Foreign Direct Investment in Ireland 2017

Financial Globalisation and Special Purpose Entities

In the world economy, substantial flows of cash are transferred daily between many different countries, a lot of which have different taxation systems and accounting practices. This reality necessitates a separation of funds going into economies from funds that are intended as actual investment and those which are simply passing through.

Special Purpose Entities (SPEs) are types of firms that have little physical presence within countries but may transfer a great deal of funds across borders. A question for many countries such as Ireland, the Netherlands and Luxembourg (countries which exhibit a large disparity in FDI figures with their European counterparts as seen in Figure 1.2) is to what extent these types of firms may distort investment figures. Indeed, the Netherlands found that by netting SPEs from their FDI inward financial flow data, the figure fell by 80%.¹ “The use of SPE structures has rocketed in a context of multifaceted and flexible multinational enterprise (MNE) structures, which have become increasingly global and seek to obtain benefits from different legal and tax regimes”.² In light of these factors, the EU and the OECD is encouraging member states to report more information on them.

What Are Special Purpose Entities?

A Special Purpose Entity is a company set up for reasons that are beyond the production of goods and services; often they are established for financing purposes or to hold certain assets or liabilities. The present IMF guidance defines them as businesses which: have no more than five employees, very little production within their resident economy, have a foreign ultimate controlling parent, and have a high ratio of foreign assets relative to domestic.