Level and structure of taxes in Albania in last decade

The last decade has seen profound political, social, economic and institutional changes in Albania, and these changes have had their effect on tax policy.

The reforms, directed at increasing fiscal revenues to deal with growing demands for spending, have established the value added tax (VAT) as Albanian principal tax. However, the bias towards indirect taxation, along with the narrow income tax base and high degree of noncompliance, have limited efforts of the Albanian tax systems to pursue objectives related to increased equity and greater stabilization.

This policy has also affected tax administration, covering issues such as the provision of differential treatment for different categories of taxpayers, simplifying tax systems by eliminating distortionary and less important taxes, incorporating information technologies, and dealing with the challenges of open and consequently more interconnected economies.

Despite these general trends, the tax burden[1] has changed increasing since 1990’s, but there’s a stagnation of it in the last decade to the level of 22% to 23.8% of GDP. However, levels of tax revenue and tendencies of changes to tax structures vary considerably by the administration capacities and accountability of policymakers through years.

In 1997, when the VAT it was applied for the full year, the tax revenues it at the level of 16% of GDP. In the consecutive years the level of tax revenues has a share of 25 to 26% of GDP. The share of VAT to the total tax revenues in last two decades it has been 4.5% to 9.4%, confirming the big share in the whole tax revenues in Albania for last 20 years.

The profit tax and personal income tax nowadays represent a substantial percentage of tax revenues as a share of GDP (4%), in comparison with ten years ago (1.2%).

The other taxes that are part of tax structure have not changed their share on the tax revenues through the years, except the custom dues that have a smaller share, because of the WTO obligation to be fulfilled by the customs authority.

Thus, the tax burden per capita in Albania in the last decade (2005 – 2015) has been not changed more than 5%, and has an average tax burden per capita of ALL 60.8 thousands[2] to ALL 118.9 thousands[3]. The tax burden is in regard of the money collected through the years and the ratio is based to GDP, so there’s no a proportional ratio between tax burden tendency and tax lump sums.

Determining the reasons for the current situation requires that one examine the evolution of the tax burden in Albania, in terms of both level and structure of taxes.

Level of taxes

The average tax burden in Albania, including contributions to social security, has remained continuously in the last two decades at least in the same ratio of GDP. In absolute terms, the increase has been close to 11% of GDP, and in relation to the average for 2005 – 2015 it has grown 4.8%. In most of the period this increase is due to the greater preponderance of direct and indirect taxes on goods and services, and to the expansion of tax bases as a result of three main factors: (a) accelerating economic growth driven by investments and moderately rising prices for primary-sector goods; (b) the introduction of novel initiatives such as minimum taxes and taxes on labor; and (c) reforms to tax structures and tax administration.

The change in tax burden in the region’s countries has been linked to changes in per capita GDP. If we can observe the GDP per capita in 2005 (US.D 2.799) and in 2014 (US.D 3.994), the increase of average wealth of taxpayers in Albania it is 42.7%, while the tax burden per capita it is increased 11%.

After the financial crisis of 2008, Albania experienced recessionary periods that produced moderate growth, both in per capita GDP and in tax burden. However, strong and rapid economic growth since 2002, accelerated the growth in tax revenues in nearly all of the region’s countries.

In countries like Albania where collections remain low in relative terms, efforts should be directed at strengthening the fiscal revenues from taxes. When collection level will achieve the region levels, the emphasis could reasonably be placed on improving the quality of the resources obtained and on achieving more equitable distribution of the tax burden, as well as on reducing inefficiencies caused by designed system and improving controls and compliance the last of these in view of the fact that, as will be seen below, rates of tax evasion continue to be extremely high throughout most of the region.

Structure of taxes

The design of reform to the tax structure over the last two decades was based on an effort to achieve greater fiscal solvency, with little attention given to other key tax policy objectives. One of the most significant tax policy phenomena in Albania during this period has been the significantly increased role of consume taxes on goods and services (value added taxes, excise and other similar taxes) as a proportion of all tax revenues.

The calculation of share of indirect taxes to GDP shows a level of 13 % and the same share of GDP take the direct taxes. Nearly the entire increase in the percentage of taxes occurred during the last decade, in the wake of fundamental tax reforms that broadened tax bases and increased the legal rates of taxation.

The profit tax and personal income tax in 2015 have a share of 30% of tax revenues, instead of the share of 14.5% of tax revenues in 2005.

Moreover, as a consequence of increased economic openness in the region and Europe, taxes on foreign trade fell 50% in relative terms. The decline was sharp in the 2007.

The social security contributions also represent a substantial percentage of tax revenues, and their weight in tax structures as a whole has increased their share, at around 24% of the total tax revenues in 2015, while in 2005 the share of them it was only 19.7%.

Although the average tax burden in Albania has seen a light upward trend in the last two decades, this tax burden is lower than do countries in region or in the other countries of the world with similar levels of development.

[1] Included only the tax revenues, not the budget revenues

[2] Exchange rate in 2005 of 1 Euro to ALL = 126.67

[3] Exchange rate in 2015 of 1 Euro to ALL = 137.28