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Fiji's Tax Cuts Under IMF Microscope

by Mary Swire,, Hong Kong

28 February 2012

The International Monetary Fund (IMF) warned that while Fiji's recent budget was particularly growth-friendly, the tax changes could threaten the revenue base and therefore further offsetting measures may be required to ensure deficit targets are met going forward.

“The reduction in marginal tax rates are important measures that could boost competitiveness and support growth, but they entail a significant fiscal cost," the IMF said in its annual review of the Fijian economy. "That cost is partially masked in 2012 by a bringing forward of corporate tax collections from 2013, as well as the fact that the rate cuts are felt for only part of the year. Starting in 2013, however, staff project revenues to be markedly lower. The authorities’ revenue projections seem overly optimistic, and while there could be some under-execution of the capital budget, deficit targets would be difficult to achieve without further fiscal movement."

The 2012 Budget, announced in November last year, included an 8% cut in corporate tax to 20% and substantial cuts in personal income tax for the majority of taxpayers. These tax cuts are to be partially offset with a new levy on top earners, a broadening of the 5% Hotel Turnover Tax to cover restaurant and other services, increases in the departure tax and tobacco and alcohol excises, and new levies on telecommunications, credit cards, insurance, and luxury cars.

In its recommendations, the IMF advocated that discretionary tax concessions should be curbed to boost revenues.

“Tightening the scope for discretionary concessions would make the system more transparent and create fiscal space for well-targeted investment incentives. While the authorities had no disagreement, the 2012 budget unfortunately contained no steps in this direction. Base broadening for the VAT and income tax would also be desirable to offset the reduction in marginal rates," the Fund concluded.

TAGS: tax | business | value added tax (VAT) | fiscal policy | budget | International Monetary Fund (IMF) | corporation tax | Fiji | tax rates | import duty | tax reform | individual income tax

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