Taxation in Somaliland

This is another instalment in our occasional series on taxation in more “unusual” places. Somaliland is in the Horn of Africa area, and is bordered by Ethiopia, Djibouti, and the Puntland autonomous area of Somalia. It is a self-governing area of Somalia which is not generally recognised as an independent or sovereign country. This seems to be due to it unliterally declaring itself independent of Somalia in 1991. However, further back in history it was a dependency of the UK (as British Somaliland), was granted independence from the UK in June 1960, and then united with what had been Italian Somaliland in July 1960.

Not being officially recognised (except, recently, by Israel) has held the territory back economically. It has a population estimated to be about 6 million. The capital is Hargeisa, and the main port is Berbera. Estimated GDP was approximately USD 7.5 billion in 2022.

Every country or territory must raise taxes, and Somaliland is no exception. Finding reliable and comprehensive information is not entirely easy, though. We have attempted to summarise the main taxes below. The main taxes are administered by the Somaliland Revenue Authority (SRA), and the legislation is contained in the Revenue Act 2016.

Impôt sur les sociétés

Corporate income tax is levied on profits at 10%. The SRA website mentions an additional “administration tax” of 2% of profit, and a stamp duty of 2.5% of the tax liability, coming to an overall rate of 12.3%.

Costs incurred in operating a business can be deducted in computing profits. Capital allowances are granted on capex, at rates varying from 5% on buildings, up to 40% on computers. Annual allowances are granted on a pool of expenditure on different classes of assets, after any first-year allowance (FYA) has been granted. Office furniture and fittings, vehicles and non-industrial buildings do not qualify for FYA. The FYA for industrial buildings is 20%. The FYA for other qualifying assets is 50% of cost, or 75% if the asset is used outside Hargeisa.

Mining companies can claim a deduction of 100% of the cost of searching for, discovering, testing or winning access to mineral deposits (that is, exploration and development costs).

Losses can be carried forward without limit. Farming losses and foreign losses are ring-fenced.

Costs incurred in starting up a new business, or in arranging an IPO on a stock exchange, can be deducted over four years, at 25% per year.

Branches of foreign companies are taxed at the same rate as for Somaliland companies but are also subject to a tax of 10% on profits which are deemed to have been repatriated, computed using a formula.

Gains on disposal of assets are included in income. A gain from disposal of shares in a company, the property of which principally consists of immovable property in Somaliland, is taxable. This is a form of taxation of “indirect disposals,” albeit more limited that in some other countries.

The legislation provides for transfer pricing rules to apply to transactions between associates but does not give much guidance on how this is to be applied.

As expected, there are penalties and interest applying for various breaches of obligations under the Law. In particular, late payment of tax leads to interest at 2% per month. There is a provisional tax system.

Non-resident transporters (by ship, air or road) are subject to a “liftings tax,” of 10%. A non-resident transmitter of messages, which earns income from using equipment in Somaliland, is taxed at 5% of the amount received for making the transmissions.

Taxes are computed in Somaliland Shillings but can be paid in either Somaliland Shillings or US Dollars. The Shilling exchanges at about 10 000 per USD.

Exempt organisations

To be exempt from income tax, an exempt organisation (such as a religious, charitable or educational institution of a public character, or an amateur sporting association) must be issued with a written ruling by the SRA stating that it is an exempt organisation.

Impôt sur le revenu des particuliers

Income earned by individuals is taxed at 10%. This, like other taxes, might be subject to administration tax and stamp duty.

Employers must deduct payroll tax at 5% from the total amount paid to staff. Benefits in kind are subject to income tax. If the only income of an individual is remuneration from a single employer, his or her income tax liability is the total amount deducted by the employer.

Rental income earned by individuals is not subject to the normal income tax, but rather to a special rental tax. This is also at 10% (plus the administration tax and stamp duty) of the rent, after deducting the costs of earning the rent.

Residents are taxed on world-wide income. However, the foreign income of a short-term resident is exempt from tax. Foreign employment income is also exempt, if tax has been withheld by the foreign employer and paid to the foreign tax authority.

Retenue à la source

Withholding tax (WHT) is levied at 10% on many transactions. This includes dividends, royalties, rent, natural resource payments, management charges and fees paid to public entertainers, sportspersons, contractors and professionals. This tax also appears to be subject to the assessment tax.

However, dividends paid to a resident company are exempt from tax, if the recipient owns at least 25% of the voting rights of the company paying the dividend.

WHT on dividends paid to a resident individual is the final tax.

There is also a domestic withholding tax, at 6%, on payments of more than 1 million Shillings by government, local authorities, government-controlled companies and any person which has been designated, for the supply of goods or materials or services. There are exemptions for supply of plant and machinery, supply of human or animal drugs, scholastic materials, and most importantly for payments to a supplier which is either tax exempt or which the SRA is satisfied has regularly complied with its tax obligations.

Remittances

Inward remittances are import for the economy. Inward remittances through money transfer (or Hawala) companies are subject to a tax of 1%, charged on the person who sends the money, and collected via the money transfer company.

Goods and Services Tax (GST)

GST is levied at 5%, for suppliers which make taxable suppliers of at least 5 million Shillings per year.

It is to be paid by:

Manufacturers (but not by wholesalers or retailers). Exports of goods are taxed at zero percent.

It is also paid on:

Imports of goods (which is collected by Customs at the time of import), and the following services

• Electricity
• Telecommunication services
• Water (if provided for a fee)
• Hotel and restaurant services
• Travel agency services
• International transport services (by air, sea or land)
• Sporting services and events

There are exemptions for human food, computers and software, disaster relief goods, medical aids, pharmaceuticals, textbooks, and raw materials for manufacturing.

Excise taxes

Excise is generally levied at 10%. It is charged on tobacco, cosmetics, perfumes, hair products, nail-care products, non-alcoholic beverages, jewellery, previous stones and precious metals, and on luxury vehicles. The excise is due on items manufactured in Somaliland or imported. Soap, toothpaste, disinfectant and toilet tissue are exempt.

A luxury vehicle means a private passenger automobile with an engine capacity of 4 litres or more, or an automobile with a CIF value of at least USD 20 000. That monetary value does not indicate much luxury!

There is also an excise on telecommunications services. This is 5% on

• The total value of airtime sold for use in cell phones,
• Fees on the use of landlines, and
• Fees for handling incoming calls.

We did not identify any excise duty on alcohol. This is probably due to alcohol being banned under Islamic law.

We saw some reference to a tax on khat, at 500 shillings per kilogram, but this is not mentioned in the Revenue Act.

Administration

Some interesting points on tax administration are:

• The tax year ends on 31 December, but a taxpayer can ask to use a subsititute year.
• If an assessment is objected to, the taxpayer must pay at least 30% of the tax assessed (or the amount not in dispute, if that is larger). This is an example of the “pay now, argue later” concept. However, the SRA can waive this requirement, or agree that a lower amount be paid, if satisfied that an objection has reasonably been made.
• An objection to an assessment must be made within 30 days. If a decision is not made on the objection within 90 days, the taxpayer can elect that the SRA is deemed to have allowed the objection. An objection decision can be appealed to the tax tribunal. After that, appeals lie to the Regional Court and above, on matters of law only.
• If the SRA has to repay overpaid tax, it must pay interest at 2%. This is a laudable concept, that could be usefully copied by other countries in the continent.
• The SRA must produce an annual report, within 3 months of its year end. This must include its financial statements, performance indicators, a report on the operation of the SRA, and any other information the SRA board decides is useful. This is provided to the President, the Minister of Finance and the Auditor General, and is then laid before the House of Representatives. This is also laudable and should be copied by countries which do not yet have this level of transparency and accountability for the activities of their tax authorities.

Conclusion

Somaliland imposes several taxes, on businesses, companies and individuals. The tax rates are generally low by international and African continental standards. The tax law seems to be quite robust and relatively simple compared to some other countries, which is probably suitable for a relatively small economy.

If you’re expanding into Somaliland or navigating cross-border tax obligations in emerging markets, our tax specialists are here to help, contact.