World Bank: Tax reform critical to sustainable growth

The government must demonstrate clear links between tax revenue and service delivery, including security provision.

Somalia must institute robust domestic revenue mobilization reforms in the short and long term to implement the National Development Plan and achieve sustained economic growth, the World Bank has said warning in the absence of such reforms ‘the country could remain in a fiscal trap’.

In its second Economic Update released Tuesday, themed Mobilising Domestic Revenue to Rebuild Somalia, the Bank said Somalia’s overreliance on foreign aid and limited domestic market support stifles sustainable growth noting ‘threats to any of these sources will affect Somalia’s growth prospects’.

Punitive tax

The Bank however cautioned against punitive tax measures as it would counter growth especially in the private sector and foreign investment. “To support sustainable expenditures, drive development and reduce reliance on external sources, the FGS (Federal Government of Somalia) will need to find ways to increase domestic revenue in a way that does not disincentivize the private sector,” the report said.

The Bank said Somalia’s tax revenue which in 2016 was just over 2% of the GDP (The value of a country’s overall output of goods and services -typically during one fiscal year- at market prices, excluding net income from abroad) is remarkably low noting sustained tax reforms could raise this figure to 13% in 2022. While significant, this would still leave Somalia at the lower level of revenue performance in low income countries.

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Somalia’s tax revenue as percentage of GDP in 2015 stood at 1.9 way below Sub-Saharan Africa average which stood at 17.9% in the same period. Afghanistan and Burundi recorded 10.1% and 10.3% in the same period respectively according the World Bank.

Service delivery

To actualize an increase in domestic revenue, the Bank says, the government must demonstrate clear links between tax revenue and service delivery, including security provision. The government must create confidence among citizens that their taxes would not be misappropriated.

An overhaul of the tax system is also critical to mobilizing revenue collection, the Bank advises. This will involve designing it in a way that is consistent with its desire to limit its role to activities and services it can perform better. “The tax system should not be a constraint on private sector growth and development.”

Tax reform

The report, a second one since the first in 2015 proposes a raft of short, medium and long term reform strategies critical to enhancing domestic revenue mobilization. In the short term, the government should impose a uniform value based tax import (as opposed to the current volume based) rate of 5-8%, an export tax as a temporary measure which include 5% on livestock exports, fish fruits and vegetables, introduce a 10-50% excise tax on khat, cigarettes, gasoline among others.

Currently, the government only imposes an import tax on khat, cigarettes and gasoline which in the 2017 fiscal budget range from $3 per kilogram for khat to between $6 and $24 for various cigarette brands. A ton of gasoline attracts a $56.25 import tax while a barrel of diesel is taxed $11.25.

Tax base

Widening the tax base to include wages and business income can also be effected in the short term, the Bank says. This includes increasing coverage of direct taxes to cover wages and business income from all private and public sector employees. Private sector employees in Somalia currently remain largely out of the tax bracket forcing the government to rely on public servants as the main income tax source.

Other measures include 5-10% tax on airtime by phone companies, 0.5-1.0% on value of remittances which could earn the government an estimated $13 million while an increase of visa fee to $100 could net the tax man $10 million annually, the report notes. Currently the visa fee is $60. Finance Minister Abdirahman Beyle announced a $20 departure fee for all passengers starting July this year in the 2017 Appropriations Act.

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The medium term should see simplified tax system, harmonization of rates, increased tax rates, legislative measures on regulation and taxation of natural resource and strengthening fiscal federalism. In the long term, the Bank proposes a consolidation, harmonization and consistent tax legislation amendments as policy measures.

Administratively, long term measures should encompass the creation of tax payer database, completion of staff recruitment to entrench reforms and expansion of tax collection throughout the country.