TIRANA, Nov. 8 – Key taxes such as the corporate income tax and the withholding tax on dividends, rents and capital gains will remain unchanged at 15 percent even for 2017, defying business calls for a reduction in the tax burden which has emerged as the key concern for the local and foreign business community.
In its new fiscal package ahead of next year’s mid-2017 general elections, the ruling Socialist Party-led government has proposed that key taxes will remain unchanged, while the business community will be mainly offered easier procedure. Several key industries, the country’s top exporting garment and footwear and the mining industry will also have some taxes cut to help the country’s poorly diversified exports recover from the slump in international commodity prices since mid-2014.
The key garment and footwear industry employing about 100,000 people and traditionally producing the country’s top exports will have its customs fees on the import of raw materials, currently ranging from 2 to 15 percent, lifted. The industry relying on cheap labour costs has re-emerged as the country’s top exporter after the mid-2014 slump in commodity prices severely affected Albania’s key oil and mineral exports which had temporarily emerged as the top exports.
The royalty rate on metallic minerals for the domestic industry will also halve to 3 percent in a bid to promote domestic production and employment in the country’s ailing mining industry and Albania sole steelmaker, Turkish-run Kurum plant, which is struggling to escape bankruptcy.
The excise rate on imported tobacco will remain unchanged but sharply reduce by 45 percent to 2,500 lek/kg (€18) for domestically produced tobacco. The tobacco excise rate was also kept unchanged last year, following consecutive annual hikes in the previous years, sharply reducing tobacco imports and leading to a considerable number of smokers to shift to cheaper hand-rolled domestically produced tobacco, commonly traded informally. The excise rate on a 20-cigarette packs currently stands at 110 lek (€0.77) while retail prices for the most popular brands range from 200 lek to 300 lek (€1.4 to 2.1) per packet.
The biggest hike that is about to affect households is the introduction of an excise rate on liquid gas for car use at 10 to 13 lek ((€0.01)/litre. The excise rate is expected to affect thousands of car owners who have converted their petrol running cars to LPG due to significant lower prices and reducing consumption costs by an estimated 50 percent compared to running on diesel or petrol whose prices in Albania are among Europe’s highest due to the high tax burden levied on them.
Finance Minister Arben Ahmetaj has said the new fiscal package which modestly lowers the tax burden is a result of fiscal consolidation and the progressive tax the Socialist Party-led government has been applying since 2014 soon after it assumed power.
“In the new fiscal package there are some easier procedures and a modest reduction in the tax burden on garment and footwear producers or the domestic industry producers, but we are on a fiscal consolidation path and have reduced taxes through progressive taxation,” said Ahmetaj.
“There are a series of elements in the fiscal package, there is a reduction in the mining royalty rate for domestic processing, a cut in customs duties for some products used by the garment and footwear industry, there’s a correction between liquid gas and liquid gas for car use which accounts for 3 to 5 percent of the total,” the finance minister has said.
“There will be no changes in liquid gas used by households and the industry. There will mainly be administrative measures and a disciplining of the oil sector which includes both the crude oil price and a healthier methodology on the disciplining of biofuels and of course the strengthening of the property tax collection,” Ahmetaj has noted.
The new fiscal package is also expected to extend the €500 taxation on so called-luxury cars from a reference price of 7 million lek (€50,000) to 5 million lek (€36,000) starting next January.
The Albanian government says it plans to spend about $100 million on wage and pension increases next year, when the public administration is expected to get between 10 to 17 percent hikes in monthly wages starting March 2017, only three months ahead of the upcoming general elections.
Experts say the pre-electoral plans could put back in trouble Albania’s underperforming public finances and plans to keep in check public debt, currently hovering at a staggering 70 percent of the GDP, a level considered too high for Albania’s stage of development and a burden for much needed investments in key sectors such as infrastructure, health, education and agriculture due its high servicing cost.
The Albanian government has also earlier announced plans to revise the current property tax by the end of 2017 following next year’s expected elections.
The reform is expected to shift property tax calculation from its current rate depending on the size and location of the property to a formula based on current market value by end-2017, in considerably higher rates.
Businesses demand review of key taxes
Albania’s foreign business community has hailed the government’s new fiscal package and its easier procedures but warned Albania has to revise downward its key taxes in order to become more competitive in the attraction of foreign direct investment compared to regional countries applying flat tax regimes of 10 percent.
“We should be competitive maybe by reducing the corporate or personal income tax which would be positive. It wouldn’t cause a lot of damage to the budget if the value added tax is collected. We can be more creative by competing with Montenegro, Macedonia or Kosovo,” says Mark Crawford, the president of the American Chamber of Commerce in Albania.
The AmCham president has hailed the proposed easier tax procedures.
“The fact that businesses will be offered the opportunity to auto-correct is something positive,” describing the pre-scheduled inspections as something essential that also saves precious time to businesses.
The Socialist Party-led Albanian government has earlier announced measures that reduce penalties on businesses following tax hikes in the previous three years.
The new package which will become effective starting next year comes after concerns of deteriorating business climate by several key foreign and Albanian associations and after a law envisaging fines of up to €70,000 on tax evasion was turned down by the country’s Constitutional Court earlier this year over “disproportionate” penalties to income and offences committed.
A rather aggressive nationwide campaign against informality in Sept. 2015 although formalizing thousands of businesses previously operating informally failed to produce the expected hike in government revenue with the budget cut three times last year and facing a mid-year cut in 2016.
The local business community had previously welcomed the measures, but warned the current high tax burden remains the key concern.
“It is necessary that the Albanian government seriously considers reducing the tax burden which is the highest in the region,” says Nikolin Jaka, the head of the Tirana Chamber of Commerce.
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 climbed 32 steps to rank 58th among 190 global economies in the latest Doing Business report to score its best ever ranking, but yet lagged behind some of its key regional competitors offering lower taxes and easier procedures.
Albania’s total tax rate as percentage of commercial profit remained unchanged at 36.5 percent in 2016, being one of the highest among EU aspirant Western Balkans countries, according to the World Bank’s Doing Business report.
High taxes were the top concern for the business community in the latest AmCham Business Index which hit a four-year low in 2016.
Taxes were the second most problematic factor for doing business for 21.3 percent of respondents in Albania after corruption, according to the latest Global Competitiveness report published by the World Economic Forum, a Switzerland-based think tank.
