In December 2017, the Rama government decided to lower the VAT threshold to smaller businesses in order to generate more income and combat “tax evasion.” Prime Minister Edi Rama defended this proposal by stating:
After an attentive hearing process not only with interest groups but also with local and international experts, we have arrived at the conclusion to lower the VAT threshold up to businesses that have an annual turnover of 2 million lekë per year.
We have decided to leave it at 2 million to make it as easy as possible for the smallest, but on the other hand for those small ones that are in fact big ones, it will be from now on impossible to continue to be small in the service of those very big ones that use them and do as if they are small to evade [taxes].
Back then, the IMF advised against the lowering of the threshold, declaring it would increase the administrative burden on small businesses and the tax authority, while generating little extra income.
More than a year after the government implemented the new policy, it appears that the IMF’s predictions have become indeed reality. A recently published Technical Assistance Report titled “Revenue Administration: Supporting the Delivery of the Reform Agenda,” states: “A VAT threshold reduction brought some 13,000 micro-businesses into the VAT system from April 2018, with little revenue impact,” even though 96% of 13,000 small businesses added filed their taxes on time! Meanwhile, the burdens on the tax office have significantly increased, and therefore the costs of the taxation system. Another result of the lowering of the VAT threshold, not mentioned in the IMF report, has been a higher degree of informality.
According to the IMF, the tax reform of the Rama government proposed for 2019 brings more opportunities for tax evasion:
“Headline items for the proposed 2019 fiscal package include an almost halving of the dividend tax (from 15 to 8 percent), a widening of the employee [Personal Income Tax] lower tax bracket, and further sector-specific VAT reductions. Some of these changes complicate an otherwise simple and well-structured tax regime and open tax avoidance opportunities—e.g., through shifting higher taxed income into dividends or [Corporate Income Tax] threshold manipulation.”
