TIRANA, April.7 – In an effort to promote growth and improve the business climate, the administration of Albanian Prime Minister Sali Berisha plans a major overhaul of the tax system. The biggest change is a switch to a flat tax. “As of January 1st, 2008, Albania will have implemented the 10 percent flat tax system, one of the lowest in Europe,” Berisha told a business community meeting in late March. Corporate taxes, currently at 20 percent, are to be slashed in half. Social security contributions from businesses will likewise be capped at 10 percent. The government and other supporters of the reform say it will widen the taxable base and simplify tax administration, while also making Albania an easier place to invest. According to Finance Minister Ridvan Bode, the changes will lead to a more streamlined fiscal system. “The flat tax helps eliminate the potential arbitrage between corporate tax, dividend taxes and the income tax,” he says. VAT and other taxes will also be gradually reduced in order to woo investors, the minister added.
Reactions
Critics say the changes will mainly benefit businesses and the affluent, have little impact on most Albanians, and punish the poor. With the abolition of a progressive tax system, they say, low-income earners will see their taxes go up, while a tiny number of high-income earners will enjoy a windfall. In the past, the IMF has been wary of plans to reduce taxes in Albania. This time, however, it seems more receptive נprovided the overhaul is combined with more effective revenue collection. “We will negotiate with the Albanian government about the tax reduction, depending on the tax collection,” IMF representative Ann Margaret Westin told the press.
Background
The Democratic Party-led government has already instituted various tax reductions during the past two years. The most important of these was the reduction of social security contributions from businesses, from 29 percent to 20 percent, and a lowering of taxes on small businesses. Meanwhile the government is entangled in an important debate with business community over controversial laws on paying full fines in cash before legal contestation. All major business associations as well as the political opposition have expressed strong disapproval of the new law.
