Tax revenue collection in Somalia has, during the past decade, been hampered by—among other things—weak institutional capacity, lack of sound tax administration systems and a fragmented administrative structure that has often placed the Federal Government of Somalia (FGS) at odds with Federal Member States (FMSs). Despite these limitations, however, Somalia’s domestic revenue tax mobilization reform has been on an upward trend in recent years. Against this backdrop, the report explores the FGS’s progress (or lack thereof) in establishing fiscal federalism and harmonizing tax administration across the country.

Summary

• Although the principles of fiscal federalism are set out in Somalia’s 2012 Provisional Constitution, it does not elaborate on a number of key issues, including revenue distribution mechanisms and the respective rights and roles of federal and state authorities. These gaps pose significant challenges to establishing harmonized tax systems across the country.
• The FGS has sought to diversify its revenue sources beyond Mogadishu, expanding into nationally regulated sectors such as telecommunications, air navigation and fishing. Moreover, to achieve fiscal sustainability over the medium term, the FGS has committed to a comprehensive fiscal reform agenda encompassing domestic revenue mobilization, expenditure controls, transparency and accountability in public resource management. In recognition of this, Somalia’s external creditors recently granted the country debt relief under the Heavily Indebted Poor Countries (HIPC) initiative.
• Currently, tax revenue collection is administered separately by the FGS and FMSs with neither jurisdiction sharing revenue with the other. In many cases, this has led to tax competition, multiple taxations and high compliance costs for the private sector.
• In terms of FGS–FMS collaboration efforts, the March 2023 Baidoa Agreement stands out as being the most consequential, as it sets out general revenue sharing principles in Somalia, guided by principles of economic stability and addressing disparities. Despite the initial consensus, however, progress in establishing the necessary institutions and formulating the required policies has been slow. Moreover, political disputes between the FGS and FMSs remain a key stumbling block.
• Overall, despite progress having been made, a number of outstanding challenges remain in terms of harmonizing and mobilizing tax revenues at both the federal and FMS level. These include the fact the FGS does not have a constitutional mandate to implement its federal tax authority throughout Somalia; the stalled establishment of the National Revenue Authority (NRA) and the Revenue Allocation and Acceleration Committee provided for in the Baidoa Agreement; the setting of unrealistic timelines for the harmonization process; and shortfalls in capacity on the part of federal and state authorities.
• Somalia is at a crucial juncture in its journey towards fiscal stability and sustainable economic development. While significant debt relief under the HIPC initiative holds the potential for transformative change, a number of structural and political challenges must be addressed if the momentum generated thus far is to be sustained. Here, donors and international partners have a crucial role to play in supporting the creation of a harmonized fiscal framework, contributing ongoing financial support, developing tax law and policy, and providing technical expertise and capacity-building initiatives. Above all, Somalia needs to make further progress in increasing its tax base, as well as harmonizing tax revenues across the FGS and FMSs.

This report is a product of the Somali Dialogue Platform.

The Somali Dialogue Platform is a programme which supports Somalis to achieve consensus on contentious political issues and is implemented by the Rift Valley Institute. The Somali Dialogue Platform is funded by the Somalia Stability Fund (SSF) III.

The views expressed do not necessarily reflect the official policies of the Somalia Stability Fund (SSF) III. The Platform maintains editorial independence on all its products.

(NB. A previous version of this report contained an error regarding the World Bank’s role in the operationalization and finance of SOMCAS, which has now been corrected.)