Countries designed their tax collection systems according to their specific needs and traditions, including prepayment or withholding of income and other taxes prior to lodgment of the income tax return and reconciliation of the actual tax payable.
The Albanian tax system today does not meet the equity, transparency and predictability criteria of a well functioning tax system. It contains significant opportunities for corruption, which further damages the accountability and credibility of the system. Of course, that these problems are at the attention of the Albanian government and the current work of the IMF (with extensive assistance from German and Sweden consultants) in collaboration with the General Taxation Directorate (GDT) is largely directed to establishing and implementing a better managerial and reporting system within the GDT to tackle many of the administrative defects.
To assist the government to accelerate the improvement of the tax administration and the investment environment, is the recently assistance of USAID Project for a number of specific issues that are currently perceived as major operating barriers to businesses.
In general, large businesses bear a disproportionate burden of taxation as compared to small businesses and individuals. This is supported by the revenue figures . Large businesses and their professional advisers report a perception of significant non compliance, under reporting and lack of enforcement in relation to businesses registered under the “small” businesses system. Small businesses can easily ‘close up shop’ in order to avoid their tax debts, and recommence business virtually the next day under a new name. It has also been reported that many individual taxpayers are registering as small businesses in order to obtain more favorable taxation rates and to overcome the withholding requirements for salary and wage income. The revenue shortfall caused by lack of enforcement in relation to small businesses and individuals is then met through heavy handed compliance and enforcement activity for large businesses.
Therefore the functioning of the system is perceived as arbitrary and inconsistent between different groups of taxpayers. It appears that the method for setting revenue targets for individual GDT employees, and standard targets for audit adjustments by the GDT has contributed to the perception of a disproportionate focus on large business taxpayers. Large taxpayers are an “easy target” for auditors who are trying to achieve their individual revenue targets through adjustments. Apart from the quality of audit case selection, conduct of audits and audit reporting, which is discussed in greater detail below, the sheer number of audits taking place is also creating a compliance burden for business. Business report on average 4 ‘tax inspections’ per year. There is no official limit on the number of audits or inspections that may be conducted in a given period, and it is not uncommon for auditors to be present on a company’s premises for many months at a time.
Albania operates under a civil legal system which does not rely on precedent for applying past decisions. In many civil jurisdictions, for the purposes of interpreting statutes, Ministerial directives and similar documents that reveal the intention of the legislature and the meaning of specific provisions are often issued and are considered to be more a primary source of law (and therefore more influential than in Common Law jurisdictions).
In relation to the work of the GDT generally, changes in policy, and amendments to the law, there is no regular forum for consultation or discussion between the GDT and taxpayers and their representatives. This can lead to frustration for all affected parties, since taxpayers feel they are not properly consulted or considered in the development of new laws that will directly affect them and the drafters may find that their laws become subject to policy review after the drafting process has been completed .
As the tax system matures and legislation inevitably increases in volume and complexity, it is just the time to fulfill the need for a comprehensively redrafted code. This process is undertaking by the government, carefully managed and has the broad support of the business community to avoid the imposition of ad hoc “policy” during the drafting process. In this regard, but also as a general proposition, business and taxpayer consultation needs to be better managed.
The profits tax (applicable to businesses with a turnover of over 8 million lek) is levied prospectively on a monthly basis. For this purpose, a new business will be required to estimate its profit for the following 12 months. Businesses have complained that it has not been acceptable in practice to quote ‘nil’ for the first year profit, even though it is not unusual for a business to make a loss in its first year of trading. According to the GDT, a nil profits estimate should be acceptable if it is supportable by the taxpayer. This suggests another example of inconsistency between the law and the implementation. Businesses also report difficulty in having their estimated profits varied on the basis of their un-audited accounts. If it is the case that profits are to differ from the estimated profits for the current year, it is necessary to go through the formal, costly and time consuming appeals process in order to have the estimated profits varied for the purpose of determining the amount of installments payable each month.
In relation to tax appeals, the law requires that within the court system, an appeal be heard by the Tax Appeals Tribunal at first instance. The decision of the Tribunal may then be reviewed by the Appeals Court. The main complaint from the business community in relation to the appeals process is the current requirement that 100% of the disputed tax must be paid before the appeal will be heard. The Constitutional Court has ruled that this requirement is unconstitutional and we understand that this is giving rise to the willingness of the lower courts to hear tax appeals without requiring adherence to the statutory escalation process described above. Most business taxpayers utilize the services of professional advisers, and that many tax disputes are settled outside the formal appeals process. The costs for taxpayers utilizing professional representatives as a matter of course in all dealings with the tax and court authorities are relatively high compared to other countries in the region.
The administration of VAT refunds (which is principally an issue for exporters) is universally acknowledged to be a problem. Although the law provides for a 30 day statutory limit on the provision of VAT refunds, with the payment of interest for delays over that time, the consensus amongst both taxpayers and the tax structure officials the refunds are simply not being processed at all. The problem is fully acknowledged by the tax administration. According to the GDT, the problem arises mainly because there is no allocation from the budget for the purpose of VAT refunds, whereas the VAT withheld is paid immediately into consolidated revenue. The registration process for new businesses in particular is complex. The relatively low level of registrations in the small business sector (currently approximately 49.000) is of concern in the context of the relatively narrow tax base and the disproportionate burden that this places on ‘legitimate’ business, as discussed earlier.
What to do then?
Anywhere in the world, a well-functioning tax system is judged by its: - efficiency (in revenue collection);
- equity (both in the burden of taxation amongst the taxpayer base and in the fair administration of the taxation system);
- transparency (taxpayers are entitled to know what the burden of tax will be for a period); and - predictability
In contrary, the present tax system in Albania fails to meet some of these criteria’s. The system relies on a very narrow revenue base, primarily drawn from VAT tax payers. The system is geared more to meeting monthly and trimester revenue targets than to supporting the broadening of the tax base by encouraging business activities. The rates and methods of tax collections, particularly the pre-payment of profits tax imposed on the start-ups do not encourage new business entries and may, in reality, encourage the expansion of “informal” businesses. The current system also seriously lacks transparency and predictability. Large discretion and arbitration allowed at the operational levels further invite abuse and corruption.
It’s an important and big issue the VAT refunds. It should be reviewed as a matter of urgency, in view of the necessity of encouraging exporting activities, a goal that Albania gives priority in the upcoming decade. The Albanian tax administration should take immediate measures to ensure the availability of the funds to facilitate the VAT refunds. The tax structures, in the meantime, should establish an effective system for examining the refund claims and having them processed in a timely manner for all VAT taxpayers.
In Albania, the rate of prepayment is more frequent and the method for variation of installments of profits tax is also very cumbersome. In particular, as a general approach, it should not be necessary to go through an appeals process in order to vary the amount of tax installments. An acceptable basis for varying installments should be agreed in consultation between business and professional representatives and the GDT (for example, it is not clear why accounts prepared by suitably qualified persons should not be acceptable to the tax administration at first instance, given the existing penalties for the provision of misleading information).
In general, bank accounts should only be frozen after initial collection procedures (letter and formal demand) have been exhausted and the debt has been overdue for more than 30 days. The current system of enforcement, particularly the application of the power to freeze bank accounts, is not working towards its goals. The inconsistent and heavy handed application of enforcement powers, compounded by the delegation of the power to local directors can discourage companies from using the banking system, while providing an opportunity for abuse of power and corruption. At a minimum, the increased focus on taxpayer education by the tax structures should include publicizing the circumstances in which enforcement powers will be exercised according to the law and the form that this will take. In this context, the appeal and review provisions should also be publicized so that taxpayers are aware of their rights and to encourage officers of the tax administration to exercise their powers appropriately. There should be a streamlined administrative process for the review of enforcement proceedings since the usual 30 day period under the current appeals process is not appropriate for a taxpayer who may not be able to trade during the period (due to frozen accounts or seizure of goods).
The tax administration should speed up the establishment of regular consultative forums between GDT, the Ministry of Finance and interest business groups. Such forums will play an important role in collecting inputs from all parties and building consensus for reforms. In the longer term, a comprehensive redraft of the tax codes by specialist legislative drafters in the MOF and the GDT may be warranted. But, the Government must ensure that sufficient policy consultation takes place before the drafting of legislation starts. With the understanding and support of all parties affected, the passage of the legislation will become more certain, and its implementation will be more likely.
Albanian taxation system: What happens inside? By Eduart Gjokutaj