policy brief: whither the small business tax in albania / heqja e taksës së biznesit të vogël...

PLANNING AND LOCAL

GOVERNANCE PROJECT (PLGP)

IN ALBANIA

Policy Brief:

Whither the Small Business Tax

in Albania?

Draft

Draft

August 30, 2013

This publication was produced for review by the United States Agency for International Development.

It was prepared by Tetra Tech ARD.

Authors: Tony Levitas* ([email protected])

Anila Gjika ([email protected])

Acknowledgement

*The authors would like to thank Peter Clavelle, Albana Dhmitri, and Silvana Meko for

comments on earlier drafts of this note. The note would not have been possible with the

patience, good will, and forthright responses to our questions that we received from the

members of the Tax Departments of Berat, Bushat Durres, Elbasan, Fier, Kamza, Korça,

Lushnje, Pogradec, and Shkoder that we interviewed. We would also like to the Farid Tardos

and Fatmir Kazazi of the IFC for a number of conversations that were extremely helpful in

clarifying our thinking about the SBT. All errors of fact or interpretation are, however and of

course, our own.

Prepared for the United States Agency for International Development, USAID Contract Number

AID-182-C-12-00001, Albania Planning and Local Governance Project (PLGP)

Tetra Tech ARD Contact: Kevin McLaughlin, Senior Technical

Advisor/Manager

[email protected]

Tetra Tech ARD Home Office Address: Tetra Tech ARD

159 Bank Street, Suite 300, Burlington,

VT 05401

Tel: 802 658-3890, Fax 802 658-4247

www.ardinc.com

mailto:[email protected]

http://www.ardinc.com/

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA

POLICY BRIEF: WHITHER THE SMALL BUSINESS TAX IN ALBANIA? DRAFT 3

PLANNING AND LOCAL

GOVERNANCE PROJECT

(PLGP) IN ALBANIA

POLICY BRIEF:

WHITHER THE SMALL BUSINESS TAX

IN ALBANIA?

DRAFT

August 30, 2013

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the

United States Agency for International Development or the United States Government.



CONTENTS

ACRONYMS AND ABBREVIATIONS ...................................................................................................... 5

1. INTRODUCTION ......................................................................................................................... 6

2. SBT AND INTERGOVERNMENTAL FINANCES IN ALBANIA ........................................................... 11

3. LOCAL GOVERNMENT ADMINISTRATION OF SBT ....................................................................... 16

4. CONSIDERATIONS AND RECOMMENDATIONS ........................................................................... 24

APPENDIXES .................................................................................................................................... 30

APPENDIX 1. LGU REVENUE AS SHARE OF GDP AND TOTAL PUBLIC REVENUE IN 2011 ........................ 30

APPENDIX 2. SBT AS A SHARE OF TOTAL BUDGET REVENUE IN 2011 FOR THE 26 LARGEST LGU ......... 31

APPENDIX 3. INTERVIEW SCHEDULE ...................................................................................................... 32

APPENDIX 4. SUMMARY OF DATA ON SBT COLLECTION ........................................................................ 33

APPENDIX 5. PROPERTY TAXES AS % OF GDP IN 2011 ........................................................................... 34

BIBLIOGRAPHY ................................................................................................................................. 35



ACRONYMS AND

ABBREVIATIONS

Bln Billion

CIT Corporate Income Tax

EU European Union

GDP Gross Domestic Product

IFC International Financial Corporation

IT Information Technology

LGU Local government unit

MoF Ministry of Finance

NRC National Registration Center

PIT Personal Income Tax

PLGP Planning and Local Governance Project

SBT Small Business Tax

SDC Swiss Development Cooperation

SMME Small, Medium and Micro Enterprises

USAID United States Agency for International Development

VAT Value Added Tax

WB World Bank



1. INTRODUCTION

Over the last few years, the Small Business Tax (SBT) has been the subject of both intense

political debate and continual, if not also chaotic reform. This Policy Brief note reviews the role

of the tax in Albania’s still evolving fiscal system and tries to clarify the most important issues

associated with the SBT looking forward. The note does not specify a blueprint for the reform or

elimination of the tax. Instead, we lay out a few alternatives that we hope will help policy makers

develop reforms to improve Albania’s overall tax culture, a tax culture that is now important not

just for the national government, but for local governments as well. Indeed, because the SBT is

an important source of local government revenue, the reform of the tax –and the evolution of the

tax culture of which it is a part—must be looked at within the larger framework of Albania’s

system of intergovernmental financial relations. Or put more bluntly, the future of the SBT has

important implications not just for how SMMEs relate to both levels of the “state”, but to how

these levels relate to each other.

We think that improving Albania’s tax culture should be considered the primary objective of any

and all tax reforms because public revenue as a percentage of GDP is lower in Albania --26%--

than in any other European country1. What this means is that the country’s fiscal system is not

providing enough revenue to support adequate public services for either citizens or firms. Indeed,

it is creating something of a vicious circle in which insufficient revenue weakens performance at

both levels of government and weak performance undermines revenue collection everywhere. In

saying, this we are not suggesting that future of the SBT be considered primarily in terms of its

ability to increase overall public revenues. What we are saying, however is that taxing small

businesses should be analyzed within the dual context of improving both intergovernmental

fiscal relations in Albania, as well as the country’s overall tax culture. In short, the reform of the

SBT should be understood as part of a larger effort to break-out of the vicious circle that is

currently constraining the development of good government at all levels of the polity.

This sort of vicious circle is obviously not unique to Albania. In fact, it is painfully common in

many developing and transitional countries. But breaking-out of it is not easy and changing a

country’s tax culture requires more than just strengthening the capacity of the state to administer

taxes efficiently or to enforce compliance. To be sure, people and firms are more likely to pay

1 See Appendix 1 for a comparison of total public revenues as a share of GDP in select countries in the region and the EU.



taxes if the payment process itself is simple and straight forward. And obviously credible

enforcement is needed to protect the state budget in the immediate, and --over the longer term- to

prevent those inclined to evade taxes from making those inclined to pay them feel like “suckers”.

But at the end of the day, these are necessary and not sufficient conditions for improving

compliance2. In short, in democratic societies questions about taxation are always embedded in

questions of legitimacy; about how deeply citizens and firms recognize the need to pay for their

own governance, and how confident they are in efforts of the governments they elect and pay for

to improve their lives 3

.

In what follows, we try to situate the reform of the SBT within the larger challenge of improving

the overall legitimacy of taxation and government in Albania. We are particularly concerned

with the role of the SBT in Albania’s intergovernmental finance system because the tax has been

an important source of local government revenue. Indeed, since 2007, the local governments

have been responsible for administering and collecting the tax. As a result, the reform (or

elimination) of the SBT will have serious –and often underappreciated— financial consequences

for Albanian municipalities. At the same time, the reform of the tax must be thought about in

relationship to the national government’s capacity to extend Value Added Tax (VAT) and the

Profit Tax to small firms and micro-enterprises. And finally, and perhaps most importantly, the

reform of the SBT must be thought about in relationship to the additional burdens that VAT or

Profit Taxation are likely to impose on the finances and skills of Albania’s SMMEs.

In the recent electoral campaign, the Socialist Party repeatedly promised that the SBT be

eliminated. These promises echoed suggestions from the World Bank (2008), one of the authors

of this note (Levitas 2010), and USAID PLGP Project that the SBT should eventually be

replaced by the origin based-sharing of the Personal Income Tax (PIT) and thus progressively

eliminated. We still think that Albania should move towards PIT sharing. But the research for

this paper, combined with after a more thorough review of the literature on how costly it is for

small firms in developing countries to comply with VAT, as well as how difficult it is for

governments to actually enforce VAT among microenterprises our position has shifted. We now

think that the SBT should be reformed, and plans for its elimination put on the back burner.

Hopefully, the following will make clear why our position has changed. But for excellent

reviews of these issues which influenced our thinking see the two papers on the small business

taxation from the IFC cited in the bibliography4.

2 For good discussions of why people pay taxes see, Kahan (2002) and Scholtz (1998)

3 It is worth adding that from an intellectual point of view, the interesting question about taxation is not why people don’t pay

taxes, but why they do: Given the odds of getting a) caught for tax evasion b) seriously punished or c) deriving measurable benefits from one’s own tax payments it is difficult to explain tax compliance in modern democracies if one thinks about tax payers as individuals who make compliance decisions on the basis of rational cost/benefit calculations. See again Kahan (2002) Tyler (1998) and Frey (2002) 4 Loeprick (2009), and IFC (2007)



The paper is divided into three parts. The first reviews the importance of the tax for local

governments, the history of the legal regime governing the SBT, and the effect changes in this

regime have had on the yield of the tax across local governments of different types and sizes.

The second summarizes the main findings of a series of interviews that we conducted with local

government tax officials in ten jurisdictions where the tax constitutes an import source of budget

revenue. Here we discuss how local governments determine SBT policies, and how they

administer the tax. Equally importantly we use these interviews to shed light on the relations

between local and national tax administrators, as well as on the interaction between the SBT and

the VAT and Profit Taxes. Finally, in the third section we discuss possible strategies for using

the reform of the SBT to improve Albania’s overall tax culture. Are most important findings and

recommendations can be summarized as follows:

1. Since being given responsibility for administering the SBT in 2007, local governments

have done a better job administering the tax than the District Offices of the national

government did prior to the tax’s devolution. The decline in the yield of the tax since

2009 has been the result of a number of hastily prepared and often ill-considered national

government reforms. These reforms have demoralized local tax officials and undermined

their efforts to create viable local tax cultures. Lowering the turnover threshold for

participation in the VAT system from eight to five million lek --while maintaining the

threshold for the SBT at eight million lek-- has been particularly disruptive: It has created

tensions, confusions and competition between local and national tax officials and has led

to the “double” taxation of those SMMEs with turnover between five and eight million

lek.

2. Despite the negative effect of these changes, the SBT still provides local governments

with 2.6 billion lek in revenue or about 6% of their total budgets. The yield of the tax

however is heavily skewed toward larger municipalities: 37% of the tax is generated in

Tirana, where the SBT accounts for close to 20% of the City’s budget. Another 44% of

the tax is generated in the 25 other local governments that have populations of more than

20,000 inhabitants. Here, the tax account for about 8% of their budgets. The remaining

247 jurisdictions generate less than 20% of the SBT and it accounts for less than 2% of

their revenues.

3. Looking forward, one policy option is to rapidly extend the VAT and the Profit Tax to all

firms with turnover above two million lek and either eliminate the SBT entirely, or

transform what’s left of it into a locally imposed, flat-tax on individual operators –an

octroi—with turnover below two million lek. This option is attractive because it would

create an even playing field for more firms; because it would radically constrain tax

competition between levels of government; and because it would eliminate the possibility

for the predatory taxation of small businesses by local governments.



4. Pursuing this option would however, require developing mechanisms designed to help

local governments replace the lost revenue. In theory, this could be done by either taking

steps to improve local governments’ use of the property tax and/or by introducing into

Albania’s intergovernmental finance system the origin-based sharing of Personal Income

Tax. In practice, however, and despite the fact that we support efforts on both fronts,

policy makers should be aware that changes in these areas will take time, and that SBT

revenue cannot be replaced immediately

5. The more important problems associated with lowering the VAT threshold to the current

threshold fore the Profit Tax (2 million lek) and effectively eliminating the SBT,

however, lie elsewhere. On the one hand, it is extremely unclear whether the national

government has the capacity to enforce a VAT threshold significantly lower than its

current level of five million lek. Indeed, as far as we can tell, enforcement of VAT at its

current threshold remains spotty, while the enforcement of the Profit Tax for SMMEs is

marginal. On the other hand, and more importantly it is equally unclear whether the vast

majority of Albania’s SMMEs have either the skills or the means to reasonably

participate in the forms of taxation that larger firms are expected to bear. If so, no

amount of state capacity can be expected to ensure compliance because those who are

expected to comply just don’t have the skills or the means to do what they are supposed

to do. If this is the case, then lowering the VAT threshold and eliminating the SBT is

more likely to undermine Albania’s tax culture than it is to improve it.

6. Another policy option is to reform the existing SBT by unifying the VAT, SBT, and

perhaps Profit Tax thresholds at a level closer to the current five million lek threshold for

VAT but (probably) lower than the current eight million threshold for the SBT. This

option does not require replacing lost local government revenue. Nor does it risk

overburdening SMMEs with compliance costs they cannot meet, or swamping the

national government with enforcement responsibilities it cannot shoulder.

7. Reforming the SBT in this way will not however eliminate tax competition between

levels of government. This competition could be eliminated by recentralizing the

administration of the tax. Recentralization however, we think is both unnecessary and

dangerous. Unnecessary because local governments have done a better job administering

the SBT than the national government did. And dangerous because it risks undermining

the national government’s capacity to enforce VAT at a reasonable threshold.

8. Clear rules however should be set up to manage the tensions that will inevitably arise

over which side of the SBT/VAT threshold SMMEs should be placed on. At the same

time the structure of the SBT should be made simpler and more transparent by reducing



the number of turnover brackets, business activities, and categories of local government

for which there are statutory rate distinctions.

9. The reform of the SBT should also be accompanied by an overhaul of the Law on Local

Taxes. The caps imposed in 2009 should be removed, especially those which have served

to legally blur the distinction between fees charges and taxes. Equally importantly, the

distinctions between fees, charges, and taxes should be clarified and provisions should be

included in the law that require local governments to treat businesses fairly when

charging them for particular services. This is because it is through this avenue more than

the SBT that Albanian local governments have been “abusing” their “tax” powers.

10. Finally, the new government should reassess the more general financial position of local

governments in Albania and take steps to both improve property taxation and to make

possible the eventual, origin-based sharing of PIT.



2. SBT AND

INTERGOVERNMENTAL

FINANCES IN ALBANIA

Like similar taxes elsewhere in the world, the Albanian SBT is a presumptive tax levied on the

turnover of small, medium, and micro enterprises (SMMEs). In Albania, the turnover threshold

for being considered a small business is currently 8 million lek or about 80,000 US dollars.

According to the IFC, this is in line with practice elsewhere in the developing world where the

average threshold level for presumptive turnover taxes seems to be about 70,000 dollars. What is

unusual in Albania --at least since 2009, when the government lowered the turnover threshold for

VAT from 8 to 5 million lek, is that threshold for the SBT is now higher (8 million) than the

threshold for VAT (5 million)5. As a result, there is currently a group of SMMEs with turnover

between 5 and 8 million lek who pay both the SBT and VAT. What is more, they are regulated

by and responsible to, two different tax administrations: to local governments for the SBT and to

the national government for VAT.

This makes little sense. First, it creates administrative confusion for both tax payers and tax

inspectors alike, and as we shall see in the next section has led many of Albania’s more dynamic

SMMEs –those in the 5 to 8 million lek turnover bracket—to try to lower their turnover to avoid

having to participate in the VAT system. Second, this important sector of the economy ---

SMMES who have moved from individually-run micro-enterprises to entities that are employing

others—now face the costs of complying with two different tax regimes. And third, imposing the

SBT on firms included in the VAT systems violates much of the logic of having a presumptive

small business tax in the first place, since such taxes are usually conceived of as a way to bring

SMMEs into the tax system at a moment when VAT compliance is either too costly for them, or

too burdensome for the government or both. In short, one of the most important reforms going

forward is to once again unify the thresholds for the VAT and the SBT6. The big question

however, is at what level, a question we will return to later.

5 For a good discussion of SBT thresholds around the world and their relationship to VAT, as well as for the general reasons for

and specific design of presumptive small business taxes see, IFC (2007). 6 For a very clear and concise discussion of this issue see, Loeprick (2009)



Since 2007, all businesses are required by law to register with the National Registration Center

(NRC), and to declare their primary areas of economic activity and other basic information in

order to receive an operating license. By all accounts, the creation of the Center has significantly

reduced the time, energy and money that business need to begin (or end) operations. It has also

improved the quality of information available to both local and national policy makers about the

distribution and nature of business activity across the country has a whole. As we shall see in the

next section, however, communication between the Center and local governments could and

should be improved. According to information from the Center there are currently about 75,000

small businesses.

Small business owners are required by law to declare their expected annual turnover to local

government tax authorities by March 1st of every year. If SMMEs fail to make the declaration,

local tax authorities can impose a turnover level that they think is appropriate. They can also

override the turnover level declared by a SMME. But all locally set turnover levels can be

challenged by taxpayers, and ultimately brought before the courts. On the one hand, and as we

shall see later, local governments relatively rarely challenge the turnover levels declared by

SMMEs. On the other hand, local governments often set the level turnover levels themselves

because firms fail to declare on their own.

Indicative tax rates for the SBT were first introduced in 2002 (Law 8978/2002) and then

reformed and replaced by the 2006 Law on Local Taxes (9632/2006)7. The rate schedule has

seven brackets, one for firms with turnover below two million lek, and six for every million in

turnover between two and eight million lek. It is questionable whether so many different tax

brackets for the SBT are necessary, if the vast majority of SBTs have (declared turnover) of less

than 3 million lek and very few have turnover above 5 million8.

Rates are also distinguished for seven different types of business activity (Wholesale, Retail,

Service, Production, Ambulatory, Transport, and Free Professions). These distinctions are

designed to make the tax more equitable by calibrating turnover with presumed differences in the

profitably of different business activities. In fact, however, the spreads between the rates for

most activities are very small, again suggesting that the system could be simplified. Finally, rate

levels are adjusted for three different categories of municipalities, with rates for communes set at

half the level of the 3rd

municipal category9. This too is questionable since there are now

communes that are larger and more urbanized than some jurisdictions that are categorized as

7 The 2006 Law cut the indicative rates in half and introduced categories for different classes of local governments. See below.

8 Unfortunately, we could not get data from the national tax office on the number of SMMEs who both paid the SBT, and who

were subject to VAT. Moreover, and as we discuss below, none of the tax departments we spoke with were able to provide us with information about the number of SBT payers in each tax bracket. With the exception of Durres (12%), all said that the percentage of all SBT payers with turnover of greater than 5 million lek was well under 10%. 9 1

st category municipalities are Tirana and Durres. 2

nd category: Shkoder, Korca, Vlore, Saranda, Gjirokaster, Elbasan, Fier,

Lushnje, Berat, Lezhe, and Kavaje. 3rd

category: all the rest.



municipalities. As such, if rates for the SBT are to be differentiated across local governments, the

categories that should be used should be based on population – or population density - and not

administrative distinctions.

Between 1992 and 2007, the SBT was fully administered and collected by the national

government. Starting in 2002, however, 100% of the yield of the tax was given to Albania’s

newly created, democratically-elected local governments. At the same time, they were given the

power to set tax rates to 30% above or below those specified in the normative schedule contained

in the law. As such, the SBT has functioned as a true, local government own-source revenue

since 2002, despite the fact that local governments only assumed responsibility for administering

the tax in 2007.

As can be seen from Chart 1 below, the tax has been an important source of local government

income since the start of the decentralization process. Indeed, between 2003 and 2005, it

constituted well over 25% of total local government revenue and yielded between 3 and 4.5

billion lek annually. In 2005, however, the newly-elected government of the Democratic Party

(DP) halved the indicative rates contained in the law. As a result, the yield of the tax dropped by

30% in 2006 (from 3.6 to 2.4 bln lek). Then, in late 2006 and with little preparation the same

government transferred to local governments responsibility for administering the tax. Many had

to scramble to put together their own tax rolls, or to make sense of the often incomplete date they

received from the national government.10

These disruptions led to a further decline in the yield of

the tax which bottomed out at 2.2 bln lek in 2007, or at about 8% of total LGU revenue.

Chart 1. Small Business Tax as % of Local Government Revenue (bln lek)

Ministry of Finance data; own calculations

10

Interviews with local tax officials. See section 2.

3.0 4.1 3.6 2.4 2.2 3.0 2.6 2.4 2.6

6.1 6.3 8.4 10.3 11.4 12.5 11.8 12.7 10.1

5.7 6.1

7.1 9.7 10.7

12.3 11.7 10.2

10.1 2.4

3.1 2.3

6.5 8.7

5.8 6.8 5.2

3.9

0%

5%

10%

15%

20%

25%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2003 2004 2005 2006 2007 2008 2009 2010 2011

SBT Other Own-Source Unconditional Grants

Conditional Grants SBT as % of Local Revenues



By 2008, however, local governments had successfully responded to the challenge of

administering the tax. Not only had they succeeded in raising collection by 35% over the

previous year, but they increased it to well above the level attained by the national government in

2006 (3 bln lek in 2008 vs. 2.4 bln in 2006). But again, these gains however were quickly

reversed by national government policy; In June 2009, the government reduced from 30 to 10%

the maximum rate that local governments could charge for the SBT over those contained in the

law11

. And then, in 2010 it unilaterally forgave all outstanding SBT debt owed to local

governments12

. As a result, the yield of the tax fell to 2.4 bln lek in 2010, or to about 8% of total

local government revenues.

In short, between 2005 and 2012, the DP-controlled national government repeatedly took

measures designed to reduce the burden of the tax on SMMEs. The government argued that these

measures were necessary to stimulate the economy, and to prevent local governments in general

and Tirana in particular from overtaxing small businesses. But whatever the justification, the

changes led to a serious decline in local government revenues, reduced their fiscal independence,

and introduced substantial regulatory uncertainty for both local tax officials and SMMEs

businesses. Worse, many of these measures were hastily prepared and motivated at least as much

by the DPs desire to make electoral gains in larger municipalities –particularly Tirana—as they

were by policy concerns13

. In any case, slashing the base of the tax, reducing local rate control,

and unilaterally forgiving debt, all had a much bigger effect on the budgets of Albania’s bigger

municipalities – generally run by mayors from the Socialist Party -- than on the budgets of the

largely rural communes that constitute the DP’s electoral base.

The greater reliance of larger municipalities on the SBT can be seen from Table 1 below which

shows the distribution of SBT revenue across local governments of different sizes. As can be

seen from the Table, the 183 local governments in Group 1 with populations of less than 6000

people, as well as the 164 local governments in Group 2 with populations between 6000 and

20,000 people, derive very little revenue from the SBT. Indeed, despite the fact that more than

50% of the population lives in these jurisdictions, they collectively generate less than 20% of all

SBT revenue. In contrast, the 25 jurisdictions in Group 3 --with populations between 20 and

80,000 people—generate 44% of all SBT revenue while only accounting 33% of the population.

11

At the same time, the government introduced extremely problematic amendments to the law on local taxes which capped all other taxes and fees at 10% of the maximum allowable tax on small businesses. This means is that if the maximum allowable SBT for a particular firm is 20,000 lek then sum total of all “taxes” --such as those for the Buildings, Agricultural Land, the Use of Public Space, or Billboards as well as for “fees” like the Cleaning, Greenery or Public Lighting Fees cannot be more than 2,000 leks a year. From a systemic point of view, these amendments blurred the already unclear distinction between fees and taxes in Albanian law. They also obviously constrained the fiscal independence of local governments. See Levitas (2010). 12

Law 10418/April 2011 applies to all unpaid taxes on the SBT up to December 31st 2010 13

It is perhaps worth adding that not only were the amendments designed to appeal to SMMEs in large urban jurisdictions, but that their effect on the budget of Tirana was particularly dramatic. Indeed, by reducing the city’s ability to fund new investment and appealing to the City’s business community, the amendments may well have been enough to swing the (contested) 2012 elections to the Democratic Party.



Moreover, these local governments derive 8% of their total budgets from the tax and unlike their

rural counterparts will surely feel the financial impact of any future reform of the SBT14

.

Finally, and most importantly, Tirana generates 37% of all SBT revenue, is heavily reliant on

revenue from the tax to close its budget. Indeed, 20% of the capital’s total revenue comes from

the SBT, and it is in Tirana that any reform of the tax will have the most significant effects.

Table 1. Distribution and Share of SBT Revenue in Local Governments of Different Sizes

(2011)

Groups by Population Group 1 <6000

Group 2 6000 -19,999

Group 3 20,000 -200,000

Tirana Total

Number of Local Governments 183 164 25 1 373

Share of Total Population 14% 39% 33% 14% 100%

Total Local Government Revenue (bln lek) 6.4 13.8 15.1 5.4 40.6

SBT Revenue in Group (bln lek) 0.05 0.45 1.2 1.0 2.6

Share of Total Local Government Revenue 16% 34% 37% 13% 100%

Share of Total SBT Revenue 2% 17% 44% 37% 100%

SBT Revenue as % of Total Revenues 1% 3% 8% 18% 6%

Source: MoF data; own calculations

In summary then, two very different observations can be made about the potential consequences

of efforts to reform or eliminate the SBT on local government budgets. On the one hand, such

efforts are likely to have a limited impact on the vast majority of Albanian local governments for

the simple reason that most currently derive relatively little revenue from the tax. In part this is

due to the fact that many of these jurisdictions are communes where the statutory rates for the tax

are very low. And in part it is because it seems like neither the national government – when it

administered the tax—nor (most) communes who took it over in 2007, have made aggressive

efforts to register what is undoubtedly a (relatively) small number of SMMEs in these areas. On

the other hand, and more importantly for the future of local government in Albania as a whole, is

the fact that the reform or elimination of the SBT will have significant consequences for the

finances of most of Albania’s larger municipalities, and most particularly for Tirana. Thus any

changes in the SBT should be accompanied by parallel reforms designed to ensure that the

financial position of these large and important jurisdictions is not undermined. We will return to

these issues after looking more closely at how local governments have administered the tax since

2007.

14

See Appendix 2 for the variation across the in the SBT as percentage of total revenues for all jurisdiction with populations greater than 20,000.



3. LOCAL GOVERNMENT

ADMINISTRATION OF SBT

Over the course of the late spring and early summer of 2013, the PLGP conducted

interviews with the Tax Departments of ten local governments to better understand the

administrative, political and financial aspects of the SBT as a local government tax. The

interviews were conducted according in an open format but loosely followed the same schedule

of questions (See Appendix 3). The questions were designed to yield comparative information

about the organization of local government Tax Departments; how they responded to the

challenges of administering tax including the development billing, complaint, collection and

enforcement systems; the effects of changes in national government policy on the functioning of

the tax; and where possible data on the yield of the tax per SBT. Interviews were conducted in

the municipalities of Berat, Elbasan, Durres, Fier, Pogradec, Kamez, Korce, Lushnje and

Shkoder as well as in the Commune of Bushat. In all cases, interviews included the heads of

local government Tax Departments. In most cases, department heads were accompanied by some

or all of their staffs. And in a few cases, separate discussions were held with the Mayor.

Seven of the ten department heads we interviewed had university degrees in economics and three

of them had also worked for the District Tax Offices of the national government before taking up

their current positions. Indeed, all seemed professionally well qualified for their jobs. All stated

that the tax rolls they inherited from the national government served as the foundation of their

initial operations, and all said that the quality of the information contained in these tax rolls was

either poor or very poor. Most received this information in paper form, though a few were given

lists of taxpayers that had been at least partially placed in electronic files.

In most jurisdictions, the devolution of responsibility for administering the tax in 2007 was

accompanied – not surprisingly — by the hiring of new personnel and by efforts to check the

governments’ tax rolls against what was happening on the ground. Typically, tax inspectors were

assigned responsibility for particular neighborhoods and tasked with identifying unregistered

businesses and making sure that all businesses were issued tax bills. This remains their primary

responsibility. All the Tax Departments that we spoke with took steps to put their tax rolls into

excel-based spreadsheets between 2007 and 2008.



By the end of 2008, these efforts had produced increases in the yield of the tax of between 12%

and 43% as can be seen from Table 2 below. These gains track those – discussed earlier — that

we saw for the country as a whole and attest to the seriousness with which Albania’s larger local

governments took up the challenge of administering the SBT. Elbasan, for instance, expanded

the number of taxable subjects from 1,600 to 2700 firms in a couple of years. The ability of local

governments to radically increase the number of firms subject to the tax suggests that the District

Tax Offices of the national government were not particularly interested in collecting the SBT on

behalf of local governments. This is understandable, given that 100% of its yield was going to

them, and thus did nothing to satisfy any revenue targets for the national budget that the Ministry

of Finance set for the District Tax Offices. More importantly it suggests that at least Albania’s

larger jurisdictions have the skills and capacities necessary to administer the tax, and that they

have done a better job of collecting it than the national government did before the tax was

devolved..

Table 2. Increase in the Yield of SBT between 2007 & 2008

LGU Increase

Durres 43%

Elbasan 38%

Bushat 35%

Berat 34%

Pogradec 31%

Lushnje 22%

Korce 21%

Kamez 20%

Shkoder 17%

Fier 12%

Source: MoF data; own-calculations; Increase for Bushat is calculated for the period 2007-2009

Some local governments in the group also made major efforts to move from hand-written bills

generated from excel spreadsheets, to integrated IT solutions designed to allow local government

officials to easily maintain tax rolls and calculate tax burdens; automatically generate tax bills;

and keep track of payments. Durres, for example has purchased an Oracle based-system for the

integrated management of all the City’s operations, a system that has been extended to the Tax

Department. Meanwhile, more modest, donor-funded initiatives to use IT solutions to improve

tax administration have been successful in Korce (USAID) and Bushat (SDC) while similar

efforts in Berat and Pogradec have failed, at least partially because of the high costs of

maintaining the systems over time. This said, there does not seem to be a clear correlation in the

data between the use of IT systems and gains in either the yield of the tax, or the size of the Tax

Department. Berat, for example seems to be doing very well administering the tax without

substantially modernizing its administrative systems.



In most jurisdictions, tax bills – whether prepared manually or electronically—are still delivered

to firms by tax inspectors to ensure that businesses sign for their receipt. In Korce and Durres

however, they are delivered by post. Similarly, in most jurisdictions the vast majority of tax

payments are made by firms at city hall, though most have also set up systems where firms can

make transfers from their banks. Despite the implementation of IT systems in a number of

jurisdictions, it seems that all of them have trouble distinguishing fines and penalties from

outstanding debt. Moreover, and more importantly no local government we spoke with was able

to easily generate synthetic data that allowed for the easy analysis of the number of tax payers in

each tax bracket (let alone by business activity); the amount due for each group; and the amount

paid and owed. This suggests that while local governments have made very serious efforts to

expand the base of the tax and to collect it, they are still not using the data they have on payment

to critically examine their tax policies or to analyze their local economies.

Despite the success that local governments have had in expanding their tax rolls, most of the tax

directors we spoke with estimated that between 5 and 15% of all businesses in their jurisdictions

remain informal and unregistered (See Appendix 4). They added, however, that the vast majority

of these are individual operators who are active in peripheral areas or who do business only in

particular seasons. These are then truly micro-enterprises and there are limited returns to

controlling them for tax purposes. Interestingly, a few officials said that there were also a group

of micro enterprises that willingly paid them the SBT despite the fact that they were unregistered

with the national government (mainly to avoid social security payments).

Most tax officials estimated that somewhere between 70 and 80% of all SBT payers were taxed

at rates set for enterprises with turnover of less than 3 million lek, or in the first two tax brackets.

Conversely, only Duress stated that over 10% of its SBT payers had turnover above the 5 million

lek, VAT threshold. When pressed, a number of officials admitted that these percentages

overstated the share of very small businesses in the overall population of SBT payers. A few, like

Pogradec, added that since the VAT threshold was lowered in 2009, they have become less

aggressive about trying to collect the SBT from larger SMMEs. At the same time, these same tax

officials defended the practice of allowing firms to underreport their turnover: On the one hand,

they argued that they lacked the man-power and instruments to effectively monitor the turnover

of most the businesses operating in their areas, and thus in general accepted the turnover

declarations of most of taxpayers without question. On the other hand, they said that in the many

cases in which taxpayers don’t file declarations themselves, and where the municipality

effectively sets their SBT turnover level for them, the tax office typically places firms in the

lower brackets of the turnover scale in the name of “fairness”.

No tax official agreed with the idea that the widespread underreporting (and acceptance) of low

turnover levels was being caused by tax inspectors taking side-payments from SBT owners in

return for lower assessments. One mayor however did explicitly raise this as a concern and

anecdotal evidence suggests that the practice is not uncommon. But it remains unclear how much



of this is really going on. Our guess is that the frequency of corrupt practices varies significantly

from municipality to municipality and is heavily dependent on the organizational culture of city

hall in general and the Tax Department in particular. We also suspect that at the systemic level

underassessment is being driven less by corruption than a combination of the two forces that our

informants openly discussed: the difficulties they have in effectively monitoring the turnover of

most SBTs, and in response to this uncertainty, a de facto policy of what might be called

“lowest-common denominator tax equity”.

Not all turnover declarations, however, are accepted at face value, and not all turnover levels set

by city tax officials are at the lowest levels. Indeed, there seem to be substantial differences in

how aggressively local governments challenge understated turnover levels, or impose higher

ones in the face of missing self-declarations. In Korce, for example, the Tax Department seems

to be responding to the revenue losses generated by the changes in national government policy

(see above and below) by trying to make sure that fewer firms declare turnover below 3 million

lek, and by actively trying to increase the number with turnover above four million. Meanwhile,

Kamza has directed its inspectors to prepare written protocols of inspection designed to ensure

that increases in assessed turnover are well documented and justified.

In general, the acceptance of low turnover levels means that there are relatively few complaints

about tax bills. A number of jurisdictions, however, have set up special procedures to adjudicate

claims before – at least in theory—they might be sent to court. Berat, for example has established

an independent commission to review complaints, while Shkoder and Kamez have created

similar committees, but within their Finance Departments. Elsewhere, these procedures are less

formalized, with disputes being brought directly to the Mayor as in Lushnje or through a three-

step process (Finance Department, Deputy Mayor, Mayor) as in Pogradec and Bushat. Five local

governments said that they have ten to twenty cases a year in which taxpayers complain that they

are being unfairly assessed. Others said they have had only a few such cases. The emergence of

formalized appeals procedures – and their use—again suggest that many local governments are

taking their tax administration duties seriously, and that increasingly local tax officials recognize

the importance that appeals procedures play in legitimizing taxation.

Unfortunately, we were unable to put together much reliable information on collection rates. In

large part this is because the accounting systems of most local governments do not permit – as

we have already noted – distinguishing payment of current liabilities from the payment of

outstanding debt. Indeed, some seem to have difficulties summing total tax bills. As a result it is

often hard to determine what real collection rates are even when local governments know how

much they billed and collected in any given year. Nonetheless, the information that we did

collect suggests that at least in many jurisdictions tax compliance is higher than one might



expect. Berat and Kamez, for example, report collecting at least 90% of what they billed every

year since 2008, while the corresponding figure for Tirana is about 80%15

.

From the local governments we interviewed, Berat, Kamza, Korce, and Bushat stand out for

having more active enforcement policies. Here, respondents said they regularly block the

accounts of delinquent firms and/or enlist the help of the local police to temporarily close

businesses until payments are made. Elsewhere, officials frequently complained about the

weaknesses of the enforcement mechanisms they have at their disposal, as well as their high

costs. At the same time, they often said that they do not aggressively collect from small and

hard-pressed micro enterprises because it makes little overall economic sense. These different

postures towards enforcement are not surprising. What is surprising was how concerned officials

were with the issue. Indeed, one of the policy questions around which there was universal

agreement was that the national government’s 2011 decision to unilaterally forgive all SBT debt

incurred through 2010 was disastrous for tax morale. Indeed, local officials in at least one

jurisdiction regarded the decision as an intentional effort to delegitimize local taxation and with

it local government as a whole.

Not surprisingly, local government officials were also extremely critical of the national

government’s 2009 decision to reduce the ceiling that local governments can impose on the

normative tax rates contained in the law from 30 to 10%. But because only a few local

governments were imposing rates above 10% before the changes were put in place, the financial

impact of this aspect of the 2009 amendments had less impact than others. Indeed, almost all our

respondents said that the most costly consequence of the amendments were those that capped all

other fees, charges, and taxes that they can impose on small firms at 10% of the value of their

SBT obligations (see footnote 10).

At present, most of the ten jurisdictions that we interviewed are applying the rates contained in

the law (See Appendix 4). A number of them however, are pursuing more active rate policies.

Kamza, for instance, charges all small businesses 10% more than the normative rates, while

Lushnje does this for all firms in operation since 2008. Korce also uses the maximum rate

allowed by law for all firms except those run by students and those engaged in tourism. These

pay 10% less than the normative rates. Berat also gives a 10% discount for tourism, while Bushat

gives this discount to all SMMEs, but --as we have discussed earlier-- combines this low rate

policy with active enforcement. Finally, many jurisdictions are giving firms a 5 to 10% reduction

in their tax bills if they pay on time and in one installment.

In 2009, the national government also lowered the VAT threshold from 8 to 5 million lek. As we

have noted, this created a category of small businesses that are at once obligated to participate in

15 Municipal Finance Self Assessments conducted by the financial departments of the respective cities on the basis of a World Bank template and with some outside technical support.



the VAT system and to pay the SBT. Local officials in virtually all the jurisdictions16

we visited

emphasized the negative impact this decision has had on the SBT as a local tax. Financially, it

has led to significant revenue losses because many small businesses have reacted to the lowering

of the threshold by closing down and reopening under another name to avoid participating in the

VAT system. This has increased the number of SMME registering and deregistering (opening

and closing) every year and with it the workload of local tax inspectors.

Equally importantly, the creation of a class of small businesses that must pay both the SBT and

VAT has created new tensions between local tax departments and the District Tax Offices of the

national government. Almost all the local tax officials that we spoke with said that their relations

with both the National Registration Center –which issues operating licenses for all businesses—

and the District Tax Offices were never great, though generally better with the former than the

latter. Indeed, most looked on the creation of the NRC as a significant improvement in Albania’s

overall regulatory environment, though many still complained that the Center often failed to

inform them about the opening and closing of SMMEs in line with the deadlines set out in the

legislation. And all wished that cooperation with the District Tax Offices would be better

because efforts to enforce compliance are more successful when the national government –and

with it the police—supported the effort. Moreover, a few suggested that the degree to which the

District Tax Offices (and the police) were ready to work with local tax departments was heavily

influenced –positively and negatively—by party politics.

But with this said, and with one exception, all our respondents insisted that relations with

national government institutions had deteriorated since the lowering of the VAT threshold. Most

of the complaints stem from the fact that District Tax Offices seem to have reclassified the

turnover of many SMMEs without consulting their local counterparts. As a result, firms that had

been classified as having turnover below 5 million lek were –from the point of both local tax

officials and the firms themselves-- suddenly obligated to pay VAT. Not surprisingly, many of

these firms turned to their local Tax Departments for help in overturning these reassessments.

And when this help could not be provided firms felt –as one local official put it— “betrayed”.

This sense of betrayal has, the official continued, undermined the authority that their Tax

Department had worked hard to establish and made it more difficult for them to collect not only

the SBT but other local fees, charges, and taxes as well.

Similarly, a number of local tax officials said that the way the national government went about

reassessing firms frequently led to the different classification of two very similar firms in the

same location. This kind of mistake, they argued, could have been avoided had they been

16

The exceptions were the officials of Bushat Commune which has no small businesses with turnover above the VAT threshold. But while Bushat is “exceptional” in our group as the only commune, and further exceptional as a commune which has taken the SBT very seriously, it actually resembles more of the country more than the urban jurisdictions that are the focus of this study. Indeed, the fact that Bushat not only has no SBTs with turnover over 5 million lek but had almost no registered SBTs until responsibility for the tax was devolved to local governments should be careful considered by those who think that the national government has the capacity to effectively administer the VAT at a lower turnover threshold.



properly consulted prior to the reassessment. Worse, from their point of view, were the negative

consequences these differential reassessments had on the SMME community’s sense of tax

equity. Indeed, officials in Pogradec said that they stopped imposing the SBT on firms with

turnover above 5 million lek in an attempt to reestablish precisely this sense of fairness –at least

at the local level. Moreover, they stressed that maintaining this sense of fairness was important

for their ability to collect all local fees, charges, and taxes, and not just the SBT.

Obviously, lowering the VAT threshold was bound to create tensions and resentments among

those firms that the national government now considered obligated to pay the tax. Indeed, it is

inevitable that many of these firms would object to the reclassification and that some would

close down and reopen under new names to avoid having to participate in the VAT system.

Nonetheless, the fact that the reclassification was carried out without prior consultation served to

undermine the sense of horizontal tax equity that local government tax officials seem to have

been working towards. Moreover, and like the national government’s forgiveness of outstanding

SBT debt, it did much to undermine the emergence of a healthy local tax culture. Worse, the fact

that there is still a group of firms that are supposed to pay both the SBT and VAT means that

from the point of view of many SMMEs –as well as those of local tax officials-- the system as a

whole is “unfair.”

It is also worth adding that the national government’s effort to get all SMMEs with turnover

above 2 million lek to pay the profit tax may be premature, both with respect to the ability of

these entities to prepare the necessary balance sheets, and the ability of District Tax Offices to

control them. According to information that we received from the Ministry of Finance, only

about 25,000 of the 75,000 registered SBTs actually file balances. Moreover, local tax officials

universally agreed that even those who do, don’t take the requirement seriously and instead

simply calculate their profit tax liabilities so that they are equal to or less than their SBT

obligations. What this means in practice is that because SBT payments are deductible from

Profit Taxes the vast majority of SMMEs pay no profit tax at all17

. Indeed, some SBTs have

understood that they are actually due refunds from the national government if their SBT

payments exceed their Profit Tax liabilities. As a result, the extension of the Profit Tax to micro-

enterprises may currently be producing net fiscal losses for the national government.

Finally, we asked local government tax officials about what they thought should be done with the

SBT going forward. Sadly, many of the responses seemed to be colored by the kind of

demoralization that occurs when professionals see their efforts undermined by frequent, hastily

prepared, and poorly implemented policy changes. Nonetheless, (and not surprisingly) all of our

respondents felt that the SBT was an important source of local revenue, and none of them

thought the tax should be eliminated. A number of them however, –and some clearly in disgust--

17

Here it is worth noting that officials in Elbasan have estimated that the compliance costs that the small businesses have for fulfilling their tax obligations (balance sheets, fiscal registers, etc.) varies from 18,000 to 35,500 lek per year and thus in many cases exceeds what they pay in the SBT.



were ready to give responsibility for administering the tax back to the national government. Even

here however, they argued that local governments should control SBT rates and that all the 2009

amendments which constrained their tax powers should be repealed.

All our respondents also stated that either responsibilities between national and local tax

administrations should be very clearly defined, or that only the national government should be

responsible for determining the turnover levels used to assess both the SBT and VAT. Once this

was said however, there was much disagreement (and confusion) about what it might mean in

practice. Officials in Fier, for example argued that the VAT system should be extended

downward to all firms to ensure that everybody was competing on a level playing field. This is

certainly an appealing idea. But the same officials were less sure about whether they thought the

national government would be able to credibly enforce the new threshold. Similarly, they

recognized that many SMMEs would have trouble doing the accounting necessary for VAT.

Here, however they thought these problems could be overcome if the national government

provided SMMEs with the appropriate training. “After all”, they argued, “wasn’t the extension of

the VAT system to all enterprises the reason that the national government had forced the

purchase fiscal registers in the first place.”

In contrast, officials in Korce were deeply skeptical about the national government’s ability to

effectively enforce VAT compliance for the tens of thousands of SMMEs with turnover less than

five million lek. Indeed, they thought that the national government was having so much trouble

enforcing VAT at the five million level, that the most sensible thing to do would be to return to

the old eight million threshold and set up clear rules for how national and local government tax

officials should behave when national tax officials felt that a firm’s turnover was above the eight

million level. Meanwhile, officials in Durres, Pogradec and Elbasan weren’t sure whether the

VAT level should be raised or lowered but like others were convinced that the only way to

minimize conflict over the SBT was to unify the thresholds of the two taxes.



4. CONSIDERATIONS AND

RECOMMENDATIONS

Before considering what might be done with SBT in the future, let us briefly summarize our

most important findings.

1) The SBT in Albania is a presumptive tax on businesses with turnover of less than 80

million lek (c. 80,000 USD). Nationally, about 70,000 SMMEs are subject to the tax. At

current assessments, the vast majority of these have turnover of less than 5 million lek.

2) Since 2002, local governments have controlled the rate of the tax within limits set by the

national government, and since 2007 that have been fully responsible for administering it.

The tax currently provides them with about 2.5 billion lek in revenue, or about 6% their

budgets. The yield of the tax however is heavily skewed toward larger municipalities:

37% of the tax is generated by SMMEs located in Tirana, where it provides close to 20%

of the City’s total revenues. Another 44% of the tax is generated in the 25 other local

governments that have populations of more than 20,000 inhabitants. Here the tax

generates about 8% of budget revenues. SMMEs in Albania’s remaining 247 jurisdictions

generate less than 20% of the yield of the SBT and the tax accounts for less than 2% of

budget revenues.

3) Since 2005, the national government has made frequent changes in the laws regulating

the tax. The national government has justified these changes as necessary to protect

SMMEs from predatory taxation. Such arguments are not unusual in countries where

local governments have been given the right to tax businesses. Indeed, they are often

extended into arguments for eliminating taxes like the SBT.

4) It is does not seem reasonable to accuse local governments of predatory taxation –at least

with respect to the SBT18

. What is clearer is that most large municipalities have made

serious efforts to expand the base of the SBT by increasing SMME registration, and that

they have done a better job of this than the national government did prior to the

18

It seems more likely that local government were and are imposing unfair costs on firms through the use of quasi fiscal fees for general public services like park maintenance, street cleaning and street lighting. See Levitas (2010).



devolution of the tax. They also seem to be collecting the tax reasonably efficiently.

Indeed, our interviews suggest that rather than overtaxing businesses, most local

governments are allowing SMMEs to understate their turnover in what we think is best

described as a policy of “lowest common-denominator tax equity”. This policy seems to

be the product of a general reluctance to raise taxes and a legitimate fear that local tax

inspectors do not have enough information to accurately determine turnover.

5) While trying to constrain local government’s use of the SBT, the national government has

also sought–quite understandably—to increase the number of SMMEs who participate in

the more general tax system. In 2009, it lowered the VAT threshold from eight million

lek to five million, creating a class of SMMEs (those with turnover between 5 and 8

million lek) who are now obligated to pay both VAT and the SBT. Equally importantly, it

also required all entities with turnover of greater than two million lek to purchase fiscal

cash registers; to prepare balance sheets; and pay the Profit Tax.

Given this history, the question is what the best policy choices are going forward. Here, there

seem to be two basic options.

1. Rapidly extend the VAT and Profit Tax to all firms with turnover above two million lek

and either eliminate the SBT entirely, or transform what’s left it into a locally imposed,

flat-tax on individual operators –an octroi—with turnover below two million lek.

2. Reform the existing SBT by unifying the VAT and SBT thresholds at a level higher than

2 million lek but (probably lower) than 8 million, while also simplifying the rate structure

of the tax.

In the following, we lay out the pros and cons of each basic option, paying particular special

attention to their implications for Albania’s overall tax culture and it’s still evolving

intergovernmental finance system. We begin with the idea of rapidly lowering the threshold for

VAT taxation and eliminating the SBT and/or transforming it into a locally-imposed tax on

individual operators with turnover of less than two million lek. This option is very appealing

because it holds out the promise of creating a level playing field for all economic entities by

forcing everybody, or virtually everybody to abide by the same rules of the game, meaning the

payment of VAT and the Profit Tax. It would radically reduce tax competition between levels of

government while eliminating the possibility of predatory taxation –at least through the SBT. It

would also encourage local governments to focus the efforts of their now more robust Tax

Departments on collecting other local government fees, charges and taxes, most importantly the

Property Tax.

At the same time, this option raises a number of other policy questions that will need to be

addressed. Indeed, it raises a number of very serious systemic risks that should be fully

understood before new laws are drafted. From our point of view, the most important basic policy



question that needs to be answered is simply how should the SBT revenue that local

governments will lose be replaced? Here, there is any number of possible mechanisms. The two

most obvious are that local governments will make up for the revenue loss by doing more with

the property tax; and that the national government will help compensate them for the loss by

beginning to share some of the Personal Income Tax (PIT) with them an origin-basis.

Neither of these possibilities is mutually exclusive and both could be pursued at the same time.

Indeed, we think Albania should look to both intensify the use of the property tax, and to begin

sharing with local governments independent of whatever decisions the new government takes

with respect to the SBT19

. But with this said, there are reasons to be cautious about how fast

reforms in these areas can be made, and thus how quickly revenues from them can be expected to

replace those lost by eliminating the SBT.

Implementing successful property tax reform is notoriously difficult, and typically requires time,

substantial investment, and levels of intergovernmental cooperation that many countries find

difficult to achieve. Particularly difficult to implement are reforms designed to produce property

taxation based on market values. There are many reasons for this including poor cadaster and

titling systems, the absence of professional valuators, and underdeveloped and non-transparent

property markets. All of these “technical” difficulties multiply the political challenges of

implementing what in most places is a fiercely resisted tax. Indeed these challenges can be

daunting even without moving towards full ad valorem taxation.

The experience of Kosovo is instructive. Kosovo which has put in place a system based on built

area (square meters) adjusted by valuation coefficients for different locations within a

jurisdiction. Here, despite massive (donor funded) investment in registering the tax base, and in

developing sophisticated cadaster and billing systems local governments are making limited use

of the tax, and citizens remain reluctant to pay it. As a result, collection rates remain well below

60% and, overall, the tax still yields revenues equal to only about 0.31% of GDP20

. To be sure,

this is about 2.5 times the level currently being collected in Albania (0.12% of GDP). Indeed, if

Albanian local governments succeeded in doubling the yield of the Building Tax and the

Agricultural Land Tax (together c. 1.5 billion lek) they would collect more than then currently do

from the SBT (2.6 billion lek).

Getting here, however, will not happen overnight, and not without sustained investment in new

systems by both the national and local government. Moreover, it should be recognized that the

rates achieved in Kosovo remain well below the average for EU members (see Appendix 5),

which –at 1% of GDP—is still three time less than what is achieved by Canada or the US. In any

case, while serious efforts must be made to improve local government’s use of the property tax

19

See PLGP (2012) 20

Levitas, Own Revenue Reform in Kosovo, 2011



in Albania, national government policy makers should understand both that it will take some

time before the property tax can replace the SBT, and perhaps equally importantly, that the

property tax alone will not fix all the woes of the country’s intergovernmental finance system.

Providing local governments with significant additional revenues through the origin-based

sharing of PIT has generally proved much easier. This is because the national government does

all the heavy lifting of administering and collecting the tax and is essentially funding local

governments by foregoing revenue that would otherwise go into the state budget. Indeed, the

origin based sharing of PIT has become a fundamental pillar of the intergovernmental finance

systems of most post-communist countries, and is frequently used elsewhere in Europe as well.

Nonetheless, and despite the relative simplicity of PIT sharing it cannot be implemented

overnight for at least three reasons. First, the national government must be able to technically

identify taxpayers by their place of residence and not by their place of work or –as is often the

case—the headquarters of the firm that employs them. Second, once this has been done the

budgetary effects of PIT sharing must be simulated to determine whether the distribution of

official employment is sufficiently evenly distributed to make the effort politically viable. And

third, in the likely event that the distribution is extremely uneven, equalization mechanisms must

be built into the system so that jurisdictions with little official employment can benefit.

But at the end of the day, the more fundamental questions involved with the eliminating the SBT

lie less in figuring out how the lost revenue should be replaced, than in the systemic risks this

idea poses for Albania’s overall fiscal system. On the one hand, it is very unclear whether most

of Albania’s SMMEs with turnover above two million lek have the accounting skills necessary to

comply with VAT or the Profit Tax, or whether even if they have these skills they the can afford

to use them. On the other hand, it seems equally unclear that the national government has the

capacity to actually enforce compliance for the tens of thousands of new firms that would have to

be included in the VAT system if threshold for the tax was significantly lowered. Indeed, these

two risks are deeply interrelated in as much as no amount of state capacity can be expected to

ensure compliance if those who are expected to comply have neither the skills nor the means to

do what they are supposed to do. Or put another way, radically expanding enforcement capacities

in a situation in which large numbers of those that are expected to comply simply cannot is a

recipe for undermining Albania’s tax culture, not improving it.

Obviously, there are no easy ways to assess how real these systemic risks are21

. But the findings

of this report suggest that national government policy makers should be very cautious about

radically lowering the VAT threshold in an effort to eliminate the SBT, or to roll it back into a

flat tax for individual operators with turnover of less than two million lek. After all, the

enforcement of VAT compliance for firms with over five million in turnover remains spotty at

21

As we understand it, the IFC is currently conducting a study of the costs SMMEs incur to comply with the current tax system in general, and VAT in particular. This study should shed important light on these systemic risks.



best. Moreover, it clearly is imposes significant costs on the SMMEs who are being forced to

participate in the system. Indeed, not only does the use of fiscal registers by many SMMEs

remain deeply problematic but, as we have seen, the vast majority of Albanian SMMEs do not

even file balance sheets for the Profit Tax, while those that do treat it as an exercise in creative

accounting.

Given these dangers we think that prudence lies in the second option and that the reform of the

current SBT should be given careful consideration. This option does not require replacing lost

local government revenue. Nor does it risk overburdening SMMEs with compliance costs they

cannot meet, or swamping the national government with enforcement responsibilities it cannot

shoulder. What it does require is setting the threshold for the VAT, the SBT, and probably the

Profit Tax at the same level. As such, the SBT should be understood as a presumptive, locally-

controlled tax designed for SMMEs without the skills or the margins to afford the compliance

costs of more sophisticated types of taxation. What the turnover threshold should be, should be

the subject of serious analysis. But our guess now is that it is somewhere between the current

VAT threshold of five million lek and the current SBT threshold of eight million.

Reforming the SBT will also require making decisions about whether the national government

should recentralize the administration of the tax with the unification of the thresholds, or whether

local governments should continue to administer it in their own name. Again, our feeling is that

local governments have taken the job of administering the SBT very seriously and that the major

problems with the tax have been more the product of ill-considered national government policy

than of the failing of local government tax departments. It is however, true that continuing to

allow local governments to administer the tax does inevitably create tensions between national

and local tax officials about which side of the SBT threshold firms should be placed.

But these tensions should be manageable if rules for cooperation and consultation are spelled

out. In any case, we strongly suspect that the costs of these tensions are less than the risks

involved with once again increasing the enforcement and collection responsibilities of the

national government with respect to the SBT: After all, it was local governments who

successfully expanded the base of the tax in 2007-8. Moreover, the national government already

has its hands full trying to ensure VAT compliance at the current threshold.

At the same time, national policy makers should consider reducing the number of different

turnover brackets used to establish the normative rates for the tax, as well as reducing the

number of rate differentiations allowed for different types of business activities. This will make

the tax more transparent and will probably make it easier for local governments to see the

consequences of, and progressively adjust their current policy of “lowest common denominator

tax equity.” In a similar vein, it is not obvious that differentiating rates according to four

categories of local governments is really called for. Tirana and Durres are probably special cases.

And it probably makes sense to have a rate group other jurisdictions with populations greater



than 20,000. But distinguishing between communes and municipalities on administrative

grounds alone seems to make little sense.

Similarly, the reform of the SBT should be accompanied by an overhaul of the Law on Local

Taxes. The caps imposed in 2009 should be removed, especially those which have served to

legally blur the distinction between fees charges and taxes. More importantly, the distinctions

between fees charges and taxes should be clarified in the law. Indeed, provisions should be

placed in the law that require local governments to treat businesses fairly when charging them

for particular services, because it is through this avenue more than the SBT that Albanian local

governments have been “abusing” their “tax powers. Finally, the new government should

reassess the more general financial position of local governments in Albania and take steps to

both improve property taxation and to make possible the eventual, origin-based sharing of PIT.



APPENDIXES

APPENDIX 1. LGU REVENUE AS SHARE OF GDP AND TOTAL PUBLIC REVENUE IN 2011

*indicates that local governments pay the wages of primary and secondary school teachers.

Source, NALAS (2012)

25%

35%

45%

41% 43%

41% 39%

36%

42%

36% 36%

28%

31%

37%

49%

3.1% 4.9% 5.1% 4.0%

7.4% 5.6% 5.8% 5.8% 5.8% 6.0% 6.2% 7.6%

8.9% 9.3% 11.9% 12%

14%

11% 10%

17%

14% 15%

16%

14%

17%

17%

27% 28%

25% 24%

0.%

10.%

20.%

30.%

40.%

50.%

60.%

Consolidated Public Revenue as % GDP

LG Revenues as % GDP

LG Revene as % Public Revenue



APPENDIX 2. SBT AS A SHARE OF TOTAL BUDGET REVENUE IN 2011 FOR THE 26 LARGEST LGUS

Local Government Population SBT as a % of Total

Revenue

Tiranë 618,288 18%

Gjirokastër 33,975 14%

Kavajë 39,304 12%

Durrës 201,947 11%

Korçë 87,199 11%

Vlorë 135,278 10%

Fier 84,794 10%

Pogradec 38,958 10%

Berat 62,850 9%

Sarandë 40,368 9%

Shkodër 113,719 8%

Lezhë 27,415 8%

Lushnjë 53,403 8%

Elbasan 123,884 6%

Kamëz 79,404 5%

Kuçovë 30,105 5%

Laç 29,596 3%

Patos 31,706 3%

Fushë-Krujë 24,566 3%

Kukës 22,547 2%

Mamurras 22,168 1%

Sukth* 25,344 3%

Rashbull* 27,615 6%

Bushat* 23,128 3%

Kashar* 21,311 2%

Paskuqan* 39,511 2%

Rrethinat* 22,682 2%

* =Communes (whose statutory tax rates are half those of 3rd

category municipalities)

MoF data, own-calculations



APPENDIX 3. INTERVIEW SCHEDULE

Questions

1. Position, length of tenure in the job, qualifications.

2. Size of Finance Department, Tax Department, and number of people devoted to SBT?

3. How were records kept on the SBT prior to 2007 and what kind of registration and billing

systems did the local government inherit?

4. What have you done to improve these systems? Have you developed or purchased IT

software to help you administer the tax?

5. Please describe how small businesses are registered in the system, how their primary

business activity is determined for tax purposes and how their turnover is assessed?

6. Is there a procedure for taxpayers to complain about, or challenge the turnover category

they have been placed in for tax purposes? How many of these challenges are there and

how do they generally get resolved?

7. What role do tax inspectors and bill collectors play in the administration of the system?

What kind of training do they receive? What kind written instructions do they receive?

Please describe any incentive systems that have been put in place to improve collection.

8. Please describe how tax bills are sent out and how tax payments are received, including

what happens in the event of non-payment? What kind of enforcement methods do local

governments have for the SBT? What kind have been used?

9. How did the 2009 caps imposed on the SBT affect the yield of the tax in their

jurisdictions? What did they do to compensate for any losses?

10. How has the lowering of the VAT threshold affected the yield of the SBT. Have small

business tried to stay out of the VAT system and also lower their SBT liabilities? Is the

assessment of turnover made by the local government independent of assessment of

turnover that the national government makes with respect to the VAT system?

11. Does the fact that small business can deduct what the pay in the SBT from their profit

taxes make them more or less willing to pay the SBT? How does this complicate the

administration of the tax?

12. Please describe the nature of and or problems with the cooperation between local and

national government tax authorities with respect to the SBT.

13. What do you think should be done to improve the SBT?



APPENDIX 4. SUMMARY OF DATA ON SBT COLLECTION

Local Government Yield of SBT # of firms SBT Per

Firm

% under 3 mln

Rate Policy Abatement Size of

tax dept

# working on SBT

(+inspectors)

yield per employee

estimated informality

Berat (2012) 45,839,000 1,684 27,220 55% -10% for tourist

firms -10% single payment;

9 2 (+5) 6,548,429 none

Pogradec (2011) 40,453,000 860 47,038 80% by law

7 1 (+5) 6,742,167 15%

Korce (2012) 93,572,000 2,200 42,533 40%

+10% for all SBTs except -30%

student/ tourist firms

-5% single payment

13 2 (+9) 8,506,545 10%

Lushnja (2012) 40,771,000 1,348 30,246 80% +10% for all SBTs active since 2008

12 3 (+6) 4,530,111 none

Bushat (k) (2011) 5,323,000 255 20,875 95% -10% for all -10% for

single payment

4 (+3) 1,774,333 none

Durres (2012) 183,998,672 4,884 37,674 53% by law - 5% single payment

28 8 (+10)

10,222,148

Shkoder (2011) 111,516,000 1,700 65,597 75% by law 11 2(+8) 11,100,000 25%

Elbasan (2012) 69,976,000 3,100 22,573 by law 11 (+10) 7,300,000 15%

Kamez (2012) 41,131,000 1,800 22,851 70% +10% for all 6 (+5) 8,000,000 20%

Fier (2012) 83,236,000 2,807 29,653 74% by law

13 7 (+3) 8,323,600 15%



APPENDIX 5. PROPERTY TAXES AS % OF GDP IN 2011

Source, NALAS (2012)

0.12% 0.18%

0.23% 0.24% 0.30% 0.31% 0.33% 0% 0.34%

0.53% 0.53% 0.60%

0.73%

0.91% 1.00%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%



BIBLIOGRAPHY

CESifo Working Paper No. 760. Pp. 1-35

Frey, Bruno S. and Feld, Lars P., (2002) “Deterrence and Morale in Taxation: An Empirical

Analysis”

IFC, (2007) Designing a Tax System for Micro and Small Businesses, (International Finance

Corporation, Washington DC.

Kahan, Dan M., (2002) "The Logic of Reciprocity: Trust, Collective Action, and Law” John M.

Olin Center for Studies in Law, Economics, and Public Policy Working Papers. Paper 281. Pp. 1-

35

Levitas, Tony, (2010) “Local Government Taxes, Fees and Charges in Albania: Current and

Future Challenges” Report for the Association of Albanian Communes funded by the Swedish

Association of Local Authorities and Regions/SIDA pp.1-33

Levitas, Tony, (2011) “Policy Note on Own Source Revenues in Kosovo,” Democratic Effective

Municipalities Initiative, UI/USAID pp. 1-33

Loeprick, Joe, (2009) “Small Business Taxation: Reform to Encourage Formality and Firm

Growth” in Investment Climate in Practice, vol. 1 (International Finance Corporation,

Washington DC.) pp.1-7

NALAS (2012), Fiscal Decentralization Indicators for South East Europe, (NALAS, Skopje

Macedonia) pp. 1-54

Planning and Local Governance Project (PLGP) (2012) “White Paper on Fiscal

Decentralization” Tetra Tech ARD/USAID pp. 1-70

Scholz, John T., (1998) “Trust, Taxes, and Compliance” in Levi, M. and Braithwaite V., (eds)

Trust and Governance, Russell Sage, New York pp. 135-166



Tyler, Tom (1998) “Trust and Democratic Governance” in Levi, M. and Braithwaite V., (eds)

Trust and Governance, Russell Sage, New York pp. 269-294

U.S. Agency for International Development

Planning and Local Governance Project in Albania St. Dervish Hima

3 Towers near Qemal Stafa Stadium Tower No. 1, Apt. 91, Tenth Floor

Tirana, Albania Tel: + 355-04-450-4150

Fax: + 355-04-450-4149

www.plgp.al

policy brief: whither the small business tax in albania / heqja e taksës së biznesit të vogël...

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