Consequences of different tax rates on freelancers from the rest of professions

Consequences of different tax rates on freelancers from the rest of professions

The analysis of tax reform can be conceptually divided into two distinct parts:

– how tax changes affect individual or business choices in terms of employment, savings and investment, and

– how changes affect the distribution of such activity across sectors of the economy.

First, tax reform can increase the overall size of the economy. If well thought out and with a change accepted by most stakeholders, the reform puts the economy on a new growth path without aiming for further changes year after year by making patches and fiscal stitching to systematize the shortcomings of haste and poor governance.

Second, there is often an exchange between growth and progressivity in this model. Recent changes, however, has highlighted the role of uncertainty in tax reform, noting that a progressive income tax system provides security against volatile income by making the change in the percentage of post-tax revenue less that the percentage change in pre-tax income.

But what do professionals who are already facing this discriminatory policy think?

Pano Adashi, 56, an IT business analyst who works for a large group of market analysis, broke away from the company where he worked and started performing services on a contractual basis two years ago. He made the decision after being informed that his business would have no profit tax and VAT for a turnover that was far from what he could bill within the year. He likes the flexibility of his new career and is clear that “he would never continue as a firm employee, but as a permanent independent professional”.

But his status as a self-employed contractor could already be revoked, due to extensive changes to a complex tax law justified by the reform of the personal income tax law. This change will only affect the freelancers that provide services, while some other professions that produce, trade, transport or just do not provide services will be just as excluded as before. This makes no sense to him, but also restricts him in his right to do business the way he thinks, just because some self-employed professionals should be considered self-employed tax evaders and the rest of the professions like self-employed, including medium and large businesses are considered tax evaders.

The reform will have serious consequences for hundreds of thousands of contractors, with employers facing potentially higher costs and some workers demanding significant cuts in their incomes, as well as an additional administrative burden for both. Mr. Adashi, for example, fears he may suffer a possible cut in his spending, due to non-payment of future tax, which he had not planned in his work, as well as uncertainty about his future.

“There is so much uncertainty around, contractors do not really know what customers will do,” he said. “A lot of customers really do not understand or do not care about this change of rules.”

If he were to be classified as an employee, he believes there are three options now:

– prove another form of registration as a business,

– work as informally as possible, or

– to leave the country,

none of which he wants to do.

As firms and contractors begin to face the unpleasant scenarios created by the forthcoming tax reform, we at ALTAX look at the consequences of rule changes and how independent professionals and their clients can navigate dangerous challenges for a while in their future.

First, all this will cause uncertainty and chaos in the market structure. This lack of responsibility for taxpayers will translate into further loss of trust in the system and the government’s sensitivity on equal treatment of taxpayers, the implementation of neutral taxes and a system based on tax justice. All this new policy will directly affect the reduction of fiscal compliance by being considered as a devaluation of the business facilitation policy.

Second, this new initiative affects the loss of trust in government initiatives to relieve business from taxes, due to the lack of seriousness and responsibility in drafting fiscal policies to the detriment of certain businesses.

Third, it further strengthens the capacity for corruption

Fourth, the initiative has a direct negative impact on the most vital part of the service sector, including the contraction of 12-14 percent of the economy for small businesses, leaving room for exploitation by large businesses.

Fifth, this policy is in violation of the Constitution by differentiating and discriminating before the law a certain category of citizens by mistreated one profession / sector and treating another profession / sector differently.

Sixth, this new way proposed for the taxation of the freelancers violates the principles and is contrary to the honest taxation, that whoever earns more pays more, because in fact although this principle has not yet happened, but with this new approach it will create even more distortions.

The changes for the exemption of small businesses from the simplified profit tax and VAT were not requested by the business, but were proposed and approved by the current majority a few months before the 2021 political elections. This policy undertaken and announced by Prime Minister Rama as ” a very aggressive measure of support, which is unique in our region and coincides with the commitment to support anyone who creates jobs for themselves and their families, creates jobs for others and becomes part of the small business community” can now is considered erroneous and hasty, as it has created elements to evade personal income tax.

It looks that the tax-free initiative that was declared as unique in the whole region, after being a political approach not analyzed properly and only for the pre-election period. Not more than 242 days have passed since the Rama 3 government and now a part of the services sector, registered as professionals is considered as the worst of the fiscal system in Albania.

The decrease in the number of businesses that registered, as a result of the tax cut seems to have been a statistical and political bubble and not a steady increase in business and economy showing that we have a non-dynamic economy.

In fact, the entire community of freelancers, after accepting the tax on dual employment, even though it was outside the framework of contract-based work under the Labor Code are already aiming to be taxed the same as if they were employees in a business, but their new owner it will be the Government and not the One that they had before.

All these freelancers are the part that is left to the country from the liveliness of intellectual and professional environment. These are contractors who work in a very similar way to traditional employees, but because they bill their services through a limited activity, they gain an advantage by paying lower taxes to date by not paying profit taxes.

In this context, the UK a few years ago applied a similar scheme, but with an entirely British economic and rule of law environment, where the law has been in place for centuries and business is really sacred in its own right. So, similarity is only for certain parts of the scheme.

Freelancers as contractors and business groups already seem to have an immediate reaction and will ask the government to rethink the changes, warning that they will involve workers and companies in disputes and aggravating the environment of doing business unnecessarily in this period fraught with many unknowns and market difficulties. The surprise in changing tax policy, together with the poor understanding of the very complex rules that are changing and modifying much more often than before, risks that many real, self-employed people will be classified as employed, but with an agreement that will refuse full implementation of the amended law.

Meanwhile, this hasty change does not give utility businesses enough time to plan because of the obstacles that government guidelines will create.

Big businesses are unaffected by this whole policy, as they have for years benefited greatly from fiscal benefits and have never been the subject of changes that have so openly and strongly influenced business decisions.

It has never happened that finance or tax officials say it’s our fault. The blame always lies with the business and the “disobedient” taxpayers.

Share this post

Leave a Reply


error: