Is the government serious about tax reform?

The Albanian government has launched various efforts to address informality, particularly through digitalization measures such as the Fiscalization process. This strategy, launched in 2022, aims to reduce informal economic activities by requiring businesses to issue electronic invoices for all transactions. The aim is to ensure transparency, increase tax compliance and combat tax evasion.

However, whether these efforts reflect a genuine commitment to transparency and long-term improvement, or whether they are driven more by political calculations, is a point of debate among analysts and critics.

Furthermore, the complexity of the tax system, including its administrative procedures, still creates barriers for businesses, especially small and medium-sized enterprises (SMEs), to fully comply. While the government’s rhetoric about the success of fiscalization highlights some progress, actual results may take longer to emerge, especially when looking at sectors resistant to formalization or where informal practices have become the norm.

Insights from European countries, such as Italy’s use of service vouchers for seasonal work and Finland’s reduced VAT in informality-prone sectors, suggest possible ways in which Albania could improve its approach. These models show the importance of designing flexible, context-specific strategies that encourage businesses and workers to formalize without overly burdensome regulations. As observed in other EU countries, innovative labor market models such as part-time or temporary work can also be useful in integrating informal workers into the formal economy.

For Albania, further strategic adjustments could include better targeting of support measures, such as skills development programs for workers in informal sectors, especially in agriculture, and implementing more sector-specific fiscal policies that reward formalization. Furthermore, successful implementation will rely on a strong legal and institutional framework that can effectively manage and monitor the transition from informality to formality.

What are the remaining strengths of the current Fiscalization efforts?

According to various analysts, they are:

• The initiative in the fight against tax evasion is the digitalization of the tax system, known as Fiscalization. Launched in 2022, this system requires businesses to record their transactions in real time using electronic invoices that are automatically sent to the tax administration. This change aims to reduce the human element in tax collection, which has often been subject to corruption or misreporting. The National Agency for the Information Society (NAIS) has been instrumental in implementing these reforms, which are seen as good practices in tax collection among EU candidate countries.
• In theory, digitalizing the process ensures that more transactions are captured, leading to higher tax revenues. For example, reports from the Ministry of Finance and Economy show that Albania has seen an increase in VAT and other tax revenue collection since the introduction of fiscalization, often presented as evidence of success.
• As part of Albania’s EU accession negotiations, fiscal reforms are a critical area of ​​harmonization. The government has taken steps to meet EU standards, particularly with regard to tax transparency and efficiency. The fiscalization process has been highlighted by EU institutions as a necessary reform to improve fiscal management and increase Albania’s readiness for EU membership.

and skepticism…

Despite the positive rhetoric surrounding fiscalization, critics argue that the real impact of these reforms remains limited due to several unresolved issues.

• While the digital system reduces the possibility of human error, corruption and political patronage remain significant barriers. Reports from Transparency International and the World Bank highlight that tax law enforcement is patchy, with some businesses still finding ways to evade taxes through off-the-books transactions or using political connections. Thus, digital is sufficient to address informality if the underlying issues of weak enforcement and corruption are not addressed.
• Critics argue that Albanian businesses and individuals still do not trust tax authorities enough to fully comply with the new digital tax rules. Fear of being subject to audit or punitive action can discourage full participation, particularly among small and medium-sized enterprises (SMEs). This lack of trust is deeply rooted in Albania’s history of tax evasion and bureaucratic hurdles, which have long been part of its economic culture.
• The government’s strong rhetoric about the success of fiscalization is often seen by critics as a political move ahead of the 2025 elections. The timing of these reforms, coupled with public campaigns and media hype about their success, raises questions about whether the government is truly committed to long-term reforms or whether these efforts are aimed at securing electoral advantages. Some analysts argue that the focus on the tax system in the run-up to elections may be a strategic move to present a picture of progress without addressing more fundamental issues such as informality or corruption.

What’s new in 2024?

While fiscalization has been underway since 2022, the government’s strong rhetoric in 2024 suggests a renewed effort to tackle tax evasion, particularly with the introduction of measures targeting wage evasion and the formalization of small businesses. The digitization of tax collection processes has become more robust, and the government is doubling down on its claims of success.

• Public messaging and communication. There is a greater focus on public engagement, with campaigns designed to highlight the benefits of formalizing the economy. By portraying the fight against informality as an effort to create a fairer economy, the government is trying to improve its image and gain the trust of taxpayers.
• EU Pressure and Regional Comparisons. The government’s emphasis on fiscalization is in line with EU expectations and regional examples, such as Croatia, where real-time billing systems have significantly improved tax compliance. Albania’s progress in aligning with EU standards is seen as a key driver of the current campaign.

While fiscalization (digital recording of transactions) has seen progress, informality remains a significant challenge, especially in sectors that rely heavily on cash transactions. Despite the government’s rhetoric about the success of these reforms, a significant portion of the economy continues to function informally, exacerbated by political patronage, corruption, and a lack of full transparency.

Government digitalization measures, while crucial, may be insufficient without addressing broader systemic issues such as enforcement, education on tax compliance, and transparent practices within the public administration. Comparative experiences in the region show that digital tax systems are most effective when accompanied by strong judicial and administrative frameworks, as well as robust anti-corruption measures.

The political momentum to step up the fight against evasion in 2025 may be driven by electoral cycles. However, the change in tone and expansion of efforts may signal a more serious effort to align with EU standards and reduce informality. This suggests that while challenges remain, the overall focus is gradually shifting towards a more transparent and compliant system.

The new draft strategy for Albania’s tax system (2024-2027) aims to address informality while maintaining current tax rates. This strategy focuses primarily on improving the management of existing financial resources rather than introducing new taxes or changing the existing tax structure. The main goal is to increase tax revenues by about 65 billion lek (about 2.5% of GDP by 2027), through better management of taxes and customs. This increase is expected to come mainly from increased efficiency in the system rather than adjustments to tax rates or new exemptions.

One of the key points in this strategy is a comprehensive review of tax policies, including exemptions and indirect taxes, which can indirectly support efforts to combat informality. This approach has been developed in consultation with international institutions such as the EU and the IMF, aligning with broader regional goals for tax reform.

Despite these ambitious goals, the effectiveness of this strategy remains to be seen, especially in light of Albania’s historical struggles with informality, which is fueled by issues such as hidden employment, weak enforcement, and political patronage. While digitalization through the fiscalization process is a step forward, critics argue that without a concerted effort to address governance issues such as corruption and transparency, this strategy could face similar challenges as previous campaigns against informality.

Thus, while the new strategy presents a potential roadmap for reducing informality, its success will depend on improved governance, more targeted implementation, and a broader societal commitment to addressing the root causes of informality. The draft acknowledges the need for better systems, but will require significant follow-up to produce tangible results.

Therefore, while the fiscalization process is a positive step forward, it remains to be seen as 2024 draws to a close whether it will lead to sustainable and real improvements in tax compliance and economic formalization beyond election cycles.

Sources.

Transparency International. Corruption Perceptions Index
World Bank. Albania’s Digital Tax System
European Commission. EU Progress Report on Albania
OECD. OECD Economic Surveys. Albania