Over the past ten years, the financial sector in Somalia has seen a significant rise in financial conglomerates, which include banks, mobile operators, and money transfer services. However, the taxation system for Somalia’s financial services sector is not fully developed. Each entity within a conglomerate is subject to various taxes such as payroll, value-added, corporate income, regulator fees, bank levies, capital gains, and a financial transactions tax. Payroll taxation has recently begun, and conglomerates are typically subject to a flat monthly tax in an attempt to simplify collection. This method may not yield as much revenue as a financial services tax and has led to significant tax evasion issues. The consequences, both negative and positive, are explored in this article.
Financial conglomerates have the potential to expand Somalia’s tax base due to their involvement in a large number of financial transactions. This expansion could be substantial, potentially up to 20% of the current tax rate. Additionally, the generation of extensive data on customer transactions could provide tax authorities with valuable information for identifying tax evaders, detecting hidden income, and ensuring accurate reporting.
Integration of financial services within conglomerates could enhance tracking and reporting capabilities, allowing tax authorities to monitor cross-border transactions, identify potential tax evasion schemes, and streamline tax compliance through technological advancements and digital platforms. The net fiscal benefit could be significant, reaching up to 5% of GDP.
However, financial conglomerates also pose challenges to the tax system, including regulatory obstacles and complexity in applying appropriate taxes. The intertwining of various financial services complicates the identification of potential tax avoidance strategies, making the system more susceptible to tax evasion. Balancing tax compliance and individuals’ privacy rights must be carefully considered in addressing these concerns.
The implementation of standardized taxes in the financial sector presents challenges due to weak internal controls, potential for substantial tax evasion, and regulatory arbitrage. To address these challenges, a regulatory framework with adequate oversight and consistency with the federal system is necessary. Collaborative legal frameworks that promote information sharing can help reduce the risk of tax evasion.
Adopting technologies that handle large data sets, enhance transaction tracking, strengthen anti-money laundering measures, and raise awareness about the negative impacts of tax evasion can improve transparency and reduce tax evasion by conglomerates. As Somalia’s financial sector grows and becomes more complex, increased revenue can be generated through taxes, fees, and levies, as long as measures to mitigate tax evasion risks are in place. This will allow Somalia to expand its fiscal capacity and provide better public services effectively.
Abdullahi Osman Ali currently serves as an economist in the Ministry of Finance in Puntland, overseeing fiscal analysis and reporting duties.
