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Tax burden, its structuring and tax rates in the Western Balkans in 2018 - 2019

Budget revenues through the approval of the budget for the fiscal year contain within them the tax burden, which the government decides to be paid by taxpayers of their country for every year through the implementation of the tax system in the country. The Tax Burden (fiscal burden) includes direct taxes, in terms of individual and corporate income tax levels, and general taxes (including all forms of direct and indirect taxes at all levels of government), as a percentage of GDP.

Tax burden in WB6 countries is an indicator of tax liabilities that are poured into the budget by its citizens in respect of their return to public goods and services. In the last two years, 2018-2019 fiscal burden is respectively, at the levels of 30.4% and 30.3% of GDP in the Western Balkans. The average fiscal burden level is below the EU burden level by at least 10 percentage points. This fact points to a reserve in fiscal revenue capacity, which should be used as an incentive instrument along with other reforms to promote investment and productivity.

In 2019, Kosovo has the lowest fiscal burden in all Western Balkan countries. Serbia, Bosnia and Herzegovina, Montenegro have budgetary payments of 14.5% to 16.4% higher than the PB average.

Comparing the fiscal burden in the Balkans in 2018-2019, it can be seen that countries with a burden below the WB6 average (North Macedonia, Albania, Kosovo) have fluctuated over the years, moving at a slow pace and with ups and downs over the years.

The still low fiscal burden compared to the average of EU countries is mainly influenced by easing policies in fiscal legislation, which include tax rates with reductions to affect investment and ocasionally operations of fights against informality. In fact, poor administration capacity and level have a negative effect on maintaining a low level of burden. This factor creates a gap between the budget program to collect tax revenues and actual receipts from fiscal administrations.

The structure of fiscal burden in 2018 and 2019 has changed only in direction of direct taxes. Fiscal burden consists mainly of indirect taxes and other taxes and social contributions (83%). Direct taxes, including capital tax and labor tax, account for 17%. Kosovo is more specific in its fiscal burden, as indirect taxes account for 83% of the total fiscal burden.

This indicates an extreme dependence of tax revenues on consumption taxes. Montenegro also has an extreme dependence on consumption taxes and other local and national taxes as well as social contributions with a share of as much as 86% in budget revenues. With a better distribution of the fiscal burden structure in relation to other WB6 countries, Albania is presented, which has the highest percentage of direct taxes (7.2% of GDP), while the average direct taxes of WB6 are 5.2% of GDP.

In 2019, the direct tax burden has increased in Serbia. Meanwhile, the countries above the WB6 average are Albania, Serbia and Montenegro. Albania with the lowest fiscal burden that these two countries present a reserve in the collection of consumption taxes, as well as other taxes.

This specificity of the share of direct, indirect taxes and other taxes and social contributions, etc., if we look at it according to Table 7 in line with standard tax rates, it is noted that:

- in terms of direct taxes, countries such as Albania and Serbia that apply higher profit tax rates than others have a larger share of direct taxes on the fiscal burden in GDP.
- regarding the part that indirect taxes perform in the fiscal burden, when we look at it related to the standard VAT rate, there is another correlation, which does not correspond between them. Thus, Montenegro, which has the highest standard VAT rate (21%), actually has a high share of the fiscal burden, which is significantly higher than in other countries. But Albania and Serbia that implement the same standard VAT rate of 20% have differences in the respective parts that bear indirect taxes on the fiscal burden. This fact shows that the fiscal burden is closely related, in addition to the VAT rate, to the flow of goods and services, the extent of tax exemptions, as well as the level of informality and reserves in the administration of VAT and other taxes in general.

- if we look at the relationship between the fiscal burden of social contributions and other taxes on the rate of contribution, which is the main part of this group, it is observed that Serbia, Bosnia and Herzegovina and Montenegro, which implement higher contribution rates than others countries that have higher fiscal burdens. But even in this case, it is worth noting the fact that it is related to reserves in fiscal administration capacities and the fight against informality in the labor market in all WB6 countries.

The tax rates on capital, personal income and wages (Tab.11) for 2020 have not changed, except for Albania, which has reduced the dividend tax rate to 8% from 15% which was before 2019. Meanwhile, it has also changed the income limit from employment for the middle band that is taxed at 13% in accordance with the progressive wage tax scheme with three income bands. It is noted that WB6 countries have a significant level of compliance with the IMF mission recommendations, and all international monitoring institutions have presented a stability of tax rate policy.
When analyzing these tax rates, as indicators of fiscal burden from the perspective of the fiscal revenue that has entered the budget of each WB6 country, it can be seen that the lower rates on direct taxes have not affected the reduction of the fiscal burden, but on the contrary the fiscal burden has increased. This shows that administration and the fight against informality make the difference and are dominant over fiscal policy.

On average, the fiscal burden in Europe is as much as 40.1% of GDP. Taxes on production and imports account for the bulk of tax revenues with a share of 13.6% of GDP, with VAT accounting for 7.1% of GDP. The fiscal burden from social contributions accounts for as much as 13.3% of GDP. Income and wealth taxes account for 13.2% of GDP, with household income tax accounting for 9.5% of GDP and personal income tax and profit tax as much as 2.7% of GDP.

In EU countries, the fiscal burden is 41.5% of GDP. Fiscal burden from production and import taxes occupies 13.3% of GDP, with VAT accounting for 6.9%. Fiscal burden from social contributions accounts for 15.2% of GDP. Income and wage taxes account for as much as 13% of GDP, with household income tax accounting for 9.5% of GDP and personal income tax and profit tax accounts for 2.5% of GDP (see Table in Annex).

The average standard VAT rate in 2019 for the WB6 is 17% in Bosnia and Herzegovina, 18% in Kosovo and North Macedonia, 20% in Serbia and Albania, 21% in Montenegro.
Kosovo, North Macedonia and Bosnia and Herzegovina apply the standard VAT rate below the regional average (19.9%). All other Balkan countries, except Bosnia and Herzegovina, apply reduced VAT rates, mainly for basic consumption, health, energy supply, urban transport, as well as education, books, magazines and cultural and sports activities. Montenegro has started implementing the standard rate of 21% from 2018. Kosovo has started to implement a reduced VAT rate, at the end of 2015, and has increased the standard rate by 2%, in order to maintain fiscal stability. of the budget. Montenegro and Serbia adopted a reduced VAT rate in 2016, at 7% and 10%, respectively. Albania and Serbia apply a standard VAT rate of 20%.

VAT is the main tax in all WB6 countries, unlike EU countries, which have the main tax not VAT, but personal income tax and profit tax. The Value Added Tax (VAT) burden compared to its tax rates (excise tax taxes a specific category of goods), as in the case of profit tax and wage tax, highlights the problem with fiscal administration capacity. The VAT burden trend does not correspond to the VAT rate levels. In cases when the VAT rate is above 18% (Albania, Croatia, Montenegro and Serbia) the highest fiscal burden is not in Albania, but in Montenegro and Serbia. Although Albania implements a higher VAT rate than North Macedonia, it has a lower burden than that.
Fiscal policy in this case seems to need to be approached more closely with taxation modeling, as its productivity in is lower than the neighboring countries.

Social and health insurance rates have been stable, except for Montenegro since 2019 has reduced the employer's contribution to social security by 2%. Bosnia-Herzegovina (without Republika Srpska) and Serbia have the highest tax rates. Kosovo and North Macedonia have the lowest rates. However, Albania is only 0.9 percent higher than North Macedonia (Tab.10) and this fact is present with the low share in budget revenues. The social and health insurance burden is highest in Bosnia and Herzegovina, Serbia and Montenegro. Meanwhile, taxpayers in Kosovo, North Macedonia and Albania have a lower real burden, given the payments they made to the budget in 2019.

When we compare the burden of labor taxes, which includes both taxation on wages and contributions, the increase in the burden of contributions varies at the level of 2 % -2.6 % for Albania, North Macedonia, Kosovo and Bosnia and Herzegovina. Meanwhile, in Serbia and Montenegro, a tax burden of 3.2 % to 4.3 % of GDP is added to the contribution burden. Given this joint calculation of the two levels of burden that constitute the burden of labor taxation, it appears that the fiscal burden on labor is between 4.5 percent (Kosovo) to 17.5 percent (Bosnia and Herzegovina).

In EU countries, the labor tax burden is 44.5% in 2018. Although with a decrease, the fiscal burden on labor in EU countries is over twice as high as in Western Balkan countries.

Comparing tax rates between WB6 countries applying a progressive tax rate (Montenegro, Kosovo, Albania, Serbia) with countries applying a flat tax rate (Northern Macedonia, Bosnia and Herzegovina) regarding with the burden being paid on the budget there is a noticeable gap between them.

Given the effectiveness of the progressive tax burden, it can be seen that this model guarantees more revenue in the budget than the income guaranteed by the flat tax model.

The average marginal tax rate in the Western Balkans for individual income tax / salary is 14.5%.

- Albania (23%) and Serbia (25%) apply rates above this average;
Kosovo (10%), Bosnia and Herzegovina (10%), Northern Macedonia (10%), Montenegro (9%) apply below-average rates.
Meanwhile, for individual income, which is taxed at source, each state implements progressive policies scaled according to segments of personal income.

Tax rates for withholding taxes are:

- below the Balkan average are 4 countries; Montenegro (flat tax 9% withholding tax), Kosovo (flat tax 10%, with no dividend tax), North Macedonia (flat tax 10% on all personal income), Bosnia and Herzegovina (tax) flat 10%, where only the dividend is taxed at 5%);

- above the average of the Balkans they hold 2 countries; Albania (flat tax 15% withholding tax, where dividend is taxed at 8% from 2019), Serbia (progressive tax 15% - 20% - 25% withholding tax).

The average total rate of social contributions in the Balkans is 29.8%.

Below this average rate are listed 3 countries:

- Kosovo (10%), Northern Macedonia (27%), Albania (27.9%);

Above this average rate is listed 3 countries :

- Bosnia - Republika Srpska (33%), Montenegro (32.3%), Bosnia - Federation (41.5%), Serbia (37.05%).

The countries of the group with the burden of high tax rates have a significant difference ranging from 7% to 14%. Meanwhile, starting from the policies for increasing pensions, for transfers to the needy, but also for vocational education and capacity building of employees, they are increasing as a need to face the increase of competitiveness of human capacities, but also the economy. The policy of burden of contributions needs to be revised to narrow this gap in Kosovo, North Macedonia and Albania. Low levels of contribution rates risk in the medium and long term also the implementation of current schemes based only on the fact of increasing age for the benefit of retirees.

The diagram below shows that even in 2019 the main share of the fiscal burden in the Western Balkans belong to consumption taxes and less burden is left on direct taxes. Meanwhile, the policy on social funds is seen as not aiming to be competitive while maintaining the same burden as the previous year.

In the context of the application of tax rates, if we analyze them in their entirety with the level of fiscal burden, it can be seen that the administration capacities for indirect taxes are below the level of tax burden in each WB6 country. But even for direct taxes, the management capacity still remains completely unrealized. This confrontation requires a review of the tax rate adjustment model with capacity building, adaptation to the economic and social environment of taxpayers.

From a practical case-based perspective, there is no doubt that fiscal policy affects business economic choices. If tax rate reductions are not harmonized with one another considering the expansion of tax bases, then a budgetary situation is created that negatively impacts fiscal consolidation, as well as the strengthening of voluntarism in paying taxes and enhancing fiscal culture.

From the horizontal comparison of the rate of social contributions in total there is a regional tendency to keep them at the same level as in 2018. The non-change of social contribution rates shows that politics is relaxing the labor market and aims to help budgetary policies, despite the fact that some countries such as Albania, Kosovo and perhaps even North Macedonia need to increase their contributions to some sharp social policies regarding employment training policies and to certain categories such as: people unable to work, young people who are new to the job market as well as the poor.

If we analyze more deeply, it is concluded that some countries have a low fiscal burden (Albania, Kosovo, Macedonia). Reducing a tax rate of a certain tax is not the solution of the demand of the citizens and the budget. A complex tax system, which in recent years is being implemented in an economy that needs to be competitive in the regional market needs a harmonization of fiscal policy with tax rates. But on the other hand, the complexity of the fiscal system increases the difficulty of voluntary cooperation with the law by small and medium taxpayers, who are the majority of the tax base. Although recent studies by various organizations and researchers confirm that changes in consumption and capital tax rates are less influential in the economy than changes in individual and labor tax rates, it is worth noting that shifting the fiscal burden from consumption and capital to the individual and labor is quite a difficult task for any government.

Fiscal policy regarding low tax rates for capital has not had the expected impact on investment absorption and consequently on economic growth. This shows that fiscal policy is a very strong stimulating / inhibiting tool for the movement of capital and consumption. But it cannot be ignored that the budget needs enough money to make policies to increase the labor market through stimulation and capacity building, but also through the infrastructure line and the creation of the environment for the introduction of modern technology.

For example, let's look at the case of Montenegro, which has applied capital tax rates among the lowest in the Western Balkans. GDP in this country has not increased significantly, but has decreased over the last 5 years. The same happened with North Macedonia, which is held for lower tax rates even at European level. The country's GDP has remained at around 10 billion euros, with a decrease in national added value.

The implementation of a comprehensive reform policy must be based on a level of administration and strong capacity. Improving the tax system should address both the policy of tax rates and the strengthening of administration in a harmonization between them, because this gap between policy and administration always is being considered a necessary condition for the functioning of the development of the fiscal system in accordance with the objectives of economic development.