Recent changes to fiscal legislation and the VAT Law - International Law Office

Albanian fiscal legislation is in the process of being harmonized with EU standards. However, the European Commission Progress Report 2009 recently identified several aspects that remain to be improved. According to the report, the objectives are to improve the legal framework to reduce the informal economy and strengthen tax administration to increase the tax collection rate.

In light of these recommendations, the government has proposed draft laws to amend provisions on, among other things, value-added tax (VAT), local taxes, excise taxes and income tax. The most significant changes are those to VAT, judging by the reaction of various business sectors.

Changes to the VAT Law illustrate Albania's move towards achieving the objectives of the report. Changes to the law now class all taxable persons with an annual turnover of over Lek5 million as VAT taxpayers. The intention is to increase tax collection by widening the base of taxable activities. High-level taxpayers have welcomed the move as their burden may be shared, but small businesses consider the change as negative. The amendment not only requires taxpayers to implement new procedures and techniques, but also increases their financial burden. However, looking beyond the interests of business groups, the changes also impact on the economy as a whole.

The report recommended, among other things, the reduction of the informal economy through the improvement of the fiscal framework. Lowering the VAT payment threshold helps to achieve this goal, as it introduces the concept of fair treatment of businesses and makes it more difficult to hide financial data. According to many member states' legislation, VAT applies to all commercial activity, regardless of annual turnover (excluding street vendors). Changes to the VAT rate are implemented based on the type of product and service, not on business volume. Under these circumstances, the VAT revisions in Albania simplify the fiscal system, as the standardization of rules increases the likelihood of a better understanding of such rules among businesses.

Although the objectives of integration set out in the 2009 report are important, other EU standards must also be taken into consideration - for example, the obligation to (i) consult major economic operators on legislative changes as set out in the report, as well as in World Bank documents, and (ii) maintain legal stability and sustainability to avoid frequent legislative changes. When legislative changes occur, transition periods are granted to allow affected parties to familiarize themselves with the new systems and requirements. The changes to the VAT Law were made too quickly: the law was enacted in December 2009 and entered into force in January 2010. This has made it difficult for tax administrators and businesses to conduct the necessary evaluations for implementation of the changes. The Albanian approach to the changes failed to comply with the report's other key objective: the strengthening of tax administration to improve tax collection.

While the recent changes to the VAT rules represent a step forward in the formalization of the economy, the process of their drafting and enactment has hindered the potential beneficial effect of such changes and falls short of EU legislative standards, which should be considered as equally important to the implementation of national legislative changes.

For further information on this topic please contact Aigest Milo at Kalo & Associates Law Firm by telephone (+355 4 2233 532), fax (+355 4 2224 727) or email (a.milo@kalo-attorneys.com).