Albanian government plans to include small businesses in the VAT scheme

The Valued Added Tax is one of the most important taxes in the Albanian fiscal regime. . According to the current legal provisions all businesses are subject to VAT declaration and payment, with the exception of small businesses, which are considered to be the ones with annual turnover below LEK 5 million (about EUR 37,000). Recent developments have introduced the removal of the VAT threshold and are expected to enter into force with the new fiscal year, as of January 1st, 2018.

At the end of each year, the Albanian Government announces the major changes it plans to implement in the new budget and fiscal year. In discussions about the state budget for 2018, one of the most-debated statements was made by the Ministry of Finance and Economy – supported by the Prime Minister – in regards to the application of VAT to small businesses.

The representatives of small businesses have opposed this reform and have warned of an increase of prices, as well as of bankruptcy of small businesses which are mainly family businesses and self-employed. Critics have noted the high social costs of this proposed reform. Considering that these changes are only discussed on a political level at the moment with no legal draft yet, it is difficult to analyse the specific provisions and the expected impact on prices and the possible increase of administrative costs.

The reasons presented by the government behind this decision are based on the combat against informality and the objective of the government to impede any form of non-declared transactions. The main scope of this change is to include small business in the system, to track the movement of goods, as well as the obligation of big enterprises to issue an invoice for every performed transaction.

According to the government statements, the provision will not be applied to craftsmen and small traders who sell in municipality-run markets.

The International Monetary Fund has declared its stance against the inclusion of small businesses in the VAT scheme. It is expected that the number of affected businesses will be approximately 70,000. The tax administration will have to process around 100.000 additional tax declarations each quarter, resulting in substantial increase of administrative costs. This stance of the IMF has been consistent each time the Albanian government has suggested the inclusion of small businesses in the VAT scheme. According to IMF, small businesses are likely to make more profits when the tax burden is lowered.

An interesting development in this matter is also the decision of the High Court of Albania, dated 19th of July 2017, in which it decided to partially abolish the Decision of the Council of Ministers no.953, dated 29.12.2014, article 11/2, in regards to the minimum taxable VAT limit based on which lawyers can be regarded as taxpayers. The legal act stipulated that all lawyers are part of the VAT scheme, regardless of the annual turnover. The High Court deemed this provision illegal and abrogated it, by applying the previous limit of LEK 5 million.

With small businesses and IMF opposing this significant change while the Government argues that the Albanian economy will benefit from it, it remains to be seen what the result of the latest Albanian VAT reform will be.

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