## Tax Revenue in GNB and Peers

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---

### Summary findings
- Domestic Revenue Mobilization (DRM) is an urgent strategic priority for Guinea-Bissau to reduce public debt, fund development needs, and reduce reliance on external grants.
- Tax revenue has stagnated at around 8 percent of GDP in recent years, well below the WAEMU convergence threshold of 20 percent.
- A stochastic frontier model estimates Guinea-Bissau’s untapped tax potential at 2.7 percent of GDP in 2023.
- The widening tax gap is driven primarily by policy and administration inefficiency (compliance gaps, uncoordinated exemptions, outdated legal frameworks), not just macroeconomic fundamentals.

### Background and structural constraints
- Key structural and institutional barriers:
  - Dominance of the informal sector with limited taxpayer registration and low voluntary compliance.
  - Declining importance of customs revenue due to regional trade liberalization, smuggling, and pervasive exemptions.
  - Outdated IT infrastructure (especially in customs), fragmented databases across Ministry of Finance departments, and insufficient enforcement mechanisms.
- Economic concentration and vulnerability:
  - Heavy dependence on a single commodity: cashew exports are a large share of domestic revenue, exposing fiscal performance to international prices, weather variability, and logistic problems.
  - Imports remain another dominant source of revenue, making collection vulnerable to exchange rate and terms-of-trade shocks.
  - Revenue concentration in a small pool of large taxpayers creates concentration risks.

### Tax policy parameters (statutory rates and contributions)
- VAT: 19 percent (consistent with regional floor and modal rate).
- CIT (corporate income tax, locally “industrial contribution”): 25 percent (within WAEMU band of 25–30 percent).
- PIT (personal income tax): 20 percent (appears low relative to peers but excludes large mandatory social contributions):
  - Social security contributions: 14 percent from employers and 8 percent from employees.
  - In-work accident insurance: 2–10 percent (depending on sector).
- Implication: statutory rates broadly align with WAEMU norms; revenue shortfalls are more related to enforcement, informality, and base erosion than headline rates.

### Tax composition and performance
- Tax structure concentrated in a few sources: cashew exports, imports, and a small pool of large taxpayers.
- Inland taxes (income and sales) constitute a much lower share of total tax revenue compared with WAEMU peers; Guinea-Bissau remains concentrated in trade-related taxation.
- VAT performance:
  - Major compliance and enforcement gaps, even among largest firms.
  - Substantial untapped potential across large and small enterprises not contributing meaningfully to VAT.
  - Recommended administrative actions: risk-based audits, invoice matching, credible enforcement mechanisms.
- CIT performance:
  - Signs of diversification with rising contributions from smaller businesses and a more distributed taxpayer base.
  - Administrative weaknesses persist: limited enforcement capacity and uneven compliance across taxpayer segments.
  - Many businesses underreport; formal registration has improved but declarations/payments lag.
  - Required measures: reduce taxpayer segmentation, strengthen filing enforcement, formalize non-compliant high-turnover entities.

### Empirical estimates of tax potential and effort
- Stochastic frontier model:
  - Distinguishes revenue shortfalls due to external shocks from those due to tax policy/administration weaknesses.
  - Estimates GNB untapped tax potential at 2.7 percent of GDP in 2023.
  - The gap between potential and actual revenue was lower than SSA or WAEMU averages in 2023, reflecting binding structural constraints considered by the model, not superior efficiency.
- Tax effort:
  - Absence of sustained improvement in tax effort over the past decade.
  - Tax effort has been declining since 2021, despite reforms under the SMP and ECF supported program.
  - Offset policy actions undermined gains: example—legal framework for modern VAT finalized in 2022 but implementation progressed slowly due to inflation concerns; 2023 tax cuts on fuels and rice reduced space to implement revenue-enhancing measures in 2024.
- Box 1 (compliance and policy drivers):
  - In 2024, nearly half of the 150 largest taxpayers reported zero VAT payments; an additional 20 declared less than CFAF 1 million.
  - For industrial contributions (CIT): 76 out of the top 150 taxpayers made no payments in 2024; 12 paid less than CFAF 1 million.
  - Banking sector benefits from multiple preferential treatments at regional level, producing widely varying effective tax rates across banks of similar size/profitability.

### Administrative and legal challenges
- Fragmented, outdated legal framework with inconsistencies across instruments, ad hoc exemptions, and legacy legislation that has not kept pace with technological and market changes.
- Weak follow-up mechanisms and limited real-time taxpayer monitoring.
- Outdated IT and fragmented taxpayer databases impede coordination between inland and customs administrations.

### Policy implications and recommended measures (overview)
- Strengthen enforcement and compliance, targeting both large taxpayers and broader corporate landscape:
  - Expand audit coverage and risk-based compliance management.
  - Implement invoice matching and credible enforcement mechanisms to align declared liabilities with economic activity.
  - Scale up real-time taxpayer monitoring—especially for high-turnover firms.
- Rationalize and review tax exemptions:
  - Comprehensive review of exemptions’ legal basis and fiscal cost, with priority attention to sectors like banking where preferential treatments lower effective tax burdens.
- Institutional development and sustained reform sequencing:
  - Continue implementation of VAT and digital filing/payment systems (“Kontaktu”) while building inland revenue capacity to realize their potential.
  - Prioritize consistent legal frameworks to reduce gaps and overlaps and improve enforcement certainty.
- Address informality and broaden the tax base through formalization efforts and targeted measures to bring small but economically significant firms into the tax net.

### Administrative capacity constraints and operational challenges
- Tax and customs administrations face acute shortages in specialized personnel, particularly in areas requiring technical or sector-specific knowledge.
- Inspectors often lack adequate training for sectoral audits; example: effective auditing of the telecom sector demands contextual understanding of pricing structures, bundled services, and digital platforms.
- Capacity building is urgently needed to equip staff with modern audit, valuation, and enforcement tools.
- Human resource limitations are a binding constraint in field operations and strategic functions such as taxpayer segmentation and risk analysis.
- Enforcement remains weak and slow, allowing non-compliance to persist with limited consequence.
- Procedural delays enable taxpayers to avoid or defer payments, eroding credibility and efficiency.
- In customs, undervaluation is widespread due to absence of access to reliable, frequently updated market price information.
- Infrastructure gaps at land entry points and insufficient real-time data sharing hinder efforts to combat fraud and leakage.
- Some undervaluation issues have been resolved in 2024, but border controls remain uneven and weak.

### Box 2. Tax Policy and Administration Measures in 2024 and 2025 — I. Tax Policy Measures
- Removal of large-scale exemptions
  - The 2025 budget eliminates exemptions previously granted to the cement factory—the single largest beneficiary—responsible for approximately 50 percent of all private investment exemptions.
- Implementation of VAT
  - The VAT implementation was officially launched in January 2025.
  - The 2025 budget includes VAT collection on fuel sales at the point of sale, representing the largest revenue gain among planned measures.
- Adjustment of customs reference prices
  - Tax reference prices on alcoholic beverages, used vehicles, and cement have been aligned with current market prices to improve customs valuation accuracy.

### Box 2. Tax Policy and Administration Measures in 2024 and 2025 — II. Revenue Administration Measures
- Border infrastructure upgrades
  - The Safim border post is being paved to strengthen customs control; completion is expected by in the second half of 2025.
- Enhanced audit and enforcement
  - Inland revenue administration has intensified audit efforts, resulting in the recovery of CFAF 1.3 billion in tax arrears (as of the seventh program review).

### Tax Policy (detailed recommendations)
- Accelerate VAT implementation.
  - Require timely issuance of regulations, application of correct rates, and robust compliance monitoring—particularly in sectors where the largest revenue gains are expected.
- Rationalize tax exemptions.
  - Proceed with the planned July 2025 exemption phase-out as scheduled.
  - Conduct a full legal review and stock-taking of exemptions, especially for inland taxes where no systemic database exists, to identify inconsistencies and reveal ‘fake’ exemptions.
  - Institutionalize a transparent registry of all exemptions and regular assessments of their fiscal cost and policy relevance.
- Modernize tax laws in key sectors.
  - Update legacy legislation, especially Guinea-Bissau’s outdated and fragmented approach to the taxation of income.
  - Prioritize horizontal equity and simplification.
  - Build income redistribution into the personal income tax system; medium-term vertical equity targets to be met mainly through more effective deployment of fiscal resources to support education and healthcare.
  - Emphasize simplicity given limited private-sector literacy and limited tax administrator capacity.

### Revenue Administration (detailed recommendations)
- Target large taxpayer compliance.
  - Prioritize risk-based audits and taxpayer segmentation.
  - Expand audit capacity and follow-up procedures to prevent erosion of previous gains.
- Invest in human capital and specialization.
  - Address critical capacity gaps in technical areas such as telecom, banking, and valuation through targeted training and sector-specific audit teams.
- Strengthen customs valuation and border control.
  - Support alignment of reference prices in the 2025 budget with a system to update them regularly.
  - Invest in infrastructure and risk-based inspection systems.

### Institutional and Legal Framework
- Prioritize an integrated review and harmonization of the tax code, investment law, and sectoral regulations to eliminate overlaps and ensure consistency.
- Address legal fragmentation and harmonize tax instruments to improve legal certainty and enforcement.

### Annex I. Estimating Tax Potential — model specification and interpretation
- Model form:
  - 푇푎푥푅푒푣푖푡 = 훽0 + 훽1푋푖푡 + 푣푖푡 − 푢푖푡
- Definitions:
  - 푇푎푥푅푒푣푖푡 is the tax revenue collected by country 푖 in year 푡.
  - 푋푖푡 represents explanatory variables affecting tax revenue, such as GDP, trade openness, or other indicators. Some explanatory variables have been logged.
  - 푣푖푡 is a two-sided symmetric error term representing statistical noise (e.g., measurement errors, external shocks). It is assumed to be normally distributed.
  - 푢푖푡 is the one-sided non-negative tax inefficiency, capturing deviations from the frontier (maximum potential revenue) due to factors like tax evasion, exemptions, and administrative weaknesses. It follows a half-normal distribution.
- Methodology notes:
  - True Random Effects are used, assuming time-invariant heterogeneity is uncorrelated with explanatory variables.
  - The inefficiency term 푢푖푡 provides insights into the gap between actual and potential tax revenue performance.
  - The tax effort is computed as:
    - 푇푎푥 푒푓푓표푟푡 = 푒푥푝^(−푢푖)
    - Values close to 1 indicate higher efficiency.

### Annex I. Table 1. Guinea-Bissau: Stochastic Frontier Regression Estimates — key coefficient estimates and statistics
- GDP per capita, PPP (constant $): 5.74***
  - (0.86)
- GDP per capita, PPP (const $, squared): -0.22***
  - (0.05)
- GDP growth (annual %): -0.06***
  - (0.02)
- Trade (% GDP): 0.02***
  - (0.002)
- Government Spending: 0.15***
  - (0.01)
- Inflation, consumer prices (annual %): -0.28
  - (0.1)
- Constant: -16.50***
  - (3.6)
- Observations: 3541
- Number of groups: 161
- U-sigma: 0.1602
- V-sigma: 6.8164
- Note: Standard errors in parentheses: *** p<0.01, ** p<0.05, * p<0.1.

*Source: IMF staff analysis contained in “Domestic Revenue Mobilization in Guinea-Bissau,” sipea2025109.*

### 1. Tax Revenue in GNB and Peers ........................................................................................

### Tax Revenue in GNB and Peers

### Summary findings
- Domestic Revenue Mobilization (DRM) is an urgent strategic priority for Guinea-Bissau to reduce public debt, fund development needs, and reduce reliance on external grants.
- Tax revenue has stagnated at around 8 percent of GDP in recent years, well below the WAEMU convergence threshold of 20 percent.
- A stochastic frontier model estimates Guinea-Bissau’s untapped tax potential at 2.7 percent of GDP in 2023.
- The widening tax gap is driven primarily by policy and administration inefficiency (compliance gaps, uncoordinated exemptions, outdated legal frameworks), not just macroeconomic fundamentals.

### Background and structural constraints
- Key structural and institutional barriers:
  - Dominance of the informal sector with limited taxpayer registration and low voluntary compliance.
  - Declining importance of customs revenue due to regional trade liberalization, smuggling, and pervasive exemptions.
  - Outdated IT infrastructure (especially in customs), fragmented databases across Ministry of Finance departments, and insufficient enforcement mechanisms.
- Economic concentration and vulnerability:
  - Heavy dependence on a single commodity: cashew exports are a large share of domestic revenue, exposing fiscal performance to international prices, weather variability, and logistic problems.
  - Imports remain another dominant source of revenue, making collection vulnerable to exchange rate and terms-of-trade shocks.
  - Revenue concentration in a small pool of large taxpayers creates concentration risks.

### Tax policy parameters (statutory rates and contributions)
- VAT: 19 percent (consistent with regional floor and modal rate).
- CIT (corporate income tax, locally “industrial contribution”): 25 percent (within WAEMU band of 25–30 percent).
- PIT (personal income tax): 20 percent (appears low relative to peers but excludes large mandatory social contributions):
  - Social security contributions: 14 percent from employers and 8 percent from employees.
  - In-work accident insurance: 2–10 percent (depending on sector).
- Implication: statutory rates broadly align with WAEMU norms; revenue shortfalls are more related to enforcement, informality, and base erosion than headline rates.

### Tax composition and performance
- Tax structure concentrated in a few sources: cashew exports, imports, and a small pool of large taxpayers.
- Inland taxes (income and sales) constitute a much lower share of total tax revenue compared with WAEMU peers; Guinea-Bissau remains concentrated in trade-related taxation.
- VAT performance:
  - Major compliance and enforcement gaps, even among largest firms.
  - Substantial untapped potential across large and small enterprises not contributing meaningfully to VAT.
  - Recommended administrative actions: risk-based audits, invoice matching, credible enforcement mechanisms.
- CIT performance:
  - Signs of diversification with rising contributions from smaller businesses and a more distributed taxpayer base.
  - Administrative weaknesses persist: limited enforcement capacity and uneven compliance across taxpayer segments.
  - Many businesses underreport; formal registration has improved but declarations/payments lag.
  - Required measures: reduce taxpayer segmentation, strengthen filing enforcement, formalize non-compliant high-turnover entities.

### Empirical estimates of tax potential and effort
- Stochastic frontier model:
  - Distinguishes revenue shortfalls due to external shocks from those due to tax policy/administration weaknesses.
  - Estimates GNB untapped tax potential at 2.7 percent of GDP in 2023.
  - The gap between potential and actual revenue was lower than SSA or WAEMU averages in 2023, reflecting binding structural constraints considered by the model, not superior efficiency.
- Tax effort:
  - Absence of sustained improvement in tax effort over the past decade.
  - Tax effort has been declining since 2021, despite reforms under the SMP and ECF supported program.
  - Offset policy actions undermined gains: example—legal framework for modern VAT finalized in 2022 but implementation progressed slowly due to inflation concerns; 2023 tax cuts on fuels and rice reduced space to implement revenue-enhancing measures in 2024.
- Box 1 (compliance and policy drivers):
  - In 2024, nearly half of the 150 largest taxpayers reported zero VAT payments; an additional 20 declared less than CFAF 1 million.
  - For industrial contributions (CIT): 76 out of the top 150 taxpayers made no payments in 2024; 12 paid less than CFAF 1 million.
  - Banking sector benefits from multiple preferential treatments at regional level, producing widely varying effective tax rates across banks of similar size/profitability.

### Administrative and legal challenges
- Fragmented, outdated legal framework with inconsistencies across instruments, ad hoc exemptions, and legacy legislation that has not kept pace with technological and market changes.
- Weak follow-up mechanisms and limited real-time taxpayer monitoring.
- Outdated IT and fragmented taxpayer databases impede coordination between inland and customs administrations.

### Policy implications and recommended measures (drawn from analysis)
- Strengthen enforcement and compliance, targeting both large taxpayers and broader corporate landscape:
  - Expand audit coverage and risk-based compliance management.
  - Implement invoice matching and credible enforcement mechanisms to align declared liabilities with economic activity.
  - Scale up real-time taxpayer monitoring—especially for high-turnover firms.
- Rationalize and review tax exemptions:
  - Comprehensive review of exemptions’ legal basis and fiscal cost, with priority attention to sectors like banking where preferential treatments lower effective tax burdens.
- Institutional development and sustained reform sequencing:
  - Continue implementation of VAT and digital filing/payment systems (“Kontaktu”) while building inland revenue capacity to realize their potential.
  - Prioritize consistent legal frameworks to reduce gaps and overlaps and improve enforcement certainty.
- Address informality and broaden the tax base through formalization efforts and targeted measures to bring small but economically significant firms into the tax net.

*Source: IMF staff analysis contained in “Domestic Revenue Mobilization in Guinea-Bissau,” sipea2025109.*

### 14.      Administrative capacity constraints also weigh heavily on revenue performance. The

### 14.      Administrative capacity constraints also weigh heavily on revenue performance.

### Administrative capacity constraints
- Tax and customs administrations face acute shortages in specialized personnel, particularly in areas requiring technical or sector-specific knowledge.
- Inspectors often lack adequate training for sectoral audits; example: effective auditing of the telecom sector demands contextual understanding of pricing structures, bundled services, and digital platforms.
- Capacity building is urgently needed to equip staff with modern audit, valuation, and enforcement tools.
- Human resource limitations are a binding constraint in field operations and strategic functions such as taxpayer segmentation and risk analysis.

### Operational challenges in tax collection and customs
- Enforcement remains weak and slow, allowing non-compliance to persist with limited consequence.
- Procedural delays enable taxpayers to avoid or defer payments, eroding credibility and efficiency.
- In customs, undervaluation is widespread due to absence of access to reliable, frequently updated market price information.
- Infrastructure gaps at land entry points and insufficient real-time data sharing hinder efforts to combat fraud and leakage.
- Some undervaluation issues have been resolved in 2024, but border controls remain uneven and weak.

### Policy Recommendations — overarching framing
- Policy actions should be anchored in recognition of structural challenges: a narrow tax base, high informality, limited administrative capacity, and legal fragmentation.
- Recent reform momentum—particularly in the 2025 budget—offers a foundation for more sustained progress. The challenge is to ensure coherence, consistency, and follow-through to reduce inefficiencies and close the tax gap.

### Box 2. Tax Policy and Administration Measures in 2024 and 2025 — I. Tax Policy Measures
- Removal of large-scale exemptions
  - The 2025 budget eliminates exemptions previously granted to the cement factory—the single largest beneficiary—responsible for approximately 50 percent of all private investment exemptions.
- Implementation of VAT
  - The VAT implementation was officially launched in January 2025.
  - The 2025 budget includes VAT collection on fuel sales at the point of sale, representing the largest revenue gain among planned measures.
- Adjustment of customs reference prices
  - Tax reference prices on alcoholic beverages, used vehicles, and cement have been aligned with current market prices to improve customs valuation accuracy.

### Box 2. Tax Policy and Administration Measures in 2024 and 2025 — II. Revenue Administration Measures
- Border infrastructure upgrades
  - The Safim border post is being paved to strengthen customs control; completion is expected by in the second half of 2025.
- Enhanced audit and enforcement
  - Inland revenue administration has intensified audit efforts, resulting in the recovery of CFAF 1.3 billion in tax arrears (as of the seventh program review).

### Tax Policy (detailed recommendations)
- Accelerate VAT implementation.
  - Require timely issuance of regulations, application of correct rates, and robust compliance monitoring—particularly in sectors where the largest revenue gains are expected.
- Rationalize tax exemptions.
  - Proceed with the planned July 2025 exemption phase-out as scheduled.
  - Conduct a full legal review and stock-taking of exemptions, especially for inland taxes where no systemic database exists, to identify inconsistencies and reveal ‘fake’ exemptions.
  - Institutionalize a transparent registry of all exemptions and regular assessments of their fiscal cost and policy relevance.
- Modernize tax laws in key sectors.
  - Update legacy legislation, especially Guinea-Bissau’s outdated and fragmented approach to the taxation of income.
  - Prioritize horizontal equity and simplification.
  - Build income redistribution into the personal income tax system; medium-term vertical equity targets to be met mainly through more effective deployment of fiscal resources to support education and healthcare.
  - Emphasize simplicity given limited private-sector literacy and limited tax administrator capacity.

### Revenue Administration (detailed recommendations)
- Target large taxpayer compliance.
  - Prioritize risk-based audits and taxpayer segmentation.
  - Expand audit capacity and follow-up procedures to prevent erosion of previous gains.
- Invest in human capital and specialization.
  - Address critical capacity gaps in technical areas such as telecom, banking, and valuation through targeted training and sector-specific audit teams.
- Strengthen customs valuation and border control.
  - Support alignment of reference prices in the 2025 budget with a system to update them regularly.
  - Invest in infrastructure and risk-based inspection systems.

### Institutional and Legal Framework
- Prioritize an integrated review and harmonization of the tax code, investment law, and sectoral regulations to eliminate overlaps and ensure consistency.
- Address legal fragmentation and harmonize tax instruments to improve legal certainty and enforcement.

### Annex I. Estimating Tax Potential — model specification and interpretation
- The stochastic frontier model for tax revenue takes the form:
  - 푇푎푥푅푒푣푖푡 = 훽0 + 훽1푋푖푡 + 푣푖푡 − 푢푖푡
- Where:
  - 푇푎푥푅푒푣푖푡 is the tax revenue collected by country 푖 in year 푡.
  - 푋푖푡 represents explanatory variables affecting tax revenue, such as GDP, trade openness, or other indicators. Some explanatory variables have been logged.
  - 푣푖푡 is a two-sided symmetric error term representing statistical noise (e.g., measurement errors, external shocks). It is assumed to be normally distributed.
  - 푢푖푡 is the one-sided non-negative tax inefficiency, capturing deviations from the frontier (maximum potential revenue) due to factors like tax evasion, exemptions, and administrative weaknesses. It follows a half-normal distribution.
- True Random Effects are used, assuming time-invariant heterogeneity is uncorrelated with explanatory variables.
- The inefficiency term 푢푖푡 provides insights into the gap between actual and potential tax revenue performance.
- The tax effort is computed as:
  - 푇푎푥 푒푓푓표푟푡 = 푒푥푝^(−푢푖)
  - Values close to 1 indicate higher efficiency.

### Annex I. Table 1. Guinea-Bissau: Stochastic Frontier Regression Estimates — key coefficient estimates and statistics
- GDP per capita, PPP (constant $): 5.74***
  - (0.86)
- GDP per capita, PPP (const $, squared): -0.22***
  - (0.05)
- GDP growth (annual %): -0.06***
  - (0.02)
- Trade (% GDP): 0.02***
  - (0.002)
- Government Spending: 0.15***
  - (0.01)
- Inflation, consumer prices (annual %): -0.28
  - (0.1)
- Constant: -16.50***
  - (3.6)
- Observations: 3541
- Number of groups: 161
- U-sigma: 0.1602
- V-sigma: 6.8164
- Note: Standard errors in parentheses: *** p<0.01, ** p<0.05, * p<0.1.

*International Monetary Fund, Guinea-Bissau: Selected Issues Paper (excerpts).*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025109.pdf_