Nearly a third of the Foreign Direct Investment (FDI) to Nepal till FY 2022/23 came from tax haven countries, the recently published central bank’s survey report shows.
Nepal’s FDI stock increased by 11.8% to Rs 295.50 billion at the end of FY 2022/23, the survey report shows. Of the total, around Rs 89.17 billion, or 30.17%, came from countries such as Ireland, Singapore, West Indies, United Arab Emirates (UAE), Hong Kong, the Netherlands, Mauritius, Bermuda, British Virgin Island, Switzerland and Cayman Islands, which are widely considered to be tax havens.
Generally, countries offering low or no tax rates to foreign businesses or individuals for their deposits are regarded as tax havens.
The share of FDIs from such countries was 32.51% until FY 2021/22 and 31.27% in FY 2020/21.
|
Countries
| Amount (Rs billion) |
|---|---|
| Ireland | 22.624 |
| Singapore | 18.808 |
| West Indies | 14.395 |
| United Arab Emirates | 12.284 |
| Hong Kong | 7.235 |
| Netherlands | 5.933 |
| Mauritius | 3.348 |
| Bermuda | 3.06 |
| British Virgin Island | 0.67 |
| Switzerland | 0.446 |
| Cayman Islands | 0.367 |
| Total | 89.17 |
Experts say that the trend of siphoning off a large amount of money by different means from Nepal to tax havens, recycling it and sending it back to Nepal in the name of FDI has continued for a long time.
Former Finance Secretary Rameshore Khanal says that Nepal Rastra Bank these days vets if anyone tries to bring such investments in the country, from the lens of anti-money laundering provisions.
“However, the examining system is not that perfect,” said Khanal. “The cunning individuals reroute the money through several countries before investing in Nepal to deceive the authorities.”
Khanal added that it was more important to check the source of investment than the source country of investment as there are countries which are not considered as tax haven despite offering low or no tax for foreign businesses and individuals.
|
Country
| Amount (Rs billion) |
|---|---|
| Ireland | 20.896 |
| Singapore | 16.074 |
| Saints Kitts & Nevis | 15.091 |
| United Arab Emirates | 10.646 |
| Hong Kong | 5.358 |
| Netherlands | 6.334 |
| Mauritius | 3.845 |
| Bermuda | 2.778 |
| British Virgin Island | 4.192 |
| Switzerland | 0.403 |
| Cayman Islands | 0.33 |
| Total | 85.947 |
Another illegal way of channeling the money from tax havens is through under-invoicing of goods during their imports and using the money from tax havens to pay the actual amount, experts say. An absence of a strong screening mechanism for FDIs puts us at risk of being blacklisted by the international community, they say.
“This way big companies create money in the country by using the amount stored in the tax haven,” Khanal added. “The sanity and sanctity of the source needs to be verified to determine if it is a genuine investment or a case of money laundering.”
|
Country
| Amount (Rs billion) |
|---|---|
| Ireland | 16.482 |
| Singapore | 15.481 |
| Saints Kitts & Nevis | 14.513 |
| United Arab Emirates | 8.35 |
| Hong Kong | 2.018 |
| Netherlands | 5.37 |
| Mauritius | 2.86 |
| Bermuda | 2.039 |
| British Virgin Island | 3.67 |
| Switzerland | 0.225 |
| Cayman Islands | 0.284 |
| Total | 71.292 |
The report titled ‘Survey Report on Foreign Direct Investment in Nepal (2022/23)’ also highlights the significant gap between approved FDI and actual FDI inflows in the country. Between fiscal years 1995/96 and 2022/23, the total actual net FDI inflow stood at around 35% of total FDI approval.
Overall, India continues to remain on top with Rs 103.5 billion FDI followed by China at Rs 35.5 billion, and Ireland, Australia and Singapore at Rs 22.6 billion, Rs 19.1 billion and Rs. 18.8 billion, respectively.
The report also shows the average Rate on Equity (RoE) of FDI companies in Nepal is continuously declining. The average RoE, which was 16.08% in FY 2018/19, dropped to 11.61% in the last fiscal year.
Meanwhile, the dividend repatriation by foreign companies registered in Nepal under FDI has increased by 10.58% in the last fiscal year, with the manufacturing sector topping the list.
It had declined by 39.88% in FY 2021/22.
The Nepal Rastra Bank's new report shows foreign investors repatriated Rs 17.334 billion in FY 2022/23, up from Rs 15.675 billion in FY 2021/22.
The NRB report states the highest dividend repatriation approval, Rs 8.847 billion, in FY 2022/23 has been for the manufacturing sector.
The information and communication sector comes second with Rs 3.673 billion while the financial and insurance services sector come third with Rs 3.5 billion.
|
Fiscal Year
| Dividend Repatriation |
|---|---|
| 2022/23 | Rs 17.334 billion |
| 2021/22 | Rs 15.675 billion |
| 2020/21 | Rs 26.07 billion |
| 2019/20 | Rs 12.90 billion |
| 2018/19 | Rs 27.78 billion |
|
Sectors
| 2018/19 | 2019/20 | 2020/21 | 2021/22 | 2022/23 |
|---|---|---|---|---|---|
| Information & Communication | 12.541 | --- | 13.984 | 5.402 | 3.673 |
| Manufacturing | 9.779 | 7.527 | 6.747 | 7.315 | 8.847 |
| Electricity, gas, steam and air conditioning | 2.762 | 0.032 | 3.816 | 1.678 | 0.13 |
| Financial and Insurance Services | 2.167 | 4.799 | 0.869 | 1.089 | 3.5 |
| Education | 0.347 | 0.347 | 0.303 | ….. | ……. |
| Construction | 0.161 | 0.05 | 0.052 | …….. | |
| Other | 0.011 | 0.097 | 0.357 | 0.106 | 1.115 |
| Accommodation and food services | 0.011 | 0.042 | 0.001 | 0.022 | |
| Transport and Storage | 0.004 | 0.025 | 0.042 | ||
| Agriculture, Forestry and Fishing | 0.003 | ….. | |||
| Mining and Quarrying | …. | ||||
| Human Health and Social Work | 0.002 | 0.002 | |||
| Total | 27.78 | 12.9 | 26.07 | 15.675 | 17.334 |
| Source: NRB |
According to the survey report, Bagmati Province has the highest stock of FDI share, 59.7%, while the Lumbini, Karnali, and Sudur Paschim Province account for less than 1.0% of the total FDI stock.
