TIRANA, April 14 – Albania has been losing pace in the regional competitiveness race for foreign direct investment in the past couple of years as its business climate deteriorates mainly due to an increase in the tax burden and continued lack of rule of law.
The latest survey by the German Association of Industry and Trade in Albania, the ranking in the 2016 Doing Business report but also concerns by other foreign and local business representatives confirm the deteriorated situation.
Albania continues remaining one of least attractive destinations for German investors among 16 Central and South East European countries, according to an annual survey conducted by the German Association of Industry and Trade in Albania (DIHA) released this week.
The fight against corruption and crime, the transparency of public procurement, legal security, the predictability of economic policies, the public administration, the tax authorities, the tax system and tax burden are some of the key barriers German businesses and their Albanian partners face in the country.
Rolf Castro-Vasquez, the DIHA president, says foreign businesses in Albania undergo inspections by tax authorities 20 times more than their local competitors.
Among 20 European destinations, Albania ranked 19th as an investment destination for 2016 leaving behind only neighboring Kosovo. The experience of current German investors operating in Albania seems to have played a key role. The survey showed only two-thirds of current German investors in Albania (67 percent) would invest again in Albania if they were given the opportunity, ranking Albania the worst among 16 CSEE countries.
A majority 56 percent of German businesses described the current economic situation in Albania as bad, a 10 percent increase compared to 2015, according to the survey conducted with 40 DIHA members in early 2016. Some 38 percent of the respondents described the situation in 2016 as satisfactory compared to only 5 percent as good.
However, the 2016 expectations about the economic situation in the sectors where the companies operate are slightly more optimistic with 41 percent expecting the situation to improve, but the same percentage expecting it to remain unchanged.
Own business situation, revenues and investments are also expected to slightly improve in 2016.
German businesses in Albania are most satisfied with cheap labor costs, the productivity and motivation of employees and quality and availability of local suppliers.
The survey results come after German Chancellor Angela Merkel assured in last year’s visit to Tirana that Europe’s largest economy is ready to invest if it is convinced of the legal security offered by the investment destination and if there is an efficient public administration and corruption and organized crime are properly tackled.
German companies are already present in Albania operating in several key sectors with total investment of €128 million at the end of 2014, according to the country’s central bank.
The biggest German investments in Albania can be found in the Tirana International Airport, the Durres Port and the Tirana Business Park.
German-owned ProCredit bank also plays an important role, offering loans to SMEs and most recently to renewable energy projects.
German companies in Albania are also actively engaged in other important sectors such as construction, production, retail sales and logistics. Tirana Business Park, a €100 million investment led by Germany’s Lindner Group, has partially opened outside Tirana.
The German development cooperation with Albania was launched in 1988, just before the collapse of the communist regime. Since then, the German federal government has made available around 1 billion Euros in financial cooperation projects throughout the country. The focus is on improving municipal infrastructure, energy supply and strengthening the financial sector.
Tax concern
Other Albanian and foreign business associations have also appealed for measures needed to improve the country’s business environment after Albania lost 35 places to rank 97th out of 189 countries in the latest Doing Business report published by the World Bank.
The appeal comes at a time when a sharp decline in international oil and metal prices has severely affected the country’s domestic industry by reducing investment, exports and government revenue and some of the key investors in the energy and transport sectors are in talks to sell their Albania assets.
Mark Crawford, the president of the American Chamber of Commerce, says the business environment and taxes are the key concerns for American and Canadian investors, some of whom are already leaving the country.
The oil companies are leaving Albania because of problems with state-run agencies and taxes and not due to the sharp decline in international oil prices, he told a local TV.
“They think there is no stability here. If they come and invest here they think they could have problems with taxes or the government tomorrow,” said Crawford.
In a reaction to concerns over the business climate, the Foreign Investors Association of Albania placed the long-awaited judiciary reform and rule of law as key priorities.
“The implementation of the reform in the Albanian judicial system will have a strong impact on the business environment for coming years and will considerably influence on current investment decisions,” said FIAA in a statement.
With international oil and base metal prices at a record low, the Albanian economy has been hit by a series of bankruptcies and suspicious takeovers that could have severe consequences on the country’s exports, employment and government revenue.
Canada-based Bankers Petroleum has recently signed a preliminary deal with China’s Geo-Jade Petroleum Corporation to sell its major Albania assets and a newly acquired minor oil block in Hungary for a reported C$575 million (€392 mln). The surprise announcement comes as the country’s biggest oil producer has recently been facing tough times after more than a decade of operations in Albania due to a sharp cut in international oil prices and tax and environmental disputes with the Albanian government.
Meanwhile, U.S.-based TransAtlantic Petroleum has announced the sale of its loss-making Albanian unit to another smaller American company named GBC Oil which has undertaken to pay off the company’s huge debts.
Last March, one of the country’s biggest foreign investors, Turkey’s Kurum, filed for bankruptcy in a surprise move which could have severe consequences for the country’s economy and employment.
Business associations have continuously appealed for a review downward of taxes on profit, dividend and personal income and a return to a flat tax regime of 10 percent as an incentive giving the business community more room to develop and increase registration numbers.
Since 2014, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in Albania one of the region’s highest.
Albania’s total tax rate as a percentage of commercial profit of rose to 36.5 percent in 2015, up from 30.7 percent in 2014, lower only compared to Serbia among regional competitors.
Business associations have also filed court appeals against some legal changes increasing penalties on informality, replacing fines with prison time and some tax hikes by the Tirana Municipality.
In early March 2016, Albania’s Constitutional Court turned down a heavy fines law increasing fines on tax evasion by up to 50-fold as running counter to constitutional principles. The new legal changes envisaged fines of 500,000 lek (€3,529) to 10 million lek (€71,000) on informality in apparent “disproportionate” penalties to income and offences committed.
The high unemployment rate at 17 percent and some tough nationwide campaigns to tackle electricity thefts and debts and tax evasion are estimated to have been among the key reasons that led to some 66,000 Albanians seeking asylum in EU countries in 2015, mainly to Germany.
FDI stagnates
Affected by a sharp cut in energy-related investment due to a drastic decline in international oil and base metal prices, Albania’s foreign direct investment stagnated in 2015 when it grew by a mere €12 million to €881 million, according to Bank of Albania data.
At €881 mln, the annual FDI flow was up by only 1.4 percent compared to 2014 and down by 6.8 percent compared to the peak level of €945 mln in 2013.
Experts say the situation is a result of both external factors related to the sharp cut in commodity prices and internal factors related to the business climate and tax burden.
Albania was the second largest recipient of foreign direct investment among EU aspirant regional countries for the fifth year in a row in 2014, but the FDI stock remains the lowest compared to four other regional competitors, according to a report by UNCTAD, the United Nations body responsible for international trade.
When it comes to the FDI stock, Albania lags behind regional competitors with an FDI stock of $4.46 billion at the end of 2014, compared to Serbia’s $29.5 billion, Bosnia’s $7.4 billion, Macedonia’s $5.1 billion and Montenegro’s $5 billion.
Geographically and in natural resources, Albania has an advantage compared to many of its landlocked neighbors.
FDI prospects for 2016 seem more optimistic as the major Trans Adriatic Pipeline bringing Caspian gas to Europe has already launched its construction works in its Albania section and Norway’s Statkraft continues the construction of Devoll hydropower plant, the biggest investment in renewable energy in the past three decades in Albania.
TAP, which is expected to bring gas to Europe through Greece, Albania and Italy will generate one of Albania’s largest FDI projects, with important benefits for a number of industries, including manufacturing, utilities and transport, experts say.
The telecommunication, 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.
Greece, Canada, Switzerland, Austria, and Italy are the biggest foreign investors in Albania.
