The VAT threshold, the reckless policy and the behavior of the administration affect the growth of small businesses

Value added tax (VAT) in Albania, according to tax statistics in 2023, includes 34,767 taxpayers within the scheme, of which 9,450 are taxpayers registered as small businesses.

The number of taxpayers with VAT guaranteed the main large source of revenue of the state budget in 2023 in the amount of 192.3 billion ALL or 32% of all tax revenue. But, at least for more than two decades, VAT is the first source of state budget revenue, mainly from imports and less from transactions within the country.

Compared to 10 years ago, VAT decreased by 6.4 percent of its share in total revenue.

VAT is applied to most domestic goods and services, as well as to imported goods and services with some exceptions that are defined in the VAT law[1].

All businesses must register for VAT if their taxable turnover is above a threshold set by government decision. But they can choose to register voluntarily if their taxable turnover is below the threshold set by the government.

The current registration threshold is 10 million Lek (96,000 Euro) and the change of the thresholds during the period we analyze are shown in the table below.

The threshold in Albania during the period 2008-2023 was decreased or increased 4 times and generally the change did not take into account influential elements such as inflation, but was used as an instrument of tax policies to increase the taxable base or to fight informality.

– From statistics collected by the tax administration for the years 2008-2009[2], where the threshold is 8 million ALL/year, a small tax base of 26,600 VAT taxpayers is observed.
– According to the presentation of the statistics processed by ALTAX[3], it is observed that in the years 2012-2013, with the reduction of the threshold from 8 million ALL/year to 5 million ALL/year, the VAT base has increased to 32,000.
– In 2017, before the reduction of the VAT threshold from 5 million to 2 million, the number of VAT taxpayers is 37,616 taxpayers, of which 16,998 are small business taxpayers[4]
– In 2019, after the VAT threshold was lowered, it is observed that the number of VAT taxpayers is 55,243 taxpayers, of which 32,509 are small business taxpayers[5].
– In 2021, after the VAT threshold was increased from 2 million ALL/year to 10 million ALL/year, it is observed that the number of VAT taxpayers is 28,945 taxpayers, of which 8,814 are small business taxpayers[6].
– At the end of 2023, with the unchanged threshold of 10 million ALL/year, it is observed that the number of VAT taxpayers is 34,767 taxpayers, of which 9,450 are small business taxpayers[7].

In the statistics that we presented, it seems that the government’s initiatives with the reduction of the tax threshold have aimed to stimulate the increase in the entry into the VAT scheme of small businesses. In both cases, when the reduction of the VAT threshold occurred, it was accompanied by an increase in the number of taxpayers (VAT base). In 2010, the increase of the VAT base is at least 20% more, and also in 2018, the increase of the VAT base is 47% more. Even the increase in the participation of small businesses has increased, constituting up to half of the VAT base.

But, with the increase of the VAT threshold in 2021, the number of taxpayers has decreased by 48%, where the departure of small businesses from the VAT scheme is 3 times less.

Meanwhile, during the year 2022 – 2023, there is an increase in the VAT base by 20% even though the threshold continues to be 10 million ALL/year.

A key issue to sensitize policy-making is the open discussion of how VAT and in particular the registration threshold will affect the behavior of small businesses.

For our part, we are trying to understand the efficiency and costs of VAT by analyzing three important parts of the behavior towards the registration threshold: voluntary registration, the impact costs of participating in the VAT scheme and the effects of growth in the market.

Voluntary registration makes VAT unique among all major taxes. This refers to a situation where a business is registered for VAT benefiting from the scheme, always if it is applied correctly, without exceptions and discriminatory reliefs and timely reimbursement based on risk management and not controls and corrupt pressures. This behavior of the administration is likely to occur in contrast to the elimination of such an approach, due to political patronage and the suffocating lack of meritocracy and the growing presence of corruption at all levels of administration.

In such an environment, although it may be profitable for the administration for businesses to voluntarily register for VAT so that they can claim VAT refunds on purchases, in reality some or most businesses will they aim by all means to avoid the burden of VAT together with the burden of the administration, transferring to the buyers the hidden cost in the increased prices, taking advantage of the corrupt administration and the presence of informality.

In an attempt to avoid or even evade, a small business operating in the market keeps its reported taxable turnover below the registration threshold or limits the extent of formal operations in the market, reporting sales so as not to exceed the threshold.

The effects of growth in this case are affected by legal and extra-legal costs, where businesses deliberately limit their growth in order to keep turnover below the taxable threshold and possibly also have a higher rate of profit, to build up reserves anyway if they are forced to register by the administration or by hasty fiscal policies for the registration threshold.

Therefore, it is important to investigate whether the shrinking of the VAT base has occurred because some businesses are more affected than others, or because the application of many benefits and exemptions from VAT of sectors and activities affects tax morale and affects the behavior of taxpayers to avoid the VAT scheme, taking advantage of the high threshold for registration in it.

As all firms in Albania are subject to the same VAT regime, there is no obvious control for groups of taxpayers that can be used to identify the threshold effect. So, the first challenge for the Ministry of Finance is to develop an in-depth analysis and use it for medium-term policies to identify the threshold effect of different segments of taxpayers.

In this analysis, as a parallel approach to the effect of VAT, businesses that mainly offer goods and services with a zero rate or exempt from VAT should be studied, as the VAT threshold is not an obstacle to increasing turnover for such businesses.

In particular, a small business that supplies only exempt goods or services has no legal requirement to register as nothing is gained from its registration. Also, a business that sells mostly zero-value goods and services has a clear tax advantage over those businesses that are registered even though they are not direct competitors with each other, as they operate in different sectors.

However, in our analysis, starting from the samples of the indicators above, we find first of all that crossing the threshold generally increases the gross turnover for businesses, since they have to charge VAT on their sales, but at the same time it increases and the level of VAT payment due to market distortions and the influence of informality and unfair competition.

Meanwhile for small businesses there is a compliance cost for them, once for initially registering for VAT, and then a periodic compliance cost for completing VAT returns. Compliance costs are relatively low by international standards, but they are not negligible. Meanwhile, the increase in administrative costs remains problematic, including tax control and the corruption tax that accompanies it and is a high cost for small businesses.

Thus, according to an analysis by IMF experts for the United Kingdom, it is found that VAT registration can make a tax audit more likely, because it gives the tax authorities more information [8].

An impact on the growth of small businesses is also the impact of the standard VAT rate of 20%, which is high. Based on the tax rate in neighboring countries with Albania, as well as the need to increase circulation and expand the base through increased compliance, it is an urgent need for fiscal policy to discuss a reduction in the standard rate in order to increase tax compliance and reduce competition. dishonest taxation directly influenced by both the high threshold, but also by the still high level of informality.

Furthermore, when there are other changes to business taxation such as the 15% self-employment tax and dual employment taxation it is quite likely that small businesses will deliberately try to stay below the VAT threshold temporarily or even forever.

Of course, such a stifling of small business growth can have a social cost and conflict with other businesses.

Annual turnover growth will slow during 2024 and beyond (if fiscal policy remains unchanged) as most small businesses burdened with more taxes than the previous year will hold back on declaring e-invoice sales to avoid close to the VAT threshold.

The increase in business costs shows us a repeat of the past, indicating that their response is likely to be a real survival response rather than an evasion response.

[1] https://www.tatime.gov.al/eng/shkarko.php?id=36

[2] https://altax.al/product/tatimet-ne-shqiperi-2008-2010/

[3] https://altax.al/pragu-i-tatueshem-i-tvsh-normat-tatimore-dhe-te-hyrat-ne-buxhet-1996-2020/

[4] https://www.tatime.gov.al/shkarko.php?id=2694

[5] https://www.tatime.gov.al/shkarko.php?id=7511

[6] https://www.tatime.gov.al/shkarko.php?id=12083

[7] https://www.tatime.gov.al/shkarko.php?id=14228

[8] https://www.imf.org/-/media/Files/Publications/WP/2024/English/wpiea2024033-print-pdf.ashx