A better way to tax in Albania

A better way to tax in Albania

The main source of tax revenue in Albania is value added tax (VAT). The weight of VAT tends to be broadly close to the level of development of the region and is still comparable to that of the Western Balkan countries, but there is still room for improvement in the battle against evasion and exclusionary policy gaps. In VAT share on tax revenues is seen a decrease, which to some extent is affected by the burden of personal income tax, but in fact is more than that.

If the analysis extends further to consume taxes, the excise tax does not appear to bear another increasing share in revenue, beyond the results in value that record a significant increase.

The two main consumption taxes together carry a 10-year average weight as high as 47% of the budget tax revenue. Their share in 2011 is as much as 52.5% of tax revenues. In 2021 their weight is as much as 40.8% of tax revenues.

Budget revenues from VAT & Excise and the ratio with tax revenuesbil. Lek
Fiscal year20112012201320142015201620172018201920202021 (11m)
% of Revenue39.2%38.7%37.3%36.8%36.8%35.5%35.0%34.2%31.1%32.7%29.2%
Excise Tax40.436.438.240.93941.945.244.946.744.546.6
% of Revenue13.3%12.1%12.7%12.2%11.4%11.3%11.3%10.7%11.0%11.2%11.6%
Source: MFE

The share of consumption taxes seems to have decreased by 11.7 percentage points. But this does not mean that in 2021 less consumption taxes were collected compared to 2011. In fact, in 2021 consumption taxes are 3.8 billion more than in 2011. However, this income is low, as it is affected by numerous exemptions and fiscal facilities, accompanied by poor effectiveness in the fight against tax evasion.

But where has the consumption tax share shifted in these 11 years?

If we have to analyze how the share of taxes in the budget has shifted (tax structure) we will have to continue the analysis with other taxes that have an impact on budget revenues.

The share of business income tax revenues (profit tax) in the country is growing slightly, but with low impact weight and far from optimal income levels.

Relying mainly on value added tax and excises has a negative impact on increasing the contribution of this tax, significantly affecting ineffective decision-making to increase investment.

Budget Revenues from Profit Tax and the ratio to tax revenues bil. Lek
Fiscal year20112012201320142015201620172018201920202021 (11m)
Tax on Profit19.716.815.121.524.929.131.634.436.628.430.7
% of Revenue6.5%5.6%5.0%6.4%7.3%7.9%7.9%8.2%8.6%7.1%7.7%
Source: MFE

The share of personal income tax (PIT) revenues in Albania is higher but not stable (however with promising results if the reform in the progressivity approach is to be comprehensive). From the indicators of personal income tax receipts, it seems that we do not have a shift of the tax burden beyond the value collected from this tax is increased.

Budget revenues from Personal Income Tax and the ratio to tax revenues bil. Lek
Fiscal Year20112012201320142015201620172018201920202021 (11m)
Personal Income Tax27.927.929.528.829.731.432.136.546.133.636.5
% of Revenue9.2%9.3%9.8%8.6%8.7%8.5%8.1%8.7%10.8%8.4%9.1%
Source: MFE

Properly projected, revenue growth through TAP has a similar growth impact as VAT and can help improve increase of equity. Greater use of personal income taxes, combined with loans to boost labor force participation, and perhaps fewer profit tax, could boost growth.

National taxes have an increase in their share of tax revenues and appear to bear a share of the reduced share of consumer taxes.

Local taxes also have an increase in their share of tax revenues by an additional 1.9 percentage points. The increase of the share of local taxes at the end of 2021 is understood by ALL 13.1 billion more local taxes than in 2011.

Whereas, social and health insurance contributions have an increase of their share in tax revenues by 5.8 percentage points. This increase in their weight is also the main impact on shifting the tax burden from consumption to labor taxes (personal income tax and insurance contributions). Labor taxes carry a share of 33.5% of tax revenues in the budget.

An increase in the share of labor taxes has increased the tax burden to the detriment of employees. In this dynamic of change the tax share structure it is necessary to review through the analysis of which strata and categories should receive a higher tax burden in relation to the policy implemented in 2021 and before.

Budget revenues from national taxes, local taxes, S&H contributions and the ratio of tax revenues             bil. Lek
Fiscal Year20112012201320142015201620172018201920202021 (11m)
National Taxes21.428.728.432.633.635.738.538.636.435.835.8
% of Revenue7.0%9.5%9.5%9.7%9.8%9.7%9.7%9.2%8.5%9.0%8.9%
Local Taxes11.810.810.812.411.714.918.421.723.121.924.9
% of Revenue3.9%3.6%3.6%3.7%3.4%4.0%4.6%5.2%5.4%5.5%6.2%
Health&Social Contributions56.657.4607071.779.186.893.198.497.797.5
% of Revenue18.6%19.1%20.0%20.8%20.9%21.4%21.8%22.2%23.1%24.5%24.4%
Source: MFE

Our presentation highlights specific reforms that can help Albania address its fiscal, growth and equity challenges.

In politics about TAP there are clear design flaws, where mainly fiscal policies with low legal rates, imbalances in the taxation of income from work and capital, facilities spread without a dynamic analysis, but also regressive (which tend to benefit the rich), have impacted in part the administration of TAP and past problematics. These erode the tax base and worsen the distribution of income.

Thus, an employee in Albania, on average, has per capita income as much as 31% of capita per income of an employee in the European Union. The labor tax share collected by the Albanian budget is 33.1% of tax revenues. Whereas, the labor tax share collected by the EU budget is as much as 51.7% of tax revenues[1].

Given this comparative parallelism, it seems that the share of labor taxes is not less burdensome compared to EU countries, thus expressing the opinion that in this regard it is necessary not to further advance with increasing fiscal burden.

In fulfillment of the tax revenues in this regard, the fiscal program needs to be oriented towards narrowing evasion and expanding the base of labor taxes. This program to date is still in underdeveloped stages and this is evident from the high level of evasion in the labor market.

Reducing TAP exemptions would simplify the system, increase revenue, and make taxation even more progressive. Thus, an individual who earns more pays even more taxes without imposing additional taxation on formal middle-income employees.

Leaving the other parameters unchanged, if facilities and increased management of personal income from capital were eliminated, the country would see a double increase in TAP income, influencing the change in the effective tax rate and categorization best of progressively taxable income. What is important, however, is the policy that would increase tax contributions from capital, as low rates or poor tax administration disproportionately until today have benefited wealthy families.

Providing well-targeted incentives for low-wage beneficiaries, for example, a household income tax credit, can encourage their participation in the labor market and help reduce the gender gap.

It can also promote job formalization by partially offsetting social security contributions and helping to improve revenue collection.

Profit tax reform is also needed and need to be implemented now.

The progressiveness of rates by sectors / activities is most needed to help attract investment in them, but also to mitigate the shift of profit between sectors.

While, the reduction of tax benefits and tax exemptions can equalize the playing field. Ongoing corporate income tax reform provide an important opportunity to review business tax compliance with international tax policy.

To address tax equality concerns, the VAT administration in our country can be strengthened by addressing exemptions combined with well-targeted transfers that encourage the use of electronic payment methods by acting as a part for the fiscalization process. The digital economy further expanded due to the pandemic should be taxed in the same way as other sectors in the economy to avoid erosion of the tax base.

Citizens’ support is essential when implementing tax reform. In 2022 where perception and trust are low about how taxes and levies are collected, tax reforms should be accompanied by improvements in the quality and implementation of public spending and the overall fairness of fiscal policy.

Timing is also important. Until the pandemic is brought under control it is important to continue supporting livelihoods to ensure a strong recovery. In circumstances when the budget has a narrower fiscal space, the tax system may need to be reformed comprehensively, which may help increase confidence in the medium-term fiscal framework.

Fiscal policy needs to be convincing in its approach that maintains an important role in responding to major shocks. We saw the effectiveness during the pandemic, and in case of new general closures mandated for health reasons, actually the same financial instruments (Eurobond, granted and other large contracts) can’t be reused.

Fiscal policy management needs to be revisited in a context of higher volatility.

The macroeconomic landscape is likely to be more volatile in the future. Pandemic support policies and especially policies in the field of construction and reconstruction can’t boost once again economic competitiveness capabilities and boost support for small business empowerment.

The anchoring of policies that manage the mistakes of the past and the national dialogue to restore confidence in politics and the economy will affect the preservation of fiscal space through strong frameworks and continuous monitoring by civil society.

[1] Taxation trends in the European Union, 2021

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