IN ALBANIA, KOSOVO and WESTERN BALKANS, 2020

Tax Burden in Albania, Kosovo and Western Balkns in 2019 >>>>Tax Freedom Day in 2020 in Albania, Kosovo and Western Balkans

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ALTAX MARCH 2020 [email protected] Albanian Fiscal Studies 8th Edition www.altax.al

TAX BURDEN IN ALBANIA, KOSOVO and WESTERN

BALKANS,

2020 Tax Freedom Day in Albania, Kosovo and Western Balkans in 2020 Tax to GDP ratio 2019 Tax burden according to regions in Albania and Kosovo in 2019 Distribution of tax burden based on the destination of expenditures Investments and tax rates in the Western Balkans GINI Index and Inequality Dita e Lirisë Fiskale në Shqipëri, Kosovë dhe Ballkanin Perëndimor në 2020 Tatimet ndaj Prodhimit të Brendshëm Barra fiskale sipas rajoneve/regjioneve në Shqipëri dhe Kosovë në 2019 Shpërndarja e barrës fiskale sipas destinacionit të shpenzimeve Investimet dhe Normat Tatimore në Ballkanin Perëndimor Indeksi GINI dhe pabarazia

mailto:[email protected]

http://www.altax.al/


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TAX BURDEN

IN ALBANIA, KOSOVO and WESTERN BALKANS

2020 TAX FREEDOM DAY in ALBANIA, KOSOVO and WESTERN BALKANS in 2020

Report of taxes, fees and social contributions to GDP Fiscal burden according regions in ALBANIA and KOSOVO in 2019 Public investments, FDI in WESTERN BALKANS Index GINI and inequality Distribution of fiscal burden

ALBANIAN FISCAL STUDIES 8th Edition

Tax Freedom Day in Albania, Kosovo and Western Balkans in 2020 ALTAX Center is an initiative of Albanian researchers aiming at a new approach to assisting Albanian fiscal and economic policy with an approach to European fiscal policy. The main goal is to promote education of the fiscal system within taxpayers and to incentivise its adaptation to the economic environment, to assist taxpayers and stakeholders (students, field experts, researchers) through expertise in order to be informed about the fiscal environment and the economic climate. On the other side, cooperation with academics and fiscal experts helps to expand and create a full audience in helping to increase fiscal capacity in Albania and Kosovo. WE GIVE YOU THE EXPERIENCE, NOT ONLY THE SERVICE!

ALBANIAN FISCAL STUDIES THEMATIC COLLECTION TAX BURDEN AND TAX FREDOM DAY

8th Edition No. 2020/03/05 www.altax.al [email protected] Date 22.03.2020 Tirana, ALBANIA

http://www.altax.al/



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Tax Burden in Albania, Kosovo and Western Balkan in 2020 Tax Freedom Day in Albania, Kosovo and Western Balkans in 2020 Report of taxes, fees and social contributions to GDP

Publication and distribution ALTAX CENTER

Analysis and comparisons, according to taxes and expenditures carried out during 2014-2018, according to the administrative areas of Albania serves to see who the geographic area is charged more or less with fiscal obligations. Meanwhile, a more detailed analysis within the document intends to orient fiscal policy and public debate to verify burden-sharing and investments for industries or areas that need to shift the burden according to the economic situation that varies year by year after year.

©ALTAX MARCH 2020 TIRANE - AL

Keywords: Tax burden, tax, fee, region, tax rate, FDI, GINI, investment, tax freedom, Western Balkans, Albania, Kosovo JEL Classification: H20, H26

TERMS OF USE AND DISCLAIMER The analysis presented in the Tax burden in Albania, Kosovo and Western Balkans in 2020, is based on a methodology integrating the latest statistics from international organizations and national sources of statistics and finances. The methodology, developed in collaboration with leading experts and partners through a consultative process, is designed to support policymakers to identify relevant policies and practices. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the ALTAX CENTER. Data in this Report is subject to change without notice. The terms cover well-defined, geographically economic areas. When this Report for which the ALTAX CENTER is the source is distributed or reproduced, it must appear accurately and be attributed to the ALTAX. This source attribution requirement is attached to any use of data and comments, whether obtained directly from the ALTAX or from another user. Users who make the Report Tax burden in Albania, Kosovo and Western Balkans in 2020 available to other users through any type of distribution or download agree to make reasonable efforts to communicate and promote compliance by their end users with these terms. Users who intend to sell the Report - Tax burden in Albania, Kosovo and Western Balkans in 2020, as a standalone product, or in part must first obtain the permission from the ALTAX Center ([email protected]). The document is available on the website - www.altax.al


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Acknowledgements

(ENGLISH) ALTAX CENTER specially thanks the educational and legal staff for the work done in collecting data, processing them, as well as a dedicated thanks to the designer for the formatting of this publication. ALTAX is an Albanian think-tank initiative asisted by tax experts and fiscal policy analysts, aiming at a new approach to Albanian-European fiscal and economic policy. The primary goal is to promote education in taxation, help and assist the taxpayers and interested parties(students, field experts, civil servants) with the proper expertise. On the other side, the cooperation with the academics and fiscal experts helps to expand and create a comprehensive audience in help of increasing of fiscal capacities in Albania and Kosovo. One of our key goals is to achieve a more efficient and less complex tax system for all. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are an entirely apolitical organization. ALTAX represents the interest of taxpayer and is founded to help, increasing the knowledge and education about the implementation in the right way of fiscal policies and public finances management. We are organized and work based on the principle “Right from the start”.

WE HELP YOU TO PAY TAXES! WE HELP YOU NOT TO PAY BRIBE FOR TAXES! WE BELIEVE IN SINLESS ADVISE!

Konsiderata (ALBANIAN) Qendra ALTAX falënderon në mënyrë të veçantë stafin e edukimit dhe atë ligjor për punën e bërë në mbledhjen e të dhënave, përpunimin e tyre, si dhe një falënderim të dedikuar për dizajnerin për formatimin e bërë këtij publikimi. ALTAX është një nismë studiuesish dhe analistësh fiskalë shqiptarë me synimin e një qasje të re analize dhe diskutimi në ndihmë të politikës fiskale dhe ekonomike shqiptare me qasje drejt politikës fiskale evropiane. ALTAX është një qendër studimore fiskale dhe punon që të rritë mirëkuptimin e qeverisë dhe publikut për çështje të lidhura me ndershmërinë e sistemit ekonomik, fiskal ne shoqërinë civile ne Shqipëri, si dhe kryerjes së shërbimeve publike vendore dhe qendrore të duhura dhe të qëndrueshme. Një nga qëllimet tona kyçe është arritja e një sistemi tatimor më efikas dhe më pak kompleks për të gjithë. Komentet dhe rekomandimet tona për çështjet tatimore bëhen vetëm për të arritur këtë qëllim. Ne jemi një organizatë tërësisht apolitike. ALTAX përfaqëson interesat e taksapaguesve, si një qendër kërkimore të pavarur fiskale, në rolin e një komentatori të financave publike, politikës fiskale, ligjit tatimor, edukimit fiskal, politikave sociale dhe pabarazive sociale në shpërndarjen e mirëqenies duke vlerësuar zhvillimin e politikave me qëllim promovimin e zhvillimit në Shqipëri të krahasuara me vendet në rajon dhe botë. NE JU NDIHMOJMË TË PAGUANI TAKSAT! NE JU NDIHMOJMË TË MOS PAGUANI BAKSHISH PËR TAKSAT! NE BESOJMË NË KËSHILLIMIN PA MËKATE!

If you want to send comments, or explanations, please contact us via email: [email protected]



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ABSTRACT

(ENGLISH) This Annual Report on Tax burden is the main output of the monitoring process of the ALTAX 2020 Albanian

Fiscal Studies Series. This report covers the period January 2019 to December 2019 and consists into 5 chapters. The thematic series of publications that are already a tradition about the debate of the tax burden in Albania and other countries of region as well, are presented by ALTAX Center again this year, with the lowest tax burden and highest tax burden indicators in 2019, for each region in Albania and Kosovo, which mean the classification for every of 12 albanian regions and the Saranda city in Albania, as well as 7 regions of Kosovo, which inlude 38 communes in total. The share of the tax burden is also presented in the comparison between the countries of the Western Balkans by making the classification for the highest burden and the lowest tax burden recorded in 2018 and compared with the previous year's rating. A special place of study also is the tax burden in Kosovo, which is published for the 8th time by ALTAX Center. Calculation of the share they have in relation to budget and domestic regional production is an indicator that aims to present disproportion between the regions in the two Albanian states, but also between the Balkan regions themselves, where a special part holds the seven Western Balkan countries. The Balkans are part of Europe, geographically surrounded by EU members. With the inclusion of the GINI index in the study is added a depth analysis abou the wealth being, including the interactive effect of fiscal burden, revenue distribution, and the use of taxes on spending from the budget. The purpose of presenting this study is to present important implications for the cities and countries involved in the study, since taxes, and fees are a key part of the tax burden and a source for enabling public services that impact on competitiveness and quality of life, economy and welfare of countries and cities. The data used for the calculations are obtained from official statistics sources, from finances, taxes and organizations that keep data and publish them, both domestically and externally. Part of the data was processed and used to compare and serve as the main reference for the presentation. The study aims to attract policymakers and scholars attention, fiscal media, fiscal policy analysts and tax administration authorities, as well as critics who can reserve comment reviews or have questions about the calculations and facts presented in the document.

PËRSHKRIM (ALBANIAN) Raporti i përvitshëm mbi barrën fiskale është studimi kryesor i procesit monitorues të serisë së Studimeve Fiskale shqiptare të ALTAX në 2020. Ky raport mbulon periudhën 2019 -2020 dhe është i përbërë në 5 kapituj. Në serinë e publikimeve, një traditë e krijuar për të tetin vit për analizën mbi barrën fiskale, QENDRA ALTAX

prezanton edhe këtë vit, barrën fiskale më të lartë dhe më të ulët, për secilin nga 12 qarqet dhe qytetin bregdetar të Sarandës në Shqipëri, si dhe për 7 rajonet që përfshijnë 38 komunat në Kosovë. Pesha e barrës fiskale paraqitet në studim edhe në krahasimin midis vendeve të Ballkanit Perëndimor duke bërë klasifikimin për barrën më të lehtë dhe barrën fiskale më të rëndë të regjistruar në vitin 2019 dhe të krahasuar me klasifikimin e një viti më përpara. Një vend të veçantë mban barra fiskale për Kosovën. Ajo trajtohet në nivel shteti, si dhe rajonesh. Qendra ALTAX e publikon për herë të tetë barrën fiskale, si dhe ditën e lirisë fiskale. Llogaritja e peshës që ato mbajnë në raport me buxhetin dhe prodhimin e brendshëm rajonal është një tregues që synon të prezantojë disproporcionet midis rajoneve në dy shtetet shqiptare të Ballkanit, por edhe midis vetë vendeve të Ballkanit, ku një pjesë të veçantë mbajnë 6 vendet e Ballkanit Perëndimor. Ballkani është pjesë e Evropës, gjeografikisht i rrethuar nga anëtarë të BE-së. Me përfshirjen e indeksit GINI në studim rritet analiza për mirëqenien ku përfshihet efekti bashkëveprues i barrës fiskale, shpërndarjes së të ardhurave dhe përdorimit të taksave për shpenzime nga buxheti. Qëllimi i prezantimit të këtij studimi është prezantimi i implikimeve të rëndësishme për qytetet dhe shtetet e përfshira në objektin e studimit, sepse tatimet, taksat dhe tarifat janë një pjesë kyçe e barrës së taksave dhe si një burim për mundësimin e shërbimeve publike, që ndikojnë në konkurrencën dhe në cilësinë e jetës, ekonomisë dhe mirëqenies së vendeve dhe qyteteve. Të dhënat e përdorura për llogaritjet janë marrë nga burime statistikore zyrtare, nga financat, tatimet dhe organizata që mbajnë të dhëna dhe publikojnë, si brenda dhe jashtë Shqipërisë. Një pjesë e të dhënave janë përpunuar dhe përdorur për të krahasuar dhe shërbyer si referencë kryesore për prezantimin. Me anë të studimit tentohet të tërhiqet vëmendja e politikës dhe studiuesve, medias fiskale, politikes fiskale dhe administrimit, si dhe kritikëve që mund të rezervojnë komente për vlerësimin apo kanë pyetje në lidhje me llogaritjet dhe faktet e prezantuara në dokument.


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Terms and definitions

ASK Agency of Statistics of Kosovo

BoA Bank of Albania

CE Council of Europe

EU European Union

Foreign Direct Investments (FDI)

Foreign Direct Investments are net inflows of investments to receive a profit in an enterprise operating in a different economy than that of an investor.

GDP Gross Domestic Product

GNP Gross National Product

IMF International Monetary Fund

IAS International Accounting Standards

IFRS International Financial Reporting Standards

Labour Taxes

This tax group includes taxes directly related to income generated from work. Such income is the income tax on employment and the contribution of social and health insurance.

NAS National Accounting Standards

SAA Stabilization Asociation Agreement

Taxes on income

Direct income tax. Although the term generally applies to a tax on individuals (where it can be defined as a personal income tax or personal income tax), it is also used in some countries for a tax on legal entities, such as societies.

Tax is generally applied annually, ie. on income earned on or related to a particular fiscal year.

Two main income tax systems can be distinguished: a global tax system and a tax table on income tax. However, even in global tax systems, in view of the theoretical different definitions of income, most countries specify the posts that constitute income for tax purposes. Income tax rates can be applied on a progressive scale where the tax rate increases with income growth or fixed rate. An overpayment can also be set.

Most countries place income tax on the total income of residents worldwide and on domestic sources of income in the case of non-residents. Some countries, however, limit income tax on domestic income for both residents and non-residents according to the principle of territory.

Tax on capital gain

The term is used for statistical purposes by the United Nations to refer to "capital liabilities (ie those taxes set at irregular intervals and very low on asset values or net assets owned by institutional units) and transfer taxes of capital (ie taxes on assets values transferred between institutional units as a result of inheritance, inter vivos (ie when the donor is alive) or other transfers ".

Tax Burden (TB) (Fiscal)

The total amount of taxes and taxes paid, as well as customs and social and health insurance, based on the relevant tax base (capital, labor and consumption taxes) by a certain group of taxpayers, industries, the region, state etc., comparable to what the groups, industries, regions, states etc. pay for.

VAT Value Added Tax

WB6 Western Balkans composed by Albania, Bosnia-Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia

WB World Bank


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CONTENTS Introduction Page 8

Data source Page 9

1 Western Balkans - Economy, Governance and Market Development, 2019 Page 10

1.1 Western Balkans and Macroeconomic Overview in 2019 Page 11

1.1.1. Macroeconomic and fiscal indicators of Albania Page 15

1.1.2. Macroeconomic and fiscal indicators of Bosnia and Herzegovina Page 16

1.1.3. Macroeconomic and fiscal indicators of Kosovo Page 17

1.1.4. Macroeconomic and fiscal indicators of Montenegro Page 18

1.1.5. Macroeconomic and fiscal indicators of North Macedonia Page 19

1.1.6. Macroeconomic and fiscal indicators of Serbia Page 19

1.2 Budgetary and tax revenues in the Western Balkans, 2018-2019 Page 20

1.3 Fiscal burden, its structuring and tax rates in the Western Balkans in 2018 - 2019 Page 21

1.4 Fiscal burden in countries with progressive taxation and those with flat taxation Page 27

1.5 Fiscal burden and budget revenue distribution Page 28

1.6 Foreign Direct Investment and innovation related to the fiscal burden Page 30

1.7 The impact of increased investment on competitiveness and not just taxes Page 34

1.8 Double taxation agreements in the Western Balkans and the effect on the fiscal burden Page 36

1.9 The need for effective fiscal reform in Western Balkans Page 38

1.10 The measurement of the informal economy and digitalization serve the fight against evasion

Page 40

2 Fiscal Burden in Western Balkans in 2019 Page 42

2.1 Fiscal burden according to taxes Page 42

2.2 Distribution of fiscal burden in Western Balkans by destination Page 43

2.3 The well-being of individuals and distribution in the Western Balkans in 2014-2019 Page 47

3 Fiscal Burden in Albania in 2019 Page 52

3.1 Budget and fiscal burden performance Page 52

3.2 Shpërndarja e barrës fiskale sipas destinacionit të buxhetit Page 56

3.3 Fiscal burden of DTM and Tirana in the years 2012 - 2019 Page 60

3.4 Local per capita tax by municipalities in Albania in 2019 Page 62

3.5 Fiscal burden on regional GDP in Albania Page 66

4 Fiscal Burden in Kosovo in 2019 Page 69

4.1 Kosovo budget performance Page 69

4.2 Distribution of fiscal burden according to the budget destination 1

4.3 Local Taxes per capita by municipalities in Kosovo Page 73

4.4 Regions with the highest and lowest fiscal burden in Kosovo Page 75

4.5 Fiscal burden on the regions of Albania and the regions of Kosovo Page 76

5 Tax Freedom Day 2020 Page 77

Tax Freedom Index and Methodology Page 77

5.1 Tax Freedom Day 2020 in the Western Balkans Page 78

5.2 Tax Freedom Day 2020 in Albania Page 79

5.3 Tax Freedom Day 2020 in Kosovo Page 81

Summary Page 83

ANNEX Fiscal Regimes - Legal Changes in 2019-2020 in the Western Balkans Page 86


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Introduction

The development of fiscal policies in function of economic and social models depends on the correctness of the policy, as a reflection of the economic and social environment. In the Western Balkan region, as in the rest of the world, government budgets need to be supported by tax systems that promote the increase of incomes per capita by stimulating economic competition. The growth rate of the economy in 2019 depended mainly on the slow pace of addressing and removing barriers that have dragged for decades development with full potential of the private sector. Meanwhile, the institutions that are engaged in enabling the preservation of a business-friendly environment have reached a level of minimal regulation, which, if follows, increases the pace of implementation of comprehensive structural, economic and social reforms. An important goal to be implemented is related to the future improvement of the economic and social climate for better conditions adapted to EU standards. The measurement and presentation of the tax burden as well as the presentation of the Tax Freedom Day Index are in the eighth edition of their publication on the Albanian economic and political environment and beyond. The fiscal and economic study presented on the results of the methodology used by the experts and partners of the ALTAX Center for the calculation of Tax Freedom Day, 2020 has become a reference for researchers, journalists and students and aims to create a model in the Albanian economic and political environment. The publication of the fiscal burden shows the effect, in what how a good / bad tax policy fulfills one of the primary goals, increasing revenue while maintaining the equality of taxpayers for the burden they should bear. On the other hand, the policy should aim at the effect that equality falls on the distribution of the burden that taxpayers should bear according to their ability to pay. Through the measurement of the fiscal burden we aim to analyze the effects of the taxation system on the distribution of economic well-being in Albania, Kosovo and the Western Balkans. The study is conducted to show the level of fiscal burden for Albanian regions, commenting on the opportunities that fiscal policies should be analyzed and administration in increasing revenues by comparing with similar regions. Its presentation is seen in terms of financing local and central investment spending and increasing the well-being of citizens, not forgetting that fiscal policy through the burden decides on the redistribution of income.

On the other hand, given the fact that every citizen is a contributor to the state budget by paying a tax in a direct or indirect form, then it is interesting for everyone to know how much fiscal burden they bear in relation to citizens in other regions of Albania, Kosovo as well as in other Balkan countries. The ranking of regions within Albania and Kosovo, as well as in countries within the Western Balkans region, according to the fiscal burden gives the business the opportunity to examine the effectiveness of government policies and initiatives for economic development, and may affect the moment of analysis for the allocation of public spending in the context of transparency of public finances. This analysis, according to the administrative areas, serves to see which group or geographical area is the most charged, and on the other hand a more detailed analysis orients the policy to see which industry or area should have a different burden from what results from the research. The object of data comparison is the income taxes paid on behalf of the state budget by residents and non-residents. Taxes and customs duties included in this analysis are taxes administered by the central tax administration (including social security contributions), taxes and fees administered by local tax administrations, and customs duties, all them calculated according to the region where they are collected.


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The results of this study are based on the income generated by residents by residence where they are, without excluding tax revenues from large taxpayers of the country and the capital (included according to the address of residence), which meet close to 3 / 4 of the total total tax revenue for both levels of tax administration. Statistical data for regions are the subject of analysis, according to the comparison of budget program data, level of implementation and various sources. The structure of this document consists of five parts. The first part is a presentation of statistical and macroeconomic data for the Western Balkans, as well as analysis of tax rates and their role, the effect of the burden on foreign investment, and the role of Double Taxation Agreements. The second part is the fiscal burden in the Western Balkans and the distribution of the burden according to the destination of spending in all 6 countries. In the third part is an analysis and commentary of the fiscal burden in Albania in 2019 and the ranking of regions and municipalities, according respectively to the level of fiscal burden and local tax burden per capita. The fourth part is an analysis of the fiscal burden in Kosovo in 2019 and the ranking of regions and municipalities, according respectively to the level of fiscal burden and local tax burden per capita. The fifth part, respectively explains the methodology of calculating the Tax Freedom Index and presents the Calendar of the Day of Tax Freedom of the Western Balkans, and specifically of Albania and Kosovo together with the comments of regions according to the ranking.

Data source The data used belong to the realization of the preliminary budget indicators of 2018 and 2019 and in certain analyzes also data of the previous years. They are taken from reports published by the Monetary Fund, the World Bank, the think tank Institutes and the statistical and study center of the European Union member states, as well as from official financial publications of the Balkan countries.

A special place in the data and information administered and processed by analysis team are the public reports approved by the Councils of the Municipalities of Albania, as well as the reports of the Communes of the Republic of Kosovo in the last two years. The presentation of data on domestic production, payment of taxes and fees are based on the cross-referencing of information, which is published in the reports of the International Monetary Fund (Country Reports), World Bank, Regional Cooperation Council, Eurostat etc., which contains tables, comments and projections for macro data for recent years including the most recent year 2019. Data on regional domestic production were obtained from the Ministry of Finance in thremester public debt publications, as well as from the publication of the Statistics Agencies. While macro data on taxes and fees paid are derived from the processing of statistics and bulletins of the Central Bank and the Ministry of Finance, as well as from media, and public revenue agencies for all states.


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1. Western Balkans - Economy, Governance

and Market Development in 2019 All Balkan countries share similar histories of their economies, both in terms of approximation of structure, but also in terms of influencing factors and culture and approach to market economy norms. On the other hand, the changes in the social structure between them, which in fact constitutes the main driving force for the reforms that have begun or are about to begin, still have a long way to go to bring their mentalities closer to the vision of markets and the economy of the EU. The rule of law, which is considered a key criterion in the EC Enlargement Policy in the 2018-2019 Progress Reports and before, is seen to be in a slow spread given the need to be functional, with independent and accountable institutions, as well as a fair judiciary body in law enforcement. During the second half of 2019, a concrete organization began to strengthen closer regional cooperation and similar to the relations that predetermined the creation of the EU more than 50 years ago. The EU accession process has contributed to increasing harmonization between WB61 economies, at least at the regulatory level, as all countries are in constant agreement of the local legal framework under the legislation and the institutional system in force in EU countries. Following the Berlin Process, each of the WB6 economies has launched a new series of reforms seeking to push further those that have been launched earlier. A good desire by actually governments and leadership in each country has sought to strengthen the ties of trade and free movement of people and goods and services, but Kosovo's opposition, as well as the neutral stances of Montenegro and Bosnia and Herzegovina, have influencing the retention of previous positions. The SEE 2020 initiative agreed earlier, as an opportunity for this purpose by defining common objectives for WB6 countries, where the highlighted objectives for eliminating tariffs and quotas for cross-border trade for industrial and agro-agricultural products have given a small impact to facilitate trade for some countries. But what needs to be pushed further to benefit the best of such organizations should include more advanced commitments and objectives related to (a) removing barriers to the free movement of employees, (b) promoting faster advancement of related projects with Connectivity Agenda2 (which is the core part of economies, like transporation and energy) (c) progress towards the legal framework and its market-oriented implementation, and (d) stimulation of business and relationships. between WB6 markets. The effectiveness of governance is the irreplaceable element of economic development and prosperity. The relationship between economic growth and the effectiveness of governance is a key issue to be considered by all other actors who contribute to the economy and society. WB6 countries went through a large number of economic and financial challenges, but also political stability challenges, which developed into a governance model with weak institutions and small markets and no identity put into question in every turmoil the dynamic developments required from the future, including the quality of economic governance. The liberalizing trade trends, mostly between border countries, as well as the increase in foreign investment in some countries that already exceed their higher levels than other WB6 countries, appear to be improving that part of the business climate. But if progress reforms are not strengthened by other substantive measures and are in line with EU standards, then it remains for the economy to work again

1 Albania, Serbia, Kosovo, Montenegro, North Macedonia, Bosnia - Herzegovina 2 Western Balkan Investment Framework


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under its own capacity in the WB6 countries, as well as lose the opportunity to compete in the European economy with the diversity of products and services generated by these countries. Although private investment has largely influenced economic growth, what is most important for these countries is speeding up reforms and their productivity beginning with close implementation, as WB6 taxpayers have shown signs of fatigue and eagerness to lack of visible results in their well-being, as well as in the environment in which they live and contribute. Reforms in tax systems and the growth of some sectors have created fiscal space for some of Western Balkan state budgets, which have rushed to use that for current spending and infrastructure investment.

1.1. Western Balkans and Macroeconomic Overview in 2019

Economies of WB6 maintain a similar economic structure in their contribution to GDP, and consequently face similar challenges in their efforts for sectoral economic developments.

The GDP of the Western Balkans in 2019 is estimated to have reached US. D 113.13 billion. If we analyze the structure of GDP, it is noticed that 45.5% of it consists of GDP of Serbia. Bosnia and Herzegovina come in second place with 17.8% of GDP. Albania ranks third with 13.2% of GDP. Northern Macedonia's GDP ranks fourth with 11.2%. Fifth place is Kosovo with 7.8% and the last place is held by Montenegro with 4.8% of GDP. GDP growth rate in 2018, according to estimates, reached 3.9%. In 2019, from the preliminary estimates it is declared to be at the level of 3.3%. The year-on-year growth rate is down 0.6 percentage points.

The highest level of economic growth in 2019 is expected to be reached in Kosovo at 4%. In second

place is Serbia with an estimated economic growth of 3.5%. Northern Macedonia is expected to achieve economic growth of 3%. Meanwhile, Bosnia and Herzegovina and Montenegro are experiencing economic growth at the same level in both countries with 3%. Albania seems to have the lowest level of economic growth at 2.9%. The decline in growth rates, or the slowdown in economic expansion, is an indicator to be held accountable in almost all WB6 countries, except Kosovo and Northern Macedonia. The slowdown in the economy in 2019 has come for specific factors of each country, but also for common factors, which are present in each of them.

Among the common factors are (a) public confidence in governance and transparency, (b) corporate governance and ethics of doing business, (c) infrastructure quality, (d) truncated ownership and property rights, (e) barriers for trade, (f) low productivity of the economy, (g) informality and high evasion. Specific factors for each country, although they may seem common, are estimated to be (a) organized crime, which is more active in Northern Macedonia and Albania, (b) the polarization of political wings

Tab. 1 GROWTH OF GDP IN WB6 IN 2018 -2019 in %

COUNTRIES 2018 2019*

ALBANIA 4.1 2.9

BOSNIA-HERZEGOVINA 3.6 3.0

NORTH MACEDONIA 2.7 3.2

KOSOVO 3.8 4.0

MONTENEGRO 4.9 3.0

SERBIA 4.2 3.5

WESTERN BALKANS 3.9 3.3

Source: IMF, WB, Stats

* estimation


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and the lack of economic stability, mainly in Albania, Kosovo, North Macedonia, (c) lack of rule of law, where specifically Albania and Bosnia and Herzegovina are more problematic in this regard. Meanwhile, other factors may also have an impact on the development of the economy, such as market dimensions, competitiveness of the economy, diversification of public spending portfolios, and other challenges that are mentioned in many studies and reports for each country. According to the OECD 3 , the economies of WB6 have above the world average the Economic Complexity Index (ECI) and opportunity values (OV). This fact means that while ECI shows the status of WB6 economies at the level of medium-sized developing economies, their capacities are different. In this context, these economies can expand towards more complex products, which means similarities of the economy with more developed countries. Growth tendency of economies of WB6 in 2019 showed GDP growth at a slow pace that has not exceeded the 4% level limit. But the tendency to use the economy's capacities and accelerate the pace of growth is projected to occur during the second half of 2020 for countries that have performed lower than projected for 2019, because of external and internal risks. These risks are tripled by the effects of natural disasters and pandemic by Covid-19, which are expected to affect a more resilient structure, which will be oriented by the external demand for products and services. In several countries of WB6 it affected a moderate increase in their economies, which are connected directly or not with each-other. In this economic environment, we see the data about the slowdown in public investment in Kosovo, but also the slow level of export growth in Albania and Serbia, which together contribute to an increase of no more than 3.2%. If we compare the pace of economic growth of the WB6 with the economic growth of the EU, it seems that the trend of economic growth in these countries is higher than the economic growth of EU countries. However, noting the productive and developmental capacities of the economy and the labor force of each WB6 country, it can be said that all of them operate under real opportunities for the use of resources and capacities. Sustainable growth, which is a common approach for WB6 economies, aims to improve the structured modeling of the economy through the development of 4 vital sectors in order to strengthen and streamline capacity, but also to ensure a strong guarantee for the sustainability of economies by improving the well-being of their citizens. The energy, transport, tourism and environment sectors will be committed to increasing the competitiveness of the economy to enable the extension of products and services beyond the physical borders of the WB to EU countries and beyond. The combined approach is aimed at achieving the objectives that each WB6 country must meet, taking into account that the continued growth and development of the economy through natural resources as to this day will be limited, as long as these resources have their limits, both physically and economically to reduce costs and increase benefits by reducing the impact on the environment. The main exports of WB6 are electricity, also materials and electrical equipment, as well as machinery and transport equipment, not forgetting the part of computer services, which is growing in recent years. In years, if one looks at the export statistics of the last 10 years there is a qualitative increase indicating the inclusion of technology in generating value added of economy in the external market. From WB6 economy statistics, studies and analyzes, it can be seen that the share of cross-border trade in relation to GDP, which performs each country in the regional market, has changed slightly in relation to the traditional partners that each country has had. In the structural plan of export destinations, WB6 economies are partners and members of agreements with the same EU countries. While the trade in goods has increased among WB6 countries, it is a different situation and with little advancement in the trade in services. This fact shows that although free trade commitments, barriers removal engagements, and competitiveness through increased productivity and quality of services and goods have enabled the strengthening of economic cooperation, still WB6 economic operators feel ineffective to succeed beyond borders of local markets.

3 OECD, Global South east Europe, Unleashing the Transformation Potential for Growth in the Western Balkans, 2019


13

Competitiveness is not the forerunner of economic development policies, although for this purpose have been engaged by governments increasing resources and capacities. Inter-regional trade is still an important component of exports to WB6, although it is not the most essential part of exports, with the exception of Kosovo and Montenegro, which have major exports to EU countries, as well as Albania and Serbia, which are more market-oriented in EU countries. Meanwhile, North Macedonia and Bosnia-Herzegovina have a balanced share between exports within the region and exports outside the region. Cross-regional trade is mainly focused on semi-finished and agricultural products. Given this fact, inter-regional trade has not had an impact on changing the structure of exports and in the future may play a small declining role in relation to the total volume of exports. However, rising consumer demand and increased access to credit, influenced by the still apparent competitiveness constraints by WB6 companies, continue to maintain a high trade deficit. Despite the positive developments in employment growth in the labor market, it is found that close to half of the labor force is able to have a job. Below this average is Bosnia and Herzegovina with an employment level indicator of 42.1% of the able-bodied workforce and Kosovo with an employment rate of 40.9% 4. The share of labor forces in GDP in 2019 is at the level of 51.6%. The highest level of participation in work is in Albania with 59.6%, and followed by North Macedonia with 56.9% and continue Montenegro with level of 56%. Serbia has a 54.5% share of the workforce.

Looking at the bottom part of the graph above is the quantitative labor market structure, given the busy population with at least a job in each of the countries. Serbia accounts for 41.1% of the labor market structure in the WB6 region. Albania is the second largest labor market in the WB6 with only 18.6% of this market and less than half of the labor market occupied by Serbia. Bosnia and Herzegovina hold the third place with 15.9% and North Macedonia is fourth with 12.9% of the WB6 market. Kosovo is in fifth place with a market share of WB6 labor market of 7.9%. The last place is held by Montenegro with 3.6% of the labor market in WB6. The level of inflation during 2019 in WB6 has an average annual level of 1.6%, where Bosnia-Herzegovina, North Macedonia, Montenegro have an inflation rate below the WB6 average (see Tab.2). 4 Rising Uncertainties, Western Balkan Economic Regular Report Nr.16, Fall 2019

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Participation rate of labour forces and structure of labour market, 2019

Structure of labour market Partecipation rate of labor forces


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The need to increase the level of technology of traditional and new products, as well as to improve macroeconomic indicators has forced WB6 governments in the last 10 years to adopt reforms in almost all major productive sectors of the economy. These reform initiatives have been the strongest incentive to focus on attracting FDI as well. Talking of indicators linking the development of foreign investment with the part of the integration of WB6 domestic economies with the EU, it is seen that the inflow of foreign investment in these countries has reached levels that exceed expectations, reaching the average level by the end of 2019 totaling 5.2% of regional GDP. The FDI level is 0.3 percentage points lower than in 2018. FDI inflows in 2018 and 2019 remain the highest in the last 5 years. According to the WB Autumn Report 20195, Montenegro and Albania hold the top positions with a net FDI inflow rate respectively of 8% and 7.8% of GDP. Serbia ranks third at the level to 6.2% of GDP. Meanwhile, Kosovo, North Macedonia and Bosnia and Herzegovina hold the last places with investment levels in a downward order below the regional average, where Bosnia and Herzegovina maintain the lowest level with 2.3% of GDP. The composition of FDI for this period consists of the automotive industry and car parts, renewable energy and tourism and technology services. FDI in WB6, however, is considered limited if compared to the FDI per capita in EU countries, as well as the potential for attracting investment from these countries, or even from other fast-growing countries. GDP per capita in WB6 is as much as half of GDP per capita in EU countries. Investments in research and development (R&D) continue to be at low levels, reaching up to 1% of the total budget expenditures planned and realized in the WB6, with the exception of Montenegro, which has increased expenditures for 2019, by changing the approach as early as 2018. This approach, if not changed in practice will cause shortages in the product of scientific research, but also in goods and services generated by advanced technology. Lack of attention needed to change both the capacities needed, but also the resources to enable change will produce negative effects that time will not be able to heal or systematize, as the development of this sector requires time to be effective in economy and social life. It is appropriate that development strategies should consider a balance between long-term productivity and those that can be considered future products, which are considered valuable capital reserves to reshape the economy in difficult times, as well as to serve growth. qualitative economics towards more complex products. However, WB6 countries have stepped up efforts to improve the research and innovation sector by adapting policies, as well as regulatory frameworks and action plans to change current performance and increase the impact of innovation on education and the economy. To this end, this approach, which is expected to advance further in 2020, is seen in certain cooperation at the regional level, with the EU framework in mind, as well as some objectives set with the launch of the Berlin Process.

5 Rising Uncertainties, Western Balkan Economic Regular Report Nr.16, Fall 2019

Tab. 2 Macroeconomic indicators in WB6 in 2019 % of GDP

COUNTRIESGDP

GROWTH

BUDGET

DEFICIT

PUBLIC

DEBT

UNEMPLOY

MENT

TRADE

BALANCEINFLATION NET FDI

ALBANIA 2.9 -1.9 63.7 11.4 -15.2 1.8 7.8

BOSNIA - HERZEGOVINA 3.0 -1.2 33.3 21.2 -23 1.1 2.3

NORTH MACEDONIA 3.2 2.3 40.7 17.9 -16.5 0.9 3.2

KOSOVO 4 -2.8 17.1 24.5 -29.2 2.8 3.8

MONTENEGRO 3 -3.6 81.1 15.7 -24.8 1.1 8

SERBIA 3.5 -0.2 52.7 13.5 -12 1.9 6.2

WESTERN BALKANS 3.3 -1.2 48.1 17.4 -20.1 1.6 5.2

Source: IMF, WB, MoF, CB, Eurostat, Of f icial Statistics


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Although fiscal consolidation, for each WB6 country, remain the key word in public finances, it is a fact that the high level of public debt remains unchanged, albeit with slight reductions. Even in those cases when there is a decrease in public debt, it is seen that governments control public spending, mainly capital, thus curbing the effect that this category of investment has on the economy, but justifying keeping the budget deficit under control. Meanwhile, the risks of maintaining and increasing social spending, local government, and keeping pace with reforms are associated with a risk that remains a threat to the long-term consolidation of public finances.

The banking sector has shown signs of recovery of bad debt recovery (non performin loans = NPL), affecting their good capitalization and increasing liquidity for lending to businesses and individuals. But a more efficient link between the banking sector and businesses is still a partially addressed problem, but it also affects the financial market of WB6 countries, as well as maintaining still low levels of innovation and its greater reach in the economic environment.

1.1.1. Albania's macroeconomic and fiscal indicators

According to forecasts announced by MeFE, BoA, IMF and WB, Albania's economic growth for 2019 is estimated to have reached 2.9%, down by 1.2 percentage point from 2018, when economic growth reached 4.1%. Economic growth during 2019 was also affected by the effects of the earthquake that hit Albania in November 2019. Economic growth was achieved mainly by domestic consumption as well as domestic demand on the one hand, but also by the investment of TAP project and private investments in renewable energy that are nearing completion, as well as a slight increase in exports of mineral products and tourism. The positive contribution of exports of goods and services was offset by the negative effect of imports, due to their specific growth and high share, making net foreign demand in aggregate only a slightly positive effect on real economic growth. The sectors that made a contribution to economic growth were: (i) Financial and insurance activities with a real annual growth of about 11.6% and a contribution of 0.34 percentage points; (ii) Immovable property activities with an annual growth of about 7.61% and a contribution of 0.45 percentage points; (iii) information and communication with an annual growth of about 6.38% and a contribution of 0.18 percentage points; (iv) Scientific, professional and technical activities with a real annual growth of about 6.31% and a contribution of 0.37 percentage points; (v) Wholesale and retail trade etc. with an annual increase of about 5.77% and a contribution of 0.9 percentage points6. However, the slowdown in growth rates from the fourth quarter of 2018 was a forecasting signal for the continuation of the economy with an upward trend according to the optimistic forecasts that stated that they would exceed the level of 4% economic growth. Political developments, which marked the prolonged period of political crisis that began in February 2019 and lasted almost all year, failed to materialize the full potential for economic development, but also the implementation of more appropriate fiscal initiatives to change the climate. of doing business. The impact of the political crisis was multifaceted, where on the one hand it did not mark the expected economic growth declared in the forecasts for 2019, and on the other hand it increased the costs of doing business by exposing the defects of government capacity in the implementation of reforms at the projected pace. Foreign direct investment recorded a level of 7.8% of GDP in 2019, down 0.2 percentage points compared to 2018. Total investments decreased by about 0.37% in real annual terms during 2019.

6 Kuadri makroekonomik dhe fiskal 2021-2023, VKM 53, datë 29.01.2020


16

The labor market dynamics has continued to perform positively. Referring to the quarterly survey of the labor force by INSTAT, employment until the third quarter of 2019 increased by 2.6% compared to the same quarter of the previous year, or about 31 thousand employees. The unemployment rate (for the age group 15-64) has continued its downward trend since T1-2014 where it recorded its highest value of 18%, already decreasing to 11.8% at T3-2019, with a reduction of 0.8 percentage points compared to a year ago (T3-2018), or with a reduction in the number of unemployed persons of about 8.2 thousand in the time frame of one year. Meanwhile, for the age group of 15 years and over, the unemployment rate during the third quarter of 2019 recorded 11.4%. The trade deficit deepened slightly during the first nine months of 2019 by about 12%, as a result of a contraction in exports, where the dynamics of electricity compared to the previous year was a dominant factor, and on the other hand, there was an increase in exports. import volume. The deepening of the trade deficit during the first half of the year has been offset to a considerable extent by the surplus of the balance of services, which mainly reflects the good performance of tourism services during this year as well. Also, the current account deficit deteriorated by about 40% over the 9-month period. The deepening current deficit has been largely dictated by the widening trade deficit in imports, reflecting rising spending on imports and declining export earnings. At the same time, the expansion of the negative (primary) income balance from investments has been an additional factor in deepening the current deficit. The general balance of payments and the external position of the economy remain quite stable, where the accumulated stock of foreign exchange reserves remains at a sufficiently high level, equivalent to over 6 months of import of goods and services. The private sector lending to the economy is expanding in 2019, recording an increase of over 7% compared to a year ago. This lending is extended to businesses as well as to consumers. Non-performing loans (NPLs) have continued to decline, already at around 11%. Inflation over 2019 has recorded lower rates compared to a year ago. According to the latest data from Instat, the average inflation for 2019 is at the level of 1.7%. Albanian specifics: Justice reform and the impact on the macroeconomic environment

The justice system in Albania is undergoing a series of profound reforms in order to meet them European standards in this system. Through the adoption of Law no. 76/2016 "On some additions and amendments to the law no. 8417/1998" Constitution of the Republic of Albania ", as amended, Albania began to implement justice reform. Justice reform is expected (a) to fight corruption within the justice system, (b) to punish organized crime at all levels in the fight against corruption. A package of laws has been passed, covering all aspects of judicial reform, where the

Assembly has passed 22 laws, as well as a decision, thus concluding the package of reform laws in the justice system. Similarly, from last year, Albania had a new development in the implementation of fiscal policies related to the tax burden, emphasizing the fight against informality. The context in which policymakers reacted nevertheless changed significantly in relation to the unproductive year, both in terms of political stability, but also in terms of economic aspects and economic orientation.

1.1.2. Macroeconomic and fiscal indicators of Bosnia and Herzegovina Bosnia and Herzegovina reached a GDP level of 16.7 billion euros, according to WB data and projections from Trading Economics. Economic growth for 2019, according to the IMF estimate is not expected to be further than 3.1%, while in 2018 growth was at the level of 3.6%. The economy had a lower demand in 2019 than the EU market. While industrial production fell sharply, due to the supply of energy, tourism grew significantly from neighboring Bosnia and Herzegovina. Another pace for the economy is expected to come from investment in infrastructure, as well as increased consumer demand and public spending.


17

Bosnia and Herzegovina's economy is dominated mainly by services at 55.8% of GDP, as well as by the manufacturing industry at 24.5% of GDP, and agribusiness at only 5.9% of GDP. In 2019, it is estimated that the budget deficit is 1.2% of GDP. Meanwhile, public debt is estimated to have reached 33.3% of GDP. Compared to 2018, the level of public debt has decreased by 0.9 percentage points. Public finance management needs to adapt to international standards in terms of its budgeting and monitoring process, transparency and forecasting methods. The contribution of investments is at unchanged levels from a year ago despite a slight increase in private business lending. One of the main reasons for this situation in carrying out capital expenditures with public funds is the lack of formation of the federal government. Foreign direct investment recorded a level of 2.3% of GDP in 2019, with a slight increase of 0.1 percentage points compared to 2018. The average inflation rate for 2019 was 1.1%, while in 2018 it was 1.4%. The lack of a common economic space, due to ethnic segregation, is a serious obstacle to private sector development and foreign investment. The environment for doing business is considered difficult, due to the existence of market fragmentation and a high level of informal economy. According to official statistical data, the unemployment rate in 2019 was as high as 18% of the workforce. In the agro-agricultural sector is employed 16.4% of the workforce, in industry are employed 29.7% and 53.9% of the workforce is employed in services and commerce.

1.1.3. Kosovo's macroeconomic and fiscal indicators

Kosovo's economy has shown progress in its transition to an open and competitive market economy while maintaining macroeconomic stability. According to MeFT, for the first three quarters of 2019, preliminary data from KAS shows that the GDP growth rate was on average 4.25%, driven mainly by total investment and consumption (especially private), with a contribution to GDP, respectively, of 1.8 percentage point, respectively. Another positive contribution to growth came from net exports, with about 0.62 percentage point. In the absence of official data on national accounts, indirect indicators available for economic activity in the fourth quarter of 2019, suggest a similar trend of GDP growth. Domestic demand is expected to be the main driver of economic growth in the fourth quarter of 2019. However, its economy is still dependent on international community assistance and remittances in terms of financial and technical support.

Remittances are estimated to make up about 17% of GDP in 2019. While, assistance from the international community amounts to 10% of GDP in 2019. This aid has served in particular for the privatization of state-owned enterprises. According to the latest estimates of the European Bank for Reconstruction and Development, Kosovo is expected to have achieved economic growth of 4%7, which may continue in 2020. Meanwhile in 2018, economic growth was 3.8%. The main contributor is the demand of domestic consumers. Meanwhile, public spending, remittances and domestic consumption are among the other important contributors to GDP growth. At the end of 2018, Kosovo applied an import tariff at 100% on the value of products imported from Bosnia and Herzegovina and Serbia. With its introduction, the structure of imports has changed. While this fee is expected to be removed in the first quarter of 2020, the market is currently filled with products mainly from Northern Macedonia, Albania and Turkey.

7 IMF forecast and estimates an economic growth up to 4.2%


18

Kosovo has a decrease in 2019 of the contribution of investments in GDP at the level of 1.1% compared to the forecast which was 1 percentage point higher. Meanwhile, Foreign Direct Investment accounted for 3.8% of GDP in 2019, up to 1 percentage point from 2018. However, careful financial, public, and budget management investments are helping the country secure minimizing investment-related fiscal risks, which should ease the pressures on medium-term debt sustainability. Kosovo for the first 9 months of 2019 resulted in a surplus of 14 million Euros, unlike the previous year which resulted in a deficit of 21.6 million Euros. Anyhow, the budget deficit for 2019 was 2.8%, while the fiscal burden resulted at 27.2% of GDP. Kosovo's public debt for 2018 was 17.1% of GDP and according to estimates for 2019 it can reach the level of 20% of GDP. External debt was 9.3% of GDP with an increase of at least 3 percentage points compared to 2018. The bad debts of commercial banks were at the level of 2.5% in relation to total loans. Inflation rate, measured by the annual changes in the consumer price index (CPI), recorded an average annual growth of 2.8% during 2019. Job participation rate at the end of 9-month 2019 was 41.9%. The unemployment rate still remains the highest in WB6 with a situation of 24.5% unemployment at the end of the 9-month period 2019, the most prominent of which is the level of unemployment for the young age of the workforce. The main sectors that bear the employment burden are agribusiness with a level of 7.4% of the total labor force, industry with 18.1% and services with 74.1%.

1.1.4. Montenegro's macroeconomic and fiscal indicators

Montenegro’s economy went through its growth in all four quarters of 2019, with industry making the

biggest impact in late 2019 and tourism during the second and third quarters. While Moody’s reaffirmed

the level of lending to the economy at B1 level did not give a positive assessment regarding the expected

fiscal risks associated mainly with financing the infrastructure project8.

Despite the development at good levels of the economy, it remains fragile depending on the change of internal and external factors. Economic growth for 2019 is estimated to have reached 3%. The composition of GDP is from agribusiness with 6.7%9, from industry 15.9%, from production 4%, from services 54.5%10 and the rest from other activities. Private consumption is one of the main factors influencing economic growth and is expected to continue to be so in 2020.

Despite the government's control over the budget deficit in 2019, with a positive primary balance of 1.5%, public debt has increased by 8.5 percentage points, reaching the level of 81.1% of GDP11. This increase at this level is as a result of the loan taken by the Montenegrin government from China Eximbank for financing the infrastructure project. The country's trade deficit (export-import) is as much as ¼ of GDP. Foreign direct investment recorded a level of 8% of GDP in 2019, an increase of 1 percentage point compared to 2018. The average annual inflation in 2019 is at the level of 1.1%, below the target of the Central Bank.

8 The first phase of the highway investment between the port in Bar and Boljare, recording 6% of GDP 9 Agriculture is composed by 60% livestock and 40% cultivations 10 Tourism is about of ¼ of GDP (around Euro 1 billion) and absorbs 34% of total of FDI 11 GDP is calculated to be in value of Euro 4.51 billion


19

The financial system is dominated by foreign capital banks and has a persistent history of deteriorating bad debts. The level of unemployment is decreasing, but still high, marking a level at the end of the 9-month period

of 2019, as much as 15.2% of the able-bodied workforce, being also hampered by the high level of

informality in the labor market.

1.1.5. The macroeconomic and fiscal indicators of North Macedonia The economy recorded a slight increase in exports. According to data from the World Bank and Trading Economics, GDP in 2019 is estimated at Euro 11 billion with an increase of 3.2%, while in 2018 the growth was 2.9%. However, private consumption was an influential factor and investments had a moderate growth, which has influenced the economic growth of 2019. In these investments, the most significant impact was held by them from the state budget, giving a positive and stimulating impact on the economy, which has had a slow pace of its performance throughout the start of 2019. However, the slow growth of the EU economy also affected the exports of North Macedonia. Meanwhile, parliamentary elections, as well as delays in opening EU accession talks, have had a minor impact in 2019. Industrial production increased by 8.8%, while exports increased by 16.8%. Bank bad debts account for only 5% of total loans granted, having a performance below the average level of WB6 bad debts. The budget deficit did not exceed 2.5% of GDP, and at best it was financed by domestic debt and foreign borrowing, maintaining a positive primary balance of the annual budget. Public debt is expected to grow to 43.1% of GDP in 2020, while not exceeding 40.2% by the end of 2019, while a year earlier its level was as high as 40.6% of GDP. Foreign direct investment recorded for 3.2% of GDP in 2019, with a significant decline of 2.6 percentage points compared to 2018, mainly due to the unstable political situation. Inflation in 2019 remained at the level of 0.9% being within the targets set by the Central Bank. The unemployment rate fell to 17.1% at the end of the 9-month period of 2019, while the workforce increased to 57.2%. Ongoing reforms addressing labor market weaknesses and strengthening institutions are the most effective drivers in helping to boost the economy in the medium term.

1.1.6. The macroeconomic and fiscal indicators of Serbia

Serbia has maintained an upward trend of the economy in 2019, which since 2018 turned out to be at the level of 4.2%. Economic growth for 2019 is estimated to have reached 3.3%, mainly due to the increased pace of investment. In 2019, a budget deficit of 0.2% of GDP was recorded, while in 2018 it resulted in a surplus. Public debt is at 52% of GDP. The deficit was the result of public investment, which increased by 33.6% in 2019 compared to a year ago, reaching 4.9% of GDP. The average inflation rate in 2019 reached 1.9%, within the Central Bank's forecasts. In 2019, the level of exports increased by 10.5% compared to a year ago. Exports were dominated by agri-food products, services and parts for the automotive industry. Serbia accounts for half of WB6's


20

exports and accounts for 44% of regional imports. Moderate demand from EU countries was offset by rising exports to other markets outside the EU, indicating growing production capacity. Imports of goods and services increased 10.7%. Based on a stabilized macroeconomic situation, as well as improving the environment to attract investors, there was an increase in foreign direct investment at the level of Euro7.3 billion, both for 2018 and 2019. The net FDI level was 6.7 billion Euros. However, foreign direct investment in 2019 recorded a level of 6.2% of GDP, down 1.2 percentage points from 2018. The lending expanded by 9.8%, being more favorable to businesses and in line with sustainable economic growth, due to increased investment lending by large businesses, as well as an increase in home loans for individuals. Unemployment at the end of the 9-month period of 2019 marks 9.5%, reaching a lower level of 1.8 percentage points than a year ago.

1.2. Budgetary and tax revenues in the Western Balkans, 2018-2019 Economic growth combined with fiscal discipline and good public debt management seems to have affected Serbia, Albania and Bosnia and Herzegovina. However, high levels of public debt remain a risk present in most countries in the region. A peculiarity for 2019 is the non-approval of the budget of Bosnia and Herzegovina, due to its blockade by the Serbian co-president, forcing the federal government to operate based on the terms of the 2018 budget.

Budget revenues in GDP in 2019 marked an increase of 0.3% of GDP compared to 2018. In 2018 budget revenues reached the level of 35.1% of GDP and in 2019 at a slightly higher level (35.4% of GDP). The highest increase of budget revenues is marked by North Macedonia with 1.6% of GDP and Kosovo with 1.2% of GDP. Their reductions for the comparative fiscal years 2018 -2019 present Bosnia and Herzegovina with a level of 1% less GDP, as well as Serbia and Albania with 0.3% less.

% of GDP

COUNTRIES 2018 2019 DIFFERENCE

MONTENEGRO MONTENEGRO 42.4 43.0 0.6

SERBIA SERBIA 41.1 40.8 -0.3

KOSOVO KOSOVO 26.1 27.3 1.2

BOSNIA-HERZEGOVINA BOSNIA-HERZEGOVINA42.8 41.8 -1.0

NORTH MACEDONIA NORTH MACEDONIA30.4 32.0 1.6

ALBANIA ALBANIA 27.6 27.3 -0.3

WESTERN BALKANS WESTERN BALKANS35.1 35.4 0.3

Source: WB, IMF, MoF

Tab. 3 BUDGET REVENUES IN WESTERN BALKANS IN 2018-2019

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

0.05.0

10.015.020.025.030.035.040.045.050.0

2018 2019 DIFFERENCE


21

In 2018, tax revenues account for 87% of total budget revenues. In 2019, tax revenues account for 86% of budget revenues, with a decrease in their share in contributing budget revenues by 1 percentage point. The budget revenue trend has not had the same trend as tax revenues. Thus, Montenegro and Northern Macedonia have declining tax revenues, but an increase in budget revenues. Whereas, the direction of budget revenues in terms of tax revenues for Kosovo (increasing) and for Albania (declining) are the same. Meanwhile, for Serbia there is the same situation and unified both for budget revenues, but also for tax revenues. For Bosnia and Herzegovina, the decline in budget revenues has apparently not been affected by tax revenues, which have increased.

1.3. Tax burden, its structuring and tax rates in the Western Balkans in 2018 - 2019

Budget revenues through the approval of the budget for the fiscal year contain within them the tax burden, which the government decides to be paid by taxpayers of their country for every year through the implementation of the tax system in the country. The Tax Burden (fiscal burden) includes direct taxes, in terms of individual and corporate income tax levels, and general taxes (including all forms of direct and indirect taxes at all levels of government), as a percentage of GDP.

Tax burden in WB6 countries is an indicator of tax liabilities that are poured into the budget by its citizens in respect of their return to public goods and services. In the last two years, 2018-2019 fiscal burden is respectively, at the levels of 30.4% and 30.3% of GDP in the Western Balkans. The average fiscal burden level is below the EU burden level by at least 10 percentage points. This fact points to a

% of GDP


MONTENEGRO MONTENEGRO 36.5 36.4 -0.1

SERBIA SERBIA 36.0 36.0 0


BOSNIA-HERZEGOVINA BOSNIA-HERZEGOVINA34.4 34.5 0.1

NORTH MACEDONIA NORTH MACEDONIA26.0 25.9 -0.1


WESTERN BALKANS WESTERN BALKANS30.4 30.3 -0.1


Tab.4 TAX REVENUES IN WESTERN BALKANS IN 2018-2019

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.00.1

0.2

0.0

5.0

10.0

15.0

20.0

25.0

30.035.0

40.0


Tab.5 TAX BURDEN IN WESTERN BALKANS IN 2018 - 2019 % of GDP

2018 2019

KOSOVO 24.0 24.1

ALBANIA 25.7 25.2

NORTH MACEDONIA 26.0 25.9

BOSNIA-HERCEGOVINA 34.4 34.5

SERBIA 36.0 36.0

MONTENEGRO 36.5 36.4

WESTERN BALKANS 30.4 30.3

Sourc e: IMF, MoF

TAX BURDENCOUNTRIES


22

reserve in fiscal revenue capacity, which should be used as an incentive instrument along with other reforms to promote investment and productivity. In 2019, Kosovo has the lowest fiscal burden in all Western Balkan countries. Serbia, Bosnia and Herzegovina, Montenegro have budgetary payments of 14.5% to 16.4% higher than the PB average. Comparing the fiscal burden in the Balkans in 2018-2019, it can be seen that countries with a burden below the WB6 average (North Macedonia, Albania, Kosovo) have fluctuated over the years, moving at a slow pace and with ups and downs over the years. The still low fiscal burden compared to the average of EU countries is mainly influenced by easing policies in fiscal legislation, which include tax rates with reductions to affect investment and ocasionally operations of fights against informality. In fact, poor administration capacity and level have a negative effect on maintaining a low level of burden. This factor creates a gap between the budget program to collect tax revenues and actual receipts from fiscal administrations.

The structure of fiscal burden in 2018 and 2019, as presented in Table 6 has changed only in direction of direct taxes. Fiscal burden consists mainly of indirect taxes and other taxes and social contributions (83%). Direct taxes, including capital tax and labor tax, account for 17%. Kosovo is more specific in its fiscal burden, as indirect taxes account for 83% of the total fiscal burden. This indicates an extreme dependence of tax revenues on consumption taxes. Montenegro also has an extreme dependence on consumption taxes and other local and national taxes as well as social contributions with a share of as much as 86% in budget revenues. With a better distribution of the fiscal burden structure in relation to other WB6 countries, Albania is presented, which has the highest percentage of direct taxes (7.2% of GDP), while the average direct taxes of WB6 are 5.2% of GDP. In 2019, the direct tax burden has increased in Serbia. Meanwhile, the countries above the WB6 average are Albania, Serbia and Montenegro. Albania with the lowest fiscal burden that these two countries present a reserve in the collection of consumption taxes, as well as other taxes.

Tab.6 Tax Burden - Direct, Indirect and other taxes and social contributions in WB6 in 2018 - 2019 % of GDP

Direct TaxesIndirect

Taxes

Other Taxes,

social

contributions

Direct TaxesIndirect

Taxes

Other

Taxes, social

contribution

KOSOVO 3.5 20 0.5 3.7 20 0.4

ALBANIA 7.2 11.3 7.2 7.1 11.0 7.1

NORTH MACEDONIA 5.2 12.2 8.6 4.8 12.2 8.9

BOSNIA-HERZEGOVINA 4.1 16.3 14.0 3.9 16.1 14.5

SERBIA 5.8 16.5 13.7 6.1 16.4 13.5

MONTENEGRO 5.5 18.6 12.4 5.2 19.1 12.1

WESTERN BALKANS 5.2 15.8 9.4 5.1 15.8 9.4

Sourc e: IMF, MoF

2019

COUNTRIES

2018


23

This specificity of the share of direct, indirect taxes and other taxes and social contributions, etc., if we look at it according to Table 7 in line with standard tax rates, it is noted that:

- in terms of direct taxes, countries such as Albania and Serbia that apply higher profit tax rates than others have a larger share of direct taxes on the fiscal burden in GDP.

- regarding the part that indirect taxes perform in the fiscal burden, when we look at it related to the standard VAT rate, there is another correlation, which does not correspond between them. Thus, Montenegro, which has the highest standard VAT rate (21%), actually has a high share of the fiscal burden, which is significantly higher than in other countries. But Albania and Serbia that implement the same standard VAT rate of 20% have differences in the respective parts that bear indirect taxes on the fiscal burden. This fact shows that the fiscal burden is closely related, in addition to the VAT rate, to the flow of goods and services, the extent of tax exemptions, as well as the level of informality and reserves in the administration of VAT and other taxes in general.

- if we look at the relationship between the fiscal burden of social contributions and other taxes on the rate of contribution, which is the main part of this group, it is observed that Serbia, Bosnia and Herzegovina and Montenegro, which implement higher contribution rates than others countries that have higher fiscal burdens. But even in this case, it is worth noting the fact that it is related to reserves in fiscal administration capacities and the fight against informality in the labor market in all WB6 countries.

The tax rates on capital, personal income and wages (Tab.11) for 2020 have not changed, except for Albania, which has reduced the dividend tax rate to 8% from 15% which was before 2019. Meanwhile, it has also changed the income limit from employment for the middle band that is taxed at 13% in accordance with the progressive wage tax scheme with three income bands. It is noted that WB6 countries have a significant level of compliance with the IMF mission recommendations, and all international monitoring institutions have presented a stability of tax rate policy. When analyzing these tax rates, as indicators of fiscal burden from the perspective of the fiscal revenue that has entered the budget of each WB6 country, it can be seen that the lower rates on direct taxes have not affected the reduction of the fiscal burden, but on the contrary the fiscal burden has increased. This shows that administration and the fight against informality make the difference and are dominant over fiscal policy.

Tab.7 Tax Burden - Direct, indirect and other taxes and social contributions - Tax Norms in WB6 in 2019 % of GDP

TAX BURDEN CIT RATES TAX BURDENSTANDARD

VAT RATESTAX BURDEN

SOCIAL

CONTRIBUTIONS

RATES

KOSOVO 3.7 10 20 18 0.4 10

ALBANIA 7.1 15 11 20 7.1 27.9

NORTH MACEDONIA 4.8 10 12.2 18 8.9 27

BOSNIA-HERZEGOVINA 3.9 10 16.1 17 14.5 41.5

SERBIA 6.1 15 16.4 20 13.5 37.05

MONTENEGRO 5.2 9 19.1 21 12.1 32.3

WESTERN BALKANS 5.1 15.8 9.4

Sourc e: IMF, MoF

COUNTRIES

DIRECT TAXES INDIRECTOTHER TAXES - SOCIAL

CONTRIBUTIONS

Tab.8 TAX RATES of Direct Taxes in WESTERN BALKANS in 2020 in %

TAX RATESNORTH

MACEDONIAKOSOVO MONTENEGRO

BOSNIA AND

HERZEGOVINASERBIA ALBANIA

PROFIT TAX 10 3; 9; 10 9 10 15 5; 15

PERSONAL INCOME TAX 10 10 9; 11; 15 10 10 - 25 0 - 13 - 23

WITHHOLDING TAX 10 0; 5; 10 9 5; 10 15; 20; 25 8; 15

Sourc e: Deloitte, MoF


24

On average, the fiscal burden in Europe is as much as 40.1% of GDP. Taxes on production and imports account for the bulk of tax revenues with a share of 13.6% of GDP, with VAT accounting for 7.1% of GDP. The fiscal burden from social contributions accounts for as much as 13.3% of GDP. Income and wealth taxes account for 13.2% of GDP, with household income tax accounting for 9.5% of GDP and personal income tax and profit tax as much as 2.7% of GDP. In EU countries, the fiscal burden is 41.5% of GDP. Fiscal burden from production and import taxes occupies 13.3% of GDP, with VAT accounting for 6.9%. Fiscal burden from social contributions accounts for 15.2% of GDP. Income and wage taxes account for as much as 13% of GDP, with household income tax accounting for 9.5% of GDP and personal income tax and profit tax accounts for 2.5% of GDP (see Table in Annex). The average standard VAT rate in 2019 for the WB6 is 17% in Bosnia and Herzegovina, 18% in Kosovo and North Macedonia, 20% in Serbia and Albania, 21% in Montenegro. Kosovo, North Macedonia and Bosnia and Herzegovina apply the standard VAT rate below the regional average (19.9%). All other Balkan countries, except Bosnia and Herzegovina, apply reduced VAT rates, mainly for basic consumption, health, energy supply, urban transport, as well as education, books, magazines and cultural and sports activities. Montenegro has started implementing the standard rate of 21% from 2018. Kosovo has started to implement a reduced VAT rate, at the end of 2015, and has increased the standard rate by 2%, in order to maintain fiscal stability. of the budget. Montenegro and Serbia adopted a reduced VAT rate in 2016, at 7% and 10%, respectively. Albania and Serbia apply a standard VAT rate of 20%.

VAT is the main tax in all WB6 countries, unlike EU countries, which have the main tax not VAT, but personal income tax and profit tax. The Value Added Tax (VAT) burden compared to its tax rates (excise tax taxes a specific category of goods), as in the case of profit tax and wage tax, highlights the problem with fiscal administration capacity. The VAT burden trend does not correspond to the VAT rate levels. In cases when the VAT rate is above 18% (Albania, Croatia, Montenegro and Serbia) the highest fiscal burden is not in Albania, but in Montenegro and Serbia. Although Albania implements a higher VAT rate than North Macedonia, it has a lower burden than that. Fiscal policy in this case seems to need to be approached more closely with taxation modeling, as its productivity in is lower than the neighboring countries.

-5

0

5

10

15

20

25

30

35

40

45

TOTAL VAT TOTAL ONHOUSEHOLDS

ON PERSONALAND

CORPORATE

TAX ON PRODUCTION ANDIMPORTS

TAX ON INCOMES AND WEALTH SOCIALCONTRIBUTIONS

TOTALI

TAX BURDEN in EUROPE and EU in 2018

EUROPE EU DIFFERENCE

Tab.9 VAT RATES in WESTERN BALKANS in 2020 in %

TAX RATESNORTH


BOSNIA AND

HERZEGOVINASERBIA ALBANIA

VAT (STANDARD) 18 18 21 20 20

VAT (REDUCED) 5 8 7 10 6

Sourc e: Deloitte, MoF

17


25

Social and health insurance rates have been stable, except for Montenegro since 2019 has reduced the employer's contribution to social security by 2%. Bosnia-Herzegovina (without Republika Srpska) and Serbia have the highest tax rates. Kosovo and North Macedonia have the lowest rates. However, Albania is only 0.9 percent higher than North Macedonia (Tab.10) and this fact is present with the low share in budget revenues. The social and health insurance burden is highest in Bosnia and Herzegovina, Serbia and Montenegro. Meanwhile, taxpayers in Kosovo, North Macedonia and Albania have a lower real burden, given the payments they made to the budget in 2019. When we compare the burden of labor taxes, which includes both taxation on wages and contributions, the increase in the burden of contributions varies at the level of 2 % -2.6 % for Albania, North Macedonia, Kosovo and Bosnia and Herzegovina. Meanwhile, in Serbia and Montenegro, a tax burden of 3.2 % to 4.3 % of GDP is added to the contribution burden. Given this joint calculation of the two levels of burden that constitute the burden of labor taxation, it appears that the fiscal burden on labor is between 4.5 percent (Kosovo) to 17.5 percent (Bosnia and Herzegovina). In EU countries, the labor tax burden is 44.5% in 2018. Although with a decrease, the fiscal burden on labor in EU countries is over twice as high as in Western Balkan countries. Comparing tax rates between WB6 countries applying a progressive tax rate (Montenegro, Kosovo, Albania, Serbia) with countries applying a flat tax rate (Northern Macedonia, Bosnia and Herzegovina) regarding with the burden being paid on the budget there is a noticeable gap between them. Given the effectiveness of the progressive tax burden, it can be seen that this model guarantees more revenue in the budget than the income guaranteed by the flat tax model. The average marginal tax rate in the Western Balkans for individual income tax / salary12 is 14.5%. - Albania (23%) and Serbia (25%) apply rates above this average; Kosovo (10%), Bosnia and Herzegovina (10%), Northern Macedonia (10%), Montenegro (9%) apply below-average rates. Meanwhile, for individual income, which is taxed at source, each state implements progressive policies scaled according to segments of personal income. Tax rates for withholding taxes are: - below the Balkan average are 4 countries; Montenegro (flat tax 9% withholding tax), Kosovo (flat tax 10%, with no dividend tax), North Macedonia (flat tax 10% on all personal income), Bosnia and Herzegovina (tax) flat 10%, where only the dividend is taxed at 5%); - above the average of the Balkans they hold 2 countries; Albania13 (flat tax 15% withholding tax, where dividend is taxed at 8% from 2019), Serbia (progressive tax 15% - 20% - 25% withholding tax).

12 including withholding taxes, like: tax on dividend, interests, capital gain etc. 13 The case of the tax rate for this group in Albania has an explanation, because the tax rate of 13% on personal income includes over 95% of their tax base

Tab.10 SOCIAL and HEALTH CONTRIBUTION RATES in WESTERN BALKANS in 2020 in %

SOCIAL and HEALTH

CONTRIBUTIONS RATES

NORTH


BOSNIA AND

HERZEGOVINA

REPUBLIKA

SRPSKASERBIA ALBANIA

EMPLOYER 27 5 10.3 10.5 0 17.15 16.7

EMPLOYEE 0 5 24 31 33 19.9 11.2

TOTAL 27 10 34.3 41.5 33 37.05 27.9

Burimi: Deloitte, MeF


26

The average total rate of social contributions14 in the Balkans is 29.8%. Below this average rate are listed 3 countries: - Kosovo (10%), Northern Macedonia (27%), Albania (27.9%); Above this average rate is listed 3 countries15: - Bosnia - Republika Srpska (33%), Montenegro (32.3%), Bosnia - Federation (41.5%), Serbia (37.05%). The countries of the group with the burden of high tax rates have a significant difference ranging from 7% to 14%. Meanwhile, starting from the policies for increasing pensions, for transfers to the needy, but also for vocational education and capacity building of employees, they are increasing as a need to face the increase of competitiveness of human capacities, but also the economy. The policy of burden of contributions needs to be revised to narrow this gap in Kosovo, North Macedonia and Albania. Low levels of contribution rates risk in the medium and long term also the implementation of current schemes based only on the fact of increasing age for the benefit of retirees.

The diagram below shows that even in 2019 the main share of the fiscal burden in the Western Balkans belong to consumption taxes and less burden is left on direct taxes. Meanwhile, the policy on social funds is seen as not aiming to be competitive while maintaining the same burden as the previous year.

In the context of the application of tax rates, if we analyze them in their entirety with the level of fiscal burden, it can be seen that the administration capacities for indirect taxes are below the level of tax burden in each WB6 country. But even for direct taxes, the management capacity still remains completely unrealized. This confrontation requires a review of the tax rate adjustment model with capacity building, adaptation to the economic and social environment of taxpayers. From a practical case-based perspective, there is no doubt that fiscal policy affects business economic choices. If tax rate reductions are not harmonized with one another considering the expansion of tax bases, then a budgetary situation is created that negatively impacts fiscal consolidation, as well as the strengthening of voluntarism in paying taxes and enhancing fiscal culture. From the horizontal comparison of the rate of social contributions in total there is a regional tendency to keep them at the same level as in 2018. The non-change of social contribution rates shows that politics is relaxing the labor market and aims to help budgetary policies, despite the fact that some countries such as

14 for employer and employee 15 Republika Srpska is included as part of Federation of Bosnia and Herzegovina,

6 5 10 7

20 1817

20 21

10 9 15 1015

13 10 1010

9

23 1825

15

27.9 27

41.5

37.05 32.3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

TAX RATES STRUCTURE IN WB6, 2020

VAT REDUCED VAT STANDARD C.I.T. (MAX) P.I.T. MIN P.I.T. MAX SOC.&HEALTH CONTRIBUTIONS


27

Albania, Kosovo and perhaps even North Macedonia need to increase their contributions to some sharp social policies regarding employment training policies and to certain categories such as: people unable to work, young people who are new to the job market as well as the poor. If we analyze more deeply, it is concluded that some countries have a low fiscal burden (Albania, Kosovo, Macedonia). Reducing a tax rate of a certain tax is not the solution of the demand of the citizens and the budget. A complex tax system, which in recent years is being implemented in an economy that needs to be competitive in the regional market needs a harmonization of fiscal policy with tax rates. But on the other hand, the complexity of the fiscal system increases the difficulty of voluntary cooperation with the law by small and medium taxpayers, who are the majority of the tax base. Although recent studies by various organizations and researchers confirm that changes in consumption and capital tax rates are less influential in the economy than changes in individual and labor tax rates, it is worth noting that shifting the fiscal burden from consumption and capital to the individual and labor is quite a difficult task for any government. Fiscal policy regarding low tax rates for capital has not had the expected impact on investment absorption and consequently on economic growth. This shows that fiscal policy is a very strong stimulating / inhibiting tool for the movement of capital and consumption. But it cannot be ignored that the budget needs enough money to make policies to increase the labor market through stimulation and capacity building, but also through the infrastructure line and the creation of the environment for the introduction of modern technology. For example, let's look at the case of Montenegro, which has applied capital tax rates among the lowest in the Western Balkans. GDP in this country has not increased significantly, but has decreased over the last 5 years. The same happened with North Macedonia, which is held for lower tax rates even at European level. The country's GDP has remained at around 10 billion euros, with a decrease in national added value.

The implementation of a comprehensive reform policy must be based on a level of administration and strong capacity. Improving the tax system should address both the policy of tax rates and the strengthening of administration in a harmonization between them, because this gap between policy and administration always is being considered a necessary condition for the functioning of the development of the fiscal system in accordance with the objectives of economic development. The tax rates for all Balkan countries can be found in the Annex.

1.4. Fiscal burden in countries with progressive taxation and those with flat taxation Fiscal revenues from WB6 countries applying progressive taxation (Montenegro, Kosovo, Albania, Serbia) compared to countries implementing flat taxation (North Macedonia, Bosnia and Herzegovina) have a higher burden, respectively of 1.8% and 2.1% of GDP in 2018 and 2019.

Tab.11 TAX BURDEN IN FLAT TAX COUNTRIES AND PROGRESSIVE TAX COUNTRIES in WB6 in 2018 - 2019 % of GDP

DIRECT TAXES INDIRECT TAXES

OTHER TAXES -

SOCIAL

CONTRIBUTIONS

DIRECT TAXES INDIRECT TAXES

OTHER TAXES -

SOCIAL

CONTRIBUTIONS

KOSOVO 3.5 20 0.5 3.7 20 0.4

ALBANIA 7.2 11.3 7.2 7.1 11.0 7.1

SERBIA 5.8 16.5 13.7 6.1 16.4 13.5

MONTENEGRO 5.5 18.6 12.4 5.2 19.1 12.1

AVERAGE TAX BURDEN 5.5 16.6 8.5 5.5 16.6 8.3

NORTH MACEDONIA 5.2 12.2 8.6 4.8 12.2 8.9

BOSNIA-HERZEGOVINA 4.1 16.3 14.0 3.9 16.1 14.5

AVERAGE TAX BURDEN 4.7 14.3 11.3 4.4 14.2 11.7

Sourc e: IMF, MoF

COUNTRIES

2018 2019


28

The taxation model for capital and personal income is seen to be unrelated to the burden of insurance contributions, or even indirect taxes. Albania and, in part, Montenegro and Serbia (as of 2019) apply a progressive personal income tax system, which still carries with it a sharp and yet unaddressed problem for solutions related to the expansion of the narrow tax base on capital and labor. The Balkans have been characterized by fiscal policies that have focused on stabilizing the profit tax rate, a tendency to adapt to progressive taxation on personal income, and a slight reduction in the rate of social contributions.

Countries implementing progressive taxation have an average contribution burden for 2018 lower than countries implementing flat taxation with 2.7% less and for 2019 it is 3.4% less. But this difference is a result of the high level of fiscal burden in Bosnia and Herzegovina. This fact seems to affect the average fiscal burden from social contributions and is the same reason for the average tax burden on indirect taxation in countries with progressive taxation, which are 2.3% and 2.4% above 2.4% and 2018, respectively other WB6 countries with direct flat taxation regime. Comparing the level of fiscal burden for direct taxes in the Western Balkans with the EU-28 average, the difference is more than double. This fact between comparisons for the same model, on the one hand comparing fiscal policies through tax rates, while comparing fiscal burdens on the other, shows once again that the administration is still working below the capacity provided by fiscal legislation in the respective states, which implies, inter alia, the presence high tax evasion. In the total fiscal burden, according to the graph below, it appears that countries with low productivity in the collections of a constituent group of total fiscal burden (eg insurance, and other taxes in Kosovo) are offset by higher receipts from another constituent group (Indirect Taxes in Kosovo).

The various studies conducted on informality in the labor market in the Balkans show the concern of a labor market informality that is changing and decreasing at a slower pace than the forecasts and programs of the Balkan governments. A narrow base of direct taxes still shows a still-closed transition in terms of the greater contribution that direct taxes on capital and labor income (companies and individuals) have to budget. All Western Balkan countries apply a flat rate of profit tax, except for Albania and Kosovo.

0

2

4

6

8

10

12

14

16

18

DIR

EC

T T

AX

ES

IND

IRE

CT

TA

XE

S

SO

CIA

LC

ON

TR

IBU

TIO

NS

DIR

EC

T T

AX

ES

IND

IRE

CT

TA

XE

S

SO

CIA

LC

ON

TR

IBU

TIO

NS

2018 2019

TAX BURDEN IN FLAT TAX COUNTRIES AND PROGRESSIVE TAX COUNTRIES in WB6 in 2018 - 2019 (% e PBB)

PROGRESSIVE TAX FLAT TAX


29

1.5. Fiscal burden and budget revenue distribution

The distribution of budget revenues shows at least the level of taxes on spending on money transfers to the working age population and beyond. It also aims to achieve that personal income taxes are progressively collected according to income levels and the orientation in which money transfers go where the needs of the population are most necessary in relation to improving living standards. The high level of income inequality in the Western Balkans continues to receive growing attention from governments, despite the political wing. Governments tend to address the phenomenon of inequality as a challenge that each country must address. But it is now imperative that income redistribution be clearly addressed through fiscal policy and administration. Before being treated as a flaw in capitalist system enlargement, it is necessary for countries to first update the data and raise awareness of all segments related to the means of correcting social polarization. The measurement of inequality in individual income, according to the GINI index16 (coefficient) should be seen in connection with the fact that inequality is significantly affected by taxes and fees. One of the studies conducted published by the OECD17, income inequality is mainly reflected in the impacts that come from inequality in the labor market, but not only. Income inequality from work is the main contributor to household income distribution. If we look at the case of Albania, most of the income from work goes to high wage levels for a minority of less than 1% of employees. Also, the decrease in the distribution effect according to the current fiscal policy has been accompanied by an increase in inequality in the labor market, but also in the taxation of income circulating in the informal market. In some cases, the latter circulates more income than the formal labor market itself.

Money transfers from the budget to various population groups, such as retirees, the unemployed, the disabled people account for 12.3% to 12.5% of budget expenditures in the Western Balkans, respectively for 2018 and 2019. These transfers are mainly aimed at redistributing income throughout the lives of individuals following the principle of their distribution according to the historical level of the contribution of individuals to the budget. Although the values of these transfers per individual represent modest or very small amounts of money in relation to individual consumption, they remain a permanent instrument of income redistribution for long-term or permanent periods. Meanwhile, government transfers in the last 2 years, e.g. in Albania they have maintained levels that have little difference (10.2% - 10.4% of GDP),

16 The Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among

individuals or households within an economy deviates from a perfectly equal distribution. The Gini coefficient can theoretically range from 0 (complete equality) to 1 (complete inequality); it is sometimes expressed as a percentage ranging between 0 and 100. In practice, both extreme values are not quite reached. 17 Income redistribution across OECD countries - Main findings and policy implications, September 2018

11.8

14.7

6.2

15.3

15.4

10.211.6

14.6

6.4

17.0

15.2

10.4

0

2

4

6

8

10

12

14

16

18

MONTENEGRO SERBIA KOSOVO BOSNIA N.MACEDONIA ALBANIA

SOCIAL EXPENDITURES IN WB6 IN 2018-2019

SOCIAL EXPENDITURES 2018 SOCIAL EXPENDITURES 2019

https://www.oecd-ilibrary.org/docserver/3b63e61c-en.pdf?expires=1586630998&id=id&accname=guest&checksum=B01343B9642986CBA597D51C278F346C


30

without being able to reach the level of countries with more well-funded social policies such as in Serbia, Montenegro. If we focus on the distribution of income by fiscal burden and the type of taxes applied, it can be mentioned that the tax burden shows little progressivity in the redistribution of income by geographical area and employee wage bands by economic sector, as the development of economic sectors and geographical areas themselves there are historical, economic, cultural, educational and environmental differences. But even demographic shifts along with changing middle age are factors that change income equality. Changing progressivity in the upper levels of payroll taxation is more effective in reducing inequality than similar changes in the bottom end of the income scale. In particular, the higher the fiscal burden, the lower the Gini Index. This can be argued by explaining why countries like Sweden, Germany and France, which have high tax rates on the wealthy individuals, suffer less from inequality compared to the US, which has a relatively low fiscal burden. Although it is not possible to find official data for each Western Balkan country, explicitly this conclusion seems to hold true. Because tax evasion is so widespread in the Western Balkan countries, the indicators of burden and fiscal productivity from the study's findings may make it clear that countries face lower costs of efficiency in reducing tax inequality.

Comparative analysis of average per capita income (Tab.12), as a result of economic growth during 2012-2019 shows that Montenegro has the highest increase in per capita income. In this country, per capita income in relation to the population increased by 74.2%. Even in North Macedonia, per capita incomes have risen sharply to a high of 71.1%. Meanwhile, Albania has an increase in per capita income at a high level of 66.8%, but with a difference of at least 5-8 percentage points from the two neighboring countries. Serbia and Kosovo have an increase in per capita income almost at levels similar to 62.1% and 62.7%, respectively. The country with the lowest growth rate compared to other WB6 countries is Bosnia and Herzegovina with 58.4%. This comparative analysis is in fact the most visible indicator of the productivity of the economy, development policies and strategies, and the appropriate level of addressing economic models towards increasing the well-being of WB6 taxpayers. While it is said that Albania has effectively used its natural resources in recent years, and has tried to increase capacity, it is noted that it has not managed to increase welfare in the same way as its closest eastern and northern neighbors. Although both of these countries do not have the potential that Albania possesses, they appear to have made better use of the available domestic resources and capacities as well as foreign and domestic investment creating a higher welfare than Albanians.

Tab.12 DIFFERENCE of INCOME per CAPITA in WB6 in 2012 and 2019 in %

USD 2019 Euro 2019 USD 2012 Euro 2012

MONTENEGRO 8,703 7,746 6,587 4,995 74.2

SERBIA 7,397 6,583 6,016 4,562 62.1

NORTH MACEDONIA 6,096 5,425 4,699 3,563 71.1

BOSNIA-HERZEGOVINA 5,741 5,109 4,779 3,624 58.4

ALBANIA 5,372 4,781 4,248 3,221 66.8

KOSOVO 4,442 3,953 3,600 2,730 62.7

Source: Eurostat,WB, IMF

GROWTH of

INCOME/

CAPITA 2019/2012

COUNTRIESINCOME PER CAPITA


31

1.6. Foreign Direct Investment and innovation related to the fiscal burden The average foreign direct investments in WB6 in 2019 are in the level of. 6.2% of GDP. What matters for FDI relates to their treatment as one of the factors that need to be integrated with internal elements and under specific conditions, where their synergy can improve the economic development of the Balkan countries. However, in order to be competitive in the Balkan and European markets with the aim of attracting a considerable amount of investment, it is inevitable that the necessary reforms will be implemented, with the most important being: reducing corruption, improving the efficiency of the administration to reduce indirect costs. On the other hand, effective strategies should be devised for direct and personalized attraction of investments that are likely to occur, ie. create an attractive and family business environment for investment. It is important to maintain a sound economic and financial model, as well as a competitive tax system, but with content and taking into account the fulfillment of budgetary objectives, before considering competitiveness. But FDI depends not only on domestic policies but also on regional policies as a whole. Issues such as transport and energy interconnections, disputes between countries, arbitrary decisions on customs duties directly affect each other and where relevant, may not create incentives for foreign investors. The FDI in the WB6 region remains limited, where the average stock of FDI per capita in the WB6 is less than half the value of FDI per capita in Eastern Europe (members of the EU), and only as much as 1/7 of the average FDI per capita in other EU countries. However, the region still has the potential to invest in WB6, attracting investment from EU countries as well as East Asian countries. From the FDI structure it is clear that there is still a dominance of the services sector and the inflow from large European and Asian countries, which are part of the market programs and territories of large foreign companies. The total FDI shows that only the Republic of Serbia has more than half of the total FDI stock in the region, while the rest is divided between five other countries, which roughly corresponds to the size of the market and their economies. The service sector is dominated by the financial services sector, as well as the trade and manufacturing sectors, which account for about 1/5 of the FDI stock of the chemical, food and beverage industries, as well as products for the automotive industry. The region's efforts seem to need to focus on investments that require efficiency. Export-oriented FDI needs to foster competitiveness and efficiency, which in fact depend on foreign-domestic interaction with the acquisition of innovative knowledge and technology to become part of the future economy for the domestic market. In support of the economic purpose to esase the inflow of FDI, tax incentives in respect of R&D in WB6 countries should become a day-to-day policy of widespread adoption. Although tax incentives are no different from incentives for economic development policies, they are far from the strategy for a research and development system. Tax incentives must necessarily be specific to market developments and innovation appropriate to its development. Taxable income deductible expenses are the most popular current R&D policy, followed by recognition for most of them, as recognized expenses. Other stimulus policies push the depreciation rate for R&D higher than usual. The vast majority of tax incentives are based on corporate income tax, while some countries have (additional) incentives that apply to social security contributions and / or payroll tax. The individual tax


32

would be broader, if individuals would prefer to finance their own research with their own resources, or with funding from private organizations and investors. The tax benefits that apply to innovation income (mainly patents) are increasing both in number and in the types of patents being registered. In the last two years, eleven EU member states have offered a reduction in corporate income tax, for income derived from intellectual property, as well as a reduction in personal income tax in the case of the self-employed. Currently, only a few WB6 countries still have tax incentives closely linked to specific R&D. Usually today the incentives are based on a combined model between the specific research expenditure scheme and the scheme based on their volume. Promoting FDI from competitive tax policies with low rates is more effective if FDIs are withdrawn, aimed at efficiency based on low production costs, which means low fiscal burden on labor. In this context, if Kosovo, Albania and North Macedonia keep their labor costs low compared to other WB6 countries, what needs to be taken into account is transparency and strong fiscal policy management.

In Tab.13 when we look at foreign net investment as percentage of GDP in 2019, it turns out that labor costs should be seen as closely related to per capita income or the well-being of employees in countries where investment is invested and the cost as a single element does not has a reflective relationship with FDI. From this comparison, although it should be seen as related to the fiscal burden as a whole, it can be concluded that beyond the low cost of

labor and the fiscal burden it is necessary to have a balanced economy, low cost administration and transparent policy in a financial market. developed and linked to world markets. Expansion of foreign trade disparities of the Western Balkan countries during 2019, as well as in 2018, were financed by the increase in foreign capital inflows, mainly through FDI. But according to WB studies and research reports from EBRD, and the IMF country reports, all of them suggests that the size of capital inflows is not related to an interdependent relationship with the lack of capital. Furthermore, FDI inflows were directed to investments in sectors such as financial services, real estate and construction, which do not generate strong performance for export and increase the competitiveness of the economy.

As can be seen in the graph above, the first place for FDI stock according to GDP is held by Montenegro, followed by Albania. But Serbia remains the most important country for FDI volume in the

ALBANIA 7.8

BOSNIA -

HERZEGOVINA

N.MACEDONIA

3.2 KOSOVO 3.8

MONTENEGRO

8

SERBIA 6.2

N E T FD I I N WB6 I N 2 0 1 9 (% O F G D P)

Tab. 13 NET FDI PER CAPITA IN WB6 IN 2019

COUNTRIESNET FDI (%

GDP)

FDI/CAPITA

(US.D)

ALBANIA 7.8 415

BOSNIA - HERZEGOVINA 2.3 132

NORTH MACEDONIA 3.2 193

KOSOVO 3.8 169

MONTENEGRO 8 723

SERBIA 6.2 456

Source: IMF, WB,CB


33

Western Balkans, although it holds the third place for net FDI stock to GDP, with an approximate inflow as in 2018. Albania benefited from large volume of foreign investment directly in the region, mainly in energy projects and financial services, as a continuation of large projects started several years ago. In contrast, Bosnia and Herzegovina was weak, perhaps due to its increasingly segmented economic environment and lack of political stability in the country. North Macedonia and Kosovo received more FDI than a year ago, despite growing political debate in those countries. Suppliers of the automotive and electronics industries make North Macedonia the only country in the region with the highest share of FDI in production. The analysis of FDI of WB6 countries identifies different relations of foreign direct investment, exports and imports in the GDPs of these countries, as well as the different composition of their GDPs. According to the analysis, the impact of FDI on the economic development of Bosnia and Herzegovina, North Macedonia and Montenegro in recent years has not been the main influencing factor. On the contrary, in Albania and Serbia, FDI has had an impact on the GDP of respective countries, being reflected in their levels of economic growth. This attitude does not exclude the specific importance of foreign direct investment, but of course they are not the decisive factor in the development of these countries. If the period of about twenty years is analyzed, almost all the economies of the Western Balkans can be observed to be quite weak. FDI inflows, while showing a positive trend, are still below their level to reach the ambitious target of doubling FDI by the end of the current decade. In addition to the traditional channel of privatization through mergers and acquisitions of local businesses for FDI inflows, investors are also increasingly turning to renewable energy investments. This interest is partly generated by investment incentives currently offered and the spread of specific economic zones in the region. If we start from the logic of economically developed countries, as well as those that are moving at an accelerated pace of development, it can be noted that if the economy relies on a developed infrastructure, services and effective public administration, increasing productivity to target a relatively relative market. greater, then the competitiveness of the tax rates and fiscal burden wins only advantages granted or when these conditions exist. These conditions are mostly achieved in the largest number of OECD member countries, which although have a high fiscal burden, they are much more effective in attracting foreign investment. A low tax burden on the other hand cannot compensate an unattractive economic environment for investors. Tax incentives can be used in a more oriented way and to be cost effective for the expenses that investors will incur, but also to meet the needs of the budget. Taxes are only one of the elements that even in the conditions of a low rate offer can not compensate for the poor infrastructure, poor market access and other conditions on which an investor is based, such as p. sh. space to move freely in the financial market. If businesses (especially SMEs) do not have sufficient lending and low cost, then their growth will continue to be weak and of course investment and labor market will be affected.

Balkan governments have responded to these pressures of competition in various ways. Many countries have lowered profit tax rates, as the shortest and most easily monitored way to achieve investment objectives. In fact, what they need to do is tax cooperation between them. Interaction and coordination of fiscal and economic policies should be conceived to be implemented within the borders of the Western Balkans, without returning to the policy of non-cooperation. Fiscal policy competition does not work within the Western Balkans. But, if the states were part of the big market, they would have a real opportunity to compete with the policy of lowering tax rates. The competition between each other helps powerful states and companies to easily enter through the policy of disintegration of the Balkan states.


34

However, lowering tax rates tends to be costly for the budget, as the revenues that are deducted from the budget from the policy of lowering tax rates actually undermine fair competition in the country, but also turn into an added burden for certain segments and groups of taxpayers. On the other hand, the reduction of tax rates turns into a culture for citizens to put pressure on governments to maintain such a policy permanently, without having an effect on the need to expand the base and distribute the burden equally.

1.7. The impact of increased investment on competitiveness and not just taxes

Host countries of FDI in the Western Balkans have been applying low profit tax rates for over a decade. However, it can still be seen that the attraction of investment has not tended to increase significantly, even in countries where this decline has been among the lowest in the Balkans. When we analyze the effect of the fiscal burden according to net investment statistics as a percentage of domestic production, it is noted that countries with higher FDI do not have the same trend as the fiscal burden. The reason for not exceeding the fiscal burden and foreign investment is the strongest indicator of the role that the investment climate in a given country has in the first place. Fiscal policy has the effect of boosting investment, but this is because market conditions and rules are perceived by investors according to investment indicators with positive situations and above their average levels. On the other hand, the need for developed systems of financial markets, road and energy infrastructure, capacities and deficient labor market capabilities along with the level of corruption have another influential effect on attracting investment and developing the domestic market. Following the response from the representative indices of the above indicators, in accordance with the planning for attracting foreign investment, it is worth drafting fiscal policy that adjusts capital and labor tax rates according to market level and vision for capital and future market. The perception that only low tax rates can attract FDI has had little effect on policy-making in the Western Balkans in the last decade. In theory, if a country applies low profit tax rates and generally capital, it becomes more attractive to shift the profits of investment companies, as it affects the dividend that remains as profit after tax. Albania and Kosovo are comparable in their policies with other Western Balkan countries. But the problems of corruption and inadequate administrative capacity, the lack of transparency, and the mechanisms used in low-tax systems with the weaknesses they carry make these two countries still far from quality and long-term investment. However, from the cross check of investment indicators, with tax rates it remains unclear whether a tax rate should really be reduced in order to attract the attention of investors, as indicators of fiscal burden in these two countries show that they are much lower than other countries. neighbors with them. From the history of competition between the countries of the Western Balkans for tax rates as low as possible, the facts of investments made over the years show that it is not clear whether the reduction of the profit tax burden is able as the only instrument to attract large investors, but also medium ones. But what remains unaddressed until the solution are the main structural barriers to competition, which include a relatively poor business environment18, uncompetitive and rigid markets for industries that are

18 reaffirmed by the World Bank's Doing Business 2020 report, with few exceptions


35

interconnected with other markets, a difficult regulatory environment, and unpredictable, poor access to the financial market, high FDI stock in non-exporting sectors, and a large informal sector. Competition of tax rates for FDI is a reality in today's global and Balkan environment. It is true that investors routinely compare the burden of direct taxes in different countries, as policy makers typically do for countries that are similar in terms of market location and size.

A widely held view is that taxes are likely to be more important in choosing an investment host country if non-tax barriers are removed and if national economies converge with investment recovery requirements in the most competitive form and manner among countries. While profit tax is recognized as an important factor in investment decisions, in fact practice shows that it is not the main determinant.

Table.14 shows that the lowest points (show the most advanced position) compared to the WB6 average are held by Serbia with 9 pillars, Montenegro with 8 pillars, Albania with 6 pillars, North Macedonia with 5 pillars and Bosnia and Herzegovina with 2 pillars.

0

2

4

6

8

10

12

14

16

KOSOVO MONTENEGRO BOSNIA ANDHERZEGOVINA

SERBIA ALBANIA

CORPORATE PROFIT TAX RATES in WB6 in 2019-2020

STANDARD REDUCED

Tab.14 INDEX OF COMPETITIVENESS IN WESTERN BALKANS IN 2019 points

MONTENEGRO 53 83 57 104 65 53 42 26 44 134 50 69

SERBIA 75 51 77 64 76 55 73 54 82 74 54 59

NORTH MACEDONIA 84 75 70 82 64 83 110 82 83 109 65 97

BOSNIA - HERZEGOVINA 114 84 80 64 73 82 108 107 80 101 117 117

ALBANIA 76 98 75 104 46 50 75 38 102 111 63 110

WESTERN BALKANS 80 78 72 84 65 65 82 61 78 106 70 90Sourc e: WE forum, Global Competitiveness Report 2019

* Kosovo has no data in Global Competitiveness Report 2019

¹ including "Scurity, Social Capital, Checks and Balances, Public-sector performance, Transparency, Property rights, Corporate governance, Future orientation of government"

² including "Transport infrastructure, Utility infrastructure"

³ including "Mobile-cellular telephone subscription,Mobile-broadband subscription, Fixed-broadband internet subscription, Fibre internet subscription, Internet users"

⁴ including "Inflation, Debt dinamics"

⁵ including "Healthy life expectancy"

⁶ including "Current workforce, Skills of current workforce, Future workforce, Skills of future workforce"

⁷ including "Domestic competition, Trade openes"

⁸ including "Flexibility, Meritocracy and incentivization"

⁹ including "Depth, Stability"

¹⁰ including "Administrative requirements, Entrepreneurial culture"

¹¹ including "Interaction and diversity, Research and Development, Commercialization"

Market

size

Business

dynamism¹⁰

Innovation

capability¹¹Health ⁵ Skills⁶

Product

market⁷

Labor

market⁸

Financial

system⁹COUNTRIES* Institutions¹ Infrastructure² ICT adoption³

Macroeconomic

stability⁴


36

The dimensions of the economy are important to see the weight of fiscal policy in relation to its current maturity, as the larger the economy, the slower the performance of a fiscal reform / policy. On the other hand, the dimensions of an economy are directly related to the tax base, determining the trend of its expansion. In the case of a small economy this expansion is more difficult to happen, due to the conflict that the tax base has with the differentiated tax policy by segments. FDI are apparently oriented towards countries that have offered access to markets and profit opportunities; a predictable and non-discriminatory legal and regulatory framework; macroeconomic stability; skilled and responsible labor markets; well-developed infrastructure and innovation; developed financial system and interconnected with the world network, meritocracy and entrepreneurial culture and an advanced level of corporate governance and growing investment in research and development.

The Balkan countries which are members of the EU, although they have a higher profit tax burden, the fact that they are part of a market with standartized rules, but also due to the guarantee of a developed infrastructure, public services and hospitable environment and attractive to business, reasonable transportation costs, including market size, then it is futile to be required to compete by Western Balkan countries only with low tax rates, without offering similar advantages as those of the Balkan member states of EU. A low fiscal burden cannot compensate for a generally weak or unattractive environment for FDI. Also, while attention is often focused on corporate income tax, the importance of other taxes needs to be recognized. Some businesses find that they can reduce tax burdens by changing from one form of business registration to another. This election eliminates corporate income taxes paid at the medium and large business level. Meanwhile, governments often change fiscal laws to address this avoidance or even evasion with the aim of not eroding the tax base and fiscal revenue. In fact, the biggest problem with income and the deformation of equality before the law is more related to the shortcomings in the fight against tax evasion and informality. This gray economic space creates the premise that businesses can hide their real business status by performing undeclared transactions with this category. In these conditions and fiscal environment, it is hasty policy to make modifications to systematize and address the problem that should be made by the administration and not the policy. Another factor is how friendly the tax and customs administration, central and local, is with the business. From the surveys and numerous reports of organizations in the protection of business rights is seen as a common conclusion, that in those countries of the region where investors find security, predictability, sustainability and timeliness in the implementation of tax rules, as well as an effective rate tax, then that environment is considered business friendly. Balkan governments should try to improve business volunteerism by paying their budget obligations, improving transparency and security for a correct tax treatment. Looking ahead, the limits of tax competition can be further tested, by further reducing the burden of corporate taxes on foreign investment, but also by not falling prey to the fashion of tax cuts, when viewed by policy makers such as unnecessary to attract investment, due to unfulfilled qualities for attracting investment from the host country and a lack of understanding of the local context for successful foreign investment.


37

1.8. Double taxation agreements in the Western Balkans and the effect on the fiscal burden

The fiscal hospitable environment must also be affected by the need that arises for the policy to take action against the misuse of the fiscal system by the aggressive international tax scheme, which exploits the differences between the systems. Balkan countries should also consider tax treatment of FDI abroad. Some countries today offer a tax treatment that allows tax relief in the country of origin that goes far beyond the old argument in the face of competition, which requires a tax exemption from the country of origin or a deferral of retained earnings. foreigners, favoring the increase of the tax on income generated abroad of the fiscal residence. Most of the bilateral agreements on the elimination of double taxation on income and capital taxes (DTICT) are based for the most part on (a) the Model Income and Capital Tax Convention Model (OECD Model) and (b) Model of the Double Taxation Convention between developed and developing countries (UN Model). Meanwhile, each state in the Western Balkans, for each of the investments of strategic importance, signs a Tax Agreement with the strategic investor, returning this model. The difference between the two models of Agreements is both related to the taxes that are included or excluded from them, but also to the extent of its effect based on the principle of fiscal residence. Various studies show that after the signing of a DTICT between the two economies with reciprocal positions of mutual foreign investment, the redistribution of tax rights to the country of residence is not a problem. However, when such an Agreement is signed between the two countries with asymmetric investment positions, then the importing capital country risks losing its income tax. Resource countries can benefit from the impact of FDI. But the positive effects on FDI are more likely for middle-income countries and less likely for low-income countries. Whether a capital-importing country benefits from the signing of an DTICT also depends on the dimensions of its tax base. The primary benefit that developing countries require from signing a DTICT is to increase the supply of foreign direct investment. But one of the problems that has become known from the practices of implementing Agreements is that Tax Agreements can precede investments, not because they encourage them, but because they can only be concluded when there is an expectation of an investment. In all of the above, but without being limited to the reasoning and logic of benefits from the signing of DTICT, the moment of their signing and the non-imposition of the fiscal system and budget in unfavorable conditions of competition with neighboring countries is of particular importance. With the signing of an DTICT, the impetus for international business is to make a profit by taxing little or nothing with the source tax on the profits it will transfer to its place of residence. On the other hand, by learning only with ease, investors put pressure on governments at the time of signing agreements with them for other additional difficulties, in addition to those guaranteed to you in advance by the MTD and the specific law for the investor. The main problem with the signing of a DTICT between a developed country and a Western Balkan country is the attempt to shift the fiscal facilities of investment that will take place towards the host country of investment. The benefit of developed countries in this case is revenue tax revenues, which are the main basis of budget revenues in their countries. Meanwhile, the countries of the Western Balkans, which are based on consumer taxes, are not given the opportunity to increase the budget revenue base by increasing revenue tax receipts to change the trend of budgets that most of the collection of e. have from consumption taxes.


38

As with profit tax rates, income tax rates have been the subject of ongoing competition in the Balkan region to encourage investor attraction. DTICT further instrumentalizes and encourages this policy pursued by the Western Balkan states. An experience comes from Albania. Although large investors have been using Albanian natural resources for over a decade, given the benefits from DTICT, but also from specific agreements that have been lobbied by the governments of the time the agreements were signed, they have almost never contributed to the tax budget. on the dividend, or even with other taxes, which are the subject of ongoing debate between them and the Albanian fiscal administration.

But, in fact, each state of the Western Balkans has drafted packages for free economic zones, increasing the incentive dose with fiscal facilities for certain segments of the economy, or geographical areas within each country. Meanwhile, with the approval of these facilities, together with the Agreement that in some cases are copied from previously signed bad models lead to the creation of distortions of fiscal principles, but also impact on budget performance in certain cases.

Currently, by the beginning of 2020, each country in the Western Balkans implements, according to the laws approved by the Parliaments of their respective countries, a number of agreements with over 35-40 different countries according to the level of trade relations, but also according to geographical position, where in this sense all countries between them have DTICT in force. Montenegro still has a large number of DTICTs in place, bearing what it has had since it was part of the Serbia-Montenegro Union.

1.9. The need for effective fiscal reform in Western Balkans Implementing tax reform implies something specific: lowering tax rates and broadening the tax base. Lowering the tax rates loses revenue, but a prudent reform finds them closing the gaps in tax evasion, exemptions and favorable fiscal treatment of one type of income over another, with all these measures aimed at broadening the revenue base which taxed. However, this reform policy does not describe the real tax reform. Given that reform has a positive connotation, what is so exciting about promulgating a lower rate tax policy and a broader base? Theory and facts suggest that individuals and businesses, which the current system imposes with significant tax liabilities, lobby continuously how to benefit from favorable changes in tax legislation. The facts of all these years in the last two decades have shown that these changes rarely happen to serve a major economic purpose. They are proposed because some industries or individuals have chosen a strong lobbyist with deep pockets. It even helps members of Parliament "understand" how important the gap they seek for greater public goods. So, tax rate cuts and tax breaks are often economically inefficient as well as uneven. If we start from the initial effect of the reform, where lower tax rates will generate more economic growth and thus this expansion of the economy will begin to pay off itself by increasing the tax contribution to the budget, then this impact would be calculated correct. But when the government has little taxpayer support for this policy, then the effect of lower tax rate reform can cost both the budget and the tax base, which can be narrowed because of the backlash from

TAX DOUBLE TREATIES IN FORCE, 2020

TAX AGREEMENTS NUMBER

MONTENEGRO 36

SERBIA 60

NORTH MACEDONIA 48

BOSNIA-HERZEGOVINA 40

ALBANIA 40

KOSOVO 15

Source: Deloitte, MoF


39

unfair competition, which is created by lowering certain tax rates for some industries and taxpayer categories. In this way, the equality of taxation that existed before the reform was also broken. As soon as governments come in power, they wrongly and unequivocally conceive the theory of tax abatement with economic developments. They start with a very general perception that if taxes are cut, people will work and businesses will invest more. In fact, the impacts of such approaches are unclear: Some taxpayers will work slightly less after a tax cut, as they can keep their income constant with less work. Whereas, some of them that carry more share in the state budget will work more to take advantage of the space created by fiscal relief policies than to seek to invest to generate greater profits. Meanwhile, the vast majority of them will not change their own way of working (or the amount they invest). All this panorama that can be seen after implementing a low-tax policy is due to the fact that the economic environment in which it operates is very problematic, the competition in regional markets is strong, and the informality and corruption do not allow such developments to take place, reflecting on policy changes. Moving the argument to Albanian reality in 2014 and on, where tax cuts for low-wage individuals occurred, as well as removing the small business tax and significantly lowering tax rates for other small business categories, the initiators of these ideas predicted that these reform measures would provide an "immediate and sustainable boost" to the Albanian economy. They were obviously wrong. The same thing happened in this period, just as tax cuts have always happened: loss of budget revenue and disruption of equity in the economy. Many taxpayers changed their tax status by "switching" to other tax statuses so they could get the most out of their new tax benefits. The impact assessment on the economy was reduced and the government burned down the opportunity through attempts to shift the fiscal burden from poor to rich people. Compared to neighboring countries, the economy could not be more competitive than before. Moreover, economic growth and jobs actually did not achieve the numbers, where they were projected. So, another thing is talking about tax cuts and another thing is talking about tax reform. The real tax reform is not tax cuts. In fact, the tax cuts and reliefs, together with these reform measures, could deplete the budget at a cost of ALL 10-15 billion over a 10-year period. Meanwhile, in the event that tax evasion has not been reduced to levels felt by the formal economy, the missing revenue will be an increased cost for taxpayers who are formal and why the tax base may increase for this category over the years. Real tax reform means tax changes that respond to the needs of most taxpayers, now and for the future. Real tax reform would begin with a clear-eyed assessment of the resources the government will need to meet these needs, all of which are considered public goods, including social security and risks that will not be met by actors of market. Reform must compensate, not exacerbate market and system inequalities. Reform must raise the revenue needed to meet the many challenges we will face as a country in the coming decade. Between 2020 and 2030, the share of the population over 65 is expected to grow more (from 15 percent to 20 percent), putting pressure on both the spending and budget revenue side. Health costs are rising slowly, thanks in part to the design of the health system to reduce costs.


40

But given the demographic and health cost pressures, it is notable that holding Social Security and public health programs will require another 1.2 percent of GDP over the next decade. Why it is so needed, and how it should support its strong role, for a government that is easily funded and uses constitutional rights to meet the great challenges we face. First, it is necessary to establish a fully meritocratic model as soon as possible, which should no longer be the fate of previous models. The main effect will be a significant increase in income as it minimizes corruption and lack of motivation at work. The timing of doing so directly affects their outcome and affects future voting. Secondly, the fiscal burden should be shifted from indirect taxes to individual taxation and then real estate taxation should be applied. The reforms to be undertaken should not target large categories of taxpayers, but rather target categories that should become part of a system of equality before the law. Direct tax reform is significantly less effective than other reforms to the economy, but indirect tax reform is more sensitive to citizens. Third, the maintain of a social and economic environment, to increase the capacities and treatments of employees to strengthen competition and market expansion beyond current boundaries, aiming at a comprehensive policy to keep the few paying workers out of the country. Satisfactory revenue growth, in a way that balances efficiency and capital considerations, i.e., minimizes the distortions created by favoring one type of income over another while maintaining tax neutrality is the true tax reform.

1.10. The measurement of the informal economy and digitalization serve the fight against evasion

Measuring informality is not a new problem. The news is about using innovation and technology to help with this major challenge. How can Albania and other economies of the Balkans can profit by using new technologies? Thinking about this new approach, the advised action could be very close to the strategy how to create incentives for formalization. This requires reforms in various areas, for example taxation, labor law, product markets, and improving the business climate. In fact, more accurate estimates of the informal economy can help make policies more effective and better targeted. In Western Balkans, for example, since a large part of the economy is untaxed, different changes to tax policies, did not significantly have affected income distribution. When we focus on the redistribution of incomes by fiscal burden tool it can be said that the tax burden shows little impact in the redistribution of income by geographic areas and segments of employees by economic sectors, as the development of economic sectors and areas geographical, historical, economic, cultural, educational and environmental differences. But demographic movements along with the change of average age are factors that change the equity of income. Meanwhile, government transfers in the last 5 years, eg. in Albania have maintained the same level of 11.8% of GDP.19. If economic growth is not accompanied by equitable income distribution or an equal rise in employment levels, we see an increase in the growth of the informal economy, given its low barriers to entry.

19 ALTAX - Tax Burden in Albania, Kosovo and Western Balkans 2019


41

Statistics on the activities in the informal economy, in employment, productivity and even the regions where the activities are prevalent are critical for designing dedicated policies to support them in a specific manner. Formalization of informal activities is not only and just for tax collection or law enforcement purposes. The dimensions of informal economy are so much more changing, and are growing with the rise of the shared economy. In some neighbor countries, for example, the informal sector is estimated to be the same size as the formal one, just for the sake of informality in the virtual market that represents many services that are not part of the market dimensions we know. As seen by the latest report from World Bank, poverty levels among people in informal employment are, on average, twice as high as that of people in formal employment. Why? Because of low productivity, low incomes, poverty, and limited access to government budget and benefits and slower economic growth. On the other side, it provides employment and income to people who would otherwise not find employment, or it supplements their insufficient income from employment in the formal/regulated sector. If we cannot measure informality, we cannot evaluate how inclusive economic growth really is. So, we may not be able to determine whether policies are working as they are intended. If the government will not measure the informality, there has not sense the fight against evasion, because is a battle without knowledge and proper information to know in real time the potential of the “enemy”. Bringing the informal sector into the formal economy is probably one of the most significant policy-making challenges for Albania and the whole region of Balkan. In this regard, new models for deploying technology, along with new payment flows are key to expansion of territory of formalization. Mobile and digital technologies can be used to better bring Informal’s together and to connect service providers to them in new and innovative ways. This reduces the cost of delivering solutions and improves the effectiveness of providing essential services to Informal’s and microentrepreneurs trapped in a cash economy. Government and NGOs have the capability to reach and deliver services to the last mile, while policymakers are critical in creating supportive regulations that can incentivize consumers and small businesses to adopt electronic payments. However, the private sector (including non-traditional stakeholders across key sectors such as telecommunications and consumer goods) must be part of these broader digitization efforts, as these actors are critical to drive innovation, scale and usage of services. While the informal economy will never be completely eliminated, we can certainly reduce the cash it generates by harnessing the power of technology and partnerships. This will not only help unlock the informal economy’s massive economic potential, but will subsequently move hundreds of millions of people across the country, but even in the Balkans towards long-term prosperity. Turning cash into digital transactions is all about designing relevant solutions that fully address the needs and desires of people and businesses, which can vary by geography, individual preference and community. Time and resources are needed to gain a full understanding of their world, and how technologies fit – or don’t fit – into it.


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2. Tax Burden in WB6 in 2019 Budget revenues in GDP in 2019 have been in function of programs and reforms undertaken with a comprehensive goal to promote economic growth, growth and employment growth, improve the quality of the macroeconomic environment and increase the penetration of innovation in the function of improving services for citizens, as well as filling gaps of various natures on the path to integration into the European Union. The budget revenues of the Western Balkans in 2019 are as much as 35.4% of GDP.

2.1. Tax burden according to taxes

The economies of the Western Balkans region are working below their potential, and in these circumstances the demand for capital is not at its peak. This situation is evidenced by the fact that economies do not use the offers of the financial system, but the latter is not developed in a variety of instruments as in developed economies. However, the policy of shifting the burden of different taxes from one segment to another should be maintained within the framework of medium-term budget planning. Tax revenues, meanwhile, account for 30.4% of GDP in the Western Balkans. There is still a clear gap in the tendency to approximate every possible fiscal aspect with a positive approach to improving budgetary health. WB6 has a fiscal burden of at least 11 percentage points lower than the EU (41.5%).

Montenegro holds the highest fiscal burden with 36.4%, followed by Serbia with 36%. Bosnia-Herzegovina holds the third tax burden rank with 34.5%. All three countries have a significantly higher fiscal burden than other WB6 countries with at least 8% to 10%. Kosovo holds the lowest fiscal burden with 24.1%. While Albania has a fiscal burden of only 1.1% more than Kosovo and 0.7% less than North Macedonia, keeping the fifth place in the ranking of WB6 countries according to the level of tax burden. North Macedonia has a fiscal burden of 25.9%. The comparison of fiscal burdens also explains the elasticity of the distribution of the main part of the budget expenditures of the countries based on their own sources of income. The VAT burden, which holds about 13.3% of tax revenues, still in 2019 indicates an addressing problem regarding the need to diversify the budget sources and overhaul the tax revenue pyramid. Kosovo carries the largest share of VAT in budget, followed by Bosnia and Herzegovina, which shows the high dependence of budgets on these countries on consumption and imports. While other countries have high

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

KOSOVO ALBANIA N. MACEDONIA BOSNIA SERBIA MONTENEGRO

TAX BURDEN IN WB6 IN 2018 - 20192018 2019


43

levels of VAT in the structure of budget revenues, they still have a better diversification of revenue sources from direct taxes and other taxes. The latter one also has a high burden on labor taxes, causing the fiscal burden to be high. Kosovo is still far from managing the potential of labor taxes and shifting the VAT burden to the income taxes on labor and capital. Meanwhile, it is recommandable that efforts to shift the burden should be made gradually and without affecting the tax base. For example, in Albania, where the reductions-increases of VAT rates in 2018 have brought as a secondary effect the claims of other sectors not included in the benefits of the reduction, to seek those benefits from the fluctuating and contradictory policy towards the principles of VAT , where the policy of exemptions or escalations is not tolerated. Another case from 2018 is the farmers' taxation policy by changing the VAT refund scheme for the raw material, or changing the policy for packaging taxes, which bring effects on breaking the credibility of the scheme and reducing the level of voluntary compliance. in law enforcement by taxpayers.

In 2019, Bosnia and Herzegovina, Serbia and Montenegro are the three countries that tax more income from work than other sources of individuals and businesses incomes. The high workload at the levels seen in these countries has little impact on the productivity of the economy, as long as the economy works below its potential. When this economic cycle situation changes, then politics must reflect the changed conditions. The low-burden policy on insurance contributions in Albania, Kosovo and North Macedonia is uncompetitive compared to their neighbors. But it also does not allow the budget to spend more on social funds. The burden of capital taxes is at close levels between the countries of the Western Balkans.

2.2. Distribution of fiscal burden in Western Balkans by destination The distribution of income means equality before the law and for this reason it is natural to expand the tax base for each of the taxes in order to justify the expenses according to their destination. All WB6 countries have a budget deficit in 2019. This situation is due to the costs that reforms can have in countries that have to face budgetary as well as political costs. Given the fact that spending is the signal on where revenue should be planned more accurately, budget policy modifications need to be made, including fiscal ones, with the aim of increasing the efficiency of tax use and other budget revenues. Montenegro maintains the highest level of budget expenditures among WB6 countries. In 2018, as much as 50.7% of GDP was spent on public funds in this country, and in 2019, was spent 45.6% of GDP of public funds. Serbia and Bosnia and Herzegovina have also spent budgets at over 40% of GDP, both in 2018 and 2019.

This level of spending in these countries is above the average budget expenditure on GDP in WB6. Below this level are North Macedonia, Kosovo and Albania, respectively with 32.2% of GDP, 35.2% of GDP and 29.7% of GDP.

% GDP


MONTENEGRO MONTENEGRO50.7 45.6 -5.10

SERBIA SERBIA 42.7 41.2 -1.50


BOSNIA - HERZEGOVINA BOSNIA - HERZEGOVINA42.6 40.6 -2.00

NORTH MACEDONIA NORTH MACEDONIA32.9 32.2 -0.70


WESTERN BALKANS WESTERN BALKANS38.2 37.4 -0.82


Tab.15 Budget expenditures to GDP in WB6 in 2018-2019

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

0.0

10.0

20.0

30.0

40.0

50.0

60.0



44

An analysis between the reduction of the level of budget expenditures and the decline of GDP between 2018-2019 shows a relationship that is one of the determining factors in economic slowdown, according to the table with four Balkan countries.

In countries with small economies, public investment has a significant impact on their economic development. A large public investment program can achieve a major boost to economic sectors, or it can stimulate multiple private investments, which together constitute a major boost in both the private and public sectors. For this reason, in the periods of growing budgets, their impact on the economy must be taken into account. But if it can be seen in the long run, estimating that WB6 economies are operating below their potential, reducing public spending (and consequently the budget deficit) would lead to falling interest rates, as the public sector cannot compete with the private sector for funds. Low interest rates will allow the private sector to make more investments. This level of investment would lead to an increase in capital with a direct effect on increasing productivity. In fact, all this equation has not yet happened in this trend. Budget expenditures in GDP in 2019 compared to 2018 marked a decrease of 0.82 percentage points, where Montenegro has a significant decrease in the level of expenditures compared to other countries by 5.1 percentage points. Serbia, Bosnia and Herzegovina, North Macedonia and Albania also have lower levels of spending on GDP, but at a lower trend than in Montenegro. Kosovo alone has a 4.4 percentage point increase in spending, mainly due to the electoral process, which in any WB6 country has a growing impact on public spending. Budget expenditures made in GDP in 2018 were at the level of 38.2% of GDP. In 2019, budget expenditures were at 37.4% of GDP. In the following, the destination destinations will be presented in function of the budget programs for each country. Comparing the years 2018 to 2019 between expenditures and budget revenues, it is noted that Montenegro and North Macedonia have the same characteristics in terms of effective productivity of budget management. Other WB6 countries, even though they have had positive primary balances, appear to have less effective fiscal and budget management productivity.

Tab.16 COUNTRIES WITH DECREASE OF GDP IN 2018-2019 in %


BOSNIA-HERZEGOVINA 3.6 3.0 0.6

MONTENEGRO 4.9 3.0 1.9

SERBIA 4.2 3.5 0.7

ALBANIA 4.1 2.9 1.2

Source: IMF, WB

COUNTRIES EXPENDITURESBUDGET

REVENUES

MONTENEGRO -5.1 0.6

SERBIA -1.5 -0.3

KOSOVO 4.4 1.2

BOSNIA - HERZEGOVINA -2.0 -1.0

NORTH MACEDONIA -0.7 1.6

ALBANIA -0.03 -0.3

WESTERN BALKANS -0.8 0.3


Tab.17 DIFFERENCE BETWEEN EXPENDITURES (2019/2018), AND BETWEEN REVENUES (2019/2018) % GDP

EXPENDIT. REVENUES


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According to the chart above, countries with budget cuts have the largest difference between extreme values, a fact that shows that fiscal consolidation policy has been accompanied by a policy of limiting budget expenditures. On the other hand, Montenegro and North Macedonia also have a decrease in the fiscal burden in 2019 compared to 2018. While, Albania, although it has the lowest fiscal burden in 2019, has not reduced budget expenditures, remaining connected a good part of them related to reforms and payments for concessions in the sectors of health, infrastructure, fiscal administration and in economy. Based on this policy, which effectively fills the gap between expenditures and receipts related to weighty items in the budget, one can understand the logic of the policy that must be implemented to achieve high budget productivity. For the same period of 2018-2019, the increase in expenditures in Kosovo corresponds to an increase in budget revenues by 1.2% of GDP.

If we compare the destination of budget expenditures during 2018 - 2019 in WB6 countries, it is noteworthy that the highest level of capital expenditures in relation to GDP is held by Montenegro and Kosovo, respectively with 8.5% and 7.8% of GDP in 2019, or 0.1% less than 2018. Meanwhile, since Montenegro has spent less on budgets in 2019 than in 2018, Kosovo has spent more. But in the meantime, Kosovo has increased social spending, unlike Montenegro, which has not seen any increase in social spending or public sector wages. Other countries, such as Albania, have a decrease in the level of capital expenditures from year to year for the comparative period, while budget expenditures have not decreased, but also in this country social expenditures have increased by 0.2%. Countries that have increased capital investment have not necessarily increased tax collection on capital, as they have exploited other tax revenues for these investments without aiming to burden investors with high taxes on their investments. In 2019, capital expenditures account for 14% of budget expenditures, while in 2018 this expenditure group accounts for 13% of budget expenditures. Social expenditures account for 1/3 of all budget expenditures in 2019 in WB6 countries, or by 1% increase compared to 2018. Social expenditures are financed by fiscal burden on wages and social and health contributions. This group of expenditures is at higher levels in Bosnia-Herzegovina, North Macedonia and Serbia and stands above the WB6 average. In comparing the level of social spending from 2018 to 2019 Bosnia-Herzegovina, Albania and Kosovo, respectively with 1.7%, and 0.2% of GDP more for the other two countries. Kosovo holds the last place because the social spending scheme is not included in the budget, but is subject to a scheme based on pension funds, which is modeled differently from other Balkan countries. Montenegro, Serbia and North Macedonia have declining social spending levels, with declining ranging from 0.1% to 0.2% of GDP.

Tab.18 ADMINISTRATION, SOCIAL AND CAPITAL EXPENDITURES IN WB6 IN 2018-2019 % GDP

2018 2019 2018 2019 2018 2019

MONTENEGRO 11.3 11.3 11.8 11.6 8.6 8.5

SERBIA 9.2 9.4 14.7 14.6 3.6 4.2

KOSOVO 8.8 8.7 6.2 6.4 7.9 7.8

BOSNIA - HERZEGOVINA 10.3 10.2 15.3 17 2.8 2.5

NORTH MACEDONIA 6.3 6.5 15.4 15.2 2.5 3.5

ALBANIA 4.5 4.5 10.2 10.4 4.8 4.7

WESTERN BALKANS 8.4 8.4 12.3 12.5 5.0 5.2

Source: WB - Fall report 2019

CAPITAL

EXPENDITURESCOUNTRIESADMINISTRATION

EXPENDITURES

SOCIAL

EXPENDITURES


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While these countries have reduced the level of social spending, there is an increase in the level of spending on public sector wages, which shows of an increase in the level of wages in this sector in the face of challenges arising from EU membership negotiation processes. This indicator is presented with these levels as it is related to the level of salary that for all three countries with high level of administrative expenses keep the first three countries for the level of high salaries in relation to other countries. In the confrontation between the taxes on labor and social spending, the fact that Bosnia-Herzegovina, Serbia and Montenegro manage to cover social spending with labor taxes paid in the budget stands out. Even in these countries, it is possible to provide guarantee funds for other items of the budget. This situation is due to the high burden on labor taxes. In order to have a more complete perception of the effective use of budget expenditures, we also consider the trend of expenditures for personnel (administration), which is paid from the budget revenues. Public sector wage expenditures account for 22% of budget expenditures in 2019 and have remained almost unchanged as compared to 2018. The highest level of wage expenditures is held by Montenegro and Bosnia-Herzegovina and Serbia, which are significant. above the average level of wage spending in WB6. Kosovo also has a spending rate higher than the WB average. Meanwhile, Albania and North Macedonia hold the last places, maintaining a level of spending no higher than 15% of budget expenditures. Kosovo is reducing inefficient bureaucracy and corruption in services that are thought to bring illegal benefits, and is working to revive capital investment to strengthen the growth trend. Albania and North Macedonia are twice as expensive as other countries. But this level of spending does not often indicate a valid consolidation policy to strengthen administrative capacity. If the cost of administration is cheap, in addition to the budget benefit, the risk of incomplete and quality public services is likely to appear. But the equally great damage is due to the circumstances when a government has delegated some functions in the private sector by easing the budget, but increasing for citizens the cost of services, after delegating and postponing them in time from public-private partnership. In recent years, public finances in Albania have entered a secure and optimal fiscal consolidation trajectory, materialized in the most key parameters of sustainability. First, it materialized in reducing the overall budget deficit by 5% of GDP in 2013 to less than 2% for 2019. Second, since 2016 public finances have recorded a positive primary balance (primary surplus), which has become a very important operational parameter of the sustainability of public finances and the perception of economic and market actors regarding the health of public finances. Third, fiscal consolidation has materialized into a declining public debt trend. In recent years the net public debt has decreased from the level of 71.9% of GDP in 2015 to 64% for 2019. However, Albania needs to strengthen its administrative capacity to more strongly influence the design and coordination of economic and fiscal policies, as well as to implement structural and regulatory reforms by seeking cooperation from all major political and technical factors in the country. Social contributions are not labeled as tax in fiscal legislation. Given the fact that they are mandatory to be paid in the same way as taxes on personal income, on the same salary, the only element that separates them from taxes is the benefit system. When benefits are mentioned, if we make a distinction between the many elements of benefits from the schemes implemented in the country, the only ones related to exceptions to the tax progression rule are pensions that will be paid in the future by this current contribution payments. In all of this we can understand that progressive taxation cannot be applied in the right way for which it is designed, as high contributions payments cannot be part of progressiveness, as they directly affect the income redistribution chain for the future of the individual. On the other hand, the income of contributions is not redistributed for public consumption or used for other purposes, beyond those guaranteed by law.

In trying to argue the effectiveness in the investment economy with public funds, it is estimated that a significant increase in public investment can boost employment in the short term and based on the rapid growth of productivity in the coming decades the budget benefits its income from payment of dividends in significant amounts.


47

While foreign and private investment has a clearer focus on the benefits and rapid recovery of investment, concerns have been expressed about the fact of intelligent public investment by the public sector. Even if the increase in public investment in traditional economic sectors can increase the performance of the economy, the necessary financing for investments in sectors that do not have a high rate of return on investment may present economic distortions that will reduce growth in the long run. If so, this issue is worth discussing not only how much public investment should be undertaken (quantity), but also how / where funding (quality) is performed. A large public investment program can achieve a major boost to the economic sector, or it can stimulate numerous private investments, which together constitute a major impetus in both the private and public sectors. A new orientation of the budget policy of the Western Balkans should become the instrument of open monetary financing (similar with helycopter money), especially at a time when natural disasters and previously unpredictable disasters directly affect consumption and the economy, ie as a result of tax revenues. Various current and previous experiences have shown us that supplies of significant amounts of money are addressing the monetary and fiscal crisis (which may have a place for reasons unrelated to budgetary management), ie printing money and supplying directly in front of the vulnerable layers with the aim of going to consumption serves as a "cure" of liquidity for the economy as well. This action applies to WB6 countries, which depend on the realization of their budgetary objectives by consumption and above all beyond the filling of the budget box helps production and encourages optimization of supply chain supply of both sides: demand and supply. With the implementation of this monetary stimulus modeled on the principles of fiscal consolidation, new money can be thrown into the economy, given that there is enough liquidity for the continuation of economic activity. Monetary direct funding will involve creating additional deposits instead of paper money in circulation. This stage will initially be characterized in a financial environment dominated by the deposit of money in government accounts, which will then be transferred to private deposit accounts either as a reduction of one or more taxes, or through additional public spending.

2.3. The well-being of individuals and distribution in the Western Balkans in 2014-2019 The latest edition of Credit Suisse's Global Welfare Report for 2019, which is being published annually and with a history of over 20 years, shows that the Western Balkan countries, except Serbia, have a slight increase in the number of adults. Montenegro has seen a significant increase of 17.9% for the period 2014 to 2019. While Albania marks an increase of 3.7% in the same period. Northern Macedonia, Bosnia and Kosovo have minimal growth, indicating a slight change in the adult group. Looking at the same line with the total population change over the same period, the report shows that Albania is with the most significant increase in population by 0.4% although a slight increase if we look at the numbers of population. Kosovo, Northern Macedonia and Montenegro have a slight population growth of 0.2%. Serbia and Bosnia, meanwhile, have a declining population. This decline is due to low fertility rate (Bosnia has a fertility rate of 1.26 and Serbia 1.48 per thousand) and a lack of inflow of migrants from other countries in the region and beyond. As long as Serbia, Bosnia and other closest countries are not attractive places for potential immigrants, their population will continue to age and decline, a prospect that also means it will make catching even harder in terms of wealth and living standards with western countries. Meanwhile, recent movements of population from Western Balkan countries to Western European countries, although growing, are not considered an influential factor in these statistics, as long as they are not permanent residents in these countries.


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The Western Balkan countries are on a steady course of increasing their well-being and this is evident from the level of net national wealth growth 20. As these countries increase in net wealth value, they appear not to offset the decline in natural resources with the risk that in the long run, growth will decline as the wealth on which this growth is based is eroding year after year. But, seeing as the pace of population growth and adulthood in the Western Balkans has increased, GDP growth and welfare levels have a marked increase in incomes for adults (adult) in the last 5 years. Albania with 20%, Montenegro with 18% and Bosnia with 18% have an increase in income per adult, followed by Northern Macedonia with 14%. All this comparative overview between 2014 and 2019 is an indication of how production capacities and resources have been utilized in each Western Balkan country. Starting from the comparative base year 2014, it appears that in Kosovo, Albania and Serbia there has been a marked increase in well-being greater than the regional average, which refers to the overall value of net wealth owned by the country's citizens, including capital of natural and human resources.

Most of the change in wealth value year after year in the period 2014 to 2019 is due to the change in asset prices and exchange rates. Foreign exchange market volatility in the Western Balkan countries, or the foreign exchange market in countries that do not have capital stock exchange, are usually the largest source of profit and loss. But in these years the 5-year balance sheet seems to have been positive thanks to the stability of the national currencies of the Western Balkan countries. In an in-depth reading of the indicators that represent the wealth value of different countries of the world, what is noteworthy for the countries of the Western Balkans region is the increase in the wealth value of each of the countries.

20 National net wealth, also known as net worth, is the sum of the total value of a country's assets minus its liabilities. This value is an important indicator of a country's ability to borrow and keep costs controlled and is influenced not only by real estate prices, equity market prices, exchange rates, liabilities and incidence in a country. instead of the adult population, but also from human resources, natural resources and capital, as well as technological developments, which can create new assets.

Tab.19 Adults and population in 2015 and 2019 in WB6 000 persons

Indicators* Year ALBANIA SERBIANORTH

MACEDONIAMONTENEGRO

BOSNIA-

HERZEGOVINAKosovo**

2015 2,146 6,837 1,598 9,647 2,791 1,381

2019 2,225 6,798 1,617 11,371 2,815 1,384

3.7% -0.6% 1.2% 17.9% 0.9% 0.2%

2015 2,923 8,851 2,079 628 3,536 1,800

2019 2,936 8,748 2,084 629 3,505 1,804

0.4% -1.2% 0.2% 0.2% -0.9% 0.2%

* data from Reports of year 2014 and 2019, Credit Suisse Global Wealth Databook

Adults

Difference (in %)

Population

Difference (in %)

Tab.20 GDP and Wealth per capita in WB6 in 2014 dhe 2019 US.D

Indicators* Year ALBANIA SERBIANORTH

MACEDONIAMONTENEGRO

BOSNIA-

HERZEGOVINAKOSOVO**

2014 5,827 8,304 6,902 9,647 6,009 s'ka të dhëna

2019 7,001 7,580 7,900 11,371 7,110 5,817

20% -9% 14% 18% 18%

2014** 10,309 7,784 11,871 21,567 12,336 1,921

2019 31,366 25,046 25,723 53,484 27,873 25,723

3.0 3.2 2.2 2.5 2.3 13.4


** data for Kosovo belong to Report 2016, Credit Suisse Global Wealth Databook

GDP/ Adult

Difference (in %)

Wealth / Adult

Difference (in %)


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According to two reports obtained for comparative analysis, it is apparent that in 2019, the total value of the national net wealth:

- in Albania was US $ 70 billion, while in 2014 it was US $ 23 billion. The increase is 3 times. - in North Macedonia US $ 42 billion, while in 2014 it was US $ 19 billion. The increase is 2.2

times. - in Serbia was US $ 170 billion, while in 2014 it was US $ 59 billion. The increase is 2.9 times. - in Bosnia and Herzegovina was US $ 78 billion, while in 2014 it was US $ 37 billion. The

increase is 2.1 times. - in Montenegro was US $ 26 billion, while in 2014 it was US $ 10 billion. The increase is by 2.6

times. Serbia has the highest national net wealth, due to its inheritance, with US $ 170 billion net and the second highest growth of net wealth after Albania, which for 5 years has increased net wealth 3 times based on the values which have created mostly its citizens. But Bosnia holds the second most valuable national net wealth position in the Western Balkans at US $ 78 billion. Based on the map of the distribution of national net wealth, it is seen that the Slavic countries still maintain high rates of increase in their property value, which is augmented not only by the contributions of the citizens themselves, but also by the investments that have increased in the two countries mentioned above.

The table 21 above shows the absolute value and the percentage change for the comparative period 2014 to 2019 of financial wealth, non-financial wealth and adult debt value. A more detailed breakdown of the structure of the wealth of adults by looking at the change that has occurred for (a) financial wealth, (b) non-financial wealth, as well as deducting the average debt due to each adult is seen that in Albania there is an increase e.g. financial wealth per adult significantly higher than in other Western Balkan countries with a difference of 66% higher than adult persons in Serbia and 2.7 times higher than adult in Bosnia Likewise, non-financial wealth per adult in Albania increased at a rate 1.5 times higher than non-financial wealth per adult in Montenegro and Serbia, and a 2.7-fold higher increase that nonfinancial wealth increased in Bosnia. But as there is a higher growth rate of financial and non-financial wealth per adult in Albania, there is also an increase in the value of debt per adult relative to these countries. Thus, the debt per adult in Albania

Tab.21 Financial and non financial wealth per adult in WB6 in 2014 and 2019 US.D

Indicators* Year ALBANIA SERBIA MONTENEGROBOSNIA-

HERZEGOVINA

2014 3,244 5,008 18,442 3,413

2019 4,612 6,281 24,397 3,961

42.2% 25.4% 32.3% 16.1%

2014 21,088 16,686 27,006 23,038

2019 28,396 20,541 33,306 25,830

34.7% 23.1% 23.3% 12.1%

2014 1,322 1,459 3,665 1,813

2019 1,642 1,777 4,219 1,918

24.2% 21.8% 15.1% 5.8%

2014 10,678 9,113 19,216 11,398

2019 14,731 10,737 24,242 13,037

38.0% 17.8% 26.2% 14.4%


Note: For Kosovo and North Macedonia there's no data

Median wealth / Adult

Difference (in %)

Difference (in %)

Non financial wealth / Adult

Difference (in %)

Debts / Adult

Difference (in %)

Financial wealth/ Adult


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for last five years has increased by 11% more than this indicator in Serbia, and up to 4.5 times higher than in Bosnia. Today, equity in wealth is closely linked to income equity. But in the past 5 years it has been shown that everything has to do with the shock of property value by groups of adults, a concentration and saving of wealth in fewer people. Part of this wealth inequality is in fact dictated by age, not just population groups. Thus, e.g. young people tend to have a lot of debt and no more savings, which means they have a negative balance of their net wealth. But the table below shows the landscape and the volatility of wealth by value categorization, highlighting the reality of rising inequality on average in the Western Balkans in just a few years, i.e. 2014 to 2019. The index above shows the distribution of net welfare of domestic value to individuals and in some Western Balkan countries, defined as marketable value for financial wealth as well as non-financial wealth (mainly buildings and land) after deducting the debt, which result to be as an average net wealth for each adult.

In clarification of the data above presented in the table 22, from the comparison between 2019 and 2014: - In Albania there is a decrease by 31% of the group of adults with a wealth below 10.000 USD, while there is an increase by 27.8% of the group of adults with wealth value from 10 thousand to 100 thousand US.D, and an increase with 3% of the number of adults with a wealth value over 1 million US.D. This change in the percentages of groups by wealth value is also seen in the GINI Index, which shows a decrease of 3.1 points, indicating that wealth is oriented towards the group that can be considered as the middle class of the population, but with an increase in the wealth in high value to fewer adults. - In Serbia, Bosnia-Herzegovina and Montenegro the same way of transferring wealth values has happened as in the case of Albania, but with some levels of shifting more towards adults with wealth values from US $ 100,000 to $ 1 million and those adults with wealth over $ 1 million U.S. But what is striking is that in Serbia inequality has increased more in 2019 than in 2014.

Tab.22 Distribution of wealth through adults,and the difference between 2014 vs. 2019 in %

Country Year < 10,000 US.D10,000 - 100,000

US.D

100,000 - 1 million

US.D> 1 million US.D GINI

2014 69.1 30.1 0.9 0.01 66.8

2019 38.0 57.9 3.9 0.1 63.7

-31.1 27.8 3.0 0.1 -3.1

2014 61.8 37.1 1.1 0.01 66.3

2019 42.0 54.5 3.4 0.1 64.2

-19.8 17.4 2.3 0.1 -2.1

2014 48.7 48.4 2.8 0.01 65.7

2019 25.0 65.0 9.7 0.3 64.8

-23.7 16.6 6.9 0.3 -0.9

2014 65 33.9 1.1 0.01 69

2018** 68 30.8 1.2 0.02 65.5

3.0 -3.1 0.1 0.0 -3.5

2014 77.8 21.7 0.5 0.01 65.4

2019 47.9 48.7 3.3 0.1 67.6

-29.9 27.0 2.8 0.1 2.2


* data fro North Macedonia belong to the Reports 2014 and 2018, Credit Suisse Global Wealth Databook

Difference (in %)

MONTENEGRO

Difference (in %)

NORTH MACEDONIA

Difference (in %)

SERBIA

Adult wealth:

ALBANIA

Difference (in %)

BOSNIA-HERZEGOVINA

Difference (in %)


51

- In North Macedonia there is an increase of 3% of the group of adults with a wealth value below 10.000 USD, while there is a decrease with 3.1% of the group of adults with a wealth value from 10.000 to 100.000 USD, as well as a slight increase of 0.1% in the number of adults with a wealth value from 100 thousand to 1 million US.D. This Western Balkan country is in a trend in opposite to other countries in terms of a better distribution than other countries in terms of wealth values, reflecting this tendency also when we see the sharp decline of the GINI Index by -3.5 points. When most of the wealth value is more capital-based, there is naturally less room for other human and movable capital, including financial assets. The strongest negative impact is between equity and other financial assets, as other financial assets are larger in Western Balkan countries where social expenditure distribution systems, mainly from the state budget, but also from private funds. Meanwhile, what is characteristic of wealth values in the Western Balkan countries is that non-financial wealth is prevalent over ¾ of the entire total wealth value of adults. This feature of the Balkan countries is the main difference with the developed countries of the EU or even those that are members of the OECD. For example, when we look at the situation of income distribution in Albania and inequality, through the positioning according to the GINI Index we see a relative level of inequality, but better positioned than other countries in the Western Balkans. However, this data cannot argue the whole indicator of inequality, as the GINI index is also influenced by other elements, such as: informality, tax burden, average age of the population. However, if we look at the case of Albania, after the application of the progressive payroll tax, it is noticed that since 2014 the progressiveness of the payroll tax seems to have reduced the inequality observed in the gross and net income reported. This is explained by the fact that countries that exercise fair fiscal pressure have an impact on reducing inequality. We find this fact in the reports of the IMF, the OECD, the World Bank.


52

3. Tax Burden in Albania in 2019 The budgetary burden is based on the income determined according to the fiscal indicators that are realized in the previous year for the following year. Fiscal policy, which is oriented towards fiscal consolidation to influence the reduction of public debt, is mainly based on indicators of economic growth, inflation and indicators of good governance. Economic growth and employment are supported by the realization of a high level of public investment. The budget burden includes all tax and customs payments, insurance contributions, but also budget fees and outflows from public institutions and public companies’ payments that have an obligation for various goods and services.

3.1. Budget revenues and tax burden performance

In the last three years, approved budgets have aimed at gradual and targeted reduction of the tax burden by reducing the tax rates and exemptions studied. The increase in revenue is mainly aimed at expanding the tax base, combating informality and improving tax administration. The budget in 2019 is based on improving fiscal consolidation and minimizing informality in the economy based on the principle and scheme of fair taxation, for a part of direct tax revenues. Revenues from Taxes and Customs for 2019 have been influenced by factors such as: economic growth and price index, new fiscal policies and the effects of the fight against informality, accompanied by anti-avoidance measures aimed at increasing the level of voluntary compliance of taxpayers with the law. Budget revenues in 2019 are lower than in 2018 compared to GDP. In 2019, budget revenues are as much as 26.6% of GDP, while in 2018 they were as much as 27.6% of GDP, with 1% of GDP more. Revenues from taxes and customs, along with insurance contributions and local tax revenues (tax revenues) accounted for 25.2% of GDP in 2019.

Grants account for as much as 2% of 2019 budget revenues. The main share in the budget revenues is held by the revenues collected by the tax and customs administration with 66% against them. In 2019, the two administrations (Tax and Customs) together have collected tax revenues of as much as 18% of GDP, with a difference of 0.7% of GDP from 2018, or less by (-) 3.3% year on year. In 2019, the tax administration collected 97% of the revenues of social and health funds, while in 2018 it collected 95% of the revenues from social and health funds. In 2019, social and health funds account for 22% of budget revenues, while in 2018 they accounted for 20% of budget revenues.

Tab.23 BUDGET REVENUES TO GDP IN ALBANIA IN 2018 -2019 % GDP

BUDGET REVENUES 2018 2019 DIFFERENCE

GRANTS (including from CE) Grante (përfshirë ato nga KE)0.50% 0.52% 4.2%

TAX REVENUES FROM CENTRAL

TAX ADMINISTRATIONTë ardhurat tatimore qendrore18.7% 18.0% -3.3%

TAX REVENUES FROM LOCAL TAX

ADMINISTRATIONTë ardhurat tatimore vendore1.3% 1.4% 2.0%

SOCIAL CONTRIBUTIONS Sigurimet shoqërore4.9% 5.0% 2.5%

HEALTH CONTRIBUTIONS Sigurimet shëndetësore0.8% 0.8% 2.0%

NON TAX REVENUES Të ardhurat jo tatimore1.4% 1.5% 8.9%

REVENUES FOR OWNERS'

COMPENSATIONPër kompensim pronarësh0.08% 0.06% -24.8%

TOTAL 27.6% 26.6% -3.4%

Source: MoFE2018 2019 DIFFERENCE


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Fiscal revenues from local government in 2019 have reached 1.4% of GDP and account for 5% of budget revenues. Receipts are 0.1% more GDP with a year-on-year increase of 2%. Non-tax revenues21 collected in 2019 were as much as 1.5% of GDP and account for 5% of budget revenues. Receipts account for 0.1% of GDP more than in 2018 and with an annual increase of 8.9%. In 2018, these budget revenues were 1.4% of GDP. The structure of budget revenues in more detail and for a care view is presented above in Table 23.

As can be seen in the graph, the fiscal burden is the main part of the budget revenue burden. For 2019, fiscal revenues account for 95% of budget revenues. In 2018, fiscal revenues accounted for 93% of budget revenues, or 2% less than in 2019. Budget revenues and fiscal revenues have declined relative to GDP. The decline in budget revenues has been affected by the decline in revenues from taxes and customs, which in relation to the respective GDPs 2018 and 2019 have a decrease of 0.7% of GDP. The fall of GDP by 1.2 percentage points has directly affected tax revenues and, consequently, budget revenues, although the decline in revenues is smaller compared to the horizontal comparison between them. But as inflation has changed by at least 0.1% from 2018 to 2019, it is clear that the effect of good governance has had an impact on tax payments. Tax revenues that are de facto fiscal burdens mark a decrease of 0.7% of GDP in 2019 compared to 2018. Tax revenues have increased in absolute value by 6.9 billion Lekë, but in relation to GDP they are less year by year.

Fiscal burden during the years 2018 - 2019 is declining. The largest increase has been influenced by the fiscal policy of progressive taxation, the reform of fiscal decentralization, as well as the expansion of the VAT contribution base, which has increased its contribution accompanied by an increase of over 50% of the value of VAT refund.

21 consist of service fees, penalties for administrative offenses, revenues from public institutions

27.6%

26.6%

25.7%

25.2%

2018 2019

DIFFERENCE BETWEEN BUDGET AND TAX REVENUES (% GDP), 2018 -2019

BUDGET REVENUES TAX REVENUES

Tab.24 TAX REVENUES TO GDP IN ALBANIA IN 2018 -2019 % GDP

TAX REVENUES 2018 2019 DIFFERENCE

CENTRAL TAX REVENUES Të ardhurat tatimore qendrore18.7% 18.0% -3.3%

LOCAL TAX REVENUES Të ardhurat tatimore vendore1.3% 1.4% 2.0%

SOCIAL CONTRIBUTIONS Sigurimet shoqërore4.9% 5.0% 2.5%

HEALTH CONTRIBUTIONS Sigurimet shëndetësore0.76% 0.78% 2.0%

TOTAL 25.7% 25.2% -2.0%

Source: MoFE

CENTRAL TAXREVENUES

LOCAL TAXREVENUES

SOCIALCONTRIBUTIONS

HEALTHCONTRIBUTIONS



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The details of the share change of all components of the fiscal burden as seen in Table 24 distinguish the large change in the weight of local taxes (2% increase), the contribution of health insurance (2.5% increase) and social insurance (2% increase), where both together mark an increase of 4.5%. Meanwhile, tax and customs revenues have declined, coinciding with the economic downturn and the downward trend in inflation.

The local budget has increased the share of its local revenues in relation to total revenues. Local taxes generate most of the local revenue with about 76% of their total value. After this tax, most of the income comes from property taxes. This increase in local revenues is indicative of the growing fiscal performance of local government. On the other hand, the start of the fiscal cadastre and the reform of the property tax is an as yet unexpected expectation, due to the fact that from this source of income will be expected to increase progressively from year to year. The increase in local budget revenues has turned them into local budget as the source with the largest share of local revenues, a fact that clearly shows the qualitative increase of fiscal decentralization of local government. Local tax revenues from property tax make up a significant portion of local government revenues, or about 22% of local revenues. The performance of the property tax in 2019 is not positive and it is concluded that compared to a year ago the property tax has remained almost at the same level, not reflecting changes. This tax is still far from the expectations given by the change in the way of taxation of property for Albania from the surface tax to the tax on the market value. Increasing performance in the collection of social contributions is a consequence of the effects of the fight against informality and evasion in the labor market, which has also increased the number of contributors and the number of employees. In Table 25 below, the structure of tax revenues (without local taxes and insurance contributions) is dominated by 43% of VAT, which in over 78% of it is collected from imports to customs.

VAT marks a decrease year by year (2018 to 2019) as much as 0.2% of GDP, or a lower performance by 1.9%. In absolute value, the effect from the negative performance is 11 billion Lekë. If we analyze performance by tax revenue agencies it is: - tax administration that has a positive performance with a change of year by year as much as 0.1% of GDP, which means a higher performance by 1.3% year by year. In absolute value, this performance is ALL 2.1 billion, given that this collected VAT is net, as we deduct the VAT refund in 2019; - negative performance customs administration with a change of 0.3% of GDP year after year, which means a negative performance difference of 3.4%.

Tab.25 CENTRAL TAX REVENUES TO GDP IN ALBANIA IN 2018 -2019 % GDP

FROM TAX AND CUSTOMS* 2018 2019 DIFFERENCE

VALUE ADDED TAX 9.7% 9.5% -1.9%

TAX ADMINISTRATION 3.1% 3.2% 1.3%

CUSTOMS 6.6% 6.3% -3.4%

minus VAT REIMBURSEMENT 0.9% 1.4% 57.7%

NET VALUE ADDED TAX 8.8% 7.8% -10.9%

CORPORATE PROFIT TAX 2.1% 2.2% 2.5%

EXCISES 2.8% 2.8% 0.3%

PERSONAL INCOME TAXES 2.2% 2.7% 22.0%

NATIONAL TAXES etc. 2.4% 2.2% -9.1%

CUSTOMS FEES 0.4% 0.4% 0.7%

TOTAL 18.7% 18.0% -3.3%Source: MoFE

* not included LOCAL TAX REVENUES


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According to MoFE authorities, the reason for the decrease in VAT is related to several important factors, such as: - Reducing electricity production and increasing its imports, which has reduced domestic VAT and increased VAT lent on imports, - Changing the scheme of the TAP Project from VAT supplies to excluded supplies, - Declining exchange rate of EURO against the Lek. This factor has created negative effects on VAT revenues for imported goods. - Decline in metal and oil prices in international markets, - VAT waiver for agricultural inputs and machines. VAT refund has increased in 2019 compared to 2018 by 0.5% of GDP. The difference between the two years in the performance of reimbursements is 57.7%, which in absolute value means 9.1 billion Lekë more VAT refund. An increase in the reimbursed amount of VAT occurred in 2017 compared to 2016, where the difference is 56.3% with an absolute value of more than 5 billion Lekë. Excise taxes has an unchanged performance in 2019 compared to 2018, where the change in positive performance is only 0.3%. Also, the customs tariffs mark an almost unchanged performance in 2019 compared to 2018, where the change in positive performance is 0.7% Corporate Profit tax has increased by 0.1% of GDP, with a positive performance of 2.5% year on year. The positive financial result of the companies in 2018 has generated the effect of increasing taxable profit and consequently the tax paid in 2019. Also, the positive situation of the energy sector during 2018, has allowed the companies of this sector to pay in the Budget of State during 2019, not only the profit tax of 2018, but also a portion of outstanding liabilities from previous years. Personal income tax performs with the highest performance in 2019 compared to 2018 with an increase of 0.5% of GDP, with a change in performance year by year by 22%. National taxes show a decrease in performance in 2019 compared to 2018 with a weight reduction of 0.2% of GDP. Negative performance has given a negative effect with 9.1% less revenue. According to MoFE, revenues from mining royalties for crude oil have decreased as a result of the decrease in the exported quantity, as well as as a result of the decrease in the price of crude oil in international markets compared to the projections for 2019, leading to a decrease in unit rent. from 3.62 lek / ton to 3.42 lek / ton. Meanwhile, revenues from exported minerals have declined due to the decline in the price of minerals in international markets, which has not been offset by the increase in the amount exported by 146 thousand tons. The closure of most gambling has an impact on lowering national tax revenues. In absolute value, the loss in national tax revenues is 2.2 billion Lekë. What needs to be emphasized in the implementation of fiscal policy is the personal income tax. It has already been 5 years since the implementation of the progressive taxation scheme (2014) it is noticed that the net base (registrations - deregistrations) of personal income tax and profit tax has a normal increase, which is a normal rate of change. Yet this great challenge to current fiscal policy has not been overcome. Fiscal policy has not advanced further in implementing the principle of fair taxation through progressive taxation, the administration has not yet made the impact to show politics its shortcomings in this regard and the need for updates year after year.

A positive effect on tax revenues is the policy of reducing the dividend tax rate from 15% to 8%, which has generated in the state budget over 11 billion Lekë income, from 3.5 billion Lekë that were collected as tax on dividend in 2018. Tax exemptions22 (VAT, Excise, Profit Tax, Personal Income Tax) for 2019 have a minus effect on revenues 5.34% of GDP or as much as 21.7% of tax revenues.

22 are considered losses from fiscal revenues provided for in the fiscal legislation in force, as a result of fiscal facilities or preferential rates set for certain categories of taxpayers or activities. "Tax expenditures" are assessed using a new methodology based on several models for estimating tax expenditures by tax type.


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3.2. Distribution of fiscal burden by budget destination

Budget funds with their destination for economic development, but also increased competitiveness and faster improvement of innovation, start-ups and research - development. Meanwhile, all development and assistance policy destinations for the social and needy are another approach to budget spending through dedicated funding and care agencies. For the development of the economy in more focused way, several budget funds are already in operation, such as: Regional Development Fund, Owners' Compensation Fund, Competitiveness Fund, Innovation Fund, Start-Up Fund, Creative Business Support Fund, etc. Meanwhile, budget funds for 2019 with support from the budget for concession / PPP23 contracts are a total of ALL 12.4 billion. Of these, approximately ALL 6.4 billion are investments and ALL 6 billion are current expenditures. Compared to the actual funds of 2018 in the amount of 8.7 billion Lekë, in 2019 the funds reach up to 42.5% more. The total amount of annual net payments made by the general government units, which result from the concession contract or public-private partnership (PPP), as a rule, should not exceed the limit of 5 percent of the actual tax revenue of the year. budgetary ancestor. In case of exceeding this limit, the Council of Ministers takes corrective measures on the side of budget revenues, necessary and sufficient, to be returned within the allowed limit, during the next two budget years. The total expenditures of the 2019 budget are 491.9 billion Lekë 24 . According to Table 26, total expenditures are as much as 29.1% of GDP with a difference of 0.1% of GDP compared to 2018. The main destination of expenditures, according to the share of GDP, is distributed in: Social funds, (including payments for social and health insurance, pensions, the unemployed, economic assistance, former persecuted individuals, families in need, as well as payments to owners), which together account for 40.6% of budget (0.6% more than in 2018). Compared to GDP, these funds in 2019 are as much as 11.8% of it with a difference of 0.2% of GDP compared to 2018.

In second place are expenditures on salaries and insurance contributions of the administration of public institutions (15.6% of total budget expenditures). In contrast to 2018, which have maintained almost the same share these expenditures have taken this position due to the share reduction that investment expenditures have in 2019. Capital expenditures (for investments) in 2019 are in the third place in the destination of budget use with a share of 15.2% in total budget expenditures, while in 2018 they were as much as 16% of total budget expenditures. The allocation of funds for local government accounts for 11.4% of total budget expenditures, while in 2018 they were as much as 10% of total budget expenditures.

23 at the end of 2019, 13 concession contracts or public-private partnerships are active 24 in 2018 budget expenditures are 3.8 billion. In 2019 they are 4 billion Euros

Tab.26 BUDGET EXPENDITURES TO GDP IN ALBANIA IN 2018 -2019 % GDP

BUDGET EXPENDITURES 2018 2019 DIFFERENCE

ADMIN.WAGES AND CONTRIBUTIONS Pagat dhe kontributet 4.5% 4.5% 0.01%

OPEX Operative dhe mirëmbajtje 2.8% 2.8% 0.6%

SOCIAL AND HEALTH CONTRIBUTIONS Sigurimet, pronarët 10.3% 10.4% 0.8%

UNEMPLOYEMENT, DISABLED PEOPLE, ETC. Papunësi, ndihmë, ish-përndjekurit1.3% 1.4% 6.5%

CAPITAL INVESTMENT Investime kapitale 4.8% 4.4% -7.6%

LOCAL GOVERNMENT Buxheti vendor 3.0% 3.3% 9.5%

DEBTS AND INTERESTS Borxhi dhe interesat 2.2% 2.1% -7.1%

LOANS, EXPROPRIATIONS ETC. Subvencione, Huadhënie, Shpronësime, etj.*0.1% 0.1% -39.0%

TOTAL 29.2% 29.1% -0.2%

Source: MoFE

* this group of expenses also includes the payment of arrears in non-performing years 2007 -2013

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%



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Funds for good administration and maintenance of public property (or operating and maintenance costs-OPEX) account for 9.5% of total budget expenditures, with a small margin of 0.5% by 2018, when these expenditures accounted for 10% of total budget expenditures. The distribution of budget funds for government debt and interests’ payments in 2019 amounted to 7.1% of total budget expenditures, while in 2018 these expenditures were at the level of 8% of budget expenditures. Expenditures on public project expropriations, subsidies and loans in 2019 based on government decisions and those carried over the years account for 0.6% of total budget expenditures. From the destinations for the distribution of budget funds, it can be seen that the expenditures for investments and operating expenses, as well as those for interest payments on debts received have decreased in 2019 compared to 2018. In 2019, the budget has paid: - 40.6% of income for social destinations; - 25.1% of budget revenues for itself (personnel and operating expenses); - 15.2% for capital investments that include related contracts that last several budget years, but also new investments according to PPP contracts; - 11.4% of budget revenues for local government; - 7.7% of revenues for expenditures for new debts that go for the payment of debt and its interests, as well as for expropriation compensations.

Expenditures for the public administration (15.6% of the budget) are distributed in over 4/5 of them for salaries and close to 1/5 for the payment of social and health insurance contributions.

Social expenditures, which are destined for 6 categories according to Tab.27, reach 11.7% of GDP. Revenues collected from the budget, through labor taxes, amount to 8.5% of GDP.

Only 55% of revenues cover socially targeted spending. In this case, MoFE allocates additional resources from the beginning of budget planning, in order not to affect the implementation of social policies. These

Tab.26/1 EXPENDITURES FOR ADMINISTRATION TO GDP IN ALBANIA IN 2018 -2019% GDP

ADMIN.WAGES AND CONTRIBUTIONS 2018 2019 DIFFERENCE

ADMINISTRATION WAGES 3.8% 4% 1.94%

SOCIAL AND HEALTH CONTRIBUTIONS 0.6% 1% -0.86%

TOTAL 4.4% 4.5% 1.55%

Source: MoFE

Tab.27 SOCIAL CONTRIBUTIONS TO GDP IN ALBANIA IN 2018 -2019 % GDP

EXPENDITURES FOR SOCIAL FUNDS 2018 2019 DIFFERENCE

SOCIAL CONTRIBUTIONS 7.7% 7.8% 1.1%

HEALTH CONTRIBUTIONS 2.5% 2.5% 1.3%

OWNER'S COMPENSATION 0.2% 0.1% -19.7%

COMPENSATION FOR EX-POLITICAL SENTENCED 0.1% 0.1% 16.1%

ECONOMIC ASSISTANCE 1.3% 1.2% -5.7%

UNEMPLOYMENT PAYMENTS 0.02% 0.03% 45.1%

TOTAL 11.7% 11.7% 0.3%Source: MoFE

* not included LOCAL GOVERNMENT


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additional funds are taken from the tax that should be used for another budget expenditure and allocated to close the entire fund planned by the budget for social policies. In the table showing the distribution of social funds (11.7% of GDP), according to 6 different destinations, the main weight belongs to the social security fund (7.8%) for the payment of benefits for pensions, maternity leave, work accidents, illness. Another item where these costs are allocated is for the health care fund (2.5%). While economic aid receives 1.2% of GDP. The rest goes to unemployment, compensation for former political persecuted, and compensation for owners (all three together 0.23% of GDP). In the table showing the distribution of social funds (11.7% of GDP), according to 6 different destinations25, the main weight belongs to the social security fund (7.8%) for the payment of benefits for pensions, maternity leave, work accidents, illness. Another item where these costs are allocated is for the health care fund (2.5%). While economic aid receives 1.2% of GDP. The rest goes to unemployment, compensation for former political persecuted, and compensation for owners (all three together 0.23% of GDP).

Table.28 shows that capital investments for 2019 have taken into account all contractual obligations for investment projects with foreign and domestic financing. As well as in 2018 and in 2019, financing of ongoing projects has been a priority. The following guidelines have been followed for financing investments: - Priorities of the Government Program for the period 2017 - 2021; - European integration priorities; - Ongoing projects. - Support at local cost and VAT for projects with foreign funding; These expenses are financed in 2/3 of them from the budget financing with their own funds and 1/3 with the foreign funds. The year 2019 compared to 2014, as the year before the administrative reform, it is found that there is a change in the structure of expenditures in favor of increasing capital expenditures.

Capital expenditures are a very important item not only for the fact that they make up the bulk of the local budget but also because these expenditures are the ones that directly affect economic growth and improve the quality of life of citizens.

25 1. Social Insurance; 2. Health insurance; 3. Economic assistance; 4. Compensation for former political persecuted; 5. Compensation for owners; 6. Unemployment benefit

Tab.28 CAPITAL INVESTMENTS TO GDP IN ALBANIA IN 2018 -2019 % GDP

CAPITAL INVESTMENT EXPENDITURES 2018 2019 DIFFERENCE

DOMESTIC FINANCING 3.2% 3.0% -5.1%

FOREIGN FINANCING 1.6% 1.4% -13.6%

TOTAL 4.8% 4.4% -8.0%

Source: MoFE

Tab.29 BUDGET TRANSFERS AND THEIR OWN EXPENDITURES - LOCAL GOVERNMENT, 2018 -2019 % GDP

BUDGET TRANSFERS 2018 2019 DIFFERENCE

LOCAL BUDGET (its own tax revenues) 1.5% 1.7% 15.2%

TRANSFERS FROM GOVERNMENT BUDGET 1.5% 1.6% 3.6%

TOTAL 3.0% 3.3% 9.3%Source: MoFE


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Compared to 2018, investment expenditures in 2019 are increasing, which shows up to the value of about ALL 2.4 billion. Local spending has been rising over the last 5 years, with better local performance and an impact on the growth of public works being applied by local self-government units. In 2019, there is an increase in the level of operating expenses. They are related to the increased need for maintenance for the functions transferred in 2016, to improve the quality of local public service delivery, as well as to increase the various assets from investments that require maintenance and maintenance costs. Salary expenditures in the local budget have increased for 2019. This fact is related to the consolidation of the organizational structures of the new local self-government units, and in the absence of a new policy in increasing salaries there is a slight increase compared to one years ago. Also, the increase of local investments requires an increase of personnel expenses in order to provide the service that responds to the additions. The increase in the share of local government expenditures in relation to the expenditures of the central budget expenditures on gross domestic product is an important indicator of the effort to deepen local fiscal decentralization. Meanwhile, the part of the transfer from the budget is taken from the taxes paid without a specific destination (eg VAT revenues). In this form of communication of the budget with the destination of expenditures, it is seen that transparency should aim precisely beyond these values. So, the goal for a possible transparency should be to deal with confrontations at the local level, to further achieve the confrontation of expenditures that are carried out at the central level and how much is covered by the income needed to be collected to carry out expenditures. In dealing with income with the destination of spending that belongs to that income, as well as its coverage with additional funds, due to non-full coverage, it can be seen that the main expenses incurred by the budget cannot be self-financed by tax sources that have the appropriate name. The first signalization is the decrease in the level of expenditure in relation to the income for the expenditure. The most obvious is for social spending as well as debt spending. Both of these cost groups indicate better performance in income dedicated to them, or not, as well as lower costs for public services, as in the case of lowering the cost of debt service, by entering the international markets with Eurobond. Given the coverage of expenses and the effectiveness of their use, there should be another spirit and will and debate on the fiscal burden. It must begin to be built as a new culture of public opinion. In fact, it should be organized organizations and civil society, which in the framework of the global initiative for open government should aim to receive as their right from the government the budget transfer. This culture should keep the channel of social dialogue with the government open, which on the one hand should be accountable for its decisions and on the other hand the taxpayers should not feel connected to the will of the government for every step of life. Because tax revenues are relatively predictable, governments can plan ahead with greater certainty.

But beyond the analysis of budget indicators, an in-depth verification is needed (a) quality of expenditure, (b) non-creation of new debts for future budgets, which means an increase in future burden (c) and verifying whether expenditures are well-oriented for economic development or represent clientelistic interests and leave room for abuse of budget funds, and other arguments.


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3.3. Fiscal burden of DTM and Tirana in the years 2012 - 201926 Typically, the tax administration has maintained the large taxpayer unit in any change to the model of its structure, with the aim of securing and protecting revenue from this critical segment of taxpayers, which in many countries contributes more than 50 percentage of tax revenue. But has all this unchanged status quo been worth the budget revenue and increased transparency? The table 30 shows the ratio of income share held by the two largest organizational units of the tax administration: Tirana and Large Taxpayers.

At these levels of total share of income, as shown in the table, the contribution of the Directorate of Large Taxpayers (DTM) has fallen to a level that does not coincide with the main purpose of its existence. At first glance, it can be seen that what is lost from DTM is found in Tirana. In fact, what should have been the trend would be an increase in the weight of each of them from the available resources. But, excluding tax payments that come from extraordinary activities or coincidences, both directorates work below capacity and reserves to maximize revenue. This low level of contribution to the budget shows an indisputable fact that the big businesses of Albania do not carry for years the main share from which they are also beneficiaries through the works they carry out with budget funds. While the value of turnover declared by large taxpayers is more than 2/3 of the GDP, their contribution to the budget through taxes is as of 1/3 of all budget revenues. Naturally, the MoFE and the GDT have often introduced the need to strengthen DTM operations and capacities. But so far, this multi-year concern is still without the necessary response to make the difference. Reaction to the administration model In an analysis that we do not have regarding the answers as to who and how has affected this poor result, the questions that can be quite instinctive by expertise point of view are: Has the selection of really large taxpayers affected the reduction of the tax burden? Are they dealing with wealthy individuals, who are such even though they do not receive a dividend? Has it been worthwhile to implement all foreign assistance recommendations without objections? Has the corruption tax affected, which is found to have a strong impact? Has the change of managers affected the seasons of the year and the lack of an institutional memory in fiscal management? Numerous and more forceful questions can be asked at other times by other experts. But the discussion today is only an analysis, which can be followed by others, without leaving this situation only in the lap of apathy that has occupied all those who do not have professional sensitivity and lack of responsibility for the role they should have.

26 Tatimpaguesit e mëdhenj dhe kontributi në barrën fiskale, Studime Fiskale Shqiptare, Shkurt 2020, ALTAX

Tab.30 SHARE OF TAX BURDEN TO CENTRAL TAX REVENUES FROM LARGE TAXPAYERS AND TIRANA COUNTY, 2012 - 2019 in %

2012 2013 2014 2015 2016 2017 2018 2019

LARGE TAXPAYERS 47 41 40 39 36 39 38 37

TIRANA COUNTY 23 27 28 37 39 36 36 37

TOTAL 70 68 68 76 75 75 74 74

Source: MoFE

FISCAL YEARSREGIONAL TAX

DIRECTORATES

0

20

40

60

80

2012 2013 2014 2015 2016 2017 2018 2019

LARGE TAXPAYERS TIRANA COUNTY

https://www.researchgate.net/publication/339595997_Tatimpaguesit_e_medhenj_dhe_kontributi_ne_barren_fiskale_2012-2019


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Approaches and proposals for a different model First, the criteria for identifying large taxpayers were newly defined in 2005, and they have seen limited improvements over the years. Actually, they need to be reviewed with a sharper approach to include all individuals and businesses that make up the main share of the economy, as the current approach turns out that some of the really large taxpayers are not involved in the same structure, but are administered by the regional directorate. Really large taxpayers have their own dynamics in trying to shift the burden and costs of their business to those areas and cities where taxes and costs are cheaper. Their monitoring by the state is a legal obligation. For this purpose, the IMF missions, as well as the experts who have closely assisted the tax administration have provided advice that needs to be filtered and adjusted according to the current level of administration. The main goal in absorbing technical assistance and mission recommendations that guide fiscal administration approach should be a dialogue where the implementation of those recommendations that have access to be implemented should prevail, as not everything that has been accepted by the assistance has been productive and has affected the improvement of administration. A simple fact is precisely the VAT refund structure, which cannot be considered to have performed as recommended after several years of experience in its operation. Second, the DTM should have a sharper focus on risks and should also greatly improve the skills levels of its auditors. The existence of a large informal economy makes VAT inefficient, as VAT as a tax for the formal sector hinders development through a host of distortions of the overall balance. The imposition of VAT in this way encourages production to remain in the informal sector, which often produces domestically consumed goods. In order for the word to take on the proper meaning to play a role in decision making it is necessary that the DTM should create a risk model within its structures in order to be able to manage the various risks that affect and affect it from the outside. structure, but also within it. Large taxpayers present different and significant risks to compliance, such that they have been observed to have had major consequences on tax revenues, always remaining in the middle of the road and unaddressed for solutions. Third, tax policy in recent years has focused on lowering tax rates and has applied specific incentives to sectors that are intended to be encouraged to develop in Albania (eg low VAT rate on accommodation and hotels with 4/5 stars and pharmaceutical manufacturers). This trend has continued in at least each of the years in these last 5 years. In this trend, e.g. even the profit tax rate has been reduced from 15 to 5 percent for 11,000 businesses. On the other hand, a reduction in the VAT threshold has resulted in the entry of about 13,000 micro-businesses into the VAT system, but with little impact on tax revenues. Meanwhile, the headline of the 2019 and 2020 fiscal package included a halving of the dividend tax (from 15 to 8 percent), an expansion of the tax base for dual employment, the preparation of the legal basis for adapting the transactions of all businesses (in steps) without using paper for transaction registration. Recent tax policy reforms have narrowed the taxpayer base and complicated taxation for several other segments. Some of these changes actually complicate the simple tax regime, which is enforced by micro-businesses and in turn creates the possibility of tax evasion, for example, by shifting higher dividend tax revenues, or manipulating profit tax threshold. This obviously has a direct impact on large taxpayers as well. Monitoring and analyzing the impacts and interactions along with the appropriate response are a legal obligation for the state. Fourth, a very important orientation is in terms of the lack to develop management and implementation capacities with the skills required by the task they undertake to conduct tax analyzes to better understand the instability in tax revenues. There are currently no employees with these revenue analysis skills to view revenue collection, trends and expectations, and to determine the reasons for significant changes from budget forecasts during the year. Meanwhile, the leadership that has come and gone in recent years is at the average level of management that occurs in countries with developed administration. All these appointments have given their impact on the failure to achieve the main objective of the administration: maximizing budget revenues. It is the task of the political leadership that makes the reforms and launches them to show the maturity and the sincere will to determine at the top of the reforms the category of manager to be at the same height of the objectives of the announced reforms. Fifth, to be considered is the deep understanding to increase the readiness and strength of the implementation of international laws and various agreements regarding the exposure to the risks of border businesses with Albania, but also international ones. Limited experience with price transfer should change towards an approach that should be based on the prior work of risk analysis in the preliminary identification of deviations that come to the budget from the phenomenon of price transfer. All this effort is worthwhile to ensure more complete and accurate decision making by responding to identified risks. While we are talking about new and different approaches from the current routine, in fact the biggest challenge is the quality and productivity that comes from the audit staff, who have a low impact on budget revenues.


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3.4. Local per capita tax by municipalities in Albania in 2019 The method of calculating the fiscal burden expressed as local taxes per capita Calculation The fiscal burden for the country's municipalities is based on municipal-based data on the population and local revenues collected by the Municipality. Revenues considered as tax liabilities include liabilities paid by the business registered in the municipality, as well as for those payments of local taxes and fees that are part of the tax revenues paid by individuals and families, according to the inclusion made in fiscal bulletins. Statistical data at the national level were obtained from the Instat information bulletin, from other data published by the tax and customs administrations and the annual decisions and reports approved by the local government, crossed with the publication data of the Monetary Fund, World Bank, as well as studies conducted for Albania by local projects, which have served as a reference for calculating the fiscal burden and other comparative indicators. For the calculation of the domestic production of the region for 2019, our experts have evaluated the publication of the Institute of Statistics, as well as the regional trend of the structure of domestic production in the previous three years against the average. The calculation of local revenues for municipalities is based mainly on calculations of the capacity of taxes and fees, information obtained from the budget program of local taxes and fees, in their implementation, as well as on the policies set for the following period, according to legal acts for them. In this calculation the error reaches up to ± 3%

If we refer to the revenue items27 in relation to a year ago, we find that in relation to the same period of the previous year we have a greater increase in all revenue items, both in local taxes and in that one. of small business. The sustainability of the increase of local taxes in 2019 is noticed, providing an income for the budget of 17.5 billion Lekë. The small business tax does not have a high share in local revenues and in 2019 it reached the value of 355 million ALL. Compared to 2018, the property tax has remained almost at the same level, not reflecting changes in 2019 and has generated 5.2 billion Lekë for the local budget. In an analysis of the structure of budget revenues of 61 municipalities in Albania, 41% of revenues come from taxes, fees and charges and 59% come from other local revenues and transfers from budget. The remaining part that is completed by the transfers from the state budget is carried out according to the formula defined in the budget law, as well as through the allocation of the so-called competitive grants, for specific projects in special municipalities. In the analysis of local taxes paid by residents on behalf of the local government, fiscal policy has oriented the fiscal burden mainly on individuals who are residents in cities and less on individuals who are residents in the village. Given the fact that 51% of the population has a fiscal residence in the municipal units of the villages, then this social group of the population is even more relieved by the fiscal burden of local government. The burden of local taxes, fees and charges consists mainly of two main items: (a) the local tax group, which is entitled to Municipal Councils to make reductions up to 30% above official rates, (b) tax on wealth, which from 2019 changed the way of calculation and taxation passing as a tax that is applied on the value of wealth. After the '90s, this tax was oriented to tax the area with fees that were different from one municipality to another, according to the category they hold. The share of revenues collected by the local government through the tax administration that each municipality has occupies 5% of all budget revenues and spends as much as 10% of budget revenues.

27 Revenues from taxes, fees, as well as fees and services related to public property or public businesses are part of the revenues that are administered

directly by the local government.


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The rest of the revenue available to municipalities, which is 5% of the state budget, is allocated to them, according to the budget law, from revenues collected from taxes and fees collected from central fiscal administrations. If we start from the logic of the fiscal residence, about 30% of businesses in the country have the location of their activity in areas outside the cities. This part mostly belongs to the taxes and fees that these businesses pay to the central budget, on behalf of the GDT.

Local taxes and fees The fiscal burden on local taxes, tariffs & fees, which are paying Small Businesses, Individuals and Families,

consists of:

1. Property tax28

2. Simplified tax on profit for small business29

3. Accommodation tax at the hotel

4. Influence of infrastructure impact on new buildings

5. Tax on the transfer of immovable property rights

6. Table Fee

7. Temporary market tax

8. Green fee

9. Cleaning and Disposal Fee

10. Private beach fees (for coastal areas)

11. Fee for permits for structure use

12. Parking fee for vehicles

13. Lighting fee

14. Fee for occupying public space

15. Administrative service fees of the Municipality

16. Tariff for public transport

17. Authorization fee for fuel trade

18. Authorization fee for traffic in the city

19. Fee for issuing work activity permits

20. Veterinary service fee

21. Urban Planning Fee

22. Tariff of the institutions of the Municipality

23. Taxes administered by tax agents

When analyzing how much is the fiscal burden that individuals and businesses pay directly on behalf of the local government, it should be borne in mind that they also bear the burden of taxes and state budget taxes (consumption taxes and income taxes, as well as contributions of insurance and national taxes). Local per capita tax according to municipalities in Albania, which is considered a fiscal burden for residents, based on the average value of local taxes paid for 2019 in relation to the number of inhabitants, which has registered each of the 61 municipalities results in an average value for spirit that serves to rank them depending on the result.

28 0.05% of the value of residential buildings and 0.3% of commercial apartments; on the surface of agricultural land; on the surface of construction land 29 5% for businesses with an annual turnover of 5-14 million ALL and 0% for businesses with an annual turnover of 0-5 million ALL


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RANKINGS MUNICIPALITYLOCAL

TAXES/

CITIZEN

LOCAL

TAXES/

CAPITA

EXP./

CITIZEN

EXP./

CAPITA

(TAX -

EXP.)/

CITIZEN

(TAX -

EXP.)/

CAPITA

SHARE

OF

MUNICIP.

TAX/

REGION

1 Roskovec 52.5 14.5 120.7 33.4 -68.2 -18.9 16%

2 Lezhë 37.1 10.3 86.1 24.0 -49.0 -13.7 81%

3 Himarë 32.6 16.3 47.3 23.6 -14.7 -7.3 17%

4 Tiranë 22.1 18.2 30.8 25.4 -8.7 -7.2 89%

5 Vorë 22.0 11.7 41.1 22.0 -19.1 -10.2 3%

6 Selenicë 21.3 4.1 152.9 29.2 -131.6 -25.1 5%

7 Kamez 19.2 6.4 51.4 17.2 -32.2 -10.8 5%

8 Mallakastër 19.8 5.8 130.2 38.2 -110.4 -32.4 8%

9 Maliq 19.1 2.3 166.2 20.1 -147.1 -17.8 9%

10 Ura Vajgurore 18.7 5.5 79.3 23.5 -60.6 -17.9 20%

11 Skrapar 18.6 6.2 102.1 34.2 -83.6 -28.0 10%

12 Devoll 17.3 4.0 101.7 23.8 -84.4 -19.7 10%

13 Konispol 16.4 3.7 141.3 32.0 -124.9 -28.3 2%

14 Sarandë 12.5 10.4 34.5 28.8 -22.0 -18.4 22%

15 Fier 12.3 5.5 61.0 40.9 -48.7 -35.3 38%

16 Librazhd 12.1 3.3 125.3 33.8 -113.2 -30.5 8%

17 Patos 11.8 8.6 30.2 21.8 -18.3 -13.3 13%

18 Divjakë 11.2 2.9 61.8 16.2 -50.6 -13.2 5%

19 Gjirokastër 11.4 7.4 48.0 31.1 -36.6 -23.6 53%

20 Korçë 11.0 7.1 33.1 21.3 -22.1 -14.2 56%

21 Lushnjë 10.7 4.5 42.5 17.9 -31.8 -13.4 20%

22 Kavajë 10.1 5.1 26.3 13.2 -16.2 -8.1 3%

23 Vau i Dejës 10.6 3.2 83.0 25.3 -72.4 -22.1 12%

24 Malësi e Madhe 10.2 1.8 130.1 22.4 -119.9 -20.6 7%

25 Cërrik 10.1 3.2 58.5 18.3 -48.4 -15.2 9%

26 Tepelenë 9.9 4.8 126.6 61.3 -116.7 -56.5 10%

27 Pogradec 9.4 4.0 59.3 25.3 -49.9 -21.3 22%

28 Durrës 8.9 6.1 23.3 16.0 -14.4 -9.9 79%

29 Shkodër 8.9 5.0 32.7 18.2 -23.8 -13.2 76%

30 Bulqizë 8.9 2.7 100.5 30.7 -91.6 -28.0 30%

31 Elbasan 8.6 5.3 35.8 22.0 -27.3 -16.7 64%

32 Peqin 8.4 2.4 71.0 20.4 -62.6 -18.0 6%

33 Tropojë 8.3 2.4 86.2 25.2 -77.8 -22.8 26%

34 Vlorë 8.1 6.3 10.0 7.7 -1.9 -1.5 48%

35 Përmet 8.5 4.3 76.0 38.0 -67.5 -33.7 11%

36 Prrenjas 8.1 2.2 105.2 28.6 -97.2 -26.4 4%

37 Berat 8.0 5.1 31.9 20.2 -23.8 -15.1 46%

38 Rrogozhinë 7.2 2.4 41.3 13.8 -34.1 -11.4 1%

39 Kukës 7.4 2.9 60.8 24.3 -53.4 -21.3 64%

40 Kuçovë 6.9 3.7 32.8 17.5 -25.9 -13.8 19%

41 Libohovë 6.7 3.1 69.6 32.1 -62.9 -29.0 3%

42 Poliçan 6.5 3.0 74.9 34.1 -68.4 -31.2 5%

43 Dibër 6.4 1.6 90.8 22.4 -84.4 -20.8 33%

44 Gramsh 5.8 2.7 70.6 32.4 -64.8 -29.8 5%

45 Kolonjë 5.7 3.2 52.0 28.8 -46.3 -25.6 3%

46 Kurbin 5.6 2.2 45.4 18.1 -39.9 -15.9 12%

47 Mat 5.3 2.4 50.9 22.6 -45.6 -20.3 24%

48 Memaliaj 5.2 1.6 101.7 32.1 -96.5 -30.5 5%

49 Shijak 4.8 4.8 54.4 15.9 -49.6 -11.1 9%

50 Dropull 4.8 4.8 16.5 16.5 -11.7 -11.7 15%

51 Klos 4.4 2.2 61.3 30.2 -56.9 -28.0 12%

52 Këlcyrë 4.4 1.8 126.4 52.7 -122.0 -50.9 3%

53 Krujë 3.9 3.9 33.8 17.8 -29.9 -13.9 13%

54 Mirditë 3.9 2.6 50.3 33.3 -46.4 -30.7 7%

55 Delvinë 3.7 3.0 25.8 20.4 -22.1 -17.5 2%

56 Fushë-Arrëz 3.8 2.5 18.4 18.4 -14.7 -15.9 2%

57 Pukë 3.3 1.9 46.1 25.9 -42.7 -24.0 2%

58 Belsh 3.3 1.7 36.5 19.2 -33.2 -17.5 3%

59 Has 3.2 1.4 68.4 29.3 -65.2 -28.0 11%

60 Finiq 2.4 2.4 38.0 17.2 -35.6 -14.8 3%

61 Pustec 1.2 1.2 17.5 17.5 -16.3 -16.3 0.4%

11.0 4.7 66.0 25.3 -55.0 -20.6 20%

Source: MoFE, Local Budget, Porta Vendore

ALBANIA - LOCAL TAXES, TOTAL EXPENDITURES / CITIZEN / CAPITA , 2019 000 ALL

AVERAGE


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The Municipality of Roskovec30 holds the 1st place, with the highest per capita payment of local taxes, with an annual load of 52.5 thousand ALL for citizens (based only on the population registered in the city) and 14.5 thousand Lekë per capita for all inhabitants who are part of of the municipality of Rroskovec. Meanwhile, the total expenditures for the citizens are 120.7 Lekë, as well as for the total inhabitants of the Municipality where the village is included are 33.4 thousand Lekë per inhabitant. In the following column, if we look at the difference in value between taxes and local fees with expenditures at the civic level, they are 65.2 thousand Lekë, while if in the following column this difference is between taxes and fees at the municipal level with total expenditures per capita, then the value is 18.9 thousand Lekë. The last column is the ratio between the contribution of taxes and local tariffs in total of the municipality of Roskovec to the contribution of local taxes and fees in the whole region of Fier. The same logic is used for all other municipalities listed in the table above. Large municipalities, such as Tirana, which is in 4th place, Fier in 15th place, Durrës in 28th place, Shkodra in 29th place, Elbasan in 31st place, Vlora in 34th place are the indicator of the load of citizens and residents. with local taxes per capita at levels representing the local policies of these Unions and counties for the fiscal burdens of citizens and their residents within the limit of a load approved by the Municipal Council with ± 30% deviation from the levels approved in the law on local taxes. When we consider the influential factors, the measurement of the fiscal burden is not a measure of the extent of the budgetary effect of the government or public administration (its composition). On the other hand, it is not even the measurement of all the obligations that a taxpayer carries in function of the income that he realizes within a year (payment for non-fiscal institutions). The fiscal burden in value, which is presented as local tax per capita, results from the tax / tax ratio and the local fee collected in the state budget with the number of resident residents (a) for the city, as well as for (b) the city and village. To create a general perception of how much the average fiscal burden belongs to each individual, who is a fiscal resident in Albania, regardless of whether he is an active taxpayer or not, the table above shows that the fiscal burden varies depending on the municipality. average per capita. Thus, the average fiscal burden per capita in the district of Tirana is 22.1 thousand ALL / year for citizens and 18.2 thousand ALL for all residents if the city and the village are included together, although the village contributes relatively less taxes than the city. In the simplest sense, a citizen of Tirana as an individual pays an average of 22,100 ALL per year in taxes and fees per year, while if we include the village this summer decreases by reaching a payment level of 18,200 ALL per year, due to the fact that a load of certain local taxes and fees are also paid by taxpayers who are resident residents of the village. This confrontation clearly shows the fact that the state budget has received more than it has given for them. But, if we include in this analysis the capital investments of the budget, for infrastructure, educational, health projects, as well as other expenses, then the situation of expenditures that are distributed from the budget for all regions shows an increase of their weight to GDP, starting from the projects. developmental, but without being affected by budget payments through fiscal burden. This discrepancy is explained by the concentration of consumer and wholesale trade industry in these large counties. But on the other hand, the various zonal differences over many decades are the object of transfer or distribution of costs according to development initiatives. An interesting indicator of the distribution of the fiscal burden is the value added tax burden for each individual. In 2019, each individual Albanian fiscal resident contributed to the budget for this tax, but also non-residents (foreigners), with 55 thousand ALL per year for the consumption of services and goods during their stay in Albania. This calculation is closer to the correct perception, because this tax is paid by each individual when buying goods or services.

30 Domestic migration and emigration of the population increase the burden on suburban and small counties. The population is according to the latest update from INSTAT


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3.5. Fiscal burden on regional GDP in Albania Fiscal burdens, as a result of the activity of the central and customs tax administration, revenues from local government, as well as a part of receipts from the public institutions for social and health contributions constitute the comprehensive part that is calculated in relation to regional GDP.

Fiscal burden from taxes and customs has increased its share by 0.1% in 2019. In 2019, strengthening local tax administration, as well as the impact of dividend taxes led to better performance levels. The burden of social and health insurance contributions holds a growing share on the fiscal burden of 5.6 percent in 2019 compared to 2018. In the last 6 years its share has increased by 40.6%. The fiscal burden of 2019 compared to 2018 is presented according to the regions in Table 31. According to the ranking of the burden as% of GDP, the 1st place is held by the Municipality of Tirana at the regional level, which being the capital of the country and with the highest density high population (29% of the country's population) maintains this place every year, since the first edition published by ALTAX. The last place in the ranking in 2019 is held by the Municipality of Fier, which is also the center of the region with 20.2%. In Tab.31, is presented the calculation of the fiscal burden for 12 Municipalities / Regions of Albania, for 2018 and 2019. The Municipality / Region of Tirana, Durrës, Vlora, Shklodra, Korça, Gjirokastra, Lezha and Beat are presented with a slight decrease of fiscal burden in 2019 compared to 2018, respectively with -1.2, -0.2 and -1.2% of GDP. The Municipality / Region of Elbasan, Kukës, Dibra and Fier have a growing change in the fiscal burden from 2018 a year later. The share of the regional fiscal burden (taxes and central and local taxes) on domestic production includes the calculation of taxes paid to the state budget by each region to the country's GDP. This category of income includes fiscal burdens borne by taxpayers on behalf of the central tax administration (General Directorate of Taxes), as well as local tax administrations (Municipalities and units).

The fiscal burden for all counties in 2019 has a share as much as 25.2% of GDP. The main share is held by the Tirana region with a fiscal burden of 11.3% of the country's GDP, followed by Durrës with 3.4% of GDP (respectively both with less than 0.1% of GDP compared to 2018). The Municipality / Region of Fier will continue to exist in 2019 with a respective share of as much as 2% of GDP.

Tab.31 RANKINGS OF REGIONS ACCORDING TO TAX BURDEN IN ALBANIA 2018- 2019

MUNICIPALITY

REGION 2018 2019

1 TIRANË 28.4% 28.0% 0.4%

2 DURRËS 25.9% 25.5% 0.3%

3 VLORË 24.4% 24.4% 0.0%

4 SHKODËR 24.6% 24.0% 0.6%

5 KORÇË 24.2% 24.1% 0.1%

6 GJIROKASTËR 24.6% 23.9% 0.7%

7 LEZHË 23.9% 23.7% 0.2%

8 BERAT 23.1% 23.0% 0.1%

9 ELBASAN 22.6% 22.9% -0.4%

10 KUKËS 21.5% 22.9% -1.4%

11 DIBËR 20.1% 20.7% -0.6%

12 FIER 19.8% 20.2% -0.4%

* calculation by ALTAX

RANKINGSFISCAL YEARS DIFFERENCE

19/18


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Municipality / Region of Vlora with 1.5% of GDP, Elbasan with 1.4% of GDP and Shkodra with 1.3% of GDP. The other Municipalities / Regions have a lower fiscal burden (all as much as 3.2% of GDP), where each of them has collected 0.6% - 0.8% of GDP for the budget. More than half of the fiscal burden that has been paid as taxes and budget fees by the tax and customs administration belongs to the area of Tirana and Durrës (14.7% of GDP). These indicators apply to transparency regarding the share held by consumers and investors, realizing that the declining trend in indirect tax burden (pressure on consumer prices) and the growing trend of direct taxes (impact on corporate profit and personal income) reflect the positive effects of government fiscal policy, which aims at a redistribution of income by benefiting more capital gains taxes on capital. The ratio of paid taxes or the territorial unit within the state in relation to GDP is an indicator that is worth seeing how much is the real contribution of taxpayers. On the other hand, it is worthwhile to understand how much should be claimed in order to benefit back in the form of expenditures made from the budget for services that are of great public interest. On the other hand, a better local fiscal administration should justify narrowing the gap between consumption and distribution of the population and businesses in the region. The legal changes of the end of 2019 in the fiscal system (Fiscal Package 2019), on the one hand, aim to facilitate small business, the self-employed, but also distribute the tax burden more harmoniously between those who are taxed from work and those who are taxed by capital. On the other hand, changes in fiscal policy tend to normalize the situation in many sectors of the local economy. These changes, at the same time, increase revenues in some municipalities where the benefit is greater for the main ones, e.g. Municipality of Tirana, enabling the provision of more services with a higher quality. In the fiscal easing policies in the last two years in terms of local tax burden is "Simplified profit tax" for small business, which has been repealed for the segmentation of businesses with a turnover of 0 to 5 million ALL per year. But, the increase of the annual turnover threshold up to 14 million ALL per year for the other segmentation of businesses that tax the profit by 5% per year is another shift of the burden of this tax towards businesses that earn more, thus facilitating small business and especially the self-employed. The annual turnover business from 8 million to 14 million ALL, which is the change of the fiscal package 2018, constitutes 20% of the number of businesses in the country. In all 12 counties, more than half of the fiscal revenue consists of the fiscal burden collected by the citizens of the main district municipality. The specific shares of the country's counties include the number of taxpayers who bear the fiscal burden, industrial characteristics, gender, population structure, education, underground and aboveground natural resources, inherited individual assets and the ones created over two decades, as well as elements of the environment and investments with public and private funds, including zonal development plans. These reports also guide the distribution of taxpayer segmentation, according to the size they have (micro, small, medium, or large). From the data of the reports, it can be seen that the fiscal burden in the regions is maintained at the quantitative level by the base of resident taxpayers included in the categories of micro (self-employment) and small businesses, rather than by the base of resident taxpayers included in the categories of businesses medium and large. An influential factor is related to the distribution of consumer goods and services, which have a tendency to be consumed outside the area where they are created or produced towards export or in areas with population density.


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4. Tax Burden in Kosovo in 2019 The budget burden and the fiscal burden in Kosovo are measured in the same way as it has been clarified for Albania. The fiscal burden of total revenues in Kosovo is due to the contribution of 85% from indirect taxes, 15% from direct taxes. This revenue structure is a result of the structural composition of the Kosovar economy, which has a dependence on imports and as a result results in high trade deficits.

4.1. Kosovo budget performance In absolute terms, budget revenues in 2019 are 1.89 billion euros. According to the graph, tax revenues are 1.66 billion Euros and non-tax revenues are 0.215 billion Euros.

The structure of budget revenues, according to Tab.32 in 2019 consists of the main part of tax revenues (98%), non-tax revenues, the part that does not constitute taxes and encumbrances (0.7%) and Grants (1.3%). Central tax revenues account for 22.7% of GDP, while local government revenues account for as much as 1.1% of budget revenues. Kosovo's budget revenues in 2019 are as much as 24.1% of GDP and account for 88% of total revenues of the 2019. Budget revenues, including tax revenues and some taxes and charges from the central and local level of obsolescence that are constituent items in non-tax revenues.

According to Tab.33, central tax revenues increased by 0.2% of GDP in 2019 compared to 2018. Local tax revenues increased by 0.1% of GDP. Meanwhile, revenues from contributions and other taxes are down 0.2% of GDP. Revenues collected domestically have historically followed the trend of economic activity in the country, with a gradual improvement. Although the basis of these revenues continues to low life, thanks to the

Tab.32 BUDGET REVENUES TO GDP IN KOSOVO IN 2018 -2019 % GDP

BUDGET REVENUES 2018 2019 DIFFEREENCE

GRANTS Grante dhe mirëadministrim0.1% 0.3% 153.5%

TAX REVENUES FROM CENTRAL

TAX ADMINISTRATIONTë ardhurat tatimore qendrore22.5% 22.7% 0.9%

TAX REVENUES FROM LOCAL TAX

ADMINISTRATIONTë ardhurat tatimore vendore1.0% 1.1% 11.0%

SOCIAL CONTRIBUTIONS Kontribute dhe taksa të tjera0.5% 0.3% -40.0%

NON TAX REVENUES Të ardhurat jo tatimore2.0% 2.9% 45.0%

TOTAL 26.1% 27.3% 4.6%

Source: MoFT 2018 2019

Tab.33 TAX REVENUES TO GDP IN KOSOVO IN 2018 -2019 % GDP

tax revenues 2018 2019 DIFFERENCE

CENTRAL TAX REVENUES Të ardhurat tatimore qendrore22.5% 22.7% 0.9%

LOCAL TAX REVENUES Të ardhurat tatimore vendore1.0% 1.1% 11.0%

CONTRIBUTIONS AND OTHER TAXES Kontribute dhe taksa të tjera0.5% 0.3% -40.0%

TOTALI 24.0% 24.1% 0.5%

Source: MoFT 2018 2019

CENTRAL TAXREVENUES

LOCALTAXREVENUES

CONTRIBUTIONSETC.


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design and implementation of structural reforms, has positive signals for a more accelerated growth trend beyond that driven by increased economic activity (as a result of increased voluntary compliance and narrowing of the tax gap). In tax revenues in 2019, the main share is held by customs duties with 70.7%. This structure is expected to change gradually by shifting the high participation of indirect taxes to direct ones, after the adoption of the measures of release in production and the full effect of the Stabilization and Association Agreement, through the replacement of customs duty and border VAT with more revenues from corporate tax and personal income tax. Earlier changes in the Law on VAT, which have enabled the postponed payment of VAT on production inputs, have already begun to have an effect in this regard31.

Domestic and customs VAT in 2019 increased by an average of 1% of GDP with a year-on-year change of 8.3%, where 6.1% comes as an increase in the tax base (private consumption + donors + goods and services e government) and the rest comes from the collection of tax debt. VAT in total consists in its turnover with 28.2% of local VAT and 71.2% of border VAT. Domestic VAT increased by 10.6% year on year, with a change of 0.2% of GDP. In absolute value, the domestic VAT is 239 million Euros. VAT at the border increased by 3.4% year on year, but with a decrease of 0.16% of GDP. In absolute terms, the VAT limit is 606 million Euros. VAT refunds are declining year by year by - 4.2%, with a change in absolute value minus 2 million Euros. VAT refunds in absolute terms in 2019 are 46 million Euros. Revenues from Corporate Income Tax increased by an average of 0.04% of GDP, with a change of 9% year on year. In absolute terms, revenues are 95 million Euros. Revenues from Personal Income Tax have increased by an average of 0.07% of GDP, with a change of 8.5% year on year. In absolute terms, revenues are 166 million euros. This increase is based on economic developments and developments in the country and their effects on the labor market, the salary bill for the public sector and measures to increase administrative effectiveness in this tax category. These increases are mainly due to the impact of economic developments reflected in the increase of the tax base (GDP-Indirect Taxes + Subsidies and Transfers) for each tax and the rest from the reduction of the tax debt stock.

31 Budget Laws 2019 -2020

Tab.34 CENTRAL TAX REVENUES TO GDP IN KOSOVO IN 2018 -2019 % GDP

FROM TAX AND CUSTOMS* 2018 2019 DIFFERENCE

VALUE ADDED TAX 12.0% 13.0% 8.3%

TAX ADMINISTRATION 3.0% 4.0% 33.3%

CUSTOMS 9.0% 9.0%

minus VAT REIMBURSEMENT -1.0% -1.0%

NET VALUE ADDED TAX 11.0% 12.0% 9.1%

CORPORATE PROFIT TAX 1.0% 1.0%

EXCISES 7.0% 6.0% -14.3%

PERSONAL INCOME TAXES 2.0% 2.0%

NATIONAL TAXES etc. 1.0% 1.1% 10.0%

CUSTOMS FEES 2.0% 2.0%

TOTAL 24.0% 24.1% 0.4%Source: MoFT

* not included LOCAL TAX REVENUES


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Another impact that has led to a higher direct tax increase in 2019 includes the declaration of a higher profit as a result of exemptions from the Government of customs duties and excise duties on production inputs and information technology equipment. Revenues collected from Kosovo Customs in 2019 amount to 1.17 billion Euros. In cases of non-change of tax rates, border revenues have historically conveyed value and the amount of import. Excise taxes have increased by an average of 3.8% year on year, reflecting the growth of real GDP which is the tax base of excise revenues. Meanwhile, the customs duty has increased by an average of 4.8% based on the increase in imports of goods which are the tax base of these revenues, as well as the negative effect on revenues from the SAA and the Free Trade Agreement with Turkey. Non-tax revenues have an average increase of 11.4% in 2019 compared to 2018. These revenues reflect the Government's policy stance to avoid reliance on non-tax revenues and create incentives to reorganize administrative fees accordingly. on the principle of cost-based service and in accordance with the legislation on permits and licenses. By simplifying the tax and customs system, increasing the quality of services to taxpayers, continuing the full digitalization of services for the taxpayer, we expect increased efficiency of tax administration and increased voluntary compliance with tax obligations, which will therefore be positively reflected in it. tax revenues collected in the country. The increase in tax revenues for the short term is expected to be supported mainly by indirect taxes, especially VAT and excise duties, while a stabilization of revenues from customs duties is foreseen as participation in tax revenues, as a result of the implementation of trade agreements. free with EU countries (SAA). Additional impact is expected to be the abolition of customs duties on all goods entering the production process as a raw material, as well as the abolition of customs duties on information technology equipment. The positive effects that lead to greater production than payment in the country after the sale of the final products will reduce the losses from these exemptions. Direct tax revenues are also expected to increase gradually, albeit on a relatively low basis.

4.2. Distribution of fiscal burden according to the budget destination Impact of new measures to improve the business environment, facilitation of imports for the manufacturing sector, exemption from customs duties in the case of imports of technological equipment, plans to narrow the tax gap and informal economy, measures for advancing the efficiency of revenue collection by collection agencies, with a particular focus on reducing debt stock, etc. are considered to have the potential to increase the level of revenue. Notwithstanding this, for reasons of cost planning on the basis of stable income, a conservative approach has been applied in assessing the impact of these measures. Consequently, expenditures can be maintained at a manageable level, and with the aim that expenditure commitments are based on sustainable funding. To build trust in a fiscal system that works to increase the well-being of its citizens, an analysis needs to be made of the return of taxes paid as a fiscal burden on public spending on taxpayers. In the analysis of budget expenditures for the last 2 years, according to table 35 it is seen that total expenditures in 2019 have an average annual increase of 7.3% year on year, with an increase in absolute value by 142 million Euros. Meanwhile, revenues increased on average year by year by 6.3% with a change in absolute value of 98 million Euros.


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The largest increase in total costs is borne by operating and maintenance costs (goods and services) with a change of year by year by 17.6%, or as much as of 0.8% of GDP. In absolute terms, this change is worth € 44 million. One of the factors influencing the growth of this category is the reclassification of expenditures from the category of capital expenditures to the category of goods and services. Capital expenditures are unchanged, but in respect of GDP they show a decrease of 0.6%, or a change from year to year with less than 5.1%. However, capital expenditures have had the highest rates at 69% in 5 years. An important part of the capital investments is the continuation of the M2 project for Mitrovica, and other investments for the improvement of local, sports and educational infrastructure, and projects which, compared to last year, have marked a significant increase. Wage and social contribution expenses (administration) have increased in absolute value by 24 million Euros with a change of 4% year by year. Wage and bonus costs continue to account for a significant share of total spending. Expenditures for the local budget and transfers have a positive change of 12.4% year by year, with an increase in absolute value of 69 million Euros. This increase in transfer subsidies includes the implementation of the Teachers' Law and the natural increase in the number of pension beneficiaries. Expenditures for capital investments in 2019 account for 25.3% of total expenditures and in 2018 they are as much as 27.2% of total expenditures. Administration costs account for 29.4% of total expenditures. In 2018, their share is 30.3% of total expenditures. Expenditures on transfers for local government account for 29.9% of total expenditures, while in 2018 they accounted for 28.6% of total expenditures in 2014 and 2018. Comparing the tax revenues with the budget expenditures, which coincide with them, it can be seen that the revenues from the personal income tax justify only 25% of the budget expenditures for the salaries of the state administration. Meanwhile, only 19% of corporate income tax revenues and property taxes together are justified for capital investment expenditures. Other destination budget expenditures (for local government and operating expenditures), together with the completion of parts not covered by capital expenditures and wages, are covered by indirect taxes, which meanwhile go to other local expenditures.

% GDP

BUDGET EXPENDITURES 2018 2019 DIFFERENCE

ADMIN.WAGES AND CONTRIBUTIONS Shpenzimet për pagat dhe kontributet8.7% 8.7% -0.3%

OPEX Shpenzime operative dhe mirëmbajtje3.9% 4.7% 20.7%

CAPITAL INVESTMENT Shpenzime investime kapitale10.3% 9.7% -5.1%

LOCAL GOVERNMENT Shpenzime për buxhetin vendor dhe transferta7.8% 8.4% 8.3%

TOTAL 30.8% 33.0% 7%

Source: MoFT

Tab.35 BUDGET EXPENDITURES TO GDP IN KOSOVO IN 2018 -2019

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%



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4.3. Local taxes per capita by municipalities in Kosovo The own municipal revenues are financial assets that are collected from taxes, fees, fines, payments for public services provided by the municipality, rents from real estate owned by the municipality, revenues from the sale of municipal assets, revenues from municipal enterprises, and from income from co-payments from services in education and health, etc. Municipalities collect their own revenues in two forms: as revenues collected directly by the municipality as an activity of the municipality and as revenues collected from the central level (hereinafter, indirect revenues) which are transferred to municipalities as an integral part of own revenue. Property tax is considered a very important source of income and one of the most stable categories of municipal revenues. The Municipal Assembly sets property tax rates on an annual basis at the tax rate of 0.05% to 1% of the market value of the property. It is important that the revenues collected by the municipalities are returned to the citizens in the best possible way of providing the best and highest quality services. In Kosovo, the fiscal burden has been increasing year by year. If we analyze the collections from the local government according to the municipalities that are an integral part of 7 regions, it is noticed that the highest burden is borne by the citizens of Prishtina region with a local tax burden of 148 Euros per year, as well as those of Gracanica with 135 Euros per year. These two municipalities have their own per capita income more than double that of other municipalities in Kosovo. Although the tax burden decreases when the tax base increases, this has not happened in Kosovo. The regions of Prishtina, Prizren and Mitrovica have the highest population. But, apart from Pristina, the other two regions do not bear a justified burden based on the argument of a broad tax base. From this point of view, the analysis states that the levels of local tax administration should increase their capacity to take advantage of opportunities to increase local revenues. A look at the distribution of the local tax burden shows that the first problem is the low capacity of local tax administration. Meanwhile, the unequal distribution of the local tax burden is explained to a certain extent by the concentration of consumption and the non-harmonized trade industry in all regions. An influential factor is also related to the distribution of consumer goods and services, which tend to be consumed outside the area where they are created or produced for export or in densely populated areas. But the problem that is still not being narrowed is evasion, which comes from an unchanged informal economy even though revenues grow from year to year. But this increase in revenue is not due to the battles won against evasion, but mostly as part of the taxation that corresponds to the expansion of the economy, as well as the reflection of inflation. The highest percentage of non-taxed services is one of the most acute and massive problems for the Kosovo market. The fight against tax evasion should be the main focus of fiscal policy, as the missing part should not only be a way to increase government revenues, but also be a way to increase the equality of the tax system for taxpayers. This war will dictate even more complete transparency and a need to improve the reliability of the tax system for citizens and businesses. All revenues collected in a municipality belong to it and become part of the municipal budget. The table below lists all municipalities in Kosovo according to per capita revenues for 2019.


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Kosovo - Its own tax revenues and expenditures / capita in 2019 Euro

RANKINGS MUNICIPALITY

Its own tax

revenues/

Capita

Expenditures

/ Capita

RATIO

TAX/EXP.

1 Prishtinë 148 409 36%

2 Gracanica 135 617 22%

3 Fushë Kosovë 62 257 24%

4 Gjilan 55 316 17%

5 Obiliq 53 498 11%

6 Shtërpcë 51 291 18%

7 Kllokot 49 461 11%

7 Ferizaj 49 297 16%

8 Pejë 46 265 17%

9 Prizren 45 246 18%

10 Kamenicë 40 303 13%

11 Vushtrri 39 293 13%

12 Novobërd 38 386 10%

13 Suharekë 37 266 14%

14 Gjakovë 36 258 14%

15 Mitrovicë 35 281 12%

16 Lipjan 34 241 14%

17 Partesh 33 714 5%

18 Ranillugë 32 479 7%

19 Istog 31 262 12%

20 Hani i Elezit 29 291 10%

21 Klinë 23 249 9%

21 Kaçanik 23 242 9%

22 Viti 22 237 9%

23 Gllogovc 21 203 10%

23 Shtime 21 263 8%

24 Rahovec 20 230 8%

25 Skënderaj 19 253 8%

25 Podujevë 19 261 7%

26 Junik 18 279 6%

27 Malishevë 16 243 6%

27 Deçan 16 212 7%

28 Dragash 14 243 6%

29 Mamushë 12 345 3%

30 Mitrovica Veriore 11 495 2%

31 Zubin Potok 4 386 1%

31 Zveçan 4 338 1%

32 Leposaviq 2 341 1%

48 288 17%Sources: Municipalities,Parliament, MoFT

AVERAGE


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4.4. Regions with the highest and lowest fiscal burden in Kosovo Tax and non-tax revenues in the budget in 2019 in relation to the domestic production of the Region for 2019 for each of the 7 regions in Kosovo are presented in Table 36.

The highest fiscal burden for 2019 is borne by taxpayers of the municipality / region of Prishtina (28.5%) with an increase in the level of burden by 0.3% compared to 2018. In 2nd place for the high fiscal burden are the taxpayers of the municipality / region of Ferizaj as 24.6% of the regional GDP, who in 2018 have maintained the same position in the ranking. In 2019, the fiscal burden increased by 0.3% of regional GDP. Prizren is in 2019 with an increase in the fiscal burden by 0.2% of regional GDP with a level of 24.3%. Last year, these taxpayers ranked third in the country. Gjilan is the region with the lowest burden (23% of GDP), which comes as a result of low budget revenues in relation to regional GDP, ranking 4th in the ranking. It held the same place in 2018. Gjakova holds the 5th place for the low fiscal burden (22%) keeping the same position in the ranking compared to the previous year. In the group of regions with low fiscal burden, it holds the region of Mitrovica (17%) with a decrease of 0.3% of regional GDP. In 6th place for low fiscal burden is the region of Peja (21.1%), with a fiscal burden below the level of the average fiscal burden of Kosovo. The reasons for a low fiscal burden are mostly found in business constraints in these areas, but also in a performance related to problems in field administration. On the other hand, informality and corruption have had an impact on maintaining an unexposed and non-transparent fiscal burden on the budget.

Tab.36 RANKING OF REGIONS ACCORDING TO TAX BURDEN IN KOSOVO*

MUNICIPALITY

REGIONFISCAL YEAR 2018 2019

1 PRISHTINË 28.2% 28.5% 0.3%

2 FERIZAJ 24.3% 24.6% 0.3%

3 PRIZREN 24.1% 24.3% 0.2%

4 GJILAN 23.1% 23.0% -0.1%

5 GJAKOVË 22.5% 22.0% -0.5%

6 PEJË 20.7% 21.1% 0.4%

7 MITROVICË 17.3% 17.0% -0.3%

*calculation by ALTAX

RANKINGSFISCAL YEARS DIFFERENCE

19/18


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4.5. Fiscal burden on the regions of Albania and the regions of Kosovo Although the comparison cannot be ethically called correct, it is still worthwhile to see how this burden has affected regional economic development in both countries. It is also worth noting its impact on foreign investment, given that the burden is higher in Kosovo than in Albania. A comparison of foreign investment inflows shows that Albania has a higher value of investment. Even in terms of capital expenditures from the budget, it can be seen that Albania spends 4.4% of GDP. While Kosovo spends 9.7% of GDP. Social spending in Albania is 10.4% of GDP, with a difference with Kosovo for the same spending group +4 percentage points. Administration expenditures in 2019 are highest in Kosovo with +4.2 percentage points higher year by year. Based on the conclusions that come from the experience of countries that have moved forward with capital expenditure reforms, it is necessary not to neglect short-term costs, but to shift and monitor with a certain care the very importance they receive regarding the fragility of reform progress. in their early years. The seven regions and municipalities included in Kosovo are considered to have a lower fiscal burden than the fiscal burden of Albania's regions, where 4 of the regions have a fiscal burden below its national level. There are 10 regions / municipalities in Albania with a lower burden than the fiscal burden of Albania. If we compare the political similarity of the region of Prishtina with that of Tirana, the comparison between them brings out a fiscal burden for the taxpayers of Tirana 0.5 percentage points lower. Meanwhile, the region of Fier, as the region that records the lowest fiscal burden in Albania is +3.2 percentage points higher than the fiscal burden of the Mitrovica region. So, the comparison for some of the elements that are most directly affected by the fiscal burden show facts that are not necessarily related to the fiscal burden, but also to the needs that each country has to develop its policies, based on government programs that have the direction 4 -years of the country. In fact, as discussed above, the fiscal burden is not the only element considered by investors. But still a low burden shows that capacity development and technology in use are still on their way to greater empowerment and penetration into the economy. In order to alleviate this burden for Kosovar importers, legal initiatives have been taken aimed at adopting measures of release in production. One of the goals of structuring the fiscal burden is to improve its base by replacing the customs duty and VAT collected at the border with higher corporate tax revenues and personal revenues. Revenues collected within the country have followed the trend of economic activity, with a trend of gradual improvement. Although the base of these revenues continues to be low, due to the implementation of structural reforms there are positive signals for a more accelerated growth trend beyond that driven by increased economic activity.


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5. Tax Freedom Day in 2020

Tax Freedom Index 2020 Methodology The Fiscal Freedom Day is calculated on the basis of the tax revenue ratio for the fiscal year with the gross domestic product. Tax revenues include all types of taxes and duties, customs duties, as well as social and health insurance. Total tax revenue is calculated as a percentage of GDP. The resulting ratio is multiplied by the number of days of the year. The resulting number is counted as the days of the months starting January 1. The number of divided days, according to the days of each subsequent month, stops until the day that is completed by the month that it corresponds (for the year 2020 will be a leap year, and the calculated is pushed one more day). The day that calculation is stopped is considered the Fiscal Freedom Day. The meaning of this day is related to the fact that the country's taxpayers on this day closed the accounts of payment of tax liabilities and from this day of the year and the following they work for themselves without having any tax liability to the state.

Calculate the Tax Freedom Day for yourself The Day of Fiscal Freedom represents the taxpayer’s fiscal freedom in general. But what is your tax Freedom Day? Here's a simple way to calculate it for each year. If you will have all the information you need when paying your taxes, the calculation is a simplified conclusion of the action. First, add your total liabilities to the central tax office (for cases when you are registered as an activity) as well as local taxes and fees. In the case of an individual who is not registered with the tax office, but has income from different sources, you must include in this calculation all the taxes and fees you pay for the services you are required, as well as the ones you are withheld (p. eg tax on wages, interest rates, municipal taxes etc.). At the other end, record the gross income you received during the past year. The ratio between total total taxes and fees paid and all your gross income results in a number. This number is the last day of the year related to the fiscal burden. After this date that coincides with the one-day calendar of the month is considered your Fiscal Freedom Day. The year 2020 is a special one for the days of the year corresponding to the fragile year, with 366 days.


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5.1. Tax (Fiscal) Freedom Day 2020 in the Western Balkans The calculation of fiscal freedom is composed of three factors: Individual income tax burden, Tax burden on business income as well Total tax burden as a percentage of GDP. In 2020, Fiscal Freedom Day for the Western Balkans is the 111th day of the year. This year, fiscal freedom comes on the same day as it came in 2019. In 2020, in Kosovo, Albania and Northern Macedonia this day falls earlier, while in Bosnia-Herzegovina, Montenegro and Serbia it falls. Later. Even in 2019, this day has come respectively for the countries of the Western Balkans. The only change that has occurred between the two years is in Albania. In 2020 the day of fiscal freedom is two days earlier than in 2019, due to the reduction of fiscal burden in 2019. Fiscal Freedom Day represents the taxpayers of a country in the face of their burden from the fiscal administration to collect fiscal liabilities for the budget. This day is the indicative date to be recognized, on what day of the year the burden on the state budget is met or to show taxpayers how many days they need to work in order to pay their share of tax liabilities on behalf of the budget. After this day, the remaining income remains as logic in the pocket of the business or individual, to pay individual, family or business expenses. From the calculation of the days consumed in each country to pay the fees that constitute the fiscal burden, according to the data declared by each of the fiscal revenue administration and confirmed by the Ministry of Finance for each of the Western Balkan countries, it results that depending on of the level of fiscal burden to GDP, the Day of Fiscal Freedom in 2020 in the Western Balkans comes on April 20, 2020. Fiscal Freedom begins its journey through the region by knocking first on Kosovo on March 28. He then went to Albania on April 3 and a day later to Northern Macedonia on April 4. There is no date for this month to be celebrated as Fiscal Freedom Day. In May, Fiscal Freedom Day arrives in Bosnia and Herzegovina and five days later arrives in Serbia on May 9. Fiscal freedom has recently been celebrated in Montenegro on May 11. This year, Kosovo is considered to have an advantage in easing the burden with Albania, reaching this day 5 days before and 22 days before WB6. After this date, the entire WB6 region begins to feel completely relieved of the fiscal burden owed to the budget. Based on the date when the Fiscal Freedom is celebrated, everyone understands how much the burden of the budget burdens the citizens of the country. On the other hand, Fiscal Freedom is the index that shows how many free days businesses and individuals have throughout the year to work for themselves and their families.

CALENDAR OF TAX FREEDOM IN WESTERN BALKANS IN 2020

COUNTRIES

WORKING

DAYS FOR

BUDGET

IN 2019*

WORKING

DAYS FOR

BUDGET

IN 2020

DATE OF

TAX

FREEDOM

IN 2019

DATE OF

TAX

FREEDOM

IN 2020

KOSOVO 88 88 March 28th March 27th

ALBANIA 94 92 April 3d April 1st

NORTH MACEDONIA 95 95 April 4th April 3d

BOSNIA-HERZEGOVINA 126 126 May 4th May 3d

SERBIA 131 131 May 9th May 8th

MONTENEGRO 133 133 May 11th May 10th

WESTERN BALKANS 111 111 April 21st April 20th* calculation by ALTAX


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Why does Tax Freedom Day change every year? To bring this day to the attention of all taxpayers as soon as possible, ALTAX presents the Fiscal Freedom Calendar every year for the last decade. The reason why the day changes is closely related to the revenues collected by the fiscal administration and the agencies that collect social contributions to the state budget. The more revenue collected during a year, the later the Fiscal Freedom Day is celebrated for the following year. Albania had this day later in 2019, as more revenues were collected than a year ago in relation to GDP. In other WB6 countries, this day has not changed in 2020, due to revenue collection in the same ratio with GDP as in 2019. This income may not necessarily be the same between years, but may be in the same proportion when they are viewed as the level achieved by GDP.

5.2. Tax (Fiscal) Freedom Day in 2020 in Albania

This day shows all Albanians how much they have had to work for their state budget and tells them that this period has lasted until the end of the first quarter of 2020. Fiscal Freedom Day falls on the first day of April. Fiscal release for 2020 is on the 92nd day of the year, which falls on April 1st. After this period, earnings from labor and capital belong to the individual and business, as it is already considered that the budget has managed for only 3 months to introduce in the budget from taxpayers’ part of the profits generated from labor or capital leaving space for another three quarters. of the year they work for themselves. The day that celebrates the whole of Albania does not coincide with the day of fiscal freedom of each region, as the fiscal burden for Albania is calculated as the average of the entire fiscal burden of the country's regions.

According to the fiscal burden of each region, as well as the calculation according to the calendar of the year, it turns out that Fiscal Freedom will come to 12 Albanian regions in the first quarter of 2020. Durrës and Tirana regions are the only ones that celebrate Fiscal Freedom at the beginning until close to mid-April 2020. The region of Berat, Lezha, Korça and Vlora result in the same number of days in 2019 and 2020, in which taxpayers from these regions work to pay fiscal obligations and get rid of fiscal burden.

CALENDAR OF TAX FREEDOM IN ALBANIA IN 2019 - 2020

REGIONS

WORKING

DAYS FOR

BUDGET

IN 2019*

WORKING

DAYS FOR

BUDGET

IN 2020

DATE OF

TAX

FREEDOM

IN 2019

DATE OF

TAX

FREEDOM

IN 2020

FIER 72 74 13-Mar 14-Mar

DIBËR 73 74 14-Mar 14-Mar

ELBASAN 82 84 23-Mar 24-Mar

KUKËS 79 84 20-Mar 24-Mar

BERAT 84 84 25-Mar 24-Mar

LEZHË 87 87 28-Mar 27-Mar

GJIROKASTËR 90 87 31-Mar 27-Mar

SHKODËR 90 88 31-Mar 28-Mar

KORÇË 88 88 29-Mar 28-Mar

VLORE 89 89 30-Mar 29-Mar

DURRËS 94 93 4-Apr 2-Apr

TIRANË 103 102 13-Apr 12-Apr

ALBANIA 94 92 4-Apr 1-Apr* calculation by ALTAX


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The regions of Fier, Dibra, Elbasan, Kukes, Gjirokastra, Shkodra, Durres and Tirana turn out to have to work with a number of fewer days in 2020 than in 2019. Fiscal Freedom Day in 2020, as in 2019, comes first in the Fier region. In 2018, the taxpayers of Fier have worked 72 days to get rid of the fiscal burden. In 2019, they worked 72 days to get rid of this burden. 2020 Fiscal Freedom Day falls on March 14th. Taxpayers in the Dibra region in 2020, as well as in 2019, hold the second place in the country in terms of the number of days they have spent to get rid of the fiscal burden. In 2018, the taxpayers of Dibra worked 73 days to get rid of the fiscal burden. In 2019, they worked 74 days to get rid of the fiscal burden. 2020 Fiscal Freedom Day falls on March 14th. Taxpayers in the Elbasan region worked 82 days in 2018 and 84 days in 2019. In 2019, Elbasan taxpayers held third place for the day of fiscal freedom that came earlier than other regions in 2020 on 24 March. On this date, taxpayers from the Kukës and Berat regions are also relieved of their fiscal burden. Fiscal Freedom Day in Kukës fell on March 20, 2019 and in Berat on March 25. The day of fiscal freedom 2020 in the region of Lezha and Gjirokastra falls on March 27. Taxpayers of these two regions had Fiscal Freedom Day in 2019 on March 28 and March 31, respectively. In 2018, taxpayers in the Lezha region worked 87 days to pay off liabilities under the obligatory fiscal burden to pay, while Gjirokastra taxpayers worked 90 days. In 2019, taxpayers in the region of Lezha and Gjirokastra have worked for 87 working days on behalf of the budget. Even in the region of Shkodra and Korça, taxpayers have had the Day of Fiscal Freedom 2020 2020 on March 28, while the Day of Fiscal Freedom 2019 in Korça has fallen on March 29 and in Shkodra on March 31. In 2018, taxpayers in the Shkodra region worked 90 days to pay off liabilities under the compulsory fiscal burden to pay, while Korça taxpayers worked 88 days. In 2019, taxpayers in the Shkodra and Korça region worked for 88 working days on behalf of the budget. Taxpayers in the Vlora region have Fiscal Freedom Day 2020 on March 29. Fiscal Freedom Day in 2019 has fallen on March 30th. Taxpayers in the Vlora region, both in 2018 and in 2019, have worked 88 working days to pay tax liabilities to the budget. In the region of Durrës, taxpayers have the day of fiscal freedom 2020 on April 2, while in 2019 the day of fiscal freedom was on April 4. Taxpayers in the region of Durrës, in 2018 worked 94 working days, while in 2019 worked 93 working days to pay tax liabilities to the budget. In the region of Tirana, taxpayers have the day of fiscal freedom 2020 on April 12, while in 2019 the day of fiscal freedom was on April 13. In this region, which has the largest number of taxpayers in the country, they have paid 103 working days in 2018 and 102 working days in 2019 to pay tax liabilities to the budget. After this date, all taxpayers can calculate the remaining income to use for their own purposes and needs for consumption, savings, or investment. This facility helps to encourage greater consumption for family members, as well as increase savings and their use for investment by businesses. But in reality, beyond the symbolism of the date, planning is done based on programs that are based on business or individual performance.


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5.3. Tax (Fiscal) Freedom Day in 2020 in Kosovo

The Day of Fiscal Freedom arrives in Kosovo in the last days of March 2020. Fiscal Freedom in Kosovo arrives on the 88th day of 2020. This day according to the calculations of the days according to the months of the year falls on March 28, 2020. In 2019, the Day of Fiscal freedom was on March 29 and arrived on the 88th day of 2019, the same as in 2020. Taxpayers, who are residents of all 6 regions of Kosovo, have Fiscal Freedom Day 2020 during March and only one region in April. The Day of Fiscal Freedom in Kosovo 2020 arrives faster in the Mitrovica region on the 2nd day of March. In 2019 this day was on March 13th. This region reaches 15 days earlier than the region of Peja on Fiscal Freedom Day 2020, based on the revenues collected during 2019. On the day of fiscal freedom 2019 this region has reached 3 days earlier than the region of Peja. In 2019, taxpayers in the Mitrovica region worked 62 days to pay off their fiscal obligations and get rid of their fiscal burden. In 2018, they worked 72 days and later brought 2019 Fiscal Freedom Day. Taxpayers in the Peja region have the day of 2020 fiscal freedom on March 17, which falls 3 days earlier than in 2019. Peja taxpayers celebrate fiscal release in 2020 after working 77 days in 2019 to pay all obligations their fiscal. In 2018 they worked 79 days before they were considered to have paid their fiscal obligations and managed to work for themselves.

In the Gjakova region, taxpayers have the day of fiscal freedom 2020 on March 20, while in 2019 the day of fiscal freedom was on March 23. Taxpayers in this region, in 2018 worked 82 working days, while in 2019 worked 80 working days to pay tax liabilities to the budget and get rid of fiscal burden. In the Gjilan region, taxpayers have 2020 Fiscal Freedom Day on March 24, but even though they worked the same number of working days (84 days), both in 2018 and in 2019 to pay the fiscal burden on Freedom Day Fiscal in 2019 has reached on March 25th. This discrepancy comes because 2020 is a fragile year and there is one more day, a fact that affects the calculation of days. Prizren region has a difference in the days of fiscal freedom between 2020 and 2019, due to an increasing burden for 2019. In 2020, Fiscal Freedom Day is on March 29. In 2019, Fiscal Freedom Day was on March 14th. In 2018, the taxpayers of this region worked 73 days before it was called that they had

CALENDAR OF TAX FREEDOM IN KOSOVO IN 2019 - 2020

REGIONS

WORKING

DAYS FOR

BUDGET

IN 2019*

WORKING

DAYS FOR

BUDGET

IN 2020

DATE OF

TAX

FREEDOM

IN 2019

DATE OF

TAX

FREEDOM

IN 2020

MITROVICË 72 62 13-Mar 2-Mar

PEJË 79 77 20-Mar 17-Mar

GJAKOVË 82 80 23-Mar 20-Mar

GJILAN 84 84 25-Mar 24-Mar

PRIZREN 73 89 14-Mar 29-Mar

FERIZAJ 87 90 28-Mar 30-Mar

PRISHTINË 88 104 29-Mar 13-Apr

KOSOVO 88 88 29-Mar 28-Apr* calculation by ALTAX


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fulfilled their obligations according to the fiscal burden that belonged to them. In 2019, they worked 89 days until they managed to repay all the fiscal obligations that belonged to them to pay the budget. Taxpayers in the Ferizaj region have the day of fiscal release in 2020 only 1 day later than in Prizren. Fiscal burden in 2019 has been rising. Taxpayers had the day of fiscal freedom in 2019 on March 28th. To reach these dates, taxpayers in this region have worked 87 working days in 2018 and 90 working days in 2019. In the region of Prishtina, taxpayers bear the biggest fiscal and growing burden for 2020 compared to 2019. Based on this, the Day of Fiscal Freedom 2020 is on April 13, while in 2019 this date was on March 29. In this region, which holds the largest number of taxpayers in Kosovo, resident taxpayers worked in 2018 88 days and in 2019 worked 104 days only to pay tax liabilities to the budget. Fiscal Freedom Day in Kosovo has been postponed, due to the fact that the performance of budget revenues in recent years in all regions of Kosovo has continued to improve. However, the struggle that should start by force to push towards the minimum tax evasion limits, which is trying to cross the borders that have been established until today and is beginning to affect the tax equality of taxpayers, remains an undeniable challenge. This fact also appears in the distribution of income according to the GINI Index, mentioned above. Kosovo has deteriorated its income distribution situation only five years ago. ALTAX calculates the Fiscal Freedom Index for Kosovo for the 5th time.


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SUMMARY In 2019, the countries of the Western Balkans do not have significant developments in the fiscal policy of the tax system in view of the fiscal burden. The policy pursued has aimed at stabilizing and consolidating fiscal, as well as some small changes, aimed at harmonizing social policies, or facilitating certain segments of the activities of the national economy. Slavic countries, which are an integral part of the WB, make up more than 80% of the GDP of the Western Balkans. Given this economic weight, the four together are influential in the economic relations of the region and if they did not have national divergence, they would be a unique market with competitive features for the neighboring countries with WB6. During 2019, there is a stagnation of the fiscal burden compared to the previous period and it has given some impetus to the dimensions of the budget and tax policy. Economic insecurity has not yet left the Western Balkans and Northern Macedonia, Albania, Serbia, and has led to situations of political instability. Only Montenegro showed a positive impact of the political situation on FDI assistance, in reducing unemployment, although the unemployment rate remains high. Given the low budget expenditures of capital investment in most countries, as well as the search for a functional and competitive economic model in the long run, the sustainability of budget performance and fiscal consolidation is needed in order to achieve economic development and guarantee social welfare. Of all the valid recommendations for the WB6 region, the one that addresses the removal of all barriers to trade applies, giving priority to the EU regulatory framework, and including legal certainty as one of the preconditions for FDI to be considered. not as a competition between countries in the region, but as an incentive for structural changes in the economy and its diversification, according to the demands of market opening. Although at first glance these issues may seem like internal problems, they are quite related to their level of cooperation and unresolved bilateral and multilateral issues. Although the need for FDI is great, it has not yet managed to bring together key actors to address common issues, despite having a very high potential benefit for all. Fiscal incentives are essentially an instrument of the state's fiscal policy, not often targeting quality-oriented, specific groups of businesses have begun to spend more of their own funds for this purpose. The state should pay attention without thinking long and hard and focus clearly on the right policy towards certain segments and groups of business and society. The development of knowledge and innovation in large companies shows that even now they exceed those of small firms in quantity. This finding, however, indicates the reserves and potential of small and medium-sized businesses, as well as prominent individuals to benefit more from tax incentives. Extensive use of R&D tax incentives at the time of the economic downturn raises the question of how effective are these fiscal policy instruments? The vast majority of studies conclude that tax benefits for R&D expenditures are effective in stimulating growing investment. If we can talk further about how tax incentives work for R&D, it ultimately depends on how innovative the products, services and production processes that emerge in the market are. Scientific research and innovation must be oriented towards policies of interest to the country, and together in a mosaic to form a complete social and economic development panorama, integrating with each other. Universities can identify interesting developments in unpredictable environments and situations and produce practical solutions to major problems with them, because universities have breadth and autonomy of action. The process of re-dimensioning WB6 economies requires a structural transformation taking into account the history, competitiveness and many elements highlighted in this report for regional economies.


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Transformation also requires the strengthening of institutions, technological evolution and the extension of innovation in the first steps of citizens' lives, emphasizing the qualitative increase of skills, internal market reforms, increasing the connectivity and exchange of goods and services, summarizing all these in sectoral programs and development strategies, as a product of process and people analysis. In this way, it will be possible to highlight the sectors or sub-sectors and the most potential products to contribute to medium-term development and beyond. Fiscal policy affects economic growth through four main directions: job supply, physical capital, human capital, and technological innovation. Labor productivity in the economy is the clearest reflection of a number of factors, including human capital, the physical capital with which they must work, and the technology available to them. Fiscal burden, as an income delegated by taxpayers to the government budget, when it is not evenly distributed and addressed according to the needs of citizens and economic progress will be an economic cost to the country leading to political and social distortions. The fiscal burden is not yet the subject of full discussion and transparency by the governments of the Western Balkans. The components of the WB should start thinking and setting objectives related to increasing the fiscal burden by minimizing tax evasion, formalizing the economy year after year with comprehensive and sustainable programs. A burden created not at the expense of increasing tax rates, but in narrowing evasion helps directly in distributing the fiscal burden towards those segments of taxpayers and citizens who have greater opportunities to cope with the bulk of the fiscal burden. The fiscal burden should aim to extend to the territories of evasion, but also to the dynamics of the economy. Tax policy has directly affected the level of labor market supply, as in the cases of Northern Macedonia and Albania, when the latter recorded the lowest unemployment rate at 11.4%. The increase in the share of innovation in the economy and the fiscal and financial incentives for easing the burden in the initial moments of business have been seen in the light of the reduction of the capital tax burden with an expectation for investment incentives. Given the reduction in the cost of direct taxes, where lower corporate income tax rates can encourage businesses to invest in physical capital, it is expected to make labor work more productive. Revenues, consumption and employment taxes have boosted the supply of employment, given that the economy in most WB6 countries is based on trade and services. According to the level of minimum and average wages, labor taxes and consumption taxes have acted as a deterrent in some countries with a high burden on them, directly affecting staff costs for employers. High wage costs (wages and taxes) can have a deterrent effect on resident businesses thinking about how to replace investment capital with that of employment, but by reducing their investment funds. On the other hand, if a non-competitive economy in the global market does not increase the cost of labor force paid with minimum and average wages, it can have negative effects on the departure of employees and capital where it is even better paid. The fiscal burden distributed in different Albanian regions, if faced with the available resources and capacities, as well as if it is more rationally intertwined with the intended economy, the impact of the role of government programs in the distribution of investments and the preparation of conditions for investors where the burden is not incentive would help each municipality to think more deeply about the possibilities and ways to integrate within the model of doing economy and budget. Meanwhile, fiscal policy must be strongly linked to the development of the structure of the economy, continuously analyzing the changes and shifts in the performance of the economy from one sector to another, anticipating the market and global competition. For example, the effects of the drought in 2019, showed that the forecast for the redistribution of fiscal burden should not remain static and be done only once. Given the low levels of labor market participation, capital investment and productivity below economic capacity, it is important that tax reform works to boost economic growth and not the other way around.


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The economy is the first. The fiscal burden must be to factorize economic competitiveness, drawing the attention of taxpayers and the media in the region to this tax ethic. Meanwhile, fiscal competition, which has been going on for many years between the Western Balkan countries, is dictating budgets to lose focus on consolidation using ready-made tax cuts at floor levels, but in many cases these reductions have not yielded the expected results. An example is workforce management. If the labor force is immobile (does not emigrate), education and healthcare funded by the state budget increase labor productivity and are in this sense an added public value to the economy. But if the labor force is mobile, then education and health can be consumed in the country that welcomes human capital supplied by another country. A strong finding from the analysis is the conclusion that not all changes in tax rates can have an effect on economic growth, consumption or even foreign investment. Reforms that improve investment incentives, reduce budget support for sectors of the public economy, avoid financial collapse, and deepen public debt have a clear and visible effect on all citizens regarding long-term economic performance. From our estimates of the impact of the increase in capital tax revenues from capital and consumption, ie the real fiscal burden (which also controls the flow of labor income and the circulation of goods and services), it results that high taxes encourage retirement. of investment towards countries that have a similar economic environment but with lower tax rates. But, if the potential of fiscal administration increases by increasing collections without changing tax rates, then this is not a tax increase, but the beginning of the correct implementation of fiscal legislation through good administration. Taxes and investments go in the same direction for the Balkan countries, as they show that the state and the law are being strengthened. This evidence further adds support for the idea that when tax policy is reformed, there is good reason for governments to consider the impact of tax policy on its country's attractiveness to investment flows.


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ANNEX FISCAL REGIMES - LEGAL CHANGES IN 2019-2020 IN THE WESTERN BALKANS

1. ALBANIA The legal forms of businesses are (i) simple traders, (ii) collective companies; (iii) limited partnership; (iv) Limited Liability Companies (Sh.pk); (v) joint stock companies (JSC); (vi) public companies, (vii) branches and representative offices. Accounting and financial reporting rules are applicable under IAS and IFRS. A new law is implemented from January 2019 on accounting and financial statements. Consolidation of financial statements is not functional for Albania. The place of fiscal residence is determined based on the registration as a legal entity in Albania, or is controlled and managed in Albania. Residence is also determined if the criteria for permanent residence are met. Repatriation of post-tax profit is permitted. The fiscal resident is taxed on income earned by him, both domestically and abroad. Income from services rendered by non-resident persons shall be considered with source in Albania if they are carried out for a resident person, regardless of where they are physically carried out and regardless of where they are paid. Earlier, they were considered source in Albania, and thus taxable in Albania, only income generated by services rendered in the territory of the Republic of Albania by non-resident persons. The proceeds of ownership (and other rights deriving from ownership) on immovable property located in the territory of the Republic of Albania shall be considered source income in Albania, and therefore taxable in Albania, and income (i) the rights to use mineral resources, (ii) the rights to use hydrocarbon resources, (iii) other rights to use natural and terrestrial natural resources including the sea in the Republic of Albania, and information that it belongs to these rights. The above rights and related information will be treated for tax purposes in Albania as if they were immovable property. As such, in addition to the proceeds from their use, the proceeds from their alienation (transfer of ownership over them) will also be considered with source in Albania, thus taxable in Albania. Revenue from shareholdings and shareholdings in Albania. The income realized by non-resident persons from the transfer of ownership over shares or interest interests, wherever they are located, will be considered with source in Albania and thus taxable in Albania, if (i) over a year before the transfer of ownership, more than 50% of the value of those shares or interests is attributed directly or indirectly to the immovable property, rights or information mentioned above. Dividends earned from the distribution of profit are taxed at source at the rate of 15%. Dividends paid to a non-resident are taxed at source at the rate of 15%. Dividends received by resident companies are exempt from profit tax. The tax rate on dividends distributed to shareholders and the profits distributed to partners decreased from 15% to 8% since the January 2019. For the dividends / profits distributed by resident companies in Albania, this reduced rate will apply to retained earnings realized in 2018 before, including reserves and capitalized gains, provided that (a) the dividend tax, pertains to undistributed profits of 2017 and beforehand, be paid by 30 September 2019, and the dividend tax for 2018 will be paid by 20.08.2019. Bank interests, patents, copyrights paid to a resident or non-resident are taxed at source at the rate of 15%. Capital gains from a resident are taxed at 15% tax rate, as well as non-residents are taxed at 15% tax rate. In cases where capital gains realized by shareholders from the direct or indirect sale of the capital or voting rights of a legal person in Albania are considered as source income in Albania and the legal entity subject to change of ownership calculates and pays the profit tax considered by the sale of assets, according to the foregoing projections, then the share capital gain will not be subject to profit tax in Albania.


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If, during a tax period, the direct or indirect ownership of the capital or the voting rights of a legal person varies by more than 20%, that legal person will be treated as if (i) sold a proportionate proportion of its assets with the value of their market, and have the same assets repurchased with the same market value. In this way, the legal entity subject to change of ownership will recognize a "taxable profit from the deemed sale of assets" and will calculate the profit tax on it. This rule applies if the legal entity subject to change of ownership has realized in the previous 3 years an average turnover of at least 500 million Lekë. The wage tax is applied at the flat rate of 10%, after deducting the sum of € 240, as the tax threshold of the unpaid wage. The upper payroll segment level is taxed at the rate of 13%, since 2019 increased from 130,000 Lekë / month to 150,000 Lekë / month. Profit tax is applied at the standard rate of 15% and with the reduced rate for tourist and information activities. From January 2019 businesses registered for profit tax with turnover ranging from € 64,000 to € 112,000 will pay the 5% tax rate on profit instead of the previous 15%. Businesses with annual turnover ranging from € 40,000 to € 64,000 will pay 5% tax rate. Investment incentives are provided in various forms implemented under the laws that define them, such as: (i) low tax rates (5%) without prerequisites; (ii) a special scheme for farmers; (iii) reduced VAT rates for tourist and information services; (iv) the economic sector excluded from VAT (hydrocarbon search); (v) tax exemption for 10 years for 4-5-star tourist hotels; (vi) tax-benefit relief based on investment projects on a case-by-case basis such as infrastructure construction, tourism, clothing industry, oil production and new ventures; (vii) duplication of spending on research and development investments in the free economic zones. The tax loss can be carried forward up to 3 consecutive tax years and is available as a deduction for any income for those years. Foreign tax credit is limited to the amount of taxation in Albania for the income earned. Thin capitalization applies to the level of recognizing the deductible interest on loans not exceeding 4: 1 of the debt / equity ratios and exceeding the net interest rates by 30% on the profit before EBITDA is unrecognized for taxation as an expense. Property tax on construction projects used for business purposes is applied (a) 4% -8% of the sale price per m² for residential and commercial buildings, (b) 2% -4% over the investment value for the capital and 1% -3% for other municipalities, for tourism, agroindustry, industry, for personal housing purposes and for public purposes (c) 0.1% of the investment value for infrastructure projects for the construction of national roads, airports, ports etc. The transfer of ownership of immovable property is applied at the rate of 2% of the sale price for immovable property, except for buildings with a tax of 2.4 € / m² up to 16 € / m². The inheritance and transfer tax are applied to the transaction value at the rate of 15%. A new anti-avoidance rule is in effect since January 2019, where the tax administration is given the right not to accept suspected transactions based on restrictive criteria for the parties involved in transactions. VAT is applied at a standard rate of 20%, while the reduced rate is 6% (electric minibuses, tourist hotels, advertising for audio-visual media, books, accommodation and restaurants for agro-tourism units). The VAT registration threshold is € 16,000. Some activities like licensed professionals do not have a turnover threshold for VAT registration. The activity of agricultural producers has a threshold of € 40,000 to be registered on VAT. VAT exemptions include some goods and services. Exports are at 0% VAT rate. The compulsory social and health security contributions are in total 27.9%. The employer pays directly from his account the salary that gives the employee contributions to the pensions and inability to work (15%), the contribution to health (1.7%). The employer retains the gross salary and pays the employer's pension contributions and disability (9.5%), the health contribution (1.7%). Payments are made at the Albanian LEK (ALL), the local currency.


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NEW! FISCAL PACKAGE, 2020 *

The Fiscal Package 2020 envisages some changes in the fiscal legislation. Among the main changes are: Income taxes - Incentivization of the vehicle industry sector by reducing the profit tax rate to 5%, for legal entities that exercise economic activity in this industry. - Promoting sports, by presenting its positive impact on society. For this project, fiscal incentives are proposed for the possibility of taxation on the personal service of bonuses given to athletes, or sports teams part of sports federations recognized by the relevant legislation. Also, for legal entities, for the realization of the gain of experience older than 100 million ALL, the amount sponsored in the work of sports, of recognition as a discount purchase, for easy effect of calculating the profit tax, you can find more three times the amount sponsored. - Carrying losses for a 5-year day for taxpayers, who invest in business projects with Changes over 1 billion ALL. - Harmonization of Law no. 8438 no. 8438, dated 28.12.1998, "On the direct tax", amended by the law of "On the invoice and operation of traffic monitoring" National taxes - specifying the value of the vehicle for the effect of the criteria that a vehicle must meet to be considered a luxury vehicle, amortizing the value of the vehicle with 10% of the remaining value; - changes in the penalty in order to unify the penalty for late payment for the annual tax on used vehicles; - increase of the commission that benefits DPSHTRR, by 5 (five) percent for the initial registration tax and the annual tax for luxury vehicles ”; - increasing the category of persons with disabilities to be exempt from the annual tax on used vehicles. - exemption from paying the annual tax on used vehicles, “Early vehicles of historical interest and collection according to the legal and sub-legal acts in force”. Tax Procedures, Value Added Tax The changes in the Laws: "On Tax Income" and "On Value Added Tax" are mainly related with the drafting and approval of the law "On fiscalization". So, there are procedural changes related to it. At the same time, some administrative violations and levels of penalties have been reviewed in order to facilitate of their practical application. The effects of fiscal policies on the 2020 budget • Programmed increase of cigarette excise. Annual effect +750 million ALL. • Adoption of a law on housing revaluation. The estimated value for 2020 is +4 billion ALL. • Incentivization of the automotive industry sector by reducing the profit tax rate to 5%, for legal entities that exercise economic activity in this industry. Currently we have no effects that can be calculated on budget revenues • Exemption from personal income tax of bonuses given to athletes or sports teams part of sports federations recognized by the relevant legislation. The effect will be minimal depending on the results achieved • Legal entities, which realize annual taxable profit over ALL 100 million, sponsored amounts in the field of sports, known as deductible expenses, for the purpose of calculating profit tax, are deductible as much as three times the sponsored amount. The calculations are theoretical, as those companies that will finance the sport need to be identified. • Carrying losses for a period of 5 years for taxpayers, who invest in business projects worth over 1 billion ALL. Effects cannot be calculated. • Specifying the value of the vehicle for the effect of the criteria that a vehicle must meet in order to be considered a luxury vehicle, amortizing the value of the vehicle with 10% of the remaining value; The change is procedural • Increase of the commission that benefits DPSHTRR, of 5 (five) percent for the initial registration tax and the annual tax for luxury vehicles”; • Increasing the category of persons with disabilities to be exempt from the annual tax on used vehicles. Minimal effects. • Exemption from paying the annual tax on used vehicles, "Early vehicles of historical interest and collection according to the legal and sub-legal acts in force". Minimal effects * as explained by experts of Budget and fiscal issues in Ministry of Finance and Economy


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2. BOSNIA - HERZEGOVINA

Bosnia and Herzegovina comprise tax administration 4 structures that implement the tax legislation: Indirect Tax Authority; the Tax Administration of Bosnia and Herzegovina; the District Administration of Brcko; the Tax Administration of Republika Srpska. From all of tax jurisdictions, two of them are the main: Federal Tax Administration of Bosnia and Herzegovina and Tax Administration of Republika Srpska. Legal changes and the legal framework are mostly a reference for implementation of the Bosnia and Herzegovina tax administration. The regulatory framework between administrations of different jurisdictions has harmonization, but with certain differences regarding direct taxes. The accounting and financial reporting rules under the Law on Accounting and Auditing are applicable under IAS and IFRS throughout the territory of Bosnia and Herzegovina. The place of the fiscal residence is determined based on the registration of a business as a legal entity, or where it has the principal place of business by applying the criteria of permanent residence, or whether they are subject to withholding tax. Repatriation of post-tax profit is permitted. Taxation of a fiscal resident is done by taking into consideration incomes generated within and outside the country. Non-resident companies are only taxed for incomes deriving from the activity within the country's jurisdiction. Dividends are taxed at a flat rate of 10%. For dividends paid to non-resident companies, 5% and 10% are taxed. Dividends, which benefit from business branches within the same fiscal jurisdiction are exempt from profit tax. Meanwhile, dividends obtained from foreign sources are included in taxable income. Fiscal residents are allowed to credit the tax paid abroad. Profit tax is applied at the rate of 10%. A consolidated statement of financial statements is permitted, provided that one company owns over 50% of the shares of the other. Investment incentives, (a) a 50% reduction in profit tax if a company invests over 25.5 million Euros on production assets, (b) 30% reduction in profit tax if it invests over 50% of the value passing through profit before tax for production, (c) double-digit recognition of wage costs for new employment lasting beyond 12 months. Tax losses can be carried forward for a period of 5 years. Losses can be reduced by the profit of the following year. Capital gains are taxed at a 10% tax rate. A tax rate of 0% is applied to resident businesses and individual that are nonresidents. Deductibility on individual allowable expenses are about 1,840 Euros per year. Other permissible discounts are included for other family members for mortgage interest and for some health services. In the Srpska Republic the individual allowable expenses are 3,070 Euros per year and 460 Euros for each individual of the family. Other permitted expenses are voluntary social security payments in the amount of 610 Euros per year. The inheritance and gift tax are set at regional level and range from 2% to 10%, as in the case of determining the market value. The sale of immovable property is subject to the taxation of the transfer of ownership right located at the regional level, varying from 0.05% to 0.5% of the transaction value, according to the open market reference. Responsible for paying this tax may be both the seller and the buyer. This responsibility is defined by the rules established by the regions. VAT is applied throughout the country of Bosnia and Herzegovina with the same rules and exceptions. The standard VAT rate is 17% for 2019. The VAT registration threshold applies to businesses and individuals who transact on the value of € 25,560 per year. However, VAT registration can be done voluntarily, even if an annual turnover is not above the threshold set. VAT, public services, health services and financial services are excluded from VAT. Exports are taxed at a rate of 0%. Payments are made at the Bosnian Mark (BAM), the local currency.


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3. KOSOVO

The tax system in Kosovo consists of a set of tax laws and administrative instructions, including: (a) Corporate Income Tax (CIT), (b) Personal Income Tax (PIT), (c) Value Added Tax (VAT), (d) Customs Obligations, (e) Excise Taxes and Special Provisions, Pricing Transfer, and Double Taxation Avoidance Agreements. Accounting and financial reporting rules are applicable under the Kosovo Accounting Standards, based on IAS and IFRS. Taxpayers with gross annual income of € 50,000 or more and those with annual gross income of less than € 50,000 who opt to be taxed on the basis of real income keeps books and records compliant with the requirements set out in the Law for Corporate Income Tax and the Law on Tax Administration and Procedures. The fiscal residence is determined according to the principles of the OECD permanent residence. Corporate Income Tax applies to corporate taxable income. The standard rate of Corporate Income Tax is 10% of taxable income. Foreign tax credit is allowed. Taxpayers with annual gross income of € 50,000 or less are taxed at a rate of 3% (for activities such as trade, transport, agriculture and similar commercial activities) or 9% (for service, professional, crafts, entertainment and similar). Taxpayers with annual gross income over €50,000 are taxed at 10% in taxable income. Personal income tax is progressive. Income up to 960 Euro / month is not taxed. For income from 961 Euro / month - 3,000 Euro / month are taxed at 4%, from 3,001 Euro - 5,400 Euro / month are taxed at 8% and over 5,400 Euro / month are taxed at 10% Taxable income for a tax period is based on the difference between the gross income received and receivable during a tax period and allowable deductions relating to such gross income. The tax loss can be carried forward up to 4 (four) consecutive tax years and is available as a deduction for any income for those years. Carrying out a loss is not permitted if the business has an ownership change of more than 50% or if a personal business enterprise is changed to another business form (legal entity, partnership or similar). The tax system has not tax incentives. The taxpayer that pays the lease keeps the tax at source 9% at the time of payment or lending. Taxpayers who make payments to non-business physical persons, farmers, farmers, recycler materials, mountain fruit, medicinal plants and the like, at the moment of payment, withholding tax at the rate of 3% in gross pay Capital gains are taxed at a 10% tax rate. Insurance companies (who make insurance or reinsurance of life, property, and other risks) pay 5% tax on gross tax receipts (instead of Corporate Income Tax). The employer, who is the principal employer of the employee, withholds a sum of tax for the respective period of salary payments. An employer who is not the principal employer of the employee, withholds the amount of 10% of the taxable wages for the tax period. Pensions paid by, or in the interest of, the Kosovo Pension Savings Trust or an authorized supplementary pension fund regulated by the legislation on pension contributions, as well as health insurance under the Health Insurance Law, are subject to withholding tax from the payer of such pensions or of such health insurance on the rates provided for in the relevant legislation on Personal Income Tax. VAT is scaled up in two rates: the standard rate of 18% and the reduced rate of 8% of the value of imported supplies and domestic taxable supplies for basic food and electricity, with the exception of exempt supplies and supplies treated as exports. The customs tax is 0% - 10%. Most of the raw materials are released. Also, most of the equipment for production is exempt. Some of the raw agricultural materials (such as seeds, etc.) and equipment are exempt from Customs and VAT. Payments are made at the Euro (EUR), the European Union currency


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4. MONTENEGRO Legal business forms are (a) joint-stock companies, (b) limited liability companies, (c) partnerships, (d) branches and representative offices. Accounting and financial reporting rules are applicable under IAS. The place of fiscal residence is determined based on registration as a legal entity in Montenegro, or if controlled and managed in Montenegro. Residence is determined if the criteria for permanent residence are met. Taxation of a fiscal resident is done by taking into consideration incomes generated within and outside the country. Non-resident companies are only taxed for incomes deriving from the activity within the country's jurisdiction. Dividends paid between residents are subject to withholding tax at the rate of 9% but are not included in taxable income. Dividends earned from the distribution of earnings from outside Montenegro are included in taxable income, but the resident in this case may require the lending of the tax paid abroad. Capital gains from a resident as well as nonresident are taxed at a 9% tax rate. The tax loss can be carried forward up to 5 consecutive tax years and is available as a deduction for any income for those years. Profit tax applies at a flat rate of 9%. Companies and branches are obliged to pay the profit tax in Montenegro. Tax incentives. Manufacturing companies in an undeveloped area (not for agriculture, transport, shipbuilding, steel and fishery) benefit from the profit tax advantage for 8 years after the start of the business. Exemption is limited to Euro 200.000 Withholding tax applies at a flat rate of 9% for bank interest, rent, commercial services, consultancy, and auditing, copyright, patent, technical services. Property tax applies to the owner / user with the rates of 0.25% to 1%. For construction companies there are limited exceptions to the payment of this tax. The transfer of the right of ownership of immovable property and inheritance is taxed at the rate of 3% of the transaction value. This tax does not apply if the transfer of property is realized as a gift or inheritance to children, parents or spouses. In Montenegro, no thin capitalization policy applies, unlike some neighboring Western Balkan countries. Salary income is the subject of progressive taxation at rates of 9% and 11% (up to ende of 2019). The dividing line for implementing progressive rates is the average salary (€ 750 per month). Below this threshold, the tax rate is applied by 9% and over this threshold is applied by 11%. VAT is applied at a standard rate of 21%, while the reduced rate is 7%. The VAT registration threshold applies to businesses and individuals who transact on the value of €18,000 per year. However, VAT registration can be done voluntarily, even if an annual turnover is not above the threshold set. VAT exemptions include healthcare, financial services, including insurance, education. Exports are taxed at a rate of 0%. Compulsory social and health security contributions are paid for contributions to pensions and disability at work (20.5%), contribution to health (12.8%) and unemployment benefits (1%), including employer and employee, where the employer pay directly 8.3% and for the employee is withheld 24% of contributions and are paid directly from employer on behalf of employee. The maximum annual contribution rate for contributions is no more than € 53,371. Payments are made at the Euro (EUR), the European Union currency


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5. NORTH MACEDONIA Legal business forms are (a) public companies, (b) joint-stock companies, (c) limited liability companies, (d) partnerships, (d) branches and representative offices. Accounting and financial reporting rules are applicable under IAS and IFRS. The place of the fiscal residence is determined if it is registered under Macedonian law, or if it has a legal headquarters as a legal entity, applying the criteria of permanent residence. Taxation of a fiscal resident is done by taking into consideration incomes generated within and outside the country. Non-resident companies are only taxed for incomes deriving from the activity within the country's jurisdiction. Dividends payable between resident companies are subject to tax exemption. The dividend is taxed at the rate of 10%. Capital gains distributed by companies are treated as taxable income and taxed at 15%, which are applied on 70% of profit. From January 2019, income from property rights, industrial rights, interest, leasing and capital gains, gambling, insurance are taxed at the rate of 15%, up 50% from earlier year. The tax loss can be carried forward up to 3 consecutive tax years and is available as a deduction for any income for those years. Based on rules of thin capitalization no interest expense is recognized in cases where shareholders owning 25% or more voting shares receive loans exceeding 3 times the value of their shares in the company. The re invested profit is not taxed, as an incentive tax measure for easing the investments. Northern Macedonia abolished the implementation of the 10% flat tax on personal income after 10 years of practice. According to the Law on Progressive Personal Income Tax, from January 2019, Personal monthly income, up to the amount of € 1,460 is taxed at the rate of 10%. Personal monthly income exceeding € 1,460 is taxed at 18%. This level of taxation affects no more than 1% of taxpayers. Revenues below this monthly threshold are taxed as before at the rate of 10%. Employees' salaries are allowed to be deducted as deductible expenses for tax purposes 1,555 Euros per year, or 129 Euro / month. The inheritance and transfer tax are applied to the transaction value at rates ranging from 2% to 5%, depending on the proximity of the relationship between the seller and the buyer. The sale of immovable property is subject to the transfer tax of local ownership right, varying from 0.1% to 0.2% of the transaction value. VAT is applied at a standard rate of 18%, while the reduced rate is 5% for pharmaceutical products, food, information technology and public transport. The VAT registration threshold is € 16,200. However, VAT registration can be done voluntarily, even if an annual turnover is not above the threshold set. VAT exemptions include healthcare, financial services, including insurance, education. Exports are taxed at a rate of 0%. Social and health security contributions are paid by the employer on behalf of the employer for a total amount of 27%. This obligation includes 7.3% pay for health insurance, 0.5% for additional health insurance, 18% for retirement and disability, and 1.2% for unemployment. Payments are made at the Macedonian Denar (DEN), the local currency.


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6. SERBIA

The legal forms of businesses are (a) public companies, (b) joint-stock companies, (c) limited liability companies, (d) partnerships, (e) public companies, (f) branches and representative offices. Accounting and financial reporting rules are applicable under IAS and IFRS. Consolidation of the financial statements is functional for Serbia, where the company seeking to report in consolidated form can choose one of the group companies. The group is considered as such when at least one company owns at least 75% of the shares of the other. The place of fiscal residence is determined based on registration as a legal entity in Serbia, or if controlled and managed in Serbia. Residence is also determined if the criteria for permanent residence are met. The fiscal resident is taxed on income earned by him, both domestically and abroad. Dividends received by Serbian resident companies are taxed at source at the rate of 0% and resident individuals at 15%. Dividends paid to a non-resident individual are taxed at source at the rate of 15%. Dividends received by non-resident companies are taxed at the rate of 20%. Bank interests, patents, copyrights paid to a non-resident are taxed at source at a rate of 20%. Capital gains from a resident are taxed at 15% tax rate, while for non-residents taxed at 20% tax rate. The wage tax is applied at the flat rate of 10%, after deducting the sum of € 127, as the wage tax threshold. Purchase of shares by employees of the company with their salary is exempt from personal income tax, but is subject to the criteria set out in the law. Profit tax is applied at the standard rate of 15%. Profit Tax exemption for 10 years for large investors who finance projects worth over € 8.47 million in real estate and employ 100 employees during the investment period, (b) double recognition of the cost of research and (d) companies that invest in capitalization of new companies may credit the tax up to 30% of the amount invested, but not more than 800,000 Euro, (e) the transfer of property by an individual to an entity that implements a concession right is exempt from taxation if the value of the concession exceeds 50 million Euros. The tax loss can be carried forward up to 5 consecutive tax years and is available as a deduction for any income for those years. Foreign tax credit is limited to the amount of taxation in Serbia for the income earned. Thin capitalization applies to the level of recognition of deductible interest on loans that do not exceed 4 times the capital of the company and 10 times for the banks and leasing companies. Personal income tax is levied on a progressive scale starting at 10% for income from salary, with 15% for income from capital and 20% from rental income, wealth (royalty) and other income. VAT is applied at a standard rate of 20%, while the reduced rate is 10%. The VAT registration threshold is € 67,700. Taxpayers with taxable value under € 453,450 declare each month, while those who exceed this taxable annual value declare once in 3 months. VAT exemptions include some goods and services. Exports are exempt from VAT. The compulsory social and health security contributions are in total 37.05%. The employer pays directly from his account the salary that gives the employee contributions for pensions and inability to work (12%), contribution to health (5.15%). The employer retains the gross salary and pays on behalf of the employee the contributions for pensions and disability at work (14%), the health contribution (5.15%) and the unemployment allowance (0%) The property tax for businesses that apply the IAS tax rate on real estate is 0.4%. The transfer of ownership of immovable property is applied at the rate of 2.5%. Payments are made at the Serbian Dinar (DIN), the local currency.


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Tables for Contributions and Beneficiaries in Albania according to the 2020 Budget

REVENUES AND EXPENDITURES OF BUDGET FOR PENSIONS IN 2019 - 2020 BILION LEK

TITLE 2019 2020 DIFFERENCE

REVENUES* 84,342 88,609 4,267

From the contributions of legal and natural persons 81,332 85,569 4,237

From farmers' contributions and voluntary ones 3,010 3,040 30

EXPENDITURES 133,087 139,988 6,901

Costs for benefits and administration 130,637 137,468 6,831

Retirement policy contingency 2,450 2,520 70

Budget funding 48,745 51,379 2,634

Funding without pension policies 46,295 48,859 2,564

Source: MoFE

* The ratio of contributions received with the transfer from the Budget is 1.8

EMËRTIMI 2019 2020 DIFFERENCE

OBLIGATORY SOCIAL INSURANCE FOR: 660,667 670,961 10,294

TEMPORARY DISABLED EMPLOYEE 2,076 2,286 210

MATERNITY 18,356 16,726 -1,630

PENSIONS 639,817 651,524 11,707

FROM THESE SENILITY PENSIONS 515,984 534,661 18,677

ACCIDENTS IN WORK OF PROFESSIONAL DISEASE 61 60 -1

COLLECTION OF CONTRIBUTIONS FROM FERMERS AND VOLUNTEERS 357 364 7

0

SUPPLEMENTARY CONTRIBUTIONS 56,742 59,722 2,980

SUPPLEMENTARY SOCIAL CONTRIBUTIONS 3,051 3,471 420

SUPPLEMENTARY CONTRIBUTIONS FROM MILITARY AND POLICE 27,776 29,842 2,066

PROFESSOR ACADEMIC TITLE 921 990 69

OILMAN STATUS 7,631 7,784 153

METALLURGIST STATUS 3,000 -3,000

SPECIAL TREATMENT OF UNDERGROUND EMPLOYEE 14,365 14,576 211

0

COMPENSATION PROGRAMS AND SPECIAL TREATMENTS 547,588 573,337 25,749

INFLATION COMPENSATION 520,345 549,256 28,911

STATE SPECIAL PENSIONS 274 276 2

PENSIONS BONUS FOR VETERANS 3,050 2,844 -206

BONUS FOR WORK INVALIDS 522 1,050 528

COMPENSATIONS FOR INCOMES OF PENSIONERS 337,907 343,098 5,191

SOCILA PENSIONS 2,884 2,982 98

STATUS OF MARTIR OF NATION 345 346 1

SPECIAL TREATMENT OF PILOTS IN RETIREMENT 233 231 -2

SPECIAL TREATMENT OF EMPLOYEES IN THE MILITARY INDUSTRY 455 362 -93

SPECIAL TREATMENT FOR SUBMARINE MILITARY 61 58 -3

BURIAL EXPENDITURES 19,419 15,932 -3,487

Source: MoFE

NUMBER OF BENEFICIARIS

ISSH BUDGET IN TERMS OF BENEFITS IN 2019 - 2020


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TAX BURDEN in EUROPE and EU in 2018

TOTAL VAT TOTALON

HOUSEHOLDS

ON PERSONAL AND

CORPORATE

INCOME

EUROPE 13.6 7.1 13.2 9.5 2.7

EU 13.3 6.9 13 9.5 2.5

DIFFERENCE -0.3 -0.2 -0.2 0 -0.2

Source: Eurostat, MoF

TAX ON PRODUCTION

AND IMPORTSTAX ON INCOMES AND WEALTH

TAX RATES IN BALKANS IN 2020 in %

DIVIDEND INTERESTCAPITAL,

SERVICESTOTAL EMPLOYER EMPLOYEE

NORTH MACEDONIA 5; 18 10 10; 18 0; 10 0; 10 0; 10; 15 27 27 0 2 - 5 0.1 - 0.2

KOSOVO¹ 8; 18 3; 9; 10 0; 4; 8; 10 0 10 5; 10 10 5 5 0 0.05 - 1

MONTENEGRO² 7; 21 9 9 - 11 -15 9 0; 9 0; 9 32.3 8.3 24 3 0.25 - 1

ALBANIA³ 6; 20 0; 5; 15 0 - 13 - 23 8 15 15 27.9 16.7 11.2 15 1 - 8

BOSNIA-HERZEGOVINA* 0; 5 0; 10 0; 10 41.5 10.5 31

REPUBLIKA SRPSKA 0; 10 0; 10 0; 10 33 0 33

SERBIA 10; 20 15 10 - 25 15; 20 15; 20; 25 15; 20; 25 37.05 17.15 19.9 1.5 - 2.5 0.3 - 2

BULGARIA 9; 20 10 10 0; 5 8; 10 10 32.7 - 33.4 18.92 - 19.62 13.78 0.4 - 6.6 0.01 - 0.45

GREECE⁴ 6; 13; 24 28 22 - 45 10 15 15; 20 41.06 25.06 16 1 - 10 0.1 - 0.55

CROATIA 5; 13; 25 12; 18 24; 36 12; 20 12; 15; 20 12 - 36; 15 37.2 17.2 20 3 - 4 3

ROMANIA 5; 9; 19 16 16 5 16 16 37.25 2.25 35 1 0.08 - 1.3Sourc e: Deloitte, MOF

Notic es and Changes of tax rates in 2019-2020

Incomes over Euro 50.000 in commerce, transport, agriculture could choose to pay 3% on gross income, meantime for services, entertainment, proffessions with 9%

² Local authorities apply a overtax of 15% on employee salary. It is decreased with 2% social contribution of employer

³ From 1 January 2019 the dividend tax is 8% (it was 15%)

⁴ From 1 January 2019 profit tax rate is decreased with 1% (it was 29%); dividend tax is decreased to 5% (it was 15%)

* Federation of Bosnia and Herzegovina

OTHER BALKAN COUNTRIES (MEMBERS OF EU)

SOCIAL AND HEALTH

CONTRIBUTIONS INHERITANCE

TAX

PROPERTY

TAX

17 10 10 2; 10 0.05 - 0.5

COUNTRIES VATPROFIT

TAX

PERSONAL

INCOME

TAX

WITHHOLDING TAX ON:


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TAX BURDEN IN ALBANIA, KOSOVO AND WESTERN BALKANS,

2020

Report of taxes, fees and social contributions to GDP Fiscal burden according regions in ALBANIA and KOSOVO in 2019 Public investments, FDI in WESTERN BALKANS Index GINI and inequality Distribution of fiscal burden

Tax Freedom Day in Albania, Kosovo and Western Balkans in 2020 Tax to GDP ratio 2019 Tax burden according to regions in Albania and Kosovo in 2019 Distribution of tax burden based on the destination of expenditures Investments and tax rates in the Western Balkans GINI Index and Inequality

Dita e Lirisë Fiskale në Shqipëri, Kosovë dhe Ballkanin Perëndimor në 2020 Tatimet ndaj Prodhimit të Brendshëm Barra fiskale sipas rajoneve/regjioneve në Shqipëri dhe Kosovë në 2019 Shpërndarja e barrës fiskale sipas destinacionit të shpenzimeve Investimet dhe Normat Tatimore në Ballkanin Perëndimor Indeksi GINI dhe pabarazia

IN ALBANIA, KOSOVO and WESTERN BALKANS, 2020

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