Tax Expenditures – Tax loopholes in Albania, 2022

In the publication of the draft budget 2023, the Ministry of Finance and Economy in a section of the report that accompanies the fiscal statements of the budget also clarifies the methodology and the effect on the budget of tax expenditures (alb. boshllëqe tatimore)[1].

“Tax expenses” are estimated using a new methodology based on several models for the assessment of tax expenses according to the type of taxes. The analysis of legal exceptions and benchmarking (exceptions that are the norm in all countries) was carried out with the assistance of the World Bank.

For the assessment and measurement of “exemptions from taxes” the following taxes and fees are taken into consideration:

Value added tax, namely in Law no. 92/2014 “On Value Added Tax” in the Republic of Albania, amended.

Income tax, namely in Law no. 8438, dated 28.12.1998, “On Income Tax”, amended.​​​​

Excise taxes, namely in Law no. 61/2012 “On Excise Duty in the Republic of Albania”, amended.

Taking into consideration the chain index of real economic growth, as well as the special effects produced because of changes in fiscal policies, the preliminary total value of tax expenditures for the following items is determined:

Tax Expenses from Value Added Tax

Excise Tax Expenditures

Income Tax Expenses.

It should be noted that most of the value of tax expenses is occupied by those expenses which derive because of exemptions from each of the above taxes. The overwhelming part of the total tax expenditure is taken by the tax expenditure that comes from VAT, and the remaining difference as tax expenditure from Excise and Profit Tax.

Value Added Tax (VAT)

Tax expenses coming from VAT are calculated according to the new methodology, using the Source-Uses tables produced by INSTAT. By extracting for each of the 35 types of activities (separated according to the two- and four-digit NACE codes) the part of the activity that is taxed at the standard rate, the reduced rate, and the exception, it is possible to estimate what the tax expenses from VAT are.

Excise taxes

Excise tax expenses are calculated by making the differences in the highest rates for each category of excisable goods with the real rates that have been excised, since for some categories of goods under the excise regime, there are several excise rates (for wine, beer, etc.).

Tax expenses = (Highest rate established by law – Effective rate) * Amount spent on consumption

Income Tax

The tax expenses that come from the Profit Tax are calculated with the assumption that in 2020 taxpayers will not pay 5% but 15% on the taxable profit, all entities with an annual turnover below 8 million ALL.

According to the final report on Tax Expenditures, published on the official website of the Ministry of Finance and Economy, for the years 2019 and 2020 the tax expenditures are as follows:
(Millions Lekë)

(Source: Ministry of Finance and Economy, 2022)

The methodology used by the Ministry of Finance and Economy seems to coincide with the calculations of ALTAX experts [2], where in 2021 they performed the same calculation for the VAT and administration gap that belongs to the 2020 data.

According to the in-depth study, ALTAX experts calculated that the Gap from the policies of exemptions and facilities together with the reduced VAT rates:

– in Albania it is 5.4% of GDP

– in Kosovo it is 3.6% of GDP.

Administration gap and compliance approach:

– in Albania it is 0.5% of GDP

– in Kosovo it is 1.7% of GDP.

The efficiency of VAT according to the relevant formula, because the closer to the 100% level is a better indicator, it can be seen that:

– in Albania it is 0.66.

– in Kosovo it is 0.93.

Within the study, you can familiarize yourself with topics

[1] Tax expenditures, or “tax loopholes” are considered losses from fiscal revenues provided for in the fiscal legislation in force, as a result of fiscal facilities or preferential rates established for certain categories of taxpayers or activities
[2] https://altax.al/product/boshlleku-i-tvsh-se-ne-shqiperi-dhe-kosove-2021/