Hiiraan Online

Liban Obsiye and Yusuf Salah
Saturday, April 06, 2013

Tax evasion across the globe is rising and at a difficult economic time such as this, the world appears to have finally woken up to its impact. The European Union, American government and now some African nations such as Nigeria are making an enormous fuss about lost revenues that they could have used to bolster their public finances and investments. Some are working desperately hard to retrieve some of it but with clever international tax and business lawyers and accountants on their side, the tax evaders can rest comfortably safe in the knowledge that the underpaid and skilled government greyhounds are only going round in circles at the scent of their own failure.

Starbucks an international coffee shop chain, having suffered a media barraging for its tax payment record in England in late 2012, volunteered to pay an extra £10 million voluntary tax. While this is generous and is aimed at protecting the brand from public protests, it is an indication of the enormous challenges facing one of the world’s best funded government Departments in Great Britain, Her Majesty’s Revenue and Customs.  These challenges do not get any easier in America as its many Corporations directly fund the Presidential and political campaigns of the future occupants of the White House and Capitol Hill. As such well connected corporations and wealthy individuals can adopt the famous belief that only the poor pay taxes.

In an age of globalisation, it is easy to move anything from labour to machinery around the globe easily. Money is no different and at the click of a button vast amounts of cash can be transferred to tax havens with greater secrecy than the mafia’s own code of silence, the Omerta. These tax havens have now officially come into the international spotlight. This week ahead of the third substantive meeting of a UN high level panel which will discuss the future of development after 2015 and which includes the influential Nigerian Finance Minister Ngozi Okonjo-Iweala, tax evasion by companies as well as corrupt leaders have emerged as the key issues hampering progress. This issue in many ways is a realisation that in the face of dwindling aid budgets and the prospect of slow global economic growth good governance and a strong tax base will be the key to national survival for most developing countries. The importance of an enforceable tax policy is even greater now because of the lack of progress on trade despite the promises of developed nations at the last Doha trade round talks.

A Tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state. Taxes can be direct or indirect and both are used for financing government spending on public policies, reducing inflation and even protecting local industries from foreign competition. In developed nations like France, America and Great Britain tax is crucial to funding the very essentials such as education, research and infrastructure that gives and sustains these nations global competitive advantage over others. In Latin America, especially in Brazil, Bolivia and Venezuela (under Hugo Chavez) millions were lifted out of poverty through fairer and easy to enforce tax policies which have contributed to the establishment of free state education, low cost housing and better infrastructure to attract investors.

African nations all need to learn from their Latin American counterparts and start to take the issue of taxation seriously. Two eminent Development academics at the London School of Economics Crisis States Research Centre summarised that their six years of research funded by the British government, showed that there is a need for the provision of better targeted aid which enables rather than continues the culture of aid dependency. One of the key ways of achieving this alongside peace promotion and keeping is helping to establish and strengthen a tax system that enables a government of a post conflict nation or those that are generally fragile, become more financially independent and legitimate in the eyes of their people.  The UK’s Department for International Development which funded this research hopefully will be taking these findings seriously and acting on it. Early signs are encouraging as in November 2012 the influential International Development Select Committee’s report urged the Department for International Development to increase their focus on building and supporting tax authorities as part of UK Aid policy globally.  Since Somalia is a very fragile post conflict nation, its leaders, social policy architects and international donors need to be giving taxation serious thought.

Somalia is not new to taxation. In fact many of the businessmen of the past complained of over taxation under all the regimes after independence. Everything was taxed from income, coal, fruits, livestock and vegetables to imports of cars and other international goods. Nothing escaped the tax collectors of the past. There was, more impressively, a clear division of labour as local governments taxed smaller local traders and businesses and the centre concentrated on imports, exports, income and corporation taxes. In the self declared independent state of Somaliland this system is still in place. Local government officials still collect local taxes on property, agriculture, small businesses and market traders while the Ministry of Finance deals with the corporations, importers and exporters alongside its key duty of formulating plausible tax policies.

A key policy triumph for the ruling Kulmiye Party in Somaliland was that, as they claim, through better economic management, tax planning and policy enforcement and the limitation of corruption they were able to double the nation’s income annually since coming to power. It is hard to prove this claim as there were no official accounting documents to prove any of it and the presence of the surplus money alone cannot be indicative of better tax policies or enforcement. However, this was better than what was happening and to some extent, still is happening in Mogadishu.

Since the collapse of the Siad Barre administration over two decades ago effective tax collection has not even been a national issue. The ports of Somalia, probably the single largest income generator for the nation, were owned by tribal warlords and powerful businessmen with militias. Even worse for traders and investors, every few miles of dirt road had a guard post of differing groups extorting money from them and other travellers. This nightmare scenario is at last starting to subside as the government gains more and more of its territory back from warlords and Al-Shabaab.

This new Somali government is hungry for change. The commitments it’s made to good governance and self sufficiency are an obvious indicator of this. Development though costs vast amounts of money and the best way to strengthen Somali’s fragile peace and for the government to extend its authority across some remaining and stubborn tribal territories, is to carry out the kind of rebuilding and engagement that requires a perfect balance between cultural sensitivity and economic development. Foreign aid does not always allow for this and the strings attached can sometimes undermine internal relationships. The best long term strategy for Somali peace, progress and development, as the President, Hassan Sheikh, proposed in his visit to London was to be financially independent. Very few countries have achieved this but the ambition itself is a welcome change from the past. The message ought to be made clear: Somalia no longer wants to seen internationally as the wondering unloved poor begging nomad its come to symbolise to donors.

Tax collection appears to have started in Somalia already. The government has insisted recently that all businesses need to register themselves to trade openly for a fee depending on their size. This, if logged and recorded properly will allow for the documentation of all legitimate businesses in Somalia. Those without a trading licence ought to be closed until they pay or gradually made to pay according to their abilities. The key worry is the formulation of tax policies themselves. The taxes need to be fair and create the kind of business environment that makes people want to invest. If taxes are too high and punitive the economic costs can be devastating. The role of both the central and local government in tax policy needs to be clarified for businesses and investors so that they are not charged twice for the same thing and all tax payers need to be provided with a receipt which can be traced back to them and their payment to limit corruption. This all may sound simple but it is ambitious for a nation that has been at war with itself for over two decades.

The challenge for any tax policy adviser is the devolution of Somalia. Should Puntland, like it does now, keep all the tax it collects from its inhabitants and Ports? If not how do you convince them to surrender that revenue to the centre which could distribute it to poorer regions and not back to them necessarily? The solution is tax education.

Some Somalis like many people across the globe do not like paying taxes and the past failure of the Somali state has made them more reliant on their tribal families than central government. For many years locally raised taxes funded inter tribal wars and the centrally collected taxes benefits have not been witnessed in some areas of Somalia. The advantage this Somali government has is that it is new, clean and to some extent representative of most of the Somali regions. It needs to capitalise on this in its short honeymoon period to convince the Somali people that they are part of a nation and not the tribal enclaves they live in. Taxes collected will be distributed across all regions and that they will fund education, infrastructure building, law and order and health. They will not be used to arm the militias that attack them nor feed the politicians that stole from them in the past. The Somali people are sick of war and want a quick return to normality but they can only be nudged to pay taxes in the short term if the benefits of it are explained well and made explicit.

Many feel that the tax evaders of Somalia and Somaliland have used their wealth to buy power, influence and create the crippling monopoly that enslaves poor customers with unsustainable prices. Many of the companies are owned by those in the Diaspora who have the most to invest at this post conflict state of Somalia. However, making taxation work requires heavy penalties for non compliance. Registering them in Somalia is an excellent start but they will later need to be audited and inspected and where they are not compliant sanctioned. The non compliant businesses can be named and shamed as well as shut down until tax bills are settled. Those owners with foreign passports can be reported to their embassies and local and international NGOs who will then be able to pressurise them at the expense of ruining their brand reputation. If this does not work they should be expelled and goods seized to be auctioned off or sold to settle their taxes. If tax collection works in Somalia it can help the international community sleep better at night, pay for development and limit, if not totally halt, the ships of refugees sailing to the western developed nations. Who does not want all of this in the donor community? This hope will make most of them assist with reprimanding their tax evading nationals trading in Somalia.

Whatever the tax policies, at the early stages of institutional development, the government will have to rely on individual honesty in its tax collection processes. However, with the introduction of ICT and better trained inspectors and officials, tax collection can be made more precise and easier in the future. At present many business men are claiming to want stability in Somalia and are offering to help the government. A good way to test the honesty of their commitment would be to ask for a voluntary contribution for every year the larger businesses, especially importers of essential goods and remittance companies, have operated in war torn Somalia before its inception. The likelihood is that they have never paid official taxes before this in Somalia.

Taxation is crucial to Somalia’s development, peace and security. If done well it will provide the government with the financial ability to drive forward its own national agenda and execute the policies that can once again bring a nation together. It will provide funding for business start ups that will free the people from monopoly, build the infrastructure for trade and investment and educate the future leaders of the nation freely so that they escape the tribal strangulation that is suffocating them today. It is time to, once again, take taxation seriously in Somalia.

Yusuf Salah is a community organiser, adviser and advocate. He lives in Bristol, UK and holds a Masters in Economics from Kanpur University, India.
He can be contacted at: [email protected]