Tourism and the tax issues in Albania

Tourism and the tax issues in Albania

In latest decade tourism has become a primary economic activity of many countries in Mediterranean Sea region. If the economic benefits of tourism are clear (more added value and employment, for example), the various costs derived from it are also evident (congestion, environmental degradation, etc.). This makes public regulation of tourist activity a necessity, and such regulation must pursue a certain balance, not always easy to reach, in order to attain the maximum net social benefit over time.

Among the public policies affecting the tourism sector, taxation plays an especially important role. This is due, first of all, to the magnitude of the potential revenue in terms of the fiscal system and its high degree of social acceptability. Secondly, its importance is linked to its capacity to act as the substitute of a price for the public goods and services consumed by tourists. Finally, there is the corrective (e.g. environmental) role that these taxes can be given.

According to calculations by the World Council for Tourism and Travel, direct contribution of tourism to GDP of Albania in 2015 was 5.9%. For regarding the opening of new working posts, the tourism sector has opened directly 50.500 jobs or 5.3% of the total while indirectly has engaged an overall of 182.000 employees.

It is well known that a tourism tax distorts when demand is relatively elastic, since the price differential caused by the tax leads to a significant change in behavior.

Traditionally it has been considered that many tourist destinations have no clear substitutes (for particular geographical or climatic reasons, distance, quality, etc.), which creates monopoly power in the supply side and also means that price alterations may bring about minor changes in the demand side (low elasticities).

This situation could lead to use tourism taxes not only for an easy and efficient collection of revenues from an inelastic base, but also as a way to correct the undesirable effects of market power. Nevertheless, the available data indicates that countries in this situation do not tax tourism more intensely.

Anyway, in recent years price elasticities have increased in some tourist regions mainly due to the incorporation of new countries to tourism markets. This could be the case of the Mediterranean region, where belong also Albania, which compete nowadays in the same market acting like substitute for old fashion places in Europe.

The tourism sector faces conventional or general taxation on economic activity and also a set of specific taxes. In the case of conventional taxation (central) this sector is subject to high rates (e.g. VAT), even though the administrative costs associated to this option make it less attractive from a practical point of view.

Specific (regional) taxation generally takes the form of taxes on lodging, which are very common in the fiscal practices of both developed and developing countries.

In Albania, central taxation on the tourism sector is usually below average, perhaps due to the difficulty of distinguishing between tourists and non-tourists. At the same time, there is a growing interest in the application of regional taxes on tourist activities.

The tourism value chain encompasses a variety of different actors, including hotels, air carriers and transport companies, tour operators, travel agents, rental agencies, and countless suppliers from other sectors.

Four key sector distinctions are important in the design of a tourism-specific tax regime:

– Tourism is a highly competitive market in which fixed products (destinations) are selected by mobile consumers with multiple destination choices, a dynamic that may increase the price elasticity of demand. Thus, the sector is particularly sensitive to issues related to fiscal incentives and tax competition.

– The outputs of the tourism industry are services, but many inputs are not. Tourism services meet both final demand (consumption by a tourist) and intermediate demand (purchase by a firm).

– Taxing tourism may seem appealing when the bulk of taxes can be placed on non-constituents, but taxing inbound travel is akin to taxing exports it erodes competitiveness. The distinction can be blurred between taxes principally paid by tourists as end users and those that mostly affect tourism businesses, depending on the degree to which taxes are directly passed on to tourists.

– The tax regime should treat large firms differently than small ones. Most of the sector’s activity is generated by smaller hotels and tour operators who are particularly sensitive to compliance costs. Because taxing tourism is not straightforward, governments have developed multiple approaches to collect revenues from the sector.

Such policy differences are evident when comparing marginal effective tax rates (METRs) for tourism investments, which vary substantially, even among neighboring economies. Revenue collection is often complex and costly to administer, creating inefficiencies and contributing to poor business environments for tourism.

The marginal effective tax rate is a quantitative tool used to assess the impact of the statutory tax regime (instruments, rates, and coverage) on investment. A series of studies using METR analysis found that:

– The effective rates on capital investment in the tourism sector vary substantially across similar economies.

– The effective tax burden on capital for tourism investments is, on average, relatively low compared to that of other sectors. This is largely due to the high proportion of investment in capital-intensive items coupled with sizeable initial and annual depreciation allowances.

As in other sectors, tourism businesses may be vulnerable to distortionary tax regimes, a result of generally thin profit margins and fierce competition from domestic and foreign firms alike. Some countries address these issues and other investment climate constraints by introducing special fiscal incentives for tourism, such as tax holidays, exemptions of customs duties, initial capital allowances, and accelerated depreciation on buildings. Incentives are often administered on a discretionary basis” not through the tax law” and can introduce a range of well-known problems. These include a bias toward large foreign investors, administrative burdens for the tax administration, and corruption.

It may seem counterintuitive for governments to subsidize the industry development. However, it is frequently argued that high price elasticity of demand, positive externalities from tourism development, and slow amortization of high initial investments may justify initial public support to jumpstart the sector. When analyzing the value of incentives, it is important to distinguish between different forms of tourism. Providers of “enclave tourism” to oceanside resorts, for instance, usually face stiff competition from other beachfront destinations. When tourism can be based on unique attractions or business purposes, the destination has a competitive advantage it is the reason for traveling and cannot be substituted.

When deciding to offer incentives, policymakers should focus on those that take industry dynamics into account and do not result in distortions of the tax regime, loss of transparency and equity, and major revenue shortfalls.

Depreciation allowances should focus on tourism operators’ major investment items. For hotel investors, land and buildings usually represent 75 to 80 percent of capital expenditures, while furniture fixtures, fittings, and equipment can represent about 20 to 25 percent. For tour operators and ground handlers, vehicles usually represent the largest investment share. To avoid officials using discretion in granting incentives, depreciation rates on buildings and reduced customs duties should be evenly applied and automatically guaranteed to all investors without application and approval processes.

Indirect taxation is a major source of government revenue from tourism activities. Yet applying the VAT causes sector specific problems. Ambiguity about what is subject to the VAT leaves too much to the discretion of tax officials. The VAT is usually imposed on domestic supplies and imports. The exports are zero rated. However, tourism is not usually considered an export service; it is not always clear which components of a tourism product (such as a tour package) should be treated as exports or not. Some countries zero-rate tour-operated services provided to customers outside their borders, while others treat these as standard services.

In theory, relying on a single rate is the most effective way to administer the VAT and reduce compliance costs. However, in some cases lower VAT rates are applied to hotel and restaurant services. International firms’ prominence in the sector adds to the complexity. Usually foreign tour operators offer packages combining several inputs. When these goods and services (for instance, a package including accommodations, tour guiding, tour brokerage, and transport) are treated differently under the VAT, the risk of taxpayer evasion increases and significant cost and complexity are added to the compliance and monitoring process. In short, multiple rates complicate administration and compliance, creating opportunities for abuse and corruption.

While large operators who benefit from economies of scale, access to finance, and global experience are the strategic focus of most investment promotion activities, numerous smaller businesses (family businesses) provide related services, run small hotels, and supply the sector’s larger firms. Incentive regimes can create a bias against small firms when incentives apply only above a certain threshold.

Enterprises with a turnover below the VAT threshold and those that operate informally also cause a break in the VAT chain. In these cases, a withholding tax can be introduced to ensure some tax collection. With such a tax, larger operators either withhold a tax payment from the purchase price when they buy from non-registered (informal) sources in order to justify these expenses, or they cannot claim deductions for their inputs. Thus, the tax allows revenue collection from the informal sector and helps encourage informal suppliers to register their operations and potentially opt into the VAT regime.

To minimize compliance costs, tourism-specific VAT treatment should be avoided; rather, the goal should be to pursue a level playing field for all actors in the economy through an evenly applied VAT rate. International tour operators should be able to either register for the VAT when they open for business or be charged the VAT on all taxable supplies purchased from domestic firms.

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