Amending the law on the VAT threshold
More resultsIntroduction
One of the measures that the government claimed would help to fight high levels of grey economy activity was the lowering of the VAT threshold. The new law forced small businesses to enter the VAT scheme. By closing the gap in the trade chain and forcing small businesses to ask big businesses to issue invoices, it was expected that there would be an increase in VAT declarations from big businesses (see here).
- Country
- Albania
- Sector
- Public finance
- Type of Law
- Capturing a market, an industry or public resources
Description of the law
One of the measures that the government claimed would help to fight high levels of grey economy activity was the lowering of the VAT threshold. The new law forced small businesses to enter the VAT scheme. By closing the gap in the trade chain and forcing small businesses to ask big businesses to issue invoices, it was expected that there would be an increase in VAT declarations from big businesses (see here).
The change was enabled by Article 4 of Law No. 107/ 2017, which stipulates that the minimal threshold for VAT registration is regulated by decision of the Council of Ministers. In accordance with Article 4, Article 2 of the Council of Ministers' Decision No. 652 of 10 November 2017 lowered the threshold for VAT registration for companies to an annual turnover of ALL2 million (approximately €16,000). The vast majority of businesses in the category are small retail firms, such as grocery shops.
The move was criticised as counterproductive to the achievement of the stated objective. Some investigative media reports also denounced it as a tailor-made law that served the interests of a few supermarket chains (such as the Big Market chain, which is owned by an MP in the ruling Socialist Party).
Full Law Name
Law No. 107/2017of 30 November 2017 amending Law No. 92/2014 on VAT in the Republic of Albania
Type of law
Act of Parliament
Scope of application
Substantive: VAT
Personal: SMEs in retail
Territory: national
Temporal: until abrogated
Time of adoption and entering to force
Law No. 107/2017 was adopted on 30 November 2017 and has been in force since 1 January 2018.
Decision No. 652 of the Council of Ministers was adopted on 10 December 2017. The VAT threshold for SMEs has been in effect since 1 April 2018.
Who drafted it
Minister for Finance and Economy
Who submitted it to Parliament or to another collective body
The draft law was submitted to Parliament by the Council of Ministers, whereas the Decision of the Council of Ministers was drafted by the Ministry of Finance and Economy.
Relevant developments in the process of adoption that show signs it’s tailor-made
At the end of 2017, the Government of Albania moved towards lowering the threshold for VAT registration from ALL5 million to ALL2 million a year, a change that sought to decrease the level of informality in the Albanian economy.
The move was criticised by the World Bank and IMF as ineffective (to address informality) considering the fact that the inclusion of small businesses in the scheme would create a greater burden on the tax administration and distract it from focusing on large enterprises (see here).
In fact, the effects of the measure did not address informality, but did lead to the closure of many retail SMEs. As a result, the IMF has urged the Albanian government to reconsider the step (see here and here).
After more than a year, the effects of the law’s application did not lead to any significant increase in VAT revenues (rather, a decline was noted in 2018-2019). On the other hand, the largest supermarket chains (Big Market Sh.pk. and Spar Albania Sh.pk.) did not declare a significant increase in profits in 2018, while Eco Market declared heavy losses. At the end of 2018, the economic weekly publication Monitor reported that two companies – Spar and Big Market – had expanded their businesses at the expense of small shops (see here).
Spar Albania is owned by Balfin Group, whose president, Samir Mane, is reported to have influence and political ties with the ruling party (see here and here). Similarly, Big Market was founded by Vullnet Sinaj, a businessman who became an MP for the ruling Socialists in 2017 (see here, here, here and here). These close connections to the ruling party point to the tailor-made nature of the law.
Who adopted it
The Council of Ministers acted in accordance with its legal authority in setting a lower threshold for VAT registration (Decision of the Council of Ministers No. 652).
Enforcement
Yes
Initiatives to challenge it and their outcomes
No
Affected sector
Public finance
Direct beneficiaries and related networks
Balfin Group: Samir Mane is one of the richest businesspeople in Albania
Big Market: Vullnet Sinaj sponsors the electoral campaigns of the ruling Socialist Party (see also here)
Eco Market Sh.pk. is a company owned by Armand Duka, president of the Albanian Football Federation, and his brother Agron Duka, leader of the Environmentalist Agrarian Party. The Duka family are politically very influential in the Durrës District, which is one of the most important municipalities in Albania (see here and here).
While the supermarket chains have reported similar percentages of net profits over the years, they expanded their number of supermarkets in 2018 as a result of the new VAT threshold (see here and here).
Direct victims
Retail SMEs; family businesses; low income citizens employed by SMEs
Socio-economic impact
Nearly nine months after the new threshold entered into force, the weekly Monitor reported that over 20,000 retail SMEs had gone out of business: roughly 6,900 had officially closed, while another 14,000 had moved to "passive" status (see here).
Recent reports confirm that the trend has continued to benefit supermarket chains and large shopping centres (see Monitor in July 2019).
Is there any corruption case that is linked to the tailor made law?
No
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