Lower VAT threshold increasing tax evasion, big businesses warn

Tirana Times
By Tirana Times September 11, 2018 12:10

Lower VAT threshold increasing tax evasion, big businesses warn

Story Highlights

  • Local milk processors, egg and beer producers say small businesses commonly refuse supplies accompanied by tax receipts in order to avoid switching to the VAT system, something which has damaged them and favored competitor suppliers trading products informally

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TIRANA, Sept. 11 – A lower value added tax threshold that the Albanian government introduced this year in a bid to formalize the market has apparently increased tax evasion among small businesses and created problems for big companies amid growing refusal by vendors to accept VAT receipts for their supplies.

Big businesses complain they have been facing rising difficulty to trade their products since April 2018 when new legal changes became effective reducing the annual turnover threshold for a small business to be included in the 20 percent value added tax to 2 million lek (about €15,700), down from a previous 5 million lek (€39,000). The legal changes were part of a reform aimed at reducing tax evasion but significantly increased costs for self-employed small business owners who strongly opposed the lower VAT threshold, warning of massive bankruptcies.

Local milk processors, egg and beer producers say small businesses commonly refuse supplies accompanied by tax receipts in order to avoid switching to the VAT system, something which has damaged them and favored competitor suppliers trading products informally.

“Even though we have tried to abide by the rules, the lower VAT threshold has damaged us and there have been businesses who have quit our products,” Saimir Begaj, the head of the Erzeni milk processing company, one of the country’s top two milk plants, is quoted as saying by local Monitor magazine.

“It’s mostly coffee bars, fast food restaurants and small restaurants in rural areas that want supplies with no tax receipts,” he adds.

Luan Bregasi, one of the country’s most successful businessman operating in the beer and tourism industries, says the government should revise the VAT system again.

“In my opinion, small businesses must report VAT but not pay for it. Despite the incentives toward small businesses, I am in favor of new incentives. We have been facing tough resistance and refusal to accept tax receipts is one of the reasons for a decline in production business,” Bregasi is quoted as saying.

Small business owners also admit they are forced to avoid issuing tax receipts for the products they sell in many cases in order to escape a higher tax burden and pay the VAT difference for the purchase and sale price with the authorities, something which they say could lead them to bankruptcy amid an already tough situation negatively affected by declining purchasing power and rising competition from supermarket chains and shopping centers already in the VAT system.

Market operators say informality considerable increased during summer, the peak of the tourist season, when tax authorities focused their campaign on tax evasion in coastal areas.

High levels of informality and unfair competition is one of the top concerns for local and foreign businesses operating in Albania, along with high perceived corruption, and an inefficient judiciary.

Tax evasion in the country is estimated at about 30 percent of the country’s GDP.

Some 11,000 small businesses were automatically included in the VAT system last April after the VAT threshold was lowered, triggering nationwide protests by businesses worried over the higher tax burden leading to massive bankruptcies. There was concern also among other small businesses considering that a business has to report daily turnover of about 5,550 lek (€43) in order to avoid the VAT system.

Data published by Albania’s tax administration shows the number of businesses shifting to passive status in the first eight months of this year rose to about 9,600, a 50 percent hike compared to the same period last year and the new VAT system has also had an impact for the hike.

As a rule, businesses switch to the passive register in case of not operating or not submitting tax statements for 12 months or declaring the suspension of commercial operation with the National Business Center for a period of more than 1 year or indefinitely.

 

VAT revenue fails to increase

Official data shows the legal changes lowering the VAT threshold were not reflected on higher government revenue during the first seven months of this year after small businesses filed their first quarterly VAT statements last July.

A finance ministry report shows the tax administration failed to meet the VAT revenue target by about 2 billion lek (€15.3 million) for the first seven months of this year and VAT income was even down by a modest 324 million lek (€2.5 million) compared to the same period last year, hinting lower consumption or increased tax evasion.

The tax administration collects only about a quarter of total VAT, mainly from domestic business transactions, with the rest collected by the customs administration.

VAT, which is levied at a fixed 20 percent rate on almost all products and services, accounts for about a third of total tax revenue, but only about 1 percent of it is collected from small business transactions.

Meanwhile, government revenue rose by a mere 2.9 percent to a total of about 256 billion lek (€2 billion) in the first seven months of this year, but missed the target by a sizeable 3.1 percent equal to 8.26 billion lek (€65 mln) for the January-July period, according to finance ministry data.

The government blamed the strengthening of Albania’s national currency against Europe’s single currency and the US dollar with a negative impact of about 5 billion lek (€39.3 mln) for the first eight months of this year for the underperforming government revenue triggering a mid-year budget cut.

The negative effects are mainly related to euro’s free fall against the Albanian lek making imports much cheaper and reducing the amount of the key value added tax that the Albanian government collects from imports, the overwhelming majority of which comes from the Eurozone.

Europe’s single currency has been trading at a 10-year low of about 126 lek for the past three months in a situation, primarily hitting the country’s Eurozone exporters, but also savers in Europe’s single currency and remittance recipients.

Tirana Times
By Tirana Times September 11, 2018 12:10