Somalia implements tax reform to boost revenues, reduce foreign aid reliance

Somalia’s New Tax Law Is About More Than Money

In a packed hall in Mogadishu this week, government officials and business leaders did something that once sounded abstract in a country battered by conflict and aid dependence: they debated tax brackets, compliance, and what a fair state should ask of its citizens. Somalia introduced a new tax law at its annual tax forum, pitched by officials as the backbone of a modern state and a path away from foreign aid. The timing is not an accident—and the stakes are high.

Why this matters now

Somalia’s budget is still fragile, its security contested, and its social needs immense. Yet it has also just cleared a historic hurdle, completing a years-long journey through the Heavily Indebted Poor Countries initiative. External debt that once stood at roughly 64 percent of GDP in 2018 has dropped to under 6 percent by the end of 2023. Debt relief is not an end; it is a door. The International Monetary Fund has pushed Somalia to step through it by mobilizing domestic revenue, modernizing customs, and broadening the tax base that today leans heavily on Mogadishu’s airport and seaport.

Here’s the hard truth: Somalia’s tax-to-GDP ratio was just 2.6 percent in 2022, among the lowest in the world—far beneath an African average around 16 percent. At that level, a government cannot sustainably fund schools, clinics, courts, or the steady salaries that anchor security forces. “This new tax law is a crucial component of our efforts to build a stronger and more self-reliant Somalia,” a government representative told participants. “By streamlining our tax processes and improving collection, we can generate the necessary resources to invest in services that our people deserve.”

What’s different this time

Officials say the law will simplify rules, clarify who pays what, and make it easier to comply—particularly for small and medium businesses that have long operated in the gray zones of cash economies and informal levies. Policymakers are betting on a few enabling trends:

• Digitization: Near-ubiquitous mobile money can be harnessed for registration, e-filing, and transparent receipting.
• Customs modernization: With imports funneled through a few critical gateways, improved systems at the port and airport can quickly lift collections.
• Debt relief tailwinds: With the IMF program framing reforms, Somalia has a window of political capital and technical support to act.

Business leaders at the forum were cautiously optimistic, welcoming a push for predictability. Entrepreneurs in Somalia know uncertainty all too well: when tax rules seem arbitrary or change without notice, investment stalls. A law that is clear and consistently applied would be progress in itself.

The promises—and the pitfalls

Even the best-written tax statutes can falter on contact with reality. Somalia’s reality includes stubborn structural weaknesses, insecurity, and corruption. The country ranked 179th out of 180 on this year’s Transparency International index. That’s not an abstract indicator. It translates into bribes at checkpoints, opaque waivers for the well-connected, and a public that assumes taxes disappear into a black hole. Tax morale—the willingness to pay—grows only when citizens see the bargain honored: money in, services out.

There is also the matter of a “shadow state.” Al-Shabab runs a parallel taxation system in areas under its control, collecting millions each month from traders, truckers, and even telecoms. It issues receipts, audits books, and punishes evasion. This is coercion, to be sure, but it also shows that in a vacuum of state capacity, other actors will fill fiscal space. Reasserting fiscal sovereignty is partly about beating a better service proposition: public goods for lawful taxes.

And then there is climate. A cycle of droughts and floods has displaced more than a million people since 2021; more than 7 million Somalis need aid. When families are moving to survive, formal tax systems struggle to keep track of taxpayers, let alone collect from them. The government’s argument is that domestic revenue is precisely what can make Somalia less fragile in the face of crisis—by funding early warning systems, resilient infrastructure, and safety nets. That will require revenue sharing agreements and public investment plans that people can see and trust.

The politics of taxing in a conflict economy

Tax reform is often presented as technocratic—forms, rates, software. It is deeply political. Who gets taxed first? Which sectors receive incentives? How do you share revenue between federal and member states in a young federation? These choices create winners and losers. In fragile contexts from Afghanistan to the Democratic Republic of Congo, reformers have learned that early wins often come from a few strategic moves: cleaning up customs, digitizing payments to seal leakages, and building joint task forces that mix tax, police, and anti-corruption officers.

Somalia can borrow from neighbors. Rwanda’s e-filing system massively reduced compliance costs; Kenya’s e-invoicing expanded the VAT net; Ghana’s property tax pilots showed the power—and limits—of local revenue in places with weak land registries. None of these were overnight victories. But they built habits of paying and delivering: receipts for taxpayers, services for communities.

What business wants to see

At the Mogadishu forum, private sector voices were clear on two points: transparency and predictability. Investors can manage risk they can measure. That means published regulations, realistic transition timelines, and an appeals process that doesn’t require connections to navigate. Regular, public reporting of revenue and spending—quarterly bulletins, dashboards tied to projects—can help bridge the trust gap. If a market in Hamar Weyne sees its drainage cleared ahead of the rains, paid for by city levies, that is a “receipt” in the language of public services.

Equally important is not to choke the formal sector while the informal remains wild. Phased implementation, simplified regimes for small traders, and attention to compliance costs can keep the reform from becoming self-defeating. Many Somalis already pay—to state and non-state actors alike. A credible reform narrows the channels, reduces the burdens, and shows results faster than frustration can set in.

Global context: the end of easy aid

Aid budgets are tightening worldwide, and donors are increasingly conditioning funds on domestic revenue mobilization. Somalia is not alone in facing the hard arithmetic: public services cost money, and sustainable states collect it largely at home. The upside is sovereignty. Own revenue means own priorities. The risk is that rushed reforms can backfire if they ignore how people actually live and transact. The sweet spot is a reform that meets people where they are—on mobile phones, in markets that straddle formal and informal—and walks them, step by step, into a state that functions.

What to watch next

• Implementation timelines and regulations: Clarity will signal seriousness; confusion will sap confidence.
• Digitization milestones: E-registration, e-invoicing, and payment gateways that are simple and widely used.
• Customs performance: Monthly collection trends at Mogadishu’s port and airport are early indicators of reform traction.
• Public reporting: Are revenues linked to visible projects? Are audits published?
• Security spillovers: Does a stronger fiscal state begin to undercut Al-Shabab’s taxation machine?

Somalia’s new tax law is, at heart, a bet on the social contract. If citizens see their money build something tangible—clinics open, roads graded, teachers paid—paying tax becomes less a demand than a duty. If, instead, they see the old patterns of opacity and privilege, the reform will become another promise that didn’t stick. Between those futures lies the slow, unglamorous work of administration—and the courage to tax fairly, spend wisely, and explain both, again and again.

By Ali Musa
Axadle Times international–Monitoring.