On fiscal policy in Albania and the region and its impact on economic growth

Description

Tax benefits (incentives) have been used as a tool to attract investments in the region, linking their effectiveness to the economic structure, political stability, and the efficiency of the tax administration.

Albania’s tax policy has served as a key instrument for attracting investments and stimulating economic development through tax exemptions and incentives for specific sectors such as tourism and agribusiness. This has led to the growth of certain sectors but has also posed challenges for the economy and the fiscal system.

Over the past two decades, Albania has applied a combination of competitive tax rates and exemptions for foreign direct investments (FDI), along with tax credits for innovation. However, the lack of a clear strategy has generated debatable economic effects.

In particular, Albania has used sectoral tax incentives without a coherent investment strategy, leading to questionable benefits for the economy.

Compared to Western Balkan countries:

• North Macedonia and Serbia have implemented more structured fiscal policies to attract investments, offering low corporate income tax rates (10% and 15%, respectively) and targeted incentives for sectors such as technology and manufacturing.
• Kosovo maintains a simplified tax structure, focusing more on economic formalization than on aggressively attracting foreign investors.
• Montenegro applies exemptions for the tourism sector, but with restrictions on their duration and level.
• Croatia and Slovenia, as EU member states, have reduced the use of tax exemptions and focus on supporting innovation, green development, and scientific research, imposing limits to prevent market distortions.

In this context, Albania remains in an intermediate position, with a business-friendly tax policy that is unstable in terms of public revenue generation. The use of exemptions and incentives for strategic sectors such as tourism and renewable energy has contributed to attracting investors and developing these sectors but has also created challenges in tax collection management.

Tax benefits include incentives for tourism investments, VAT exemptions for specific activities, and support for the development of hotel infrastructure. These measures have helped increase tourism and attract investments in the Albanian coastline and other cities. Low corporate income tax rates (up to 15%) have been considered attractive for investors, especially in the renewable energy and technology sectors.

Efforts to create a sustainable and efficient tax system include lowering taxes and supporting key sectors such as tourism, agribusiness, and renewable energy.

This approach has stimulated investment and helped increase employment opportunities, contributing to higher domestic consumption and investment.

Additionally, fostering research and development (R&D) can promote the development of new and innovative industries, including technology and biotechnology.

However, despite the opportunities provided by tax policy, some obstacles have emerged during its implementation.

The tax administration in Albania has faced inefficiencies and capacity shortages in delivering reliable and transparent services to businesses and individuals, complicating tax collection and the formalization of the economy.

The lack of consistency and adaptability of tax policies to business needs has created uncertainty for investors and led to unfair competition.

At the regional level, countries such as Kosovo, North Macedonia, and Serbia have applied simple tax systems with low rates to attract investors. For example, Kosovo applies a 10% corporate income tax, and North Macedonia has implemented a similarly low rate of 10% to stimulate investments, particularly in energy and industrial manufacturing sectors.

Based on data from the period 2012–2022, Albania has managed to attract substantial investments in the energy sector, including renewable energy projects, with investment inflows growing by 5–10% annually.

The technology sector, especially software development and tech services has seen notable growth following improved investment conditions and tax incentives.

The rise in tourist numbers and support for the real estate sector have also contributed to economic growth.

Nonetheless, challenges in tax collection and fiscal evasion control remain present, requiring ongoing monitoring and enhancement of tax administration efficiency.

In 2023–2024, Albania has seen an increase in investments, including projects in renewable energy and technology, supported by fiscal incentives.

A key component of fiscal policy for the upcoming years beyond 2025 is the reference to the Medium-Term Revenue Strategy (MTRS).

The Medium-Term Revenue Strategy 2024–2028, adopted by Albania, aims to increase tax revenues through broadening the tax base, improving the efficiency of the tax administration, and reducing informality. However, it also seeks to support strategic sectors such as R&D and renewable energy. Still, the strategy must address the challenges posed by tax exemptions and the risks of creating market distortions.

The main challenge lies in tax exemptions and their misuse, which could hinder revenue growth and sustainable economic development.

The lack of a clear focus on strategic sectors could result in inefficient spending in areas with low development potential.

To achieve the goals of the MTRS, Albania needs to focus on supporting sectors like R&D, renewable energy, and technology by offering targeted tax incentives and improving revenue collection through a more efficient tax administration.

Albania can improve its tax policy by applying a sustainable approach, strengthening the tax administration, and focusing on sectors with high development potential such as R&D and renewable energy.

This would require regular assessment of the impact of tax exemptions and better management of opportunities for sustainable economic development.

In conclusion, Albania’s tax policy has delivered benefits in key sectors such as renewable energy, tourism, and technology, but it requires consistency and a clear strategy aligned with sustainable economic development and effective tax collection.

The impact of tax policies on the Albanian economy and fiscal system calls for deep evaluation and continuous monitoring to ensure long-term national development.