Trade Liberalization and Tax Reforms in Cape Verde

Abstract: When a country liberalizes trade through lowering taxes on imports, it stands before a number of challenges. Recovering lost trade tax revenue is one of them. Cape Verde is one of the countries that are currently negotiating an Economic Partnership Agreement with the EU and studies predict that the tariff reductions resulting from the agreement may have a severe impact on Cape Verde’s government revenue. During the past decade, several tax reforms have been carried out in Cape Verde, including both taxes on international trade as well as domestic taxes. This study analyzes the revenue effects of these reforms and discusses Cape Verde’s prospects of recovering future lost tariff revenue. Further, in an analysis of the effects of the tax reforms on the overall economy, a number of aspects laid out in the theoretical framework are examined in order to determine the tax system’s accordance with recommendations from tax theory for development. The study concludes that total tax revenue has increased as a result of reforms and the tax system has been improved, mainly through simplifications, rate reductions and improved collection efficiency. Taxes on international trade have become relatively less important in total government revenue and given way to domestic consumption taxes. In spite of weaknesses still prevalent in the system, the fact that domestic taxes have proven to be efficient enough to increase at a speed higher than GDP growth presents positive prospects regarding further trade liberalization.