1. Equality: Taxes should be levied according to ability to pay.
2. Efficiency: The cost of administering the tax should be as low as possible, so that a large part of what is taken from the taxpayer is not used up in collecting the tax.
3. Certainty: The amount of tax that is due, the method of payment, and the deadline for payment should be clear, so that each taxpayer can be certain about his or her obligations.
4. Convenience: The time and manner of payment of a tax should be as convenient as possible for the taxpayer

In Somaliland taxes fail to conform to any of these criteria. Firstly, Somaliland has one of the most unfair tax systems in Africa - a regressive system that causes the poor to pay proportionately higher taxes. The commodities consumed by the poor attract higher taxes and are most easily taxed. As a result those who spend over 90% of their income on food have the highest tax burden. The luxury goods and services used by wealthy families attract very little or no taxes. A destitute family in Sheikh Noor shanty town (Hargeisa) with an annual income of $140 will typically have a tax burden of $30 - a net contribution of 73 days’ income to government coffers.

Secondly, we have a tax structure, which is inefficient and expensive to administer. It is estimated that around 30 cents of every tax dollar collected by customs goes in administration costs. The recently established Inland Revenue wastes more resources than it collects. The costs of tax collection include administrative costs and the costs taxpayers incur in complying with, legally avoiding, or illegally evading taxes.

Thirdly, taxes are imposed arbitrarily. Because rules have been deliberately made complex and difficult to understand, it is up to the tax collectors to decide who pays what and how much. The main purpose of levying taxes in arbitrary and non-accountable ways is to provide income for the collectors and corrupt officials. The current Laws of Direct Taxation, which were originally translated from Italian, are so confusing that even civil servants at the Inland Revenue rarely consult it. They simply do not understand what it is all about. None of the taxation documents are written in Somali or are available to the tax paying public.

Fourthly, corrupt tax officials choose a time and manner of payment that forces taxpayers to bribe them. Tax collectors carry out surprise visits to businesses and demand on-the-spot payments. Tax police also raid businesses and imprison owners at the request of junior clerks.

Not only is the tax structure too complex, unfair, inefficient and inequitable, but the amount of revenue it generates is miniscule. The current tax revenue of about $20 million per annum, which is roughly two per cent of GDP, is the lowest in Africa. Eritrea, which has a similar economic structure and roughly the same GDP, raised more than this in its first year of independence. Its tax revenue now is ten times that of Somaliland.

More worrying for the government is the fact that this tiny revenue is in decline. The last Minister of Finance recently claimed that he increased government revenue from 84 to 101 billion shillings in the last two years. But adjusting for inflation, the revenue actually fell in real terms from $15 to $13 million. Unless the government takes drastic action this trend is set to continue. What is urgently required is a major overhaul of the tax system.

Key Elements of Structuring

1. Simplify the Tax System: The system should be easy and simple to administer. One of the lessons learned from experience is the importance of a simplified tax system with few taxes, low and uniform rates, limited number of rates for each tax, a broad base and limited exemptions. Simplified tax forms and procedures encourage compliance and are inexpensive to administer.
2. Broaden the Tax Base: The government should seriously consider introducing value added tax. VAT is generally tax-neutral in terms of economic efficiency and can substantially increase tax revenue. This will be particularly effective in the booming services sector such as telecommunications, which does not contribute much to overall taxes. A standard rate of 10% on telephone bills can generate large revenue but will not affect telephone companies or small telephone users. An organization or individual who receives a monthly telephone bill of $1,000 can easily afford an additional $100 of tax. Those who make one-minute international calls to their relatives abroad will not notice this.
3. New Income Tax Laws: The current law on direct taxation should be replaced urgently. This absurd law requires that anyone who earns more than 72,000 shillings ($10) per annum should file a return. It sets the income tax rate for those who earn 6,000 shillings (less than a dollar) a day at 25%. Too bad if they are below the poverty line!
4. Reduce Entry Regulations for Businesses: In an economy dominated by informal sector, it is in the government’s interest to encourage as many businesses as possible to register. The current regulatory framework makes it difficult for businesses to formally register. A starting point would be to abolish current regulations, which require all importers to buy expensive Ministry of Commerce licenses. It currently costs at least $1,000 to purchase such licenses after completing a long bureaucratic procedure involving certificates from Inland Revenue, $700 deposit at a government bank account, criminal background checks at the CID, compulsory Chamber of Commerce membership, proof of ownership of fixed assets and so on. The transaction costs involved in the process are beyond the reach of the hundreds of small traders who regularly order goods from Dubai.
5. Reduce Trade Taxes: Heavy reliance on trade taxes undermines the competitiveness of our international trade. Effective import taxes as high as 30% are unsustainable given the absence of import taxes in the neighboring Puntland. It is also important to consider exempting staple food items mainly consumed by the poor.
6. Abolish Multiple Exchange Rates: The use of artificially set exchange rates at customs further complicates already complex tax codes. For example, the value of imports are first converted into SL shilling using one of the "official" exchange rates, which is usually below 50% of the market exchange rate. When the nominal tariff rate is 50%, the effective rate will be in the region of 20-30%. This has no purpose other than to confuse taxpayers and encourage corruption. A 20% tax rate should mean 20% and not 50%.
7. Consult Taxpayers: Businesses need to be fully consulted and given sufficient time before tax changes are introduced. Last year’s failed experiment aimed at increasing trade taxes by 280% illustrated the cost of poor decision making. The Minister of Finance was advised in one afternoon that by changing official exchanging rates, they could at a stroke increase trade tax rates by 280%. In the following day, the cabinet unanimously approved the proposed idea, which they saw as another form of disguised tax. Two weeks later embarrassed ministers were forced to abandon the tax rate changes after the country’s entire international trade activities stopped for fourteen days of confusion.
8. Improve Data Collection: Without reliable information, policy makers cannot make informed decisions. With the complete absence of data of any sort, setting tax rates is like shooting in the dark. It is scandalous that ten years after the Ministry of Finance was established we do not even have national accounts of any sort.
9. Make the System More Transparent and Accountable: Both revenue collection and public expenditure need to be more transparent and accountable. No taxation without representation.

Dr Ismail Ibrahim Ahmed
Btecsomaliland@aol.com
London, UK

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