TAX NOTES FOR CONSTRUCTION INDUSTRY IN ALBANIA_AL-Tax.org
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1 TAX NOTES FOR CONSTRUCTION INDUSTRY IN ALBANIA © AL-Tax TIRANA, ALBANIA 2010 Information and orientation in order to know the Construction Industry and to be in help of tax administration and enterpreneurs
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The purpose of these tax notes designed for the construction sector is to help tax auditors, assessment and collection, debt management inspectors as well as other interested users or groups to expand their knowledge about some particular construction activities or the construction sector in general. These notes are particularly recommended for use by all people involved in conducting tax audits.
Transcript of TAX NOTES FOR CONSTRUCTION INDUSTRY IN ALBANIA_AL-Tax.org
1
TAX NOTES
FOR CONSTRUCTION
INDUSTRY IN ALBANIA
© AL-Tax TIRANA, ALBANIA 2010
Information and orientation in order to know the Construction Industry and to be in help of tax
administration and enterpreneurs
2
TAX NOTES
FOR CONSTRUCTION INDUSTRY
IN ALBANIA
CONTENT
BACKGROUND
Construction sector as a part of economy
The insight of Industrial Notes for Construction
CHAPTER I
PARTICIPANTS IN THE CONSTRUCTION SECTOR
General/prime contractors
Subcontractors
Public works contractors
Investors
Landowners and residential construction developer
Big and heavy construction contractors
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Architects, engineers and other professionals
Material suppliers
Transporters and machinery
Construction lenders
Multiple roles in construction process
Contracting process
Scheduled subcontractors
Contractual income
Types of contracts
Long-term contracts
Short-term contracts
Fixed price or lump sum contracts
Cost-plus contracts
Time and material contracts
Change of order
Bonding
Guaranty companies
Institutional permits during the construction process
Registration of buildings as immovable property
Notary and construction
CHAPTER II
SMALL CONTRACTORS
Long-term contracts
Individual and collective employment contracts
Cash payments
Payments via bank
Mixed payments
Cost comparison method
Labor force comparison method
Contract terms fulfillment method
From cash payment towards payment via bank
General description
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Key orientations
Minimum fiscal costs and profits
Key issues and audit techniques
Gathering information for audit
Problems related to incomes from construction
Tax-exempt incomes
Undeclared incomes
CHAPTER III
PRIME CONTRACTORS
Long-term contracts
Definition of long-term contract
Parties in a long-term contract
Tax exemptions in contracts
Testing contract incomes
Determining contract implementation level
Cost comparison method
Incomes earned from contract implementation
Supplementary costs in long-term contracts
Special rules for supplementary costs
Contract fragmentation
Look-back method
Completed Contracts
General information necessary for auditing companies
Suggested audit techniques
CHAPTER IV
RESIDENTIAL DEVELOPERS
Definition of residential developer contracts
Categories of residential developer contracts
Not-for-trade buildings
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Buildings constructed upon contract with landowner
Buildings constructed upon contract with landowner and investors
Residential building with contractors
Land cost estimated by general criteria
Instruction Nr.2116/17 Prot., date 15.12.2004
Subject: On collection of tax obligations from construction taxpayers
Audit of bookkeeping for lands and buildings
Audit of accounting for fiscal obligations
Audits of bookkeeping for social insurance contributions
Problems from audits in the construction sector
CHAPTER V
FORMS OF AUDITING BALANCE SHEET
What is a form of auditing a balance sheet?
Audits of actives in balance sheet
Audits of passives in balance sheet
Taxpayers under observation by Tax Administration according to the Agreement with Albanian
Constructors’ Association (ACA)
Duties for registration sector
Duties for assessment sector
Duties for the audit sector
Verification of incomes declared in the past years
Exchange of information between Tax Offices
Orientations on bookkeeping for construction based on experience from audits (audit acts)
Fiscal legislation and specifics for construction
Bankruptcy in construction
CHAPTER VI
PARTNERSHIPS IN CONSTRUCTION
Legality of partnerships
Partnerships of investors and owners in construction
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Partnerships of construction contractors
Auditing Investors’ partnerships
Auditing contractor partnerships
Requests for information from partnerships
Issues to consider at the moment of registration and de-registration
Issues to consider in the activity process
Issues of profit distribution relations within partnerships
APPENDIXES
Appendix A: Most important questions
1. Questions about the economic activity and obligations in the construction sector
2. Questions about different situations, tax calculation forms, methods and other problems in the construction sector
Appendix B: Forms for calculation of costs and measures in construction
Appendix C: Statistics of the economic sector in construction
Appendix D: Information about data collected from questionnaires and potential information sources
FISCAL GLOSSARY
Most common fiscal and construction terms
7
BACKGROUND
The purpose of these tax notes designed for the construction sector is to help tax auditors, assessment
and collection, debt management inspectors as well as other interested users or groups to expand their
knowledge about some particular construction activities or the construction sector in general. These
notes are particularly recommended for use by all people involved in conducting tax audits.
The construction sector represents a major part of our economy. It counts around two thousand taxpayer
registered with significant turnover, which make of this sector one of the biggest in our economy.
Construction accounts approximately for 12% of Albanian GDP. In the year 2009, a total of 28,400 VAT,
Profit Tax and Simplified Profit Tax returns were submitted to the tax authorities by the construction
business in Albania, reporting a total turnover of above 145 billion Leks (1.18 billion Euros). Detailed
statistics about construction are provided in Appendix C.
This book is divided in six chapters, and the first chapter explains the partecipants in construction
industry. Their role respresents a specific taxpayer and specific process of construction.Meanwhile in the
construction process there are other professionals and activities with an important contribute in
construction. On the other hand all these “actors” play the roles based in the tipicall contracts, presented
in this chapter with the term explanation.
In the second chapter is described the role of small contractors, individual and collective employment
contracts, cash payments and payments via bank. Also in this part of Industrial notes there is an important
part for tax audit in order to know about some audit methodologies, as: Cost comparison method; Labor
force comparison method; Contract terms fulfillment method and some key issues and audit techniques.
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Third chapter includes definition about principial contractors and long-term contracts, externalities and
cost comparison method, but also look-back method. This part explains the definition of completed
Contracts and general information necessary for auditing companies and suggested audit techniques.
In the forth chapter there is an insight about residential developers, categories and how they work and
develop their contracts with landowners, investors and some specific Agreements between tax
administration and Albanian Constructors Association, accompanied with official orders and instruction
how to complain the taxpayers of this economic sector.
The fifth chapter explains in depth the forms of tax audit of construction balance sheet and tax returns.
This chapter includes definition about fiscal legislation and specifics for construction including the specific
cases as well as bankruptcy in construction
In the final chapter, the sixth you may find information about organizational structurte of construction,
mostly about the partnership in construction industry and the specific issues to consider in the
construction activity process and issues of profit distribution relations within partnerships.
To be in help about the knowledge of the construction industryin the book, finally there are four
appendixes and a Fiscal glossary.
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CHAPTER I
PARTICIPANTS IN CONSTRUCTION SECTOR
There are several participants in the construction process. Each of them has a clearly
distinct and separate role in this process. Brief information about the major participants
will be provided below.
General/Prime Contractors
A general building contractor's principal business is the performance of the construction
work in accordance with the plans and specifications of the owner. A general contractor
takes full responsibility for the completion of the project. Generally the general
contractor subcontracts out a substantial part of the work, while maintaining overall
control through project managers and onsite supervision. The general contractor can be
only a sole proprietorship, partnership, or corporation as defined in the Law “On
commercial companies in Albania”. In general, they are administered by the Large
Taxpayers’ Office. The general contractor may implement the contract by himself or
may also utilize specialty subcontractors or can perform any portion of the work. In all
cases general contractors should be licensed by the Ministry for Public Works and
Territory Adjustment according to the already established categories of the construction
process. In any case the contractor may be registered in tax administration.
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Subcontractors
Subcontractors represent a significant number of taxpayers in the construction sector.
Subcontractors differ from contractors because of their limited scope of work, which
usually includes specialties like: plumbing, carpentry, electricity or flooring and roofing.
They usually make a contract with the contractor. The main goal of a construction
subcontractor is to construct according to the plans and specific requirements of the
construction project owner. A subcontractor assumes full responsibility for completing
the construction project.
Generally, subcontractors perform considerable part of the construction work
employing people part-time in order to control the quality of work performed by his/her
staff. Usually subcontractors are monthly paid by contractors. Payment is made upon
presentation of an inventory of work performed with attached invoices for all items. The
contractor can either appoint someone from his staff to control the volume and quality
of finalized work or do this by himself. The contractor may enjoy any juridical status
(corporate, individual or NGO) and any fiscal registration form (with or without VAT).
Public works contractors
Public works contractors specialize in public works construction projects. These projects
may include the construction of a single building or any number of buildings, streets,
industrial parks, etc. Certain segments in the central or local public administration can
also be prime contractors when they have annual budget funds to be used for public
investment projects directly with enterprises forming part of their organizational
structure. However, the current tendency is that, in general, public services in each
sector are subject to competition and contracting with the private sector.
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Public works projects include:
* Local Government Projects: Shopping centers, restaurants for poor people, grocery
stores, etc.
* Rental Facilities: Office buildings, industrial parks, apartments, etc.
* Public investments: Streets, parks, bridges, art works, highways, harbors, airports, etc.
* Public Buildings: City halls, prisons, institutions, schools, hospitals, campuses, etc.
* Special Projects: National security centers, scientific centers, international centers etc.
Investors
The owner of a construction project may be an individual, corporation, partnership, or
government body. Public investors (central and local institutions) are the major
categories in construction. In their case, juridical capacity to perform this function is
specified in the legislation on functioning and separation of powers between central and
local government. These institutions are considered investors in the broadest sense of
this term, since the state is the investment owner in an economic and juridical sense.
The owner evaluates whether a project is feasible and will provide the future benefits
desired. The owner then engages an architect or engineer to design the plans and
specifications of the project. Normally, the owner secures the necessary financing for
the project for both the construction period and permanent financing upon completion.
The owner will retain ownership title to the project throughout the construction phase.
The general contractor may or may not have ownership interests in the project.
The investor may own a percentage interest in one of the following ways:
1. Owning stock in the corporation that owns the project
2. Being a partner in a development partnership
3. Owning the property over the project or an interest as an individual
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Landowners and residential construction
There is evident difference between the landowner and the contractor who builds in
accordance with a contract between himself and the owner. The landowner is generally
the owner of the residential project as well as the constructor of this project in the
capacity of contractor. The contractor acquires land, obtains approval, secures
construction financing, and begins construction of the residential development through
all the construction stages. Usually, the landowner makes an agreement with the
contractor to require as profit a certain percentage of the construction project after
construction phase has been finalized. In the initial phase the landowner “has sold” his
property rights to the contractor and the construction process begins on the next phase.
This process requires that the contractors implement a per-unit price to each unit sold.
The price of each unit (site, materials and labor costs as well as an allocated portion of
profit and VAT) can be measured with the sales price of each unit sold. In most cases,
the sales price is based on what the market will bear under the current economic
environment. However, residential construction usually booms during periods of low
interest rates, while high interest rates cause the market to recede.
Big and heavy construction contractors
Big and heavy construction contractors like those for streets, bridges, highways and
railroads require specialized equipment and machinery. The equipment includes
bulldozers, graders, dump trucks, and rollers. Examples of this construction category
include city streets, freeways, railroads, rural roads, highway, bridges, and tunnels.
Heavy construction contractors require large and complex mechanized equipment, such
as cranes, bulldozers, pile drivers, dredges, and pipe laying devices. Some examples of
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projects in this category include dams, large bridges, refineries, petrochemical plants,
fossil fuel power plants, pipelines and offshore platforms. Most industrial plants are
classified in this category because of the complexity of the work. The largest engineering
and construction firms are included in the heavy construction classification.
Architect/Engineers
The architect or engineer designs the plans to be used by the construction contractors.
The plans provide the necessary details (dimensions, materials to be used, location of
fixtures, etc.) to the contractors. When the project has started, the architect/engineer
may monitor the contractor's progress and often it may be him to approve progress
payments to the contractors. The architect/engineer will make modifications (change
orders) in the plans as needed. Change orders are written revisions to the contract
which increase or decrease the total contract price paid to the construction contractors.
The change order document contains the change order number, change order date, a
description of the change, and the amount of the change order. Change orders can also
be issued by the contractors under the terms of the contract.
Material Suppliers
Material suppliers provide the raw materials used in the construction project. Material
supplies are purchased by suppliers and installed by contractors and other developers or
by the subcontractors and installed by them in accordance with their contract with
contractor. In every case when the material supplies are purchased by suppliers in
continuity for the construction period, this usually is based upon a written contract
between them.
General contractors often provide the materials before they pay subcontractors and
material suppliers to ensure that all parties have been properly paid. Materials are
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generally delivered directly to the construction site and in the case of some particular
materials (like concrete, etc.) are direct job costs, which are not normally inventoried by
the contractor. In most situations the contractor will maintain inventories of
miscellaneous yard stock frequently used. It must be said that in some situations the
payment of material supplies by contractor can be based in barter system.
Transportation and machinery
Transportation and machinery are important components in the construction process.
Usually contractors meet their transportation needs through transportation companies.
Like suppliers, transporters make a contract for the work they perform and in most
cases they act as subcontractors. The same applies to special equipment or machinery
like bulldozers, cranes etc. Such relationship between contractor and transporter or
machinery occurs with small contractors. In the case of big and heavy contractors similar
services may be provided by the contractor’s employees. Transportation includes
transportation of construction waste and material supplies. Transportation of material
supplies should be given special attention during audits, since in many cases this service
is provided to the construction site with the supplier’s vehicles. However, as a rule
transportation service is provided on transportation unit price and is billed by the
contractor.
Construction Lenders
The construction lender provides the necessary funds to pay contractors on a progress
basis. In return for making the loan, the lender receives interest on the outstanding loan
balance. Construction period interest (referred to as "soft costs") paid to lenders must
be registered as business expense by the contractor/owner during the construction
period, only in the case when it is not against instructions of the law “On profit tax”.
Interest and other loan costs are often taken directly from the loan principal as a result
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of interest provisions. As construction work progresses, the construction lender (bank,
savings and loan, etc.) will advance the funds based on the work performed or based on
a payment schedule. The construction loan is generally secured by the land and
construction project in progress. When construction is completed, the contractor/owner
will secure permanent long-term financing.
Multiple roles in the construction process
Each of the above participants can and often do have multiple roles in the construction
process. For example, the landowner could also be the general contractor
(builder/developer). The contractor may also be either owner of construction or
contractor by himself. In addition to providing supervision the general contractor may
also do specialty work that would typically be subcontracted (for example, concrete
work) or make a contract with subcontractors. Construction lenders frequently hold an
equity position in a development partnership in order to participate in the management
decisions and share the profits. Anchor tenants, such as major department store chains,
participate in the development partnership in exchange for signing long-term leases.
Contractors and material suppliers can obtain rights in the project by filing mechanics
liens against the property. The auditor should thoroughly understand each participant's
role in order to determine whether the transactions have received the proper tax
treatment.
THE CONTRACTING PROCESS
Usually the bidding process about construction projects solicits for long term contracts,
but this is not a rule. The bidding is frequently used for construction projects that are
financed by public funds. In the case of construction projects financed by private funds
the implementation of the bid is used for long terms projects and based on criteria
decided by owners.
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When the owner determines that the project is feasible and the construction financing
is available, the owner will solicit bids from general contractors and/or specialty
contractors. Owners will use trade publications and newspapers to invite contractors to
bid for the construction contract. The notice will provide the contractors with the
procedures to be followed in submitting a bid. The bidding contractor obtains a copy of
the plans and specifications from the owner to prepare for the formal bid.
The bidding contractor solicits bids from subcontractors, estimates direct material and
labor costs, and evaluates the ultimate profit potential of the contract. The amount of
the bid covers the estimated costs and profit for the construction project. The owner
evaluates the submitted bids and will award the contract to the successful bidder. The
contract document contains the contract amount, project start/completion dates,
progress billing procedures, insurance requirements, and other pertinent information.
There are standard cost manuals that a general contractor can use as a guideline in
computing the bid. These guides contain a compilation of cost data for each phase of
construction. It is important to realize that the cost of bidding a job can be considerable.
The costs include reviewing and reproducing the job specifications and blueprints,
calling in subcontractors to get bids on the work involved, working up the total cost of
the project, and preparing a formal bid.
The preparation of the bid is the first step in the cost control system. The object of the
cost control system is to provide the general contractor with information regarding
actual project costs versus anticipated or budgeted costs. These cost comparisons are
essential for internal control as well as for auditing purposes. You may see situations
where a contractor might pursue a "break-even" bid to generate enough cash flow to
meet payroll, etc., particularly in recession periods.
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Scheduled Subcontractors
It is the general contractor's job to schedule the subcontractors so the construction runs
smoothly and is completed on schedule. The various specialty areas include, but are not
limited to, the following:
1. Clearing the land which may include demolition of existing structures
2. Excavating the land which may include digging holes and leveling
3. Pouring the foundation and transportation
4. Ductwork for sewage and white water
5. Steel, brick and/or wood framing
6. Rough framing
7. Rough electrical
8. Wood or concrete flooring
9. Roofing
10. Heating and air conditioning
11. Installing elevators and/or escalators
12. Installing sprinklers and other safety equipment
13. Installing electrical fixtures
14. Insulating and weather-stripping
15. Framing window and door sashes
16. Installing tile and marble
17. Installation of suspended acoustic ceilings
18. Installing toilets, sinks and other plumbing fixtures
19. Painting walls, inside and out
20. Laying carpet and other floor coverings
21. Clean up
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In the case of construction projects for roads, railroads, bridges, airports and art works
the subcontractors’ list includes but is not limited to the following:
1. Clearing the land which may include demolition of existing structures
2. Excavating the land which may include digging holes and leveling
3. Unloading and transportation of site excavation and clean up waste
4. Ductwork for sewage and white water
5. Site fencing with different materials
6. Preparation of construction sites
7. Rough electrical, sewage and discharge installations
8. Laying construction site with rough materials
9. Leveling and compression of construction site
10. Installation of technological systems according to specifications
11. Laying the site with different materials
12. Isolation and protection of building with contemporary materials
13. Installation of specific connection and alarm systems
14. Clean up.
Contract Income
Most companies use a standard construction contract. The most important information
contained in the contract is the amount the general contractor will be paid and how
often he or she will be paid. The contract will state whether the contractor will bill
monthly, at the completion of the contract, or at certain stages of the project. The
billing invoices may include copies of the subcontractor bills and lien releases. The
owner may have a supervisor at the site who confirms the contractor has completed the
work for which he has billed.
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The contract may also include provisions for retains, which are usually kept by the
general contractor until the project is complete. Retains are usually up to 10 percent of
the total due to subcontractors.
TYPES OF CONTRACTS
Long-term contracts
Long-term contracts are defined as any contract for the manufacture, building,
installation, or construction of property if such contract is not completed within the
fiscal year in which such contract is entered into. The landowner, as profiteer in the
construction industry has an important role in this type of contract.
Short-term contracts
Short-term contracts are contracts started and completed within the taxpayer's fiscal
year. For short-term contracts, construction costs are treated as current period costs
under all methods of accounting.
Fixed price or lump sum contracts
A fixed price or lump sum contract states that the contractor will complete the project
for an agreed-upon price despite unforeseen costs that might arise during the
construction phase. Most fixed price contracts in reality provide for some variations for
economic price adjustments. If there are any modifications to the original contract,
change orders are executed which often increase or decrease the contract amount.
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Cost-plus contracts
Cost-plus contracts stipulate that the contract amount will be the cost of the
construction project plus a fee. The fee may be earned in various ways. A fixed fee is
generally earned evenly throughout the term of the contract. A percentage fee is
frequently based on the amount of cost incurred. Most cost-plus contracts have a
guaranteed maximum to protect the owner from cost overruns. Many cost-plus
contracts allow the contractor to share in cost savings if the project comes in under
budgeted cost.
Time and material contracts
Time and material contracts are contracts that provide payments to the contractor
based on direct labor hours at a fixed rate plus the cost of materials and other specified
costs.
Change Orders
Change orders can be initiated by the contractor or the owner. A change order modifies
the original contract and either increases or deceases the contract costs and/or contract
price.
Bonding
Owners often require the general contractor to be bonded. In these cases the general
contractor is required to purchase a guarantee or surety bond. The purpose of the bond
is to guarantee the owner and lender that should the general contractor fail to finish the
project there will be available funds to hire a replacement.
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A general contractor's bonding capacity is based on their financial statements and past
performance. A bond request will be denied if it exceeds their bonding capacity. A
contractor may leave what appears to be an unusually large amount of cash in the
company to increase his or her bonding capacity. State contracts usually require surety
bonds. In other cases, collateral bond is required in which the contractor pledges
personal property as collateral in value equivalent to the contract price.
Guaranty Companies
Guaranties are generally insurance companies which provide bonding to contractors.
Bonds provide a form of insurance to the owner. Performance bonds protect the owner
if the contractor fails to complete the construction work. Performance bonds are
typically a percentage of the contract amount. To secure a bond, contractors must
submit detailed financial data to the surety company.
Institutional permits during the construction process
Based on the Law “On Zoning”, before beginning work with a particular construction
project the owner (owners or investors) should present a series of documents required
for obtaining a construction permit. These documents should be submitted to the
zoning office with the local government, according to the jurisdiction of the site in which
the project will be implemented. The documentation required for a construction site
includes:
- Topographic survey of area signed by a licensed topographer;
- Zoning study for construction project location;
- Construction site plan;
- Proof of ownership and cadastral map;
- Project design signed by licensed architect;
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- Technological design for industrial and production projects;
- Technical report signed by contractor’s technical manager;
After the above-mentioned documents have been submitted, the following are also
required in order to obtain a construction permit:
- Complete technical design of building signed by licensed architect and constructor;
- Construction work schedule;
- Geological and engineering study of construction site signed by licensed engineer;
- Certified contract with contractor implementing the construction project together with
professional license of the contractor company and its technical manager;
- Total estimate of construction work.
After this documentation is examined by the Council for Territory Adjustment, the latter
will decide to either approve the construction permit or not. At this moment the
construction contractor is obliged to pay a local fee equal to 5% of the estimate value,
approximately 30,000 Lek/m² (until 2008).
The Construction Police is the competent authority to control construction work.
Construction Police is subordinate to the Ministry for Public Works and Territory
Adjustment. In every case, in addition to control on project implementation, the
Construction Police may also require the following documents from the contractor:
1. Decision from Council of Territory authorizing work to begin;
2. License of construction contractor;
3. License of technical manager, part of contractor’s staff. This license or that of the
contractor is issued by the Licensing Department with the Ministry for Territory
Adjustment, upon a set of standard criteria;
4. Seismic study for buildings higher than 8 floors;
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5. Technological permits for industrial and production projects;
6. Geological record;
7. Architectural plan;
8. Contract with supervisor.
After checking the authenticity of these documents, the Construction Police issues a
certificate to start work with the respective project.
For the purpose of control by Construction Police a contractor should avail of the
following:
- Diary of construction work;
- Documents for employees’ technical safety;
- Record of hidden works;
- Control record for current stage of work;
- Proof of analysis for iron and concrete;
- Record from labor inspectorate;
- Electrical design of the construction site;
- Fencing of the construction site;
- Technical safety measures during work;
- Fencing according to the project organizational plan;
- Machinery operators must possess annually renewed licenses;
- Contracts with water and power supply enterprises.
Registration of buildings as immovable property
Once a building is completed it should be registered with the Real Estate Registration
Office. But before this, the zoning office with local government prepares a report,
known as technical report. This technical report, otherwise known as the utilization
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permit, is issued after all above-mentioned requirements have been unquestionably
met, following reports issued by relevant institutions.
After the Tax Office has issued the fiscal certificate, the zoning office with local
government will forward the complete file to the Real Estate Registration Office. The
latter will not transfer the investor’s title to a third party unless it has received a
certificate from the Tax Office, confirming the investor’s fiscal status.
Notary and sale of constructed buildings
According to the Law “On Notary”, the following duties perform by notaries would be of
interest to our industrial notes:
- Perform acts for corporate or private individuals who intend to exercise their rights
and protect their legal interests. Explain the rights and duties thereof and warn them
of consequences arising from notary acts, so their interests will not be harmed from
lack of knowledge of law.
- Counsel parties on fiscal consequences in case of notary acts resulting in property
alienation
- Certify citizens’ signatures on various acts;
- Redact records and make inventories, describing the state of things upon request of
citizens when so asked by the court;
- Redact declarations and documents upon request of interested parties, as well as
other acts stipulated by law.
It is obvious that of all the above-mentioned duties, the tax inspector should consider
the fact that whenever parties sign a contract (contractor, sale of surface area) these
contracts are not the final element to determine the contract cost and price. Such fact is
only confirmed by checking contracts onsite, after preliminary information and
investigation. Therefore, in no case can the contract price certified by the notary bear
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evidence of the actual price. It is only evidence of what the parties have agreed between
them. For fiscal purposes, the actual cost and price can be checked by adopting basic
audit principles and taking into consideration the principal elements in a contract.
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CHAPTER II
SMALL CONTRACOTRS
Every contractor with a construction contract:
1. Who estimates that his/her contract will be valid for two fiscal years, as of the
moment it is entered into;
2. When the gross turnover for 3 fiscal years prior to the year it entered in force is 8
million Leks/year.
Long-term contracts
Long-term contracts are considered all contracts between parties for construction work
and material supplies if the contract has been entered into for a longer period than one
fiscal year. Such contracts are compiled between the subcontractor and the contractor
or owner. However, in similar relationships the parties should rely on two fundamental
requirements:
First, the contractor should consider contract duration when determining the fiscal
elements to be included therein, such as: implementation period, contracted sum, form
of payment, contract implementation mechanisms and special conditions.
Second, the contracted sum should definitely state the minimum VAT applicable. This
relates only to small subcontractors with lower turnover than the minimum VAT.
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Individual and collective employment contracts
Individual and collective employment contracts are contracts between parties. The most
common contracts are compiled by company lawyers or legal offices and they stipulate
terms and obligations of the parties. The employer is the manager of the contractor or
subcontractor, whereas the employee is a person with a concrete specific duty to
perform according to his/her individual capacities and the employer’s needs. In similar
cases no fiscal invoice is used in the transactions between parties; instead, the employer
issues a payment order. Payment can also come in cash or through bank account.
Employers withhold all applicable contributions upon incomes generated by this
employment relationship. All other incomes raised outside this scheme constitute a new
relationship and therefore they should be subject to new fiscal obligations according to
fiscal legislation.
There are also other types of employment contracts in which the employer is a specialty
company providing the contractor with labor force. In such cases the contract is made
between the contractor or subcontractor and an individual, corporation, government or
non-government organization, foreign mission or assistance providing labor force in the
process. This is considered supply of services, and therefore the employer should issue a
fiscal invoice to the employee for the service provided.
Cash Payments
A contractor or subcontractor using cash payment reports incomes at the moment they
are received by issuing a fiscal invoice even in the case of prepayments. In most cases
contractors or subcontractors may not receive the money although they have issued a
fiscal invoice to confirm the transaction. Proof of payment for every fiscal invoice issued
on sales or prepayments is considered the final evidence for a completed transaction.
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Payments via bank
Payments via bank accounts are the goal of an informal economy. Financial relationships
in transactions via bank accounts are one of the major duties of the tax administration.
This duty is closely related to a consistent attitude in observance of the law on
payments via bank accounts and the legislation package on money laundry is very useful
in this process. Although the law on tax procedures contains an article which limits cash
payments between parties in a transaction, a contractor or subcontractor may largely
use cash payment in every day life, given the type of economy in the country.
Transactions in the construction process will not make an exception for as long as the
economy will rely predominantly on cash payment.
In the case of contractors for residential buildings and civil works, producers and traders
of material supplies, cash flow usually goes through cash registry and the money goes
directly to the owner’s account. This is not the case with construction, production or
trade contractors and companies which have the right to perform work for the public
administration and can only circulate cash through their bank accounts.
Mixed payments
There are cases when barter exchange is used between subcontractors and their
material suppliers in construction. However, economic profit through a contractual
relation is the very essence of this type of exchange, which is mostly used when
liquidities are lacking. Nevertheless, relations between parties can be partly monetary
and partly barter exchange. Such relations, however, usually occur between parties
which are closely related know each other well.
Other types of financial relations in construction include assets given for use. Such
principle is only adopted when the buyer is not obliged to make cash payments for using
the assets.
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Cost comparison method
Cost comparison method includes comparison between applied cost and planned cost
for construction project within the fiscal year. Such assessments are based on:
- Initial project the contractor deposits with local government for construction
permit;
- Construction estimates applied;
- Contracts compiled for construction work to be performed.
This method enables the contractor to compare the following total cost components
and determine percentages for contract completion. This method gives a clear picture of
incomes and is valid only if used in consistency with contract specifications. The most
common methods for total cost components are the comparison between:
- Contract cost and applied cost;
- Contract cost and applied labor cost;
- Contract cost and applied cost for machinery and transportation;
- Contract cost and applied cost for estimated and applied work.
These are all deductible costs if compatible with the law on documentation and
bookkeeping as well as with legislation related to fiscal invoices for acknowledged fiscal
costs. Material supplies entered though fiscal invoices should be inventoried and
correspond according to the law on bookkeeping.
Labor comparison method
The purpose of labor comparison method is to compare the cost of labor performed in
various construction phases with estimated labor cost in a particular construction
project. This method is adopted when work has been performed or a certain
construction phase has been completed, thus reflecting added value as well. The
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method of labor comparison in fact reflects the part of added value that has been mixed
with other construction process elements, such as materials, machinery, transportation
and other complementary elements, indispensable in the construction process.
Contract terms fulfillment method
When contract terms have been fulfilled, the best method would be to compare the
construction process declared in work inventories with contract terms between the
respective parties. Incomes declared by contractors in their annual balance sheet should
be compared with contract terms and obligations. Such terms should be taken into
account when accepted by parties.
The contractor can only postpone fulfillment of contract terms only for grave reasons.
However, contractors never declare losses in a contract, since such contract is based on
prepayments and payments for work completed in the construction process or material
supplies, whose supplier is clearly stated in the contract. Every element of income or
cost pertaining to a specific fiscal year corresponds to a particular item in the
construction inventory, which should be easy to analyze in case of verification.
From cash payments towards payments via bank
This form of payment is common in the construction industry among subcontractors,
small contractors (electricians, plumbers, carpenters, painters, designers, lawyers, etc.),
freelancers (architects, engineers, designers, lawyers, etc.) related to construction
process and, generally, among individuals, who in most cases order construction
products. In spite of their registration status with tax authorities, all of them should use
the same type of financial transactions among them. Although Albanian legislation
condemns cash payment outside banks if the sum exceeds 300 000 Leks, cash payment
remains widespread and convenient among Albanian citizens.
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Every auditor inspecting a transaction related to purchase of certain materials or
services should check its compatibility with legal requirements and reasons for choosing
this particular type of payment. Was the transaction performed with a casual supplier or
was this particular purchase not planned? Is the vendor in this particular case properly
registered? If cash payment is tested, does the paid sum match? Of course, one can
continue with such investigative questions to get to the final point: verification of the
suspicion that this particular type of payment reduces the contractor’s fiscal burden.
There is no doubt that one can jump to better conclusions after examination of cash
register account/s, bank accounts and other accounts by verifying their total sum and
comparing it at the moment of audit. If the amount of money in the cash register
exceeds ordinary daily costs, this means that the auditor has found something worth
investigating. Cash register flow usually indicates retail supplies or casual suppliers or
customers and invoices reveal them as private customers or customers for personal
needs.
Similar cases can be provided from audits conducted in the field.
In case during an audit the auditor notices that the contractor, subcontractor, small
contractor or freelance makes more than half of the payments in cash, the auditor has a
strong argument to start investigating further transactions.
Important, popular cases, court or appeal cases can also be used.
Of course, lack of a current bank account or minimum cash flow via banks increases
suspicions on cash flow. Money moving from one owner to another should undoubtedly
be accompanied with goods or services previously provided, being provided or to be
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provided in the future. In other words, money is insolubly related to the place and time
the good is supplied or service provided as well as the construction phase.
General description
Each individual or taxpayer should be aware of the forms and terms of financial
transactions with other parties. Tax procedures promote and encourage cooperation
with taxpayers for voluntary compliance, based on accounting principles. According to
this cooperation spirit, taxpayers will pay fewer taxes in case they cooperate in the
process of filing their tax returns with the tax administration and in case they keep
regular and accurate accounting documentation. This means that taxpayers’ correct
attitude towards the tax administration avoids frequent tax audits, which in most cases
result in penalties. Taxpayers themselves can ask the tax administration to audit their
activity. Penalties applied for this category of taxpayers should differ from the ones
applied for taxpayers filing false declarations. The tax administration should consider
taxpayers’ request for cooperation as an opportunity to correct deviations in their
financial situation under audit with minimum penalties.
Key orientations
During their work, auditors should try to make the best use of these industrial notes for
construction industry as well as available manuals to help them identify the most
appropriate method to use. For this they should first get acquainted with:
- Taxpayer’s organization (juridical status, functioning and organization of the
administration and employees);
- Type of work (contract, subcontract, etc.)
- Types of financial transactions ( cash payment or bank account )
- Form of activity (equity, with intermediates, mixed).
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Tax specialists should never consider only one of these methods. Instead, they should
resort to their professional judgment based on some criteria included in manuals or
official documents relative to the particular object being audited. However, in any case,
judgment should correctly follow specific fiscal laws, instructions, regulations, orders
and manuals issued by superiors, according to administrative rank. Correct observance
of all the above also includes execution of every final ruling of the court or appeal
system. Tax officials should be aware that every method they adopt correctly reflects
the entire legislation and acts thereof or rulings by the court and appeal system
Minimum fiscal costs and profits
(History)
In the framework of increasing cooperation and strengthening partnership with correct taxpayers
represented by legally acknowledged associations and organizations and in observance and accordance
with the requirements of article 36 of the Law No.8560, 1999 “On tax procedures in the Republic of
Albania” (not in force actually) as well as for the purpose of renewing the minimum fiscal cost agreement
and memorandum for minimum fiscal sale price/m2, the General Tax Directorate and the Albanian
Constructors’ Association, after carefully studying the situation and in order for these minimum indicators
to reflect changes in price index and market construction costs, agreed to establish the following:
I. Minimum Fiscal Cost (M.F.C)
1. The construction cost change index declared by INSTAT for 2003 will be used in order to compute
minimum indicators for the purpose of computing tax obligations. This index has increased by
2.75%. Taking into account the minimum fiscal cost of 26,526 Leks/m2 per construction surface area
established in 2002 as well as the impact of price increase, the Minimum Fiscal Cost for the city of
Tirana will be
M.F.C. (Tirana) = 27,000 Leks/m2 of construction surface area
This cost includes VAT of 20%, equal to 4,500 Leks/m2.
2. Minimum Fiscal Costs for other districts of Albania are computed by using coefficients established
according to Instruction Nr. 5 from the Council of Ministers, date 31.05.2001, and are shown in
Table 1 attached.
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II. Minimum Sale Prices for Construction Surface Area
1. For the cities of Tirana, Durrës, Vlora and Korça, Minimum Sale Prices per m2 of apartment area are
listed by geographically established zones and sub-zones in the maps attached (map nr.1 for Tirana,
2 for Durrës, 3 for Vlora and 4 for Korça). Minimum Sale Prices for Tirana, Durrës, Vlora and Korça
by zones and sub-zones are respectively shown in Tables nr.2, 3, 4 and 5 attached. Minimum Sale
Prices per m2 of construction surface area are given in Euro. To change to Lek, refer to the exchange
rate declared by the Bank of Albania for the respective period.
2. For other districts, minimum sale prices for m2 of construction surface area are computed on the
basis of the average minimum fiscal price for all the zones of Tirana (330 Euro/m2 or 42.900
Leks/m2) and the coefficients established by Instruction Nr.5 from the Council of Ministers, date
31.05.2001, shown in Table 1 attached. Therefore, this average minimum price for all zones of
Tirana is multiplied by the respective coefficient.
In order to compute the value of minimum VAT and social insurance contributions, both parties agree to
distinguish these two cases:
Case 1: Work IS entirely performed 100% by the construction subject itself:
1. On the basis of calculations for all cost elements it turns out that VAT created in the construction
process (labor, complementary costs, site preparation, network connections, etc.) per 1m2 of
apartment surface area represents 27,4 % of VAT computed on the basis of 4,500 Leks/m2.
Therefore, minimum VAT payable will be:
4,500 x 27.4% = 1,233 Leks/1 m2 of construction surface area (for Tirana)
2. For the purpose of computing social insurance contributions, the share of salaries and social
contributions in the minimum fiscal cost will be 17.6% of the construction cost, excluding VAT, i.e.
salaries and social contributions will be:
22,500 x 17.6% = 3,960 Leks/m2 of construction surface area (for Tirana) of which:
-Salaries are 3,041 Leks/m2 of construction surface area
-Social insurance contributions paid by the company are 918 Leks/m2 of construction surface area
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The value of social insurance contributions paid by the employee is 356 Leks/m2 of construction
surface area. Social insurance contributions to be paid by the construction company for 1 m2 of
construction surface area are 1,274 Leks (918+356=1,274) (for Tirana).
3. For other districts, the parameters for m2 of construction surface area are computed by using cost
change coefficients for every city as compared to Tirana and are shown in Table 6 attached.
Case 2: Work IS NOT performed entirely 100% by the construction subject
1. When part of the construction work is performed by subcontracting companies registered for
VAT, the minimum VAT to be paid by the construction company is computed by deducting the
percentage value representing the items of work performed by subcontractors from the total
minimum VAT applicable. These percentages are shown in Table 7 attached.
Example: If electric and plumbing work has been performed by subcontractors, the minimum VAT
applicable for 1 m2 of construction surface area will be computed as below:
27.4% - (27, 4% x 9.4%) = 27, 4% - 2.1% = 25, 3%
2. In case some category of construction work is performed by contracted groups of individuals:
- For the purpose of social insurance contributions, this category is considered as seasonal
employees (for a period no longer than three months) and the construction company
computes social insurance contributions for them according to the law in force for
seasonal employees.
- For payments made to this category of individuals for the work they have performed, the
company is obliged to compute, withhold and transfer to the state budget a tax equal to
10% of the gross salary.
A. Common surface areas, such as staircase, lifts, pumping stations, etc., which are not part of a sales
contract (i.e. are not specified as separate items in the contractor’s contract and final contract with
customers), do not generate income and consequently are not subject to profit tax.
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B. All completed or ongoing construction projects or projects already contracted at the moment this
agreement is signed, will be subject to sales prices established in agreements in force before this one,
provided that received incomes (partially or completely) related to these contracts are declared in the
annual tax return (balance sheet) of the respective year, or declared as incomes during balance sheet
audit.
In case buildings are mortgaged at carcass, minimum fiscal prices and costs apply till completion of
the respective building and the first applicant nominated in the initial construction permit will be
responsible for settling tax obligations.
C. Costs and sales prices established in this agreement apply to all contracts with contractors,
subcontractors or final customers signed after signature of this agreement.
Note: It must be said that those cost has been updated according the statistics year by year.
KEY ISSUES AND AUDIT TECHNIQUES
Gathering information for audit
In general it is necessary to check documents for periods starting one year prior to the
current year. However, this norm should be applied with discretion and not in all cases.
Registers for accounting and fiscal purposes are not properly kept or organized. This
phenomenon is common with subcontractors. Their documents may be updated for
everyday business purposes, but not to meet audit requirements. In the case of
contractors, auditors may find several fiscal and accounting registrations accompanied
with appropriate justifying documentation. The audit technique depends on the amount
of documents found. The simplest way to determine the type of information to request
from contractors or subcontractors is to have a good understanding of the way they
manage their activity and keep documentation.
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Usually, contractors keep the following documentation:
1. Copy of contract with owner or person requesting the construction and estimate;
2. A copy of the tender contract and estimate;
3. Information on bank guarantees for the respective construction object;
4. Contract with subcontractors and suppliers
5. Proof of payments made to subcontractors and owners;
6. Certified contracts with customers prepaying the contractor;
7. Orders placed for subcontractors according to contracts with them;
8. Invoices for materials or services purchased for construction needs;
9. Correspondence with owner, subcontractor or central and local government officials;
10. Agreement for monthly installments to pay on loans obtained by institutions or
individuals;
11. Copies of permits issued from relevant offices to build, use and register the
constructed project in compliance with local and national taxes and fees;
12. Sales contracts with various customers certified by notaries and real estate
registration offices.
Many contractors also keep numerous registrations for their employees. The
employee’s file with a construction contractor may contain documents related to the
specific job of each employee. In all cases their work is measured by a timesheet, kept
by a person appointed from the contractor, which registers everyday working hours as
well as overtime hours.
Problems related to incomes from construction
Auditors should mainly focus on finding the best way to audit accounts. Initial interview
is essential in creating a correct impression of the specific type of construction activity,
bookkeeping, cash flow, construction costs, work in progress and obligations and
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responsibilities of personnel closely related to the construction activity. Cash flow test
and other techniques described in the appendixes to the tax audit Manual are valid for
contractors and subcontractors. These techniques help auditors to conduct audits in a
correct way. On the other hand, conclusions drawn from the application of these
techniques provide information on the defects of the activity as well as on relevant
legislation required for their correction. The questionnaire available in the appendix to
these industrial notes for Construction is very useful for the initial interview.
There are several problems you can encounter while auditing construction activities.
Below we are listing some cases of a general or similar character:
- In some cases the auditors come across non-inclusion of incomes from loans or credits
from prepayments by customers or loans to the business.
- In other cases incomes from construction activity may not be declared.
- There can be cases when incomes earned after a court or arbitration ruling are not
declared as fiscal incomes.
- In some other cases auditors may come across undeclared incomes found from fiscal
audits which are forgotten and consequently not included in the total annual incomes.
There is continuous risk that subcontractors or small contractors can under-report their
incomes, because they do not have to obtain construction, utilization or registration
permits for their construction product and often work with funds ensured outside banks
or through other informal channels. Of course, under-reporting also relates to special
processes in their work, which either require short time or are completed without any
contracts with contractors.
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Tax-exempt incomes
Albanian legislation contains exemptions from direct or indirect taxation for the purpose
of stimulating particular categories of business, customers or users of the construction
sector. Such exemptions are foreseen in specific laws and include:
1. Exemptions in the Law “On income tax”
The following are exempt from personal income tax:
- Incomes earned by owners as e reward for expropriations made for public interests.
2. Exemptions in the Law “On Value Added Tax”
- Supply of land, site or their rent is exempted from tax except cases when they are
used for parking and storage of transportation vehicles and other vehicles.
- Supply of buildings is tax-exempted.
- Buildings and other public property leased by central or local government authorities
is tax-exempted.
Undeclared incomes
Small contractors and prime contractors can incur personal costs not directly related to
the construction process. Such costs are included as construction costs in construction
iventories declared in tax offices. In case the taxpayer is a company which incurs costs
for repair work in a partner’s premises, the auditors should immediately look for
problems with dividends lost as construction work. Such costs are unknown for the
auditor.
Payments made to compensate landowners of construction site area should attract
auditors’ attention. These costs are invisible and hard to find through the interview or
direct contact with owners, direct beneficiaries of income undeclared by contractors or
contractors, who spend this money but do not declare them in the items of construction
work.
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CHAPTER III
PRIME CONTRACTORS
Long-term contracts
Before registration with tax authorities, construction contractors choose the most
convenient juridical form for the activity they are going to exercise. Registration with tax
administration occurs only once, at the beginning of their activity and after they have
been acknowledged juridical capacity to exercise activity in accordance with the Law
“On commercial companies”. Their fiscal status is determined on the basis of the
business plan which presents turnover levels to the tax administration (with or without
VAT).
Generally, prime contractors register in the VAT and profit tax scheme and are subject
to respective laws. Once in this scheme, prime contractors are obliged to adopt
standard accounting principles. Such contractors usually have more than 100
employees, performing different functions in the company.
Definition of long-term contract
In general, a long-term contract is similar to any other contract for production of
materials, construction of buildings, installations or building public works provided that
the contract will not be completed within one fiscal year, as of the date it is entered
41
into. Every contract has its own specific terms and obligations, related to the specifics of
the parties participating in the contract.
Parties in a long-term contract
Parties in a long-term contract for a particular construction project include the project
owner, architect, contractor, lender and landowner. Participation of all these parties in
the contract is not a general rule. Participation is determined by the principal parties,
which by definition include the project owner and the contractor.
The contract starts with an introduction of the parties. It also specifies the contractor’s
duties and owner’s obligations towards the contractor and states the conditions to be
fulfilled by the contractor implementing the contract as well as the terms for contract
closure and resolution of disagreements. In any case, the contract between parties is
very useful to tax inspectors, because it helps them to get better knowledge of the
environment in which the project is being implemented. However, the contract should
never be considered as a fact to be used for calculating obligations. Usually obligations
are checked after the inspectors have observed how contract terms have been
respected in everyday practice.
Tax exemptions in contracts
Contracts between parties may also stipulate tax exemptions for owners. Tax
exemptions usually occur in contracts for projects which are part of project agreements
approved in principle by the Council of Ministers and ratified by the Parliament of
Albania. It is necessary to carefully read the parties’ exemptions from tax obligations
and local taxes and in case of ambiguities auditors should seek clarifications from
superior structures in the General Tax Directorate. In all cases, tax exemptions should be
42
considered in the framework of project deadlines, total contract sum and current sum
implemented by the contractor as well as the accuracy of calculations and bookkeeping.
Testing contract incomes
The following should be considered as a test of incomes the contractor has earned from
implementation of contract during the period extending beyond one fiscal year from the
date it is entered into:
a. All business incomes declared by the contractor in the balance sheet for the year the
contract is entered into and the following years up to the year the contract is
completed;
b. Balance sheet or project owner’s income declaration of for the same fiscal years that
apply to the contractor;
c. Balance sheet or income declaration for other potential participants in the contract.
Comparison of financial indicators for each year and participant in the contract will
represent one side of the balance for checking contract generated incomes. Bringing
these declarations to one common denominator and their comparison with indicators
collected and ascertained by tax officials will prove the real incomes earned by the
implementation of the contract.
Determining contract implementation level
There are two ways to determine the contract implementation level. Cost comparison
method is one of them.
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Cost comparison method
Cost comparison method for determining the contract implementation level separates
total applied cost from total contract cost. In case no total cost is stated in the contract,
the auditor should refer to the estimated cost confirmed by authorities issuing
implementation permit or other relevant authorities appointed by the government.
Applied cost includes:
- Part of expenses for materials directly used in the contract implementation;
- Value of labor force used for the project implementation in its respective stages;
- Part of expenses related to amortization of assets and depreciation of other assets;
- Value of work purchased by specialty subcontractors;
- Value of profit made by the contractor during contract implementation as compared to
the value or percentage stated in the contract.
VAT is not included in the contract since it is a consumption tax and as such it has no
impact on the project implementation cost. It is collected by the contractor to the
benefit of the tax administration. In general, if we consider the contractors’
bookkeeping, we can observe that all direct cost items and those used as fiscally
acknowledged costs form part of applied cost for each particular period.
This method is widely used by all taxpayers who are contractors and, according to
contract terms, report to the construction project owner. Registered taxpayers in the
sole role of subcontractors are included in the reports prepared by the contractor, who
is at the same time the buyer of their work.
Total applied cost up to a given period
Percentage of contract implementation level = -------------------------------------------------
Total cost estimated in the contract
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Example 1
Company A has signed a contract as subcontractor with owner B. The contract states that the
total cost of the project will be 1 billion Leks. The contract will last for a 25-month period. The
contract enters in force on 8 September, 2008 and closes on 8 October, 2010. The project owner
is an individual in the role of investor. For the sake of simplicity, the value (cost) of reported
monthly work is 40 million Leks/month. We want to check the percentage of contract
implementation level for April 2009.
Then:
Total applied cost up to April 2009 = 320
million (40 million x 8 months)
Percentage of contract implementation level = 32% -----------------------------------------------------------------
Total cost estimated in the contract = 1 billion
Leks
Incomes earned from contract implementation
Incomes earned from contract implementation every year are determined by
multiplying the estimated contract price with the percentage of contract
implementation level at the end of the fiscal year and by deducting every sum of
incomes from the previous year acknowledged as incomes earned from contract
implementation. The estimated contract price is not equal to the contract cost since this
price also includes the contractor’s profit:
Incomes earned from contract implementation for the year…= Estimated contract price x
percentage of contract implementation level – incomes acknowledged and presented in
the previous year
Example 2
As in example 1, company A has signed a contractor as subcontractor with owner B. The contract
states that the total project cost will be 1 billion Leks, whereas the estimated total contract price
45
is 1.1 billion Leks. The contract will last for a 25-month period. The contract enters in force on 8
September, 2008 and closes on 8 October, 2010. The project owner is an individual in the role of
investor.
The percentage of contract implementation level for an entire fiscal year (12 months), according
to the report above, is 40%.
The contract has entered in force in September 2008 and the total applied cost until December
2008 is 100 million Leks. In the year 2009 this total cost is 396 million Leks. Thus, incomes
earned from contract implementation for 2009 = 1.1 billion Leks x 40% - 100 million Leks = 340
million Leks.
Supplementary costs in long-term contracts
All costs resulting from long-term contracts or direct profits from long-term contracts
will form part of this very contract in the same way as costs are allocated to long periods
of long-term contracts. Cost allocation rules for long-term periods relates to direct
materials costs, labor costs and indirect costs, which will be further explained below.
Direct materials costs
All materials used, according to a long-term contract, in the process of a construction
project implementation, such as building, installations or production of materials for the
purpose of this project will be considered part of the contract. Elements of direct
materials cost include the tax invoice price minus deductions, plus transportation cost
and other material-related costs used in the project.
Direct labor costs
All direct labor cost can be identified in case such an element is attached to the long-
term contract. Elements of direct labor cost include: compensations, overtime
payments, payments for holidays, sick leave, income tax, social and health insurance
contributions, which are all paid by the employer to the account of the tax
administration.
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Indirect costs
All indirect costs incurred from the implementation of a long-term contract should form
part of this contract, unless prohibited by the Albanian legislation. Indirect costs include
all other costs which are not direct materials or labor costs. Some indirect costs to be
included in the total cost are:
- Repair of machinery and transportation vehicles;
- Maintenance of machinery and transportation vehicles;
- Costs for heating, lighting, energy, water and other similar expenses;
- Rent for machinery, equipment and transportation vehicles;
- Salaries for supervisors of project quality;
- Indirect materials and accessory supplies;
- Taxes acknowledged as deductible costs;
- Amortization, depreciation and cost for repair work in case of mistakes in the process;
- Administrative costs due to long-term contract, excluding sales costs for capital and
assets;
- Insurance costs, e.g. for machinery, equipment and other technological devices used in
the process of long-term contract implementation;
- Costs for research and experiments for the purpose of the project;
- Reconstruction of some parts of the construction project;
Explanations
Below are some types of activities these costs apply to in long-term contracts:
- Administration and coordination of construction projects (regardless of the place
where such administration is made)
- Personnel operations including full-time recruitment, part-time recruitment,
reallocation of resources, registration of employee data;
- Purchase operations including purchase of materials and equipment, scheduling
and coordination of their distribution;
- Storage operations;
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- Accounting operations and those for completion of databases for other
activities;
- Security and protection services;
- Services for the necessary documentation for contractual services.
Special rules for supplementary costs
Contractors implementing a particular construction project can include costs
acknowledged by income tax legislation as supplementary costs. For a better
understanding, let us look at the following example 3.
Example 3 Supplementary cost application due to change order
Administrative costs identified as supplementary cost on contract cost can be accounted
according to the period in which the cost is applied, always according to accounting principles
and income tax legislation.
Contract price = 1.1 billion Leks; Estimated contract cost = 1 billion Leks
Year one. Actual cost 2008 = 100 million Leks
Total est. cost = 1 billion Leks = 10% complete x 1, 1 billion Leks = 110 million Leks income
=====
Year two. Change order, increase income 110 million Leks, increase cost 100 million Leks
Actual cost = 400 million Leks
Total estimated cost = 1.1 billion Leks = 40% x 121 billion Leks =484 million Leks –110 million
Leks = 384 million Leks income
=====
Year three. Change order, increase inc. 11 million Leks, cost 10 million Leks
Actual cost = 1.11 billion Leks;
Actual income = 1.22 billion Leks – 484 million Leks = 736 million Leks income
=====
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Contract fragmentation
In order to check real income declaration it is necessary to see whether a long-term
contract has been implemented directly by the contractor or parts of this contract are
implemented by subcontractors, who can maintain direct relations with the contractor
although they may have violated contract terms. In such cases, it is important to check
whether the contractor has been avoided by subcontractors in violation of contract
terms. On the other hand, although tax authorities cannot intervene in the parties’
attitudes towards contract obligations, they can investigate in order to find out why
such deviation occurred. Generally, contract prices are established on the basis of
estimates and are applicable in the construction process. If in the case of a
subcontractor the contract price is lower, this should be considered a deviation in the
relations between parties and consequently it represents a good opportunity to make a
more thorough analysis of work or service items considered as deviations. In any case,
contract fragmentation does not imply drafting a new one, but only fragmentation of
separate processes of construction work.
Look-back method
The look-back method guarantees the comparison between the amount of taxes paid in
the fiscal year of contract completion and taxes estimated in the contract for every year
it was in force, by calculating unsettled obligations, interest and penalties for payments
lower than the fact. This method is usually applied for long-term contracts and in cases
when the difference between the amount of taxes calculated in the contract and the
amount of taxes paid in fact is lower than 1% of the taxpayer’s average incomes for the
last three fiscal years prior to the contract completion year.
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Calculation according to the look-back method is as follows:
1. In the fiscal year of long-term contract completion, income recalculation according to
contract terms for all other preceding fiscal years should take into consideration the
applied cost and price instead of the contract cost and price;
2. Identification of tax overpayments or underpayments for every fiscal year based on
point 1 above only for the purpose of calculating interest according to the look-back
method;
3. Use of overpayments to compensate for taxpayer’s underpaid obligations which may
not relate to the particular construction activity but to other activities the same
taxpayer performs.
When checking a completed contract the tax auditor should focus on:
- Period of contract completion;
- Settlement of tax obligations resulting from contract implementation and their
comparison with tax obligations estimated in the contract;
- Rules observed for deductions and bad debts;
- Realization of contract income and their documentation;
- Delays in the observance of contract terms and consequences thereof;
The example below will help to better understand this method.
Example 4:
Company A uses the percentage of completion method of accounting for long-term contracts.
Company A entered into a qualified long-term contract in August 2009, which was completed in
December 2010. The total estimated cost at completion is 40 million Leks and the estimated
contract price is 50 million Leks. The cost incurred and allocated to the contract was 14 million
Leks in 2009 and 21 million Leks in 2010. (No other income or expenses were incurred by A in
2009 or 2010).
50
Percent Complete
Per Return 2009 2010
Cumulative Costs 14,000,000 35,000,000
-------------- ----------------
Total Costs 40,000,000 35,000,000
Percent Complete 35% 100%
Profit per Return 2009 2010
Earned incomes:
50M x 35% = 17,500,000
(50M x 100%) - 17.5M = 32,500,000
Cost incurred 14,000,000 21,000,000
-------------- ---------------
Gross profit 3,500,000 11,500,000
-------------- ---------------
Profit Tax (10%) 350,000 1,150,000
--------------- --------------
STEP 1: Computation of the Look-Back Provision Percent Complete Based on Actual Total Cost
2009 2010
Cumulative Actual Costs 14,000,000 35,000,000
---------------- ----------------
Total Actual Costs 35,000,000 35,000,000
Percent Complete 40% 100%
STEP 2: Computation of Under (Over) Payment of Tax under the Look-Back Method
2009
Earned incomes (50M x 40%) 20,000,000
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Cost incurred 14,000,000
----------------
Gross profit 6,000,000
---------------
Profit Tax per Look-Back 300,000
Profit Tax (10%) 350,000
--------------
Under (Over) Payment 400,000
---------------
This method helps tax inspectors and others interested in earned incomes and
obligations deriving from the contract implementation to compare and draw
conclusions as to the calculation and payment rates for tax obligations estimated on the
basis of total contract price and cost.
The percentage rate of contract implementation level and comparison of this indicator
with minimum tax levels determines the use of the look-back method to check
overpayments or underpayments in the fiscal year of contract completion.
Completed Contracts
A contract is considered completed for purposes of the look-back method no later than
the year of final completion and acceptance within the meaning of authority that must
supervise all construction work performed. Accordingly, determination of the
completion year for any long-term contract is based on an analysis of all relevant facts
and circumstances, including the manner in which parties in the contract deal with each
other, contract content and nature of work to be performed or costs incurred in the
contract. Therefore, the first application of the look-back method must occur no later
than the tax year in which the subject matter of the contract has been delivered and is
available for use by the customer.
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For the tax year immediately following the year of completion, any previously
unreported portion of the total contract price (including future receivables) must be
reported in that year, even if the percentage of completion ratio is less than 100%
because the taxpayer expects to incur additional allocable contract costs in a later year.
At that time, any remaining portion of the contract price is includible in income under
this accounting rule.
General information necessary for auditing companies
It is important to first identify sources of information and then choose the best way they
can be available for the auditor. Contact with sources of information is very important in
the preparatory process for auditing a company. The following could be potential
sources of information:
– Ministry of Territory Adjustment, Municipalities and Communes;
– Treasury;
– Customs data on imports of construction materials;
– Real estate registration offices;
– Courts for changes in the commercial registry;
– Notaries for contracts signed for construction of residential buildings and fund
transfers;
– Various information bulletins;
– Information from print and electronic media;
– Information and publications by various construction associations;
– Information from NGOs;
– Organizations specialized in surveys;
– Taxpayers or contracting parties;
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– Materials and methodologies from foreign assistances and seminars conducted
by them;
– Exchange of information in observance of obligations from agreements to avoid
double taxation;
– Inside tax administration structures.
According to the procedural law, it is obligatory to provide part of the above-mentioned
information electronically. Another part of this information can be exchanged through
correspondence between tax structures and offices. The rest of the information can be
received upon written request.
Suggested audit techniques
Audit methods and techniques should help tax auditors to detect irregularities, mistakes
and frauds violating the laws applicable to the construction activity and financial
information. Every tax auditor should know where to focus and what to do when
auditing taxpayers exercising their activity in the construction industry or other relevant
activities in this industry. The following could be some of the audit techniques:
1. Definition of contract as long-term.
a. Purpose of work to be performed, articles 2 or 3 in the contract and price in
articles 6 and 8 are the most important elements;
b. Contracts for services, construction management, maintenance and
guaranties are elements to be taken into consideration. Prepayments are
taxable in case taxpayers benefit from them.
2. Ascertain whether the taxpayer has performed work directly or through
subcontractors. Their identification and listing by service provided. Agreed price for
service provided is also very important.
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3. Ascertain whether the contract price is correct
a. In the case of a supplementary cost contract, in order to determine the
contract price for a supplementary cost contract, the applied cost per period
plus project completion estimated cost plus estimated tariff are added to the
gross price of principal contract. Labor and materials vary with different work
processes.
b. It is important to check contract deadlines in order to identify corrections in
the contract price due to change of orders or other options and supplements
that might occur.
c. Project requests for changes in the contracts. Are changes reflected in the
expected incomes from contract in the year they have occurred?
4. Verification of applied cost versus contract cost on the date of audit.
a. Verification of the fact whether the taxpayer is abiding by the rules for real
cost declaration according to deadlines specified in the contract.
b. Materials and supplies from subcontractors (to the construction site) are costs
incurred by the contractor for the current fiscal year. They should not be
included in the inventory.
5. Physical check and observation of construction project implementation based on
preliminary information about volumes and deadlines for principal work processes.
6. Confirmation with third parties (subcontractors or suppliers) for sales made to the
contractor for the respective construction project.
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7. Adoption of similar audit techniques and methods as in previous internal audits or
audits from other institutions.
8. Verbal information from managers and employees are registered in the interview
book and used for auditing the assessment for the respective period.
9. Control of justifying documents and their comparison with components of the
implemented construction project.
The appendix for construction industry plays an important role in this manual.
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CHAPTER IV
RESIDENTIAL DEVELOPERS
Definition of residential developer contracts
A contract is considered residential developer contract if 80% or more of the total
contract cost is reasonably designated for residential developing purposes, direct
reconstruction or rehabilitation of property, located on solid surface, separated in
apartments within one and the same building with one or more similar units. For this
purpose, a separate house or group of houses is considered separate as compared with
other houses which use one-another’s wall to separate between them.
Categories of residential developer contracts
Residential developer categories differ among them in the types of contracts and
transactions performed between parties. First, the auditor should check possession of
the construction permit for a residential project and ownership of the residential
building.
Types of contracts include the following:
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Not-for-trade buildings
(History)
At the moment of application for construction permit the company/contractor states the
purpose or destination of the construction project. In spite of the fact that the project is a not-
for-trade building or not, construction costs should be taken into account when calculating
construction costs and profits from the construction process. The tax auditor should try to find
and give arguments that this cost should be higher than the minimum cost established in the
Agreement with the Association of Constructors, officially forwarded to Tax Offices (not in force
since 2008).
- If the construction company works together with an investor (landowner), the construction
company in the sole role of contractor is liable for minimum VAT applicable per 1 m² of
construction surface area. This VAT can only be reduced in case part of the work has been
performed by VAT subcontractors, who have issued a tax invoice accompanied with the
taxpayer’s respective inventory and purchase book.
- Taxable profit from construction process will be the profit established in the same Agreement,
which should not represent less than 7% of minimum cost without VAT.
Buildings constructed upon contract with landowner
In case the landowner has made a contract with a contractor for constructing a private building,
the construction company in the sole role of contractor performs the work to completion.
According to the instructions from the General Tax Directorate, for every residential apartment
project the holder of the construction and utilization permit should pay a minimum VAT per 1 m²
of construction surface area, based on corresponding values of the final inventory period. This
VAT in construction complies with the tables for zones available in the Tax Offices.
In case taxpayers have failed to meet the VAT and profit tax parameters for a given construction
moment, Tax Offices should require the respective company to pay the difference between the
minimum applicable VAT/m2 and the VAT declared so far as well as the respective profit tax,
according to the instructions issued by the General Tax Directorate. If the landowner declares
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that the final part of construction work is performed by him/her or a third party, while the
construction company has not declared any work performed, the landowners should pay as
withheld tax to the Tax Office, the difference between the minimum applicable VAT/m2 and the
VAT declared so far. If another contractor takes over the work, that contractor should pay the
difference of VAT and profit tax for the ongoing construction period, according to parameters for
construction zones.
Buildings constructed upon contract with landowner and investors
In case the landowner or investor/s has a contract with a contractor for constructing a private
residential building, the construction company in the sole role of contractor performs the work to
completion. The contractor’s fiscal cost and price are considered as in the case above.
Residential building with contractors
The construction company in the sole role of contractor should pay minimum VAT per 1 m² of
construction surface area. This VAT can only be reduced if work has been performed by VAT
subcontractors who have issued tax invoice reflected in their accompanying inventory and
purchase book. In spite of the declaration of inventories for final work performed by a.
landowners, b. investors or c. any other contractors declaring work performed, the responsibility
to pay minimum VAT per 1m2 is not removed.
Taxable profit from construction process will include construction profit established in the
Agreement, which should represent 7% of the minimum cost without VAT. The same logic applies
to social and health insurance contributions. The construction company provided with
construction permit should declare and pay no less than the minimum sum allocated as salary
cost and minimum sum of insurance contributions per 1m2 of construction surface area.
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Land cost estimated by general criteria
Although land can be sold and purchased, for fiscal purposes this is not acknowledged as
fiscal cost. This is stated in the Law “On income tax”, article 21: “For the purpose of
determining taxable profit, cost for land purchase and improvement are not
acknowledged”. Its value becomes marketable in case a construction project is
implemented on it. The project constructed on this land at the moment of sale also
includes the cost of land, and the project owner should include it in the initial
construction costs.
In Albania, landowners have the right to sell their property in the market. Given the
current conditions, in case of expropriation for public investment purposes, the state
compensates land cost according to the laws in force. In case a private construction
company wants to start a residential construction project on private land, the most
common form applied is compensation of land cost in apartment surface area,
according to a contract price agreed upon by the parties involved.
In this barter transaction, the landowner pays no obligation to the state for up to 30% of
the value of work completed. In the agreement with the association of constructors this
is the maximum foreseen limit not to be subject to profit tax on sale of constructed
surface area. To determine the surface area for sale one should take into account
deductions made for the landowners.
Depending on the year the construction was made, the instructions sent to local tax
offices also include a breakdown of maximum limit of surface area not subject to profit
tax on sale.
The instruction below is to be applied for Tirana and it speaks about tax obligations in
the construction process as well as obligations arising from sale of constructed
premises.
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Even is not yet in force, this Instruction Nr.2116/17 Prot., date 15.12.2004
Subject: On collection of tax obligations from construction taxpayers” it was part of ordinary
work for tax administration until 2008.
In order to improve the fulfillment of tax obligations by taxpayers in the apartment construction
sector with regard to projects constructed over the last 4-5 years and based on the Law nr. 9209
date 23.03.2004 “On legalization of supplements to construction projects” we hereby instruct:
Instructions nr.2116/1 date 10.6.2004 and nr 2116/12 date 16.8.2004 issued by GTD will be used
in order to determine tax obligations for taxpayers operating in residential construction sector.
The above instructions are based on legal provisions in force and agreement with the association
of Albanian constructors, which establish the minimum sales cost and price levels to be used for
calculating tax obligations.
Priority has been given to audits, identification of correct and real costs and prices. Therefore,
minimum cost, price and profit foreseen in the Agreement cannot empirically apply to all cases.
They can only be valid for specific cases when tax audit has not proved the contrary and when
contract prices are lower than the parameters established in the Agreement.
1. For the purpose of computing profit tax, the Agreement and Instructions nr.2116/1 date
10.6.2004 and nr 2116/12 date 16.8.2004 issued by GTD underline that profit for a particular
project will be the result of the difference between incomes and costs.
• Incomes are calculated as a product of the surface area designated for sale and the
minimum price for the respective zone. The surface area designated for sale is equal to
the total surface area minus surface area for landowner and common surface area, if the
latter does not appear as sold in the sales contract.
• Project costs include all expenses made for the construction project, including VAT for
construction process. In all cases, costs cannot be lower than the product of total surface
area x minimum fiscal cost, (including VAT for construction).
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2. Since the construction and sales process for residential buildings lasts for an average 2-3-year
period, the minimum cost and price for the respective period should be taken into
consideration when calculating VAT obligations, as shown below:
a) Minimum profit per 1m2 of surface area designated for sale shown in Table 3 attached
for Tirana will be taken into consideration for residential buildings completed in the
years 2000, 2001 and 2002.
b) The minimum cost of 26.526 Leks/m2 (sent by GTD with document nr.1147/5 date
14.6.2002) should be taken into consideration for residential projects completed in 2003.
For minimum fiscal purposes, consider minimum prices and minimum profits per m2 of
surface area designated for sale specified in Table 1 attached.
c) The minimum cost of 27.000 Leks/m2 (sent by GTD with document nr.2116/1 date
10.6.2004) should be taken into consideration for residential projects completed in 2004
and after this year. For minimum fiscal purposes, consider minimum prices and minimum
profits per m2 of surface area designated for sale specified in Table 2 attached.
3. To determine surface area designated for sale, consider deductions made for owner’s surface
areas and common surface area not for sale. The maximum limits of these surface areas for
Tirana are given below.
Maximum limits of not-for-sale surface areas:
a. For residential projects completed in the years 2000, 2001 and 2002, the maximum surface
area designated for landowners (if any) will be 25% and common surface area no more
than 8%.
b. For residential projects completed in 2003 the maximum not-for-sale surface area will be:
• For zones with minimum sales price from 260 – 400 USD/m2, the maximum surface area
designated for landowners (if any) will be 25% and common surface area no more than
8%.
• For zones with minimum sales price above 401 USD/m2, the maximum surface area
designated for landowners (if any) will be 30% and common surface area no more than
8%.
c. For residential projects completed in 2004 and after, the maximum not-for-sale surface
area will be:
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• For zones with minimum sales price from 300 – 370 Euro/m2, the maximum surface area
designated for landowners (if any) will be 25% and common surface area no more than
8%.
• For zones with minimum sales price from 371-500 and above 500 Euro/m2, the
maximum surface area designated for landowners (if any) will be 30% and common
surface area no more than 8%.
If the percentage of landowner’s profit in the contract exceeds the 30% limit, the sales price
per surface area will increase by 2% for every 1% of profit increase.
4. The maximum common area of 8 % will be calculated from the total surface area minus
landowner’s area. Thus, if the total surface area is 100m2 and the landowner’s area is 25%,
or 250m2, the maximum common surface area will be calculated as follows: 1000 – 250 =
750 x 8 % = 60 m2.
5. Since the construction process lasts 2-3 years, the declaration of final project inventory
with the Tax Office will be considered as the assessment moment for tax obligation. So, if
this final inventory was declared with the Tax Office in the years 2000, 2001 or 2002, the
criteria in point 2.b above would apply when calculating minimum fiscal obligations.
6. After computing the profit tax obligation from sale, according to the criteria described above,
it is possible to see whether the taxpayer has declared and paid profit tax on sale in the
preceding years. If so, the respective sum will be deducted from the final profit tax. It is
important to bear in mind that, if the company is both contractor and investor at the same
time, profit tax on construction process paid by that company is not deducted from final
profit tax. Therefore, there will be no 25 % deduction from the inventoried profit of 7 % (1575
x25 %)
7. The above criteria apply to:
• Residential projects constructed in preceding years to be registered as immovable
property with the Real Estate Registration Office by investor companies
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• Existing buildings to be legalized according to Law nr. 9209 date 23.03.2004 “On
legalization of supplements to construction projects”
8. In conclusion, profit tax on residential projects will be paid as follows:
• For the construction process of the project, profit tax will be paid by contractor or
investor (in case the latter is both). To determine this profit consider taxpayer’s
declaration, relevant documentation and data from tax audits. This profit cannot be
lower than 7% of the final inventory without VAT. For example, for Tirana, profit tax on
construction process cannot be lower than 1575 Leks/m2 x 25 % = 393 Leks/m2.
• For residential project sale, profit tax will be paid by the project investor (contractor in
case investor at the same time). To determine this profit consider taxpayer’s declaration,
relevant documentation on sales contracts and data from tax audits. This profit can
never be lower than the parameters established in this document.
Audit of bookkeeping for lands and buildings – Accounting and tax methodology
Land can be classified in separate categories and accounts: bare land (no buildings), land
with own buildings; land with buildings of third parties and land with layers. Buildings
include installations, repair, adaptations and infrastructure.
Auditing of "Lands" and "Building projects" has the following major goals:
- Make sure of the material existence of such assets;
- Confirm whether the company is the real owner of its own assets;
- Make sure that assets have been assessed and registered in the balance sheet
according to their correct value;
- Considering their maintenance condition and age, draw relevant conclusions with
regard to justification of depreciation measures as well as depreciation amount and
rate applied:
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- Make sure that purchase and transferals of fixed assets are reflected in the
bookkeeping through relevant registrations;
- Assess the threats to ownership of fixed assets (e.g. fire) and compare them with
insurance packages signed.
Accounting and technical recommendations
Auditing includes at least the following:
- Check the justification of property on land and other immovable property, property
titles, cadastral registers, mortgage registers and purchase contracts on the date of
balance sheet;
- Every fixed asset in this section should be crosschecked and correspond with: purchase
cost, cadastral assessment, insurance value, accounting value, mortgage alienation
value, sales value, production value (real or theoretical), replacement value, value
from examination and tax reports;
- Comment on history of figures for all changes occurring in the respective accounts of
these investments;
- Examine every indication or element related to accounts for lands and buildings and
judge whether changes should be considered as investments or utilization costs;
- Proceed with site visits in order to observe any new installations or damages for the
purpose of crosschecking them with respective costs in the bookkeeping;
- Identify eventual non-occupied areas;
- Ascertain the aging condition and maintenance of buildings and crosscheck with
amortizations made till the moment of audit;
- Make sure that necessary amortizations have been properly made, in conformity with
relevant laws and rules and check calculations made for these amortizations;
- Consider potentials for fraudulent bookkeeping: unjustified purchase at very high
price, unjustified sale at very low price, inclusion of utility costs in fixed assets or vice-
versa, free-of-charge lease contracts, free-of-charge contracts for third parties, use of
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company installations for personal purposes, deviations between real price, registered
price and the price in the authentic act;
- For new buildings, check the real cost, eventual destruction costs and verify whether
best offers have been observed;
- Examine how the price of buildings is determined and whether personnel wages are
entered in the bookkeeping;
- Make sure that values have been modified to reflect changes in replacement price;
- Detect cases when prices have been hidden in notary acts;
- Examine procedures applied so that every investment purchase is immediately covered
by insurance packages;
- Examine bookkeeping for damages in the buildings;
- Examine commissions and payments to intermediaries during purchase of lands and
buildings;
- Examine measures to maintain fixed assets in good condition to guarantee their best
use (maintenance services, periodic inspections, etc.);
- Check for real insurance, mortgage, pledged by the company which affect land or
immovable property. If yes, examine the guaranties applied and at least check: the
nature of guaranties, nature and amount of commitments guarantied and
beneficiaries;
- In the annex, mention changes in land and immovable property occurred during audit;
Special attention should be devoted to accounting treatment of fixed assets in this
section:
a) Accounting treatment for land purchase and sale
1. When land is entered in a company’s assets, the value is debited in account 211
“Land” as contribution value, purchase price or credit respectively in account for
“principal assets (individual or group 1) or in the account “Partners account for
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contributions in the company” or “Suppliers of fixed assets”. Account 211 registers
the value of land owned by the company. It is important to distinguish between
separate accounts, based on the nature of component elements of fixed assets:
- Bare lands (no buildings);
- Improved lands (with channels, etc);
- Underground and above soil: terms used when the company is not the owner of the
three elements attached to the same part of terrain: land, underground and above
soil;
- Exploited lands (carriers, mineral layers) which are the only elements subject to
depreciation;
- Residential terrains with one more buildings.
2. During sales, the value of origin for elements sold and that of amortization, if any, are
taken from the respective accounts. Their net sum is debited to account 652
“Accounting value of elements for fixed assets sold”; at the same time, account 752
“Incomes from elements of fixed assets sold” is credited in the debit of account 462
“Request to receive from fixed assets sold”. Provisions are closed in credit of the
respective subdivision of account 78 “Reacquisition of amortizations and provisions".
b) Accounting treatment of sale-purchase operations in construction
In case a construction is purchased for a price which does not separate land price from
building price, only the building price portion is subject to amortization. Consequently,
when a company purchases a building, we must make sure whether it has divided the
global purchase cost in percentage with the relative value attributed to each of the
two elements (account 211 “Land” and 212 “Building” in the total value of immovable
property.
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1. When buildings are entered as company property, account 212 “Buildings” or its
subdivisions are debited:
- For incoming value,
- For purchase price,
or for the real cost of property production, in credit of:
- Account 101 "Principal assets (principal or individual)" or account 4561
"Partners – Account for contributions in society",
- Account 404 "Suppliers of fixed assets or other respective accounts,
- Account 72 "Production of fixed assets".
2. In case of sales, the value of origin for buildings sold and respective amortizations are
taken from their respective accounts. Their difference is debited to account 652
“Accounting value of elements for fixed assets sold”; at the same time, account 752
“Incomes from elements of fixed assets sold” is credited in the debit of account 462
“Request to receive from fixed assets sold”. Provisions are closed in credit of the
respective subdivision of account 78 “Reacquisition of amortizations and
provisions".
Audit of accounting for fiscal obligations
Fiscal obligations are sums that the company owes to the state in the form of taxes. The
purpose of audits for fiscal obligations is to make sure that:
- Tax declarations are in conformity with legal specifications;
- Fiscal risks are subject to provisions;
- VAT sums paid to the state budget are correct.
Audit for tax regularity
In general, we must make sure that all taxes are correctly paid, after checking
calculations, adjustment deadlines and payment orders.
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- Check calculations of tax obligations as they appear in the annex to the declaration; in
particular make sure that the following have been taken into consideration:
- If necessary, corrections to be transferred to the accounting result;
- Special registration applicable for incomes from branches;
- Deficits carried over
- Postponed amortizations;
- Short-term and long-term plus-values.
- If there has been no compensation for calculated taxes and prepayments made, make
sure that the credit surplus of account shows exactly the amount of taxes due, as
calculated above. If there has been such compensation, make sure it has been correct.
- Check that corporate tax prepayments are correctly calculated and registered in
account 444 "State – Profit tax".
- Check that the calculation of activity tax is correct, with special attention to the use of
previous losses and minus-values as well as reacquisition of provisions for taxes on
previous activities.
- Check that all fiscal consequences identified from audits have been taken into
consideration when calculating the tax.
- Check that the sum in Profit and Loss Account corresponds with the sum transferred to
the balance sheet.
- Make sure that tax declarations have been completed according to the rules.
- Check details regarding claimed sums, payment of which has been refused and
consider the possibility to open up a provision. Following up the company’s situation,
consider the possibility to seek advice from a fiscal specialist as to the risks involved.
VAT audits
VAT audits focus on VAT due, deductible VAT and VAT collected by company. Audits will
focus on periods from last VAT audit and effective use of relevant provisions.
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Audits of bookkeeping for social insurance contributions
The main goals of audits of social contributions are to make sure that:
- The total sum paid for social contributions is correct after or before it is paid by the
company;
- Social insurance contributions are regularly and correctly paid by the company;
- The company has correctly registered all above-mentioned operations in the
bookkeeping.
With regard to checks on surpluses in the account for social insurance contributions, it is
important to refer to the final declarations (for the month, quarter, etc.) and summary
of annual payments.
Technical and accounting recommendations
Audits should focus at least on these directions:
- Check that subdivisions in account 43 “Social organizations and relevant accounts”,
precisely subdivision 431 "Social Insurance contribution", 437 "Other social
organizations – Expenses due” in sub-account 438 have been transferred to the
passive side of balance sheet in the section “Fiscal and social obligations”.
- Check that subdivision “Social organizations – incomes to be received” in sub-account
438 also appears in the balance sheet in the section “Other credits”.
- Make sure that the Annex provides details on incomes to be received and expenses
due relative to positions, rights and obligations.
- Check the accuracy of respective sums for different categories of social expenses
registered in the bookkeeping as expenses due at the completion of activity. In
addition to this, make sure that social expenses to be adjusted at the completion of
activity have brought about:
- Registrations in the debit of account 644 “Social insurance and assistance quota”
or account 645 “Quotas for other social organizations”;
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- Registration in credit of accounts opened for various social organizations
(subdivisions of accounts 431,437 and 438).
- Compare section "Social obligations" and respective subdivisions of account 64
“Personnel Costs”, in order to make sure of the accuracy of sums known as social
obligations transferred to the total honoraria for company personnel. Such audit has
been conducted during checks on payment operations.
Problems from audits in the construction sector
A. One of the most common problems in audits of construction projects is the moment
of sale by investors avoiding fiscal obligations and paying only personal income tax to
the amount of 10% of their incomes from sale. Meanwhile, considering this a point of
common abuse, the tax administration issued a circular to all local tax offices to register
them as active taxpayers. Below is the document of 2003, not still in force but the
problem and the solution is the same.
1. Taxpayers in the category “Investors” in construction will be registered as VAT and
profit tax taxpayers. In fact, this taxpayer category will be subject to profit tax since
sale of residential buildings is exempt from VAT. It is up to the investors to choose
their status, i.e. whether they create a company and register with the commercial
registry or register with the court as a private commercial individual. Regardless of
their registration form, in fiscal terms they will be taxpayers of VAT (which they are
exempted from) and profit tax.
In case an investor or a group of investors, identified and acknowledged by the Tax
Office wants to register, the taxpayer or group of taxpayers should provide the
taxpayer with an authorization according to article 12 “Fiscal Representative” of
Law “On fiscal procedures in the Republic of Albania”. In order to avoid delays and
abuse, in every case, the investor or group of investors (contracted parties) will be
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obliged to register for taxes with the same Local Tax Office as the company
declaring them as investors, and their entire activity will be documented with this
office.
2. During tax periods there must be a careful follow up of the profit tax amount to be
paid by the investors. For this, they should take into consideration the surface area
available from contracts and profit earned from apartment sales, i.e. the difference
between sales cost and price. Minimum fiscal limits have been already established
for these two elements, i.e. average cost and average sales price.
B. Another problem appearing in audits of residential construction activities is the
moment of supplying technical services by non-resident specialists. Several contractors
have been provided answers regarding this specific case. Below we are presenting the
answer to a similar case, in which the foreign specialist is an Italian resident.
If the “Double taxation agreement” is in force in their countries of residence, the
provisions of this agreement will apply in cases of technical services supply performed
by non-resident contractors or companies. The first condition to meet in the framework
of this agreement is that the company providing the technical service, etc. should be
resident in the country with which the agreement has been finalized. In such case, the
provisions of the agreement explain each country’s taxation rights. Thus, business
incomes are taxed in the country of residence, except when the company is doing
business in the other country through a permanent office, and only incomes attributed
to this office/branch can be subject to tax in Albania.
For the concrete case and in view of the agreement in force with Italy, we hereby
explain:
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In order to avoid taxation of Italian companies providing project services to the benefit
of your company (Albanian resident), you should provide evidence and documents to
confirm that the companies providing such services to you are Italian residents (e.g.
certificates issued by Italian tax authorities). You should provide evidence that the
service is entirely performed in Italy, i.e. that the Italian companies have had no
permanent office/branch in Albania as specified by the Agreement and the Law “On
income tax” and consequently have not been obliged to be taxed in Albania for incomes
attributed to this office.
Based on the domestic law and the Agreement, for fiscal purposes the Albanian tax
administration has the right to make corrections to these payments when they are
made between related persons and when they have been artificially increased in order
to avoid taxes from your part. This means that in case of transactions between related
persons, the tax administration has the right to not fully or partially acknowledge as
deductible costs the payments your company has made to the benefit of Italian
companies.
Another frequent problem is the treatment of some cases in terms of obligations in the
construction phase and profit tax in construction of residential buildings and business
premises therein for personal reasons by investors or landowners at the moment of
sale.
1. At the moment of construction, the landowner or investor should meet the following
criteria:
- If the landowner or investor has signed a contract with a contractor for the
construction of a residential building for personal purposes, the constructing company
in the role of only the contractor performs the work till completion. According to the
instruction from the General Tax Directorate, a minimum VAT per 1m2 of construction
surface area at the value of respective period in the final inventory applies to every
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residential construction project. This minimum VAT should be paid by the holder of
the construction and afterwards utilization permit. This VAT in construction is in
conformity with the tables for zones, available in the Tax Office
- In case taxpayers have failed to meet the VAT and profit tax parameters for a given
construction moment, Tax Offices should require the respective company to pay the
difference between the minimum applicable VAT/m2 and the VAT declared so far as
well as the respective profit tax, according to the instructions issued by the General
Tax Directorate. If the landowner declares that the final part of construction work is
performed by him/her or a third party, while the construction company has not
declared any work performed, the landowners should pay as withheld tax to the Tax
Office, the difference between the minimum applicable VAT/m2 and the VAT declared
so far. If another contractor takes over the work, that contractor should pay the
difference of VAT and profit tax for the ongoing construction period, according to
parameters for construction zones.
The following procedures apply with regard to tax on the moment of sale:
2. At the moment the building is sold by the investor or landowner it is required that:
- In case investors are registered with the Tax Office as such, it is your legal right to
request the corresponding payment for profit tax on sale for the residential building or
business premises therein. However, investors’ obligation to register for residential
buildings and business premises therein arises only when they exercise economic
activity for residential buildings sale.
- In case the investors have a contract with contractors for constructing their personal
residential buildings, the contracting company in the sole role of contractor should
pay respective VAT and profit tax obligations in the construction stage.
- If the construction and utilization permit are in the name of landowners who are also
investors, they are responsible for obligations arising (profit tax) after the construction
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project is completed and ready to be registered with the Real Estate Registration
Office.
Below we are providing some cases related to the investors’ or landowners’ position at
the moment a residential building should be registered in the Real Estate Registration
Office.
Case 1: When investors (or group of investors) or landowners are not selling any m² of
the building or business premises therein:
- With regard to profit tax on sale, the tax office will require the investors and
landowners to produce a certified document confirming that the residential building is
not for sale, but, instead, it will be used for personal purposes.
- For the purpose of building registration with the Real Estate Registration Office, the tax
office will issue a certificate, which requires the latter to block any transferal of this
property to third parties.
Case 2: When investors (or group of investors) or landowners are selling part of surface
areas m² of the building or business premises therein and are not registered:
Based on the Law “On income tax”, in every case, real incomes generated from sale of
surface area will be taken into consideration when calculating profit tax for investors or
landowners, constructing and/or selling surface areas designated for residence, trade,
production or service. Sold surface areas imply areas stated in sales contracts with
clients (surface areas transferred as compensation to landowners or common surface
areas, when the latter are not specified in the contract).
Taxable sales profit on partial surface areas will be the difference between incomes
from sales and costs incurred for partial sales. In such case, the salesperson should
register as investor or group of investors with the tax office. Profit on sold part will be
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minimally equal to the sold surface area multiplied with the difference between
minimum price for the respective zone and minimum cost foreseen in the Agreement. In
such case, individuals trying to register their buildings as residential buildings are not
obliged to register with tax authorities, since they do not exercise economic activity.
If the residential buildings were constructed for sale and consequently profit, individuals
will be required to pay respective tax obligations for their activity for buildings
constructed during these years and pending for registration with the Real Estate
Registration Office in the year 2005.
Case 3: When individuals or groups of individuals claim financing for part of the
residential building and business premises therein are registered as corporate with tax
authorities:
With regard to profit tax, procedures will respect instructions issued by the General Tax
Directorate for local tax offices, which relate to profit tax at the moment of sale of
residential building and business premises therein. In such cases, the Real Estate
Registration Office can register the corresponding part in the name of the corporate
(legal entity). The Real Estate Registration Office will calculate the “tax on property
transferal” for every m2 transferred by the company (investor or group of investors
establishing the company). In each of the above cases, when the Real Estate
Registration Office is notified that any of the investors, some of them or all of them
want to transfer all or part of the property they own, the Tax Office will calculate all
missing tax obligations in the profit tax, together with penalties, and authorize transferal
of this property only after all tax obligations have been settled.
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CHAPTER V
FORMS OF AUDITING BALANCE SHEET
What is a form of auditing balance sheet?
The balance sheet is a mandatory accounting document separately describing active and
passive property elements of an enterprise which presents its equity in a separate and
distinct way. Together with the profit and loss account and annex it constitutes an
inseparable entirety known as “annual account”.
In order to audit a balance sheet, it is necessary to compile a comparative balance sheet
in a way that reflects changes in absolute value for every section. Such a sheet makes it
possible to distinguish between changes as exceptional or abnormal.
Verification of such changes will allow for a more effective audit of their object and
extent. The following are some of the analysis procedures to be applied for balance
sheet and accounts:
- Fixed percentages of ordinary financial analysis and their comparison with percentages
from previous audits and those from the respective activity sector;
- Comparisons between data resulting from annual accounts as well as previous,
following and foreseen data from the enterprise/company or other similar companies;
- Comparison of percentage for various positions and sections.
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Audits of actives in balance sheet
Actives are the part of balance sheet which re-groups parts of property with positive
economic value for the company. It presents the use of company resources, i.e. capital
available; such capital is invested either as permanent titles (fixed assets) or as
temporary titles (circulating assets).
Audit of actives in balance sheet should at least make sure that:
- All actives have been presented;
- Such actives are presented in the balance sheet at an acceptable value, considering
corresponding corrective positions (amortizations, provisions).
The material existence of the inventory and the reality of rights on third parties should
be subject to personal confirmation by authorized accounting experts, confirmation by
respective third parties, to different extents. In addition to this we can verify that values
attributed to actives are determined in a way that directly refers to them; In case of
doubt, we must always resort to cautious assessment (abiding by the principle of
caution, described in the Law of 2008 "On financial statements"). In general, it is
recommended that we are based on an assessment of actives to a value as close to
replacement value as possible. When assessment in the balance sheet deviates
significantly from replacement value, the tax auditor should point this out in the report.
Audits of passives in balance sheet
The passive of balance sheet regroups a company’s equity and property elements with a
negative value for the company. The entirety of passive elements constitutes company
resources. Audits of passives in balance sheet should make sure that the balance sheet
is exactly as presented:
- Nothing is missing;
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- All obligations have been presented and the company’s own property (capital and
reserves) is presented correctly;
- There are sufficient necessary and desirable provisions and reserves as compared to
the positions of the actives they pertain to.
As with the audit of actives, perfect and indispensable concordance between accounts
and registrations is not sufficient and more extra-accounting checks need to be done.
Confirmation from third parties and declarations from responsible managers are
necessary, especially when it comes to responsibilities assumed by authorized persons.
History
Taxpayers under observation by Tax Administration according to the Agreement with
Albanian Constructors’ Association (ACA)
The Albanian tax administration is committed to follow up on revenue created by the
construction sector. In this framework we have presented some paragraphs of the following
document, which is still in force and intends to improve administration of taxes in this sector.
Even it is not in force since 2008, the official document Nr. 2116/1 Prot., date 10.06.2004
present the duties for each function of the tax administration with regard to follow up of
taxpayers in the construction sector:
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Duties for registration sector
The registration sector has the following duties:
1. Provide all construction companies with a secondary NIPT for each new construction
project, requiring the necessary documentation.
2. Provide investors with a secondary NIPT for the project. The construction company is
required to provide the secondary address. It is up to the investors to choose their
juridical registration form, whereas they will be registered as taxpayers liable for VAT
(which they are exempt from) and profit tax. The registration sector will not provide a
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company with a secondary NIPT for the project unless taxpayers have registered as
investors (if any, for the project in question).
3. Close all secondary NIPT-s when the contractor has completed the construction process
(in the case of constructors only) and sales (in case the constructor is also investor).
Duties for assessment sector
Assessment inspectors responsible for residential construction taxpayers have the following
duties:
1- Open an index card for every building a particular company constructs and therein
register: surface area, starting time, minimum VAT applicable for that particular
building, profit tax (from construction and sale), payment deadlines for profit tax and
minimum social insurance contributions for the building;
2- Follow up the progress of the construction process and sales as well as payment of tax
obligations within the minimum parameters accepted for the building in question.
3- Periodically check balance sheets and verify that incomes from sales for each object are
correctly presented and minimum profit is declared according to the parameters in the
agreement.
4- Make sure that the respective taxpayer possesses the constriction and utilization permit
for the building in question.
5- Identify and determine obligations in the case of investors.
6- Check settlement of obligations and sign the Certificate issued for the Real Estate
Registration Office according to point 3 above.
Duties for the audit sector
Auditors have the following duties:
1- In any case, check a particular company’s real costs and incomes documented in:
invoices for purchased materials, documentation for paid labor, contracts of contractors
and final sales contracts with clients.
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2- Analyze declared costs and compare them with project estimates and applicable norms
for materials used. Critically analyze the sum of credited VAT, structure of its component
goods and make sure that such materials are really used in the construction project.
3- Check the form adopted for payment of installments by checking the applicable limit for
mandatory payments through payment accounts. Sanctions established by law will apply
in case of payments beyond the limit authorized by law (500 thousand Leks for the year
2004 and 300 thousand Leks for following years) and not made through bank accounts.
4- Investigate in Notary Offices and Real Estate Registration Offices and Real Estate
Agencies in order to find out the real sales prices. Minimum parameters should never be
taken for granted.
5- In case the project owner pays for the contracted surface area via bank credit, check
respective contracts and prices therein. If such prices are higher than those applied with
other clients (not paying through a bank credit), sales prices applied with clients
operating through bank credits will be taken into consideration.
6- Minimum prices and costs established in the Agreement will be taken into consideration
in the cases of projects of poor quality and in non-favorite areas.
Verification of incomes declared in the past years
With regard to tax obligations for completed or ongoing projects with contractor contracts, we
would like to underline the following:
1- In case the taxpayer has declared all sums received from contracts with clients as
incomes in the years 2000, 2001 and 2002, such sums will be considered correct provided
that they are reflected in the final result. Therefore, the taxpayer should have allocated
in the result (profit and loss account) the difference between incomes received from
clients for that particular year and incurred costs for the project in question.
2- In case the taxpayer’s activity for the years 2000, 2001 and 2002 has been audited and
during the audit the taxpayer has failed to declare incomes received from clients and
relevant contracts (not presented in the balance sheet for the audited year), calculations
of profit tax for these periods will take into consideration the minimum fiscal price
established in the agreements with the constructors’ association.
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Exchange of information between Tax Offices
In many cases construction companies construct projects outside their city of fiscal registration.
In such cases construction companies have been provided with a secondary NIPT by the tax office
of the city in which the project is being constructed and pay VAT obligations there, (branch);
whereas profit tax obligations are paid in the Local Tax Office where the company is registered.
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Orientations on bookkeeping in construction, based on experience from audits (audit acts)
Information related to the business and its progress can be presented by the accounting system,
which explains the financial situation of all parties related to a construction project in one way or
another. According to the Law “On Bookkeeping” (not in force), bookkeeping is mandatory for all
participants in economy. Such participants include: private individuals and legal entities
registered in the Republic of Albania, commercial on non-commercial subjects, exercising
economic activity. The same law applies to central or local government institutions and entities,
which represent independent budgetary entities and entities created by them.
Who are interested in accounting information?
Accounting information is especially useful for:
- Managers of contractor and subcontractor companies, in order to understand the
current situation and progress of their business and make plans for the future;
- Investors and lenders, in order to know the progress of their outstanding investments
and loans and the risk level for their activity before their investment and while it is in
progress;
- Tax officials, in order to better and correctly plan for tax obligations and determine
other employee-related contributions in this activity;
- Employees, interested in their salary levels, profit rates, regular and correct payment of
withheld obligations for taxes and contributions;
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- Licensing and supervisory institutions, which have to monitor financial indicators in
order to compare them with their requirements.
Current accounting methods and relevant orientations
Bookkeeping relies on basic documentation which includes its collection, analysis and
presentation. Bookkeeping is done in two ways: manually and electronically. In spite of
the method applied, the following documents are used in the bookkeeping: diary,
ledger, inventory book and any other mandatory register.
Items and registrations in the accounting documents should be described in a commonly
used language, complete, accurate and performed in a timely and regular way. They
must be easy to understand from origin to completion. In case abbreviations, numbers,
codes or symbols are used, their meaning should be clearly explained in any particular
case. In the case of electronic accounting, data should also come in print version and
meet other criteria for regular and accurate bookkeeping.
At the moment, there are several types of IT programs which have been adapted to the
rules and principles of existing legislation. The most frequently encountered during tax
audits are versions of ALPHA and FINANCE. However, bookkeeping is in no case limited
only to these two programs. Processing of basic documentation implies numerous
actions. However, below there is a list of steps grouped by basic justifying
documentation, registers processing this documentation and accounting registers.
A. Basic justifying documentation
- Sales fiscal invoices, simple fiscal invoices, fiscal vouchers and accompanying invoice
models approved by the Ministry of Finances;
- Payment orders;
- Bank documents;
- Entry and exit storehouse documents;
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- Payrolls;
- Customs clearances;
B. Registers and declarations for the administration
- Purchase and sales book;
- Cash registry and bank register;
- Storehouse;
- Diary of construction work;
- Technical safety cards and administration records;
- Register of fixed assets and amortization norms;
- VAT, income tax and contributions declaration forms;
C. Accounting books
- Diary;
- Ledger;
- Account cards;
- Storehouse inventory and fixed assets book.
At the end of each year, ledger accounts should result in a particular closing value after
they have been completed with values representing transactions. Grouping and ratio
between these accounts present the activity’s financial situation.
Annual individual and consolidated accounts are written in Albanian and expressed in
Albanian Lek.
Every form of accounting organization should make it possible for external audits to be
conducted in a way that allows an expert to get a general picture of the subject’s
transactions and situation from accounting books within reasonable time.
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An inventory of active and passive elements of property should be prepared at the
moment a property is created. An inventory should also be prepared at the end of every
accounting action for the purpose of preparing annual accounts or whenever necessary.
The physical inventory of movable property is made at least once a year, and as a rule,
on the closest date to that when the accounting action is closed.
The physical inventory of immovable property is made at least every three years, but
the effects of their depreciation because of use or other reasons should be assessed and
accounted for every accounting action.
The accounting inventory is made at least once a year and, as a rule, at the moment
when annual accounts are closed.
Differences identified from an inventory and any other systemization of accounting data
thereof should be registered to the account of the accounting action for which the
inventory was made.
Accounting documents are stored in their original form for the entire 10-year storage
period from closure of calendar year they pertain to.
Analysis of financial reports measuring the fiscal “temperature” of a construction
project
The key issue in the analyses of financial reports is not to simply find an answer. Such
analysis, above all, is used to measure the fiscal “temperature” in order to understand
when a business:
1. Is profitable
2. Has sufficient money to pay the bills
3. Has the capacity to pay employee salaries and contributions
4. Has the capacity to pay taxes
5. Is using assets effectively
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6. Has technological problems
7. Is a candidate for bankruptcy
The major financial reports appear as follows:
1. Profit: Has the business made good profits as compared to turnover?
2. Return report: Have assets and active capital used brought profits to the business?
3. Liquidities: Has the business sufficient capacity to pay all its bills?
4. Use of assets or activity: How has the business used its fixed and circulating assets?
5. Mechanism: Does the company have considerable debts or is it financed by its own
partners?
6. Investors or partners
The report is based on interest groups
Interest groups Reports to be considered
Investors Return of capital used
Profit per stock
Dividends per stock
Incomes from dividend
Interests covered
Obligations
Lenders Interests covered
Dividend payment report
Dividends covered
Incomes from dividend
Administrators
of activities
Profit report
Asset circulation report
Inventory, debtors and creditors report
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Obligations report
Investments report
Employees and
administration
Return of capital used
Profit
Cash flow indicators
Investments report
Suppliers and other
creditors
Profit
Liquidities
Creditor flow
Management of capital used
Clients Profit
Liquidities
Return of capital used
Government and its
institutions
Profit
Liquidities
Return of capital used
Fiscal legislation and specifics for construction
1. Law “On VAT”
The construction sector, especially the part of it related to residential buildings is clearly
explained in details in Instruction on VAT point 7.1. In this part of the instruction we
learn about:
- Definitions for construction processes and construction work;
- Minimum fiscal value and minimum fiscal price, which, as of 2006, are
determined upon decision from the Council of Ministers;
- Forms of VAT application in construction according to a typology of cases related
to the destination of construction project.
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2. Law “On income tax”
Fiscal legislation related to the construction process also contains specifications in the
Law “On income tax”. This law includes the part related to amortizations of buildings
and reconstructions, known and unknown construction costs as well as payment of
personal income tax when immovable property is sold.
Bankruptcy in construction
Bankruptcy procedures begin when private individuals, legal entities or commercial
companies, according to the provisions in the Law "On commercial companies" or state-
owned enterprises, according to the Law No.7926, date 20.4.1995 "On transformation
of state-owned enterprises into commercial companies" is not able to pay. For legal
entities, bankruptcy procedures begin when these companies are overburdened with
debt.
Bankruptcy procedures begin only on the basis of indictment. The right for indictment
pertains to the debtor and each of his/her creditors, which, at the beginning of this
procedure, have a motivated claim against the debtor’s property. The creditor should
clearly and convincingly present and give arguments to support the debtor’s incapacity
to pay. The debtor has the right to oppose the indictment according to the Civil Code
Procedures for opposing indictments. In the case of legal entities, management
authorities are also entitled to requesting bankruptcy procedures, according to the Law
"On commercial companies".
The bankruptcy administrator, appointed by the District Court to conduct the
bankruptcy procedure, is held accountable before tax authorities for deregistration
procedures. According to the Law “On tax procedures”, taxpayers are entitled to
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request deregistration with a decision by National Registration Center (NRC), only after
they have settled all unpaid tax obligations and presented their closure balance sheet. In
case the construction contractor has not settled tax obligations, the tax authority can
request the beginning of bankruptcy procedures as an interested creditor, based on the
Law No.8901, date 23.5.2002 ‘‘On bankruptcy”.
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CHAPTER VI
PARTNERSHIPS IN CONSTRUCTION
Legality of partnerships
Partnerships are a form of joint-venture between private individuals and legal entities
which is obliged to know, execute and act in compliance with the requirements of the
Law “On VAT”, the Law “On income tax”, the Law “On collection of social and health
insurance contributions”, and the Law “On local tax system” in order to be able to
exercise a temporary joint activity for profit purposes.
Legal requirements for partnerships function in the same way as for all other taxpayers
subject to the above-mentioned laws and they are not exempted unless such exemption
for partnerships is the result of an inter-governmental agreement, ratified by their
respective parliaments.
Partnerships of investors and owners in construction
Investors or owners of a construction project often have difficulty to finance their
project due to the lack of sufficient capital, human resources or technical equipment to
implement it. By establishing a joint-venture as a union of private individuals and legal
entities to exercise a temporary, joint and for-profit activity, construction project
investors and owners often manage to overcome difficulties and accomplish their goals.
Although not separate legal entities, such joint-ventures have their advantages and
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disadvantages. However, they are necessary for construction investors and their quality
development.
Partnerships of construction contractors
Construction projects may be implemented by joint ventures of contractors, which are
considered partnerships from the perspective the Law “On income tax”. Usually
partnerships are created for a specific purpose (project, contract, work) and a limited
period of time. Partnerships created for implementing similar construction projects are
registered and subject to the same laws that apply to partnerships of investors and
owners.
In cooperation with interest groups and other public administration institutions, at the
end of each year the Ministry of Finances presents instructions and rules relative to
changes in taxes administered by tax authorities.
In order to gain juridical capacity, a partnership between two or more private individuals
or legal entities, which can register with the tax administration without a decision from
the NRC, will simply complete the required steps described in the Law “On tax
procedures”.
Partnerships have the obligation to prepare financial balance sheets presenting financial
indicators of their activity. Although they may not be registered as entities with special
juridical capacity, according to fiscal legislation, they are obliged to declare closure of
their activity and complete relevant closure procedures with the Tax Office, and
simultaneously with the NRC, which has issued the certificate for exercising their
activity.
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Auditing Investors’ partnerships
During audits of partnerships created for financing construction projects, it is important
to take into consideration issues relative to creation, activity and liquidation of
partnerships. Each partner brings individual resources in a partnership and can be
compensated in different ways. Auditors should get acquainted with plenty of specific
information, especially information made known to the partners by the Administrative
Council. Such information specifically relates to:
- Fairness of information provided to partners;
- Management report;
- Contracted construction project;
- Respect of equality between partners based on their contribution;
- Movement of partnership members;
- Modification of partnership accounting presentation and assessment;
- Irregularities, errors and violations identified;
Review of fairness of information provided to partners is made:
- On one hand, by reviewing the Administrative Council management report and
annexes, whether they are mandatory or not, and;
- On the other hand, by checking all documents on partnership’s financial situation and
accounting that are addressed to partners.
Audit of a partnership’s balance sheet is conducted in the same way as described above.
Auditing contractor partnerships
Tax auditors auditing partnerships created for implementing construction projects
should be aware of the specific issues relative to their creation, activity and liquidation.
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Each partner brings individual resources into the partnership and can be compensated
in different ways. Parties should be considered independently.
Such perspective often leads to potential questions and problems, such as:
§ What resources (fixed assets, capital, services, etc.) has each party contributed
into the partnership?
§ What is the value and basis of property each of them has contributed?
§ Which of the partnership members has more active contributions?
§ Which are the partnership profit, loss and distribution rates?
§ Have there been changes in the property structure inside the partnership?
§ Has the partnership distributed liquidities?
§ What type of property has been distributed and who are the beneficiaries?
§ How is the construction company compensated for its work (in Lek, capital
growth, etc.)?
§ How does the construction company allocate direct costs in the partnership
project?
§ What impact does project implementation have on the contract between
parties?
Audit of a partnership’s balance sheet and its activity declarations is similar to audits of
other juridical forms exercising similar activity, despite their form of organization.
Requests for information from partnerships
According to these construction industrial notes, the history of partnership incomes is
very important in calculating their tax obligations and conducting transparent tax audits
and assessments, in compliance with the specific legislation for this sector. Incomes
indicate the tendency of transactions.
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- Costs incurred (deductible or non-deductible) are another important factor for
crosschecking the situation of economic activity. Such costs have already been
explained in details in the fiscal legislation.
- It is important to have an understanding of labor force in terms of its distribution by
types of activity, its share in production and evasion, in terms of zones and
employment rates, etc.
- Actives of an economic activity are another significant criterion for the activity of a
partnership.
- Loans and obligations of a particular economic activity observed at the moment of tax
audits represent a substantial indicator in terms of the assessment of their activity
progress and potential abuses with obligations. A breakdown of this group (partners’
accounts, 1-year loans, etc) reveals analytical indicators and shows the importance of
the above criterion.
All the above would be insufficient to complete the framework of information on
partnerships. In any case, the situation should be carefully studied in advance and this
can help to frame the questions to be answered.
Issues to consider at the moment of registration and de-registration
Partnerships are special forms of organization among private individuals and legal
entities, which agree to exercise a temporary, joint and for-profit activity. Partnerships
are not created as separate legal entities in the forms specified by the Law “On
commercial companies”, the Civil Code or other laws. The implication is that
partnerships can neither be created with a court decision nor register with the court.
To register for taxes with the tax administration, partnerships are neither obliged to
previously acquire the status of legal personality (legal right to exercise activity) nor
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present the respective NRC decision to tax authorities. On the other hand, they are
obliged to respect every other registration requirement specified above as all other
taxpayers. Partnerships register only once with NRC offices in the same location where
their central office is situated.
When partnerships decide to close their activity (de-register), they are entitled to
request de-registration only after they have settled all unpaid tax obligations and
presented proof of payment and closure balance sheet to the assessment and collection
sectors. In case the partnership fails to settle all tax obligations (including administrative
penalties and applicable interests), the NRC, no later than 45 days from receipt of
request, has the obligation to check the tax situation of the partnership in question and,
when necessary, conduct onsite audit of the activity in the company requesting de-
registration. If the audit finds that the partnership has no unsettled obligations, the Tax
Office confirms this fact no later than 45 days from the finalization of the audit. In case
45 days after notification from the tax office, according to deadlines established in the
Law “On tax procedures”, the administrative council of the partnership has presented
no written objection, the NRC takes the decision to de-register the partnership involved.
Issues to consider in the activity process
While exercising the activity it was created for, investor, owner and contractor
partnership construction partnership should take into consideration the forms of
declaration, calculation and payment of tax and social obligations. The following are
forms of declaration and payment of obligations:
- Self-assessment and self-declaration of tax obligations
This form generally applies to VAT, profit tax and some income tax categories, namely
incomes from leases, emphitheosis and employment and incomes from social and
health insurance contributions.
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- Prepayment of tax obligations
This form of payment is used only in the case of profit tax prepayment during the action
year. Computation of preliminary installments for profit tax is based on the
specifications foreseen in the Law “On income tax”, whereas their payment is made no
later than the 15th of every month. The final tax assessment is made at the moment the
annual taxable income declaration is presented (profit and loss).
- Withheld tax
This form is used for personal income tax, such as: staff salaries and honoraria, bank or
security commissions interests, dividends, loans and leases, property transfers, incomes
earned from differences between stock purchase and sales price, according to the Law
Nr. 8438, date 28.12.1998 ‘On income tax’’.
It is the duty of tax auditors to check that tax obligations are correctly computed, in
spite of the assessment method adopted. Audits can help to check the accuracy of profit
tax, VAT and other tax declarations as well as incomes from employment and social and
health insurance contributions.
If during profit tax audits it turns out that the profit declared in the taxpayer’s annual
income declaration or that of preceding years is not true, auditors have the right not
only to correct the tax obligation for the respective year or preceding years, but also
change the profit tax prepayment installments for the current year. For this, they should
respect acknowledged audit standards and officially notify the audited partnership.
Issues of profit distribution relations within partnerships
Partnerships are free to exercise their activity and make relevant decisions, within the
framework of legal and sub-legal acts. Partnership has its equity which consists of the
total sum of partnership member shares (contributions).
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Shares of partnership capital can come in cash or stock. They are completely settled
when money is paid or stock contribution is assessed by relevant experts and made
available to the partnership. Partnership capital can increase or decrease based on the
partnership members and shares of capital each member has in the partnership. No
income from partnership activity is added to its shares of capital.
At the moment a partnership closes a temporary activity or at the end of financial year,
the administrative council authorizes the preparation of an annual inventory and
balance sheet in accordance with legal dispositions in force for accounting, as well as a
written administration report.
The administration report presents the partnership situation during the limited period
or last financial year, major activities performed during the period and scientific and
research activities of the company.
The above-mentioned documents are made available to authorized accounting experts
in the partnership’s central office one month before the partners’ assembly is convened.
Upon their request, a copy of these documents is provided to the experts.
Changes related to the format of annual accounting presentation and assessment
methods adopted should be included in the appendix to the administration report and,
if necessary, in the report of accounting experts, too. Profit to be distributed includes
profit for the financial year or limited period within the financial year minus reserve
contingencies established by law.
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APPENDIXES
Appendix A: Most important questions
1. Questions about the economic activity and obligations in the construction sector
Question: Which are the tax obligations a construction contractor should pay?
Answer: For the taxable activity a contractor is obliged to pay the following taxes to the
state budget:
- VAT 20%
- Profit tax 10% (since 2008)
- Personal income tax, according to payroll 10%
- Social and health insurance contributions
- Withheld tax on incomes for employees, specialists and anyone performing work
to the benefit of a construction project that are not registered.
- Local tax
No VAT applies to a construction company with a professional license which constructs
projects to be used in its own licensed business, because work inventory is registered as
both taxable sale and taxable purchase. In such cases it is allowed to credit paid VAT to
purchases made for this purpose. This right pertains to anyone possessing a professional
license for the project they want to construct, otherwise the construction project is not
considered self supply. Construction projects should be types already used in the
construction industry and their purpose/destination should be declared and approved in
the construction permit issued by the municipality.
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2. Questions about different situations, tax calculation forms, methods and other
problems in the construction sector
Question: What is the procedure for transferring overpayment from one tax to another
tax the same business has to pay?
Answer: According to the fiscal legislation, this transferal is nothing but what in the law
is called tax overpayment refund. Therefore, in case the sum paid for a particular tax
exceeds the due sum, the tax office with which the taxpayer has registered takes one of
the following steps after communication with the taxpayer involved:
- The overpayment is used for other unpaid ax obligations of the same taxpayer;
- With the taxpayer’s consent, overpayment is used for future tax obligations of the
same taxpayer;
- Overpayment is returned to the taxpayer no later than 30 days from presentation of
written request by taxpayer. In case of failure to respect this dateline, the tax
administration is obliged to also pay respective interest to the taxpayer.
However, in case the overpayment is used as compensation for other tax obligations of
the same taxpayer, the tax administration is always obliged to notify the taxpayer about
this fact.
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Appendix B: Forms for calculation of costs and measures in construction
Methods of cost and price analysis
For cost breakdown and measures in construction, contractors usually rely on
established per unit measures. Therefore, the construction sector is obliged to respect
some construction standards (all construction categories) for:
- Structure of construction (foundation, pillars, floors, fencing, etc)
- Fine works (plastering, flooring, installation of alarm systems, etc.)
- Final works (rehabilitations, decorations, frontage, etc.)
The book of technical measures with every construction company contains an analytical
breakdown of work items.
There are several studies conducted by relevant construction institutes, which take into
consideration liberalization of technical measures in terms of: a) quality of raw material
and other materials; b) technology used and c) level of labor participation in inventory
items. However, standard measures will be taken into consideration for a particular unit
of construction volume (per m², per m³ etc.).
This standard measure per unit is computed by multiplying size of material with the
quantity required to complete the unit.
Example
1. Building of 1 m³ brick wall based on the inventory breakdown of materials requires:
- ... bricks size.... x ... x ... cm
- ..... m³ plaster
- raw materials and other necessary materials in small quantities
2. Preparation of 1 m³ concrete M-300, based on the inventory breakdown of materials requires:
- ....... – ...... kg cement;
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- ....... – ...... sand;
- ....... – ...... lime;
- ....... – ...... water;
- ....... – ...... contemporary hardness components.
3. Building of 1 m³ pillar, based on the inventory breakdown of materials requires:
- ............m³ concrete;
- ............kg iron ø.....-....
- ............m³ plank;
- ............other materials.
4. Building of 1 m² road, based on the inventory breakdown of materials requires:
- ............m³ asphalt-concrete;
- ............kg iron ø.....-......;
- ............m³ crushed stone;
- ............other materials.
Based on the situational breakdown for materials in the example above, we can ask the technical
manager to explain the differences between materials as compared to consumption rates for raw
materials and materials purchased from the contractor for project purposes. If we need to break down or
analyze the measures of used materials according to this value, we can look at the example below.
Example
Building of 1 m³ brick wall, according to the situational breakdown of materials costs:
- ..... Brick size.... x ... x ... cm; = ....... brick units x .......Leks/unit = ... Leks
- ... m³ plaster; =......... m³ plaster x .....Leks/ m³ plaster = ... Leks
- Other raw material & engineer staff; ... working hours/m³ brick wall x …Leks/hour = ... Leks
- Social contrib; ... working days x ... Leks salary x ....soc.contr/working day = ... Leks
- Administrative costs; 1 m³ brick wall x ... leke/m³ brick wall = ... Leks
- Machinery, transportation with own vehicles etc.; 1 m³ brick wall x ...Leks 1 m³ wall = ... Leks
- Company profit rate (minimum 7% of value for 1 m³ brick wall); = ... Leks
- Taxable value for 1 m³ brick wall = ... Leks
- VAT (taxable value x 20%) = ... Leks
- Total contract price (taxable value + VAT) = ....................LEKS
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The above analysis is a per unit analysis. In order to compute values presented in the situational inventory
we need to multiply the volume m³ of constructed brick wall with the value in Lek for each of the above
elements. Therefore, if the situational inventory is not partial but total, we have managed to assess the
contract price for this construction item.
If we want to find the applied contract price for the entire project, the same logic would apply when
analyzing the construction situational inventory for the analysis of other items included there (1 m³ pillars,
concrete, beams and 1m² of road). The only difference for each of them would be the names of materials
or work. However, in every case, the above items and any other item, specifically related to the type of
construction project, should be part of the analysis in the situational inventory of the construction
project.
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Appendix C
2000 2001 2002 2003 2004 2005
A. CONSTRUCTION SECTOR1 GROSS DOMESTIC PRODUCT (G.D.P) 530.907 587.716 624.718 682.669 766.991 836.0222 CONSTRUCTION INDUSTRY IN G.D.P. 31.603 45.208 43.945 48.810 62.231 74.448
- annual growth in percentage 47,29% 43,05% -2,79% 11,07% 27,50% 19,63%3 Number of taxpayer in construction industry 1.959 1.986 1.962 1.977 2.007 2.158
3,1 registered for VAT 1.847 1.773 1.672 1.753 1.765 1.8923,2 registered as small entrepreneurs 112 213 290 224 242 2663,3 - annual growth of number of taxpayer in percentage 0,00% 90,18% 36,15% -22,76% 8,04% 9,92%
4 Tax Revenues of Construction Sector 2.749 5.871 5.768 5.628 6.803 7.344 - annual growth in percentage 0,00% 113,57% -1,75% -2,43% 20,88% 7,95%
5 Tax pressure ( 4 : 2 ) of sector 8,70% 12,99% 13,13% 11,53% 10,93% 9,86%6 Tax pressure ( 4 : 1 ) of total GDT 0,52% 1,00% 0,92% 0,82% 0,89% 0,88%
specific weight of construction sector in tax revenues 7,90% 14,52% 11,63% 10,00% 10,33% 11,59%
B. Tax Revenues 34.790 40.438 49.593 56.255 65.884 63.353
C. TOTAL of CONSTRUCTION INDUSTRY 2.749 5.871 5.768 5.628 6.803 7.344From which:
C.1. Public Sector . . . 556 1.899 0 0 0C.2. Privat Sector 2.749 5.844 5.766 5.628 6.803 7.344
C.1.1. Public Sector (in percentage) 0,00% 9,47% 32,92% 0,00% 0,00% 0,00%C.2.1. Privat Sector (in percentage) 100,00% 99,54% 99,97% 100,00% 100,00% 100,00%
1 VAT 2.749 3.843 3.695 3.382 4.099 4.101Public Sector . . . 530 1.896 0 0 0Privat Sector 2.749 3.843 3.695 3.382 4.099 4.101
2 Profit Tax 0 789 1.384 1.845 2.371 2.902Public Sector . . . 26 3 0 0 0Privat Sector . . . 763 1.384 1.845 2.371 2.902
3 Personal Income Tax 0 1.055 421 372 330 339Public Sector . . . . . . . . . . . . . . . . . .Privat Sector . . . 1.055 421 372 330 339
4 Small Business Tax . . . 0,2 0,6 4,8 2,9 05 National Taxes 0 183 267 30 2,4 0,2
Public Sector . . . . . . . . . . . . . . . . . .Privat Sector 0 183 267 30 2,4 0,2
* in 2005 1 Euro = 123 Lek
No. Type of tax revenue Figures in years Milions of Leks*
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Appendix D
Potential information sources
It is possible to find information about the economic sector of construction in:
q Permanent statistical bulletins published by Institute of Statistics (INSTAT). Such
bulletins provide data about the construction cost index, construction component cost,
apartment sales and lease cost tendency, etc. Data from INSTAT can be found in its
internet website www.instat.gov.al
q Different statistical materials included in this book relative to ratios between tax
obligations versus turnover, taxable supplies versus turnover or ratios for their
effectiveness in past periods for taxpayers operating in the construction business;
q Materials published by the Albanian Constructors’ Association in its monthly magazine
CONSTRUCTOR or in its website www.shnsh.org;
q District Tax Offices, especially in the case of certificates issued to companies operating
with public funds;
q Ministry of Territory Adjustment and Transportation for the periodic list of personal
licenses issued to company technical managers and licenses issued to companies;
q Local government data about construction site permits and construction project
permits, as well as technical control acts required for a project to be considered ready
for registration with the Real Estate Registration Office;
q Data from the Commercial Registry with the Court about new registrations in the sector
of construction activities as well as data on taxpayer deregistration from the same
registry;
q Data from the Real Estate Registration Office relative to property registration requests
and property registration;
q Promotional information by construction contractors about their completed projects
and offers in the print and electronic media and different sites in the internet, or
information which can be found on vehicles with the taxpayer’s brand, logo or name;
q Contracts between contractors and individuals registered in notary registers in every
district in order to identify the real contract price between parties (price to be found in
the contractor’s contract) and sales contract, which for residential projects, according
to previous experiences, is below the real market price;
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q Surveys conducted by the tax administration through the questionnaire and other
forms relative to work in process and completed work;
q Use of previous audit data relative to taxes by tracking the history of their declaration
and correction from audits. Data from companies with the highest construction activity
parameters should be used as point of reference for similar construction activities;
q Use of different materials about the construction activity and results from tax audits
and experience from foreign tax administrations. These materials should be used for
the purpose of identifying similar techniques to be used by tax auditors in compliance
with Albanian fiscal legislation.
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FISCAL GLOSSARY Most common fiscal and construction terms
- A -
Accounting – is a function through which, according to accounting rules and methods, every
taxpayer registers actions and events occurring during an activity and causing changes in its
property or financial situation. Accounting is kept in Albanian language and currency Lek
Accounting system – form used for bookkeeping and publication of information thereof by all
subjects
Accounting control/audit – procedures and documentation relative to assets, entry and
registration of financial transactions and reliability of financial registers which are based on
standards issued by the Minister of Finances or relevant law, in order to ensure comparison of
computation practices among all ministries in compliance with national and international
conventions
Accounting control system – a series of actions considered part of the entire internal control
system for fulfilling the goals of accounting in an entity. It includes compliance with financial and
accounting policies and procedures and preparation of reliable financial reports
Actives are company assets divided into separate groups and positions, such as: fixed assets,
circulating assets and other assets (regulatory accounts).
Adequate Control/audit – can occur when management have planned and prepared control in a
way that provides reasonable guarantees that taxpayers’ risk is effectively managed and
organization goals will be effectively achieved
Audit/control procedures – are policies and procedures as well as audit environment, whose
management have decided to reach specific organization goals
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- B -
Balance sheet is the basic document which separately describes the active and passive property
elements available upon closure of accounting actions and distinctly points out the equity
account
Bankruptcy – bankruptcy procedures begin when a private individual, legal entity or commercial
company is in a situation of payment incapacity, according to the provisions in the Law "On
commercial companies" or a state-owned enterprise, according to Law nr.7926, date 20.4.1995
"On transformation of state-owned enterprises into commercial companies". Bankruptcy
procedures for legal entities begin when they are found overburdened with debts
Bid – a legal offer by a contractor, who specifies the contract price to be implemented for a
particular project and contract terms
Bonus – a value paid to the contractor on the basis of contract price in the case when a contract
is completed ahead of schedule and contract terms agreed upon by the parties have been
satisfactorily fulfilled
Business Assets - Assets used in a trade or business or used to produce rental or royalty income.
Business-Use Property - Property used for the production of income. Examples include rental
houses, machinery, factories, office buildings, and similar items.
- C -
Capitalize - To treat the cost of additions and improvements to property as a capital
improvement.
Compliance – actions taken by a taxpayer in conformity with applicable laws, rules and
regulations
Construction permit – permit issued by local government authorities to construct a residential
building or any other public work or make property improvements
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Contract income – are determined as product of contract price with the percentage of contract
implementation level at the end of the fiscal year minus every income from previous year
acknowledged as incomes from contract implementation
Control activity – Control activities are policies, procedures, techniques and mechanisms which
help to make sure that management directives are properly executed
Control/audit – has the two following meanings relative to management and administration:
1. Mechanisms and tools for management, self-regulation or enforcement for the purpose of
preventing violations
2. Action through which something or someone is checked
Cost comparison method – is used to calculate the contract implementation level by separating
total applied cost from total contract cost
Cost of Goods Sold - Beginning inventory plus direct purchases, direct labor costs, and overhead
costs less withdrawals for personal use and ending inventory.
- D -
Direct labor cost – Direct labor cost elements include: basic compensations, overtime payments,
payments for holidays and social and health insurance contributions made by the employer to
the benefit of the tax administration by tax inspectors for tax assessments performed
Direct material cost – will be considered all materials used for completing a construction project
with a long-term contract, such as buildings, installations or production of materials for the
given project. Direct material cost elements include the price from tax invoices minus
deductions and transportation or other costs relative to material processing to the moment it is
used in the respective project
Documentation – is the material (paper documents) prepared and received or maintained
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- E -
Effectiveness – implies the fulfillment level of objectives and relations between expected
outcome and factual outcome of a particular activity
Efficiency – implies a relation between the outcome in terms of goods and services or other
products and the resources used for producing them
Error – is an action representing a deviation from established rules and performed by personnel
without being aware of its consequences
Exempted supply – is the supply or lease of land or terrain, lease of public property buildings,
supply of finance services, supply of gold, banknotes and coins, supply of postal stamps and
other supplies foreseen in the Law on VAT
- F -
Financial control/audit – are controls intended to effectively and efficiently use financial and
material resources and guarantee assets
Financial statement – Accounts prepared by a legal entity, private individual or any other entity
for the purpose of reporting financial issues
Financial system – procedures for preparation, registration and reporting of reliable information
about financial transactions and economic events
- G -
General Standards – Qualifications, competences and independence, objectivity and proper
caution required from the auditors in order to fulfill duties relative to job and reporting
standards in a competent, effective and efficient way
Governance – describes the role of persons with authority to supervise, audit and manage a
given subject. People with governance authority are usually responsible to make sure that the
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subject in question will meet its objectives, provide financial reports and reports for interested
parties
Governance Process – procedures used by taxpayer’s or stockholder’s representatives in order
to ensure better risk management as well as tax audit processes administered by the
management
- I -
Income from dividend – are all incomes earned by individuals in the form of profit shares from
partnerships or dividend from commercial companies and other subjects
Income from salary – are all incomes included in a wage and other extra incomes earned from
this wage such as working years, difficulty level, distance from residence, special category of
work or service, and other supplements to the wage resulting from legal or sub-legal acts
Indirect costs – include all other costs which are not material or labor costs
Individual - for fiscal purposes, is a private, non-trade person, according to the Civil Code
Internal control system – a process influenced by director, management and staff of an entity,
intended to provide reasonable security towards fulfillment of each department’s mission,
objectives and goals. Internal control, internal control system, management and control system
and internal administrative and accounting controls interchangeably refer to one another in the
internal control process
Inventory – is a detailed and documented (accounting) verification of property elements and
their registration in special documents and inventory books as well as assessment of active and
passive elements in order to update them with current values at the date of inventory
Irregularity – implies violation of law or secondary act because of an economic operator which
affects or will affect general community budget or budgets managed by them by reducing or
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losing incomes from their own resources directly collected on behalf of the community or by
unjustified costs incompatible with a certain rule established by management
- L -
Labor comparison method – intends to compare the cost of labor performed in different project
phases within the fiscal year with the labor cost estimated in the contract for the respective
project
Legality – principle which requires consideration of domestic Constitution and legislation as well
as ratified international agreements and accepted standards
Long-term contracts – are similar to any other type of contract prepared for materials, short-
term specialty work, installation or construction of huge assets, except the fact that such
contract does not end within one fiscal year as of the date it is entered into. This type of
contract stipulates an important role for landowners as direct beneficiaries in the construction
industry
Look-back method - The look-back method guarantees the comparison between the amount of
taxes paid in the fiscal year of contract completion and taxes estimated in the contract for every
year it was in force, by calculating unsettled obligations, interest and penalties for payments
lower than the fact
Loss – is the negative difference between incomes and costs for a particular fiscal period
- M -
Material supply – is transferal of ownership right over immovable or movable property
Mis statement – Error in financial information due to mistakes or fraud.
Mixed supply – when service supply is included in the material supply or vice-versa
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Monitoring – Process and procedures planned by management in order to make sure that audit
in all its components is prepared and functions in compliance with goals (audit environment, risk
analysis, activity control, information and communication)
Marginal tax rate - The amount of additional earnings taken by government. The taxpayer with
€50,000 of income may face a 28 percent tax rate on the next euroof income earned, even
though the average tax rate for this taxpayer’s income is 20 percent. The marginal tax rate
affects incentives to offer additional labor and/or capital to the economy.
- N -
Noncompliance – this term is used for acts which are against existing laws and regulations
- O -
Opinion – expression of ones opinions and view on a particular issue
Owner of construction – can be an individual, private individual, legal entity, partnership or
state-owned enterprise. The owner evaluates whether a project is feasible and will provide the
future benefits desired.
- P -
Partnership - is a form of joint-venture between private individuals and legal entities for the
purpose of exercising a temporary, joint and for-profit which is obliged to abide by and act in
compliance with fiscal legislation requirements in the same way as all other juridical forms in the
Albanian law
Passive – is the counterbalancing part for the actives of a company, including equity,
contingency costs, obligations and equity
Payable VAT – paid by a taxable person for a particular fiscal period, is the difference between
VAT applied for the construction period on total taxable value of all taxable supplies made by
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this person during the same period minus any tax credit allowed for that person and fiscal
period in question
Payments due – are parts of balance sheet passives including: loans from banks and other
crediting institutions; tax and social obligations; obligations for purchases or services from third
parties and obligations for prepayments or partial payments
Person – implies an “individual” (private or non-trader according to Civil Code):
- “private individual” (physical trade person);
- “legal entity” (commercial company established according to the Law nr.7638, date 19.11.1992
“On commercial companies”;
- Other legal entities established according to Civil Code, which exercise for-profit activity in the
Republic of Albania, and;
- Other legal entities established or acknowledged as such by special laws
Personal income tax – is the tax applied on any form of income from any source earned by any
individual
Prepayment – payment generally made to contractors for work performed according to the
contract. Such This payment applies for either big or heavy constructions or for residential
buildings, which will be owned by clients crediting the contractor
Preventive control/audit – implies preliminary control/audit and self-control. Such control is
intended to prevent undesirable events or reduce errors and irregularities
Procedure – an action or series of actions taken in order to implement a certain policy
Process – logically connected tasks involving people, machinery and methods used for changing
input into output
Profit – is the positive difference between incomes and costs for a particular fiscal period
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Public sector - includes: ministries and other institutions subordinate to the Council of Ministers
or ministries: local government authorities and public subjects subordinate too them;
commercial companies with totally state-owned capital or 50:50 shares of capital; second-level
banks, insurance companies and financial institutions which have 50% of the shares.
- R -
Rent – includes all incomes from tenants of land, houses, buildings, etc
Reserves – represent certain part of the taxpayers’ profit designated to remain with the
company for a long time, according to legal provisions, company statutory provisions or
decisions by competent company authorities
Residential building contract – a contract is considered such if 80% or more of the total
estimate contract cost is reasonably designated for direct residential building, reconstruction, or
rehabilitation and improvement and is located on solid surface, divided into apartments within
the same building and with many similar units
Risk – uncertainty for something that may happen, which is expected to have an important
impact on the fulfillment of objectives
Risk analysis – Process through which identification, assessment and analysis of potential risks is
made
- S -
Services – are considered activities such as: repairs, photocopying, beauty salons, car repair
shops, driving schools, computer and hairdresser courses, consultants, customs agencies, tourist
and travel agencies, exchange agencies, parking, laundry, dry cleaning and other similar services
Service supply – is every other supply which is not considered material supply
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Short-term contracts – begin and end within the same fiscal year. In the case of short-term
contracts, material costs and construction costs in general are considered current period costs
Small contractor – will be considered every contractor with a construction contract:
1. Who estimates that his/her contract will be valid for two fiscal years, as of the moment it is
entered into;
2. When the gross turnover for 3 fiscal years prior to the year it entered in force is 8 million
Leks/year
Social insurance contribution – are obligatory payments of social and health insurance
contributions. These contributions are collected by tax authorities to the benefit of the Social
Insurance and Institute and Health Insurance Institute, according to relevant legal provisions and
other secondary acts
System – Set of related activities and measures undertaken by a particular subject intended to
work together for fulfilling a certain objective
- T -
Tax – is a contribution required to be paid by every individual who directly benefits from a public
service
Tax invoice – is a fiscal document confirming sales of goods or services which are subject to
taxation; each purchase of goods or services designated as professional activity is subject to tax
invoice
Tax on new construction projects – is the value in Leks for a new investment. The investment
estimate is used for calculating this tax. The tax rate is a percentage of the investment value.
City or communal council has the right to approve investment classification categories and sub-
categories, which can be used to determine the tax rate. Tax obligation is with the investor and
tax revenues are collected by the authority issuing construction permit to the benefit of the
municipality or commune in which the investment is made
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Tax on real estate –includes tax on buildings and agricultural land and represents the value in
Lek to be paid by owner or co-owner based on share. Tax on real estate is paid by all domestic
or foreign, private individuals or legal entities who are owners of the above-mentioned property
in the territory of the Republic of Albania
Tax responsibility – this implies the fact that a person is engaged in an activity or gains property
which contains taxable elements according to fiscal legislation provisions
Taxable value – of a taxable supply is the total sum paid for that particular supply
Taxation – obligatory and irreversible payment to the state budget including administrative
penalties and interests on overdue payments as specified by law
Taxpayer – is a person subject to a particular tax or taxes
Transaction – action by means of which it is possible to transfer property rights from one owner
to another
- U -
Unpaid bills – usually occurs in cases when suppliers credit the contractor with their materials
for a certain period of time for payment they are entitled to receive within the fiscal year the
supply is made
- V -
Value Added Tax (VAT) – is the value added by vendors to all goods or services and carried into
the circulation cycle up to the terminal consumer
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FOR INFORMATION
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These industrial notes constitute an “administrative attitude” in terms of laws, instructions,
official documents and other sub-legal acts they refer to. These notes may be useful for the
administration and other participants in the economic life as orientations tax assessments and
collection of tax obligations
Industrial notes for the construction sector intend to have a preventive effect and reduce
investigation time. The combination of these notes with risk analysis elements will improve the
effectiveness and quality of work. Knowledge of technical standards in the construction sector
also helps to better detailed and specified tax obligations in compliance with standards
____________________________
For further information with regard to Tax Notes for Construction Industry, please contact Mr.
Eduart Gjokutaj in the mobile phone number +355 6825 79711.
You can also write to this e-mail address: [email protected]
You are always welcome!
TIRANA, 2010
© AL-Tax
