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The taxation hurdles and opportunity for Somalia

The government needs to begin investing in digital monitoring of trade volumes and various income generations in Somalia which largely go untaxed. Revenue collection has been historically low due to poor techniques employed to collect it. Many industries are not well engaged in revenue mobilization including lucrative businesses such as oil and telecommunications industry.

In 2012, Federal Government of Somalia only mobilized $30 million in domestic revenue, equivalent to 0.9 per cent of Gross Domestic Product (GDP) and $5 million in external assistance to the budget. Revenues and grants rose from 1 per cent of GDP in 2012 to 3.7 per cent in 2014 and were projected to reach $199 million in 2015, up from $145.3 million in 2014 according to the World Bank estimates.

However, domestic revenue collection and grants underperformed in 2014, particularly indirect and other taxes. Reliance on taxation at the points of entry with the inland trading largely remaining a free market for all will not be beneficial to the government which is badly in need of revenues for reforms and reconstruction.

The situation has hardly changed, the domestic revenues (taxes plus fees) as a share of GDP remains very low, at just 2.7 percent of GDP in 2016, making it difficult to provide services.

“Revenue growth in 2016 was flat, reversing the growth in earlier years. Past forecasts were unrealistically high (as the differences between budgeted and actual revenues), a problem that led to ad hoc cash rationing,”

World Bank wrote in its latest report about Somalia.

The same report however notes that economic growth remains steady, showing a sign that there are activities generating money but the tax is not being realised.

With nominal GDP is estimated to have reached $5.9 billion in 2015, a 5 per cent increase over the 2014 estimate of USD 5.6 billion. The GDP is estimated to have reached USD 6.2 billion in 2016, a nominal growth of 6.2 per cent. This should have been commensurate with tax collection if systems were in place.

In fact, the   World Bank estimates that Somalia is able to raise domestic revenue from around 2 per cent of GDP in 2015 to more than 13 percent of GDP (USD1.1 billion) in 2022 if reforms including increased compliance and enforcement of existing taxes, broadening of the base for taxes already on the books (e.g. wage and corporate income), and higher use of excises and some temporary taxes that would be removed in later phases of the plan when a broader range of tax instruments is available.

The headache for the government however is how to collect money from a trading environment where payment system is largely informal and complicated.

The use of multiple currencies, including airtime as mediums of exchange in addition to the Somali shilling and the U.S. dollar, the currencies of Djibouti, Ethiopia, and Kenya as mediums of exchange in border areas makes the collection very difficult.

The government would find it very hard to declare airtime in its collections and that creates another loophole where what is collected cannot reach its target destination because the collectors have an easy excuse out.

The Central Bank of Somalia must be encouraged to institute serious reforms in the country’s currency regime and formalise exchanges. CBS has begun to engage in currency reform prior to a planned issuance of a limited volume of thousand-shilling notes for circulation in an initial phase to restore the credibility of the domestic currency as a first step toward allowing the CBS to engage in effective monetary policy.

This will be a great step in ensuring the country has a measurable growth and is able to invest in the much-needed infrastructure to stimulate growth.

Apart from the overreliance in import, the fact that exports are not earning in taxation and duties has left Somalia’s current account deficit, at around 15 percent of GDP, remains large.

“The current account deficit is largely driven by imports, estimated at 62 percent of GDP, and larger than exports by a factor of more than four. Reforms in public financial management (including strengthened domestic revenue mobilization), and strengthened governance are needed to raise more resources for development and ensure that the increased resources are used wisely and efficiently wrote in its assessment.

It is estimated that more than 80 per cent of tax revenue comes from trade taxes. These traders would be the best milk cow to feed the yawning budget gaps in Somalia which makes the government lack resources to undertake major programs or investment projects. Indeed, the public investment has so far continued to rely heavily on official development assistance, which focuses on the social sectors and security rather than broad-based investment.

The bigger miss lies in the poor policy, weak administrative capacity, and inadequate coordination of institutions at all levels of governments and between the federal government and its Federal Member States (FMS).

Although the government may have all the weaknesses in collecting revenues, it is one area where investment in technology and human resource if Somalia is to implement the strategy laid-out in the National Development Plan and achieve the state-building, sustained rapid economic growth, and poverty reduction objectives of the National Development Plan 2017-2020.

 Care must also be exercised though to avoid disrupting stat ups by heavily demanding tax from them. Many countries with weak tax collection systems tend to focus on a specific income earning group and shoulder them with the entire country’s taxation while leave the traditionally hard to collect taxes uncollected.

The private sector has been an engine of Somalia’s development in the past two and half decades and hurting them will hurt the economy in the long run.

The FGS should also begin streamlining the tax laws; tackling the problem of the hard-to-tax informal sector of the economy, particularly agriculture and livestock; imposing and collecting income taxes on wages and salaries in both the public, private, increasing tax compliance by large companies; and levying departure fees and other sources of nontax revenue.

 Building capacity to raise revenue through taxes is particularly crucial, because it reduces dependence on aid, helps finance service delivery, strengthens the contract between the state and its citizens, and fortifies intra-society relationships.

The   FGS and federal member state governments must agree on who collects revenue where to boost mobilization efforts and the newly initiated dialogue among Ministers of Finance gives a ray of hope to have the matter resolved and unlock the revenue collection stalemate.

The FGS currently collects all its revenue from the capital city; states collect and retain revenue from territories under their control. The arrangement where the FGS transfers some amount of domestic resources as well as externally financed resources to the states under the World Bank administered Multi Partner Fund while the federal/sub-national level expenditure responsibilities have not been clearly defined limits revenue mobilization.

“Agreement on tax assignment that allows the FGS to collect taxes outside Mogadishu would substantially increase potential revenue economists argue.

This may not be palatable to the territories outside Mogadishu but it is a workable model in tax collection.

 Collecting tax is one thing, ad mistering it is another, the loopholes that leak collected taxes must be sealed and the money collected put to better use beyond the largely recurrent expenditures.

Addressing corruption in tax administration and creating a well-managed, honest professional tax cadre will be very important.

FGS has low capacity of tax administration, the lack of a framework to enable taxpayer’s self-assessment, the presence of many low-yielding “nuisance” taxes, the illicit revenues collected by many local authorities, and double taxation (mainly by local authorities and the FGS). Technology can be of great help in this distinction.

Without any reforms, Somalia will remain in a fiscal trap, while even modest reforms significantly scale up FGS fiscal capacity. 

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