Nepal Receives Nearly a Third of FDI from Tax Havens: Report

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.

FDI from Tax Haven Countries (Till FY 2022/23)

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.

FDI from Tax Haven Countries (Till FY 2021/22)

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.” 

FDI from Tax Haven Countries (Till FY 2020/21)

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.

Dividend Repatriation in five fiscal years from 2018/19

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

 

Sector-wise Dividend Repatriation (in Rs 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.