Tuesday May 7, 2024
By Abdullahi Osman Ali
Credit: alexsl/ iStock by Getty Images
In the past decade, the financial services sector in Somalia has witnessed a large growth in financial conglomerates comprising banks, mobile network operators and money transfer operators. The taxation of Somalia’s financial services sector., however, has not yet been fully developed but the various enterprises comprising a conglomerate are liable for multiple taxes including payroll tax, value-added tax, corporate income tax, regulator fees, bank levies, capital gains tax as well as the putative financial transactions tax. Taxation of payroll has also started. To simplify tax collection. conglomerates are generally liable to a lump sum tax on a monthly basis. This is likely to yield much less revenue than a financial services tax, and there is substantial tax evasion. The implications of this arrangement - adverse and desirable - are discussed in this article.
From the revenue point of view, financial conglomerates could increase Somalia’s tax base due to their handling of large volumes of financial transactions. This increase is unknown but could be substantial, as great as [20] percent of the current tax rate. Data availability would also expand as a result of the generation of extensive information on customer transactions, which could be utilized by tax authorities to identify potential tax evaders, detect hidden income and ensure accurate reporting.
The integration of financial services within conglomerates can also improve tracking and reporting capabilities. This would enable the tax authorities to monitor cross-border transactions, track remittances and more effectively identify potential tax evasion schemes. Furthermore, financial conglomerates could streamline tax compliance by leveraging advanced technologies and digital platforms. This involves automating tax calculation, providing online tax filing options, and enabling easier access to tax information for individuals and businesses. The net fiscal benefit could be considerable, perhaps as high as [5] percent of GDP.
Nevertheless, financial conglomerates could also have a negative impact on the tax system, including regulatory challenges. The lack of a common tax framework in Somalia could make the system more complex and difficult to tax appropriately. The complexity of transactions in terms of the integration of different financial services makes it difficult to identify potential tax avoidance strategies. Hence, the system becomes more susceptible to tax evasion. The affiliation of banks, mobile network companies and money transfer operators could lead to the growth of a large informal economy in Somalia. A balance would need to be struck between ensuring tax compliance and protecting individuals’ privacy rights which is another concern associated with tax evasion.
Although the standardized taxes on this sector have yet to be established, their implementation will present considerable challenges. There is a risk of substantial tax evasion due to the weak internal control in Somalia, easy engagement of anti-money laundering and regulatory arbitrage.
To mitigate the challenges, there is a need to adopt a regulatory framework that enables appropriate oversight which at the same time is consistent with the federal system. Legal frameworks that highlight collaborative mechanisms and allow access to information could also lower the risk of tax evasion.
Moreover, adopting technologies that can handle large data sets and enable the tracking of transactions, strengthen anti-money laundering measures, and create awareness of the detrimental effects of tax evasion and the importance of tax compliance. They could all improve transparency and lower the level of tax evasion from conglomerates.
Lastly, Somalia’s financial sector is getting bigger and more complex while hosting a large volume of transactions. More revenue can be generated from financial sector services in terms of taxes, fees and other levies. However, it is important that the adoption of these strategies be combined with policies that mitigate the risk of tax evasion. This will enable Somalia to increase its fiscal space and deliver more and better public services.
Abdullahi Osman Ali is an economist in Puntland’s Ministry of Finance where he is head of fiscal analysis and reporting.