Ballina Aktualitet 2019 fiscal package: Albania tightens tax evasion rules, offers incentives

2019 fiscal package: Albania tightens tax evasion rules, offers incentives

Albania’s ruling Socialist Party majority has unveiled a series of legal changes aimed at fighting tax evasion among high income earners, local businesses and transactions involving foreign-owned assets starting next January, in addition to several tax incentives in a carrot and stick approach ahead of next year’s June 30 local elections.

In its 2019 fiscal package, the ruling Socialists have proposed legal changes that fight tax evasion among high-income professionals such as private hospital doctors, lawyers, consultants, engineers fictitiously registering as small businesses to avoid paying the 23 percent personal income tax for income of more than 130,000 lek (€1,017) a month, a threshold which under newly proposed legal changes is raised to monthly salaries of higher than 150,000 lek (€1,188).

Albania currently applies progressive taxation of up to 23 percent on personal income for monthly wages of more than 130,000 lek (€1,017) under a system that excludes the first 30,000 lek (€225) from taxation and a 13 percent rate on income from 30,000 to 130,000 lek.

Authorities say the new legal changes ease the tax burden for some 15,400 employees in the country but calculations show what high income earners benefit from hike in the personal income threshold taxed by 13 percent is a mere 2,000 lek (€16) a month.

Proposed legal changes allow tax authorities to use ‘alternative assessment methods’ that will re-categorize taxpayers in case of fictitiously operating as a business to escape personal income taxation.

Tax evasion with wages in Albania’s private sector is high and progressive taxation replacing the former 10 percent flat tax on personal income and corporate income is estimated to have contributed to businesses continuing the practice of ‘envelope wages’ to avoid paying higher taxes.

Another key sanction in the 2019 fiscal package involves making it compulsory for foreign investors to pay a capital gain tax of 15 percent in case of selling their Albania assets in a bid to avoid key transactions that bring nothing in income to the Albanian government.

Finance Minister Arben Ahmetaj says the legal changes are aimed at preventing tax-free transactions such as that of the country’s largest oil producer, former Canada-owned Bankers Petroleum which in mid-2016 was acquired by China’s Geo Jade for C$575 million (€390 mln) following a decade of operations in the country.

“When Bankers Petroleum was sold outside Albania, the country earned nothing from the sale operation. It couldn’t manage to tax it because of the fiscal system and rules it has not adopted yet and which is adopting under this advanced OECD package,” Ahmetaj said this week.

Several other major assets in Albania, including the country’s sole international airport and banks have changed hands in the past couple of years and shareholders in lucrative concession contracts sold their stakes for ridiculously low prices, reportedly escaping the 15 percent capital gain tax because of operating under offshore tax haven laws.

The 2019 fiscal package also makes it compulsory for businesses to initially pay off tax obligations before switching to passive status.

The move comes at a time when the number of businesses temporarily closing down has seen a sharp double-digit increase amid a hike in the tax burden on small businesses, already facing tougher competition from shopping chains and supermarkets as well as a decline in the purchasing power.

Another legal change proposed as part of the 2019 fiscal package is related to small family-run businesses registered as natural persons whose owners will not be allowed to obtain more than one tax ID number to avoid paying profit tax or pay at a lower rate by dividing their business into separate companies and keep the turnover low.

Tax incentives

The tighter sanctions against tax evasion come along with a series of tax incentives that the Albanian government is offering in bid to further improve the business climate by reducing the tax burden, which the latest Doing Business report described as the highest among Western Balkan countries.

Tax evasion in Albania is estimated at high levels of around 30 percent despite several nationwide campaigns in the past few years having formalized thousands of businesses and workers.

The major change in the upcoming fiscal package includes a reduction in the dividend tax to 8 percent, down from a current 15 percent in a measure that foreign business associations say is expected to provide a positive effect on boosting and diversifying investment and creating more favorable treatment for employees.

The government says the 8 percent dividend tax rate will also apply to undistributed profits in the pre-2018 period provided the tax is paid by Sept. 30 2019.

The year-end fiscal package follows a mid-2018 package when the ruling majority approved lower corporate income tax for mid-sized businesses and incentives on agribusinesses.

Proposed changes under the new fiscal package also increase the mining royalty on the key chromium exports to 9 percent, up from a current 6 percent in a move that discourages exports of raw chromium and gives a boost to local processing industry where major investment has been made.

Other proposed changes include cuts in the value added for imports of electric buses and VAT exclusions on imports of agricultural machinery and raw material for the pharmaceutical industry as well as cuts in the plastic and glass packaging to reduce local production costs at a time when imports have become much cheaper due to Europe’s single currency trading at a 10-year low against the Albanian lek.

Business representatives have called on the Albanian government to consider a fiscal package that would remain unchanged for at least a mid-term period so that they can plan their investments more accurately.

The current tax policy, changing almost on an annual basis, is rated as one of the top concerns for Albania’s foreign and local businesses, in addition to a high tax burden compared to regional competitors, widespread tax evasion, corruption and an inefficient judiciary.

The ruling Socialist Party majority expects the country’s economic growth to recover to 4.3 percent and public debt to drop to 65 percent of the GDP for 2018, in forecasts that are significantly much more optimistic compared to what international financial institutions such as the World Bank and the IMF predict for the Albanian economy in 2019 when contribution by two major energy-related projects that drove FDI growth over the past four years considerably wanes.

Opposition worried

The main opposition Democratic Party says the 2019 budget fails to bring development and welfare for the country’s households and businesses and what it mainly focuses on is favoring what it calls oligarchs who will get $100 million from taxpayer money next year to fund their ‘corruptive’ public private partnerships that the Albanian government has signed in road, health and waste management sectors.

“This is a budget that is accompanied with an extra $40 million in taxes for Albanians and an increase in the public debt, which according to the Supreme State Audit Institution, exceeds 72 percent of the country’s GDP if the concessions’ bill is included,” says Jorida Tabaku, an opposition Democratic Party MP who is also the deputy chair of the parliamentary economy committee.

According to her, Albanians have paid an extra 5 billion lek (€40 mln) in taxes since 2014 after Edi Rama took over as the country’s Prime Minister and currently pay a third of their income in taxes, making the cost of living in Albania the most expensive in the Balkans at a time when income remains one of the lowest.

The main opposition Democrats, who have been boycotting Parliament since last September over the ruling majority’s alleged linked to gangs and rising corruption, says a flat tax, strict public debt rules and the right infrastructure investments can give the right impetus to the country’s economy.

The Democrats say their proposed anti-mafia package will put an end once they assume power to what they call corruptive concessions, tenders and permits by seizing assets and making them available to improve access to education, healthcare, road infrastructure and create new jobs.