The customs revenue collected at ports are the highest single source of government funding in Somalia, but this isn’t enough to fund its operations and development agenda. What options does the government have to introduce tax reforms that citizens will see as fair and just?
The Federal Government of Somalia is yet to establish taxation systems in all sectors to boost its revenues. As a result, the country is still heavily dependent on aid and remittances from the diaspora.
World Bank reports indicate that domestic revenue in Somalia accounts for only half the government budget. As of 2014, 76 per cent of this revenue was derived from taxes on international trade.
Hezron Gikang’a, a financial expert and the Diplomatic Council’s Permanent Representative in Africa, says that Somalia, like several other post-conflict states, faces a number of challenges in expanding its tax base, diversifying the same and increasing revenues.
“This is not a unique situation, neither is it insurmountable. But given the two decades of protracted conflict that has wracked this Horn of Africa nation and the atrophy of most formal structures of governance, it is difficult to administer a tax reform policy that increases revenues and is seen as fair and just by the taxpayers,” Mr Gikang’a observes. Yet the government cannot escape a structured tax system to raise the necessary revenues to fund its operations and assist in the redistribution of wealth and income.
There are success stories to pick up lessons from. Venezuela is a comparable case. The government under Hugo Chavez (2002 to 2013) introduced and enforced tax policies that transformed the South American country out of poverty. The country introduced free public education and low-cost housing, and improved its infrastructure. Investors got attracted.
The success was nonetheless made possible through taxation policies that were easy to enforce and thought to be fair to the citizens.
Tax is essentially a politically negotiated process. If the government is seen to be legitimate, and has the means to enforce compliance, or has punitive measures for non-compliance, then citizens will comply. That means that the political leadership and public administration administering the tax must be legitimate, or at least be seen to be,” Hezron Gikang’a, a financial expert and the Diplomatic Council’s Permanent Representative in Africa
Mr Gikang’a notes that Somalia’s current government has the onerous task of re-establishing a formal and central government’s legitimacy across its territories, through which a tax policy, collection and use of the same can be administered.
“In the current reconstruction phase, this ability to exert unmitigated control either through civil or democratic means seems difficult in some of the regions where it does not have complete control of civil, trade and private affairs. Either there are other competing centres of power or alternative/traditional systems and structures have evolved and replaced the formal public administration system as we know it,” says the financial expert.
“Tax is essentially a politically negotiated process. If the government is seen to be legitimate, and has the means to enforce compliance, or has punitive measures for non-compliance, then citizens will comply. That means that the political leadership and public administration administering the tax must be legitimate, or at least be seen to be,” he explains.
Tax evasion is a matter of concern globally. Last year, the African Union (AU) reported that Africa lost over US$50 billion annually through multi-national companies and businesses engaging in swindling money to avoid paying tax.
Trade mispricing, payments between parent companies and their subsidiaries, and profit-shifting mechanisms designed to hide revenues are all common practices by companies hoping to maximise profits, the AU report stated.
In Somalia, citizens and some sections of those in power are beginning to raise concern over lost revenues, something that could keep the government in check to reduce the loss.
Presently, the government collects tax from airport and sea ports. The customs revenue collected at ports are the highest single source of government funding. Experts suggest that the government should consider introducing taxes on money remittances and real estate transactions, and as proposed by the World Bank, create national agencies to collect some tax or all taxes on behalf of the sub-national governments as done in Uganda, Canada and Germany. The approach, according to the international financial institution, has proved useful where two levels of government share a specific tax base.
Mr Gikang’a advises that first and foremost, “the prerequisite for reforming the tax policy and base lies in re-establishing a professional public service, re-establishing the government’s legitimacy and having the political leadership gain the support of the diverse constituencies before it can embark on rebuilding the economy, restoring faith in its currency, property laws and justice systems”.
These, he argues, underpin the success of sustaining the peace and security, restoring service delivery and rebuilding much needed infrastructure.
“Citizens will not accept to be taxed if they cannot see where their money goes and who takes their hard-earned money and for what purposes,” Mr Gikang’a stresses.