Property tax reform in Albania: What is done wrong and how to go on?

Comprehensive property tax reform in Albania is generally acknowledged to be a technically complex and data intensive process, typically involving interaction and coordination between many agencies at both the central and local level.

The present property tax in Albania is fairly simple, but its share to budget is negligible.

It consists of three area-based taxes: the agricultural land tax applying to all agricultural land registered with the national Real Estate Registration Office (RERO); and the buildings tax applying to the area of all buildings (residential as well as business) and for the first time was implemented in 2016 the urban tax. The revenues from these taxes are assigned exclusively to local government, municipalities who are also responsible for the invoicing and collection of the property tax.

The share of property tax to budget is very low at a level of 0.13 percent of GDP. The low share of the existing tax is caused by a multitude of factors. In addition to a fairly narrow base, tax rates are very low. This fact is very clear with two cases, presented below.

Case A

A typical 65 m² apartment in the city of Vlora. The estimates of the market value of the apartment are at LEK 58,500 (Euro 418) per m² for a total market value of LEK 3.8 million (Euro 27,170). City officials confirm that this price estimate is reasonable. Under current law, the tax on this apartment is either LEK 650 (Euro 6.64) or LEK 780 (Euro 5.57) per year, depending on the year the unit was constructed. Thus, the effective tax rate is about 0.02 percent of market value. Another way to assess the magnitude of the tax is to compare it to other costs. In this case, the annual tax on the apartment is equivalent to the cost of about four liters of motor fuel. It also represents less than 0.3 percent of the annual minimum wage.

Case B

A single-family home in Tirana. A home of 130 m² on a 500 m² parcel of land, with a current estimated market value of LEK 27.7 million (Euro 193,000). If the home was built after 1993, the annual tax under current law would be LEK 3,900 (Euro 28). This equates to an effective tax rate of 0.014 percent of market value. The tax can be compared to purchasing less than 2 liters of motor fuel per month. It is also less than one percent of the average annual wage.

But, since the rate of collection for families and residential homes is very low, taxes on commercial properties are much higher and are collected more consistently. Collections from businesses are higher for three reasons. First, business registrations are more up-to-date and complete, thus business taxpayers are more readily identified by local government. Second, local government notify businesses regularly of their tax obligation. Finally, commercial tax rates are much higher than residential rates. For example, the rate for a retail business in Tirana is over 13 times higher than for a residential apartment in the same building. Where a residential property would pay, say, LEK 3,900 (Euro 28), a retail shop of the same size and in the same building would owe LEK 52,000 (Euro 372). Outside of Tirana the commercial rate can be over 33 times higher than for residential properties.

The tax rates on agricultural land are also relatively low while collections are very low. The highest valued agricultural land in Albania is located in the prefecture of Fier and has an estimated market value of LEK496 per square meter. Thus, an average sized farm in that area would have a total estimated market value of LEK6.45 million (Euro 46,000). This same farm has a tax obligation under current law of LEK7,280 (Euro 52), for an effective rate of 0.11 percent. Lower quality land has lower land values and lower tax rates with effective rates as low as 0.06 percent of market value. Actual collections of the agricultural land tax averaged LEK546 (Euro 3.90) per farm across Albania.

Furthermore, the fact that the present tax is area-based reduces its buoyancy, but insufficient property registration and lack of efficient administration, collection and enforcement at the local level also have serious adverse implications for actual tax collections. In particular, low collections due to lack of calculation for residential properties appear to be a general phenomenon. Another problem, it is that property registration, valuation, invoicing, collection and enforcement processes are not synchronized between them. A potential impediment to effective administration is the fact that land registration function is located in the Ministry of Justice and the MoF and central tax administration do not have access to these data.

Some local governments have created their own database of properties and have initiated field inspections to augment RERO data. The city of Tirana, for example, recently inspected and measured all commercial properties resulting in a 15 percent increase in the number of taxable properties and a 60 percent increase in the tax amount billed. The city of Fier is creating their own GIS system starting with RERO data and then visiting all properties in the city to augment their data through a self-declaration process and in-field surveys. The city of Elbasan has levied a fixed property tax of LEK700 on all residential properties and is collecting the tax through their water billing system. They have also re-measured commercial buildings. The result of these two efforts has been to nearly double the amount of property tax collected in the city. Other cities are also considering using the water bill as a means of collecting the tax. In some instances, however, the collection rate on water bills may limit the utility of this approach.

Based on the second year of experience of administrative reform and the plans of MoF to increase the property tax share in budget revenues may necessitate reform of intergovernmental finance. This could take the form of adjustments to the system of central transfers and reform of the equalization system, but designed in a way to avoid negative incentives for the raising of own local government revenue. These broader issues of the future design of the inter-governmental system are, however, beyond the remit of this report, and will not be discussed any further.

Albania has been working for years to improve the identification and registration of land and buildings through the Real Estate Registration Office (RERO). It is often difficult to resolve competing ownership claims in Albania and even property descriptions must be verified in the field. RERO was created with the express purpose to assemble all relevant documentation and complete the first registration of all properties as data is verified in the field and competing claims resolved.

The administration of any tax requires three elements. There must first be a definition of the basis and method for allocating the tax burden among citizens. Such an allocation scheme constitutes a definition and identification of the tax base. The base may be as simple as the number of people in a household, or as complex as the concept of value added as in the VAT. In the case of a recurring tax on immovable property, this step involves defining what should be included in the definition of taxable property.

After defining taxable property, it is also necessary to identify all such property in practice. One oft cited advantage of the property tax is that the taxable base is visible, difficult to conceal and therefore difficult to avoid. While this is true, it is still necessary for the tax authority to identify all the taxable property.

The second required element is that the taxable object must be linked to a specific taxpayer. Thus, it is essential in administering a recurring tax on property that taxable property be identified in the field and associated with a specific taxpayer. The third required element is an effective invoicing and collection system.

RERO plays a vital role in the registration of property and the identification of legal ownership, but there is no reason to wait for RERO to complete its registration work before reforming the property tax. An efficient property tax system requires that property be adequately identified and along with the relevant taxpayer. A number of countries have addressed the limitations of their legal property registry by creating a separate fiscal registry. A fiscal cadaster of this sort starts with what is available in the legal cadaster, if one exists. The fiscal cadaster is then updated through field inspections and/or a self-declaration process to include properties not yet listed in the legal cadaster.

While a completed digitized property register would greatly facilitate administration of the property tax, a fiscal cadaster should be built in Albania as a basis for a value-based property tax. To see how this might be accomplished it is helpful to review the various relevant data sources already in existence in Albania.

Building of a fiscal cadaster requires a substantial volume of high-quality data. There are a number of potentially relevant existing sources and agencies that should be involved or consulted in the development of a fiscal cadaster. These include RERO, INSTAT, National Housing Agency, National Center of Business, Agency for Compensation and Restitution of Property, National Civil Registry, State Authority for Geospatial Information, Local Government cadastral registries, Ministry of Finance and National Territorial Planning Agency.

Cooperation and collaboration between essential entities will be vital. It is clear that information essential for the creation and maintenance of a fiscal cadaster now exists in a variety of government agencies and entities. To create an accurate and effective fiscal cadaster will require that these agencies share information, collaborate in validating and updating the information and perhaps ultimately even consolidate some functions.