Tax arbitration system goes live in Cape Verde

When launching their tax reform process, most developing countries tend to leave the tax justice system for last. There are good reasons for this.

On the one hand, it is necessary to decide the specific taxes to be included in the tax system to have a good idea of how to resolve disputes between the tax administration and taxpayers.

On the other hand, in many developing countries, litigation in the courts is limited and only tends to grow as the economy modernises and the administration becomes more efficient. This is why reforming the tax dispute resolution system tends to be seen as the last piece of the puzzle.

Cape Verde is no exception to the rule. The small nation off West Africa, with an economy centred on tourism and the ambition to become a regional services hub, started its tax reform process more than 10 years ago.

Over that period, Cape Verde introduced VAT and modern personal and corporate income taxes, thus equipping itself with a modern tax system in line with international best practice. At the same time, the economy has been growing and the business landscape has become more sophisticated, making it clear that preventing and resolving disputes between the administration and taxpayers is not a negligible factor for competitiveness on an international scale.

And that was how Cape Verde came to the idea of adopting a tax arbitration mechanism.

How it works

The Cape Verde tax arbitration system was first launched in 2016 and is just now going live.

The system allows taxpayers freely to choose between referring their tax disputes to state courts or to arbitration tribunals. It allows referring to arbitration any dispute involving the assessment of taxes, fees or contributions, which means that arbitration has a broad scope encompassing VAT, taxes on income or wealth, and the different tax incentive schemes existing in the country.

The system further caps disputes that can be referred to arbitration at CVE 10 million (approximately $107,123) during its first five years of existence and after that, the cap is CVE 20 million. Considering the country’s reality, these caps will allow referring to arbitration a substantial portion of the disputes currently referred to State courts and help keep the pressure off the court system.

Arbitration tribunals operate in a Tax Arbitration Centre specifically set up to that end and staffed with purpose-trained arbitrators. If and when taxpayers decide to refer their disputes to arbitration, they are free to appoint an arbitrator of their choosing. The same right is afforded to the Administration. Both party-appointed arbitrators will then choose the presiding arbitrator. Referring disputes to a single arbitrator is not an option, which brings greater security to the system and gives confidence to the parties. The decisions of the arbitral tribunal are final and binding, and not subject to appeal except in very limited cases of unconstitutionality or contradiction with decisions of the judicial courts. Arbitration proceedings are expected not to take more than six months to produce a final decision, which is significantly less than the time spent by judicial courts to achieve the same outcome.

Why it matters

As designed, Cape Verde’s newly minted arbitration system is a major stepping-stone to boost the country's competitiveness.

Companies operating in Cape Verde and ordinary taxpayers know that from now on any conflict they have with the tax administration can be resolved in a matter of months instead of years. There are few jurisdictions where this is possible.

Tax arbitration is certainly a safety factor when it comes to diversifying investment in an economy that has until now been hugely centred and dependent on tourism. Cape Verde cannot become the regional services hub it aspires to be without a modern and efficient tax dispute resolution system.

Naturally, there are difficulties in implementing such an arbitration system. Among them is the difficulty in ensuring the training of qualified arbitrators, in a country where expertise in the tax area is still limited, or the difficulty in preparing the administration to deal with a dispute resolution mechanism with a much faster response capacity than the state courts, which requires greater preparation and the change of routines crystallised long ago.

But these challenges are no different to those posed by any major tax system reform and Cape Verde is not a country known for shying away from challenges. It is still too early to anticipate just how successful the Cape Verdean tax arbitration system will be. What is clear, however, is that this initiative shows a lot of ambition and a clear desire to make a difference.

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