Effect and role of Double Tax Treaties in Western BalkansALTax
Most of the Double Taxation Treaties on Income and Capital Income Tax (DTT) are largely based on (a) the Model of the Revenue and Capital Income Tax Model (OECD Model) and (b) The Model of the Double Taxation Convention between Developed and Developing Countries (UN Model).
Every country of Western Balkans has signed a tax agreement with a strategic investor for each of the strategic investments by turning this model between the parties (state and group / international investor company) similar to the MTD benefits among the states. The difference between the two models of the Agreements is related to the taxes that are included or excluded from them, but also by the extent of its effect based on the principle of fiscal residence.
Various studies show that after signing a DTT between the two mutually-owned foreign mutual investment positions, the redistribution of tax rights to the country of residence does not pose a problem. When such an agreement is signed between the two countries with asymmetrical investment positions, then the importing country of the capital risks to lose the income tax. Source countries may benefit from FDI impact. But the positive effects on FDI are more likely for middle-income countries and less likely for low-income countries. If a capital importing country benefits from the signature of a DTT, it also depends on the dimensions of its tax base. The primary benefit that developing countries require from signing a DTT is to increase the bid to attract foreign investment. But one of the problems that has become known in the implementation practices of the Agreements is that tax agreements may precede investments rather than incentives, but because they can only be concluded when there is an investment expectation.
In all this process, but not limited to the justification and logic of benefits from the signing of the DTT, a special importance takes the moment of signing them and the failure of the fiscal system and the budget in unfavorable conditions of competition with neighboring countries.
For example, the signature of the initial agreement between the international group, which owns the project of the TAP pipeline and the Albanian government, as the host country of the investment was in the disadvantage of budget revenues, since the income tax rate at the time of signing this Agreement was at low historical levels, at 10%. Any future increase of tax rates by the Albanian parliament would be subject to reimbursement in so far as it would be the increase in relation to the rate base when the agreement was signed. Following the renegotiation of the initial Agreement by using clauses that created the possibility of renegotiation, the Albanian state restored its fiscal position alike to the neighboring Greek agreement, which had signed the same Deal Agreement model but having in place tax rates that corresponded to one high fiscal burden, in relation to Albania. Therefore, studies that measured in this case the impact of the DTT, but also the agreement between the parties regarding the influx of this investment in the country were “sensitive” to the concern that the true value of the DTT was not cause deformity only of tax equality within the system Albanian tax system, but also would served as a new perspective on changing the model for other future investments.
By signing a DTT, the promotion of an international business is to realize profits by taxing little or not at all the investment’s profits it will transfer to its place of fiscal residence. On the other side, being taught with ease, investors put pressure on governments at the time of signing the Agreements for additional subsidies, in addition to those that are previously guaranteed by DTT and the specific law to the investor and investment.
The main problem of signing a DTT between a developed country and a Western Balkan country is the effort to relocate the fiscal investment facilitations that will occur to the host local investor.
Benefits of developed countries in this case are collections of income taxes, which are the main source of budget revenues in their countries. Meanwhile, the Western Balkan countries, which are based on consumer taxes, are not given the opportunity to increase the revenue base by increasing revenue tax receipts to change the trend of budgets that most of the receipts have tax on consumption.
As with profit tax rates, income tax rates have also been subject to ongoing competition in the Balkan region to boost investor attractiveness. In this case, DTT instrumentalize and further encourage this policy that is being implemented by the Western Balkan countries.
But, in fact, each Western Balkan country has also drafted packages for free economic zones by increasing the incentive rate with fiscal incentives for certain segments of the economy or geographical area within each country.
Meanwhile, with the approval of these fiscal releases, together with the agreement that in some cases are copied from badly signed models lead to creating distortions of fiscal principles but also impact on budget performance on certain occasions.
One experience can be mentioned from Albania. Although large investors have been using Albanian natural resources for over a decade, based on the benefits of the DTT, but also by specific agreements that have been the object of lobbying, they have almost never contributed to the budget with dividend tax, or even with other taxes, which are the subject of ongoing debate between them and the Albanian fiscal administration.