SOMALILAND TAXATION SYSTEM: A FORCE FOR ECONOMIC INEQUALITY OR EQUALITY?
Written by Mohammed Dasher Ahmed
Governments use the revenue raised from taxation to invest in development, fight poverty and provide public services in social and physical infrastructures needed to improve long term growth.
Somaliland collects less then 7% of its GDP in tax revenues according to World Bank, which is half of Sub Saharan African average and far below the minimum level considered by the UN as necessary to achieve the Sustainable Development Goals. Therefore Somaliland needs to increase its tax base and make its tax system progressive taxation system rather then regressive tax system. Similarly Somaliland faces widening inequality according to the World Bank recent study of inequality in the country, Somaliland’s Gina coefficinient, a measure of the income gap is 45.7 in rural areas in comparison to 27 in Ethiopia and 42.6 in urban centers against 37 in the neighboring country. The index ranges from 0, which represents perfect equality, to 100, which implies complete inequality.
According to Economist Thomas Piketty, who specialized in the study of economic inequality, one of the causes of economic inequality is the kind of tax system a country adopts; regressive taxation versus progressive taxation.Progresssive tax system require those with higher incomes to pay a higher percentage of their income, where in regressive tax system those with lower incomes pay a higher percentage of their incomes on taxes.
At the present time , as you can observe at the chart below ,46% of Somaliland tax revenue is generated from international trade and transactions,16% from of Sales tax,9% from income and corporate tax,8% from lease and royalties tax,7% from income of licenses and taxes, the remaining is generated from various small sources such as penalties, from other government units, property tax etc.This clearly expounds the fact that the tax burden falls on small traders, where the sectors such as the service industry where profit and wealth has concentrated pays the smallest share of tax as evidenced by the fact that income and corporate tax is only 9% of the total tax revenue.In addition, Somaliland charges companies 10% of corporate tax, in comparison with 26% in Ethiopia and 28% in Kenya. That means Ministry of finance collects tax from the poor and does not sufficiently tax the profitable companies in the service industry. This is one of the main causes of economic inequality in Somaliland. According to UNCTAD, taxation should be focused on higher incomes and higher value urban properties as well as luxury goods, financial transactions and import tariffs. It is important that the tax system is fair and plausible: people with no wealth or outside the formal sector cannot be taxed.
There are other causes of economic inequality apart from the regressive taxation system currently prevalent in Somaliland such as: Globalization (providing investment opportunities for already-wealthy people), extra legal ownership of property, regressive taxation, automation, ethnic discrimination/tribalism, gender discrimination, nepotism (awarding of contracts without open and competitive tendering) and land speculation etc. All those other factors which cause economic inequality are all present in Somaliland.
To assuage the problem of economic inequality in the country, the wealth and the profitable businesses should be taxed. In addition tax reform and procurement reforms should be implemented. Currently the Ministry of finance failed to explain the benefits of tax reform and procurement reform bills to the House of Representatives, whom have recently rebuffed the procurement reform bill. The whole ministry of finance apparatus including the Minister, who is busy on other things, failed to explain to the house the benefits of the procurement bill. In fact, according to OECD data, TAX/GDP ratios in sub Saharan countries where tax administration reforms are being implemented now exceed 16.8% of GDP, which is the average for fragile and low income countries.
In conclusion, Somaliland tax system is a force for economic inequality, which needs an urgent review.
By: Mohammed Dahir Ahmed
Senior Financial Consultant and Independent Political Analyst.