Albanians to pay an extra 112 million in taxes in 2015

While key taxes such as the personal and corporate income taxes will remain unchanged, the fiscal burden will further increase by raising the withholding tax on non-wage income, increasing the circulation tax on fuel and imposing higher excise rates on tobacco.
TIRANA, Nov. 4 – Albanians will pay an extra 16 billion lek (around 112 million Euros) in higher taxes on non-wage income, fuel and tobacco in 2015, according to the 2015 fiscal package government has just announced.
While key taxes such as the personal and corporate income taxes will remain unchanged, defying businesses calls for a return to the flat tax regime after the corporate income tax was raised by 5 percent to 15 percent in 2014, the fiscal burden will further increase by raising the withholding tax on dividends and rents, increasing the circulation tax on fuel and imposing higher excise rates on tobacco.
The Albanian government plans to collect an extra 5 billion lek (Euro 35 million) from the increase by 5 percent to 15 percent on the withholding tax on dividends, interest rates on loans and deposits, income from copyright or intellectual property, games of chance as well as other rewards.
The biggest extra income is expected from the increase by 10 lek (12 lek VAT included) (Euro 0.084) in the circulation tax levied on fuel.
Fuel prices in Albania, already among the highest in Europe, are expected to reach a record 200 lek/litre (Euro 1.4). ). Government says it plans to collected an extra 6.7 billion lek (Euro 42 million) from the increase the circulation tax, currently at 17 lek/ litre, by another 10 lek (12 lek VAT included) which would take it to 27 lek litre (Euro 0.19), not to mention the excise tax at 37 lek/litre, the carbon tax at 1.5 lek/litre on petrol and at 3 lek/litre on diesel, VAT at 20 percent, and other customs duties which make fuel prices in Albania the highest in the region and Europe despite the country having one of Europe’s lowest GDP per capita.
The increase in the excise rate on tobacco is expected to bring government an extra 4.2 billion lek (Euro 30 million). Two months before a new hike in tobacco excise rate enters into force, cigarette prices in Albania have undergone the usual price increase ahead of such news while no measures have been taken to curb the speculation expected to bring tobacco importers and traders huge profits. Prices on most popular cigarette brands have already increased by 20 to 30 lek per packed (Euro 0.14 to Euro 0.21) abusively preceding the expected price increase starting January 2014. The excise duty on 20-cigarette packs will increase by another 20 lek (Euro 0.14) starting next January, taking the excise rate to 110 lek (Euro 0.77) per packet, as part of efforts to curb the high smoking rate.
Hike in power prices
Government says it has allocated 1.6 billion lek (Euro 11.3 million) in compensation to people in need for the expected increase in electricity prices in 2015 but has not announced the new unified rate yet after confirming it will lift the 300 kWh threshold charging lower tariffs.
Power prices for both household and business consumers are set to undergo an unavoidable increase next year as part of a reform in the country’s electricity sector which causes the state budget around $200 million in losses. Government has confirmed it will lift the 300 kWh threshold charging lower prices for household consumers and apply unified tariffs at an average rate. The reform would affect around three-quarters of Albanian households with a monthly consumption of 300 kWh. Estimates show that a household with 300 kWh monthly consumption will pay an extra of around 1,000 lek (Euro 7) under the new average tariffs expected at a unified 9.53 lek kWh (Euro 0.067)
An annual report by energy regulator ERE shows the number of Albanian households with a monthly consumption of 300 kWh rose to 76.3 percent in 2013, up 1 percent compared to 2012. Household electricity consumption accounted for 57.6 percent of the total in 2013.
Currently, Albanian households pay electricity bills under a two-tier price level which charges them 7.7 lek/kWh for a consumption of up to 300 kWh a month and 13.5 lek for each kWh they consume above the 300 kWh threshold (VAT excluded). Average tariffs for business consumers vary from 8.5 lek/ kWh to 10 lek kWh based on low or medium voltage power access. Meanwhile, state institutions pay 11.5 to 14 lek kWh.
Power prices during the past six years have increased by 63 percent climbing from an average of 5.71 kWh in 2005 to 9.53 lek kWh currently.
In Albania power prices, which take a considerable part of households’ monthly income, have remained unchanged since the end of 2009 when the Energy Regulatory Entity (ERE) approved the latest increase in electricity tariffs. Yet, the electricity prices in Albania are relatively high considering that Albania has one of Europe’s lowest GDP per capita expressed in purchasing power standards.
Albania’s household electricity prices are higher than in six European countries, although the country’s GDP per capita, an indicator of the standard of living, is among the lowest in Europe, according to data by Eurostat, the statistical office of the European Union. At Euro 11.5 per 100 kWh, Albania’s household electricity prices including VAT at 20 percent, are higher than in Serbia at Euro 6.1, Macedonia at Euro 7.8, Bosnia and Herzegovina at Euro 8, Bulgaria at 8.8 Euros, Montenegro at 10.5 Euros and Iceland at 10.9 Euros.
Support measures
As support measures, government says it will lift the fuel and carbon tax on fuel for the fishing sector, including the already lifted excise which would reduce fuel prices by 67 lek/litre (Euro 0.47) for this industry.
Government will also lift the 20 percent VAT on compulsory non-life products dominated by auto insurance but impose a 3 percent tax on gross insurance premiums, which is expected to cause an estimated loss of around 280 million lek (around 2 million euros) to the state budget.
The new fiscal package increases mining royalty rate to local government units and reduces the royalty rate on domestically processed minerals.
The government also plans to lift the 2 percent taxes on the import of raw materials for industry and livestock such as wheat, food for livestock and lift the 10 percent customs tariff on wheat which is expected to negatively impact the state budget with 232 million lek. Government says the measures are expected to reduce prices on some key food products such bread and meat.
The new package also recognizes expected loss as deductible expenditure which reduces profit tax and addresses residual value in depreciation.
The excise rate on natural bitumen, currently at 5 lek/kg will be lifted while the customs tariff on crude oil will also be removed. Contributions in the emerging private pension market will also stripped of personal income tax benefiting more than 7,000 members of the private pension funds. The customs tariff on new tires will also reduce by 5 percent to 10 percent.
Growth targets
The left-wing Socialist Party-led government expects economic growth to gradually recover to 3 percent in 2015 and accelerate to 4 percent in 2016 and 4.5 percent in 2017. For 2014, government and the IMF which is assisting with reforms to achieve sustainable growth, expect growth at 2.1 percent despite the economy having registered sluggish growth in the first half of this year. The slight shrink in the second quarter of the year means the Albanian economy has grown by only 0.56 percent in the first half of 2014, which is the worst performance in the past six crisis years, and that the road to recovery for the Albanian economy will be long and require key reforms.
Newly revised data also shows the Albanian economy grew by an average of 2.6 percent annually during the 2009-2013 crisis years compared to a pre-crisis decade of an average 6 percent, being one of the best performers in the region, according to INSTAT.
The Albanian government expects a 12 percent increase in revenue in 2015 with total income at 414 billion lek (euro 2.92 billion), up 50 billion lek compared to the projected 2014 budget.
Government plans to spend 475 billion lek (Euro 3.35 billion) in 2015. The budget deficit is expected to drop to 4 percent of the GDP, down from 6.6 percent in 2014 while public debt will for the first time in the past global crisis years slightly drop to 70.6 percent down from 71 percent. Public investments estimated at 80 billion lek (Euro 564 million) or 5.4 percent of the GDP will focus on tap water, energy, innovation and ICT, tourism and road infrastructure.
“Several external factors will have an important impact such as the recovery in the Eurozone and especially in Greece despite the lower than expected pace as well as some internal factors such as the increase in FDI especially in the energy sector, the rise in exports and obvious progress in important investment projects,” says the Finance Ministry.
“Economic growth under conditions of fiscal consolidation is expected to be supported by the improvement of the business climate, the expansion of lending to the economy by replacing government’s internal borrowing with financing from international markets, an increase in public investments (especially in infrastructure), an accommodative monetary policy in the mid-term and a reduction in external risks (the economic recovery in Italy and Greece) and the accommodative monetary policy of the European Central Bank,” says the ministry in its reports on the 2015 budget and fiscal package.
Government also expects an increase in economic activity as a result of the country’s EU candidate status since June 2014 which will increase supply for the private sector and as a result of support packages in different sectors of the economy such as manufacturing, tourism, agriculture and other sectors in growth.
Speaking at a press conference, Finance Minister Shkelqim Cani said the 2015 budget supports sustainable economic growth and employment and reduces risks by reducing public debt and reforming the energy sector.
“We have committed to reduce public debt from 71 percent of the GDP currently to 65 percent of the GDP in 2017. The debt reduction eases the burden of the state budget because of reducing its cost and risks to the economy,” said Cani.
However, the opposition Democratic Party remains skeptical of the new budget and fiscal package and expects 2015 to be as difficult as 2014 for the Albanian economy.
Business community worried
While the Albanian government has already announce new tax increases and a hike in electricity prices, both the foreign and Albanian business communities are concerned over the impacts such measures would have on the economy at a time when recovery remains sluggish and foreign investments have slowed down.
The American Chamber of Commerce, which represents the largest foreign business community in Albania, has unveiled a series of proposals mainly related to the reintroduction of a flat tax on personal income and the reduction of the corporate income tax which in 2014 was raised by 5 percent to 15 percent.
The AmCham says the fight against informality, estimated at more than 30 percent of the GDP, and the expansion of the taxpayer base would enable the Albanian government to revise downward the personal income and corporate tax which have considerably affected high-income earners and medium-sized and big enterprises since Albania shifted to progressive taxation in January 2014.
The German Association of Industry and Trade (DIHA) has also expressed its concern over the expected rise in electricity prices and frequent tax changes which do not have a positive impact on the business climate and stability.
The Albanian business community represented by several associations is convinced that tax hikes in times of crisis would not be productive.
“The heavy fiscal burden damages businesses, fair competition, leaves room for much more evasion and does not bring a proportional increase in revenue,” says Nikolin Jaka, the chairman of the Tirana Chamber of Commerce and Industry.
“The theory of raising taxes in times of crisis is not productive. Policies should target and promote lending, consumption and foreign investments which bring more employment and are the only way leading to economic growth,” Jaka tells local media.
The Chamber also recommends the inclusion of businesses with an annual turnover of 5 to 8 million lek in the VAT system, a reduced VAT of 10 percent on agribusiness, manufacturing and tourism, increased investments in the public transport and the lift of VAT and excise duty on fuel for this sector.
The implementation of a full-scale fiscal amnesty requiring a qualified majority of votes after the failure of the previous partial fiscal pardons remains a key concern for the Tirana Chamber of Commerce.
Meanwhile, the Konfindustria association has called on government to revise downward the corporate income tax to 9 to 9.5 percent, which would put Albania on par to other regional countries and increase its competitiveness on the attraction of foreign direct investment.
With electricity prices set to increase for business consumers next year, the Konfindustria Association has warned the move would have a severe impact on the ailing Albanian economy.
In a statement, the Konfindustria association says an increase in electricity prices at a time when around half of the electricity fed into the grid is lost because of technical reasons and non-payments, risks further deteriorating the country’s economic development and the financial situation of the electricity generation and distribution operators because of the massive culture of non-payment of bills.
Impact on FDI
The shift to progressive taxation, government’s freeze of its stimulating policy on investments on hydropower plants and lack of privatization revenue moderately affected foreign direct investment during the first half of this year. Foreign direct investment dropped to 183 million euros in the second quarter of 2014, down from 197 million euros in the final quarter of 2013 and 286 million euros in the second quarter of 2013, according to revised Bank of Albania data. However, the decline for the first half of 2014 remains moderate due to the positive performance in the first quarter of the year when FDI rose by 57 percent to 197 million euros year-on-year. In total, FDI for the first half of 2014 registered 380 million euros, down from 411 million euros during the same period last year, registering a 7.5 percent decline.
FDI rose to a historic high of 953 million euros in 2013, up from 666 million euros in 2012 and a previous record of 793 million euros in 2010, says the central bank.
The manufacturing and extractive industries have attracted around half of the FDI stock in Albania during the country’s past two decades of transition into a market economy after the collapse of communist regime and its planned economy.
Prospects remain optimistic as a UNCTAD report says that in Albania, the Trans-Adriatic pipeline bringing Caspian gas to Europe will generate one of that country’s largest FDI projects, with important benefits for a number of industries, including manufacturing, utilities and transport. TAP is scheduled to start construction in 2015 and carry the first gas by 2019. The pipeline will transport natural gas from the giant Shah Deniz II development in Azerbaijan through Greece and Albania to Italy, from which it can be transported farther into Western and Central Europe.