TIRANA, April 4 – The number of business closures during the first three months of this year hit a record high of about 42 a day, a 50 percent hike compared to the same period last year and more than double compared to the first quarter closures in the previous years, according to Albania’s tax administration.
The hike precedes legal changes reducing the annual turnover threshold for a small business to be included in the 20 percent value added tax 2 million lek (about €15,000), down from a previous 5 million lek (€37,000), in a reform aimed at reducing tax evasion but significantly increasing costs for self-employed small business owners who have warned of massive bankruptcies.
Albania’s tax administration reports more than 3,800 businesses, mainly small ones and operating in key regions of Tirana and Durres switched to passive status in the first three months of this year, ahead of the inclusion of more than 11,000 businesses nationwide in the 20 percent VAT system.
Tax authorities claim a considerable number of passive businesses have been fake in order to avoid penalties or switching to the VAT system and followed by immediate registrations in the same units by people linked with taxpayers previously owning the activity. Tax inspectors have warned of penalties over the phenomenon and that businesses cannot get out of VAT in case of reactivating.
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.
The sharp hike in business closures comes amid an increase in the tax burden, sluggish consumption and fierce competition by supermarket chains and shopping centers, already in VAT system.
The Association of Small and Mid-sized Business has warned of massive closures unless the government withdraws from its decision to lower the VAT turnover threshold.
“We are against VAT because it increases small and medium-sized business costs. It increases the prices of products traded by this category and favors monopolies and reduces Albania’s business competitiveness compared to regional countries,” says the Association.
Economy experts have also warned applying VAT on small businesses could have a negative impact on the economy considering their huge impact on private sector employment.
“The mission of small businesses is employment and self-employment. If reporting has costs, then the negative consequences will be big,” says economy expert Arben Malaj, a former finance minister.
“Businesses should not be punished during their first year until costs are adjusted,” he adds.
Zef Preà§i, another economy expert, supports the reduction in the VAT threshold as an initiative fighting tax evasion, but warns the initiative could have negative effects if businesses are not supported with the extra reporting costs, training or cash registers.
According to him, Albania lacks tax refund mechanisms that would promote tax receipts and compensation for households.
“That is a handicap which since 2010 when the personal income tax was introduced continues to remain a problem and unfortunately there is no effort to correct this,” says Preà§i.
Tax authorities have earlier said business costs will be minimal as small 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.
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.
Albania has some 160,000 businesses, 90 percent of which small family-run ones employing up to four people. About 90,000 businesses with an annual turnover of more than 5 million lek (€37,000) are already in the VAT system.
The finance ministry has earlier noted some 70,000 small businesses will continue to remain out of the VAT system because of their low turnover.
Handicrafts traders, street vendors, taxi drivers, barbers and fruit and vegetable traders and municipal-run markets will continue to be excluded from the 20 percent VAT no matter what their turnover is.
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.
