TIRANA, Feb. 27 – Albania’s tax authorities have warned of penalties over alleged growing fictitious business de-registrations and suspension of activity as thousands of micro and small businesses are expected to enter the 20 percent value added system by next April, something that is expected to increase their operating costs.
The phenomenon comes as business closures in the first two months of this year hit a record of about 45 a day, hinting tougher competition amid poor consumption and a new upcoming hike in the tax burden.
Data published by the country’s tax administration shows some 2,600 businesses switched to the passive status for the first two months of this year, at an average rate of 45 businesses a day.
As a rule, businesses switch to 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.
Last year, some 14,400 businesses switched to passive status, at an average rate of 35 businesses a day.
Meanwhile, the number of new businesses for 2017 was at about 19,000, increasing the number of total businesses by only 5,500, one of the lowest rates in the past few years.
Starting April 2018, the 20 percent VAT threshold on businesses will be lowered to annual turnover of 2 million lek (about €15,000), down from a current 5 million lek (€37,000) in a move which is expected to have a negative impact on dozens of thousands of small businesses, already facing tough competition by supermarket chains and shopping centers.
Most closures during this year are taking place in the country’s largest cities such as Tirana and Durres and mainly involve family-run groceries or coffee bars, some of which believed to taking place fictitiously.
“The General Tax Directorate has identified an increase in the number of applications with the National Business Center on deregistration or suspension of activity by taxpayers who have been punished for various violations by the tax administration and who have switched their tax responsibility as well as taxpayers who are first entering the value added tax system and immediate registrations in the same unit by people linked with taxpayers previously owning the activity,” says the tax administration in a statement.
Tax authorities warn they will impose severe penalties in case they prove the new business owners have family relations with the previous owners applying for closure or suspension of activity and that every business shifting to passive status during the first quarter of this year, will not be able to escape the VAT obligation starting April 1 in case of reopening.
The Albanian government expects some 9,000 businesses to join the 20 percent VAT system, but does not expect an increase in consumer prices.
“I don’t think there will be a price increase as 18,000 small businesses have already been in the VAT system for the past five to six years and there has been no complaint, protest or problem by this group of businesses,” Niko Lera, the fiscal policy director at the finance ministry has told local media.
According to him, costs will be minimal as the businesses that will be included in the VAT system will only pay the VAT difference for the products they trade and continue reporting quarterly with tax authorities.
However, when it comes to the services sector such as small coffee bars and fast food restaurants, the 20 percent VAT means the costs will either be transferred to customers, as has happened with the price hike in the past few years, or business owners will have to handle with lower profits.
Albania has some 160,000 businesses, 90 percent of which small family-run ones employing up to four people.
The government had earlier announced only handicrafts traders, street vendors, taxi drivers, barbers and fruit and vegetable traders in municipal-run markets would be excluded from the 20 percent VAT.
VAT, profit tax
The tax reform was announced in late 2017 as part of the government’s renewed nationwide campaign against informality, which is estimated at about 30 percent of Albania’s €11 billion GDP.
Levied at a fixed 20 percent rate on almost all goods and services, VAT is the key tax the Albanian government collects, accounting for about a third of total revenue.
VAT is a considerable burden on final prices with Albania being the region’s sole country not to apply differentiated VAT on basic products, negatively affecting consumption levels.
Meanwhile, the profit tax will remain unchanged at 5 percent for businesses with an annual turnover between 5 million lek to 8 million (€59,000) and at 15 percent for businesses with a turnover of more than 8 million lek.
The value added and personal income tax thresholds are one of the main causes leading to tax evasion in Albania, a survey has shown.
About 38 percent of companies surveyed by the Albania Investment Council, a government advisory body, have rated the turnover thresholds that Albania applies on businesses to be included in the 20 percent VAT system and the progressive taxation the country applies on wages as the main two factors leading to tax evasion, one of the top concerns facing Albanian and foreign businesses operating in the country.
Albania currently excludes businesses with an annual turnover of less than 5 million lek (€37,262) from the VAT system and applies progressive taxation of up to 23 percent on personal income for monthly wages of more than 130,000 lek (€968) under a system that excludes the first 30,000 lek (€224) from taxation and applies a 13 percent rate on income from 30,000 to 130,000 lek.
The changes on the personal income tax were introduced in 2014 after the ruling Socialist Party lifted the 10 percent flat tax the country had been applying on both companies and households and introduced a 15 percent rate corporate income and progressive taxation on wages, triggering concerns of a higher tax burden on businesses and high-income earners.
