I have seen Somaliland grow unimaginably during the short three and a half years I have been living here. Institutions are maturing; businesses are booming; people are more hopeful than ever. With this increasing growth, sophistication, and maturity comes an increasing reliance on rules rather than clan-and family-based trust to regulate the conduct of the large entities of the country. The presence of rules is a good thing, no matter what the business leaders from Mogadishu claim. Think of it like this. If a football player is extremely dominant in his primary school league does that mean anything? How high are the stakes in that situation? Beyond his parents, family, and friends who cares that he is the dominant player?
Yet, if the same player grows through the B-Leagues to the A-Leagues and perhaps even is scouted to go play for a major European club will people care then? Certainly. Will that player be subjected to more rules and more stringent application of the rules? Certainly.
Rules, if smartly crafted, create a level playing field where all players can succeed based upon their talent and their ideas. So whether you, as a sophisticated, embrace or decry the increasing application of rules in Somaliland is definitely up to you but the rules themselves are coming. Without further adieu let us get out of the land of metaphors, roll up our sleeves and talk a small bit about rules.
"Things as certain as death and taxes, can be more firmly believed." ~ Daniel Defoe, The Political History of the Devil, 1726.
As we careen beyond Eid al Adha into the latter parts of the calendar year, businesses should begin thinking about their taxes. Last year, if we all remember, the Ministry of Finance put all of the Somaliland businesses on notice that in the coming year the Ministry was going to take tax collection very seriously. So the wise among all of us business leaders in Hargeisa will ensure that we are ready to be taxed in a more thorough and authentic way than the prior, ad hoc way, that taxes have been collected.
Many people are in the business of providing services to non-governmental organizations (NGOs). While the NGOs are exempted from tax on most of their financial transactions as a condition of the donors giving their aid to the NGOs to disperse, those that they do business with are not necessarily immune from having their taxes collected.
Leases are taxable. If you lease a building to an NGO, especially an international NGO (INGO) than you should budget to pay your taxes on the rent from the building. It is not often discussed but certainly no secret that the Ministry of Finance has been collecting the rental contracts which your tenants that are NGOs have signed. These rental contracts will presumably be used by tax collectors in the coming year.
Here is how the income from rental contracts should be assessed, according to the currently in force tax laws. The rent which you receive from the NGO will be logged as income on your balance sheet according to the provisions of Article 12(1)(e) of the Tax Law. Afterward this income will be reduced 30% according to Article 23 of the Tax Code. This 30% reduction is meant as a simple proxy for the “repairs, maintenance, and any other expense or loss which might have been incurred. ”
There is a solid argument that if you have spent more than 30% on upgrades or maintenance for the compound that the total actual amount which you spent as expenses on the compound, rather than the proxy amount (30%) should be used but this is not yet a settled issue by the Somaliland courts. After the expenses are deducted,the amount which remains will be 70% of the total income which you received for the year. This amount is known as your tax basis. It is the baseline to which the taxation percentage is to be applied.
There is one major exception to this rule of renting buildings to NGOs. This exception is where an individual or entity their building to be used as a school. If you have rented a building to a school the only thing which you need to double check is whether the school is licensed by the Ministry of Education. When the school is licensed by the Ministry of Education then the income that you receive on the building will not be included in your tax basis. In other words that money comes to you completely tax free.
For those individuals who have buildings that are currently free they may want to consider leasing to a school for a slightly lower price than an NGO may pay for an office as the rent you receive on the building will be tax free.
So there are two things to remember when you are thinking about your taxes in the coming months, and we all most certainly will be considering them. 1. If you rent any building make sure that the Office of Inland Revenue deducts the standard 30% from the total amount of rent you received from the year. 2. If you rent to a school it should be tax free to you.
Please see our column in the coming months as we are hoping to address more issues which will be of interest to business people in Somaliland.
By Casey Kuhlman
(Casey Kuhlman is a Managing Partner of Watershed Legal Services, Member, International & Compliance Division. Fallow him on Twitter @compleatang.)