Somaliland:Historical Overview of Taxation and Recent Tax Policy Challenges

By Yusuf Soraan

Somaliland tax system was first introduced by the British Protectorate administration in the early 20^th century, the people of Somaliland Protectorate considered taxation an unjust imposition by the colonizing or Protectorate power and thus it is unclean and profane. In addition to that the business and trade activities were very limited; At that time the British Protectorate administration faced a constraint in taxing, and its budget was required subsidies from the British government, because the amount of revenue collected was not applicable to cover the expenditures of the administration. After 76 years of harmonious association with Great Britain, during that period the people of Somaliland fought alongside Great Britain in the two World Wars, thus Somaliland achieved a negotiated Independence from Great Britain on the 26th June 1960. After that Somaliland neighboring country Somalia became independent from Italy one week after Somaliland, following which the two independent Somali ‘States’ unite to become the Republic of Somalia, from 1960, to 1991, to be an illegal partnership only. In short, Somaliland and Somalia were two countries whose many differences far outnumbered the similarities that had made them want to unite in the first place. Because of these differences, conflict between Somaliland and Somalia was inevitable and became apparent very soon after union. It was aggravated further when the capital was moved to Mogadishu, taking with it the economy and everything else that mattered to the people of Somaliland. Furthermore the extent of public financial management legal framework comprise the Financial and Accounting procedures of the State, Regulations for the Accounts of the State, and Stores Regulations; which regulate public financial transactions. These regulations were promulgated in 1961 with some amendments made in 1971. There are also, custom regulations (1965) that form the basis for the assessment of custom duties.

The political crisis in the 1980s sparked a major armed conflict in the former protectorate (Somaliland British Protectorate and Somalia Italian Protectorate).The conflict between the people of Somaliland and the government of Somalia worsened and culminated into an all out war. By 1988, the government of Somalia resorted to the aerial bombardment of the major cities of Somaliland, and indiscriminately killed the inhabitants, destroyed civilian dwellings, schools, hospitals, and mosques. The report of the American Human Rights Watch described the brutality they witnessed as ‘A Government at war with its own people’. Following the collapse of Somalia’s central authority in 1991, the Republic of Somaliland claimed back again its independence and formed its own government and has achieved a remarkable degree of peace and stability, this allowed the country and its population to recover from the civil war, but predominantly overwhelmed by poor tax system, which is expanding rapidly.

Taxes are essential for the financing of Government activities, but at the same time, they should be set and administered to be as growth enabling as possible. As would be expected, no formal tax policy exists in the absence of a formal government apparatus such as treasury and central bank. However, Somaliland’s do adhere to an informal patchwork of duty and tax collection. The duty and tax provide a large portion of the income enjoyed by Somaliland government. There are mainly two types of business taxes in Somaliland. The two are duty levied on all import and export goods at the ports and income tax charged on business sales at a rate of 5%. For instance, the duties levied at the port of Berbera generate an estimated 85% of government revenue. The latter is very similar to sale tax which is levied on sale turnover of the business at rate of 5%. Consumers also pay 5% on consumption of goods and services, which is equivalent to Value Added Tax (VAT), paid by the sellers instead of the buyers (consumers) who are the collecting agents for the government. Employees pay tax on their salaries commonly known as the payroll tax which is equivalent personal income tax (PAYE- pay as you earn) at rate of 6%. The businesses pay property tax at rate of 8% of their total property investment. Ministry of Finance collected the taxes. The formulation and administration of tax structure is work of the Ministry of finance in collaboration with the Central Bank which only acts as Treasury for the government. Usually, the Ministry officials visit the businesses in quest for collecting the taxes. The taxes are self assessment and declaratory. No rigorous record/book keeping is required for the purpose of ascertaining the taxes, rather entrepreneurs are required to keep only sales records. There are other levies and user charges levied to business by sector specific government ministries and other agencies. These are mainly charged on provision of government services such as issuance of registration, licenses and permits, and provision government social services. It would appear that there has been little co-ordination between the various authorities in the way these charges and fees have been levied and reported. Although these taxes provide revenue to the government, it is not clear whether they are efficient in terms of administration and collections costs. The informal sector and micro and small enterprises account for the majority of businesses in the Somaliland, making the tax base small and unreliable. Majority of these businesses are not captured into the tax net and the tax compliance cost for those in the net is high. Many operators keep little or no information and data on their operations making it difficult to correctly assess tax liabilities, implying there is unfair competition among the enterprises. This contributes to the susceptibility of non compliance by the taxpayers. The fact that administration of all taxes has not been vested in one/single agent has diluted functional revenue collection organizational structure. This explains the switch in emphasis from general taxes to specific taxes targeted to specific activities targeted to the same group of taxpayers. This is because they are relatively easy and inexpensive to administer. Consequently, there is inordinate focus revenue collection by the government agencies rather than investment promotion and facilitation. The study also revealed that the level of service delivery does not meet the citizen’s expectation since the government’s spending on basic services is insufficient. This results in the majority of the citizens avoiding tax payment.

Poorly designed or poor functions of tax system create a variety of problems in Somaliland some of them include Fiscal imbalance and insufficient revenue, distortions in resource allocation that can reduce economic welfare and growth, Inadequate provision of equity, poor administration of taxes thus Since taxes are involuntary payments to government taxpayers have a strong incentive to minimize their tax liabilities either through avoidance or through evasion. Both evasion and avoidance seriously compromise the administration of tax system, producing a system that departs significantly in its operation from the one that is described in the tax legislation. An important contributing factor to weak tax administration in Somaliland is the excessive complexity of tax laws, furthermore there are a number of causes for tax evasion such as Inadequacy of powers vested in the hands of personnel to gather facts to determine the tax liability of taxpayer, Shortage of experienced tax personnel, Absence of proper punishment for those who evade tax. With the aim of facilitating the overall development of the economy, the Government of Somaliland must undertake a comprehensive tax reform program that measures the intended to encourage trade, investment & development and thereby to alleviate poverty because there are difficult signals indicating need to renovate tax system. The important among them are:

 1. Complex and outdated tax laws: The tax law, which was put into practice for more than 53 years could not serve the current economic set up and could not go with globalization and automation. Complexity in tax laws together with high rates and many tax brackets, and narrow tax bases could not help the system collect the due revenue, for instance in this year 2014 Somaliland government impose vehicles high tax rates with few tax brackets.    

2. Weak Tax administration: Tax administration was characterized by weak assessment, collection, follow up, and enforcement due to lack of skilled manpower, proper work procedures. 

3) Failure to generate adequate revenue to meet government expenditure: Government could not collect the tax revenue due in past years. This resulted in fiscal imbalance in the economy.

Finally we recommended Ministry of finance to take substantive measures in reforming the country’s old system of taxation, because reducing poverty requires economic growth, a large volume of investment and, not least, more jobs in poor countries. Effective and sustainable development also depends on provision of a wide range of welfare services such as education, health care and infrastructure. These cost money, and development aid will never be able to fully meet this need. Better tax systems will provide poor countries with revenues on a permanent basis that are large enough to finance a welfare society. An effective tax system provides a more equitable distribution of wealth and power, which in turn strengthens economic growth over the long term. Thus the programme Tax for Development can be used to drive development in a posi­tive direction.

 Email: sooran07@hotmail.com

 Tell: 063-4486470

Yusuf Soraan

MBA of Tax and Custom Administrator  

Graduate Institute of Tax and Custom Administration in Ethiopian Civil Service University

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