In unison, business community seeks lower taxes ahead of new fiscal package

“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,” says Nikolin Jaka, the chairman of the Tirana Chamber of Commerce.
TIRANA, Oct. 21 – While the Albanian government is about to 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 Chamber argues the reduction of the corporate tax, which until the end of 2013 was at a flat 10 percent rate, would promote economic growth through reinvestment of higher income, reduce tax evasion currently widespread in a number of sectors, and help attract more foreign direct investment.
The blockage of construction permits has also had a negative impact, says Mark Crawford, the President of the AmCham in Albania, considering stability with concessions and simplification of tax procedures as key to keeping current foreign investors and attracting others.
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.
Jaka is also sceptical of the role international financial institutions such as the IMF and the World Bank are playing in Albania, bringing the example of Portugal where their advice on cutting public spending and raising taxes proved inefficient to growth in the Iberian country.
“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 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.
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.
Withholding tax on dividends, rents to increase
With the new 2015 fiscal package and budget already under discussion, the withholding tax rate on dividends and rents, currently at 10 percent is the first confirmed tax increase scheduled for 2015. Sources quoted by local media say government is considering increasing this tax to 15 percent, 3 percent higher than the IMF has recommended. Meanwhile, the corporate and personal income taxes are expected to remain unchanged.
In late-December 2013, the new Socialist Party-led Albanian government approved the shift to progressive taxation starting January 2014 after the country had been applying a 10 percent flat tax for the past six years in a move favoured by low and middle-income households but strongly opposed by the business community which has been paying 15 percent in corporate income tax during this year.
The shift to progressive taxation starting January 2014 when the tax burden was reduced for households but raised for businesses has also had moderate positive impact on the country’s public finances which this year are back on track with a double digit increase of 11 percent.
Finance Ministry data for the first seven months of this year show that while government lost around 863 million lek (Euro 6 million) in personal income tax due to the application of lower rates than the previous 10 percent flat tax, benefits from the profit tax, especially from mid-sized and big businesses were bigger after the corporate income tax was raised by 5 percent to 15 percent. The tax administration reports a 33 percent increase (an extra 3.1 billion lek or Euro 22 million) in profit tax revenue compared to the first seven months of 2013.
In total, government has collected around 2.3 billion lek (Euro 16 million) from the personal income and profit tax since Albania shifted into progressive taxation.
In a recent country report, the IMF with which government has signed a deal assisted by a Euro 334 million loan to boost the country’s growth, recommends increasing the withholding tax on capital incomes as a short-term potential measures to achieve the deficit target.
The IMF has recommended increasing the withholding tax rate on incomes from interests, share of profit, rents, dividends, and payments on intellectual properties from 10 percent to 12 percent.
The tax administration has also recommended government to establish reference prices on rents for special areas considering abuses with their self-declaration.
The increase in the excise duty on tobacco is the first tax already approved by government expected to have a positive impact on the 2015 budget.
In its latest country report last July, the IMF says Albania will need no new fiscal measures for 2014, but government authorities should tackle emerging fiscal risks such as the acceleration of arrears clearance, addressing non-performing loans and structural reforms to further improve the business climate.
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.