On 11 February 2022 the World Bank published a document entitled: Albania Country Economic Memorandum: Strengthening the Sustainability of Albania’s Growth Model. The document looks at Albania’s economic challenges, examines progress with implementing reforms and makes recommendations for a sustainable economic recovery. The report emphasises the importance of investing in people and in firm productivity; building a sustainable growth model; and strengthening public finances.
Efforts must be made to strengthen the tax administration, combined with simplifying the tax code to reduce compliance costs. The report notes that Albania collects less revenues from the value added tax (VAT), personal income tax and social security contributions than comparable countries, and this indicates that the tax base is too narrow and that there is insufficient enforcement and collection. As there is a large informal sector, tax compliance is particularly low for the personal tax and social security contributions.
Direct income taxes raise fewer revenues in Albania than in comparable countries. The efficiency of the personal income tax could be improved as it currently has only two tax brackets apart from zero, with low rates and no allowances. The tax system provides an incentive for workers to choose self-employment and pay the business profits tax, rather than be employed and pay the personal income tax.
The report suggests that personal income tax and social security contributions thresholds should be harmonised, to reduce under-reporting of income; and income from self-employment should be treated in the same way for tax purposes as income from employment. In the medium term, the personal income tax system could be improved by aligning taxation across different income sources, instead of taxing some sources of income at lower rates.
Reducing tax exemptions, including VAT exemptions, could generate more tax revenues. Vulnerable income groups or business sectors could be supported by direct subsidies rather than VAT exemptions. The VAT exemptions could be removed for private education and healthcare, non-prescription medicines, fee-based financial services, and the first sale of newly-built property, as these exemptions are more likely to benefit higher income groups.
Property and environmental taxes are efficient sources of public revenue, but their tax rates are very low in Albania. Also, the wide range of exemptions means that revenues from these taxes are lower. Property and environmental charges could become an important source of local government revenue.
Albania can improve tax compliance by improving the capacity of the tax administration. Underreporting of income is common in the country, especially in trade, construction, and services. Also, there is a large VAT gap, which could be closed further by more efficient administration.
The filing of returns of annual earnings needs to be expanded to include more taxpayers, by lowering the filing threshold. The administrative burden on taxpayers could be reduced by using pre-populated returns and third-party information. The tax administration should explore the possibility of obtaining interest data from banks.
Albania has signed the Convention on Mutual Administrative Assistance in Tax Matters and has signed bilateral tax conventions, so it can use these to access tax information. Requesting international tax information should be a normal procedure for the Large Taxpayers’ Unit and other units dealing with cross-border tax issues, including eventually a unit dealing with high net wealth individuals.
Taxpayer education and support should be improved, to increase tax certainty. Public consultation mechanisms must also be improved so the tax administration can engage with stakeholders and address their concerns.
