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US tax overhaul takes toll on global investment flows

[GENEVA] US multinationals have repatriated large amounts of foreign earnings because of last year's tax overhaul, causing a significant dent in global foreign direct investment, the United Nations said Monday.

In a fresh report, the UN Conference on Trade and Development (UNCTAD) said that global FDI - a measure of cross-border private-sector investments seen as an indicator of global economic health - plunged 41 per cent during the first half of 2018.

From January to June, global FDI flows totaled some US$470 billion, down from US$794 billion during the same period last year, UNCTAD said.

"Global FDI is indeed at a ... very, very low level compared with the 10 (previous) years," said James Zhan, head of UNCTAD's investments and enterprises division.


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"Overall, the picture is gloomy, and even the prospect is not so optimistic," he told reporters in Geneva.

Zhan said three elements affect FDI flows: mergers and acquisitions, investments in real assets and financial fluctuations within large firms.

During the first half of this year, global mergers and acquisitions inched down just one per cent, while investments in real assets swelled 42 per cent, indicating that shifts in financial flows inside large corporations are behind the drop in FDI.

"This decline, if we look at it closely, ... is mainly due to the repatriation of the earnings back to the United States by the US multinational companies," Mr Zhan said.

The United States has long had the world's largest outward FDI. During the first half of 2017, it totaled US$149 billion, with reinvested earnings accounting for a full US$147 billion of that, according to UNCTAD.

But after US President Donald Trump's sweeping tax overhaul was pushed through last December, the United States saw its reinvested earnings fall to a net divestment of US$217 billion during the first half of 2018, the report showed.

UNCTAD warned at the start of the year that the new tax bill, which slashes the corporate tax rate to 21 per cent from 35 per cent, could entice some businesses to return with the promise of higher profits.

The agency, which hinted that as much as US$2 trillion could eventually be repatriated, said the most significant change in the US tax regime for multinationals was the shift away from a worldwide system, in which income earned around the globe was taxed, but was only payable when funds were repatriated.

Under the new territorial system, Washington taxes only income earned in the United States and is allowing multinationals to pay a one-off tax on accumulated foreign income. As a result, the companies have much less incentive to hoard their foreign-made income outside the country.

Monday's UNCTAD report indicated that all regions of the world saw their inward FDI flows shrink.

The biggest drop - a full 93 per cent - was registered in Europe, which was "significantly affected by the repatriation of retained earnings by United States multinational enterprises," the report said.

The European drop came despite a significant hike in FDI flows to Britain, after it suffered a deep decline last year, it said.

During the first half of 2018, Britain thus became the world's second largest recipient of FDI, after China.


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