Government says the official version on progressive taxation will be made public by mid-December after discussing it with the IMF
TIRANA, Dec. 2 – Starting January 2014, the Socialist Party-led government will start applying progressive taxation, both on personal and corporate income, a move which has angered people receiving high wages and the business community. The reform is a shift back to progressive taxation after Albania has been applying a 10 percent flat tax on personal and corporate income since January 2008.
Although not officially made public due to ongoing negotiations with the IMF, local media have unveiled the reform will be a four-tier system with the tax rate on personal income ranging from 15 to 25 percent.
The progressive taxation on personal income will benefit an overwhelming majority of Albanians receiving monthly wages of up to 90,000 lek (Euro 628) who will pay less in personal income taxes, but punish those who earn more than 90,000 lek. The latter will face progressive taxation of 20 to 25 percent.
The changes which are part of a fiscal package the government is preparing ahead of the 2014 budget excludes progressive taxation for salaries of up to 30,000 lek, and applies progressive taxation of 15 percent for wages from 30,000 to 100,000 lek (Euro 210 to 700). Employees earning from 100,000 to 150,000 lek will at taxed by 20 percent while those receiving monthly wages of more than 150,000 lek (Euro 1,051) will pay 25 percent on personal income tax, according to unofficial reports.
Public administration employees, whose average wages stand at around 52,600 lek (Euro 368) will be the biggest beneficiaries from the reform which is expected to have minor impact on the private sector due to the high level of informality. Teachers, nurses and doctors as well as public administration employees whose gross wages are less than 90,000 lek will benefit automatic tax increases of 500 to 25,000 lek.
Compared to the current personal income taxation scheme, no change is observed for wages of up to 30,000 lek which are excluded from income tax. Under the newly proposed progressive taxation scheme, the 30,000 lek threshold is excluded from all personal income calculation.
An employee receiving a gross salary of 40,000 lek pays 4,000 lek under the current flat tax system, but will save 2,500 lek from the new scheme, paying only 1,500 lek in personal income tax. The difference between the current flat tax and the newly proposed system becomes equal for gross wages of 90,000. People receiving 100,000 to 200,000 lek will pay an additional 500 to 13,000 lek under the new scheme because of tax rates ranging from 20 to 25 percent.
The new progressive scheme on personal income is expected to negatively the state budget with USD 8 million, Finance Ministry experts estimate.
Employees will still have to pay a compulsory 11 percent in social security and health insurance. Social security contributions currently stand at 24.5 percent, of which 15 percent is paid by employers and 9.5 percent by employees. Meanwhile, health insurance contributions stand at 3.4 percent, shared by 1.7 percent between employers and employees.
Health insurance
Government has proposed lifting the threshold on which the 3.4 percent rate on health insurance is collected. Under the current scheme, the 3.4 percent health insurance rate was charged only on salaries of up to 95,130 lek. Meanwhile, small businesses whose owners are usually self-employed, will pay 7 percent of the double minimum wage which means 2,663 lek/month.
Small businesses currently pay health insurance rates at 7 percent of the minimum wage. However, under a law approved by the former government, the 78,000 small businesses were expected to pay 7 percent of the average wage starting January 2014. The new proposal to charge them at twice the minimum wage saves them around 1,400 lek/month.
No final version yet
Economy Minister Arben Ahmetaj denied government has published any table on the progressive taxation scheme and said the 2014 budget will be made public only after it is consulted with the IMF.
“We will make the budget public, only after having responsibly discussed, negotiated and decided on it with the IMF. Soon after negotiations with the IMF and the World Bank finish by mid-December, the Albanian citizens will have available the novelties on what we decide together with the international institutions,” said Ahmetaj
An IMF mission headed by Nadeem Ilahi, the IMF Mission Chief for Albania will be in Tirana from December 3 to 17 to hold the annual consultations and discuss the fiscal package and the 2014 budget with the Albanian government which intends to renew cooperation with the IMF after relations were reduced to an advisory role in early 2009.
Speaking in a meeting with Italian investors this week, Prime Minister Edi Rama said the 10 percent flat tax was fake considering what enterprises pay in bribes and VAT which is not refunded.
“The question is to simplify the taxation on personal income, which means lowering the burden to those who get less. To us, it is a social obligation that a teacher, a nurse, a policeman or even somebody with middle income should not pay the same to the Prime Minister, the minister or the MP. The so-called 10 percent tax is a fraud which we cannot accept. We will shift into progressive taxation so that those who earn less will pay less, and whoever earns more will pay more,” he said.
The Prime Minister did not provide a clear version on corporate tax, but assured the system will not be stifling to enterprises.
“As far as enterprises are concerned, we are not for the same formula and will not shift into a stifling progressive taxation, but we will have a two-tier system,” said Rama, adding that the 10 percent profit tax will be lowered for small enterprises and increase for medium-sized and big enterprises. “We cannot say it now because we are negotiating with the IMF but of course we will not head to unaffordable rates,” assured Rama.
Opposition concerned
Opposition Democratic Party leader Lulzim Basha warned this week that by keeping the 2014 budget secret, government was violating the law and posing a threat to the economy.
Basha said the budget, which has not been approved by government yet, should have already been adopted by Parliament. “The principles of transparency, predictability, all-inclusiveness and fiscal discipline of the law on the management of the budget system in Albania have been violated,” he said in a meeting with the Democratic Party MPs.
The law foresees that the budget is approved by government within October and submitted to Parliament for discussion and approval within November 20.
“Through the delayed budget, the Prime Minister targets avoiding consultations with interest groups and hopes to dictate his dangerous and crisis-leading experiments to the country’s economy,” said Basha, adding that the opposition was preparing its alternative proposals to the 2014 budget.
Progressive corporate tax
At a time when the Albanian economy is striving with the poorest growth rates in the past 15 years, both the Albanian and foreign business community oppose the new shift to progressive taxation as harmful to Albania’s competitiveness and preventing the creation of new jobs.
Unofficial sources say the government will impose a 7.5 percent income tax on small businesses with an annual turnover of 2 to 8 million lek (Euro 14,000 to 56,000) and apply a 15 percent tax on big businesses. Sources say government plans to apply a 20 percent income tax on concession companies, apart from companies operating in the oil sector which are imposed a 50 percent profit tax only after they have paid off their investments and expenditure.
The progressive taxation on personal income and company profits is foreseen in the 2013-2017 programme of the Socialist Party-led left wing government.
“The profit tax on big businesses will be at a higher rate compared to the current level in order to reflect the principle of fair taxation and the need for big companies to contribute more than small businesses which operate through self-employment. Personal income tax will be changed into a progressive scheme, by increasing the fiscal burden on higher wages and lowering it for the lower and mid-wages,” says the government in its 2013-2017 programme.
Business community against
Albania’s business community represented by the Konfindustria Association has warned the shift to progressive taxation will have a negative impact on the attraction of foreign direct investment. Konfindustria says progressive taxation on personal and corporate income would lower Albania’s competitiveness at a time when regional countries such as Macedonia, Serbia, Montenegro and Bulgaria apply a 10 percent flat tax.
The Association has also called on government to be careful with the reduction of the 20 percent VAT on specific products and services, warning that this could damage domestic products.
“Support to people in need should be carried out through the state budget and not fiscal policies which would prove inefficient. Local products would be severely affected by competition from foreign products and have negative impacts on the Albanian economy,” says Konfindustria in a statement.
Foreign businesses operating in Albania, including the American Chamber of Commerce, favour the current 10 percent flat tax regime, opposing the new reform and the frequent changes in the tax regime which they describe as harmful to the business climate.
The Europeans for Tax Reform, a campaign-oriented organisation, which focuses on the active promotion of tax reductions all over Europe said Albania plans a big step backwards by introducing progressive taxation again. “Instead of the excellent and first class global best practice of 10 percent flat tax now there should be a graded tax system of 10 percent to 20 percent. This means the largest tax increase in Albania in the 20 years of transition and a doubling of the income tax for most middle income Albanians,” it said.
Representatives of business associations argue the increase of corporate income tax would make Albania less competitive compared to other regional countries on the attraction of foreign direct investment. “A change in the 10 percent tax rate on corporate income will absolutely not be supported by the business community,” Nikolin Jaka, the chairman of the Tirana Chamber of Commerce and Industry has earlier said.
The Konfindustria business association has earlier advised that that progressive income tax should be implemented only on companies which operate under conditions of limited competition because of exclusive licences and higher profits than the average.
Since 2008, Albania has been applying a 10 percent flat tax on personal and corporate income, one of the lowest in the region, helping Albania increase foreign direct investment.
FDI, which in 2012 ranked Albania as the second largest recipient in South-East Europe, continued positively performing in the first half of this year. During the first half of this year, FDI rose to 446 million euros, up from 397 million euros in the first half of last year, registering a 12.3 percent increase, according to Bank of Albania data. Economic experts and business representatives say the key to success in these times of crisis is not changing the tax system, but fiscal consolidation and the adoption of a series of measures as suggested by the IMF and the World Bank.
Zef Preci, the director of Albanian Center for Economic Research, says the taxation system does not need major changes but only reviews.
Gjergj Buxhuku, the administrator of the Konfindustria business association, says Albania is surrounded by countries applying low and flat taxes aimed at attracting as much foreign direct investment as possible and cannot make a difference under this situation.
In a recent conference with the business community, Prime Minister Edi Rama described the business climate, and fight against corruption and bureaucracy, as more important than the 10 percent tax in the decision of foreign companies to invest in Albania.
During the electoral campaign, Socialist Party leader Edi Rama clarified that the Socialist Party intends to apply progressive taxation only on personal income tax and dividends but not on company’s profits.
The Socialist Party also says it will lift and reduce the 20 percent value added tax on a series of basic products and reduce VAT on agricultural inputs.
Ahead of the June 23 general elections, the Democratic Party lifted the 10 personal income tax only for people receiving monthly wages of up to 30,000 lek (Euro 210) but said it would continue applying the 10 percent flat tax on personal income and corporate taxes as a successful reform increasing the country’s competitiveness. The new progressive taxation project and the transparency over privatization and concession contracts will be the first targets for the Socialist Party.
“We will act quickly to apply the new taxation project by shifting into fair taxation which will reduce taxes for 95 percent of Albanians and lift taxes for small businesses. We will act fast with a facilitating package on farmers to reduce their production costs, remove VAT on basic products and medicines, and reduce household electricity prices. We will also launch a transparency process on concessions and privatizations suspected of favours at the expense of Albanians,” Prime Minister Edi Rama has earlier said.
The Socialist Party has promised to create 300,000 jobs in the next four years focusing on the manufacturing, agriculture and tourism sectors.
