World Economy

Scrap ineffective tax breaks: IMF


Countries should curtail fruitless tax breaks and instead adopt simpler tax regimes and support research and development (R&D), education and infrastructure, the International Monetary Fund (IMF) said on Thursday.

The body said lifting productivity growth was "critical" for boosting the world economy, which it forecasts will expand by 3.4 percent this year — but that tax incentives were not the way forward.

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"In emerging market and developing economies, commonly used tax incentives aimed at attracting foreign direct investment should be scaled back because they are largely ineffective and costly," the IMF said in a report.

China, for instance, offers various tax incentives for foreign companies and operates Special Economic Zones with free market-orientated policies designed to attract international business.

The IMF also advised against preferential tax treatment for small companies, saying such policies could incentivize businesses to remain small so as to remain eligible for special treatment.

It said a better way to support small businesses was a simplified tax regime that could "facilitate firm entry and reduce informality" and potentially raise productivity.

The U.K. is an example of a country where small businesses qualify for tax relief. Small businesses get a tax break of up to 100 percent on their property, if it is their sole one and it has a rental value of less than £12,000 ($17,297).

The IMF said advanced economies should use fiscal policy to incentivize more private sector R&D, which it said could lift gross domestic product in these countries by 5 percent in the long-term.

The body cut its outlook for 2016 world growth in January and has since warned that collective action is needed to boost the global economy.

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