GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Unpacking Tax Performance in Guinea-Bissau  1 © 2025 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbankgroup.org Some rights reserved. This work is a product of the staff of The World Bank Group with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Table of Contents Acronyms and Abbreviations iii Acknowledgements v Executive Summary vi Part I:  The State of the Economy 1 1.  Recent developments 2 1.1.  Real sector 2 1.2.  Fiscal and debt dynamics 4 1.3.  External sector 10 1.4.  Monetary policy and financial sector 11 2.  Outlook and risks 13 Part II:  Unpacking Guinea Bissau’s Tax Performance and Expenditure 19 1.  Revenue structure and performance 20 1.1.  Tax mix 20 1.2.  Tax performance 24 1.3.  Quantitative assessment of tax expenditures at the border 28 2.  Transition from sales taxes to VAT 29 2.1. Background 29 2.2.  Comparison of the former IGV and new VAT 31 2.3.  Streamlining exemptions under the new VAT law 32 3. Recommendations 33 References 35 Annex A.  Detailed Analysis of International Best Practices in Tax Policy 36 Annex B.  IGV and VAT Comparison 40 TABLE OF CONTENTS i GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 List of Boxes Box 1. Taxation of cashew nut exports in Guinea-Bissau 6 Box 2. Enhancing financial sector diversification and depth is vital for economic growth and resilience 12 Box 3. Guinea-Bissau’s energy transition offers huge potential 15 List of Figures Figure 1. Growth in 2024 was driven by strong services activity 3 Figure 2. Lower exports were offset by higher private consumption 3 Figure 3. Inflation moderated in 2024, but food inflation is rising (percent) 4 Figure 4. Poverty increased from 2021–2024, as measured by international poverty rate $2.15 (PPP2017) 4 Figure 5. Tax revenue is below target, with the gap filled by donor grants . . .  5 Figure 6. . . . and offset through expenditure cuts  5 Figure 7. There are three main levies on cashew exports 6 Figure 8. Tax revenue from cashew is volatile 7 Figure 9. Public debt increased to 82.3 percent of GDP in 2024 8 Figure 10. Domestic debt stock is dominated by public securities 9 Figure 11. Multilateral lenders account for over 80 percent of external debt 9 Figure 12. Cashew comprises the lion’s share of exports 10 Figure 13. The current account deficit has risen slightly 10 Figure 14. There is a persistent gap between government expenditures and revenues 20 Figure 15. Guinea-Bissau’s tax revenue decreased in 2024 . . .  21 Figure 16. . . . and is the second-lowest of peers in 2024 21 Figure 17. Top PIT and CIT rates are lowest of peers 22 Figure 18. Implicit subsidies on fuel are high 23 Figure 19. Fuel prices are below the regional average 23 Figure 20. Tax rates on beer and wine do not reflect alcohol content 23 Figure 21. CIT revenue averages 1.5 percent of GDP 26 Figure 22. Guinea-Bissau has scope to increase its CIT efficiency 26 Figure 23. PIT revenues average 0.7 percent of GDP 27 Figure 24. PIT efficiency is one of the lowest of comparators 27 Figure 25. Relief at the border fluctuates from year to year 28 Figure 26. Sales tax revenues average 2.7 percent of GDP 30 Figure 27. Guinea-Bissau’s sales tax was one of the lowest of comparators in 2024 30 List of Tables Table 1. Initial revenue enhancing measures proposed/underway for 2025, (percent of GDP) 14 Table 2. Selected economic indicators – 2021–2028 17 Table 3. Comparison of rates under the IGV and VAT 31 Table 4. Policy recommendations 34 ii TABLE OF CONTENTS UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Acronyms and Abbreviations Acronym Definition AFRITAC Africa Regional Technical Assistance Centers APGB Guinea-Bissau Ports Administration (Administração dos Portos da Guiné-Bissau) BCEAO Central Bank of West African States BOAD West African Development Bank CAD Current Account Deficit CI Industrial Levy (Contribuição Industrial) CNC National Shippers Council (Conselho Nacional dos Carregadores) COTADO Public Expenditure Monitoring and Guidance Committee (Comité de Suivi et d’Orientation des Dépenses Publiques CPI Consumer Price Index CPR Rural Property Levy (Contribuição Predial Rústica) DGCI Directorate-General of Duties and Taxes DMFAS Debt Management and Financial Analysis System DSA Debt Sustainability Analysis EAGB Electricity and Water of Guinea-Bissau (Eletricidade e Águas da Guiné-Bissau) ECF Extended Credit Facility EHCVM Harmonized Survey on Household Living Conditions EMDEs Emerging Market and Developing Economies FAD Fund for African Development (likely, exact expansion not provided) CFAF CFA franc (currency) FDI Foreign Direct Investment GDP Gross Domestic Product HHI Herfindahl-Hirschman Index IDA International Development Association IDB Islamic Development Bank IDS International Debt Statistics IFAD International Fund for Agricultural Development IGV General Sales and Services Tax (Imposto Geral sobre Vendas) IMF International Monetary Fund LFI Loi de Finances Initiale (Initial Finance Law) MTDS Medium-Term Debt Strategy NBFIs Non-Bank Financial Institutions NPLs Non-Performing Loans OMVG Organisation pour la Mise en Valeur du Fleuve Gambie (Organization for the Development of the Gambi River) ACRONYMS AND ABBREVIATIONS iii GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Acronym Definition PPP Purchasing Power Parity SDFP Sustainable Development Finance Policy SOEs State-Owned Enterprises VAT Value Added Tax WAEMU West African Economic and Monetary Union WAMU West African Monetary Union iv ACRONYMS AND ABBREVIATIONS UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Acknowledgements The Guinea-Bissau Economic Update (EU) is a periodic and Frederic Tremblay. The team is grateful to Daniela publication of the World Bank (WB) that highlights Marotta, Edouard Al-Dahdah, Julia Dimitri and peer recent economic trends and discusses development issues reviewers Isolina Rossi, Daniel Pajank and Francisco relevant to the country. The EU builds on existing WB Javier Arias Vazquez for their comments. The team would analytical reports to present current economic and social also like to express its appreciation to the Bissau Guinean issues. The Guinea-Bissau EU is intended for the general authorities for their support, particularly the Ministry of public and serves as a vehicle for launching a factual debate Finance, the Ministry of Economy, and the Central Bank on economic policy choices among key national actors, of West African States. including policy makers and citizens. The report was prepared under the overall guidance of This edition of the EU consists of two chapters. The first Keiko Miwa and Hans Anand Beck. The team would chapter presents the economic developments in 2024 and like to thank Micky Ananth, Theresa Adobea Bampoe the economic outlook for 2025–2028, with an assessment and Etsehiwot Berhanu Albert for their administrative of the risks and challenges. The second chapter analyzes support. tax revenue composition and performance. The chapter concludes with a set of policies that could help boost Macroeconomic projections and historical data are as of revenue mobilization in Guinea-Bissau. March 2025. The report was prepared by a multi-sectoral World Bank Information about the World Bank, its activities in team led by Maria Elkhdari and Anna Carlotta Allen Guinea Bissau, and electronic copies of this publication Massingue. The team included Tomas Augustin Picca, are available through this link: https://www.worldbank. Eduardo Alonso Malasquez Carbonel, Sabrina Gilbert org/en/country/guineabissau ACKNOWLEDGEMENTS v GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Executive Summary Guinea-Bissau’s economy remained resilient in 2024, India. Trade in services is limited to tourism in the Bijagós despite a challenging cashew campaign, with GDP islands. The CAD widened as the country continued to growth reaching 4.8 percent. Activity in the primary grapple with climate shocks and logistical challenges at sector was affected by a reduction in cashew production the port of Bissau, which led cashew exports to fall from due to adverse weather conditions and lingering effects 191,400 tons in 2023 to 167,500 tons in 2024. The CAD from the poor 2023 marketing campaign. However, this has been primarily financed through treasury securities was partially offset by a more than doubling in farmgate issued in the regional markets, and financial support prices for cashews producers and improved subsistence from the IMF’s Extended Credit Facility (ECF) program. agriculture output. The secondary sector output showed Regional foreign reserves have improved, covering positive signs as well, growing by 8 percent between 2023 4.7 months of imports in 2024 compared to 3.5 months and 2024, driven by a rise in the manufacturing sector in 2023. (particularly in the agri-food industry) and construction activities linked to major infrastructure projects. Growth The fiscal position improved in 2024, with the deficit in the services sector was strong (+4.2 percent y/y) driven narrowing to 7.3 percent of GDP, from 8.2 percent by retail and hospitality activities. of GDP in 2023, however public debt climbed to 82.3  percent of GDP. The increase in public debt While average inflation decelerated in 2024, prices was driven by a higher-than-expected fiscal deficit have been on an upward trend since June 2024, slightly due to lower tax revenue and higher interest expenses. increasing extreme poverty. Inflation moderated to an Revenue and grants were below expectations, with tax average 3.8 percent in 2024 from 7.2 percent in 2023, collection at just 8.2  percent of GDP—significantly reflecting a tighter regional monetary policy stance and below the WAEMU convergence criteria—due to poor easing global commodity and food prices. However, cashew export performance and lower-than-expected inflation remained above the West African Economic and revenue from telecoms, banks, and gas stations. The Monetary Union (WAEMU) target band of 1–3 percent, government implemented several corrective measures in with food prices showing renewed upward pressure in 2024, including fuel tax adjustments and the suspension the latter half of 2024 and the first quarter of 2025. As a of rice subsidies. Aside from conjunctural challenges, result, poverty indicators showed a modest deterioration, Guinea-Bissau’s low tax to GDP ratio is also explained with the extreme poverty incidence (measured at the by structural issues, discussed in chapter 2 of this update, international poverty line of $2.15 per person per day which are summarized below: in PPP2017) reaching 27.8 percent in 2024, up from 27.5 percent in 2023. Rural areas continued to bear the • The current tax system is heavily reliant on indirect brunt of poverty, reflecting persistent vulnerabilities in taxes, particularly trade levies and sales taxes, which the agricultural sector. collectively account for over half of total revenues. This dependence creates vulnerabilities, especially as Despite easing international import prices, lower it relies on the taxation of cashew exports, which are cashew exports caused the current account deficit a highly volatile revenue source. Meanwhile, direct (CAD) to widen to 8.5 percent of GDP in 2024 from taxes—including corporate income tax (CIT) and 8.3 percent of GDP in 2023. Guinea-Bissau is a mono- personal income tax (PIT)—only contribute modestly crop economy, and cashew nuts account for more than to overall collections due to systemic inefficiencies and 80 percent of exports, with most of these exports going to widespread informality in the economy. vi EXECUTIVE SUMMARY UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU • Excise taxes on key commodities like fuel and alcohol with both the fiscal and external accounts seeing a represent a substantial missed opportunity in the gradual improvement. Growth is projected to average revenue strategy. Current tax rates fail to internalize 5.1 percent over 2025–2028, assuming favorable cashew critical environmental and public health costs, leaving production, strong activity in the services sector, and an estimated 1.8 percent of GDP in potential revenue continued investment in key infrastructure projects. uncollected. The analysis reveals particularly striking Inflation is expected to gradually decline over the projection gaps in diesel taxation, which falls 63 percent short of period, and to reach 2.0 percent by 2028. Higher cashew its efficient price benchmark, while alcohol excise duties prices and moderated food inflation are expected to demonstrate inconsistent application that favors beer and contribute to a gradual reduction in the extreme poverty wine over spirits. Strategic reforms in these areas could incidence (measured as US$2.15 per person per day, simultaneously boost fiscal revenues while advancing PPP2017) 25.9 percent in 2025 to 23.3 percent by 2027. important social and environmental objectives. The CAD is set to narrow to 4 percent of GDP by 2028, • The country’s tax expenditures represent significant driven by an expected recovery in cashew exports, reduced costs to the budget, with exemptions at the border import prices for fuel, food and commodities, and potential alone accounting for nearly 1 percent of GDP gains from regional trade integration. Revenue-based fiscal annually. These relief measures primarily benefit large- consolidation is expected to bring the deficit to 3 percent of scale projects in energy and infrastructure sectors, but GDP in 2028 and debt to 72.4 percent of GDP. many lack proper transparency and overlap unnecessarily Despite the recent progress, there are significant risks with broader exemptions provided under the investment to the outlook. Economic growth could be dampened by code. Such overlaps create problematic loopholes that climate change shocks1 and their direct impact on agriculture progressively erode the tax base. A detailed review of (weakening the performance of the cashew sector), fisheries, 2023 data shows that customs duty and sales tax relief on and infrastructure. A sustained implementation of recent just two commodities—diesel and cement—accounted global trade policy shifts and accompanying weakening for 20 percent of total exemptions, highlighting the in global economic activity could translate into lower concentration of these fiscal costs. exports (in volume and in value) and lower remittances • The introduction of the value-added tax (VAT) in inflows, which would dampen the outlook. Weak January 2025, marks a pivotal transition from performance of SOEs, and financial sector fragilities could Guinea-Bissau’s outdated sales tax (IGV) framework. generate contingent liabilities. While the authorities are VAT’s sophisticated multi-stage design aims to eliminate currently committed to a robust reform agenda, political cascading taxes, improve overall compliance, and uncertainty and institutional weaknesses could weaken substantially broaden the tax base by capturing value the fiscal consolidation agenda and slow momentum for added throughout supply chains. Early implementation structural reforms, including in the energy sector. Structural results appear promising, with collection of VAT challenges—including low agricultural productivity, revenues reaching over CFCA 6 billion (0.4 percent of limited rural financial services, and climate risks—pose GDP) in the first two months of 2025. These revenues significant obstacles to more substantial and sustainable are 150 percent higher than what was collected in poverty reduction. the same period in 2024 under the repealed sales tax (IGV). However, persistent exemptions including the exemption of natural gas, private education, private 1 Addressing Guinea-Bissau’s vulnerability to climate change and health care and fee-based financial services should be its structural issues requires a cohesive approach that integrates rationalized. development and climate strategies. This could involve improving governance, diversifying the economy, protecting natural capital, The macroeconomic outlook is favorable—growth is developing human capital, and investing in climate-resilient projected to average 5.1 percent over the medium-term, agricultural practices and infrastructure. EXECUTIVE SUMMARY vii GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Importantly, the expected improvement in the debt to rollover and interest rate risks. This underscores the need trajectory hinges on significant fiscal consolidation for the effective enhancement of revenue mobilization, as in 2025 and beyond. While the authorities have been well as a transition to using treasury securities with longer successful in containing spending in recent years, there is maturities. Leveraging the ongoing technical support a risk of spending overruns in the run-up to the elections from development partners, including the World Bank scheduled for late 2025. In addition, there is uncertainty Group and the IMF, will be critical. As noted earlier, around the yields of some revenue-raising measures. The chapter 2 of this Economic Update outlines additional overreliance on short-term maturity treasury securities also policy recommendations to further enhance revenue poses a risk to debt sustainability given increased exposure mobilization in Guinea Bissau (see table A below). Table A. Policy recommendations Policy Options* Timeline 1. Broaden the tax base to increase revenue mobilization and boost efficiency Rationalize VAT tax expenditures, including the exemption of natural gas, private Short term education, private health care and fee-based financial services Harmonize tax rates by alcohol content by increasing the excise tax rate on beer and Short term wine by 25 percent and 200 percent respectively, aligning them with the taxation of spirits Eliminate implicit fuel subsidies by aligning taxes with external costs (revenue Short term potential = 1.8 percent of GDP) Improve tax efficiency for CIT, PIT and VAT including through modernizing customs Medium to long term operations, deploying digital tools, and improving taxpayer services (revenue potential = 4.1 to 6.4 percent of GDP) 2. Conduct a comprehensive tax expenditure review Increase transparency by showing which sectors and firms benefit most from Short term exemptions, reduced rates, or holidays Align reporting with regional benchmarks (WAEMU, ECOWAS) to facilitate cross- Short term country comparisons Require all ministries granting tax incentives (e.g., via Investment Code) to file reports Short term on beneficiaries and justifications Establish a dedicated unit (or task force) in the Ministry of Finance to compile and Short to medium term publish a tax expenditure report annually Require filing, even if no tax is due, to enable measurement of the size of the Medium term foregone revenue and to verify compliance with incentive conditions Collect basic financial statements from tax incentives beneficiaries to gauge the real Medium term cost-benefit of incentives granted * Most of the proposed reforms fall under the responsibility of the Ministry of Finance. viii EXECUTIVE SUMMARY Part I:  The State of the Economy GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 1. Recent developments (18.5 percent of GDP). The primary sector depends on developments in the subsistence agriculture (rice and 1.1. Real sector cereals) which accounts for an average 17 percent of GDP, followed by the production of cashew nuts, which accounts Despite challenges in the cashew sector, growth has for about 11 percent of GDP. The primary and tertiary remained resilient—at 4.8 percent in 2024—driven sectors are highly interlinked, as trade, transport services, by strong private demand and services and financial services are significantly tied to the cashew Economic growth in Guinea-Bissau remained resilient sector, which employs about 60 percent of the population. in 2024, with real GDP growth estimated to have On the supply side, strong activity in services has reached 4.8  percent, slightly above 4.4  percent in slightly offset an underperforming agricultural output 2023, but lower than anticipated at the start of the (Figure 1). Growth in the services sector has been strong year. The output gap was negative in 2024, with growth (+4.2 percent y/y) driven by retail and hospitality activities. significantly below the country’s potential estimated at Cashew nut production slowed growth in 2024, with 5.5 percent. This is largely due to negative developments production falling from 250,000  tons in 2023 to in the primary sector. First, cashew production was lower 240,100 tons in 2024. Despite lower cashew production, than expected as crops were affected by adverse weather growth in the primary sector has been resilient (+4.3 percent conditions (high temperatures during the dry season). y/y) supported by strong activity in subsistence agriculture, Production was also influenced by the lingering effects benefiting from favorable weather and the continued of a poor cashew marketing campaign in 2023 which absence of pests that are harmful to large-scale crops. drove farmers to substitute cashew plantations with Growth in the secondary sector has been strong at 8 percent subsistence agriculture. Output in fisheries was also lower between 2023 and 2024, driven by higher manufacturing than expected, with the withdrawal of European boats output, particularly in the agri-food industry. Electricity, affecting fishing activity.2 These challenges were partly gas, and water distribution activity increased by 6.2 percent offset by the increase in cashew producers’ average prices y/y, in line with the positive evolution of the energy sector (farmgate prices) from CFCA 200/kg in 2023 to CFCA in the country (Box 3) and the growing level of housing 560/kg in 2024 –boosting private demand. construction. Similarly, construction activity was robust as a result of several ongoing infrastructure projects. This The tertiary sector remains the key driver of growth in growth supports Guinea-Bissau’s economic development by Guinea Bissau, followed by the primary sector, which boosting employment, local consumption, and investment, is the main source of economic growth volatility. especially in food and beverage manufacturing. Growth in Guinea-Bissau is driven by the cashew sector, which impacts agricultural production as well as tertiary On the demand side, lower exports were offset by higher activity—including trade. Historically, the tertiary private consumption (Figure 2). Cashew exports fell sector has accounted for 44  percent of GDP and is from 191,400 tons in 2023 to 167,500 tons in 2024 due to mainly supported by activities in retail and hospitality a combination of lower cashew production, lower demand from external partners—such as India—and logistical challenges at the port of Bissau.3 Despite this decline in 2 The withdrawal was due to the expiry of the last fishing agreement between Guinea-Bissau and the European Union (EU) in June 2024. The EU and Guinea-Bissau have signed in November 2025 a new protocol for the implementation of the fisheries partnership agreement, 3 India accounts for 60 percent of Guinea-Bissau’s cashew exports. which allows EU vessels to access Guinea-Bissau’s waters for a period of In 2024, India’s cashew import volume declined by 3 percent relative five years. In addition to the EU contribution, EU shipowners will pay to 2023 and 20 percent relative to 2022, cumulatively until November license and capture fees to the Guinea-Bissau administration in order 2024. This decrease is, however, likely to be temporary given a recent to be authorized to fish. Together, this puts the total estimated financial strong rise in import prices, which increased from US$1091/ton in envelope over EUR100 million over the five-year period. June 2024 to US$1714/ton in November 2024. 2 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Figure 1. Growth in 2024 was driven by strong Figure 2. Lower exports were offset by higher services activity private consumption Supply-side contributions to growth (percentage points) Demand-side contributions to growth (percentage points) and overall real GDP growth (percent) and overall real GDP growth (percent) 6.0 20 5.0 5.6 15 5.6 5.2 4.0 4.8 10 4.4 Percent 3.0 5 5.6 2.1 5.2 5.6 4.4 4.8 Percent 0 2.0 2.1 –5 1.0 –10 0.0 –15 –1.0 2019 2020 2021 2022 2023 2024 –2.0 Private Consumption Government Consumption 2019 2020 2021 2022 2023 2024 Gross Fixed Investment Statistical Discrepancy Agriculture Industry Services Chg in Inventories Net Exports Net Taxes Real GDP Growth Real GDP Growth Source: Guinea-Bissau authorities, World Bank estimates. cashew exports, real GDP in 2024 was supported by the 2024 compared to 5.9 percent in 2023, monthly data show positive spillover effects of increased income and demand an upward trend in food prices starting June 2024, leading due to higher producer prices for cashews and lower food food inflation to accelerate to 5 percent in December 2024 prices. Furthermore, public and private investment compared to 1 percent in December 2023 (Figure 3). remained robust, with ongoing investments in the energy The spike in food prices was fueled by higher import prices sector, the construction of a new airport terminal, and the for rice, the suspension of rice subsidies, and reversal of rehabilitation of the port of Bissau driving activity. tax cuts on fuels in June 2024. Core inflation decelerated highlighting the continued moderation of underlying price pressures across the economy. Inflation decelerated in 2024, but stickier food prices and the weak cashew campaign caused poverty to Poverty in Guinea-Bissau continues to be significant, increase marginally with more than a quarter of the population (27.8 percent) living under the international poverty Inflation moderated significantly in 2024, with annual line of $2.15 per person per day (PPP2017) in 2024 average inflation declining to 3.8 percent in December (Figure 4). This is 0.3 percentage points higher than in 2024 (y/y), from 7.2 percent in 2023. This decline is 2023, when poverty rates reached 27.5 percent due to a attributed to monetary policy tightening by the Central Bank weak cashew campaign and high prices for staple food of West African States (BCEAO), and lower international items—including rice. food and oil prices. However, inflation remains slightly above the West African Economic and Monetary Union The incidence of poverty continues to be most severe (WAEMU) target range of 1–3 percent, reflecting ongoing in rural areas, where the poverty rate was 43.8 percent vulnerabilities to external and domestic shocks. In fact, in 2024, more than six times the poverty rate in urban while food inflation eased in 2024, averaging 1.8 percent in areas (6.2 percent). These results continue the tendency Part I: The State of the Economy 3 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Figure 3. Inflation moderated in 2024, but food observed since 2021 (year of the latest household inflation is rising (percent) expenditure survey), when national poverty reached 12.0 26 percent, while rural and urban poverty were 40.7 and 6.0 percent, respectively. While the gap between rural 10.0 and urban poverty has remained around 35 percentage 8.0 points since 2021, at least 1 in 4 Bissau-Guineans lived under the international poverty line during this period. 6.0 Guinea-Bissau’s continues facing persistent challenges 4.0 in poverty reduction, economic development, and social advancement. The agriculture sector, particularly the 2.0 production of raw cashew nuts, dominates the economy, 0.0 providing the main source of income for over two-thirds of households. The low productivity of the cashew –2.0 sector and limited access to resources and services have Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24 Mar-24 Apr-24 May-24 Jun-24 Jul-24 Aug-24 Sep-24 Oct-24 Nov-24 Dec-24 contributed to the high rural poverty. Food Energy Core Inflation Headline Infation 1.2. Fiscal and debt dynamics Source: Guinea-Bissau authorities, World Bank estimates. The fiscal deficit improved to 7.3 percent of GDP in 2024 (8.2 percent of GDP in 2023), driven by Figure 4. Poverty increased from 2021–2024, expenditure controls and higher donor grants in the as measured by international poverty rate $2.15 face of underperforming tax collections (PPP2017) Lower spending helped to reduce the overall fiscal 50 deficit to 7.3 percent of GDP in 2024 from 8.2 percent 43.6 43.8 in 2023, despite underperforming revenues. While total 40.7 40.4 40 revenue increased from 13.1 percent of GDP in 2023 to 13.6 percent of GDP in 2024, this was primary driven Poverty headcount rate by higher grants, which compensated for a decline in tax 30 27.5 27.8 26.0 25.7 revenues (Figure 5). Grants increased by 1.2 percentage points (pp) of GDP thanks to higher budget support 20 from donors. Tax revenue fell significantly below the targeted 8.9 percent of GDP, coming in at 8.2 percent of GDP 2024 (down from 8.7 percent in 2023). This is the 10 lowest tax-to-GDP ratio in WAEMU and far below the 6.0 5.9 5.9 6.2 regional target of 20 percent of GDP (Chapter 2). This 0 underperformance is mainly explained by lower cashew 2021 2022 2023 2024 revenues (−0.4 pp) due to a poor cashew campaign in National Urban Rural 2024 (see Box 1 for a discussion of cashew taxation) and lower-than-expected revenue from telecoms, banks, and Source: World Bank estimates. Estimates in 2021 using EHCVM (2021), gas stations. This drop in tax revenue was offset by cuts in Projections in 2022–2024 using microsimulation model and EHCVM (2021). Forecasts in 2025–2027. capital expenditure of 0.3 pp and stringent expenditure 4 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Figure 5. Tax revenue is below target, with the Figure 6. . . . and offset through expenditure gap filled by donor grants . . . cuts Revenue composition (percent of GDP) Expenditure composition (percent of GDP) 16 14.3 25 22.7 14.0 13.9 13.8 13.6 20.9 21.3 20.9 13.1 20.5 14 20 17.4 12 2.6 2.0 3.4 3.5 3.2 3.6 15 10 1.5 2.2 2.4 2.8 2.2 Percent 8 3.3 10 6 5 4 0 2 2019 2020 2021 2022 2023 2024 8.5 7.0 8.9 8.5 8.7 8.2 0 Wages and Compensation Use of Goods and Services 2019 2020 2021 2022 2023 2024 Interest Payments Current Transfers Tax Revenue Non-Tax Revenues Other Current Expenditures Capital Expenditures Grants Total Revenues and Grants Other Expenditure Total Expenditures Source: Guinea-Bissau authorities, World Bank estimates. controls through the COTADO4 (Public Expenditure The authorities implemented key corrective measures Monitoring and Guidance Committee), which helped in April 2024 to keep the domestic primary balance on reduce discretionary spending by 0.3  pp (Figure  6). the consolidation path. The measures were designed to Financing needs were mainly met through issuances support revenue mobilization: (i) reversing fuel tax cuts of treasury securities on the regional market, and new implemented in September 2023; (ii) increasing fuel tax concessional borrowing. reference prices from CFAF 170/liter in September 2023 to CFAF 411/liter in May 2024, and CFAF 437/liter in October 2024 for diesel, aligning them with market prices; and (iii) suspending rice subsidy disbursements. Moreover, tax audits by the Directorate-General of Duties and Taxes (DGCI) have been strengthened, 4 The COTADO, which was reactivated in January 2024 approves allowing for the identification and collection of at least commitments of all expenditures, except for the wage bill and CFAF 1.3 billion (0.1 percent of GDP) of tax arrears debt service to support the achievement the primary deficit target. The COTADO plays a central role in setting realistic cash accumulated in 2024. In terms of non-tax revenue, management projections, monitoring and controlling of spending a new fishing agreement was signed with the EU in and rationalizing non-priority expenditure. After some expenditure September 2024, which will allow for an increase of the bypassed the COTADO’s authorization in March–May 2024, European fishing compensation by EUR 1.4 million per the COTADO process was strengthened through the prior- year to EUR 17 million (0.8 percent of GDP). On the authorization by the Prime Minister of expenditure for real estate, expenditure side, to rationalize non-priority expenditure vehicles, and major rehabilitation works and the submission of a monthly report to the President and Prime Minister. In 2024, and strengthen expenditure controls, two key expenditure- non-priority spending is estimated to have been rationalized by control committees—the COTADO and the Treasury 0.3 percent of GDP. Committee—were reactivated in January 2024. Part I: The State of the Economy 5 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Box 1. Taxation of cashew nut exports in Guinea-Bissau Cashew nuts are Guinea-Bissau’s most significant export, and hence a critical source of income. Cashew nut exports are subject to multiple layers of taxation that impact both producers and traders. These include a combination of ad valorem taxes, fixed levies, and administrative fees at different stages of the export process (Figure 7): • Industrial levy (Contribuição Industrial - CI): A 3 percent tax on the customs value of cashew exports, payable in advance. This tax represents on average 16 percent of cashew-related tax revenue. This tax is particularly exposed to fluctuations in export prices given that it is based on the value of exports. • Rural property levy (Contribuição Predial Rústica - CPR): A fixed tax of CFAF 15 per kilogram of cashew nuts exported. It accounts for 43 percent of cashew-related tax revenue on average. • Export tax: this represents on average 48 percent of cashew-related revenue and includes: (i) a stamp duty, applied to various export-related documents, including the Export License, Certificate of Origin, and Phytosanitary Certificate (the rate varies but is often CFAF 2,000 per document); (ii) the general sales and services tax (IGV), a 17 percent tax. This is applied on services provided by the Guinea-Bissau Ports Administration (APGB), customs agents, and the National Shippers Council (CNC). In addition, exporters must pay administrative fees for licenses and certifications, as well as port and customs fees. While direct and indirect taxes on cashew exports represent a major component of Guinea-Bissau’s tax revenue, collection is highly volatile. This volatility is linked to harvest season performance and international market prices. Figure 8 shows revenues from cashew, which range between 1 and 2 percent of GDP, and represented about 17 percent of total tax revenues over the period 2018–2024. However, due to a highly informal trading sector, a significant portion of cashew exports escapes formal taxation. Figure 7. There are three main levies on cashew exports Percent of cashew related total tax revenue 100% 90% 29% 30% 80% 45% 45% 44% 48% 70% 60% 37% 42% 50% 40% 46% 46% 46% 43% 30% 20% 34% 10% 29% 9% 9% 11% 9% 0% 2019 2020 2021 2022 2023 2024 Industrial Levy Rural Property Tax Export Tax Source: Guinea-Bissau Authorities, World Bank estimates. (continues) 6 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Box 1. Taxation of cashew nut exports in Guinea-Bissau (Continued) Figure 8. Tax revenue from cashew is volatile 2.5% 30% 2.1% 25% 2.0% 1.7% 1.6% 20% 1.5% 1.5% 1.1% 15% 1.0% 0.9% 0.8% 10% 0.5% 5% 19% 12% 12% 16% 24% 19% 14% 0.0% 0% 2018 2019 2020 2021 2022 2023 2024 Cashew Related Revenue (% of Tax Revenue) RHS Cashew Related Revenue (% of GDP) Source: Guinea-Bissau Authorities, World Bank estimates. The tax system places a heavy burden on exporters, with multiple overlapping charges that reduce competitiveness. While the government collects substantial revenue from cashew taxation, high export taxes discourage investment in local processing and may ultimately lead to underreporting or smuggling to neighboring countries. Additional challenges include a lack of transparency over port and customs fees as exporters often face arbitrary charges from multiple agencies. In the short term, efforts are needed to create a more efficient tax structure to promote sector growth. To achieve this, the authorities should consider the following recommendations: 1) Reduce the CPR and stamp duty on export-related paperwork. 2) Provide tax incentives for local cashew processing industries. 3) Ensure transparency in port and customs fees to reduce informal payments. Looking ahead, the formalization of cashew producers will be key over the long term. This entails having a “formalization track” for producers, traders, and processors who voluntarily enter the regular tax system and comply with both CIT or PIT requirements. Under this track, participants would be either partially or fully exempted from per-kilogram levies on raw nuts, stamp duties on export documents, and other administrative surcharges. In return, they would register their businesses, keep basic financial records, and pay standard taxes on profits and wages. This approach shifts away from taxing at the port toward more conventional income-based taxation. By demonstrating proper employee registrations (ensuring PIT or payroll taxes are withheld) and submitting periodic CIT or PIT returns, formalized operators would show their commitment to transparency and encourage better recordkeeping throughout the supply chain. To make enrollment attractive, the government could streamline registration, digitize payments, and simplify filing for smallholder cooperatives. Over time, this dual system would gradually phase out high per-kilogram export taxes for those who comply with CIT/PIT obligations. Meanwhile, non-compliant operators who remain informal would continue to pay export levies at the port, preserving near-term revenue while creating a clear motivation to formalize. Part I: The State of the Economy 7 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Public debt is estimated to have increased to debt stock in 2024 (up from 66.3 percent in 2023). 82.3 percent of GDP, with domestic debt accounting Notably, the stock of short-term securities increased for a growing share of total debt by 57 percent in 2024 compared to 2023, driven by a high concentration of issuances of T-bills in the regional Public debt levels remain above pre-pandemic levels, market, with a maturity of less than 12 months and an reflecting elevated financing needs and the tightening average interest rate of 8.95 percent. of financial conditions in the regional market. Public debt is estimated to have reached 82.3  percent of External debt is largely held by multilateral lenders (over GDP in 2024 (Figure 9), significantly above the pre- 80 percent of external debt), with the World Bank Group pandemic average of 57.9 percent of GDP (2015–2019) and the West African Development Bank (BOAD) being due to lower-than-expected budget support, higher the country’s primary external creditors. Multilateral interest expenses, and currency depreciation. The latest holders account for 83.59 percent of total external debt, Debt Sustainability Analysis (DSA)5, conducted in driven mainly by disbursements received from inter­ December 2024, indicates that Guinea-Bissau’s public national institutions, including BOAD, the International debt is sustainable, but with a high risk of overall and Development Association (IDA), International Monetary external debt distress. Domestic financing continues to Fund (IMF), African Development Fund (ADF) and Islamic represent a large share of the debt portfolio, accounting for Development Bank (IDB) (Figure 11). The government 57.8 percent of total debt in 2024 (Figure 9). Domestic has an ongoing commitment with the World Bank, under debt stock is dominated by public securities (Figure 10), the Sustainable Development Finance Policy (SDFP), not which accounted for 70  percent of the domestic to contract any new non-concessional external debt. This commitment also forms a part of the ongoing program with the IMF under the Extended Credit Facility (ECF), which Figure 9. Public debt increased to 82.3 percent also includes a commitment to avoid accumulating new of GDP in 2024 arrears and places a limit on concessional borrowing. These measures, combined with ongoing fiscal consolidation, are Percent of GDP expected to support the gradual improvement of external 90 debt sustainability over the medium term. 80 70 The fiscal space is constrained by servicing of 60 obligations. Debt servicing is estimated to have accounted 50 for 16.2 percent of GDP (155.5 percent of revenues 40 excluding grants, and 119.1 percent including grants) 30 20 in 2024, with the majority allocated to obligations on 10 the regional market and local commercial loans. Interest 0 payments increased by 1 pp of GDP to 3.3 percent of 2019 2020 2021 2022 2023 2024 GDP in 2024, reflecting tighter financing conditions External Debt Domestic Total Public Debt in the regional market and the reliance on short-term maturity securities. This underscores the need for the Source: Guinea-Bissau authorities, World Bank estimates. effective enhancement of revenue mobilization, as well as a transition to using treasury securities with longer maturities. The recent reprofiling of debt to BOAD 5 https://www.imf.org/en/Publications/CR/Issues/2024/12/19/ reduces debt service obligations between 2024 and 2029 Guinea-Bissau-Seventh-Review-Under-the-Extended-Credit-Facility- and contributes to the downward trend in the present and-Request-for-559749 value (PV) of the external debt-to-export ratio. 8 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Figure 10. Domestic debt stock is dominated Figure 11. Multilateral lenders account for over by public securities 80 percent of external debt Public debt stock composition at end-2024 (percent of total) External debt composition at end-2024 (percent of total) Payment of Arrears BOAD BCEAO 1% Multilateral Creditors 10% IDA Commercial Banks and Other Financial IMF Institutions Multilateral Creditors African Development 5% Fund 38% Islamic Development Bank Other multilateral Angola Public Securities Kuwait Bilateral Creditors 38% Bilateral Creditors 8% Exim Bank-India Multilateral Creditors Saudi Arabia Bilateral Creditors Public Securities Spain Commercial Banks and Other Financial Institutions Other Bilateral BCEAO Payment of Arrears 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 Source: Guinea-Bissau debt bulletin, February 2025. The government, supported by technical assistance assistance missions in 2023 and 2024, alongside ongoing from the IMF and the World Bank, has advanced key training to improve debt recording, monitoring, and reforms in debt management and transparency to data coverage. Progress has been made on strengthening enhance sustainability and improve oversight. Debt debt management instruments with the publication in oversight has been strengthened by the adoption of key February 2025 of Guinea-Bissau’s Medium-Term Debt decrees in July 2021, which established a Public Debt Strategy (MTDS), covering 2025–27, and its Annual National Committee and formalized the organization Borrowing Plan for 2025.7 and operations of the Debt Directorate. The government uses the Debt Management and Financial Analysis Fiscal risks from state-owned enterprises (SOEs) are System (DMFAS) for external debt recording and is primarily concentrated in the public utility company, working to integrate domestic debt into the system. Electricity and Water of Guinea-Bissau (Eletricidade e Technical assistance from the IMF and World Bank Águas da Guiné-Bissau, EAGB). In 2023, EAGB accrued has supported improved debt reporting to international significant public debt to meet overdue obligations databases, such as the International Debt Statistics (IDS) on its electricity single-supplier contract with Karpower, and the Quarterly External Debt Statistics, while also often supported through government guarantees. However, enhancing debt transparency.6 Capacity has been further progress has been made to mitigate these risks, including the reinforced through two IMF West Africa Regional diversification of power sources through the (Organisation Technical Assistance Centers (AFRITAC) technical pour la mise en Valeur du Fleuve Gambi (OMVG) project, 6 This has also been promoted by the publication of the quarterly 7 https://www.mef.gw/publicacoes/direcao-geral-da-divida-publica/ debt bulletin, also supported by the World Bank’s SDFP in FY23. estrategia-de-endividamento-publico. Part I: The State of the Economy 9 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 which connects Bissau to a hydropower plant in Guinea- cashew nuts account for more than 80 percent of exports Conakry (see Box  3). Since August 2024, Bissau has (Figure 12), with most of these exports going to India been entirely powered by electricity from the OMVG in 2023. Trade in services is limited to tourism in the at approximately half the cost of Karpower. To restore Bijagós islands. The CAD rose from 0.7 percent of GDP EAGB’s financial viability, the government and EAGB are in 2021 to 8.3 percent in 2023, reflecting declining currently negotiating the terms of contract termination international cashew prices and higher food and energy with Karpower. The authorities are also expediting the prices (Figure 13). The country continued to grapple completion of the ring transmission line linking Bissau with exogenous shocks in 2024, as lower cashew exports to the OMVG network and extending it to the new Bor in volume—which decreased from 191,400 tons in power station, which will serve as a critical backup during 2023 to 167,500 tons in 2024—saw goods exports fall the dry season. Furthermore, to reduce reliance on a single to 11.2 percent of GDP, from 13.3 percent of GDP in source, the authorities are exploring alternative back-up 2023. This has been partially offset by a 0.6 pp decrease arrangements both regionally and domestically, as well as in goods imports, to 18.3 percent of GDP in 2024, investing in solar energy sources. driven by lower international food and oil import prices. The CAD has been primarily financed through treasury securities issued in the regional markets, with additional 1.3. External sector support from the IMF’s ECF program. The external position deteriorated slightly in 2024 due to negative terms-of-trade shocks and lower While some progress has been made, logistical cashew nut production challenges at the port of Bissau continue to hinder export performance. The port, which is a critical gateway Despite easing international import prices, lower cashew for cashew exports, has been hindered by operational exports caused the current account deficit (CAD) to inefficiencies, including delays in cargo handling and widen to 8.5 percent of GDP in 2024, from 8.3 percent customs clearance. These challenges have exacerbated the in 2023. Guinea-Bissau is a mono-crop economy, and decline in cashew exports, particularly to key markets such Figure 12. Cashew comprises the lion’s share Figure 13. The current account deficit has of exports risen slightly Export composition (goods and services) (percent of total exports) Current account composition (percent of GDP) 100% 15% 90% 10% 80% 70% 5% 60% Percent 0% –0.7% 50% –2.8% –5% –8.3% 40% –8.1% –8.0% –8.5% 30% –10% 20% –15% 10% 0% –20% 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 Cashew Nuts Fish and Shrimps Wood Balance of Goods Balance of Services Cotton Other Goods Travel Primary Income Secondary Income Other Services Current account % GDP Source: Guinea-Bissau authorities, World Bank estimates. 10 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU as India. The government has initiated reforms to improve inflation rate declined further in 2024 to 3.6 percent but port operations, including investing in infrastructure and remained above the 1–3 percent WAEMU target band. adopting digital systems to streamline customs processes. However, progress has been slow due to funding The financial sector soundness deteriorated in the constraints and capacity limitations. The government is first six months of 2024. Non-performing loans (NPLs) also exploring public-private partnerships to modernize increase from 10.3  percent in December  2022 to the port and attract foreign investment in logistics and 13.9 percent in December 2023, and further to 14.9 in trade-related infrastructure. Addressing these bottlenecks June 2024, with a significant deterioration in provisioning. will be essential to enhance export competitiveness and The ratios of liquid assets to total assets increased from reduce the economy’s vulnerability to external shocks. 24 percent in 2023 to 25.5 percent in June 2024. Despite high liquidity, the financial sector faces challenges from Regional foreign reserves have improved, covering an undercapitalized nationally systemic bank.8 The 4.7 months of imports in 2024 compared to 3.5 months in capital adequacy ratio improved from −33.8 percent in 2023, supported by Eurobond issuances in the region and December 2023 to −11.6 percent in June 2024 but remains disbursements from international development partners. significantly below the recommended 8 percent minimum The increase in reserves has been bolstered in Guinea- ratio for total-capital-to-total risk-weighted assets, impacted Bissau by higher donor grants, which rose by 1.2 percentage by the prudential situation of the undercapitalized bank. points of GDP in 2024, reflecting renewed engagement Excluding this bank, the capital adequacy ratio shows a with development partners following the government’s deterioration from 23.1  percent in December 2024 to commitment to fiscal consolidation. Additionally, 21.7 percent in June 2024. remittances have remained strong, at 5.3 percent of GDP in 2024, providing support to the external balance. However, Efforts are being made to address key challenges of the the concentration of exports in cashew nuts makes the sector. The recent conclusion of the sale of the large and country’s external position highly vulnerable to climate undercapitalized bank marks an important step to addressing shocks and terms-of-trade volatility. The government banking sector vulnerabilities. An investor’s purchase offer has recognized the need for export diversification and is and capital increase proposal were approved by the West exploring opportunities in fisheries, tourism, and renewable African Monetary Union (WAMU) regional banking energy to reduce reliance on cashew exports. commission in February 2025, and the entity’s statutes— reflecting the new shareholder composition—were 1.4. Monetary policy and financial sector published in the same month. Moreover, a third-party audit to assess the viability and solvency of the undercapitalized Monetary policy remained tight in 2024, and the bank is progressing. At the regional level, actions are financial sector has become less sound needed to strengthen the resilience of the financial sector by increasing minimal capital requirements, introducing The Central Bank of West African States (BCEAO) has Basel III liquidity ratios, and mitigating sovereign-bank kept the monetary policy tight in the WAEMU region. nexus risks. The sector’s challenges, including high credit Guinea-Bissau is a member of the WAEMU, with monetary costs and information asymmetries, remain significant and exchange rate policies managed by the BCEAO. The barriers to financial deepening and inclusion (Box 2). BCEAO maintains a fixed peg between the CFA Franc and the Euro. To counter inflation in the region—which 8 This undercapitalized bank plays an important role in providing credit surged to 7.9 percent in 2022—BCEAO policy interest to the private sector by financing the cashew campaign and bringing rates were raised by 150 basis points between June 2022 financial services to rural areas. The bank holds about 40 percent and December 2023, to 3.5 percent for liquidity calls of deposits and has the largest number of branches throughout the and 5.5 percent for the marginal lending facility. They country. The bank is suffering from a high level of NPLs, including have remained unchanged since. The WAEMU average cross arrears from government creditors which had NPLs with the bank. Part I: The State of the Economy 11 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Box 2. Enhancing financial sector diversification and depth is vital for economic growth and resilience Guinea-Bissau’s financial sector is small, underdeveloped, concentrated, and bank-centric. The full extent of the financial sector comprises only six banks, and microfinance institutions are practically non-existent. This limited financial sector landscape contributes to bottlenecks in financial inclusion and depth. The concentration of the sector in a few banks also restricts competition and limits the development of diverse financial services and products. As a result, access to financial services remains limited, especially for individuals and businesses in remote areas or with lower income levels. The absence of microfinance institutions further undermines financial inclusion, as these institutions play a crucial role in providing tailored financial services to underserved populations. As a member of the WAEMU, Guinea-Bissau’s financial sector is overseen by the BCEAO. Across the eight countries that make up the WAEMU region, Guinea-Bissau has consistently had the highest credit concentration as measured by the Herfindahl-Hirschmann Index (HHI). It has exceeded 2,000 points in 2021 (and since at least 2017). While loans to agriculture and fishing represent only 1.8 percent of total lending, total lending to the cashew sector across the economy is estimated at about 60 percent and is extended mostly to cashew exporters. This concentration on the cashew sector exposes the banking sector to demand and price volatility, as well as to risks related to climate shocks, although it is difficult to quantify their magnitude with available data. Financial sector depth, or financial inclusion, plays a vital role in empowering individuals, families, and businesses to become active participants in the economy. By improving access to financial instruments such as basic savings accounts, affordable credit and insurance, Guinea-Bissau can foster inclusive economic development. Financial inclusion enables individuals to save, invest, and protect themselves against risks while also facilitating business expansion and entrepreneurship. Access to products and services by marginalized groups—including women, rural communities, and low-income households—enables economic stability and generates opportunities that lead to improved living standards and reduced poverty. To enhance financial access and usage, particularly in rural areas and among underserved populations, Guinea- Bissau’s development agenda should include a strong emphasis on financial sector diversification and inclusion. It can do so by encouraging the growth of diverse financial institutions, including microfinance institutions, credit unions, and non-bank financial institutions, as well as the development of innovative financial products that cater to the specific risk profiles and needs of the population. This will allow the country to address the specific financial needs of different segments of the population, reach a wider population, promote competition within the sector, and improve financial inclusion and depth. Additionally, investing in financial literacy programs, building digital infrastructure, and ensuring adequate protection for the financial consumer can facilitate uptake and use by ensuring that individuals have the necessary skills and tools to become active participants of the financial sector. Crafting and implementing a detailed strategy of concerted efforts in consultation with relevant stakeholders will assist Guinea-Bissau to foster a more inclusive and resilient economy, driving sustainable development and fostering shared prosperity for its citizens. The underdeveloped and undiversified state of the financial sector in Guinea-Bissau also limits its ability to finance the transition via green investments in the short term. To address this, the government must prioritize financial sector development and inclusion to equip individuals and communities with coping instruments and mechanisms to mitigate financial risks, absorb shocks, and recover from disasters. Developing disaster risk financing tools and strategies will help to ensure predictable and timely access to much-needed resources and ultimately mitigate the long-term fiscal impacts of climate and disaster shocks. How to enhance the climate financial information architecture and climate-related data collection mechanisms in the financial sector, as well as building financial resilience to climate and disaster risks, must be carefully considered by the authorities as part of a holistic financial sector development strategy to facilitate the financing of mitigation and adaptation activities by the private sector. 12 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU 2. Outlook and risks policy could pose risk to the improvement of the CAD. The CAD is projected to narrow to 6.5 percent of GDP Real economic growth is projected to remain resilient in 2025—due to the combined effect of lower import over the medium term, stabilizing at around 4.7 percent prices for food, fuel and commodities and higher exports, in 2028, sustained by robust private demand and supported by higher cashew production. The direct impact public investment in key sectors. Growth is projected of the recent global trade policies developments is marginal at 5.1 percent in 2025 (2.8 percent per capita), under due to limited export exposure.9 However, a potential the assumption of a good cashew campaign and higher reduction in international cashew demand due to weaker producer price, boosting private demand and activity global economic activity could translate into lower exports in the service sector (including trade and hospitality), in volumes, while lower international cashew prices (due to while construction activity is expected to maintain its weaker global demand) would reduce the value of exports. momentum supporter by lower commodity prices. Over A potential economic slowdown in Europe could lead the medium term, the agricultural sector—particularly to a reduction of remittances inflows. Over the medium cashew production—is expected to remain an important term, the CAD is projected to narrow to 4 percent by driver of growth, contributing about 35 percent to real 2028, supported by efforts to reduce the cost of energy, GDP. Importantly, dividends from recent government with the transition to cheaper hydropower energy. The investments in agricultural inputs should support strong construction of the new road connecting Guinea-Bissau to cashew production and exports, enhancing rural incomes Senegal is expected to help improve the external position and supporting private consumption. Beyond cashews, through higher investments and inter-regional trade. growth is projected to be supported by activity in the External financing needs for the 2025–2028 period are construction and service sectors, with the relatively more expected to be mainly covered by budget support grants, stable electricity supply (due to the shift to OMVG as a concessional borrowing and disbursements under the IMF power source), and investments in roads and connectivity program. Foreign direct investment (FDI) is projected to infrastructure helping to enhance trade and regional remain around 1.2–1.3 percent of GDP. integration. These reforms—accompanied by digital transformation—will contribute to creating a more Improved revenue collection will help to narrow the enabling environment for economic activity, including fiscal deficit. The fiscal deficit is projected to narrow the enabling conditions to attract private investment. to 3 percent of GDP by 2028, with public debt falling to 72.4 percent of GDP in the same year. The fiscal Higher cashew producer prices and lower food prices consolidation path builds on efforts to date, including the are expected to help to bring extreme poverty down to authorities’ commitment to enhance revenue mobilization 25.9 percent in 2025 (measured as US$2.15/day 2017 and successful rationalization of expenditures over the PPP). The regional inflation rate is expected to align last two years, supported by the IMF program. Going with the WAEMU target band from 2025 onwards, and forward, the authorities are committed to implementing stabilize at 2.0 percent by 2028, reflecting the ongoing a series of revenue-enhancing measures to support the decline in domestic electricity prices and easing global fiscal consolidation agenda. The first set, which could food and fuel prices. Higher cashew producer prices and yield up to 1.5 percent of GDP in additional revenues lower food prices are expected to contribute to reducing in 2025, are presented in Table 1. Among others, these extreme poverty to 25.9 percent in 2025. Further progress include increased tax reference prices for cashew, cement is anticipated for 2026, with poverty reaching 24.6 percent, and 23.3 percent in 2027. This would represent more than 40,000 people leaving extreme poverty since 2024. 9 The US market represents only a marginal share of GNB exports, of less than 0.5 percent of total exports. For Guinea-Bissau main External pressures are expected to ease further thanks trading partner—India—cashew exports to the US are also very to lower import prices, but changes in global trade small representing 0.1 percent of India’s total exports. Part I: The State of the Economy 13 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Table 1. Initial revenue enhancing measures proposed/underway for 2025, (percent of GDP) Measures Impact in % of GDP Status Measures approved in the FY25 budget law 0.75 Increase in the tax reference price of cashew nuts from $800/ton to 0.08 Implemented $900/ton No renewal of tax exemptions for CIMAF 0.09 To be implemented in July 2025 Increase in tax reference price of imported cement from CFAF 54/kg to 0.01 Implemented 65/kg Update of tax reference prices and other measures for used cars 0.05 Implemented Elimination of exemptions of sales taxes on fuels at the point of sales 0.32 Implemented Physical inspection of all trucks at the Safim Entry Post 0.15 To be implemented in 2025 Connecting systems of hotels, supermarkets, cement venders and 0.05 To be implemented factories to DGCI in June 2025 New measures supported by the IMF program 0.71 Increase in the tax reference price of cashew to $1000/ton and its 0.17 Implemented specific rate tax Increase in the tax reference price of alcoholic drinks 0.09 Implemented Resumption of a stramp duty on mobile money 0.03 Implemented Single license for mobile operators (non-tax revenue) 0.35 New measure Daily tax withholding from APGB 0.07 Implemented Total 1.46 Source: Guinea Bissau’s 2025 Budget law (January 2025) and IMF (March 2025). and used cars, as well as the commitment not to renew improvements in revenue collection are expected in 2026 the existing tax exemption convention with the cement resulting from strengthening customs infrastructure and company (CIMAF), which will expire in July 2025.10 As potential changes in tax legislation once Parliament is shown in table 1, many of these measures have already reinstated. been implemented as part of the 2025 budget law and the IMF program. The ongoing roll-out of value On the expenditure side, the government is focused on added tax (VAT) (see Chapter 2), should also improve controlling public expenditure. This includes rationalizing revenue mobilization over the medium term. Further the wage bill and improving public financial management, which will be supported by operationalizing the Treasury 10 This follows a review carried out by the Inspector General of Single Account. The 2025 budget enforces stricter Finance in 2024, highlighting that exemptions have mostly benefitted disbursement controls on project loans and guarantees, with the company. all disbursement requests requiring Minister of Finance 14 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU approval. Expenditure rationalization will be supported Enhanced revenue mobilization, sustained growth, and by measures such as suspending non-priority projects increased efforts to draw on instruments in the regional and banning guarantees other than those for SOEs and market with a longer maturity will help maintain debt infrastructure projects. on a sustainable path. The most recent World Bank-IMF DSA from December 2024 indicates that public debt in The 2025 budget aligns with national development Guinea-Bissau is sustainable, but with a high risk of overall priorities, including increased investment in health, and external debt distress. Guinea-Bissau’s overall risk of education, and the environment. According to the debt distress was downgraded to “high” in the January 2021 resources budgeted for each sector, economic affairs DSA, and has been maintained at this rating since. The remain the most important item in the 2025 budget country will face a significant increase in the public debt (54 percent of total expenditure), with no significant service burden between 2025 and 2029. During this period, increase in nominal terms compared to 2024. The both principal and interest payments will remain high, budget allocated to the health sector has increased by reflecting the profile of the current debt portfolio, marked 66  percent—becoming the second-most important by concentrated maturities and considerable financial budget item in the 2025 Loi de Finances Initiale (Initial tightening in the regional market. Debt sustainability is Finance Law, or LFI), now accounting for 17 percent of supported by WAEMU safeguards, fiscal consolidation total expenditures, compared to 11 percent in 2024. The efforts, limited net issuance, and the consistent improvement education budget has also seen an increase in the 2025 of external debt indicators over the medium term. LFI (+4 percent) and now represents 5 percent of total expenditure. Finally, the budget allocated to environment Despite the recent progress, there are significant risks spending has registered a jump of 80 percent and has to the outlook. A sustained implementation of recent seen its share in the budget increase to 6 percent, slightly trade policy shifts and accompanying weakening in global exceeding the budget for education. economic activity could translate into lower exports Box 3. Guinea-Bissau’s energy transition offers huge potential The transition to the OMVG (Organisation pour la Mise en Valeur du Fleuve Gambie) interconnection project has fundamentally transformed Guinea-Bissau’s energy landscape while serving as a model for regional energy integration. Since August 2024, the country is fully reliant on OMVG-sourced hydropower from Guinea-Conakry, marking a decisive shift away from expensive heavy fuel oil and the Karpower contract. This transition has yielded immediate economic benefits, reducing electricity generation costs by 52 percent and cutting the national utility EAGB’s operating deficit from 50 percent in 2024 to a projected 40 percent by 2026. Savings from reduced energy subsidies and utility losses could potentially create valuable fiscal space for social and infrastructure investments that will support Guinea-Bissau’s medium-term growth. In the medium term, the economic implications of Guinea-Bissau’s OMVG transition will extend far beyond immediate electricity generation cost savings. The reliable, low-cost power supply will strengthen in the medium term the competitiveness of key export industries like cashew processing, while reducing the national import bill for fuel. Looking ahead, the ongoing completion of OMVG’s ring transmission line and Bor backup power station will further enhance energy security, particularly during dry seasons. The project’s success is expected to create opportunities to attract industries relocating from neighboring countries with higher energy costs, potentially transforming Guinea-Bissau into a regional hub for light manufacturing and agri-processing. (continues) Part I: The State of the Economy 15 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Box 3. Guinea-Bissau’s energy transition offers huge potential (Continued) Regionally, the OMVG initiative contributes to broader climate resilience by reducing dependence on volatile oil markets and lowering greenhouse gas emissions. The project’s transparent regional partnership model offers a blueprint for reforming other utility sectors and could inspire similar collaborations in water management or telecommunications infrastructure. The shared energy infrastructure also fosters economic interdependence that may help mitigate political tensions in the region. However, this comes with high risk of dependency. Realizing the full potential of this energy transition will require addressing several challenges including through the development of local Solar energy sources. Guinea-Bissau must prioritize grid modernization to reduce the technical losses that currently exceed regional benchmarks. Attracting private investment through programs like the World Bank’s Solar Energy Scale up and Access Project (SESAP) will complement hydropower with Solare energy sources, while policy harmonization with WAPP’s (West Africa Power Pool) regional pricing framework will be essential to maintain market stability. Moreover, while the transition to cleaner and cheaper power supply is commendable, back-up arrangements to ensure sustainability are critical. This is particularly important should the external supply of electricity become limited during the dry season. In response, the authorities are exploring avenues to diversify energy sources. At the regional level, this includes diversifying external electricity supply sources by entering into a power supply agreement with at least one additional neighboring country. Domestically, the authorities plan to conclude an agreement with a renewable energy developer that is expected to provide Guinea-Bissau with electricity at an even lower cost than existing electricity supplies. In addition, to further reduce the average cost of electricity, the government plans to call a competitive tender for a grid- connected solar PV plant before the end of 2025. Sources: World Bank (2024), OMVG Restructuring Report; Guinea-Bissau DPF (2025); IMF ECF 7th Review Staff Report. (in volume and in value) and reduced remittances inflows, and slow momentum for structural reform, including which would dampen the outlook. Weak performance in the energy sector. The expected improvement in the of SOEs and financial sector fragilities could generate debt trajectory hinges on significant fiscal consolidation contingent liabilities. Economic growth could be in 2025. While the authorities have been successful dampened by climate change shocks and their direct in containing spending in recent years, there is a risk of impact on agriculture (weakening the performance of the spending overruns in the run-up to the elections scheduled cashew sector), fisheries, and infrastructure. Addressing for November  2025. In addition, there is uncertainty Guinea-Bissau’s vulnerability to climate change and around the yields of some revenue-raising measures. The its structural issues requires a cohesive approach that overreliance on short-term maturity treasury securities also integrates development and climate strategies. This could poses a risk to debt sustainability given increased exposure involve improving governance, diversifying the economy, to rollover and interest rate risks. This underscores the need protecting natural capital, developing human capital, and for the effective enhancement of revenue mobilization, as investing in climate-resilient agricultural practices and well as a transition to using treasury securities with longer infrastructure. maturities. The policy reform program supported by the World Bank Group budget support operation, as well as While the authorities are currently committed to a robust the broader World Bank program and support provided by reform agenda, political uncertainty and institutional the IMF ECF program and other development partners, weaknesses could weaken the fiscal consolidation agenda are expected to mitigate some of these risks. 16 Part I: The State of the Economy UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Table 2. Selected economic indicators – 2021–2028 2022 2023 2024e 2025f 2026f 2027 f 2028f Annual percentage change, unless otherwise indicated National Accounts and Prices GDP Growth at constant prices 5.6 4.4 4.8 5.1 5.2 5.2 4.7 Consumer prices (average) 7.9 7.2 3.8 3.3 3.0 2.5 2.0 Percent of GDP, unless otherwise indicated Current account balance (incl. grants) −8.0 −8.3 −8.5 −6.5 −5.6 −4.6 −4 Exports of goods 13.3 11.2 9.3 11.5 12 12.5 12.9 Imports of goods 21.6 18.9 18.3 18.5 18.4 18.2 18.9 Foreign Direct Investment 1.2 1.2 1.2 1.2 1.3 1.4 1.2 Nominal exchange rate (average) 623.8 605.3 606.3 .. .. .. .. Fiscal Accounts Total revenue and grants 14.3 13.1 13.6 15.2 15.4 15.6 15.8 Tax revenues 8.6 8.7 8.2 9.1 9.4 9.8 10.1 Non-tax revenues 2.2 2.4 2.2 2.4 2.4 2.3 2.3 Grants 3.5 2.0 3.2 3.7 3.6 3.5 3.4 Total expenditures 20.5 21.3 20.9 20 19.4 18.9 18.8 Current expenditures 14.4 15.0 15.0 13.8 13.1 12.6 12.6 Net acquisition of nonfinancial assets 6.1 6.2 5.9 6.2 6.3 6.3 6.2 Primary balance −4.9 −5.9 −4.0 −1.9 −1.2 −0.6 −0.3 Overall fiscal balance −6.2 −8.2 −7.3 −4.8 −4.0 −3.3 −3.0 Debt Public debt (external and domestic) 75.5 76.5 82.3 80.5 77.6 74.6 72.4 External debt 36.5 34.2 34.8 34.5 33.2 31.9 30 Debt service 7.6 11.0 16.2 20 21.7 22.3 25.5 Source: Bissau-Guinean authorities, IMF, and World Bank estimates and projections (end-March 2025). Part I: The State of the Economy 17 Part II:  Unpacking Guinea Bissau’s Tax Performance and Expenditure GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Guinea-Bissau’s persistent fiscal challenges— base, and significant informal economic activity pose including recurrent budget deficits and rising public challenges to sustainable development. Guinea-Bissau’s debt levels—highlight the urgency of strengthening tax to GDP ratio is one of the lowest in the region, at domestic revenue mobilization. While economic growth 8.2 percent of GDP in 2024, and far from the WAEMU has been modest, at an average of 4.4 percent between convergence criteria target of 20 percent of GDP. 2014 and 2024, the budget balance has remained firmly in deficit over the past decade and spending pressures This chapter examines Guinea-Bissau’s tax structure have pushed public debt from below 50 percent of GDP and performance and puts forward areas for reform in the early 2010s to over 80 percent in 2024 (Figure 14). that can improve revenue performance and align the Effective revenue mobilization is critical to address this system with international best practice (outlined in persistent gap between government expenditures and Annex A). It begins by analyzing the tax mix, highlighting revenues. Moreover, expanding Guinea-Bissau’s fiscal the composition and efficiency of key revenue streams, space is important to address the rising need for improved second, it provides a qualitative and quantitative analysis public services, especially in the government’s priority of tax expenditures at the border, and finally it takes a closer areas of health, education, and infrastructure. look at the newly introduced Value Added Tax (VAT) by comparing it to the former sales tax (Imposto Geral sobre Tax systems play a pivotal role in shaping economic Vendas e Serviços, IGV). Comparative insights from and social outcomes by determining how resources are regional and global peers11 provide context for identifying mobilized to fund public services and investments. An opportunities to enhance revenue mobilization and effective tax system balances competing objectives such as economic resilience. Lastly, the chapter puts forward equity, efficiency, and simplicity while generating adequate potential areas for reform that can improve revenue revenue to meet government needs. The importance of performance and align the system with international these principles is especially pronounced in contexts like standards. Recommendations underscore the potential for Guinea-Bissau’s, where fiscal constraints, a narrow tax revenue diversification, stronger compliance mechanisms, and refined tax policy design to bolster fiscal stability and promote equitable growth. Figure 14. There is a persistent gap between government expenditures and revenues 1. Revenue structure and performance Evolution of the budget balance, real GDP growth and gross debt 10 100 1.1. Tax mix Budget balance and real GDP 80 Averaging 8.5 percent of GDP over the last ten years, 5 tax revenues in Guinea-Bissau are among the lowest Gross debt (%) growth (%) 60 of peer countries (Figure 15 and Figure 16). This 0 40 low tax-to-GDP ratio reflects the economy’s reliance on a narrow tax base, dependence on indirect taxes such –5 20 as those on imports and cashew exports (see Box 1), significant informal activity, and relatively modest direct –10 0 2012 2014 2016 2018 2020 2022 2024e 2026p Fiscal Balance (% of GDP) Real GDP Growth (%) Public Debt (% of GDP) (RHS) 11 Guinea-Bissau regional peers are Sierra Leone, Togo, Cabo Verde, Ghana and Lesotho, structural peers are Kyrgyz Republic and Timor- Source: Ministry of Finance and World Bank calculations. Leste, aspirational peers are Namibia, Senegal and Cote d’Ivoire. 20 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Figure 15. Guinea-Bissau’s tax revenue decreased in 2024 . . . 2010–2024 (percent of GDP) 10.0 9.5 9.1 9.0 8.9 8.6 8.5 8.5 8.7 9.0 8.2 8.0 7.9 8.0 7.4 7.3 7.0 7.0 6.5 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Others Personal Income Tax Corporate Income Tax Taxes on Property General Taxes on Goods and Services Excise Taxes Taxes on Int Trade and Transactions Tax Revenue (incl. Social Contributions) Source: World Bank calculations using data from MoF for Guinea-Bissau. Figure 16. . . . and is the second-lowest of peers in 2024 Tax revenue in % of GDP 25% 21.9% 22.0% 19.8% 19.8% 20.3% 20% 17.4% 17.8% 15% 13.9% 13.2% 10% 8.2% 6.6% 5% 0% Guinea-Bissau Sierra Côte Ghana Togo Cabo Timor-Leste Senegal Namibia Lesotho Kyrgyzstan Leone d’Ivoire Verde Others SSC & Payroll Taxes on Property Excise Taxes Personal Income Tax Corporate Income Tax Taxes on Int Trade and Transactions VAT/Sales Tax Tax Revenue (incl. Social Contributions) Source: World Bank calculations using data from MoF for Guinea-Bissau and from the OECD for other countries (2024). Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure 21 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 taxes. Sales taxes12 (IGV) are the largest contributors these two sources than its regional peers, reinforcing the to revenue collections, accounting for 30–36 percent heavy reliance on tariffs. of total collections between 2010 and 2024. These are followed by taxes on international trade, which have Guinea-Bissau’s revenue from excise taxes is much lower ranged from 18 to 31 percent, though have steadily than its peers. Excise taxes account for about 6 percent of declined in recent years. Corporate income tax (CIT) tax revenue and 0.5 percent of GDP, a much lower share follows closely, contributing between 13 and 21 percent. than in peer countries (1 percent of GDP). The Código do Personal income tax (PIT) makes up a smaller share, Imposto Especial de Consumo (Special Consumption Tax ranging between 6 and 11 percent, while revenues from Code or IEC) establishes a harmonized excise tax system excise taxes and property taxes remain small. to selectively tax goods with significant revenue and public health implications. This tax aligns domestic tax policy Guinea-Bissau has the highest weighted average trade with WAEMU directives and ensures coherence with tariff rate among peer countries, but the lowest top the VAT system. Excise taxes are applicable to goods that rates for PIT and CIT (Figure 17). In essence, trade include vehicles, petroleum products, alcoholic and non- taxes contribute a disproportionately large share of alcoholic beverages, and tobacco; and is applied on either total revenue, while income taxes remain comparatively an ad valorem (percentage-based) or specific (fixed per unit) underutilized. By keeping PIT and CIT rates relatively basis, depending on the product category. While vehicles, low—and by struggling with tax administration beverages, and tobacco are subject to a combination of weaknesses—Guinea-Bissau generates less revenue from percentage and unit-based taxes, petroleum products are taxed solely based on quantity (liters or kilograms). Figure 17. Top PIT and CIT rates are lowest Fuel taxation in Guinea-Bissau falls significantly of peers short of internalizing environmental and social 50 costs, representing a missed opportunity to raise up 45 to 1.8 percent of GDP in additional revenue. While 40 it is difficult to determine the exact Pigouvian tax 35 rates—i.e., the tax rates that would fully internalize the 30 social and environmental costs—IMF (2023) provides Percent 25 estimates of these externalities for fuels, including climate 20 change, local air pollution, and vehicular externalities. 15 10 Their analysis finds that excise taxes on gasoline, 5 diesel, kerosene, and LPG in Guinea-Bissau fall short 0 of internalizing these costs. Although explicit subsidies are minimal or absent, implicit subsidies are significant au n so re i er l go al ga ni oi ig M Fa ss To Be ne Iv N Bi (Figure 18): they are estimated at US$0.58, US$0.63, na d' Se a- ki te ne r Cô Bu US$0.25, and US$0.14 per litre for gasoline, diesel, ui G Weighted Average Trade Tariff kerosene, and LPG respectively (IMF, 2023). Regional Top Individual Income Tax Rate fuel price data recently published by the regional central Top Corporate Tax Rate bank (BCEAO) shows that fuel prices vary significantly Source: World Bank calculations using data from Index of Economic across WAEMU countries, reflecting different underlying Freedom. costs and domestic policies. Prices in Guinea-Bissau are slightly below the WAEMU average on the lower end 12 Guinea-Bissau transitioned from a sales tax to a VAT on January 1, (Figure 19). Eliminating implicit subsidies in Guinea- 2025. The analysis in this section is based on the sales tax data. Bissau by aligning taxes with external costs could mobilize 22 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Figure 19. Fuel prices are below the regional Figure 18. Implicit subsidies on fuel are high average Fuel efficient prices Fuel prices in WAEMU countries $2.00 Senegal Cote d'Ivoire $1.50 $0.58 $0.63 Burkina Faso Mali USD/liter $1.00 WAEMU average $1.06 $0.96 $0.25 Guinea-Bissau $0.14 $0.65 Benin $0.50 $0.60 Togo Niger $0.00 Gasoline Diesel Kerosene LPG 0 200 400 600 800 1,000 1,200 Implicit Subsidy Explicit Subsidy Consumer Price Diesel price (CFAF per liter) Source: IMF (2023), IMF Fossil Fuel Subsidies Data: 2023 Update. Source: Central Bank of West African States ( BCEAO). fiscal revenues of approximately 0.1 percent, 1.4 percent, Figure 20. Tax rates on beer and wine do not 0.4 percent, and 0.0 percent of GDP for gasoline, diesel, reflect alcohol content kerosene, and LPG respectively (IMF, 2023). Effective tax rate per liter of pure alcohol Excise taxation of alcoholic beverages is inconsistent 12,500 with alcohol content, undermining both efficiency and equity goals. Similar challenges exist when estimating the 10,000 FCFA per L of pure alcohol Pigouvian cost of alcohol consumption, given its wide range of health, social, and economic consequences. As a 7,500 minimum benchmark, excise tax rates should reflect pure alcohol content to ensure internal consistency and policy coherence. As illustrated in Figure 20, excise tax rates per 5,000 litre of pure alcohol are considerably lower for beer and wine than for spirits. Harmonizing tax rates by alcohol 2,500 content would require a 25% increase in the excise tax rate on beer and a 200% increase on wine, bringing them 0 in line with the taxation of spirits. Beer Wine Spirits Guinea-Bissau’s tax mix highlights both the challenges Source: World Bank calculations. and opportunities inherent in low-income economies seeking to broaden the base and enhance efficiency. Customs duties, sales tax, and CIT together dominate the revenue landscape, suggesting a need to diversify the economy to reduce vulnerability to shocks linked to the cashew sector, including external demand, prices and Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure 23 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 climate. Strengthening PIT, and refining sales tax policies Beyond the choice of tax instrument itself, the tax could help Guinea-Bissau fortify its revenue system. base and tax rates for each tax instrument are core Achieving these reforms will require a careful balance determinants of the efficiency of the tax system. The tax of policy and administration, paving the way for a tax base and tax rates must be considered together, as a given structure that is both growth-friendly and equitable. amount of revenue can be raised through a combination Moreover, the country’s high tariff rates reflect a historical of both (e.g. a lower rate on a broader tax base, or a higher dependence on external trade taxes, which poses challenges rate on a narrower tax base). However, a given amount of as markets move toward deeper regional integration. revenues can be raised more efficiently with a lower rate Although these tariffs currently provide a sizable revenue applied on a broad base than a higher rate applied on stream, they risk becoming less effective over time as a narrow base, as this improves the neutrality of the tax trade integration is deepened and the scope for customs- system by minimizing large gaps in the tax treatment of based taxes lessens. Strengthening and broadening the different parts of the tax base. income tax base—by revisiting statutory rates, addressing compliance gaps, and streamlining exemptions—would More importantly, effective rates matter most for help Guinea-Bissau move toward a more diversified and revenue mobilization. For example, CIT exemptions, resilient revenue framework. deductions, reduced rates and credits lower the effective tax rates on the portion of the tax base covered by these measures. Similarly, VAT exemptions, reduced rates 1.2. Tax performance and zero-rating lower the effective tax rates in a similar way. Rationalizing tax expenditures is thus critical to An analysis of tax efficiency can provide important broadening the tax base, as it allows for revenues to be insights into the optimal tax mix that can be applied to tax systems based on country-specific characteristics raised in the most efficient way possible. such as administrative capacity and the size of the informal economy. Tax streams can be ranked for their CIT efficiency efficiency in promoting economic growth.13 Property taxes are found to be the most efficient, as they have a smaller In Guinea-Bissau CIT is collected through the impact on labor supply and capital accumulation decisions Contribuição Industrial, which is applied to businesses than consumption and income taxes. VAT and excise taxes engaged in commercial, industrial, agricultural, fishing, are the next most efficient: while consumption taxes distort and service activities. The tax base is determined as labor supply decisions, they are neutral in respect to savings net profit, and a standard rate of 25 percent is applied. decisions when their rates are constant over time. Excise Companies are categorized into two groups: Group A, taxes are even more efficient, as the distortions they impose which consists of larger firms required to maintain are desirable. Personal income taxes are less efficient, as they organized accounting records; and Group B, which distort labor supply decisions as well as savings decisions includes smaller businesses that may opt for simplified by reducing the rate of return on savings. This said, they bookkeeping. However, a minimum tax of 1 percent of remain more efficient than corporate income taxes, as they turnover applies when reported profits are low or negative, do not directly hinder capital formation.14 ensuring that all businesses contribute a baseline amount to tax revenue. Non-resident entities earning income in 13 OECD (2018). Guinea-Bissau are subject to a 25 percent withholding tax 14 Corporate income taxes are one of the least efficient revenue streams when it comes to economic growth. They directly increase the user cost on gross amounts paid for goods and services. of capital, which depresses capital investments. While personal capital income taxes could be argued to have a similar impact, it is unlikely to Some businesses benefit from full or partial CIT be the case in open economies where a shortfall in domestic investment exemptions, particularly public-interest organizations capital can be made up with foreign direct investment. and government-affiliated entities. These tax expenditures 24 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU include full exemptions for certain public and non-profit during the COVID-19 pandemic (Figure 21). However, entities, as well as targeted relief for investments by while the CIT-to-GDP ratio is insightful for assessing public entities, public-private partnerships (PPPs), and revenue-raising capacity, it has limitations, particularly co-financed projects. Additionally, a presumptive taxation when comparing countries with diverse economic regime applies to small taxpayers, effectively reducing structures, such as differing capital-to-labor ratios. CIT their tax burden relative to the standard CIT system. efficiency adjusts for these differences by focusing on the Reciprocal exemptions are also granted to non-resident relationship between corporate profits—CIT’s true tax shipping and air transport companies under international base—and GDP, which varies widely across countries agreements. due to factors like economic development, industrial composition, and technological progress. CIT efficiency Moreover, the Council of Ministers may grant special is defined as the ratio of actual CIT revenue to a reference (full or partial) CIT exemptions to public entities level of CIT revenue, computed by multiplying the and public–private partnerships, offering significant standard CIT rate with the tax base (in this case GDP).17 investment incentives.15 These exemptions must be A low CIT efficiency ratio typically signals significant formalized by an official dispatch published in the compliance and/or policy gaps, where a compliance gap Boletim Oficial, which defines the scope and duration, leads to reduced efficiency due to lower revenue collection up to a maximum of seven years. While this provision relative to the tax base. Similarly, a large policy gap, such aims to support investments of strategic significance, if as those resulting from tax expenditures, also translates not carefully vetted and monitored they can result in into reduced revenues relative to the proxy tax base, as significant revenue foregone and distort competition CIT efficiency only accounts for the benchmark CIT rate. by favoring new entrants over existing firms or certain industries over others.16 To ensure these benefits align with Guinea-Bissau’s CIT-to-GDP ratio (around 2 percent), broader economic and social objectives, it is crucial that and its CIT efficiency (0.07) are at the lower end of each exempted entity maintains complete accounting and comparators, highlighting considerable room for reporting obligations—failure to comply should trigger improvement (Figure 22). The low CIT efficiency immediate reversion to normal CIT rules. Ultimately, suggests that, after controlling for the standard CIT improved transparency (e.g., publishing cost-benefit rate, Guinea-Bissau’s CIT system experiences sizable analyses of proposed tax relief, requiring full tax returns compliance and/or policy gaps. In other words, the from beneficiaries) would help balance the developmental country loses a significant portion of potential corporate rationale for these exemptions with the potential risk of tax revenue, either through low compliance or through eroding the tax base. extensive exemptions and special regimes that narrow the effective tax base. Increasing Guinea-Bissau’s CIT CIT efficiency is important to measure the gaps in efficiency from 0.07 to 0.10—as in countries such as CIT compliance and policy. CIT revenue averaged Senegal, Lesotho, and Togo—could yield additional 1.5 percent of GDP (17 percent of tax revenues) between CIT revenues in the range of 0.55 to 0.7 percent of 2010 and 2024, dipping to its lowest level in 2020 GDP. Achieving this improvement hinges on narrowing the compliance and policy gaps that currently erode the 15 Under the revised Article 8 of the CCI (Código da Contribuição effective tax base. On the compliance side, strengthening Industrial), as amended by Law 1/2022, the Council of Ministers— enforcement and improving taxpayer services would help acting upon a proposal from the sector minister and the opinion of ensure that more businesses accurately report profits and the Minister of Finance—may grant total or partial CIT exemptions for public companies’ investments, PPPs, co-financed investment fulfill their obligations. On the policy side, rationalizing projects, and projects governed by conventions or regulations in force. 16 Quantifying the cost of the exemptions requires analysis of CIT revenues microdata, for which data is pending. 17 The formula for CIT efficiency is: CIT efficiency = GDP #CIT rate . Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure 25 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Figure 21. CIT revenue averages 1.5 percent Figure 22. Guinea-Bissau has scope to increase of GDP its CIT efficiency Corporate income tax, 2010–2024 CIT efficiency rates for comparator countries 1.7 0.30 1.6 0.25 1.6 1.6 1.5 0.25 1.5 1.5 1.5 1.4 1.4 0.20 1.4 1.3 1.4 1.4 1.3 0.15 0.13 0.13 Percent 1.3 0.10 0.09 0.09 0.09 1.2 1.2 0.08 0.07 0.06 1.2 0.04 1.2 1.1 0.05 1.1 0.00 au e te rde Se e Le al o go na rg ia an Ca eon r th g ib 1.0 oi ss ha st To ne so Cô Ve am Iv yz Bi G L d’ a- N bo ra 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 ne Ky er ui Si G Source: World Bank calculations using data from MoF for Guinea-Bissau and from the OECD for other countries (2024). exemptions and special regimes—many of which PIT on behalf of their employees, ensuring compliance significantly reduce effective taxation—would broaden with tax obligations. In addition to salaries, taxable the base on which the benchmark rate applies. Since CIT income includes allowances, bonuses, and other financial efficiency measures actual revenue as a share of potential benefits, although certain exemptions exist for specific revenue at the standard rate, any increase in collections categories of income. A different tax schedule applies for from the same tax base and rate would automatically raise self-employed individuals, with tax rates set at 10 percent, the efficiency metric. Progress on either front would allow 20 percent, and 25 percent, depending on income levels. Guinea-Bissau to mobilize more domestic revenue from Self-employed individuals can deduct business-related the corporate sector without altering the rate structure, expenses, such as payroll, rent, and utilities, provided they enhancing both equity and fiscal sustainability. maintain proper documentation. Individuals must file annual income declarations and make quarterly estimated tax payments based on prior-year liabilities. PIT efficiency PIT exemptions primarily consist of exemptions for The Imposto Profissional (PIT) applies to earnings specific types of income, including family allowances, from employment and self-employment, ensuring disability pensions, low-value retirement pensions, that individuals contribute to government revenue sickness allowances, and legally mandated severance based on their income levels. It follows a progressive payments. Additionally, certain in-kind benefits, such as rate structure, with different tax brackets for salaried travel and meal allowances, are excluded from taxation employees and self-employed individuals. For employees, up to statutory thresholds. The tax system also provides the tax brackets range from 1 percent to 20 percent, with preferential treatment for foreign diplomatic and increasing marginal rates applied as income levels rise. international personnel under conditions of reciprocity. Employers are responsible for withholding and remitting Lastly, alternative rate structures apply to occasional 26 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Figure 23. PIT revenues average 0.7 percent Figure 24. PIT efficiency is one of the lowest of GDP of comparators Personal income tax (in % of GDP) PIT efficiency rates for comparator countries 1.0 0.35 0.9 0.30 0.9 0.30 0.9 0.8 0.8 0.25 0.8 0.8 0.22 0.8 0.7 0.20 0.20 0.7 0.15 0.6 0.6 0.10 0.6 0.10 0.07 0.09 0.6 0.6 0.06 0.06 0.6 0.05 0.04 0.04 0.5 0.5 0.5 0.5 0.00 au go na Se ne or al bo ste e N an Le a o i Ky erd th eg ib ss ha st o To Ca -Le so am 0.4 Le yz n Bi V G rg a- ra 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 m ne er Ti Si ui G Source: World Bank calculations using data from MoF for Guinea-Bissau and from the OECD for other countries (2024). income and self-employed individuals, diverging from a GDP as the proxy tax base and the highest marginal unified progressive PIT schedule. PIT rate to compute potential revenues.18 With PIT revenues at just 1 percent of GDP and an efficiency ratio PIT revenues have averaged 0.7  percent of GDP of 0.04, Guinea-Bissau performs on par with Togo, but (10  percent of total revenues) between 2010 and is well behind comparators like Cabo Verde, Ghana and 2024, reflecting both economic structures and high informality (Figure 23). Like many countries in the region, Guinea-Bissau faces significant challenges in taxing 18 While compensation of employees—representing the share of GDP earned by labor—is typically used to correct for cross-country personal income, especially given the large informal sector differences in the capital-to-labor ratio, data limitations in this paper where enforcement is more difficult. Limited formal necessitate the use of GDP as the proxy tax base. The highest marginal wage employment contributes to the relatively modest PIT rate is employed to estimate potential revenues, although it is not share of PIT, mirroring patterns seen in neighboring the benchmark rate from a tax expenditure perspective. In standard economies. Over time, reforms that link tax obligations to tax policy analysis, the progressive PIT rate schedule is considered social programs—such as refundable tax credits or other the benchmark, as achieving equity through progressivity is a fundamental pillar of tax design. However, deriving potential revenues incentives for formalization—could raise PIT revenues. based on the full rate schedule would require microdata, which is However, these measures require careful administrative unavailable. As an alternative, the highest marginal PIT rate serves as design and the gradual buildup of institutional capacity the next best approximation, reflecting the reality that a significant to manage more complex filing and refund processes. portion of PIT revenues is typically paid by top earners. Nonetheless, this approach means that PIT efficiency may also be influenced by Guinea-Bissau’s PIT revenues and efficiency are differences in the progressivity of the rate schedule, in addition to compliance and/or policy gaps. The formula for PIT efficiency is: among the lowest of its comparators (Figure 24). PIT PIT revenues efficiency is analogous to CIT efficiency, albeit using PIT efficiency = GDP # highest marginal PIT rate . Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure 27 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Senegal. While low GDP shares accruing to labor can Figure 25. Relief at the border fluctuates from partly explain the limited PIT revenues, the low efficiency year to year suggests substantial compliance and/or policy gaps. Tax expenditures granted at customs by tax stream (2020–2023) Despite Guinea-Bissau’s progressive PIT rate schedules— which explain the large efficiency gaps with countries with 14,000 a flat PIT system like Kyrgyzstan—the gap with other 12,000 comparators likely stems from a narrower tax base, higher In millions of FCFA 10,000 informality and inadequate administrative capacity. 8,000 6,000 Increasing Guinea-Bissau’s PIT efficiency from around 0.04 to around 0.06–0.09, as seen in Sierra 4,000 Leone, Senegal and Timor-Leste, could increase 2,000 PIT revenues by 0.3 to 0.84 percent of GDP. As with 0 CIT, this improvement could be achieved by reducing 2020 2021 2022 2023 the compliance gap—through stronger enforcement, Excise Taxes Custom Duties simplified filing procedures, and expanded third-party Sales Tax Tax exemptions at customs reporting—or by shrinking the policy gap through the Source: World Bank calculations using data provided by MoF. rationalization of exemptions and preferential regimes. Measures to incentivize formalization, such as PIT- refundable credits, would also help. Reforms that improve Significant amounts of tax relief are allocated to specific coverage and simplify compliance, while maintaining economic sectors and activities. As large infrastructure progressivity, could thus enable Guinea-Bissau to better or investment projects are completed and new ones begin, harness PIT as a source of equitable and sustainable the associated tax relief granted at customs also changes revenue. significantly. This pattern is particularly evident in sectors such as private investment and electrification projects, which represent a major share of the tax expenditures. 1.3. Quantitative assessment of tax For instance, private investments benefit from substantial expenditures at the border exemptions in 2023, with CFCA 924.27  million (0.07  percent of GDP) in custom duties, CFCA Tax expenditures linked to transactions at the border 110.73 million (0.01 percent of GDP) in excise taxes, and accounted for nearly 1 percent of GDP in 2023 owing CFCA 1,841.39 million (0.14 percent of GDP) in sales to relief provided on custom duties, excise taxes, and tax relief. Similarly, electrification projects, including the sales taxes. The data, sourced from the Ministry of Finance OMVG and Karpower initiatives, receive notable tax relief, (MoF), provides an overview of tax relief at the border but likely because these sectors represent strategic priorities does not encompass the full extent of tax expenditures, for economic development and infrastructure expansion. particularly for excise and sales taxes, which also apply to State projects and imports also receive significant relief, domestic transactions. This limitation means that the total which could indicate policies aimed at facilitating public foregone revenue from tax expenditures is likely higher investments. than the estimated near 1 percent of GDP. Figure 25 illustrates the total tax relief by tax stream from 2020 to However, not all the tax relief captured in figure 25 2023, showing considerable year-to-year fluctuations. constitutes actual tax expenditures. In the case of sales This variability is largely driven by investment cycles and taxes, businesses that are subject to VAT, or a similar system capital expenditures, which tend to be project-based and allowing for input tax credits (ITCs), may not experience subject to irregular spikes. a true tax benefit if they would have otherwise been able 28 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU to recover these taxes as part of their normal operations. on beneficiaries and justifications which can be further This is particularly relevant for private investments enhanced by data sharing across agencies. Mandating and the electrification OMVG project, which together tax returns for firms under tax holidays is crucial to account for over half of the sales tax relief. If the entities measure the size of the foregone revenue and to verify receiving these tax benefits are engaged in taxable activities compliance with incentive conditions. Finally, publishing downstream, the relief does not constitute a net revenue who benefits from incentives can reduce corruption and loss to the government. Instead, the actual tax expenditure favoritism. However, strong political will is needed to arises when the final output of these businesses is also overcome vested interests. relieved from taxation, thereby preventing the recovery of the initial tax relief. This underscores the importance of using a VAT input-output model to accurately estimate 2. Transition from sales taxes to VAT tax expenditures on VAT or sales taxes. 2.1. Background In 2023, significant tax relief was granted at the border, Guinea-Bissau’s shift from a sales tax to a value added with approximately 4 billion CFCA in customs duties and tax (VAT) marks a pivotal modernization of the 6.8 billion CFCA in IGV (sales tax) relief concentrated country’s taxation system on goods and services. To in a narrow set of goods, largely tied to infrastructure, modernize the tax system and improve domestic revenue energy, and basic consumption. Customs duty relief mobilization, Parliament approved a new VAT Bill (Law was heavily skewed toward a few key commodities, with 04/2022) to replace the antiquated sales tax law, and 41 percent of the total allocated to goods such as diesel effective implementation of the VAT began on January 01, (10.4 percent) and cement (6.7 percent). Additional relief 2025. Under the old sales tax, taxation mainly focused was granted for machinery and mechanical equipment on manufacturers, major wholesalers, and selected service (e.g., diesel engines), construction materials (e.g., towers, providers. By contrast, the new VAT adopts a broad-based tiles, steel articles), industrial packaging (notably large consumption tax model harmonized within the WAEMU bags), and select consumer goods like biscuits and clothing. framework, thereby aiming to align Guinea-Bissau with IGV relief showed a similar concentration, with the top international best practices and enhance revenue collection. ten goods accounting for 48 percent of total relief. Diesel and cement again topped the list, accounting for 14.2 and A key change introduced by the VAT is its fully multistage 8.5 percent, respectively, followed by high-value machinery nature, ensuring each stage of production, distribution, and vehicles used in electricity generation and transport and retail is taxed on the value effectively added, rather infrastructure. than taxing gross transaction amounts multiple times. Under the sales tax, certain goods could be taxed cumulatively, Lack of data on domestic tax expenditures limited the resulting in either hidden taxes within the supply chain or scope of this analysis and could be overcome through the risk of double taxation if proper credits were not taken. the preparation of an annual tax expenditure assessment The more systematic credit-offset mechanism under the report. Better transparency—through annual preparation VAT’s is designed to reduce such distortions, encouraging and publication of a tax expenditure report—would help better record-keeping and transparency. the Government evaluate the effectiveness of tax incentives (whether they are aligned with broader economic and Under the sales tax, reduced rates and exemptions social goals and are cost effective) allowing policymakers aimed at “essential” goods were in fact very broad; to take informed decision-making and enhancing public the new VAT framework narrows these measures and trust. Reliable estimation of tax expenditures necessitates broadens the overall tax base. Transitioning to the accurate records across tax types (CIT, PIT, VAT, Excise VAT in effect streamlines these exemptions to align with and Customs) requiring all ministries granting tax WAEMU directives—particularly for exports and for incentives (e.g., via Investment Code) to file reports items such as certain medical products and agricultural Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure 29 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Figure 26. Sales tax revenues average Figure 27. Guinea-Bissau’s sales tax was one 2.7 percent of GDP of the lowest of comparators in 2024 Sales tax (IGV), 2010–2024 (% of GDP) Sales tax (IGV) efficiency 3.5 1.40 3.3 3.3 3.2 1.17 2.9 1.20 3.1 2.9 2.8 1.00 2.9 2.8 2.7 2.5 2.5 2.7 2.5 2.5 0.80 2.7 2.4 0.61 2.5 2.3 0.60 0.46 0.49 2.3 0.40 0.42 0.40 0.32 0.33 2.1 1.9 0.18 0.20 0.14 0.09 1.9 0.00 1.7 au e re l na go N te bo bia Le e rg ho an ga on rd es oi ss ha st t To ne Ca ami so Ve Le Iv yz 1.5 -L Bi G d’ Se or a- ra 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 te m ne Ky er Cô Ti Si ui G Source: World Bank calculations using data from MoF for Guinea-Bissau and from the OECD for other countries (2024). inputs—while also broadening the overall tax base. As a from sales tax data. Sales tax efficiency (or C-efficiency) result, some goods and services that were partially taxed or is analogous to efficiency measures described above but overlooked under IGV now fall fully under the VAT, and uses GDP as the proxy tax base and the standard rate several previously exempt services are brought into the net. to compute potential revenues.19 While Guinea Bissau has had the highest statutory rate among comparators, The sales tax’s limited multiphase structure attempted at 19 percent, sales tax revenues have remained low as a to allow some upstream deductions with regards to share of GDP, highlighting significant compliance and double taxation, but enforcement was incomplete policy gaps. The new VAT is expected to raise revenues and prone to confusion. The new VAT solves many of and could lift the efficiency ratio, though achieving these problems with clearer rules for credit notes, partial deduction, and zero-rating on exports. A construction significant gains hinges on both sound policy design and company or a wholesaler, for example, no longer faces effective administration, particularly the implementation ambiguity around which portion of prior-stage tax can be of input tax credits, streamlined exemptions, and robust effectively recouped. Input VAT is systematically deducted, enforcement measures. and thereby the ultimate taxable amount reflects value Revenues related to goods and services could increase added at each step, not the cumulative cost of prior taxes. by 3.3 to 4.9 percent of GDP, assuming the VAT comes Notably, data shows that Guinea-Bissau’s sales tax (IVG) with greater efficiency. This rests on the assumption was not an efficient form of revenue mobilization: at 0.14, sales tax efficiency is very low compared to other 19 While final consumption expenditure—comprising household countries in the region, such as Senegal and Cabo Verde and government spending as measured by expenditure-based GDP— (Figure 27). It is important to note that this analysis is is commonly used as the proxy tax base, data limitations in this paper necessitatep the use of GDP instead. The formula for VAT efficiency based on 2023 data and therefore precedes Guinea-Bissau’s VAT revenues transition to a VAT system; the results are instead derived is: VAT efficiency = GDP # highest benchmark VAT rate . 30 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU that efficiency is increased from around 0.14 under the the tax base, reducing tax cascading, and introducing a IGV to 0.32–0.4 under the VAT (as seen in countries robust credit mechanism across all stages of production like Senegal, Ghana and Togo). As with CIT and PIT, and distribution. This section compares the two regimes this increase would reflect a narrowing of the compliance for their tax rates, tax base, and exemptions, and then and policy gaps that currently constrain performance. provides a qualitative assessment of their revenue impacts. Any gains in revenue collected at the same statutory rate would translate directly into higher efficiency. The recent A major structural change under the new VAT system transition from the legacy sales tax (IGV) to a modern is the shift from the IGV’s taxation at the producer/ VAT framework presents a critical opportunity to improve importer level to a fully-fledged VAT applied at all efficiency by reducing cascading and embedded taxes, stages of the supply chain. Under the IGV, tax was clarifying input tax credit rules, and capturing a broader primarily levied upstream, meaning that downstream share of value added throughout the economy. However, value-added—such as wholesale and retail margins— it remains to be seen whether these benefits will be fully was not subject to taxation unless further processing or realized in practice. While the VAT introduces base- transformation occurred. In contrast, VAT applies to broadening elements, some new exemptions and reduced- value added at every stage of production and distribution, rate provisions may offset these gains. Moreover, a more significantly expanding the tax base. efficient VAT system inherently results in less tax cascading (i.e. eliminating the “tax-on-tax” effect), which could, in Most tax rates remain unchanged under Guinea-Bissau’s the absence of improved compliance and a sufficiently new VAT regime (Table 3). Notably, the preferential broad base, reduce gross revenue collections. 10% rate on selected items remains in place, and the standard rate of 19% still applies to most transactions. However, the previous 15% reduced rate on electricity 2.2. Comparison of the former IGV and water has been dropped and replaced by the general and new VAT 19% rate. Additionally, the reverse charge on cross-border services is now imposed at the applicable nominal rate Guinea-Bissau’s transition from a sales tax to a value- (either 10% or 19%), instead of the higher 20% under added tax (VAT) is designed to modernize the tax system IGV. Lastly, a 30% rate has been introduced for non- and align it with WAEMU directives. In principle, the registered importers, and is the main new measure in these VAT should improve revenue mobilization by broadening updated rules. Table 3. Comparison of rates under the IGV and VAT Transaction Category IGV Rate VAT Rate Preferential items (annex/list items) 10 percent 10 percent Utilities (Electricity and Water) 15 percent 19 percent Standard rate for other transactions 19 percent 19 percent Reverse charge for non-resident services 20 percent Nominal rate (10 or 19 percent) Non-declarant import transactions — New - 30 percent Exports 0 percent 0 percent Source: Lei do IGV, Lei do IVA. Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure 31 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 While most changes to the tax base under the new aimed at broadening the VAT base and enhancing revenue VAT system are relatively minor, a few key adjustments mobilization. significantly broaden it. The most notable changes include the increase in the tax rate on electricity and water The implementation of the VAT in Guinea Bissau from 15  percent to 19  percent, as well as the reclassification has so far exceeded expectations. According to the of dairy products from the 10 percent reduced rate to the Directorate-General of Taxes and Contributions (DGCI), standard 19 percent rate. These adjustments are expected the collection of VAT revenues reached over CFCA to have substantial revenue implications, as they apply 6 billion (0.4 percent of GDP) in the first two months to essential goods and services with broad consumption. of 2025. These revenues are one and a half times higher However, accurately quantifying their impact would than what was collected in the same period in 2024 under require a comprehensive VAT model based on detailed the repealed sales tax (IGV). The DGCI praised taxpayers’ input-output tables. compliance with the new system, due to the simplified digital system and an “easy-to-use” tax code. However, This said, the VAT brings changes to goods eligible for challenges appeared, including at the border with some reduced rates (listed in Annex B). On one hand, the base importers contesting the rather high 30  percent flat has been expanded by removing preferential treatment for penalty tax for non-registered transactions. DGCI noted various items, including dairy products, specialized diet that the objective is not to overburden taxpayers or raise items, and agro-industrial machinery, which are now taxed prices but rather to reduce informality. at the standard 19 percent rate. On the other hand, the base has been narrowed with the exemption of natural gas for domestic consumption, which was previously taxed at 2.3. Streamlining exemptions under the new VAT law 10 percent. While natural gas used for commercial and industrial purposes is now fully taxable, most businesses A rough estimate suggests that the rationalization of can claim input tax credits, making the net impact of this tax expenditures on electricity and water under the measure nearly negligible. By contrast, some staple goods new VAT system will generate a significant increase (e.g., rice, flour, bread), planting materials, and equipment in revenue. Household consumption of electricity, water for solar and computing remain under the 10 percent rate. and natural gas are aggregated as a single commodity in Guinea-Bissau’s Input-Output tables, making it difficult While the tax base for several services has narrowed to obtain a precise estimate. Assuming that all household under the new VAT system through exemptions, many final consumption of these utilities is now taxed at of these services were not taxed effectively under the 19 percent rather than 15 percent, revenues are projected IGV. At first glance, the extension of exemptions to to rise by approximately CFCA 1,180 million (0.1 percent education, financial services, public administration, and of GDP), or by over 4 percent of total sales tax revenues healthcare suggests a significant reduction in the taxable based on 2022 data.20 However, the exemption of natural base. However, many of these services—particularly gas for domestic use introduces uncertainty as to the those provided free of charge by public entities—were overall revenue impact. This exemption, which effectively not effectively taxed under the IGV, as it only applied to eliminates VAT on the value-added in the final stage of remunerated transactions. Likewise, margin-based financial services were outside the IGV’s scope. Nevertheless, private fee-based education, healthcare, and certain financial 20 These estimates assume full compliance, which may not fully capture the market dynamics, especially with utilities that generally services that were previously covered by IGV now benefit exhibit high levels of formality. As such, while the increase in the from an exemption, representing a real contraction of VAT rate is likely to boost revenues from electricity and water, the the taxable base. These private fee-based services should net impact across the entire category remains uncertain without a be prioritized for reconsideration in future tax reforms comprehensive VAT model built using detailed IO tables. 32 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU the supply chain for domestic natural gas, potentially and likely leading to hidden tax burdens on exports. The offsets some of the gains from increased rates on electricity improved efficiency of the VAT system is expected to and water, though the magnitude of the impact depends yield significant long-term benefits by reducing economic on the relative consumption of natural gas compared to distortions, lowering production costs, and enhancing electricity and water. competitiveness. Over time, Guinea-Bissau stands to gain substantially from the shift to a more neutral and Removing the current VAT exemption for natural gas transparent VAT framework, fostering a more efficient for domestic use while making electricity fully taxable and investment-friendly tax environment. is critical to ensure consistency with the principles of tax neutrality and broader climate policy objectives. A neutral VAT system should aim to tax all forms of 3. Recommendations energy consumption equally to avoid creating distortions in consumer choices. By exempting natural gas while Guinea-Bissau’s low tax collection, heavy reliance applying the full 19 percent VAT rate to electricity, the tax on a narrow tax base, and escalating public debt system effectively makes a higher-carbon energy source underscore the urgent need to strengthen revenue more attractive relative to a cleaner alternative, potentially mobilization. Although the shift to a value added tax discouraging a transition to lower-emission energy offers an opportunity to broaden the tax base and reduce consumption. While VAT is not the appropriate tool for distortions, much depends on its execution: robust internalizing carbon externalities—such policies are better enforcement and more consistent exemption policies will addressed through targeted environmental taxes or carbon determine whether VAT delivers a significant boost in pricing mechanisms—it should also not inadvertently revenues. A more balanced tax mix—one that gradually provide preferential treatment to more carbon-intensive rebalances away from volatile trade taxes while tapping options. Aligning VAT policy with broader environmental into underutilized sources like property taxes, social goals would require a more consistent approach to energy security contributions, and excise taxes—can improve taxation, ensuring that tax preferences do not undermine both the adequacy and stability of government revenues. climate objectives. A key immediate priority is to rationalize the country’s More broadly, subjecting wholesale and retail margins multiple tax expenditures, which already represent to VAT could generate a substantial increase in revenues. a substantial share of revenues foregone. Despite the If all retail and wholesale margins are fully taxed under the theoretical justification for targeted incentives in areas new system, this would translate into an estimated revenue like infrastructure and social services, a poorly managed gain of CFCA 4,866 million (0.4 percent of GDP) based exemptions framework can undercut compliance and on 2022 data. While compliance and informality may erode the tax base. Better transparency—through annual reduce the revenue gains realized, this shift represents one preparation and publication of a tax expenditure reports for of the most significant changes in the transition from IGV which requiring firms in holiday periods to file tax returns to VAT and has the potential to considerably enhance tax is critical—would allow policymakers weigh incentives mobilization. against their actual costs and alignment with development priorities. By pursuing these reforms and strengthening The shift to a VAT system is expected to eliminate the public financial management, Guinea-Bissau can ensure challenges that arise from embedded taxes. While the its tax system is not only a conduit for revenue, but also a IGV attempted to mitigate double taxation by allowing catalyst for equitable, long-term economic progress. producers and manufacturers to claim credit for input taxes paid, it did not provide credits for inputs purchased at the To address these systemic challenges, Guinea- retail level. As a result, the IGV became embedded in the Bissau should prioritize a series of targeted reforms price of goods and services, distorting economic decisions (summarized in table  4). Base-broadening measures Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure 33 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Table  4. Policy recommendations Policy options* Timeline 1. Broaden the tax base to increase revenue mobilization and boost efficiency Rationalize VAT tax expenditures, including the exemption of natural gas, private education, Short term private health care and fee-based financial services Harmonizing tax rates by alcohol content by increasing the excise tax rate on beer and wine Short term by 25 percent and 200 percent respectively, aligning them with the taxation of spirits Eliminating implicit fuel subsidies by aligning taxes with external costs (revenue potential = Short term 1.8 percent of GDP) Improved tax efficiency for CIT, PIT and VAT including through modernizing customs operations, Medium to deploying digital tools, and improving taxpayer services (revenue potential = 4.1 to 6.4 percent long term of GDP) 2. Conduct a comprehensive tax expenditure review Increase transparency by showing which sectors and firms benefit most from exemptions, Short term reduced rates, or holidays Align reporting with regional benchmarks (WAEMU, ECOWAS) to facilitate cross-country Short term comparisons Require all ministries granting tax incentives (e.g., via Investment Code) to file reports on Short term beneficiaries and justifications Establish a dedicated unit (or task force) in the Ministry of Finance to compile and publish a Short to tax expenditure report annually medium term Require filing, even if no tax is due, to enable measurement of the size of the foregone Medium term revenue and to verify compliance with incentive conditions Collect basic financial statements from tax incentives beneficiaries to gauge the real cost- Medium term benefit of incentives granted * Most of the proposed reforms fall under the responsibility of the Ministry of Finance. should include rationalizing VAT exemptions, expanding focus on modernizing customs operations, deploying PIT coverage through innovative formalization digital tools, and improving taxpayer services to combat incentives, and realigning excise taxes with their true evasion and boost CIT/PIT compliance rates. By social and environmental costs. Transparency and broadening the VAT base, strengthening PIT and CIT oversight mechanisms require enhancement through through better registration and enforcement, and adjusting regular publication of tax expenditure reports, mandatory excise rates on fuels (estimated fiscal impact of 1.8 percent beneficiary disclosures, and compulsory tax filings even for of GDP) and alcohol to capture environmental and firms enjoying holiday periods. Simulations suggest that, public-health costs, Guinea-Bissau can diversify revenues over the medium term and with improved tax efficiency and reduce reliance on volatile trade taxes. Importantly, (for CIT, PIT and VAT), aligning tax administration and taken together, the measures above will help foster a tax policy with those of regional peers, Guinea-Bissau more equitable, efficient, and resilient tax system—one could benefit from additional fiscal gains of about 4.1 to better aligned with international standards and capable of 6.4 percent of GDP. Administrative strengthening must financing Guinea-Bissau’s development aspirations. 34 Part II: Unpacking Guinea Bissau’s Tax Performance and Expenditure UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU References Arnold, J. (2008). Do tax structures affect aggregate IMF (2022). “Republic of Guinea-Bissau: Projection economic growth? empirical evidence from a panel of Tax Revenues after Implementation of the Value of OECD Countries. OECD Economics Department Added Tax (Modernization of the General Sales Tax)”. Working Paper No.643. Retrieved at https://www. IMF (2023). IMF Fossil Fuel Subsidies Data: 2023 Update. oecd-ilibrary.org/economics/do-tax-structures-affect- Washington, DC: International Monetary Fund. aggregate-economic-growth_236001777843 IMF (2024). World Economic Outlook Database. Retrieved Baylor, M. and Beauséjour L. (2004). Taxation and at https://www.imf.org/en/Publications/WEO/weo- Economic Efficiency: Results from a Canadian CGE database/2024/October Model. Department of Finance Canada Working Paper. IMF, UN, OECD and World Bank (2015a). Options for Canada Revenue Agency (2024a). Goods and services tax/ Low Income Countries’ Effective and Efficient Use of Tax harmonized sales tax (GST/HST) credit - calculation Incentives for Investment—A background paper to the sheet for the July 2023 to June 2024 payments (2022 report prepared for the G-20 Development Working Group. base year). Retrieved at https://www.canada.ca/en/ Retrieved at https://www.oecd.org/ctp/tax-global/ revenue-agency/services/child-family-benefits/goods- background-document-options-for-low-income- services-tax-harmonized-sales-tax-gst-hst-credit/ countries-effective-and-efficient-use-of-tax-incentives- goods-services-tax-harmonized-sales-tax-credit- for-investment.pdf calculation-sheet-july-2023-june-2024-payments- 2022-tax-year.html IMF, UN, OECD and World Bank (2015b). Options for Low Income Countries’ Effective and Efficient Use of Tax Canada Revenue Agency. (2024b). Climate action incentive Incentives for Investment—Report. Retrieved at https:// payment (CAIP). Retrieved at https://www.canada. www.oecd.org/tax/options-for-low-income-countries- ca/en/revenue-agency/services/child-family-benefits/ effective-and-efficient-use-of-tax-incentives-for- cai-payment/how-much.html investment.pdf Diamond, P.A. and Mirrlees, J.A. (1971). “Optimal Johansson, Å., Heady, C., Arnold, J., Brys, B. and taxation and public production”. American Economic Vartia, L. (2008). “Tax and economic growth”. Review, 61(1). OECD Economics Department Working Paper No.620. Retrieved at https://www.oecd-ilibrary.org/economics/ Hanappi, T. (2018). “Loss carryover provisions: taxation-and-economic-growth_241216205486 Measuring effects on tax symmetry and automatic stabilization”. OECD Taxation Working Paper No.35. OECD (2024). Global Revenue Statistics Database. Retrieved Retrieved at https://www.oecd-ilibrary.org/taxation/ at https://www.oecd.org/en/data/datasets/global- loss-carryover-provisions_bfbcd0db-en revenue-statistics-database.html Redonda, A., von Haldenwang, C., & Aliu, F. (2024). Global IMF (2024) Seventh Review Under The Extended Credit Tax Expenditures Database (GTED) (1.3.0) [Data set]. Facility https://www.imf.org/en/Publications/CR/ Zenodo. https://doi.org/10.5281/zenodo.12585656 Issues/2024/12/19/Guinea-Bissau-Seventh-Review- Under-the-Extended-Credit-Facility-and-Request- World Bank (2016). Info Note on Cashew Nut Taxation in for-559749 Guinea-Bissau. Washington D.C.: World Bank Group. REFERENCES 35 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Annex A. Detailed Analysis of International Best Practices in Tax Policy A.1. Tax policy pillars design and administration, they typically don’t influence overarching decisions like the tax mix and key policy The tax revenue and tax expenditure analysis adheres parameters such as thresholds and tax rates. to international best practices, anchored in the five fundamental pillars of tax policy: A.2. Efficiency 1. Equity: This pillar emphasizes the fair distribution of the tax burden among taxpayers. It upholds the Tax mix principle that individuals with higher incomes or The choice of the tax mix also has important repercussions wealth should contribute a proportionately larger share for the economic efficiency of the tax system. The OECD of their earnings or assets in taxes. (Johansson, Heady, Arnold, Brys & Vartia, 2008) has 2. Efficiency: Focused on minimizing adverse effects on summarized the findings from the academic literature on economic activity, this pillar ensures that the tax system the efficiency of each tax stream for promoting economic is designed to avoid discouraging work, investment, or growth and finds that they can be ranked accordingly from entrepreneurship. the most efficient to the least efficient: 3. Adequacy: The foundation of this analysis, adequacy ensures that the tax system generates sufficient revenue • Property taxes to meet the government’s budgetary needs. This involves • Excise taxes that internalize externalities crafting tax policies that are robust enough to fulfill • Value-Added Taxes (VAT) revenue requirements without imposing excessively • Personal income taxes (PIT) high tax rates that could impede economic growth. • Corporate income taxes (CIT) 4. Simplicity: This pillar aims to create a tax system that • Taxes on financial and capital transactions is easily understandable and navigable for taxpayers. Simplification involves reducing complexity in tax laws Property taxes are found to be the most efficient, as and regulations, streamlining filing procedures, and they have a much smaller impact on the labor supply and promoting user-friendly interactions. capital accumulation decisions than consumption and 5. Transparency: Focused on clear rules and procedures for income taxes (Johansson, Heady, Arnold, Brys & Vartia, tax collection and enforcement, this pillar aims to instill 2008). When designed properly, they are also found to trust in the tax system and enhance compliance rates. prevent land under-utilization in urban areas (Johansson, Heady, Arnold, Brys & Vartia, 2008). They are also Equity and efficiency take center stage in effective a valuable source of revenues as the revenue stream is tax policy design. Progressivity, a key aspect of equity, generally stable over the business cycle. promotes a just distribution of income and wealth. Neutrality, essential for efficiency, ensures that the tax Value-added taxes (VAT) and excise taxes are found to system does not distort economic decisions or favor be the next most efficient source of revenues, as although specific activities or sectors. consumption taxes distort labor supply decisions, they are neutral in respect to savings decisions when the tax rates Adequacy forms the bedrock of this report, striving are constant over time (Johansson, Heady, Arnold, Brys to identify strategies for augmenting tax revenues to & Vartia, 2008). Excise taxes that internalize social costs restore and sustain fiscal balance. While simplicity are even more efficient, as the distortions they impose are and transparency remain pivotal in guiding tax policy desirable. 36 ANNEX A. DETAILED ANALYSIS OF INTERNATIONAL BEST PRACTICES IN TAX POLICY UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU Taxing commodities that impose a cost on society, domestic investment capital can be made up with foreign like alcohol, tobacco and petroleum products, can direct investment (Johansson, Heady, Arnold, Brys & both raise revenues and mitigate the harms of the Vartia, 2008). consumption of those commodities. While VAT does not have the efficiency benefits of excise taxes that The impact of CIT on reducing investments and internalize externalities, it is still one of the most efficient capital accumulation has a direct impact on the return tax streams with high revenue raising potential. Similar to labor in the form of wages. Since population is fixed, to property taxes, the revenue streams of VAT and excise a lower capital stock decreases the capital to labor ratio taxes are relatively stable over the business cycle. bKL l which decreases the marginal product of labor, the Personal income taxes are next when it comes to long-run determinant of wages. economic efficiency. They not only distort labor supply CIT may also hinder economic growth by reducing decisions, but also savings decisions by reducing the rate productivity through a number of channels, including of return on savings. They remain more efficient than distorting relative factor prices, disincentivizing high-risk corporate income taxes, however, since they do not directly innovative investments, and reducing foreign technology hinder capital formation. By directly affecting income, PIT transfers and knowledge spill-overs (Johansson, Heady, also provides an invaluable tool to achieve the government’s Arnold, Brys & Vartia, 2008). Finally, CIT may also dampen distributional objectives and correct any equity concerns economic growth by distorting financing decisions, favoring introduced by more regressive taxes like VAT. tax-deductible debt financing over equity financing The use of PIT to redistribute income across the income (Johansson, Heady, Arnold, Brys & Vartia, 2008). Such distribution comes with efficiency costs, however. For a policy favors sectors of the economy with tangible assets example, increasing the marginal PIT tax rate while keeping that can be used to secure debt financing at the expense of the average PIT tax rate constant is found to depress knowledge-based industries whose intangible assets cannot economic growth (Arnold, 2008). At the 2004 OECD as easily be financed by debt. average and marginal PIT tax rates of 14.3% and 26.5% Due to the strong efficiency downsides of corporate respectively, a 5 percentage point decrease in the marginal income taxes, countries around the world have been PIT tax rate is estimated to increase long-run GDP per capita slowly reducing CIT rates over the last few decades. by 1% (Johansson, Heady, Arnold, Brys & Vartia, 2008). The overall downward trend in average CIT rates in In spite of those efficiency concerns, PIT forms the most countries, combined with the mobile nature of bulk of tax revenues in most developed countries as it corporations, led to tax competition, which put pressure has very high revenue generating potential and is the most on the remaining countries with high CIT rates to follow efficient tax stream for achieving distributional objectives. the trend. CIT revenues, however, remain important in Its revenue stream is less stable than property taxes, VAT most countries around the world. The large tax base that and excise taxes, but it is still relatively stable compared to corporate profits provide make CIT a significant source corporate income taxes. of revenues even at relatively low rates. Corporate income taxes are one of the least efficient The CIT tax base fluctuates heavily over the business revenue streams when it comes to economic growth. cycle, making it an unstable source of revenues. While They directly increase the user cost of capital, which this prevents CIT from being a core source of revenues depresses capital investments (Johansson, Heady, Arnold, on which governments can rely, it acts as an automatic Brys & Vartia, 2008). While personal capital income taxes stabilizer over the business cycle, especially when CIT could be argued to have a similar impact, it is unlikely losses can be carried forward and backward in time to be the case in open economies where a shortfall in (Hanappi, 2018). In good times, CIT slows down the ANNEX A. DETAILED ANALYSIS OF INTERNATIONAL BEST PRACTICES IN TAX POLICY 37 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 economy and may prevent overheating without requiring 2008). The findings led to significant reductions in any intervention by policymakers. Canada’s corporate income tax rates over the following decades and an increasing importance of VAT and excise In bad times, losses are tax deductible and the ability taxes in its tax mix. to carry those losses forward incentivizes investments. The CIT system also provides a platform to quickly deploy stimulative measures to accelerate the recovery. Finally, A.3. Equity perhaps the most stabilizing feature of CIT is a loss carry- back provision, which provides an immediate infusion Beyond efficiency concerns, another key pillar of the of liquidity to struggling businesses and can be used to tax system is equity. The tax system provides invaluable finance further investments at a time when debt and tools for achieving the government’s distributional equity markets may not be as readily available. Overall, of objectives. Many of the approaches in which the tax the 34 countries in the OECD, “only 18 countries provide system can be used to redistribute income, however, unlimited carry-forwards” and “9 countries provide are at odds with efficiency considerations. For example, carry-backs”, which is found to significantly impair tax taxing business and capital income more heavily than symmetry and the ability of CIT to act as an automatic employment income seems like an attractive way of stabilizer (Hanappi, 2018). reducing inequality, but it leads to severe economic inefficiencies as described above. The next two sections Finally, taxes on financial and capital transactions on VAT relief and refundable tax credits provide two are found to be the most inefficient of all the revenue ways of achieving distributional objectives without overly streams considered because they distort the acquisition distorting economic incentives. and disposition of those assets, which leads to an inefficient allocation (Johansson, Heady, Arnold, Brys & Vartia, 2008). This is consistent with the theoretical VAT relief findings by Diamond and Mirrlees (1971) that taxing Offering VAT relief on basic necessities is an easy way intermediate sales of assets imposes additional distortions of mitigating the regressive nature of taxes on goods over equivalent taxes on the income from those assets. and services. Zero-rating or offering a reduced rate on In essence, “both transaction taxes and taxes on income/ essentials like basic groceries and prescription drugs is a consumption discourage the ownership of the assets, but commonly offered tax expenditure around the world. If the transaction taxes have the added distortionary cost of discouraging transactions that would allocate these VAT relief is to be offered on essential commodities, it is assets more efficiently” (Johansson, Heady, Arnold, Brys more efficient to either zero-rate or offer a reduced rate than & Vartia, 2008). to exempt, since many essential commodities are inputs into the production of other commodities. Exempting Overall, the findings on tax efficiency provide useful intermediate inputs leads to embedded taxes which insights into the optimal tax mix that can be applied to flows into the production of other commodities. If those any tax systems given the local constraints introduced by commodities are taxable, VAT is imposed again on top of the country’s administrative capacity and the magnitude the embedded tax with no possibility of recovery through of its informal economy. Given those constraints, further input tax credits. In some cases, this embedded tax can insights can be gained by modeling the country’s economy even flow into the production of exported commodities, and tax system within a computable general equilibrium which hampers the competitiveness of the country’s model (CGE). Canada developed such a model of its exports. Reduced rates or zero-rate avoid such scenarios economy (Baylor & Beauséjour, 2004) and found results by letting producers of those relieved commodities claim that were broadly consistent with the findings reported input tax credits, which prevents the embedding of VAT by the OECD (Johansson, Heady, Arnold, Brys & Vartia, in the sale price. VAT exemptions should only be used 38 ANNEX A. DETAILED ANALYSIS OF INTERNATIONAL BEST PRACTICES IN TAX POLICY UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU on commodities that are almost exclusively used for final the VAT. It is a PIT fixed tax credit based on household consumption, like health care services. size with income-based clawback. In 2022, the credit offered CA$496 for a single adult, CA$650 for a couple VAT relief should not, however, be a principal tool and CA$171 per child for households earning less than for achieving distributional objectives as it is a blunt CA$42,335 (Canada Revenue Agency, 2024a). The instrument. It is not possible to directly target low-income credit is clawed back at a rate of 5% when the household households, making it necessary to distort incentives for income exceeds the CA$42,335 threshold (Canada the entire population. As relief is granted on more and Revenue Agency, 2024a). The credit is refundable such more commodities to achieve distributional objectives, the that households paying no taxes get a refund for the full VAT base shrinks, making it necessary to raise the standard value of the credit. VAT rate to maintain revenues. This quickly erodes the efficiency of the tax, and opens the door to lobbying for The Climate Action Incentive is similar to the GST/ relief on similar commodities. Overall, the provision of HST tax credit, but for Canada’s carbon tax. The intent VAT relief for equity purposes should be limited to a few is not purely distributional here, and so the refundable tax select commodities that have the greatest impact on the credit is not clawed back with income. The credit varies progressivity of the tax while maintaining the efficiency of across provinces, but for example in 2022 in Ontario, the VAT through a low rate on a broad base. Canada’s largest province, it granted CA$488 for the first adult, CA$244 for the second adult, and CA$122 per child (Canada Revenue Agency, 2024b). Everyone in PIT refundable tax credits Ontario receives this amount, and while its intent is not purely distributional, it does mitigate the regressivity of PIT tax credits are the most potent tools for achieving the carbon tax. Foregoing the income clawback avoids distributional objectives. They let policymakers directly making the credit a disincentive to work, but it makes the target specific segments of the income distribution to credit a costly way of achieving distributional objectives. provide relief to those who need it the most. In many cases, the most marginalized pay little or no income tax, Finally, a negative PIT rate at the low-end of the making it necessary to make the tax credits refundable. income distribution is a good way of achieving some This tool can be used to offset the regressivity of other distributional objectives while incentivizing rather taxes, including VAT, carbon and excise taxes. The than disincentivizing employment. It can be a powerful refundable tax credits can take many different shapes tool to address regressivity, but it cannot be used to depending on the specific objectives: support the most marginalized who have little or no employment income. • Fixed tax credit based on household size, with or without income-based clawback Overall, PIT refundable tax credits are the most • Negative PIT rate at the low-end of the income powerful tools for addressing equity concerns and distribution mitigating the regressivity of other taxes. While they themselves may introduce some economic inefficiencies, For example, Canada offers a number of such refundable using them in concert with efficient regressive taxes like tax credits for equity purposes including: VAT, excise and carbon taxes lets policymakers strike the • GST/HST tax credit ideal balance between efficiency and equity. They are • Climate Action Incentive also a useful tool for incentivizing entry into the formal economy. The credits provide much needed relief to the The GST/HST tax credit is named after Canada’s VAT most marginalized, who can contribute later on when and is intended to partially offset the regressivity of their situation improves. ANNEX A. DETAILED ANALYSIS OF INTERNATIONAL BEST PRACTICES IN TAX POLICY 39 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 Annex B. IGV and VAT Comparison B.1. Comparison of the application of the 10 percent reduced rate under the IGV and VAT Items No Longer at 10 percent Broad Category IGV Preferential Items VAT Preferential Items (Now Standard or Exempt) Food Products • Cereals & Cereal • Cereals & Cereal • Dairy products and Preparations Preparations: Rice, flour, specialized diet items, • Dairy & Related and bread. plus additional cereal- Products based products beyond • Specialized Diet basic rice/flour/bread, Products now taxed at the standard rate. Agricultural Production • Fertilizers & Soil • Fertilizers, Live Animals, • Agro-industrial Goods Amendments Phytopharmaceuticals, machinery and repair/ • Live Animals Planting Materials, & leasing services for • Phytopharmaceuticals Tractors/Agricultural agricultural materials • Planting Materials Machinery are no longer • Agricultural Machinery preferential and are • Agricultural Services now subject to the standard rate. Energy Production • Materials and • Materials and equipment • None – both regimes Equipment equipment for solar for solar energy treat these items the energy production production same. IT Equipment • Materials and equipment • Materials and equipment • None – both regimes for computing for computing treat these items the same. Industrial Equipment • Industrial equipment • Not included in the • Industrial equipment preferential list now falls under the standard rate. Publications & Cultural • Newspapers, • Newspapers, magazines, • Small differences in the Activities magazines, and and other publications of definition other publications of cultural, educational, and cultural, educational, recreational nature recreational, or sporting nature Healthcare Services • Medical and sanitary • None – These services • Medical and sanitary services provided by are fully exempt under services, which were hospitals, clinics, and the VAT taxable at 10% under similar establishments the IGV, are now fully exempt under the VAT. (continues) 40 ANNEX B. IGV AND VAT COMPARISON UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU B.1. Comparison of the application of the 10 percent reduced rate under the IGV and VAT (Continued) Items No Longer at 10 percent Broad Category IGV Preferential Items VAT Preferential Items (Now Standard or Exempt) Professional & Other • Legal Services: • Legal Services • Construction contracting Services Consultancy and • Hospitality, Tourism & is no longer preferential attorney/solicitor Catering Services and is now subject to services • Passenger Transportation the standard rate; also, • Construction the separate treatment Contracting of lodging and catering • Passenger is now grouped under Transportation: tourism, with applicable Including vehicle rental standard or other with driver treatment. • Entertainment: Shows, sports events, and other public entertainments • Lodging & Catering Services: Firefighting Equipment • Equipment exclusively • Equipment for combating • None – both regimes intended for combating and detecting fires treat these items and controlling fires similarly. Natural Gas • Natural gas • Exempt when used for • Natural gas, previously domestic purposes at 10% under the IGV, is now exempt when used for domestic purposes. Funeral Services • Funeral services • Funeral services • None – both regimes continue to treat funeral services preferentially. Source: Lei do IGV lista anexa, Lei do VAT Annex I. ANNEX B. IGV AND VAT COMPARISON 41 GUINEA-BISSAU | ECONOMIC UPDATE - SPRING 2025 B.2. Comparison of sales tax and VAT exemptions Transaction Change/Items Now Exempt Category IGV Exemption Status VAT Exemption Status under VAT (Compared to IGV) Education • Not exempt • Exempt when provided by • Education services, Services recognized educational taxable under the IGV, institutions. are now exempt under the VAT. Financial • Not exempt • Exempt for financial operations • Financial services, Services not remunerated by previously taxable under commission or an explicit fee. the IGV, are now exempt under the VAT. Public • Not exempt • Exempt when performing • Activities by public Administration activities in the exercise of administration in their their official powers. official capacity, which were taxable under the IGV, are now exempt under the VAT. Healthcare • 10% Reduced-Rate • Exempt – Medical and • Healthcare services, Services sanitary services provided by previously taxed at 10% hospitals, clinics, and similar under the IGV, are now establishments are fully fully exempt under the exempt. VAT. Medicines and • Exempt – Operations • Exempt – Internal operations • No change – This Pharmaceutical related to the import involving medicines and exemption remains intact Products and commercialization pharmaceutical products are under the VAT. of medicines and exempt, as detailed in the pharmaceutical products relevant annex. as specified. Natural Gas • 10% Reduced-Rate • Exempt when used for • Natural gas, previously domestic purposes taxed at 10% under the IGV, is now exempt for domestic purposes under the VAT. Housing Not exempt Exempt for transactions Housing-related real estate Real Estate relating to real estate used transactions, taxable under Transactions for housing (except hotel-type the IGV, are now exempt accommodations). under the VAT. (continues) 42 ANNEX B. IGV AND VAT COMPARISON UNPACKING TAX PERFORMANCE IN GUINEA-BISSAU B.2. Comparison of sales tax and VAT exemptions (Continued) Transaction Change/Items Now Exempt Category IGV Exemption Status VAT Exemption Status under VAT (Compared to IGV) Definitive Exempt – Broad exemption Exemption is narrowed – Under The broad exemption under Imports by for definitive imports of the VAT, only the importation of IGV is significantly narrowed Diplomatic goods for diplomatic vehicles by these entities remains under the VAT, with only Missions, etc. missions, recognized exempt. vehicles remaining exempt international organizations, for these entities. cooperants, emigrants, and former combatants. Temporary Exempt – Temporary Exempt only if the goods are The temporary import Imports for imports (even if later imported under a customs exemption is now limited Repair/Benefit repaired/benefited) are suspensive regime or meet under the VAT compared exempt provided reexport specific conditions. to the broader exemption occurs, as per IGV rules. under the IGV. Small Exempt – Operations Not exempt – No threshold- Small transactions that were Transactions (goods or services) below based exemption exists under the exempt under the IGV are (Below a Value a certain value threshold VAT Code; small transactions are now taxable under the VAT. Threshold) (12 units of account) are taxable. exempt. Source: Lei do IGV and Lei do VAT. ANNEX B. IGV AND VAT COMPARISON 43