Aggressive Tax Planning in Albania and its prospects

Aggressive tax planning is about abusive tax schemes and tax avoidance and is important for the near future of economy and fiscal system of Albania to be known and prepared with the idea of maintaining community confidence in the integrity and equity of the tax system.

Aggressive Tax Planning in Albania is yet an underestimated risk to the Tax System. Even the efforts to fight tax evasion could interfere with the aggressive tax planning, the problem usually is not listed there. The aggressive tax planning belongs to the big corporations branches in Albania and is the one corporate tax policy which could undermine the policy intent of the tax law, impacts on the integrity of the tax system and erodes community confidence in the fairness and equity of the tax system. It is clear that taxpayers in a tax system, which is based on the concept of voluntary compliance, will not be predisposed to comply if they perceive that the system lacks integrity. Maintaining integrity in the system is therefore critical.

Aggressive tax planning as a new model of a business strategy

There is no one definition of aggressive tax planning, however, there are important characteristics that indicate aggressive tax planning, and they include: 

• arrangements that are contrived and artificial in their method of execution;
• arrangements that are uncommercial from a business or economic perspective;
• schemes that involve fraud on the revenue;
• circular movement of funds including non-recourse loans paid off by future earnings;
• schemes not implemented as specified in contractual and other legal documentation;
• abuse of a specific concessional or anti-avoidance provision contrary to the policy underlying the law; and
• permanent advantage as distinct from a timing advantage.

There are also a number of tax planning techniques that may indicate aggressive tax planning. These could be broadly described under headings such as:

• use of non-recourse debt;
• transfer pricing;
• manipulation of dividends/rebates/credits;
• use of tax havens;
• use of tax exempt status;
• loss multiplication; and
• use of loss entities etc.

Who could be the most sensitive activities touched by this new tax “virus”?

There are also a number of tax sensitive commercial activities that may indicate aggressive tax planning. They include:

• mergers and acquisitions;
• structured financing;
• international transactions;
• use of financing hybrids;
• strategic alliances;
• sharing of production or processing facilities etc.

In Albania, to only name a few, we have seen not massive policy of aggressive tax planning based on the small market dimensions and also in the lack of capacities to understand and plan to tackle with this new strategy of big branches of multinationals working in Albania jurisdiction.

The roots of the tax planning industry in Albania can be traced not before than a decade ago during the period of boost of oil production and is advanced in the latest year with the energy sector development.

Even that signs of tax planning from the big business actors in Albania the Income Tax policy was not in line with the new developments of the industry sector. By the early 2010s rising incomes of professionals and upper middle class and high top marginal tax rates made tax avoidance a more attractive option to a wider group of people.

In the latest years, for example, there are a number of schemes marketed that, put simply, involved the issue of bonus shares to create a paper loss which could then be used to annihilate other profits.

In some more advanced cases, for example, there is a scheme that that went one step further by cashing up the assets of a company and selling the shares for a price slightly less than the full cashed-up value for a capital, non-taxable gain. In effect the company was stripped of accumulated profits on which company tax had been paid and personal tax was be avoided

From these very brief pieces of history we come to the current tax system which is said to go through a period of tax reform. Many of the tax reform proposals, while addressing a number of the “drivers” of aggressive tax planning in the tax system should also give rise to new drivers and new tax planning opportunities. In fact, there are no structures to deal and fight against tax avoidance and aggressive tax planning.

What should be asked from authorities?

For the community to get the best from the new Tax System it is essential that new and emerging aggressive tax planning arrangements are quickly detected and acted upon.

In order to fight aggressive tax planning the tax policy and administration need to be on the front foot in obtaining information, in sharing intelligence and employing strategies consistent with the compliance model. This approach should be reflected in the organizational structure that should create a number of dedicated positions who should have a responsibility for aggressive tax planning. The “structure” should be flexible with a number of business line “projects” that focus on the most special aggressive tax planning schemes.

Firstly, need to think at the high level strategic directions, which at least should include:

• a corporately driven integrated intelligence and compliance programs;
• a business line commitment to detect and address aggressive tax planning;
• a strategic intelligence capability to detect and respond to new and emerging aggressive tax planning;
• identifying leverage points in the system;
• implementing projects to manage transitional reform risks;
• focus on key planners and promoters;
• managed litigation strategy; and
• managing alliances and relationships with the professions.

Secondly, all tax officials, who interact with taxpayers must think strategically and focus on problem areas or systemic issues. When dealing with a case or issue they need to understand the broader commercial and taxation context. At this level the intelligence derived is strategically analyzed in the context of the underlying tax planning drivers.

Thirdly, Big Taxpayers will seek to reduce their taxation burden and whilst most taxpayers will seek ways to minimize this burden legitimately and in a way consistent with general taxation policy, some will actively seek “loopholes” to reduce the burden. This concept of seeking loopholes or structural problems in the taxation law is sometimes referred to as the “drivers of tax planning”.

To successfully counter aggressive tax planning the Albanian tax authorities needs to be proactive and to operate in real time. Risk analysis provides a way of thinking which can help the tax authorities to find the systemic solutions.

The key to risk analysis is that it allows the user to consider tax planning arrangements, products or schemes from the point of view of what are the drivers and leverage points in the tax system that the arrangers and investors are looking to exploit and then to examine the legislative loopholes which are utilized.

Risk Analysis should operate at a number of levels:

• at its highest level, it provides an analytical framework for examining tax planning;
• at its next level, it is a method of capturing tax planning intelligence in a structured and systemic way. Strategic Risk and Analysis could use the model as the basis for its analysis; and
• finally, but most importantly, it allows the identified tax planning to be analyzed according to patterns and trends.

Since the whole strategy as tax administrators is built around the idea of voluntary compliance, which means of increasing the stock of “social capital” that prompts people to comply with their tax obligations even when they’re unlikely to be found out if they don’t there need to be also in the same line the strategy against the aggressive tax planning. Apart from the revenue loss involved, the main problem with tax avoidance is its contagion effect, as voluntary compliance is eroded by the sight of individuals and companies, usually those with high income or high capital reducing their tax obligations

If voluntary compliance means everything for the tax authorities and fiscal policy, then they need to work in the same spirit as well as the companies approach need to feel from the policy and administration together. They should be working hard to shift attitudes in this direction, in the first instance by encouraging the largest companies and highest wealth individuals to operate within the voluntary framework strategy.More engagement and debate between tax policy and administration and tax advisors and CIOs of big companies on this issue would be very worthwhile. Good tax behavior is not the sole responsibility of taxpayers and their advisers. If the whole tax system is to work properly, we also need coherent tax legislation and a tax administration with the fully capacities that enforces the law fairly and with common sense.