Impact of import and domestic price reference on informality and taxes

5 €

1. Definition and Purpose of Reference Prices

  • Reference prices are set by customs authorities to assess VAT and duties on imported goods when the declared value is suspiciously low.

  • They aim to:

    • Prevent tax evasion through under-invoicing.

    • Unify goods valuation and ensure fairness.

    • Secure stable and higher public revenues.

2. Negative Consequences and Market Distortions

  • Inaccurate reference prices may not reflect market realities, resulting in:

    • Higher VAT obligations than actual transaction values.

    • Disadvantages for small and medium-sized enterprises (SMEs) that struggle with additional costs.

    • Distortion of competition and promotion of informality (e.g., smuggling, corruption).

    • Consumer price inflation due to imposed artificial values.

3. Effectiveness in Combating Informality

  • Mixed results:

    • Positive: Deters under-invoicing, supports honest taxpayers, boosts VAT compliance.

    • Negative: Pushes firms (especially small ones) into informality, incentivizes corruption, and distorts price reporting and fiscal transparency.

4. VAT Productivity and Compliance

  • When well-calibrated to market values, reference prices:

    • Improve VAT productivity by increasing the tax base and compliance.

    • Enhance trust in the tax system.

  • When misaligned with real prices, they:

    • Encourage manipulation or avoidance.

    • Lead to loss of revenues and inefficiency in tax collection.

5. Policy Responses and Mitigation Measures

To minimize negative effects, Albania has adopted:

  • Regular updates of reference prices based on market data.

  • Promotion of transparency and use of alternative valuation methods (e.g., average market prices).

  • Fiscal support for small businesses to prevent their shift into informality.

  • Improved customs administration capacity to reduce corruption.

6. International Practices

  • European Union: Primarily uses declared transaction value; reference prices only when under-invoicing is suspected.

  • Western Balkans (e.g., Kosovo, Serbia, North Macedonia): Apply reference prices more broadly, balancing fairness and enforcement.

  • Developed Countries (USA, Canada, Australia, Switzerland, Singapore):

    • Use sophisticated customs valuation systems.

    • Rely on market references for accurate taxation, especially for used goods.

    • Ensure legal consistency and protect public revenues.

7. Final Assessment

  • Dual Impact:

    • Positive: Higher VAT collection, reduced tax evasion, fiscal discipline.

    • Negative: Encourages informal economy, penalizes SMEs, distorts real market behavior.

  • Policy Recommendation:

    • Use reference prices as a verification tool, not as a default method.

    • Ensure they reflect real market values, uphold transparency, and protect tax neutrality and competition.

While reference prices can improve VAT collection and reduce evasion, misuse or rigidity in their application undermines market integrity, burdens honest businesses, and promotes informality. A recalibrated, transparent, and market-aligned approach, combined with capacity building in customs, is necessary to balance revenue goals with economic fairness.

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Description

In this summary, we will include discussions on the use of customs and domestic reference prices, their impact on the Albanian economy, and comparisons with regional countries, using data and figures that cover different aspects of this phenomenon.

Customs Reference Prices and Their Use in Albania

In Albania, customs reference prices are used to determine the value of goods and assist in the calculation of taxes, including VAT and other duties payable by importers. This process is important for tax collection and ensuring fair competition in the market, but it also has disadvantages related to the interpretation and appropriateness of reference prices.

Customs reference prices are employed to avoid manipulated prices that could distort the domestic market. They are tied to the importation of goods and have a significant impact on increasing revenue collection for the state budget.

Taxation and VAT Collection

VAT is one of the main sources of revenue in Albania. In 2024, VAT constitutes 32.5% of tax revenues. In 2023, VAT accounted for €1.9 billion, equivalent to 8.2% of GDP.

This level of VAT collection is relatively high, but challenges remain in identifying the accurate prices of goods and products through the reference pricing system.

Potential problems and challenges with customs reference prices

A well-known issue associated with the use of customs reference prices is price distortion, which often results in higher-than-market prices. This distortion is among the causes of increased informality and tax evasion.

Impact on informality and corruption

Up to one-third of the Albanian economy remains informal, a level much higher than in other regional countries.
Data shows that around €1.2 billion in taxes are evaded each year due to informality and the use of reference prices that often do not reflect real market values.

Comparison with the region

  • Kosovo has a lower use of reference prices, and its tax administration applies a fairer approach by monitoring prices through demand and supply analysis.
  • Serbia operates a more advanced price monitoring system, reflecting real market prices through a higher level of transparency. This system has helped reduce informality and is one of the factors behind VAT reaching 20% of GDP.
  • North Macedonia has implemented a system similar to Serbia’s but still faces challenges like those in Albania, particularly regarding unclear reference prices for some goods.

Impact of domestic reference prices and local market prices

Domestic reference prices, used to determine values for products and services produced in Albania, are also an important factor that can influence price stability and market competition. These references help regulate commercial relationships and ensure that dominant companies do not manipulate prices.

While customs references are primarily linked to imports and foreign goods, domestic references relate to locally produced goods and services. The use of domestic references can contribute to lowering the cost of goods and help maintain price stability.

Distortion of domestic prices

Domestic prices can also be distorted due to a lack of transparency and the influence of oligopolies. The use of reference prices that do not realistically reflect market data can create an unfair competitive environment and harm consumers.

Measures for the Effective Use of Reference Prices

Given the challenges above, several necessary measures can improve the use of both customs and domestic reference prices:

  • Review of the reference price system

The reference price system should be revised to better reflect real market prices and the dynamics of supply and demand. This can be achieved through market analysis and data-driven systems to ensure transparency.

  • Increased transparency and technology

The use of technology and advanced platforms to monitor and track customs and domestic declarations will help fight manipulation and tax evasion.

  • Enhanced Control and Business Education

Educating and supporting businesses in the proper use of reference prices will increase the credibility of the system and contribute to fairer market practices.

The use of customs and domestic reference prices is a vital process for the tax and economic system in Albania, but it faces several challenges related to price distortion and growing informality.

Considering regional comparisons and implementing the right measures to improve transparency and the accurate use of these references, Albania can enhance competition and the efficiency of tax administration, contributing to greater economic sustainability and increased budget revenues

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