VAT in the Western Balkans: Import dependency, informality and fiscal management

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Value Added Tax (VAT) stands as one of the main sources of revenue for most fiscal systems, including Albania. It plays a crucial role in financing public services and supporting economic development, with a direct impact on the distribution of financial responsibilities among consumers, businesses, and the state. However, the effectiveness of VAT collection is not always uniform and may depend on factors such as the level of domestic production, the strategies of the tax administration, and the interconnection of various economic sectors.

In Albania, one of the most striking characteristics of the fiscal system is the high share of VAT collected at customs, which accounts for approximately 74.6% of total VAT revenue. This raises important questions about the country’s economic structure and the productivity of VAT, as well as the consequences of import-dependence for the formality of economic activities.

One of the key consequences of this heavy reliance on customs-based VAT collection is its direct impact on informality in the domestic economy. When the majority of VAT is collected on imports rather than on domestic production or trade, it creates opportunities for tax evasion by businesses operating within the country. This dynamic fuels informality and undermines the fairness and efficiency of the tax system, limiting the potential for increasing public revenues from internal sources.

The primary purpose of this analysis is to provide a comprehensive and critical assessment of the Value Added Tax (VAT) system in Albania, with comparative references to Kosovo and other countries in the Western Balkans.

The analysis aims to understand the structural and operational dynamics that underpin VAT revenue generation, the extent of dependence on imports for tax collection, and the implications this has on fiscal stability, economic formalization, and competitiveness.

By identifying the root causes of inefficiencies and vulnerabilities, the analysis seeks to support the formulation of more resilient and equitable fiscal policies.

This analysis is designed to:

  1. Diagnose the structure of VAT revenue

Disaggregate VAT sources between customs and domestic contributions.

Identify the weight of VAT in the total tax revenue system and its fiscal implications.

  1. Assess fiscal vulnerabilities

Examine the risks associated with high dependency on VAT from imports, particularly during economic shocks or trade disruptions.

Explore how this dependency affects fiscal stability and budgetary planning in countries like Albania and Kosovo.

 

  1. Evaluate VAT productivity and informality

Analyze how the structure of VAT collection influences tax compliance and informality.

Understand the effects on honest businesses, consumer prices, and market competitiveness.

  1. Compare regional trends and practices

Benchmark Albania’s VAT dynamics with those of Kosovo, North Macedonia, Serbia, Montenegro, and Bosnia & Herzegovina.

Highlight common challenges and divergent practices in VAT policy and administration.

  1. Provide strategic policy recommendations

Propose actionable measures for diversifying tax bases, strengthening domestic VAT collection, and improving equity and efficiency in the system.

Suggest reforms that support domestic production and reduce fiscal dependency on imports.

The scope and reach of this analysis are designed to offer a multi-dimensional perspective on the dynamics of VAT systems in Albania and Kosovo, while also drawing comparative insights from other Western Balkan countries such as Serbia, North Macedonia, Montenegro, and Bosnia & Herzegovina. The geographical focus is centered on Albania and Kosovo, given their shared characteristics of high VAT reliance from imports and similar structural economic challenges, yet the inclusion of neighboring countries allows for a broader understanding of regional trends and divergences in VAT policy and performance.

In terms of temporal coverage, the analysis is grounded in the most recent data available from the year 2023, but it does not stop there. It incorporates retrospective references to developments over the last decade in order to trace structural patterns, identify systemic vulnerabilities, and understand the evolving role of VAT in fiscal consolidation efforts. At the same time, the analysis aims to provide forward-looking reflections that can inform medium-term fiscal planning and strategic reforms.

The sectoral scope of the study is comprehensive, encompassing key components that interact directly or indirectly with VAT collection and efficiency. These include external trade and customs operations, the level and structure of domestic production, the integrity and effectiveness of the tax administration system, the size and behavior of the informal economy, and the broader macro-fiscal framework that defines fiscal policy priorities and constraints.

Finally, the analytical dimensions of the study integrate a combination of fiscal, economic, and policy-focused approaches. It examines the structure of revenue collection and VAT productivity, evaluates the economic impact of the VAT system on business formalization and market competition, and formulates concrete policy recommendations. These aim to enhance resilience, reduce fiscal risk, and support the creation of a more equitable and growth-oriented tax system.

This structured approach ensures the analysis contributes not only to a better understanding of Albania’s fiscal system but also to informing policy choices that can foster a more balanced and resilient economic model for the region.

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Description

VAT is an important source of revenue for Albania and many other countries. It has a significant impact on the fiscal system, but also on the informality of the economy.

In Albania, three-quarters of VAT is collected at customs, indicating a high dependence on imports and a low level of VAT productivity within the domestic economy.

Some of the key features and moments related to VAT and its administration by the countries of the Western Balkans are summarized below.

  1. Dependence on imports and VAT

In the Western Balkans region, most VAT revenue comes from imports, making these countries’ economies very sensitive to fluctuations in international markets.

According to the latest World Bank data (2023), Albania and Kosovo are among the countries with the highest dependence on imports. For example, in Albania, more than 70% of VAT is collected from imported goods, while in Kosovo this figure reaches 80%. Serbia and North Macedonia have a higher share of domestic production in their VAT revenue, with imports contributing around 50–60% of VAT tax revenue.

This model, which concentrates VAT collection in the import sector, makes the tax system highly vulnerable to external factors, such as global economic crises, changes in trade policies, and international events, which directly impact state revenues. For example, during and after the 2008 global crisis, many Western Balkan countries experienced significant declines in VAT revenue, causing major gaps in their state budgets.

  1. Instability of tax revenues and technology

The instability of VAT revenues is a major concern for public finances in the region. To manage this instability, many countries have started using technology and digital systems to increase transparency and efficiency in VAT collection.

In Albania, for example, the Tax Administration has implemented an advanced system for tracking transactions and VAT revenue through the online “e-Tax” platform. This system uses real-time data to help taxpayers and the administration collect and manage revenue more efficiently. This model is also used in North Macedonia and Serbia, where the digital “e-VAT” system enables all transactions to be automatically recorded and made accessible to tax authorities.

In this context, the use of technology has enabled increased VAT collection and reduced the possibility of tax evasion. However, major challenges remain, especially in countries like Bosnia and Kosovo, where digital infrastructure is still developing and the market is not yet fully covered.

  1. Informality and the structure of VAT

Informality remains a major problem for many Western Balkan countries, particularly Albania, Kosovo, and Bosnia, which face high levels of undeclared economic activity.

According to Eurostat data (2023), informality in Albania is over 30% of GDP, while Kosovo and Bosnia face similar levels. This phenomenon directly affects VAT yields, as informal businesses do not pay VAT, creating conditions for unfair competition and reducing state revenues.

To combat informality and increase VAT productivity, countries are increasingly using technology. In this framework, the use of real-time tax management systems linked to electronic payment markets allows for better identification and monitoring of transactions and taxable revenues. Countries such as Serbia and North Macedonia have made significant progress in this direction, using advanced systems for tracking and registering VAT transactions.

  1. Rising prices and the impact on consumers

In the Western Balkans, rising prices of imported goods have had a significant impact on ordinary consumers due to the reliance on imports for essential goods. In Albania, for example, food and fuel prices rose by 15% in 2023, which significantly affected household budgets, making them more dependent on subsidies and social assistance.

In this context, states are trying to use technology to monitor and control prices in the market through online platforms that provide transparency and direct information on product prices and offers.

  1. Technology and increased transparency in the state budget

Beyond improving VAT collection, the use of digital systems has also helped improve the transparency and management of the state budget. In countries like Albania and North Macedonia, state budget management platforms have been implemented that enable real-time tracking of expenditures and revenues. This process has increased citizens’ trust in governance and enabled better oversight of public funds.

Additionally, the use of data analytics and technology for revenue and expenditure forecasting has enabled states to create more sustainable and predictable budgets. In this way, countries can prevent the growth of public debt and control the budget deficit.

  1. The impact of digital monitoring and supervision systems

Digital systems and real-time supervision controls also help reduce the risk of tax evasion. In Serbia and North Macedonia, the use of automated VAT registration and transaction data systems has enabled the detection of more businesses engaging in tax evasion. This process is supported by big data analytics and algorithms to identify violators and increase VAT productivity.

However, the use of these systems has required significant investment and has faced resistance from some business groups, especially in countries where digital infrastructure is still developing.
To address challenges arising from dependence on imports, informality, and rising prices, Western Balkan countries must continue investing in the use of technology and digital systems.

This enables more efficient and fair VAT collection, reduces informality, and increases transparency.
The use of tax management platforms, as well as real-time transaction tracking, are important steps toward ensuring a more sustainable tax system and supporting the development of an economy based on fair competition and the fulfillment of the needs of citizens and businesses.

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