Tax Dealings: State and private sector relations in Somalia

Taxation is often described as the material expression of the social contract. However, this conceptualization largely reflects the Anglo-European experience and provides limited explanatory power for analysing taxation in African states, which did not experience the type of state–society bargains seen in Western Europe. Beyond neo-patrimonial and resource curse arguments, relatively limited research has theorized the political challenges underpinning domestic resource mobilization and the difficulties facing African states in collecting revenues from large businesses. This paper addresses this gap by examining fiscal relations in one particularly fragile African context: Somalia. Using a qualitative process-tracing methodology and drawing on the political settlement framework, it focuses on revenue bargaining in the corporate taxation of the telecoms sector. It finds that the combination of the sector’s fiscal importance and considerable economic power within a political settlement context where political elites had exercised limited power and authority placed the sector in a stronger bargaining position to negotiate low corporate taxes and exemptions. The lack of fit between formal and informal institutions also meant the sector resisted efforts to formalize the corporate tax rates, and informal tax arrangements continued to be preferred. Lastly, while telecoms businesses had shed some of their previous antagonism to state authority, their willingness to pay corporate taxes was related to tactics of ‘extraversion’. Specifically, the achievement of the debt relief milestone and the opportunity to earn greater rents incentivized these actors to make some tax payments to sustain the image of a formal state to gain access to external financing. These findings underscore the centrality of the political economy context in addressing the limitations of fiscal theory and draw attention to the significance of the distribution of power and the nature of institutions in shaping the motivations and the bargaining positions of state and revenue providers, especially in contexts characterized by weak state capacity.