Somalia’s tax system faces a significant challenge, with a tax-to-GDP ratio of around 3%, one of the lowest globally, highlighting a substantial gap between potential and actual revenues. The tax gap—the difference between what should be collected under full compliance and optimal policy, and what is actually collected—was estimated at 34% in 2023, with actual revenue reaching $329.5 million and a potential exceeding $500 million. The largest shortfalls were in income tax and sales tax, both showing gaps above 60%, while customs duties, although the largest revenue source, still face leakage due to administrative fragmentation and evasion. Contributing factors include the collapse of state institutions post-1990s, limited tax reach due to insecurity and armed groups like Al-Shabaab, dominance of the informal economy, weak intergovernmental fiscal arrangements, low public trust, and lack of broad-based taxes like VAT and excise duties. The Federal Member States (FMS) like Puntland and Jubbaland collect and retain their port revenues, creating regional disparities, while inland states remain underfunded. Informal taxation, regressive local levies, and absence of visible public services further discourage voluntary compliance. To address this, the paper proposes a multi-dimensional Domestic Revenue Mobilization strategy combining policy reforms such as enacting a VAT law, implementing the new Income Tax Act, introducing excise duties, and reducing exemptions; with administrative improvements including expanding the Integrated Tax Administration System (ITAS), modernizing customs, digital tax payment systems via mobile money, and using third-party data for analytics. Furthermore, establishing a national customs revenue-sharing framework is critical for national equity and effective state-building. Trust-building through improved services, phased formalization of the informal sector, and investment in governance and security are essential to close the gap sustainably. The aim is to eventually increase Somalia’s tax-to-GDP ratio from its current 3% toward an ambitious long-term goal of 15%, reducing reliance on foreign aid, increasing service delivery capacity, and strengthening the social contract between citizens and the state. The findings of the Institute of Public Finance – Somalia (IPFS) stress that fiscal reform is not merely technical but foundational to peace, development, and legitimacy in fragile states like Somalia.
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