules against profit shifting, recently implemented in Europe, and the associated loss of tax base.
Zoom link: https://zoom.us/j/98193710479?pwd=V1hhZmNtRjlxaUNTdGFvRHArbi9idz09