Scek’s Consulting
Aues Scek 23/10/08 1
Capacity Building for Tax Administration, Revenue Collection and Intergovernmental
Fiscal Relations
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
2
Contents Introduction ......................................................................................................................... 3 Current Legal Framework ................................................................................................... 4 Budgetary Process ............................................................................................................... 5
Federal Budget ................................................................................................................ 5 State Budgets .................................................................................................................. 6 District Budgets .............................................................................................................. 7
Revenue Control Procedures............................................................................................... 7 Transitional Federal Government ................................................................................... 7
Puntland .............................................................................................................................. 8 Somaliland .......................................................................................................................... 9
Financial Devolution ....................................................................................................... 9 Revenue Sharing Formula and Transfers ...................................................................... 10
Broad Implications ............................................................................................................ 10 Revenue and Tax Policy ................................................................................................... 11
Fiscal Institutions .............................................................................................................. 13 Revenue and Tax Administration ................................................................................. 14
Fiscal Function of Local Authorities ............................................................................ 16 Fiscal Relations between Local Administrative & State .............................................. 16
The Role of Federal, State, Regional, and District Authorities ................................ 18
Auditor General’s Office .............................................................................................. 18 Revenue Policy ................................................................................................................. 19
Medium-term Revenue Measures ................................................................................. 23
TFG Fiscal Policy Objective ......................................................................................... 24
Somalia’s Debt .............................................................................................................. 25 Source: Creditor Statements and World Bank Global Development Finance .................. 26
Capacity and Capability Building ..................................................................................... 26
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
3
Introduction The current tax system in Somalia is weak and has several deficiencies. One of the most
striking characteristics of the Somali tax system is its excessive reliance on customs
duties from the few actively functioning and accessible Ports and Air Ports. Almost over
80% of the total government revenue consists of taxes on imports.1 In contrast direct
taxes on income including income from public enterprises, account for less than 3% of
the total revenue for Puntland and Somaliland, while for the TFG is even less as there are
no permanent staff working for the government. This imbalance is inevitable in light of
the limited domestic resource base; it is also the result of structural and administrative
deficiencies of the tax system. Taxes on exports are estimated to be in the range or
around 10 to 15% of the total government revenue. The reason for this is the limited
export capacity coupled with the lack of a government in Somalia proper.
Another shortcoming of the tax system is its nature of being specific rather than ad-
valorem. Specific Import duties range from $0.0 for some food items to over $1000 on
imported vehicles and some luxurious items. The specific nature of the tax system on the
one hand reduces the problem of under-invoicing, but on the other hand is not responsive
to inflationary pressures, thus adversely affecting the real value of tax collections.
The customs valuation of imports is one of the weakest areas of Somalia’s tax system.
Since the collapse of the Somali state in 1991, imports are not financed with a letter of
credit through the banking system, given the fact that there are no Banks operating in the
country, except The Hawaalo (the money transfers companies) and the prices of invoices
are not reliable as they are or could be manipulated by importers. Therefore, the authority
resorts to discretionary measures of assessment and collection of taxes, which are prone
to corruptions and mismanagement.
Development partners are interested to provide assistance through budgetary support to
the Somali authorities to help jump-start the establishment of the Federal and state
institutions, but this is made dependent on the ability of the authorities to show it has the
support of the citizens by acting in a united way to collect basic revenue. Therefore the
most urgent tasks for the Federal and state authorities will be to put in place a transparent
tax system and tax administration at federal, state and local level, the earlier this is done
the better.
The objective of designing a tax system is to make it as broad as possible in terms of
administrative feasibility, while keeping the initial tax rate low in such a way that it yield
significant amount of revenue and not having any adverse impact on business activity in
the country. Toward this end a study was conducted in 2006 by Malner et. al, which
identified the major potential tax bases, including some that have not frequently been
taxed, such as money transfer companies, telecommunication and trade.
1 Besides the revenue classified under import taxes, a proportion of revenue from stamp taxes and
administrative duties is also generated by imports.
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
4
Given the weak revenue collection capacity, focus in the early stages of a totally new
revenue collection services, the tax system will have to concentrate on taxes on economic
transactions, especially imports. Another important aspect in the design of the new tax
system would be to make tax system as simple as possible in order to keep the cost of
collection to the minimal as also to keep a low cost of compliance by businesses.
While in the medium term, it is expected to have in place a reasonably effective revenue
administration, which could possibly increase indirect taxes without encountering tax
evasion.
This study review existing tax and revenue administration in the TFG, Puntland and
Somaliland and propose a broad framework on how to improve and the system to make it
simple, efficient
Current Legal Framework There are currently three separate legal frameworks that guide budgeting systems,
revenue policies, administration and intergovernmental fiscal relation with the boundaries
of the Somali Republic (Somalia Proper). These are: (i) the transitional Federal Charter
(2004); Somaliland Constitution (2001), and the Puntland Charter (1998). All the three
frameworks include guidance on decentralization system of governance, with significant
devolution of power to district level, particularly for the purpose of local services
delivery. Among the three authorities, Somaliland is the most advanced in implementing
the proposed decentralized system, it is expected the same system to evolve in Puntland
and the rest of Somalia, albeit at different pace.
The TFG strategy aims at a bottom–up approach where districts are formed before the
regions and states. This seems to be due to the wide rejection of the centralized system of
governance of the earlier Somalia’s governance system operated during the Barre’s
regime.
The framework for Puntland decentralized governance and service delivery is embedded
in the Local Government Act, which provides a significant degree of devolved power to
the districts, backed by revenue and expenditure assignments. It also outlines the
districts’ right to “domestic and international borrowing”, upon approval from the state
authorities.
However, due to extremely limited fiscal capacity, Puntland authorities had little
involvement with service delivery responsibilities. The authorities were and still are more
concerned with regulatory functions and revenue collection.
Somaliland has been increasingly devolving financial and administrative responsibilities
to the elected district councils. The shift increased the autonomy of districts and also
expected to help for better planning and budgeting, financial management and efficient
revenue generation and collection.
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
5
As for what concern intergovernmental allocation of resources the Federal, State and
districts the administrative structure varies among the three levels of governance. For the
TFG, there is a total absence of any inter-governmental fiscal relation. While for
Puntland and Somaliland there are slight differences, but they are all characterized by the
lack of objective criteria as regards to financial resource allocation to the districts. In
Somaliland they are two approaches of transferring or allocating resources to the districts.
The first approach is the shared revenues. A district which possesses customs collection
points receive 10% of the customs taxes collected in that district. In the case of Berbera
Port through which a bulk of Somaliland imports and exports go through the district of
Berbera receive 10% of the total customs revenue it collects. Thus if more money is
collected in a district the more revenue it is allowed to keep. The second approach is
whereby 12.5% of the total customs revenue collected by the Ministry of Finance, after
deducting the 10% share, is redistributed to all districts. This intergovernmental transfer
of 12.5% of total customs revenue is determined by a presidential decree and is aligned
with the size of expenditure in the district. Apparently districts are divided into three
categories. Revenue generating districts and those located along major routes are
redistributed revenue ranging from 35.6% (in the case of Hargeisa) to 1%. A second
category receives 0.95% while a third category is distributed 0.70%. Often these funds
are distributed with instructions from the President or the Ministry to spend them for
specific expenditures such as for an election outlay. Neither of these revenue transfers is
based on the needs of the population in the districts.
In Puntland there is no transfer system, although a series of surcharges are levied in
addition to the regular customs duty at the port of Bosaso. Of these, 2.5% is collected on
behalf of the Municipality of Bosaso, while another 3.5% is earmarked for the Ministry
of Local Government and Rural Development to finance the process of electing district
councils. The revenue from surcharges is never recorded in the budget and it is unclear
whether these reach the intended recipients.
It is seen from the foregoing that throughout Somalia differing levels of administrative
structures, revenue generating capacities and expenditure responsibilities are widespread
and a significant degree of harmonization will be required for decentralization to succeed.
Along with the process of decentralization, it will be necessary to have in place an
acceptable inter-governmental financial relationship which is based on objective criteria
for financial resource allocation to local administrative units.
Budgetary Process
Federal Budget
Federal Budget, the Transitional Federal Government of Somalia, established in 2004
prepared its first budget in December 2005. The total budget amounted around US$150
million; the purpose of this budget was establishing key functions of the government
through paying salaries and allowances, reconstructing facilities, and providing basic
equipment and maintenance. At the time the TFG had practically zero revenue, as there
was neither collection capacity, nor infrastructures in place to enforce taxation. The
budget was presented to international community for funding. Little financing came form
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
6
the development partners, as it was believed that due to inexistent of finance institutions
and lack of transparency budget support was considered to be inappropriate.
Development partners funded a number of activities both humanitarian and
developmental outside the government channels but through the UN and INGOs.
.
The second budget prepared by TFG was for the last quarter of 2007. In this budget the
TGF projected to be able mobilize revenues of around US$ 6,918,365 (domestic and
international) per month totaling US$20,755,095 for the remaining three months of this
year.
Domestic revenue is estimated to be US$ 3million per month and US$3.9million is
expected to come as grant from international communities. The key objectives of this
budget were strengthening government capability to functions and to deliver needed
services to community. Provide security and create an environment that is conducive to
development.
The third budget2 prepared by TFG with the assistance of The Horn Economic and Social
Policy Institute (HESPI) is the most comprehensive one. In the first instance is that the
budget is based on the government’s Interim Economic Strategy (under the RDP), which
is build in four pillars, namely: (a) revitalize the economy, (b) strengthen governance and
the rule of law, (c) rehabilitate infrastructure and basic social services delivery, and (d)
rebuild capacity of the Transitional Federal Institutions. Each of these pillars a multiyear
framework is being prepared which deals with policies and provides a costing of policy
interventions to help secure support the Somalia needs from the development partners.
Unfortunately, up to now none of these budgets got off to implementation stage, practical
terms they just remained on papers.
State Budgets
Both the states of Puntland and Somaliland have been preparing budgets for several
years now. Somaliland has been doing that since 1992 and Puntland since 1998. These
budgets are not properly classified, but they are functional in the sense that expenditures
are aggregated from the various ministries and agencies of the government. The approach
used for budget preparation processes do not take into account the needs, priorities and
lack participation of key stakeholders. Both states budgets are coded and classified alone
similar expenditures heads, with the main ones being wages and salaries, operating
expenses (services) and other general expenses amounting on average about 73% of the
total for Somaliland and 83% for Puntland. On the revenue, customs duties and direct
taxes account for about 90% of the total in both states, with government charges making
the remainder. Budget preparation is largely a mechanical exercise, that’s it increase
from one year to next with some arbitrary increments that could be linked to increase in
the size of civil services or security personnel or any other administrative expenditures.
2 The TFG: 2008 Draft Budget, Volume I The Budget Framework, March 2008
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
7
District Budgets
Local administrations exist to a varying degree throughout Somalia. In the TFG areas,
there is nevertheless far too little data available to describe the financial status or even
limited governance structures which do exist. There are governors and districts
commissioners (either appointed by the TFG or self appointed clan leaders, militias) who
collect some revenue and provide limited security services but no records are kept. In
most cases, public services are delivered either by the NGOs or private sector and
financed either through user fees or by donor support. One of the most troublesome
financial and governance problems facing districts in the TFG areas is the fact that
resources are still highly contested by various factions, thereby making it difficult to
manage them through future established district administrations.
Puntland and Somaliland have a two-tier administrative structure which is operational
below the state governments i.e. regions and districts. Under this structure region and
districts are not independent tiers of government but extended arms of the state with
responsibilities for coordination. The regions do not have their own revenue sources and
the expenditures of the governor’s establishment are incorporated in the budget of the
relevant ministries. The regions are further divided into districts and a number of them
have elected district councils. Both Puntland and Somaliland are increasingly devolving
financial and administrative responsibilities to the elected district councils. This shift will
increase stepwise the autonomy of districts and also the need for better budget planning,
financial management and efficient revenue generation and collection.
Revenue Control Procedures
Transitional Federal Government
The main source of revenue for the TFG is customs duty, even though not yet exploited
to its potential. The authorities do not have under their control of all the key ports and
airports or border points operated in the country. Other sources of income include
sometimes contributions given by the private sectors, such as the telecommunication
companies or Hawaal0 to the TFG and some bilateral donors like the Saudis and a few
Arab countries that provide budget support. In theory the Accountant General is supposed
to have the responsibility for control of all official receipts, but in practice other people
who control the Ports, airports or border points are the one who have control of the
receipts.
The TFG established receipts and payments system to manager national resources. Under
which the Accountant General has the responsibility for control of all official receipts and
the supervision of Government expenditures by ensuring that no payment is done without
proper authority and availability of funds.
The receipts are supposed to be serially numbered and controlled using registers.
Collectors (particularly Ports, Airports and local authorities, etc.) will be issued official
receipts at the time of surrendering the daily collections to the Cashier. Upon receipt of
collections, the Cashier issues a Collector’s receipt. Then the Funds are banked intact in
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
8
the Government Account at one of the three brunches (Baidoa, Mogadishu and Kismayo)
of the Central Bank.
The payments voucher is raised by the spending Ministry’s Accountant on receipt of
adequately supported payment request. The Accountant General will verify the
availability of the budget and enters the appropriate code on payment voucher. The
voucher is then reviewed and approved by the Director General of the Ministry. Once
approved it is then forwarded to the Accountant General’s office. At the Accountant
General’s office the payment voucher is checked against available funds, reviewed for
correctness in all respect and approved for payment. The voucher is then forwarded to the
Central Bank for payment, where the Central Bank Cashier makes payment and ensures
the payee signs the payment voucher for receipt of funds. In practice none of these
procedures are operational, but just on papers.
Puntland
In the case of Puntland, the main source of revenue is customs duty, which in the past
decade has been ranging at around 75% of total estimated revenue. Government charges
have been contributing at 11%. Other important sources of revenues included indirect
taxes, transfers, Government property charges and income taxes. Theoretically revenue
accounting records are maintained in the Regional Accounting Offices and a monthly
revenue report prepared and submitted to the Accountant General (AG) within the first 10
days of the close of the month.
The Accountant General is responsible for the supervision of Government expenditure
and ensuring that no payment is made without proper authority and availability of funds
on the respective vote. The AG operates through delegated authority to Regional
Accountants.
The payment voucher is prepared by the spending Ministry’s Accountant on receipt of a
payment request adequately supported and approved by the Ministry’s Director General.
It is approved by the Ministry’s Director General, recorded in the Ministry memorandum
records and forwarded to the Regional Accounting office.
The process of review and recording in the Regional Accounting office is as in the
Accountant General (Sub Accounting Units) in Puntland. Payment vouchers are recorded
in master vote books analyzed by heads and subheads. A list of all payment vouchers
approved by the Regional Accountant is compiled and together with the payment
vouchers forwarded to the Bank of Puntland for payment. On payment the Bank cashier
ensures the payee signs the payment voucher and enters the Bank stamp for payment.
Every ten days the Bank prepares a statement of payment vouchers received, paid and
unpaid, certifies it and forwards it to the Regional Accounting office together with the
paid vouchers. At the Regional Accounting office the paid vouchers are recorded in the
cashbook and filed.
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
9
Within the first ten days of the close of the month, the Regional Accounting office
prepares the monthly revenue and expenditure report and forwards it together with the
supporting analysis sheets, payment vouchers, receipt vouchers, cashbooks and vote-
books to the Accountant General’s office.
The Accountant General’s office reviews and consolidates the monthly returns. The
consolidated monthly accounts are signed by the Accountant General and forwarded to
the Auditor General within 15 to 20 days of close of the month.
Somaliland The main source of revenue for the Somaliland authorities is customs duty, which is
estimated to be on average over 85% of the total revenue. Other sources of income
include telecommunication and postage, rural development charges, court charges, water
income and fishing charges, among others.
The Accountant General is responsible for control of all official receipts. The receipts
are serially numbered and controlled using registers. The collectors account for all
official receipts issued to them at the time of surrendering the daily collections to the
Cashier. On receipt of the collections, the Cashier issues a Collector’s receipt. The funds
are banked “intact” in the Government Account in the nearest branch of the Bank of
Somaliland.
The Accountant General is supported by Sub-Accountants in 8 stations in the six regions
of Somaliland who maintain revenue accounting records. Receipts are recorded in a
cashbook analyzed by revenue subheads. On a monthly basis a revenue report is
prepared and forwarded to the Accountant General.
Financial Devolution
The states of Puntland and Somaliland have taken a series of steps toward the devolution
of financial and administrative responsibilities to the few elected district councils. In
Somaliland there are more than 20 elected district councils and in Puntland over 10. This
process did to some extend increased the fiscal and administrative autonomy of the
districts, with it also the need of the districts to strengthen their ability to perform a range
of new functions, including budget planning, prioritization, financial accountability and
revenue generation.
The districts have been granted autonomy in determining the size and composition of
their establishments, but they are constrained by the use of the state government pay and
grading structure and the fact that their budgets are forwarded through the Ministry of
Local Government and Rural Development in the case of Puntland and Ministry of
Interior in the Somaliland to the Parliament for approval. The ministries provide
instructions/guidance to the districts in the use of funds. There are several positive signs
that the devolution of responsibility in the two states could be followed by further
decentralization of resources in the near future.
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
10
Most the districts are operating under fiscal stress and face significant challenges in
finding the resources to pay for their constitutional/charter mandated responsibilities.
The key sources of district revenues are generated from immobile sources, such as
markets, but district capacity for revenue collection is limited and barely sufficient to pay
for salaries and wages, operating expenses, security and basic social services. Besides
oversized district staffing places a burden on local revenue.
In the case of the TFG the Transitional Charter does not provide specifics on the district
level functions on devolution/decentralization. While Puntland and Somaliland legal
frameworks do provide itemized long list of functions, which district councils are
expected to fulfill. On the revenue side, district councils are given broad latitude to
establish their own revenue base, included the choice of instruments and rates as long as
those don’t interfere with the state revenue collection. In practice, few of the assigned
revenue sources are being collected, this is due to lack of capacity and political control,
and districts are for the most part resorting to applying different mixes of local revenue
sources, with mixed results.
Revenue Sharing Formula and Transfers
Districts in addition to raising their own revenue, they also receive funds from the state in
the case of Somaliland. The state of Somaliland uses two approaches for this purpose,
these are:
(i) Shared revenue - in those districts where customs collection points exist,
they are entitled to receive 10 points customs taxes collected in their districts.
Funds are deposited in a separate account at the local office of the Bank of
Somaliland.
(ii) Intergovernmental transfer – a 12.5 percent of the total customs
taxes collected by the Ministry of Finance (after the 10% deduction of shared
revenue) are distributed among all districts. The formula for the distribution is
aligned with the size of district expenditures.
For Puntland there is no proper transfer system in place but there are a series of
surcharges placed at the top of regular customs duty at the Bosaso Port. Of these 2.5% is
collected on behalf of Municipality of Bosaso, while another 3.5% is collected for the
Ministry of local Government and Rural Development to finance the process of electing
and establishing district council.
Broad Implications
A number of broad implications emerge from the overview of the Somaliland and
Puntland and the TFG tax and revenue systems. Above all, it would be safe to conclude
that continuation of the present trend, namely, of
increased reliance on the tax bases which already yield the bulk of the government
revenue could be self-defeating insofar as Somalia (TFG, Puntland ands Somaliland) is
close to its taxable capacity. If anything, such an approach is likely to exacerbate the
impediments to efficient resource allocation, and eventually lead to the erosion of
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
11
existing tax bases by encouraging taxpayers’ delinquency and by diverting factor inputs
to less productive uses. The combination of relatively high import duties and widespread
discretionary practices leads not only to revenue leakages, but more importantly, to
mismanagement of resources.
The authorities in Somaliland, Puntland and the TFG should embark on a redistribution
of the tax burden as permitted by the administrative constraints. Major elements of this
policy would be a massive overhaul of the tax system, the reduction of the excessive
reliance on import duties, reduction of exemptions and arrears, and the implementation of
a broad based income tax under a unified single progressive rate structure. Over the long-
run, with sufficient time and resources to undertake administrative capacity building and
taxpayer, it may be feasible to bring about a broad matching of tax instruments and
overall policy objectives.
The existing specific duty rates must be replaced by revenue-equivalent ad-valorem rates.
The price list should be adjusted on the basis of comprehensive and reliable data on
prices, collected regularly from foreign trade journals, retail and wholesale catalogues
and other sources. Even though, under the circumstances, the use of the price list is the
best solution, every effort must be made to improve customs valuation methods so that
gradually less reliance will have to be placed on price lists and more on real transactions
values.
Revenue and Tax Policy
Public administrations attempt to use tax systems to achieve many objectives and raising
revenue is one of many and is of vital importance. An improved tax system not only
enhances tax revenues but also it simplifies the system and makes it easier and less costly
to administer. In the theory of public finance, there are generally four broad principles,
these are:
(a) The principle of equity: it focuses on horizontal and vertical equity.
Horizontal equity means that similar incomes should be taxed equally,
while vertical equity requires that a higher tax burden is placed on
individuals with greater capacity to pay. In common language it is called
the ability-to-pay principle by which the rich are taxed more than poor. In
practice taxes do little to change the overall distribution of income. Their
role in pursuit of equity is to raise the revenue to pay for distributive
expenditures such as primary education, health care, better water and
sanitation services to alleviate poverty. In Somaliland and Puntland import
duties are higher on those imported items consumed by higher income
groups such as cars, and other luxurious items, while basic food items are
taxed at lower rates. As far as income tax is concerned, in the absence of
any data it is not known how progressive the income tax structure is.
However, when the tax policy is formulated by the Federal Ministry of
Finance, the tax rationalization exercise should incorporate the principle
of equity right across Somalia. In addition, the budgetary policy should
ensure that distributive expenditures like education, health, water and
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
12
sanitation constitute a larger share of the total expenditure rather than the
current preponderance of total share going to salaries and wages, such as
in the cases Somaliland and Puntland budgets.
(b) The principle of economic efficiency: the transfer of resources to the
public sector always involves an added cost to the economy (or excess
burden) that arises out of the distortions in the price system caused by taxes.
Taxes not only reduce the size of the private sector, but also change the
prices such as wage and interest rates, prices of goods and services, etc., in
an economy which results in changes in the pattern of consumption, savings,
work effort, investment, etc. compared to the pattern that would have
prevailed without taxes. These changes in patterns or allocation of economic
resources cause an added cost on the economy. A tax structure should
therefore be designed to be relatively neutral i.e. one that generates the
necessary revenue with a minimum of economic efficiency cost or has the
least effect on the allocation of resources. Generally, high efficiency costs
are related to high tax rates and to large differentials in tax rates. The current
import duties in the case of Somaliland are too many – 13 different rates in
total and range from 2% to 75%. The tax policy for Somalia should examine
the taxes on duties and reduce the number and also the high tax rates to bring
about a minimum economic efficiency cost.
(c) The principle of administrative costs: This refers to the public sector cost
of administering the tax. The administrative costs of tax collection are
divided into two major components, these are:
Compliance cost which usually refers to costs to the private sector in
complying with the tax laws; and
Tax administration cost which usually refers to the public sector costs of
administering the tax laws.
Excessive public spending on tax administration can be wasteful, but spending too
little can also be economically wasteful. To gain broad coverage of a tax base
requires sufficient enforcement capacity. Broad coverage is generally more
equitable and allows collection of tax revenues at lower, more efficient tax rates.
Added administrative spending that make aware the taxpayer and services their
tax-paying needs can lower the economic costs of complying with the tax. If the
import duty structure is more simplified and its coverage is made as broad as
possible so that hardly any imported item is exempt, compliance cost would go
down and the tax administration would be easy. Fewer taxes and absence of
exemption would imply that tax laws would be easy to interpret and follow thus
enabling ready compliance and such laws would be easy to administer therefore
lowering administrative cost.
(d) The principle of revenue stability: introduced taxes which should produce
stable revenue flows so that budget surplus or deficits are predictable. It is
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
13
often difficult to cut public expenditures or to change tax laws or to upgrade
administrative capacity rapidly in response to revenue crisis. Hence stability
of revenue is necessary. Consequently, the taxes should be revenue elastic at
unchanged tax rates and unchanged definition of the tax base. Ad valorem
tax rates are adopted to ensure revenue elasticity. Both in Somaliland and
Puntland import and export duties are levied at specific rate and not ad
valorem rate. Thus if the value of such item increases the revenue does not
increase unless the rate of duty is also increased. Whereas if ad valorem duty
is imposed the rate of duty remains the same but the revenue increases
because the tax is based on the value of the item.
Fiscal Institutions One of the key institutions that need to be put in place or strengthened in the first instance
at the federal or state level is the Ministry of Finance with three basic vested functions: (i)
to develop a fiscal strategy and monitor its impact on the economy; (ii) to formulate
expenditure policy and implement the budget, and (iii) to formulate tax policy and ensure
revenue collection is efficient. These will require establishing a number of key
departments, which include, budget department vested with the responsibility to
coordinate the overall expenditure program and prepare fiscal projections (including tax
revenues) and budget execution and reports. This department can also have
responsibility for assessing the fiscal impact of policy measures. In the medium term, it
will be appropriate to set up a separate macroeconomic department, but at the initial stage
it could be kept under the budget department. At a late stage the macroeconomic policy
department would be responsible for formulating tax policy changes, making budge
revenue forecasts for the annual budget, monitoring monthly revenue collections and
making at least quarterly revisions of the annual revenue forecasts. It should also
monitor developments in monthly expenditure commitment payments, and any payment
arrears. Based on this analysis it should make recommendations whether any intra year
adjustments in revenue or expenditure policy appear necessary to meet the annual budget
balance objective. It may be appropriate to establish a separate unit or department
responsible for the tracking of donor aid flows, such as aid management department.
There will be a need to improve the budget law, which is part of the PFM Bill and have it
passed by parliament to serve as the basis for the operation of the Ministry of Finance. In
addition a budget and accounting manual will need to be prepared, which will provide the
appropriate guidelines and procedures to be followed by staff carrying out budgeting and
accounting functions in the Ministry of Finance and line ministries.
The second department which needs to be established or strengthened is a treasury department, vested with the responsibility for controlling spending and ensuring that it
is properly accounted for. In order to carry out the treasury function it is necessary to
establish a well-functioning cash management and payments system, which makes
expenditure payments and provides for the deposit of revenue collections into Treasury
accounts. Currently this function is performed by the Central Bank. The treasury
department also needs to establish proper accounting for external aid flows, and domestic
borrowing, if any. There is also a need for a separate unit to carry out the internal audit
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
14
function. Separate from the Ministry of Finance, strengthening the Auditor General’s
office to perform the external auditing function for all government Ministries.
Another important department is a revenue administration or agency, which could be set
up under a separate tax administration law with some degree of independence from the
MoF in its hiring and compensation polices and functions. The department’s
responsibility could include collection of customs revenue, domestic tax revenue and
administrative fees and charges among the key functions. The most important
appointment or recruitment would be that of the head of the revenue administration
department and the heads of the main departments, this should be done on merit basis and
not on the base of clan affiliation. Initially the functions could be limited to a customs
department levying duties on imports and exports and a department responsible for all
other revenue. The following section discusses the main issues which emerge with
regard to the revenue administration.
Revenue and Tax Administration
From the administrative point of view the objective should be to have a lean well-paid
revenue service, which would be part of a lean well-paid civil service. If it is politically
unacceptable to have a lean, well-paid civil service, then it may be necessary to establish
a separate independent revenue authority, which presently exists in a number of African
countries. It is important to establish a recruitment mechanism which seeks the
technically most qualified people and ignores clan affiliations. From the beginning,
principles of good governance need to be put in place promoting accountability and
transparency. It is particularly important to make clear that corrupt behavior by revenue
officials will not be tolerated and to put in place mechanisms to identify and punish
corrupt behavior. An effective police force and judiciary need to be in place at an early
stage. This is necessary to be able to punish corrupt revenue officials and taxpayers who
do not pay their taxes. It is not sufficient to simply fire corrupt officials from their jobs.
It is also necessary to have the threat of criminal prosecution and spending time in jail as
a deterrent to corruption. As soon as appropriate staff has been selected there will be a
need for effective training. Tax laws will need to be drafted, tax forms and regulations
printed, and educational material explaining the laws to the public will need to be
produced. Experts should be hired to help with this process. UNDP and the World Bank
and Development Partners will have to provide both financial and technical support with
the tasks associated with putting in place an effective revenue administration.
The option of hiring a private foreign firm to collect customs revenue, as was done for a
period in Mozambique could be one alternative, but given the fact of a relatively small
market it is likely to prove to be too expensive, and it would also undermine the strategy
of building local capacity. A better option worth pursuing is to seek assistance from
neighboring countries such as the Kenya or Uganda Revenue Authorities, or some other
African revenue authorities, with regard to a number of these tasks. They are especially
well-placed to help with the procedures for valuation of imports, because many of the
same products are imported into countries. The idea of seeking assistance from the KRA
to collect import duties on exports from Kenya to Somalia has already been discussed
between the two governments, so it should be possible to explore a wider range of
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
15
assistance form the KRA. In any event it would appear to be useful to hire a couple of
senior expatriate staff with experience in another African revenue service.
Currently there is no Federal Government tax administration in place nor is there any
federal institution established to administer taxes. At the same time there is no agreement
with Somaliland or Puntland regarding their role vis-à-vis Federal Government revenue
collections. However, in the short term laws need to be enacted governing federal tax
administration and the establishment of a lean and well paid independent customs and
inland tax revenue Departments, as well as a Department to collect revenues from
charges and fees. The need for transparency and accountability requires that a lean,
separate well paid revenue administration agency, similar to the Kenya Revenue
Authority, under a separate tax administration law, with powers to independently recruit
qualified persons be established with a policy to recruit staff on the basis of merits only.
After the Revenue department or authority is set up, staff should be recruited and
provided with training in computers and recording of trade and other revenue data
through computerized systems to replace the existing structures at the ports and airports.
Since in the short and medium terms the Department/authority will not have the capacity
for correct valuation of imports for import duty purposes and since bulk of imports into
Somalia come from Dubai and Kenya, close co-operation with the Dubai authorities and
the Kenya Revenue Authority should be initiated even though cost of freight and
insurance from these destinations to Somalia is not included in the valuation. Also
collection of duties at the main ports and airports in Somalia should commence side by
side with the commencement of correct valuation of imports for duty purposes. In
addition, recording of valuation and revenue data by detailed commodity classification,
consistent with the internationally accepted Harmonized System (HS) of commodities
should be introduced forthwith. The Harmonized System of commodities for customs
purposes should be achieved by the end of the medium term and a committee should be
established in the short term to determine how to carry out this exercise. Technical
assistance will be required to initiate and supervise this special assignment. Furthermore,
the Department/authority should introduce taxpayer unique Personal Identification No.
system (PIN) which should be used by taxpayers for making payments for imports,
exports and income tax. Finally, revenue administration should initiate training in
determining incomes and profits for income tax purposes for the medium term.
At present, 90% and 80% of total revenue in Somaliland and Puntland respectively, is
generated from customs duty alone. So the top priority in the short and medium term is to
rationalize the customs duties. Some imports are still taxed at specific rather than ad
valorem rate of duty. Also the number of ad valorem duties on imports is many. In the
case of Somaliland the number is thirteen. These are 2% on brake shoes and core plugs,
7% on tin milk, etc 10%, 15%, 18%, 20%, 25%, 30%, 35%, 40%, 50%, 55% on cars and
75% on tobacco and cigarettes. Most of the imported items carry a rate of between 10%
and 30%. In the medium term, all customs duties should be made ad valorem and the
number of duties reduced to five or six rates with the lowest rate being 5% for many food
and medicinal items and the highest 35% including the rate for khat. Export duty on
livestock should also be converted to ad valorem rate and because of the seasonal nature
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
16
of such exports, should be levied at 10%. During this period, administrative capacity and
regulations for collecting income tax from wage earners – Pay As You Earn (PAYE) -
and corporations should be developed for imposition of such taxes in the long run.
Fiscal Function of Local Authorities
At federal level decision has been made to introduce a significantly decentralized federal
system in Somali. However, much work remains to be done on assigning specific
revenue sources and expenditure responsibilities to the various levels of Government. An
important issue is work needs to be done on whether their will be a significant role for
state governments, as of now the two states Somaliland, which declared it independency
and Puntland which consider itself as an autonomous state of Somalia the limited revenue
and administrative capacity would argue for giving the district level the main local
government responsibilities. There is also an issue of whether there are too many
districts at present to facilitate efficient administration and whether some consolidation
would be useful.
Currently, there are many districts with minimal local administrative structures. A few
district administrations levy licenses, charges and fees and provide limited services but
keep hardly any records and remain unaccountable. They are not lean and remain
unviable. Therefore, some viable minimal local administrative units need to be
established and some staff recruited for them in the short term. Also staff training in
computers, record keeping, simple revenue collecting procedures and simple accounting
and budgeting should be initiated. In addition in the first year, these units should prepare
preliminary local administrative budgets for 2007 and simplified local budgets for 2008
and also plan to levy fees, charges, etc and the level of services that could be provided
with the raised revenue. In the second year, these units should begin imposing the levying
of fees, charges and begin to keep records of revenue raised and expenditure incurred in
providing services. In the medium term, such units should strengthen financial planning,
budgeting and accounting functions of staff through continuous training in financial
management, as well as progressively administer collection of revenue and social service
expenditures and start recording estimated and actual spending by donors and NGOs in
simplified annual budgets. Thus lean local administration would be in place providing
social services jointly with donors and NGOs and also progressively would be in charge
of tax revenue collection and expenditure management.
Fiscal Relations between Local Administrative & State
Whatever inter-governmental fiscal relations that exist are between the state and the
districts in Somaliland and Puntland. Such type of inter-governmental fiscal relation is
non-existent in the TFG. There is no fiscal relation either at federal level as yet. Even the
relationship in the above mentioned states and districts that exist is haphazard and
arbitrary and does not follow laid down rules. There is considerable overlap in their roles
and functions. In some security is a function of the district whereas it is the role of the
state to be in charge of security. There is also a need to establish economically viable
local administrative units with lean administration. In the short term, standardized roles
and functions of state and viable local administrative units have to be established and in
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
17
the medium term, government laws need to be harmonized with regard to expenditure
responsibilities and revenue sources that would support the decentralized services of the
local administrative units.
As far as the inter-governmental allocation of financial resources is concerned, there is no
objective criteria established for financial resource allocation to local administrative units
from states. Therefore, in the short term objective criteria for resource allocation needs to
be established and also general acceptance of these criteria needs to be obtained. In the
medium term, preliminary financial resource allocation based on acceptable criteria
should commence, to local administrative units whose roles and functions are
harmonized. Perhaps some of the objective criteria which are commonly applied for
inter-governmental allocation of financial resources and could be considered are based on
district population; level of district poverty; balanced economic development; level of
revenue collected in the district; size of district administration, etc.
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
18
The Role of Federal, State, Regional, and District Authorities
The Functions and responsibilities of the four (4) levels of the Somali governmental
authorities (federal, state, region and district) need to be clearly delineated and their
abilities to conduct fiscal operations in particular be harmonized and coordinated. A
preliminary tabulation is indicated below.
Table 1: Functions and Responsibilities at all Levels of Administrations SN Functions Federal State Region District
1
2
3
4
5
6
7
8
Macro economic policy and management
Ports, airports, roads and other infrastructure.
Postal and telecommunication.
Social services (Health & education)
Water supply
Power and electricity.
Agriculture.& industry
Natural resources e.g. water, forests, sea etc.
Yes
“
“
“
No
“
“
No
Yes
No
Yes
“
“
“
No
“
“
Yes
“
“
“
No
“
“
Yes
“
“
“
Auditor General’s Office
For accountability and transparency, an external audit of public resources and the way in
which these resources are spent is a sin qua non. To ensure that the expenditure and
revenue of government is carried out according to parliamentary approval, the task of
control is entrusted to the body known as the Auditor General’s Office. To establish such
an office an act of parliament is required to provide for the control and management of
the public finances and for the audit of public accounts. The Auditor General’s Office is
headed by the Controller and Auditor-General and the enactment also provides for the
appointment, terms of office, duties and powers of the Controller and Auditor-General.
His duties on behalf of parliament are to examine, inquire into and audit the accounts of
all accounting officers and receivers of revenue and of all persons entrusted with the
collection, receipt, custody, issue or payment of public moneys. Within a period of four
months or such longer period agreed by Parliament, after the end of each financial year,
the Treasury in the Ministry of Finance, Somalia, shall prepare and transmit to the
Controller and Auditor-General accounts showing fully the financial position at the end
of the year. On receipt of accounts, the Controller and Auditor-General shall carry out
examination and audit pf accounts and within a period of seven months after the end of
financial year to which the accounts relate certify them and prepare and transmit a report
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
19
of the examination and audit of all such accounts to the Minister. The Minister on receipt
of the report shall, within fourteen days of the receipt of the report, lay it before
parliament.
The accounts of every local authority or local administrative unit will be audited by the
Controller and Auditor-General’s or by an auditor authorized by him on his behalf. Every
local authority will prepare an annual account and submit it within six months after the
end of each financial year to which it relates, for examination and audit. The Controller
and Auditor-General will prepare a report for each local authority of his examination and
audit and a copy of each report will also be transmitted to the Minister for Local
Government.
Revenue Policy
Short-term options: While a number of donors are interested to prove budgetary support
to the TFG to help jump-start the establishment of the Somali State, the continuation of
such support will eventually be partly dependent on the ability of the TFG to show it has
the support of the Somali people by acting in a united way to collect some of its own
revenue. Thus, one of the most urgent tasks of the TFG will be to put in place a tax
system and tax administration at the federal and local government levels. It will be
desirable to put in place this revenue system within the first year.
It will be important to design a tax system, which is consistent with the basic objective of
the TFG to severely limit the role of government and to concentrate on providing a
favorable enabling environment for the private sector to prosper. Thus, the new tax
system should not be a constraint on private sector growth and development. The
objective should be to make the initial tax base as broad as administratively feasible,
while keeping the initial tax rates quite low. Such a system can yield a significant amount
of revenue in an equitable manner, while not having any serious adverse impact on any
business activity. Towards this end, it is important to identify the major potential tax
bases, including some that have not frequently been taxed, and to design effective
mechanisms to tax them.
Given the relatively weak revenue collection capacity which will be feasible in the early
stages of a totally new revenue collection service, it will be best to concentrate on taxes
on economic transactions, especially imports. Another important objective is to make the
tax system as simple as possible in order to keep the cost of collection low as well as to
keep a low cost of compliance by businesses. Consistent with these principles, Box 1
presents the revenue generation options that could be considered for short term
implementation.
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
20
Box 1: Summary of Short Term Revenue Generation Options for the TFG
Tax on Imports: The simplest and most efficient option would be to tax most imports at a uniform low ad valorem
(percentage) rate of something like 5 or 8 percent, while a few specified goods, which are either luxuries or have
harmful affects on health or the environment, are taxed at higher rates of 10 to 50 percent. The rates should be kept low
enough so as not to provide a significant incentive to try to smuggle goods to avoid payment of any duty or to seek to
bribe customs officials to undervalue the goods. Some of the goods for which a higher rate of customs duty would be
appropriate are: khat, cigarettes, petrol, diesel fuel, and motor vehicles.
Exports: It is the normal international practice not to tax exports, because it would put the country’s exporters at a
competitive disadvantage and it is usually not possible for the exporter to pass on the tax to the foreign consumer.
However, since it will not be possible to tax income for a number of years, a 5 percent tax on the following exports
might be considered: livestock, fish, frozen meat, hides and skins, fruit and vegetables. Because of the severe
environmental damage it causes, it would be best to seek to prohibit the export of charcoal from Somalia, rather than to
tax it. However, the alternative of levying an increasingly high rate of export tax on it for a transitional period might
also be considered.
Sales Tax on Domestic Production of Goods and Services: For a considerable period there is not likely to be enough
manufacturing or other value-added activity to justify a general value added tax or sales tax on goods and services.
However, consideration could be given to the levy of a 5 percent tax on sales by manufacturers of selected domestically
produced goods and the services provided by luxury hotels.
Telecommunications: Levy a 5 to 10 percent tax on the total value of airtime sold by companies for use in cell phones,
as well as charges for land lines and on the revenue received by the telephone companies from handling incoming
international calls.
Remittances: Levy a tax at a low rate of ½ to 1 percent of the value of all remittances made through money exchange
companies to individuals or businesses in Somalia. For amounts above $1,000, the rate could be cut in half.
Offshore Fishing Rights: This has been an important source of revenue in the past and should be made an important
source of revenue in the near future, along with a policy to limit the amount of fishing in offshore waters so as not to
deplete the stock of fish. However, this is an area of a possible conflict as long as there is no stable, democratic
government in place.
Tax on departing passengers on international air flights from Somalia: This could be levied at a rate of $20 on
foreigners, and $10 on Somalia passport holders. This should be considered an airport usage fee and also apply to
diplomats.
Passports and Visas: Once the TFG has become more unified, has effectively restored law and order, and has received
some international recognition, it will be desirable to issue new passports to all Somali citizens who wish to obtain
them. Passports could be issued at a price of US $50. It is also recommended that Somalia issue visas at points of entry
into the country. Non- Somali citizens could be charged a fee of something like $20 for a single entry visa and $50 for a
multiple entry visa.
Business Licenses: A dual system of issuing annual business licenses could be considered. The central government
would issue licenses for financial institutions, telecommunications companies (including telephone, TV and radio
companies), airlines, large manufacturers and firms engaged in the import and export trade. All other businesses with
fixed premises would be issued licenses by local governments.
Motor Vehicle Licenses: Motor vehicle and driving licenses should also be issued, as soon as the modalities for
issuing them can be put in place. Sources: Somali Joint Needs Assessment and Reconstruction and Development Program, Macroeconomic Policy Framework and
Data Development Cluster Report (2006)
1) Tax on imports: the simplest and most efficient option would be that most imports
be taxed at a uniform low ad valorem (percentage) rate of something like 5 or 8 %, while
a few specified goods, which are either luxuries or have harmful affects on health or the
environment, are taxed at higher rates of 10 to 50 % The rates should be kept low
enough so as not to provide a significant incentive to try to smuggle goods to avoid
payment of any duty or to seek to bribe customs officials to undervalue the goods. Some
of the goods for which a higher rate of customs duty would be appropriate are: khat,
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
21
cigarettes, alcoholic beverages, petrol, diesel fuel, and motor vehicles. While some of the
goods coming into Somalia are”transit goods”, which are smuggled into Kenya or
Ethiopia, these should also be taxed at the same rate. In the early stages of the new
revenue administration, it will not have the capacity to distinguish transit goods from
goods destined for the domestic market and to the extent that taxes can be levied on these
goods by the Somalia Government, it will discourage smuggling into neighboring
countries.
There are four important categories of goods which many countries either tax at a
relatively low rate or completely exempt from tax: necessities, medicines, agricultural
and industrial machinery, and raw materials. The pre-civil war Somalia government
provided a low customs duty rate, rather than exemptions, for all these categories.
Necessities are defined as products which account for a more important share of the
consumption of relatively poor people than of relatively better off people. This list is
usually made up almost entirely of food items. As long as the basic rate of customs duty
is only 5 or 8 percent, it would probably be best not to try to have a lower rate or
exemption for any of the four categories indicated above. Having a single rate of duty
on most imports would greatly simplify customs administration. As long as the basic
rate is low, providing an exemption from duty is not a major benefit. After a couple of
years it would be appropriate to raise the basic customs duty to 10 percent and at that
time it could be decided which products to keep at a lower rate.
With regard to exports of goods from Kenya to Somalia consideration is already being
given by the TFG to seeking agreement from the Kenyan Revenue Authority to help
collect import duties on behalf of the Somali authorities. Important goods exported from
Kenya to Somalia include Khat, cigarettes, tea, and construction materials. It might also
be worth exploring the possibility of an agreement with the United Arab Emirates Dubai
Customs authorities and Somali businessmen re-exporting goods from Dubai to Somalia
that the 5 % customs duty collected when these goods are imported into Dubai (which is
levied on most goods other than foodstuffs) be given to the Somalia government, rather
than refunded to the re-exporter. Kenya and Dubai are by far the two most important
sources of imports into Somalia, so this would greatly reduce the task of customs officials
at the main entry points into Somalia to levy import duty on goods coming from other
countries. A major reason to use the Dubai and Kenyan authorities to help with
collecting import duty is that they will be better able to carry out valuation of goods and
Somali officials could be trained in the use of their valuation procedures, some of which
could be eventually adopted for general use by Somali customs.
2) Exports: it is the normal international practice not to tax exports, because it would put
the country’s exporters at a competitive disadvantage and it is usually not possible for the
exporter to pass on the tax to the foreign consumer. However, since it will not be
possible to tax income for a number of years, a 5% tax on the following exports might be
considered: livestock, fish, frozen meat, hides and skins, fruit and vegetables. Livestock
could also be subject to this rate, or it may be easier administratively to levy a roughly
equivalent specific duty, as is currently done by Puntland and Somaliland. Because of the
severe environmental damage it causes, it would be best to seek to prohibit the export of
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
22
charcoal from Somalia, rather than to tax it. However, the alternative of levying an
increasingly high rate of export tax on it for a transitional period might also be
considered.
3) Sales tax on domestic production of goods and services: For a considerable period
there is not likely to be enough manufacturing or other value-added activity to justify a
general value added tax or sales tax on goods and services. However, consideration
could be given to the levy of a 5% tax on sales by manufacturers of selected domestically
produced goods and the services provided by luxury hotels. The list of domestically
manufactured goods which might be taxed at the stage of the sale by the manufacturer to
the wholesaler or retailer includes soft drinks, bottled water, plastic bags, detergents and
soaps, and foam mattresses and pillows. At this point, the only significant service worth
taxing appears to be the expenses of customers in luxury hotels. Given that the revenue
from the domestic sales tax is not likely to be high relative to its cost of administration,
its implementation could be delayed for a couple of years. In the meantime, some
revenue can be obtained from these sources by levying a moderately high business
license fee on them.
4) Telecommunication: levy a 5 to 10 % tax on the total value of airtime sold by
companies for use in cell phones, as well as charges for land lines and on the revenue
received by the telephone companies from handling incoming international calls. Such a
tax has been introduced in Uganda and Kenya, and this is an important economic activity
in Somalia, which is concentrated in a few firms and can be relatively easily taxed.
5) Remittances: Levy a tax at a low rate of something like ½ to 1 % of the value of all
remittances made through Hawaalo companies to individuals or businesses in Somalia.
For amounts above $1000, the rate could be cut in half. However, there should be no tax
on outward payments from Somalia, because the commissions charged on such payments
tend to be very small. The tax on inward remittances would be collected by the Hawaalo
companies from the person doing the remitting from a foreign country and would be paid
monthly by the Hawaalo companies to the Somali Government.
6) Offshore fishing rights: This has been an important source of revenue in the past and
should be made an important source of revenue in the near future, along with a policy to
limit the amount of fishing in offshore waters so as not to deplete the stock of fish.
7) Tax on departing passengers on international air flights from Somalia: At a rate of
something like $20 on foreigners, and $10 on Somalia passport holders. This should also
apply to diplomats.
8) Passports and visas: Once the TFG has become more unified, has effectively restored
law and order, and has received some international recognition, it will be desirable to
issue new passports to all Somali citizens who wish to purchase them. The existing
Somali passports, either issued by the pre-1991 government or counterfeited
subsequently, are generally not recognized for travel to foreign countries. In addition to
providing an important document to Somali citizens enabling them to travel more readily
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
23
for business, pleasure, and medical purposes, issuing new passports can be a significant
quick source of revenue. They could be issued at a price of something like US $50. It is
also recommended that Somalia issue visas at points of entry into the country. Non-
Somali citizens could be charged a fee of something like $20 for a single entry visa and
$50 for a multiple entry visa. It would probably be appropriate to follow the normal
custom of not requiring diplomats and employees of international organizations to pay a
fee for their visas.
9) Business licenses: A dual system of issuing annual business licenses could be
considered. The central government would issue licenses for financial institutions,
telecommunications companies (including telephone, TV and radio companies), airlines,
large manufacturers and firms engaged in the import and export trade. All other
businesses with fixed premises would be issued licenses by local governments. Motor
vehicle and driving licenses should also be issued, as soon as the modalities for issuing
them can be put in place. This may take a year or so. Although in some countries these
are issued by local government, in Somalia it would be best to have them issued by the
central government for the sake of ensuing uniformity.
Based on these recommendations and taking into account other factors, such as, a limited
capacity of tax and customs administration; a long established poor attitude of the
business community towards tax compliance; negative perception against taxation caused
by poor access to public services by the people, and the need for simple and cost effective
methods of collecting taxes. It is expected that the TFG could mobilize about 50 to 60
million US $ immediately, as follow:
Table 2: Potential Revenue Mobilization in the Short - Term
Item US $ in Million
Imports 22 to 25
Domestic Sales ax 0.4 to 0.7
Exports 0.6 to 1
Remittances 6.0 to 8.0
Telephones 3.7 to 4.7
Offshore fishing Rights 12.0 to 14
Passenger Departure Tax 1.5 to 2.0
Passport and Visas 5.5 to 6.0
Business Licenses 0.2 to 0.4
Total 52.0 to 60
Sources: Own estimates adapted from Malner’s assumptions
Medium-term Revenue Measures
In the medium-term it will be desirable to increase most of the indirect tax rates
suggested for the short-term. Once a reasonably effective revenue administration is in
place it should be possible to do this without encountering a significant increase in tax
evasion. In addition, consideration could be given to the introduction of a 10 % excise
duty on bottled water and carbonated drinks. A personal and corporate income tax
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
24
should also be introduced in the medium or long term. Somalia had in place quite
extensive systems of taxation of business and personal income in the past. However, the
administrative apparatus to effectively implement these taxes was always weak. Their
introduction will require significant work in drafting legislation and putting in place
trained specialized tax officials.
TFG Fiscal Policy Objective
The main goal of the TFG has been to achieve peace throughout the country. In fact in
the past year or so it made several attempts to negotiate with the various opposition
groups to disarm, demobilize, rehabilitate and reintegrate ex-militia so that they can
become productive members of society and improve security. The main component of
budget expenditure for the past three has been on security. The TFG also made efforts to
establish government institutions that are vital to maintain the rule of law including a
well-vetted and managed police force, a functioning judiciary and criminal courts, and a
corrections service. In addition efforts were also made to repair of some infrastructure,
including buildings and equipment. Practically emphasis was given to the provision of
law and order as it’s considered being a pre-condition required to facilitating
humanitarian assistance, restoration of civil authority and the promotion of economic
growth and development.
For at least the first couple of years of operation of the Federal Government, the objective
should be to ensure that there is a balance in the budget, with no domestic financing. On
a yearly basis, given the experience of the pre civil war Somalia government with high
levels of domestic deficit financing through money creation, it would be prudent to avoid
budget deficits until a firm record of good fiscal management has been established.
However, there is likely to be a need for some intra year financing to balance budget
revenue and expenditure on a monthly basis. Thus, there is an important issue of what
would be the most appropriate mechanism for such temporary financing. It is unlikely to
be feasible to sell government securities to the public for many years until a track record
for prudent fiscal policy is established. It would also be unwise to do the kind of ad-hoc
borrowing from prominent businessmen which have frequently been used by the
Puntland government. It may also be unwise to have the Central Bank inject or
withdraw money from circulation on a temporary basis, because this may interfere with
achieving the price stability objective in a smooth manner. Thus, it would appear to be
desirable to establish a modest size fund in the central bank, with the use of some donor
resources. This dollar fund could be used to temporarily lend money to the government,
which would then use the money to cover a temporary budget deficit. By the end of the
year, it should be fully repaid. Since most of the government expenditure is likely to be
for wages, there will not be much short-term flexibility to adjust expenditure. By their
very nature, revenue projections are unlikely to unfold as initially envisaged and it is not
easy to make short term adjustments in revenue. Thus some flexibility in the objective of
a balance budget on a monthly basis is appropriate.
Macroeconomic policy should eventually be formulated by a macroeconomic policy
department in the Ministry of Finance and a monetary policy department in the Central
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
25
Bank. However, for the first two years, small units will be sufficient to carry out the
function. The macroeconomic policy department would be responsible for formulating
tax policy changes, making budge revenue forecasts for the annual budget, monitoring
monthly revenue collections and making at least quarterly revisions of the annual revenue
forecasts. It should also monitor developments in monthly expenditure commitment
payments, and any payment arrears. Based on this analysis it should make
recommendations whether any intra year adjustments in revenue or expenditure policy
appear necessary to meet the annual budget balance objective.
Somalia’s Debt
Somalia’s financial relations with international creditors have been non-existent for
almost two decades. In late 1987 and 1988, the country’s economic performance
deteriorated rapidly. At the time the Somali government refused cooperation with
external creditors, while financial policies slipped out of control, the exchange rate
became increasingly unrealistic, and official aid virtually ceased. At the end of 1989,
Somalia’s external debt was estimated at US$1,774 million, almost twice the value of
GDP or about 30 times the value of merchandise exports. Of the total debt outstanding,
47 percent was owed to multilateral institutions and most of the balance owed to bilateral
creditors. The stock of outstanding external payments arrears amounted to US$425
million at end-1989, or seven times the value of merchandise exports; about 28 percent of
the total represented arrears to the IMF and 21 percent arrears to the Arab Monetary
Fund. Arrears to official creditors in the Paris Club amounted to US$73 million.
Due to significant arrears on past debt servicing obligations, the lack of a fully functional
national government and the unstable security situation, the World Bank has not activated
a lending program to Somalia since 1990. Table 3 provides the status of debt owed to the
Bank in June 2008. Table 3: Somalia’s debt to the World Bank at of June 30, 2008, in USD at the CDS exchange rate
Product Type Total Principal
Outstanding
Arrears
IDA Credits
459,694,440.92 Principal Chargers Total Arrears
125,258,663.45 60,331,545.57 185,590,209.40 PPF 1,155,501.12 1,155,501.12 122,322.28 1,277,823.40
Till today, for the same reasons Somalia has neither serviced its public debt or borrowed.
Somalia’s total external debt (public and publicly guaranteed) was estimated at US$3.3
billion at the beginning of 2007, of which an estimated 81% was in arrears (see Table 4).
Of which 40 percent is owed to multilateral creditors (including interest charges on the
amounts in arrears for the IMF), 45 percent to Paris Club bilateral creditors, and 14
percent to non-Paris Club bilateral and commercial creditors.
Table 3: Somalia’s Stock of Public and Publicly Guaranteed External Debt in 2007
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
26
Nominal Stock
Total Arrears Creditor Stock % Principa
l
Interest total
Multilateral 1,325.0 40.7 530.0 344.0 874.0
IDA 527.0 16.2 117.0 46.0 163.0
IMF 353.0 10.8 182.0 171.0 353.0
AfDB Group 134.0310.0 4.1 44.0 21.0 65.0
Others 310.0 9.5 187.0 106.0 293.0
Bilateral and commercial 1,935.0 59.4 924.0 833.0 293.0
Paris Club Creditors 1,472.0 45.2 573.0 740.0 1,314.0
Non-Paris Club & Commercial
Creditors
462.0 14.2 351.0 93.0 444.0
Total Debt 3258.0 100.0 1,454.0 1,177.0 2,631.0 Source: Creditor Statements and World Bank Global Development Finance
Capacity and Capability Building
For the newly established or to be established institutions at the federal, states and district
levels and for the already existing institutions at the state level (Somaliland and Puntland)
to function efficiently in a sustainable manner, institutional capacity building should
commence as soon as recruitment of staff is completed. For this purpose, capacity
building needs of the key staff of the budget department, the treasury, other key staff of
the Federal Ministry of Finance and the established local administrative units and the
Auditor-General’s Office have to be identified and the assessment of the skills prevailing
in the existing institutions need to be carried out, to determine the type and the level of
training required. Similarly, capacity building needs of the customs and domestic tax
revenue dept. or a separate revenue administration agency or authority have to be
identified immediately. For example, in the case of tax administration, tailor made
training aimed at understanding procedures for valuation of customs goods and services,
collection, recording and analysis of revenue data, etc are essential. In addition, the need
to draft tax laws, tax rules and regulations and the need to prepare educational material
for explaining tax laws to the public, to register tax payers and also assign them a unique
PIN would also require specialized staff training. As far as the training program for the
local administrative units (districts) is concerned, it would include training in record
keeping, simple accounting and revenue collecting procedures and simplified budgeting.
In the short and medium term, to start with, all training program could include computer
training to ensure all revenue data and records and simplified accounts and budgets are
computerized. Other training programs could include on the job training, local training
workshops, training for women, training at specialized local and international institutions
(e.g. the IMF and World Bank Institutes; some other public administration institutes),
study visits and working on short-term basis with revenue authority (such as Kenya
Revenue Authority or Dubai Customs Authority) in other neighboring countries. With
sustained capacity building staff would acquire various skills quickly and would be able
to do its work more efficiently.
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
27
Annexes
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
28
Annexes
Annex 1: Somaliland Sources of Revenue
Location 2007 Budget
SL.Sh 2007 Budget
US$ 2008 Budget
SL.Sh 2008 Budget
US$
Difference 2007-2008
SL.Sh
Difference 2007-2008
US$
Customs 163,957,701,283 26,025,032 188,943,441,458 31,490,573.5 24,985,740,175 4,164,290
Inland Revenues 26,626,309,330 3,750,207 54,585,982,092 9,097,663.68 27,959,672,762 4,659,945.46
Post & Telecom. 1,669,990,078 265,078 1,208,141,275 201,356.87 (461,848,803) 76,974.80
Ministry of Rural Development
109,943,022 17,451 753,899,691 125,649.94 643,956,669 107,326.11
Ministry of Fisheries 1,109,507,000 176,112 1,567,000,000 261,166.66 457,493,000 76,248.83
Courts 2,275,715,958 3,612,335 1,334,713,572 222,452.26 (941,002,386) 156,833.73
Ministry of Water and Mineral Res.
10,682,033 1,695 216,903,833 36,150.63 206,221,800 34,370.3
Ports 2,000,000,000 317,460 2,000,000,000 333,333.33 0 0
Local Govt. Donations
5,000,000,000 793,650 5,000,000,000 833,333.33 0 0
Donations and Loans
0 0 25,000,000,000 4,166,666.66 25,000,000,000 4,166,666.66
Total 202,759,848,704 32,184,102.96 280,610,081,921 46,768,346.98 77,850,233,217 12,975,038.8
Sources: Ministry of Finance
Domestic Revenue Mobilization and the Challenges of Governance in Somalia
Aues Scek 23/10/08
29
Annex 2: Puntland Sources of Revenue during the Period 2003 - 2007 ( in million So.Sh)
2003 2004 2005 2006 2007
Customs duties 179,307 194,040 219,847 183,360 219,948
Indirect tax 19,180 20,766 25,440 25,944 29,580
Production tax 9 24 120 12 4,824
Income tax 4,128 4,345 5,604 6,516 6,918
Government
property fees 4,829 6,570
4,920
1,980
46,278
Government
services charges 27,436 36,180
33,498
25,044 27,180
Transfer and
contributions 18,311 1,320
10,320
9,144
9,480
TOTAL 253,200 263,245 299,749 252,000 344,208
Top Related