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FISCAL REPORT 2015-2018

Comparative Analysis of the Fiscal Performance 2015-2018

MINISTRIA E FINANCAVE

MINISTARSTVO ZA FINANSIJE

MINISTRY OF FINANCE

Republika e Kosovës Republika Kosova - Republic of Kosovo

Qeveria – Vlada - Government Ministria e Financave

Ministarstvo za Finansije Ministry of Finance

Fiscal Policy and Financial Markets Department

- Fiscal Policy Division

Fiscal Report 2015-2018

Comparative Analysis of the Fiscal Performance 2015-2018

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Table of Contents Summary .................................................................................................................................. 4

List of Abbreviations (Acronyms) ...................................................................................... 5

List of Tables ........................................................................................................................... 5

List of Figures ......................................................................................................................... 6

Introduction ............................................................................................................................ 7

1. Changes in the tax legislation and the overall fiscal performance .................. 8

1.1 Changes in the tax legislation .......................................................................................... 8

1.2 Overall fiscal performance ............................................................................................. 11

2. Revenues generated within the territory and at the border ................................ 14

3. Revenues by tax categories ......................................................................................... 16

3.1. Direct Tax Revenues ...................................................................................................... 16 i. Personal Income Tax .................................................................................................................. 16

ii. Corporate Income Tax ................................................................................................................ 18

3.2. Indirect Tax Revenues ................................................................................................... 21 3.2.1. Value Added Tax (VAT) ............................................................................................................ 21

3.2.2. Excise Tax .................................................................................................................................... 23

3.2.3. Revenues from Customs duties on Imports ........................................................................... 25

3.3. Non tax revenues and other revenues .......................................................................... 26

4. Expenditures ................................................................................................................. 27

4.1 Overall expenditures and by categories ........................................................................ 27

4.2. Fiscal Indicators ............................................................................................................. 31 4.2.1. Budget Deficit ............................................................................................................................. 31

4.2.2. Public Debt .................................................................................................................................. 31

5. References ...................................................................................................................... 33

6. Appendices .................................................................................................................... 34

a. The biggest contributors to Excise Tax Revenues on Imports .................................... 34

b. The biggest contributors to Customs Duty Revenues on Imports .............................. 34

d. Standard and Reduced VAT rates and VAT thresholds for Kosovo and countries in

the region ............................................................................................................................. 36

e. Expenditure structure by economic categories, 2015-2018 (in million €) .................... 39

f. Budget Deficit, 2015-2018 (in million €) ....................................................................... 40

g. Total Debt (in million €) ............................................................................................... 40

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Summary

During the 2015-2018 period, there have been numerous changes in the fiscal area legislation. This includes new laws, bylaws, and decisions that have affected the overall fiscal performance. Based on these developments, the Fiscal Policy and Financial Markets Department has worked on this 2015-2018 Fiscal Report, a comparative analysis, with the aim of presenting an overall fiscal performance, tax, non-tax revenue performance, and government spending by economic categories for the 2015 – 2018 period.

The development of this report includes a large volume of data collected from key fiscal institutions, including the Treasury Department - Ministry of Finance, Kosovo Tax Administration and Kosovo Customs. These raw data have been processed and adjusted for the purpose of presenting the fiscal performance according to the legal structure of the economic categories. In order to conduct a sensible assesment of the 4 year fiscal performance, 2015 was taken as the base year as a benchmark for comparitive purposes.

As a result, the overall fiscal performance during the aforementioned period is positive. Government revenues have increased, along with economic growth, and the same trend has followed government expenditures. The analysis of the various economic categories, both in revenues and expenditures, assesses their performance in detail by elaborating on the factors that influenced their performance. In addition, the two main fiscal indicators reveal a positive picture, whereby the Government of Kosovo has fully respected the allowed limit.

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List of Abbreviations (Acronyms) MF Ministry of Finance GDP Gross Domestic Product VAT Value Added Tax PIT Personal Income Tax CIT Corporate Income Tax AI Administrative Instruction IT Information Technology TAK Tax Administration of Kosovo KC Kosovo Customs FPFMD Fiscal Policy and Financial Markets Department WT Withholding Tax IBT Individual Business Tax SAA Stabilization Association Agreement BO Budgetary Organizations

List of Tables

Table 1: Ratio of total revenues to GDP for the period 2015-2018 in milion € Table 2: PIT ratio to GDP for the 2015 – 2018 period in million € Table 3: Ratio of CIT to GDP for the period 2015 - 2018 in million € Table 4: PIT rates in Kosovo and the region Table 5: CIT rates in Kosovo and the region Table 6: Internal VAT and VAT at the border ratios to GDP (%) Table 7: VAT rates in Kosovo and the region Table 8: Excise to GDP ratio (%) 2015-2108 Table 9: Customs duty on imports to GDP ratio (%), for the 2015-2018 period Table 10: Annual change of GDP and Inflation, measured by CPI for the 2015 – 2018 period, in (%)

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List of Figures

Figure 1: Total revenues and expenditures in mil. € 2015 - 2018 Figure 2: Total Revenues in milion € 2015-2018 Figure 3: Share of total revenues by tax categories 2015 - 2018 Figure 4: Comparison of revenue categories for the 2015-2018 period in million € Figure 5: Total expenditures for the period 2015-2018 in milion € Figure 6: Total expenditure by economic category for the period 2015-2018 in million € Figure 7: Total expenditures by economic categories for 2015-2018 period in million € Figure 8: Share of primary taxes on total customs revenues for the 2015 – 2018 period Figure 9: Share of primary taxes on the total CIT revenues for the 2015 – 2018 period Figure 10: Revenues from PIT for period 2015 – 2018 period in million € Figure 11: Revenues from Withholding Tax and Individual Business Tax for the period 2015 - 2018 in million € Figure 12: Revenues from CIT for the 2015-2018 period in million € Figure 13: Comparison of the number of Corporations, annual turnover and CIT for the period 2015 - 2018 in million € Figure 14: VAT revenues for the period 2015 - 2018 in million € Figure 15: VAT revenues, according to collection institutions, for the period 2015 - 2018 in million € Figure 16: Revenues from Excise Tax for the 2015 – 2018 period in million € Figure 17: Revenues from Excise Tax on Games of Chance, for the 2015 – 2018 period in million € Figure 18: Revenues from Customs duty on imports, for the 2015 – 2018 period in million € Figura 19: Non tax revenues and other revenues, for the 2015-2018 period in million € Figure 20: Total government expenditure and their change for the 2015-2018 period Figure 21: Expenditure structure by economic category, in 2015 - 2018, in million € Figure 22: Share of expenditures by economic categories in GDP, in the period 2015 - 2018, in milion € Figure 23: Change in the share of economic categories in total expenditures, in the period 2015 - 2018, million € Figure 24: Primary and overall deficit in mil €, and overall deficit under the fiscal rule, in 2015 - 2018 Figure 25: Total debt (in mil €), annual rate of change and ratio to GDP (%), 2015 – 2018 Figure 26: Ratio of International and Domestic Debt for the 2015 – 2018 period

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Introduction

Kosovo's economy has gone through a steady period during the last decade. Kosovo is one of the four countries in Europe that has experienced positive economic growth in the last few years, with an average annual growth of 3.5% (in real terms). Kosovo's economic growth is expected to continue in the coming years, with projected growth of around 4%, driven by private consumption, export of services and supported by investments. The main macro-fiscal policies continue to be stable. Fiscal rules are fully adhered to and supported by a sound banking sector. The overall deficit over the four-year period has stayed in line with the 2% GDP limit, and public debt remains low. The key macroeconomic indicators reflect a healthy economy, the later if further supported by an increase in GDP per capita by 14.31% from 2015 to 2018. In addition, inflation as measured by the Consumer Price Index (CPI) has been stable over the aforementioned with an average rate of 0.6%. The unemployment rate even though it remains high, it has decreased since 2015, consequently in 2015 the unemployment rate was 32.9%, while in 2018 it reduced to 29.6%. The aforementioned macro-fiscal indicators signal economic sustainability and potential for further growth.

Stability and promotion of the country's economic development still remain the main objectives of the Government of Kosovo. To this end, a modern simple tax system was developed which is investment-friendly and approximates to EU standards, with a very low tax burden, which directly affects economic development, fiscal and budgetary sustainability. The continuous changes in Fiscal Policy have focused on creating a more favorable environment for domestic and foreign investment, thereby creating tax incentives for businesses as well as serve for the country's economic development.

For the purpose of analyzing the fiscal area, Fiscal Policy and Financial Markets Department has compiled this report in order to present in detail the changes and performance in the fiscal area for 2015 – 2018 the period. The comparative analysis of the fiscal performance will cover the main economic categories of revenues and expenditures as well as the main fiscal indicators. The first part of this report presents the main changes in fiscal legislation and the overall revenue and expenditure performance. Chapters 2 and 3 elaborate on the revenues. Chapter 2 will focus more on the revenue collection performance of the two main institutions, the Kosovo Tax Administration and Kosovo Customs. In contrast to Chapter 2, Chapter 3 provides a more detailed analysis of revenues and performance presentation by categories, tax, non-tax revenues, and other revenues. The last part of this report contains the main fiscal expenditures and indicators. Expenditures will be discussed more broadly in general terms and by economic categories including trends and changes in expenditure structure. In the remaining part of Chapter 4, the main fiscal indicators for the period 2015 - 2018 are covered.

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1. Changes in the tax legislation and the overall fiscal performance

1.1 Changes in the tax legislation

The change in tax legislation for the period 2015-2018 reflects the overall fiscal performance of the Republic of Kosovo. During this period, the Ministry of Finance has amended the tax legislation, namely the Law on VAT, the Law on Corporate Income Tax and the Law on Personal Income Tax under Fiscal Package 1.0. Major legislative changes include:

1. In March 2015, Administrative Instruction MF-No. 01/2015 was approved, on the use of electronic devices and fiscal systems, which foresaw the removal of barriers for the fiscalization of all businesses. The main purpose of this AI was to liberalize the market for electronic and fiscal devices, to create the opportunity for a larger number of operators to enter the market, thereby reducing the cost to businesses of purchasing electronic and fiscal equipment. The aim of these measures was to reduce tax evasion and prevent unfair competition and at the same time protect the consumer. It also provides for the reimbursement of a portion of VAT for citizens collecting fiscal receipts, which will impact and reflect citizens' awareness of fiscal receipts and at the same time contribute to increased tax revenues.

2. 2. The main fiscal changes arising from the new law on VAT adopted on August 17, 2015 and which entered into force on September 1, 2015, are as follows: reduced VAT rate for basic products 8% (including list of products, such as bread and bread products, cereals and cereal products, milk, oil, eggs, supply of potable water, energy and other utilities), as well as increasing the standard VAT rate for other products from 16% to 18%. At the same time, a flat-rate VAT rate scheme for agricultural products has been maintained in order to strengthen this vital sector and to broaden the market with more local agricultural products.

In addition, the VAT threshold was lowered from 50,000 euros to 30,000 euros, aiming at creating a more competitive market in the country, expanding the VAT chain and providing businesses with opportunities to refund VAT. in their inputs. Also, this measure will help align the VAT system in Kosovo with the countries of the region and the EU.

This law includes VAT exemptions for machinery and production lines for use in the production process, raw materials used in the production process and information technology equipment to stimulate this sector but also other sectors as users of these devices.

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3. In August 2015, the following were approved: Law on Personal Income Tax and Law on Corporate Income Tax. The respective Administrative Instructions for these laws have also been approved. These laws set out some facilitations for businesses as follows: abolition of the transitional period on special deductions of 10% on new assets, allowance for educational spending and training, allowance charitable contributions for public interest of 10% and in addition to the 10% allowed deductions will have an additional allowance of up to 10% on the net business income.

4. Supplementation - Amendment of the Administrative Instruction on Goods exempted from Customs Duties, from which products that have emerged as requirements from the business community and the Energy Community are exempt from customs duties.

5. Decision no.13/07, date 06.10.2017 This decision applies to the manufacturing industry. All producers importing on their own or through contractors who are authorized by the Tax Administration of Kosovo for VAT delay on raw materials are exempt from excise duties on energy sources used in the production process starting from January 1, 2018. This decision replaced Decision 16/20 dated 24.03.2015, which allowed all producers to apply for reimbursement of excise duty paid on energy sources used in the production process.

6. Decision no.13/07, date: 06.10.2017 7. This decision applies to the manufacturing industry. All producers importing on

their own or through contractors who are authorized by the Tax Administration of Kosovo for VAT delay are exempt from customs duties on raw materials and semi-products to be used in the production process starting January 1, 2018. In addition, they are also exempt from payment of customs duties on all production lines and machinery and IT equipment.

8. Decision no. 07/40, date: 11.04.2017 Decision 07/40, issued by the Government of Kosovo, exempts from customs duties IT equipment for production entities and other citizens.

9. Decision no. 08/40, date: 11.04.2017 Producers authorized by the Tax Administration of Kosovo are exempt from customs tax on the import of spare parts of machinery for use in the production process.

10. Decision no. 16/20, date: 24.03.2015: § Set the specific excise rate in the amount of € 0.25 per liter for heavy oils; § Set the specific excise rate on cigarettes-35€ /conventional unit( 1000 pieces)

& the specific excise rate of € 800 in Alcoholic Beverages 11. Decision no. 04/21, date: 01.04.2015:

§ New and unregistered vehicles are exempt from excise tax;

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§ The rate of excise tax on cut cigarettes, cigars and cigarettes containing tobacco is set in the amount of 1.10€ per conventional unit.

12. Decision no. 04/39, date: 22.07.2015: § For the first time a new rate of excise tax on fireworks is set at 2€ per kg § The excise rate on cigarettes (tobacco) is increased from 35 € to 38 € per 1000

pieces /cigarette.

The excise tax rate for the Games of Chance is set as follows: § Casinos - 7,000.00 (seven thousand) euros per calendar month. § Electronic games and other slot machines located in casino premises - 700.00

(seven hundred) euros per calendar month, for any computer, electronic machine or slot machine

§ Electronic machines with more than one position - 700.00 (seven hundred) euros for each calendar month, for each position.

§ Sports Betting / Entities Organizing Sports Betting - 840.00 (eight hundred and forty) euros each month for each ticket sales point ( location).

§ Operators (subjects) of slot machines - 700.00 (seven hundred) euros per device, per calendar month.

§ Roulette for electronic machines - 420.00 (four hundred and twenty) euros for each seating position per calendar month

§ Bingo lottery in indoor premises 140.00 (one hundred and forty) euros per premise for each calendar month.

§ Kosovo Lottery - 18% (eighteen percent) of the value of tickets sold per calendar month.

§ Keno Games 18% - (eighteen percent) of the value of tickets sold for each calendar month, according to the Kosovo Lottery Turnover Report.

This decision repeals Decision no. 03/13 dated 29.04.2011.

13. Decision no. 11/64, date: 16.12.2015: The excise tax rates are set according to the Excise Tax Calendar for the four-year period 2016 to 2019. This calendar ends in 2019, where the excise tax rate for the tariff code 240220 "tobacco containing cigarettes" reaches the amount of EUR 47 / conventional unit ;

14. Decision no. 06/51, date: 25.09.2015: The excise rate for petroleum gases and other gas hydrocarbons ( code 2711) is set at 0.15 € per liter;

15. Decision no. 09/141, date: 07.04.2017: The excise tax rate for Biodiesel is set at 0.325€ per liter.

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Figure 1: Total revenue and expenditure in mil. € 2015 - 2018 Source: Treasury / FPFMD Calculations

These changes made by the decisions of the Government of Kosovo aim to establish and support businesses operating in the Republic of Kosovo, with particular emphasis on empowering local producers.

1.2 Overall fiscal performance

From 2015 to 2018, Kosovo has gone through a stable and stable period, performing positively in terms of both tax and non-tax revenues as well as on the expenditure side.

In the category of total revenues in the period 2015–2018, Kosovo has experienced a positive trend, with an increase of EUR 305 million or 18% in 2018 compared to 2015. Direct and Indirect tax revenues increased with the same trend. Indirect tax revenues in 2018 were € 1.34 billion, which is € 211 million more or 19% increase compared to 2015. Direct tax revenues also experienced an increase of 20% compared to 2015.

1,614.34

1,707.36

1,763.24

1,777.91

1,836.80

1,923.36

1,979.56

2,012.67

2018 2017 2016 2015

Total Revenues

Total Expenditures

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In terms of participation in the general contribution, most of the revenues were generated by indirect taxes. In the period 2015-2018, indirect tax revenues contributed an average of 64% to total revenues generated. The rest of the revenues include direct tax revenues at 12%, other revenues at 12% and non-tax revenues at 10%.

1,707

1,778

1,923

2,013

2018 2017 2016 2015

Total Revenues

12%

64%

10%

-2%12%

Të hyratnga TatimetDirekte

Të hyratnga TatimetIndirekte

Të hyratnga jo-tatimore

Kthimettatimore

Të hyrattjera

Figure 2: Total Revenues in milion € 2015-2018/ Source: Treasury/FPFMD calculations

Source: DPFTF Treasury / Calculations

Figure 3: Share of total revenues by tax categories 2015 - 2018 Source: Treasury/FPFMD calculations

Burimi: Thesar/Kalkulimet e DPFTF

(200) €

- €

200 €

400 €

600 €

800 €

1,000 €

1,200 €

1,400 €

1,600 €

2015 2016 2017 2018

Figure 4: Comparison of revenue categories for the 2015-2018 period in milion € Source: Treasury/FPFMD calculation

sSource: DPFTF Treasury / Calculations

Direct Tax revenues Indirect Tax revenues Non-tax revenues Tax returns Other revenues

Direct Tax Revenues

Indirect Tax Revenues

Non-Tax Revenues

Tax Returns

Other Revenues

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Total revenues have also been stable compared to GDP. During the 2015-2018 period we have an increase of 1%, as depicted in Table 1 below.

The trend in expenditures coincides with the trend of revenue. Both the former and latter have experienced a positive growth trend, where spending in 2018 was around 2 billionT euros, and compared to 2015 it increased by 365 million euros or about 23%.

Expenditure is dominated by three main categories: Wages and Salaries, Subsidies and Transfers, and Capital Expenditures, accounting for more than 80%. The expenditure part will be covered in more detail in the fourth part of this report.

2015 2016 2017 2018 Revenues to GDP 29% 29% 30% 30%

1,614

1,763

1,836

1,979

- € 200 € 400 € 600 € 800 € 1,000 € 1,200 € 1,400 € 1,600 € 1,800 € 2,000 €

Totali

2018 2017 2016 2015

Total

- €

100 €

200 €

300 €

400 €

500 €

600 €

700 €

Paga dheMëditje

Mallra dheSherbime

SherbimeKomunale

Subvencionedhe Transfere

ShpenzimeKapitale

Pagesa tjera

2015 2016 2017 2018

Figure 5: Total expenditures for the period 2015-2018 in mil € Source Treasury/FPFMD calculations

Burimi: Treasury/FPFMD calculations

Figure 6: Total expenditure by economic category for the period 2015-2018 in milion € Source: Treasury/FPFMD calculations

Source: DPFTF Treasury / Calculations

Table 1: Ratio of total revenues to GDP for the period 2015-2018 in mil € Source Treasury/FPFMD calculations

Wages and Salaries Goods and Services Utilities Subsidies and Transfers Capital Other payments Expenditure

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2. Revenues generated within the territory and at the border

The Government of Kosovo collects tax revenues at the borders through the Kosovo Customs and within its territory through the Kosovo Tax Administration. These two institutions collect the vast majority of state revenues.

The most important revenues collected by Kosovo Customs and Tax Administration include excise tax, customs duties on imports and VAT at the border for the former. While for the latter Withholding tax, Corporate Tax and VAT are key. A large portion of the total revenue is collected by Kosovo Customs, where in 2018 it collected 1.13 billion euros, compared to TAK which generated 413 million euros in the same year. These two institutions experienced a positive trend of tax collection and compared to 2015 Kosovo Custom’s revenue collection has increased by 20% in 2018 or about EUR 185 million while TAK’s revenue collection has increased by 36% or EUR 109 million.

There is an increase in the share of VAT collected at the border. Compared to 2015 we have an increase of 4%. While for excise and customs duties on imports, there is a slight decrease, where the share of custom duties on imports decreased by 3% and excise by 1%. By contrast there is a smaller change in the share of total revenues in TAK. During 2015-2018, the share of CIT and PIT decreased by 1%.

304.00

944.93

355.23

1,044.04

365.92

1,111.95

413.15

1,130.78

2018 2017 2016 2015

Customs

TAK

Figure 7: Total expenditures by economic categories for 2015-2018 period in milion € Source: Treasury/FPFMD calculations

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38% 38% 39% 37%

14% 12% 11% 11%

48% 49% 50% 52%

0%

20%

40%

60%

80%

100%

2015 2016 2017 2018

Akciza Dogana në Import TVSH në Kufi - Dogana

48% 48% 51% 49%

31% 30% 30% 30%

21% 22% 19% 20%

0%

20%

40%

60%

80%

100%

2015 2016 2017 2018

TVSH e brendshme TAP TAK

Figure 8: Share of primary taxes on total customs revenues for the 2015 – 2018 period Source: Treasury/FPFMD calculations

Figure 9: Share of primary taxes on the total CIT revenues for the 2015 – 2018 period Source: Treasury/FPFMD calculations

VAT at the border Customs duty Excise Internal VAT CIT PIT

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3. Revenues by tax categories

Revenues of the Government of Kosovo include indirect, direct tax, non-tax and other income.

Indirect tax revenues include value added tax (VAT), excise tax and import duties while direct taxes consist of personal income tax, corporate income tax and other taxes. Non-tax revenues include other taxes from central and local governments, concessionary taxes and royalties, and other revenues include borrowing, grants and assistance, repayment of loans from Publicly Owned Enterprises, and other one-time tax revenues. This chapter of this report will first present direct tax revenues, then indirect tax revenues and non-tax revenues, including other revenues.

3.1. Direct Tax Revenues

Direct tax revenues by participation constitute the second most important group in total revenues. This category includes two important tax categories such as:

• Personal Income Tax; and • Corporate Income Tax.

Direct taxes compared to total revenues for the period 2015-2018 have gone through a similar trend. The first part of this chapter will present the performance of Personal Income Tax and compare this tax with regional countries. Then the performance of the Withholding Tax and Individual Business Tax will be discussed. The second part of this report will present the performance of Corporate Income Tax and its comparison with countries in the region.

i. Personal Income Tax

Personal Income Tax, based on Law no. 05 / L -028, includes revenues from salaries, rents, interest, capital gains, pensions paid, business activities, etc. On PIT for the 2015 – 2018 the period, the Government of Kosovo has experienced a positive trend. As depicted in figure 10, PIT revenues increased from € 108 million to € 152 million or a 41% increase from 2015 to 2018.

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Table 2: PIT ratio to GDP for the 2015 – 2018 period in million € Source: Treasure/FPFMD calculations

Also, compared to total revenues PIT accounts for about 7.6% of the total revenues. Referring to figure 10 above, PIT for the 2015–2018 period, has undergone a steady and positive trend with a consecutive annual increase of around 15%.

2015 2016 2017 2018

PIT/GDP 1.87% 2.04% 2.13% 2.28%

A similar trend followed in relation to GDP where the share for the period 2015 - 2018 increased from 1.87% to 2.28%. PIT is composed of:

• Withholding tax and • Individual Business Tax

Withholding Tax Revenues are significantly higher than those of Individual Business Taxes. Also, the changes over the years are not uniform. Withholding Tax revenues experienced an increase of about 50% for the 2015-2018 period compared to Individual Business Tax which experienced an increase of about 16% for the same period.

108.68 123.98

136.92 152.82

15.31 28.25

44.14 14%

26%

41%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

- €

20 €

40 €

60 €

80 €

100 €

120 €

140 €

160 €

180 €

2015 2016 2017 2018

TAP Total Ndryshimi i TAP në raport me 2015 (VA)

Ndryshimi i TAP në raport me 2015 (%) Linear (TAP Total)PIT total

Figure 10: Revenues from PIT for period 2015 – 2018 period in million €/Source: Treasury/ graphy by FPFMD

Source: TAK / processed by DPFTF

Figure 10: Revenues from CIT for period 2015 – 2018 period in million €

Source: TAK / processed by DPFTF

Figure 10: Revenues from CIT for period 2015 – 2018 period in million €

Source: TAK / processed by DPFTFBurimi: Thesar/Kalkulimet e DPFTF

PIT total

PIT change in relation to 2015 %

PIT change in relation to 2015

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In the Withholding Tax category, in 2018 TAK collected 119 million euros. Compared to 2015, withholding tax has increased by 50%, from € 79 million to € 119 million in 2018. This increase results partly from wage increases and partially from new jobs. For the same period, in 2018 compared to 2015 the number of employees increased by 18% which translates into 45,000 more jobs.

Whereas, Individual Business Tax performance in terms of revenues is positive but not at as good as the performance of Withholding Tax. In 2018, 33 million euros were collected. The 2018 performance was up 16% or about € 4 million more than in 2015.

ii. Corporate Income Tax

Corporate Income Tax occupies an important place in the budget basket. This tax is based on the net business income realized from business activity in the relevant calendar year. From CIT the collection of revenues for the four year period is as follows: € 66.28 million in 2015, € 80.18 million in 2016, € 73.06 million in 2017 and € 84.46 million in 2018. There is a positive trend of revenue collection with a minor decline in 2017 compared to 2016 by 7%. The overall performance of the 2015-2018 period is positive. Taking 2015 as the base year in 2016 revenue collection increased by 19%, in 2017 by 11% and in 2018 by 28% as shown in Figure 12.

79.62 91.86

104.38 119.06

29.06 32.13 32.55 33.76

15%

31%

50%

11%12%

16%

0%

10%

20%

30%

40%

50%

60%

- €

20 €

40 €

60 €

80 €

100 €

120 €

140 €

2015 2016 2017 2018

Tatimi i mbajtur në burim (TMB) Tatimi për biznese individuale (TBI)Ndryshimi i TMB raport me 2015 Ndryshimi i TBI në raport me 2015Linear (Tatimi i mbajtur në burim (TMB)) Linear (Tatimi për biznese individuale (TBI))

Withholding Tax (WB)

Change in Withholding Tax in relation to 2015 (WB)Change in Withholding Tax in relation to 2015 (WB)Linear Withholding Tax (WB) Linear Individual Busines Tax (IBT)

Individual Business Tax (IBT)

Change in Individual Business Tax (IBT) in relation to 2015

Figure 11: Revenues from Withholding Tax and Individual Business Tax for the period 2015 - 2018 in mil € Source: TAK/ graph by FPFMD

Burimi: ATK/përpunuar nga DPFTF

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Figure 12: Revenues from CIT for the 2015-2018 period in million € Source: TAK/ graph by FPFMD f

Figure 13: Comparison of the number of Corporations, annual turnover and CIT for the period 2015 - 2018 in million € Source: TAK / graph by FPFMP

The primary factor that contributed to this significant increase of 28% in revenues over the 4-year period is the increase in the number of corporations, 9,000 respectively during the 2015-2018 period. Despite the fact that the number of corporations and their turnover has followed a positive trend, and no changes were made in the CIT legislation for 2017, we have a reduction of CIT revenues by about 7%. This decline in revenues resulted from the increased reinvestment of corporate profits. Nonetheless, in 2018 the positive revenue trend resumed, where 11.52 million euros more were collected than the previous year.

67.65

80.8175.28

86.8

13.167.63

19.15

19.45%

11.28%

28%

0%

5%

10%

15%

20%

25%

30%

- €

10 €

20 €

30 €

40 €

50 €

60 €

70 €

80 €

90 €

100 €

2015 2016 2017 2018

Të hyrat nga TAK Ndryshimi i të hyrave të TAK me 2015 (VA)

Ndryshimi i të hyrave të TAK me 2015 (%) Linear (Të hyrat nga TAK)

Revenues from CIT

Change in revenues from CIT % - base year 2015Change in revenues from CIT % - base year 2015

Change in revenues from CIT base year 2015

Linear (Revenues from CIT )

13,027

15,902

19,265

22,231

6,558 7,2968,221

9,265

67.65

80.81 75.28

86.8

0

10

20

30

40

50

60

70

80

90

100

0

5,000

10,000

15,000

20,000

25,000

2015 2016 2017 2018Numri i Korporatave Qarkullimi vjetor nga Personat Juridik në mil. €Tatimi në të Ardhura të Korporatave në mil. € Linear (Numri i Korporatave)Linear (Qarkullimi vjetor nga Personat Juridik në mil. €)

Number of Corporations

Revenues from Corporate Income Tax in million EUR

Linear (Annual turnover of legal entities in milion EUR)

Annual turnover of legal entities in milion EUR

Linear (Number of Corporations)

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Table 3: Ratio of CIT to GDP for the period 2015 - 2018 in mil € Source: Treasury/ FPFMD calculations

Source: DPFTF Treasury / Calculations

Table 4: PIT tax rates in Kosovo and the region Source: Law No. 05/ L-028 on Personal Income Tax, Deloitte Countries Highlight 2019

Source: Law No. 05/ L-028 on Personal Income Tax, Deloitte Countries Highlight 2019

Table 5: CIT rates in Kosovo and the region Source: CIT Law, Deloitte Countries Highlight 2019

Also, in relation to GDP the trend proportion is the same as the change in CIT revenues. The value of the ratio of CIT to GDP varies from 1.15% to 1.25% for the 2015 – 2018 period.

Year 2015 2016 2017 2018 CIT /GDP 1.15% 1.3% 1.14% 1.25%

iii. Comparison of PIT and CIT rates with the region

This part of the report will address differences in the tax rates of PIT and CIT between Kosovo and other Balkan countries.

Personal Income Tax (TAP) in Kosovo is progressive and has 4 tax thresholds which range from 4% to 10%. Similar to Kosovo, other countries in the region such as Albania, Northern Macedonia, and Montenegro have progressive systems other than Serbia which has different tax rates for different types of personal income. In this regard, Kosovo, compared to the aforementioned countries, has lower tax rates, as shown in table 4 below. TAP tax rates in the region start the lowest at 9% in Montenegro and Albania with the highest rate, 23% for monthly incomes higher than € 1230.

State Tax type Tax rates Threeshold (Euro) Kosovo Progressive 0%, 4%, 8%, 10% 0-80; 80-250; 250-450; 450+ Albania Progressive 0%, 13%, 23% 0-246; 246-1230; 1230+

Montenegro Progressive 9%. 11% 0-711; 711+ North Macedonia Progressive 10%, 18% 0-1461; 1461+ Serbia By category 10%, 15%, 20% Withholding tax; capital; rent

Unlike TAP tax rates, Corporate Income Tax rates are more similar with the countries in the region. As depicted in Table 5, Croatia applies the highest tax rate of 18%, while Montenegro applies the lowest tax rate of 9%.

States Kosovo Albania Bosnia &

Her. North

Macedonia Montenegro Serbia Croatia

CIT tax rates

10% 10% 10% 10% 9% 10% 18%

21

Figure 14: VAT Revenues for the period 2015 - 2018 in million € Source: Treasury / graph by DPFTF

Figure 14: VAT Revenues for the period 2015 - 2018 in million €

Source: Treasury / processed by DPFTF

3.2. Indirect Tax Revenues

Indirect tax revenues constitute the largest part of revenues generated by the Government of Kosovo. These revenues are generated through Value Added Tax (VAT), Customs duty on imports and Excise tax. Within this chapter, the performance of each will be presented separately.

3.2.1. Value Added Tax (VAT)

VATRevenues

The overall performance of Value Added Tax for the 2015 - 2018 period is positive and has steadily increased. In 2018, 800 million euros were collected, which is an increase of 40 million euros or 5% compared to 2017, while compared to 2015 there is an increase of 31% or 187 million euros.

VAT in Kosovo is collected by the Kosovo Customs at the state borders and by TAK within the territory of Kosovo. As shown in Figure 15, domestic VAT revenues have resulted in year-on-year increases, emphasizing that in 2018 15 million euros more were collected than in 2017 or 60 million euros more compared to 2015. Expressed in percentage terms 7% increase in VAT revenues compared to 2017 and 38% increase in revenues compared to 2015. A similar trend has followed VAT revenue collection at the border. During the period 2015–2018, VAT at the border has increased by 26 million euros or 5% compared to 2017, while compared to 2015 there is an increase of

610.48693.75

756.42797.15

83.27145.94

186.67

14%

24%

31%

0%

5%

10%

15%

20%

25%

30%

35%

- €

100 €

200 €

300 €

400 €

500 €

600 €

700 €

800 €

900 €

2015 2016 2017 2018

TVSH në milion euro Ndryshimi në raport me 2015 (VA)

Ndryshimi në raport me 2015 (%) Linear (TVSH në milion euro)

VAT in million EUR

Change in relation to 2015 (%)

Change in relation to 2015

Linear (VAT in million EUR)

22

Figure 15: VAT revenues, according to collection institutions, for the period 2015 - 2018 in million € Source: Treasury / graph by DPFTF

Table 6: Internal VAT and VAT at the border ratios to GDP (%) Source: Source: Treasury / DPFTF calculations

Burimi: Thesar/Kalkulimet e DPFTF

128milion euros or 28%. It is worth noting that largest part of the total VAT is collected at the border, and the average over this period was around 74% of the total VAT value.

Table 3 below shows VAT collected domestically (within the country) and at the border in relation to the Gross Domestic Product (GDP). Domestic VAT as a share of GDP, from 2015 to 2018 is 3%. While VAT revenues collected at the border as a share of GDP during this period were 8% to 9%.

Year 2015 2016 2017 2018 VAT domestic/GDP 3% 3% 3% 3% VAT at the border/GDP 8% 8% 9% 9%

VAT rates and thresholds in Kosovo

In the Balkan region, VAT rates range from 18% to 25% on standard rates and from 5% to 13% on reduced rates. Kosovo has the lowest VAT rate of 18% compared to region as does Northern Macedonia. The country with the highest VAT rate is Croatia, 25% respectively. Kosovo ranks fourth in terms of reduced VAT rates. Countries like Northern Macedonia, Albania and Montenegro have lower tax rates while Serbia and Slovenia have similar rates to Kosovo.

153.96

456.52

179.29

514.46

198.34

558.08

213.13

584.02

TVSH ebrendshme

TVSH në kufi

2018 2017 2016 2015

VAT at the border

Domestic VAT

23

Table 7: VAT rates in Kosovo and the region Source: Law on Value Added Tax, Nr.05/L-037; Deloitte Countries Highlight 2019

Figure 16: Revenues from Excise Tax for the 2015 – 2018 period in million € Source: Treasury/ graph by FPFMD

State Standard rate Reduced rate

Kosovo 18% 8%

Albania 20% 6%

North Macedonia 18% 5%

Montenegro 21% 7%

Serbia 20% 10%

Croatia 25% 13% / 5%

Slovenia 22% 9.5%

3.2.2. Excise Tax

One of the most important instruments for the state treasury for revenue collection is excise tax. During the 2015 – 2018 period a considerable number of decisions have been taken which have affected the overall excise tax performance.

Despite various decisions, the excise performance in the period 2015 - 2018 was good. In 2018 around 419 million Euros were collected from excise taxes, which reveals an increase of 16% or about 58 million Euros compared to 2015.

The Excise tax performance in 2018 compared to 2017 suffered a small decline of around 3% despite the strong growth trend during the first three years. The legislative

360.63 403.30

432.21 419.05

42.66 71.57 58.42

12%

20%

16%

0%

5%

10%

15%

20%

25%

- € 50 €

100 € 150 € 200 € 250 € 300 € 350 € 400 € 450 € 500 €

2015 2016 2017 2018Akciza Ndryshimi në raport me 2015 (VA)Ndryshimi në raport me 2015 (%) Linear (Akciza)

Excise Tax

Change in relation to 2015 (%)

Change in relation to 2015

Linear (Excise Tax)

24

Table 8: Excise to GDP ratio (%) 2015-2108 Source: Treasury/ calculations by FPFMD

Figure 17: Revenues from Excise tax on Games of Chance, for the 2015 – 2018 period in million € Burimi: Kosovo Customs/ graph by FPFMD

changes mentioned in Chapter 1 were a strong driver for excise tax revenues in 2016 to increase by € 42 million or 12% compared to 2015.

The share of excise revenues to GDP was stable between 2015 and 2018. In 2015, the Excise/ GDP ratio was 6%. In 2016 and 2017 there was an increase of Excise / GDP ratio by 1%. Whereas in 2018, the implementation of the decision issued by the Government (No. 13/07), dated 06.10.2017 has affected that this year to have less revenues collected from excise tax. Consequently, the Excise / GDP ratio in 2018 dropped by 1%.

Year 2015 2016 2017 2018 Excise/ GDP 6% 7% 7% 6%

Revenues from Excise tax on Games of Chance Excise tax on Games of Chance has been applied since June 2011. As shown in the figure 17 below, the revenues collected from Games of Chance have increased progressively over the last 4 years. In 2016, 11.8 million Euros were collected or about 9% more compared to the previous year. In 2017 there was significant increase or about 500,000 euros. Compared to these 3 years, in 2018 the growth was considerable. The performance of 2018 compared to 2015 was better by about EUR 5 million or about 46%. Figure 17 below illustrates the revenue stream from Excise tax on Games of Chance over the years visually.

10.811.8 12.3

15.8

1 1.5

59%

14%

46%

0%5%10%15%20%25%30%35%40%45%50%

- €

2 €

4 €

6 €

8 €

10 €

12 €

14 €

16 €

18 €

2015 2016 2017 2018Akciza në Lojrat të Fatit Ndryshimi në raport me 2015 (VA)

Ndryshimi në raport me 2015 (%) Linear (Akciza në Lojrat të Fatit)

Excise Tax Revenues on Games of Chance

Change in relation to 2015 (%)

Change in relation to 2015

Linear (Excise Tax Revenues on Games of Chance)

25

Figure 18: Revenues from Customs duty on imports, for the 2015 – 2018 period, in million € Source: Treasury/ graph by FPFMD

3.2.3. Revenues from Customs duties on Imports1

Based on historical data, revenues from Customs duty on imports have dropped significantly. In 2015, € 131 million revenues were collected. The effects of “Law no. 04 / l-163 on goods exempted from customs duty and goods with zero customs duty "which entered into force on 16 January 2014 are being observed. This law has led to a decrease in revenues from Customs duty on imports, while on the other hand beneficiaries are businesses which increased the influx of imports by benefiting from this exemption and zero customs duty. Below we present the excise tax revenues over the four-year period

From 2015 to 2016, we have a decrease in the level of budget revenues. If we make a comparison between the years, in 2016 we have a decrease of € 1.42 million than the previous year or by about 1%. 2016 was the year of implementation of the Stabilization and Association Agreement and the decline in the level of revenues mentioned above was due to the implementation of this Agreement. A more detailed report on the SAA effect can be found in the appendices of this report.

The CEFTA Agreement, the implementation of Law 04 / l-163 and the Stabilization and Association Agreement are giving their effects which led to the fall in the level of

1 Customs duties on imports implies the customs tax paid on the import of goods and not revenues from Customs as an institution. Kosovo Customs collects the following taxes: VAT at the border, Excise duty, Customs duty on imports, Banners, Anti-Damping measures, etc

131.39 129.97 126.04 123.77

-1.42 -5.35 -7.62

-1%

-4%

-6%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

(20) €

- €

20 €

40 €

60 €

80 €

100 €

120 €

140 €

2015 2016 2017 2018

Të hyrat nga Dogana në Import Ndryshimi në raport me 2015 (VA)

Ndryshimi në raport me 2015 (%) Linear (Të hyrat nga Dogana në Import)

Revenues from Customs duty on imports

Change in relation to 2015 (%) Linear (revenues from CD on imports)

Change in relation to 2015

26

Table 9: Customs duty on imports to GDP ratio (%), for the 2015-2018 period Source: Treasury/ calculations by FPFMD

Figure 19: Non tax revenues and other revenues, for the 2015-2018 period in million € Source: Treasury/ graph by FPFMD

budget revenues for 2017 and 2018. In 2017 the decline continued by 3% in the value of 3.9 million €. Given the importance and strength of the Stabilization and Association Agreement, the decline in revenues was projected to continue in 2018, resulting in a decrease of about 2% or about € 2.3 million. Regarding the ratio of Customs Duties on imports to GDP, it is seen in Table 9 that there was as downward trend for 2015 - 2018, where in 2015 this ratio was 2.26% and in 2018 only 1.85%.

Years 2015 2016 2017 2018

Customs Duty on Imports / GDP 2.26% 2.14% 1.97% 1.85%

3.3. Non tax revenues and other revenues

Non-tax revenues and other revenues in the period 2015 - 2018 constituted a very important source for the Government of Kosovo, where their share in total revenues was 22%. Non-tax revenues mainly consist of taxes and other charges of central and local BOs, concessional taxes, mining royalties and interest income on loans granted to Publicly Owned Enterprises. Other revenues in this report include external and internal borrowing, borrowing service receipts, donor grants and assistance, deposit fund, dedicated income and one-off income.

191

180 189 196251 177

239253-6%

-1.4%2.4%

-29%

-4.5%

1.00%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

- €

50 €

100 €

150 €

200 €

250 €

300 €

2015 2016 2017 2018Të hyrat jo-tatimore Të hyrat tjeraNdryshimi i të hyrave jo-tatimore (%) Ndryshimi i të hyrave tjera (%)Linear (Të hyrat jo-tatimore) Linear (Të hyrat tjera)

Non-tax revenues

Change in non-tax revenues (%)

Linear non-tax revenues (%)

Other revenues

Change in other revenues (%)

Linear ( Other revenues)

27

The change over this period has been steady in non-tax revenues, where other revenues we have a experienced a more significant decrease in 2016. This decrease is attributed to the lack of Privatization Agency of Kosovo (PAK) revenues in 2016. Also, in 2017 no significant revenues were generated from PAK, but revenues increased from borrowing, which kept the level of revenues in line with other years. In terms of participation, non-tax wholesale revenues are covered by taxes and other charges of central and local BOs while in the case of other revenues, during this period, borrowing is the main item until 2018, while into 2018 borrowing becomes less prominent and the share as one-off revenues increases.

4. Expenditures

Increasing spending can be beneficial to a country's economy. In line with economic theories, an increase in government expenditure has a positive effect on the growth of the economy through the multiplier effect, which results in an increase in aggregate demand for goods and services, which helps increase output and employment. All this is followed by higher economic growth in the short run. The first part of this chapter will present an overview of general expenditures and by economic categories, while the second part will present the main fiscal indicators for the period 2015-2018.

4.1 Overall expenditures and by categories

Public expenditures increased in parallel with revenues during the 2015-2018 period. During these 4 years the expenditure trend has not followed a constant structure, on the contrary we can see that the increase in expenditure ranges from 4.17% to 9.22%. The value of expenditure in 2018 was 1.9 billion euros, compared to 2015, that translates into an increase of 365 million euros or about 23%. The highest growth rate of expenditures was recorded in 2016, which is mainly attributed to the category of subsidies and transfers and other payments.

Government spending has increased in parallel with GDP growth. An increase in spending would be worrying if Kosovo's economy did not grow at a sufficient rate. However, economic growth in Kosovo is strong and stable, with an average rate of 4% over the last four years and higher than other economies in the region. The ratio of expenditure to GDP shows a modest growth trend. The share of public expenditure in relation to GDP in 2015 was 27.8% and by the end of this period this ratio reached 29.3%.

28

Figure 20: Total government expenditure and their change for the 2015-2018 period Source: Treasury/ graph by FPFMD

Table 10: Annual change of GDP and Inflation, measured by CPI for the 2015 – 2018 period, in (%) Source: Treasury/ FPFMD

Naturally through the multiplier effect an increase in government spending leads to an increase in the price level and as a result inflation (demand-pull). However, inflation everywhere is a monetary phenomenon. Government spending does not always increase inflation, particularly, if there is reserve capacity in the economy (when the economy is not producing at its maximum potential). If there is a negative output gap, an increase in aggregate demand will imply that unexploited factors of production will be used to boost output, and there will be no inflationary pressures. The latter is evidenced by the moderate inflation rates in Kosovo’s economy over the last 3 years.

2015 2016 2017 2018

GDP Constant prices, annual change % 4.1 4.1 4.2 3.8

CPI annual change % -0.5 0.3 1.5 1.1

Also, the economic categories of expenditures have followed a trend similar to the general expenditure trend. The category of Wages and Salaries constitutes the largest share of expenditure over the years, followed by Subsidies and Transfers, Capital

1,614.34 1,763.24

1,836.80 1,979.56

148.91 222.47 365.22

9.22%

13.78%

22.62%

27.80% 29.05% 28.64% 29.58%

0%

5%

10%

15%

20%

25%

30%

35%

- €

500 €

1,000 €

1,500 €

2,000 €

2,500 €

2015 2016 2017 2018

Totali i shpenzimeve Ndryshimi i shpenzimeve në raport me 2015 (VA)

Ndryshimi i shpenzimeve në raport me 2015 (%) Shpenzimet / BPV

Linear (Totali i shpenzimeve )

Total government expenditure eexexpenditure Change in government expenditure in relation to 2015 (%)

Linear (total government expenditure) eexexpenditure

Change in government expenditure in relation to 2015

Government expenditure / GDP

29

Figure 21: Expenditure structure by economic category, in 2015 - 2018, in milion € Source: Treasury/ graph by FPFMD

Burimi: Thesari/përpunuar nga DPFTF

Expenditures and so on. These three economic categories make up the vast majority of spending. In the period 2015 - 2018, Wages and Salaries increased by about EUR 66 million or 13%. The increase in the other two categories, Subsidies and Transfers and Capital Expenditures, is about 30% in this period.

The above mentioned changes are also reflected in the ratio of these economic categories to GDP. As a result, Wages and Salaries have the highest proportion to GDP (Figure 22), in 2018 with 8.85% a substantial increase from 2017 where their share in GDP was 5.87%, which has consequently resulted from the growth of this category for 41.84 million in 2018. The category of Subsidies and Transfers in 2018 had the highest percentage of GDP after the category of Wages and Salaries, by 8.35%, which is very close to the share of capital expenditures, respectively 7.96 % in 2018. It should be noted that these two previous categories have grown moderately over the years and their share in GDP has been mainly concentrated at around 7-8% while other categories have a smaller share in GDP, where utilities have the lowest share ranging from 0.35% to 0.42% of GDP over the years.

- €

100 €

200 €

300 €

400 €

500 €

600 €

2015 2016 2017 2018

Pagat dhe mëditjet Mallrat dhe shërbimet Shërbimet komunale

Subvencionet dhe transferet Shpenzimet kapitale Pagesa tjera

Wages and Salaries

Subsidies and Transfers

Goods and Services

Capital Expenditure

Utilities

Other payments

30

Figure 22: Share of expenditures by economic categories in GDP, in the period 2015 - 2018, in mil € / Source: Treasury/ graph by FPFMD

Figure 23: Change in the share of economic categories in total expenditures, in the period 2015 - 2018, in mil € Source: Treasury/ graph by FPFMD

Ss

Source: Treasury / done by DPFTF

Burimi: Thesari/përpunuar nga DPFTF

The expenditure structure by economic categories as a share of total expenditures during 2015 - 2018 has undergone minor changes. Subsidies and Transfers and Capital Expenditures, in relation to total expenditures, in absolute terms, are the highest growth categories, with their share increasing by 2%. In contrast to these two categories, the Wages and Salaries category recorded a decrease of 3% in the total share, while the change in the share of the smaller economic categories in the total expenditures was relatively stable.

0%1%

2%3%4%5%

6%7%8%9%

10%

2015 2016 2017 2018

Pagat dhe mëditjet Mallrat dhe shërbimet Shërbimet komunale

Subvencionet dhe transferet Shpenzimet kapitale Pagesa tjera

Wages and Salaries

Subsidies and Transfers

Goods and Services

Capital ExpenditureUtilities

Other payments

33% 31% 30% 30%

11% 10% 11% 12%

1% 1% 1% 1%

26% 27% 28% 28%

25% 25% 26% 27%

3% 5% 4% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018Pagesa tjera Shpenzime Kapitale Subvencione dhe transfereSherbime Komunale Mallra dhe Sherbime Paga dhe Meditje

Capital Expenditure

UGoods and services

Subsidies and Transfers

UWages and Salaries

Other payments

U

U

Utilities

31

Figure 24: Primary and overall deficit in mil €, and overall deficit under the fiscal rule, in 2015 - 2018 Source: Treasury/ graph by FPFMD

4.2. Fiscal Indicators

4.2.1. Budget Deficit

The general deficit under the the fiscal rule is of primary importance which is calculated by adhering to the legislation in force2. During the 2015 – 2018 period, the deficit level was below the allowed limit of 2% of GDP. During these 4 years, the highest deficit was recorded in 2015 compared to other years, i.e. -1.3%. After 2015 until 2018, the deficit ranges from -0.9% to -1.3%

During the 2015 - 2018, the overall deficit under the fiscal rule has a positive trend, as depcited in Figure 24, there is a deficit reduction for two years and a slight increase in 2018.

4.2.2. Public Debt

Kosovo has built an enviable record of low public debt over the years. Although Kosovo's Public Debt continues to grow, it is still considered the lowest in the region. Although Public Debt grew rapidly in 2015, up 28% from 2016, the trend of an accelerated growth stabilized in 2018, with Public Debt rising by 8% as seen in Figure

2 Article 22 / A of the LPFMA and Table 1 of the Law No. 06 / L-020 of the Budget of the Republic of Kosovo.

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

-200

-180

-160

-140

-120

-100

-80

-60

-40

-20

0

2015 2016 2017 2018

Deficiti primar Deficiti i përgjithshëm

Deficiti i përgjithshëm sipas rregullës fiskale Deficiti i përgjithshëm sipas rregullës fiskale (%)Primary deficit

Overall deficit under the fiscal rule Overall deficit under the fiscal rule %

Overall deficit

32

Figure 25: Total debt (in mil €), annual rate of change and ratio to GDP (%), 2015 – 2018 Source: Treasury/ graph by FPFMD

S

Burimi: Thesari/përpunuar nga DPFTF

Figure 26: Ratio of International and Domestic Debt for the 2015 – 2018 period Source: Treasury/ graph by FPFMD

Burimi: Thesari/përpunuar nga DPFTF

25. This increase over the years is largely attributed to to domestic debt growth, which was recorded at 676milion euros in 2018, while external debt was 416milion euros. Despite the gradual increase in Public Debt, the Government of Kosovo has fully complied with the threshold level set in the applicable legislation, whereby total debt should not exceed 40% of GDP.

During the 2015-2018 period we have a change in the structure of the total debt. As shown in Figure 26, in 2015, the share of International Debt and Domestic Debt in the total debt was equal. Over the years, the structure began to change, where there is an increase in the share of Domestic Debt with a high growth rate compared to International Debt.

0%

10%

20%

30%

40%

50%

60%

0

200

400

600

800

1000

1200

2015 2016 2017 2018

Gjithsej Borxhi i Përgjithshëm

Norma vjetore e ndryshimit të Borxhi të Përgjithshëm (%)

Borxhi i Përgjithshëm (% e BPV-së)

Total debt

Annual change of the total debt (%)

Total debt (% of GDP)Total debt (% of GDP)

50%

44%

42%

38%

50%

56%

58%

62%

0% 20% 40% 60% 80% 100%

2015

2016

2017

2018

Borxhi Ndërkombëtar Borxhi i BrendshëmInternational debt Domestic debt

33

5. References

Treasury – Ministry of Finance

Annual Financial Statements 2015-2018

Kosovo Agency of Statistics

Tax Administration of Kosovo

Kosovo Customs

World Bank

Law on Personal Income Tax Nr. 05 L-028

Law on Corporate Income Tax Nr. 06/L -105

Law on Value Added Tax Nr. 05/L-037

Law on Public Debt Nr. 03/L–175

Deloitte Countries Highlight 2019

34

6. Appendices

a. The biggest contributors to Excise Tax Revenues on Imports

Revenues from Exice Tax in million euro Products 2015 2016 2017 2018 Oil 162.03 174.92 191.10 202.94 Cigarettes 102.04 124.38 123.75 130.04 Petrol 32.17 32.99 32.16 30.10 Used vehicles 13.2 19.4 30.62 8.91 Gas 7.11 9.39 8.73 5.54 Beer 6.86 5.04 4.97 5.18 Motor oils 2.01 2.09 2.19 2.01 New vehicles 0.04 0.04 0.05 0.07

b. The biggest contributors to Customs Duty Revenues on Imports

Revenues from Customs duty in million € Products 2015 2016 2017 2018 Used vehicles 8.71 11.42 14.66 12.29 Cigarettes 5.44 5.79 5.79 6.11 Beer 0.38 0.32 0.37 0.42 Motor oils 0.7 0.32 0.00 0.00 New vehicles 1.85 1.05 0.63 0.74

c. BACKGROUND INFORMATION AND IMPACT OF THE STABILIZATION ASSOCIATION AGREEMENT

In 2012, the preparation of the EU Feasibility Study for the SAA commenced, to be signed on 27.10.2015 and implemented on 01.04.2016. This Agreement establishes economic and trade relations by gradually creating a free trade area between the EU and Kosovo. At the same time it offers access to high quality products at favorable prices for citizens and businesses by importing at low customs duty rates, which are expected to fall 0% (zero percent) year after year for the 10 year period.

Although this agreement can be analyzed and elaborated from different aspects, we will approach it from the import of goods point of view.

Referring to Table 13 the value of the import of goods of those who used this right in 2016 was € 339.60 mil. From this we conclude that in the first year of implementation of this Agreement the number of users was not very high, or the information of the

35

Businesses regarding this Agreement was low. If this value is converted into financial assets then the cost of these goods was worth € 16.45 million.

The imports of goods in terms of destination of products are divided into two types: 1) The first type of products are destined to be used as raw material for production in order for the cheapest product to be suplied in the market for consumers and as a result production is expanded and exports increase 2) the second type of products are destined to be used for trade as final products and this if continued in this way the impact on the Trade Balance, it also has a noticeable effect on the Balance of Payments as well.

The table below presents the impact of the SAA.

Viti 2016 2017 2018

Vlera 339.60 517.50 613.70

Taksat 16.45 31.62 45.34

Norma vjetore e ndryshimit 52.4% 18.6%

Burimi: Dogana e Kosovës, përpunuar nga DPFTF

The data from the table above for 2017 gives us an insight into the increase in the number of users of this Agreement. From this table we can see a significantl increasing trend of the import of goods by 52.4% higher compared to 2016, the year of implementation of this Agreement. From the budgetary point of view, the tax value of these goods increased by 92.3%, or by € 15.18 million, more than in the previous year. This is attributed to the Businesses receiving better information on the SAA Agreement.

The year 2018 was the year of the highest level of usage of this agreement. Depending on the products we also have a decrease in the customs duty tax rate over the years. If we make a comparison between years, it follows that in 2018 the value of import of goods expressed as a percentage was 18.6% higher than in 2017, or the value of taxes expressed in € million reached the value of € 45.34 million.

§ In 2018 the value of taxes was in the amount of € 96.20 million, higher compared to 2017.

The following is a graphical representation of the impact of the Stabilization and Association Agreement for 2016-2018.

36

Impact of the SAA in million €, for the 2016-2018 period Source: Kosovo Customs/ graph by FPFMD

Burimi: Doganai/përpunuar nga DPFTF

Based on our calculations, it follows that the value of the import of goods for the three-year period 2016 - 2018 increased by 80.7%.

d. Standard and Reduced VAT rates and VAT thresholds for Kosovo and countries in the region

Country Standard VAT Rate

Reduced VAT Rate

Kosovo 18% 8% rate :

• Water supply, except for bottled water; • Electricity supply, including transmission and

distribution services, with central heating; • Collection of waste and other waste treatment; • Cereals such as barley, maize, corn varieties,

oats, rye, rice and wheat; • Products made from cereals for human

consumption, such as flour, doughs, bread and similar products;

• Cooking oils made from cereals or oilseeds for use in cooking for human consumption;

339.60

517.50

613.70

16.45 31.62 45.34

0 €

100 €

200 €

300 €

400 €

500 €

600 €

700 €

2016 2017 2018

Vlera Taksat Linear (Vlera )Linear (Value) Value Taxes

37

• Milk and dairy products for human consumption;

• Salt suitable for human consumption; • Eggs for consumption; • Textbooks and serial publications;

Albania 20%

6% rate :

• Accommodation services; • Services offered by 4 and 5 star Hotels; • Services provided by entities categorized as

“Agro Tourism”; • Supply of Books; • Marketing in television media; • Electric minibuses with at least 9 seats; • Health services provided by public and private

institutions, excluding insurance premiums.

Montengro 21%

7% rate - applies to basic products, such as;

• Bread; • Oil; • Milk; and • Sugar; • Orthopedic remedies; • Pharmaceutical products used in veterinary

medicine; • Textbooks; • Periodicals; • Daily newspapers.

Serbia 20%

10% rate - applies to the supply of goods and services:

• Bread; • Milk; • Flour; • Sugar; • Oils; • Fruits and vegetables; • Meat; • Fish

38

• Artificial fertilizers; • Pesticides; • Seeds for planting; • TextbookS; • Daily newspapers, etc.

North Macedonia

18% 5% rate - applies to the sale and import of:

• Food products; • Supply of potable water by public suppliers; • Publications of books, brochures, newspapers,

etc.; • Seeds for planting, fertilizers, agricultural

protection products, agricultural machinery, etc.

Croatia 25% 13% rate:

• Some food products; • Water supplies (excluding bottled water); • Newspapers, periodicals (except daily newspapers

and scientific journals with less than 50% advertising content);

• Concert tickets; • Hotel accommodation; • Some agricultural inputs; • Power supply; etc.

5% rate:

• Certain food products (including baby bread, milk and formula);

• Pharmaceuticals (only approved medicines prescribed by a physician);

• Some medical equipment; • Books (including e-books); • Daily newspapers, periodicals (with less than 50%

advertising content); etc.

Slovenia 22% 9.5% rate - applied on:

• Food • Alchooholic beverages;

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• Live animals; • Seeds; • Water service; • Pharmaceuticals for healing and prevention; • Medical equipment; • Passenger transportation; • Books, flyers, etc.

Source: Tax legislation of the countries of the region and the EU, Deloitte Country Highlight 2019

VAT Threeshold – regional countries States Threeshold 1 Threeshold 2 Kosovo 30,000 € Albania 16,200 € 40,400 € Croatia 40,000 € North Macedonia 16,000 € Montenegro 18,000 € Slovenia 50,000 € 7,500 € Serbia 68,000 €

Burimi: Legjislacioni tatimor i vendeve të regjionit dhe BE-së, Deloitte Country Highlight 2019

e. Expenditure structure by economic categories, 2015-2018 (in million €)

Economic Categories 2015 2016 2017 2018

Wages and Salaries 526.3 544.8 550.7 592.5 Goods and Services 184.8 183.0 204.1 229.0 Utilies 24.1 23.3 24.1 23.4 Subsidies and Transfers 422.1 475.1 508.3 558.7 Capital Expenditure 407.9 449.1 471.0 533.0 Other Payments 49.0 87.7 78.3 42.6 Total Government Expenditure 1,614.3 1,763.2 1,836.8 1,979.5 Growth rate in % 7% 9.22% 4,17% 7,77% Ratio to GDP % 27.8% 29.01% 28.7% 29.3% GDP 5,808 6,070 6,414 6,693

Source: Treasury, Ministry of Finance

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f. Budget Deficit, 2015-2018 (in million €)

Year 2015 2016 2017 2018 Primary deficit -95.5 -61.0 -58.9 -160.3 Overall Deficit -112.9 -80.2 -75.6 -177.2 Overall deficit under the fiscal rule -77.8 -53.8 -48.6 -64.7 Overall deficit under the fiscal rule % -1.3% -0.9% -0.8% -1.0%

Source: Treasury, Ministry of Finance

g. Total Debt (in million €)

Year 2015 2016 2017 2018

International Debt 371.17 373.77 422.15 416.63

Domestic Debt 377.78 478.97 574.27 676.62

Total Debt 748.95 852.74 996.42 1,093.05

Annual growth rate of Total Debt (%) 28.5% 13.85% 16.85% 9.7%

Total Debt (% of GDP) 13.07 14.38 16.62 17.2

Source: Treasury, Ministry of Finance