PRIVAT SECTOR’S CHALLENGES

FISCAL ADMINISTRATION, PRODUCTIVITY AND

INNOVATION

INVESTMENT COUNCIL MEETING

MBLEDHJE ETiranë,
KËSHILLIT
26 TË INVESTIMEVE
March 2024
Tiranë, 18 prill 2023 1
CONTENTS

OBJECT &
KEY FINDINGS RECOMMENDATIONS
METHODOLOGY

2
CONTEXT - REPORTS

KEY ASSESMENT FROM INTERNATIONAL

RAPORTS
EU PROGRESS REPORT - The main ongoing challenges that harm
the business climate: corruption; informal economy and unfair
competition; lack of predictability of legislation; bureaucracy, an
inefficient public-private consultation mechanism.
TADAT – “Challenges, including the need to increase
professionalism in the control function and the Office of Large
ERP 2024 – 2026 Taxpayers, a greater external engagement with intermediaries
POLITICAL VISION ON and key business representatives, the lack of important feedback
The latest Economic Reforms Program mechanisms from stakeholders and the need to address
FISCAL POLICY – has three thematic clusters, focusing deficiencies in the legal framework of administrative review for
on human capital and social policies, the resolution of tax disputes".
Draft – Strategy of Revenues - 2022 “ sustainability and recovery, and
foresee gradual elimination of IMF - “Consolidation must be achieved through a sound strategy
competitiveness (Growth plan). of revenue mobilization, together with efficiency gains and
exemptions and incentives
emphasizing 6 priorities such as reallocation of resources to infrastructure, education and climate
among which the reduction of the VAT adaptation."
compliance gap". OECD - According to the OECD Policy Index for SMEs - Albania
faces several shortcomings in competitiveness and Informality
stands out as a main obstacle for the sustainable advancement
of formal businesses and therefore the economy in general.
EBRD - “The fundamental problem for the Balkan countries is
low productivity in the economy, the result of many years of
under-investment, weak institutions, unfavourable
demographics and a difficult business environment.

3
CONTEXT – CHALLENGES

There are significant disparities between Albania's competitiveness and

regional and EU partners which hinder Albania's competitiveness:

✓Limited entrepreneurial and technological expertise

✓Unmet investment demands in both human and physical capital
✓Continued low level of research and development spending
✓A growing shortage of skilled labour

which hamper Albania’s competitiveness.

4
CONTEXT – GLOBAL INOVATION INDEX

- RANKING at the global level -

Albania ranks the last in the region

2015 2016 2017 2018 2019 2020 2021 2022 2023

SRB 70 65 58 56 57 53 54 55 53

MNE 40 46 52 55 45 49 50 60 75

ALB 112 71 115 83 70 83 84 84 83

MKD 55 62 63 84 59 57 59 66 54

BIH 122 104 86 68 71 74 75 70 77

5
CONTEXT – GLOBAL INNOVATION INDEX

Research and Human Capital, Market Sophistication, Knowledge and

Technological production, Creative Production – Key problematic areas
– Albanian ranks lower than the region

Knowledge and
Research and Market Business
Institutions Infrastructure technological Creative production
Human Capital Sophistication sophistication
production

SRB 57 51 35 41 68 41 92
MNE 82 62 56 54 66 80 85
ALB 60 96 53 93 50 91 87
MKD 75 78 40 30 60 53 69
BIH 104 68 67 27 106 64 6
91
OBJECTIVE

✓ Stimulate the debate on the current challenges of improving the productivity and
competitiveness of the economy.
✓ Identify interventions in the field of economic policies, fiscal policies and fiscal
administration that will promote the productivity and competitiveness of the
economy.

✓ The discussion recognizes the contribution of the best practices of “fiscalization” and the
provision of electronic public services as the basis of improving productivity in the last five years
and aims to identify, in dialogue with the interested parties, initiatives and political interventions
with a similar impact on the economy.

✓ In the attention of policy-making should be the efficient administration of budget revenues and
their management in order to improve productivity by encouraging innovation and minimizing
environmental and social impacts.

7
ISSUES AND SUGGESTIONS BY SMEs
1. Legal Framework
– too many changes – low stability:
• Tax procedures very dynamic (is it
time for structuring them
considering e-Tax, fiscalization,
anti-informality reforms etc? Does
the current legislation is based on
self-declarations or re-evaluations?
•Law On Income Tax – does it
provide for sustainable solutions or
new issues emerged? (subject of
contestations from group of
interests)
•VAT Compensation Scheme (lack of
a sustainable solution)
• In some cases, it triggers
informality - (e.g. excise for LPG)
5. Productivity &
Competitiveness
• Energy disruption
4. Business Climate • Lack of experts and expertise
• Expensive loans (Schemes from
AIDA are suspended)
3. Informality • Increasing costs for small
business (costs for electronic
• Continuous efforts to address it, signature)
but perception on increased level • Inspections from Inspectorates
an issue both for their frequency
2. Tax administration of informality (non-declaration,
non-registration) and quality
• Integrated sectoral efforts ( •Data protection (e-Albania)
- new efforts- old problems:
increasing the quality and • Is there a coordination between
standards in the frame of EU Policies and the Actions?
• Tax audit methodology and extended approximation, triggers market
deadlines regulation and lower informality BE
dhe ulim informalitetin (e.g.
• Limited capacities and non- clear re-
assessments tourism, transport- but no
• Legal amendments and time pressure over actions….)
the administration to prepare the
operational infrastructure (e.g. the deadline
for new Forms according to the Law On
Income Tax was postponed)
•Procedures for business de-registration still
a problem, although the legislation is clear
on this topic. (NBC deregister/ GDT keeps
businesses active in their registers)
•DTT (currently a sensitive issue and the
Instruction is too old)- individual approach
or essential structural changes that enable
adequate solutions for a market in
continuous opening and its challenges?
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METHODOLOGY
Research &
Analyses
• Analysis on legal framework and
Reports from national and
international sources
• Analysis of official data from
secondary sources
• Synthesis of findings and
recommendations to date
• The current work of the Secretariat
on labor market issues
Challenge 2
CONSULTATIONS
•Consultative meetings (17) with
central institutions, businesses,
audit studios and business
associations
•Comments from IC Members and
Partners
•Tourism Association
•Builders Association
•Durres Chamber of Commerce
SURVEY
• Structured questionnaire (sent
online)
• Focus – the challenges of the
private sector in terms of Fiscal
Good Administration, Informality,
Productivity and Innovation.
• 601 anonymous responses were
received
9
IC SURVEY: PROFILE OF COMPANIES

Challenge 2

10
2. FINDINGS
2.1 FINDINGS – FISCAL ADMINISTRATION
/COMMUNICATION
- While there is a consensus for improving communication and interaction with the central tax
administration. Challenge 2
- The private sector remains concerned about the stability of fiscal policies, the quality of fiscal
communication (tax ruling)/technical interpretation of legislation and the professionalism of the
administration.

Have you participated in training sessions offered in

recent years by the Tax Administration on the
implementation of tax legislation?

2024 32%

2022 23%

2019 19%

2018 15%

2017 18%

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

12
2.2 FINDINGS – FISCAL ADMINISTRATION
/FISCALIZATION
- The private sector has positively embraced digitization, expressing overall satisfaction with e-services.
- They also positively evaluate the central platform of tax administration invoices (fiscalization),
Challenge
highlighting the importance and stimulation 2 education, especially for SMEs introduced by this
of fiscal
system for taxpayers.
- However, there is still room for improvement, especially in increasing data reliability and customer service
elements.

Has Fiscalization affected the costs of fiscal

administration?

Other 2%

Fiscalization has not brought significant

change in administration costs
27%

Fiscalization has increased your cost of

administration
51%

Fiscalization has reduced

administration costs
20%

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

13
2.3 FINDINGS - INFORMALITY

- Despite efforts to formalize the economy, businesses still maintain a high perception of informality.
- The sectors - agriculture, trade and services are considered the most problematic.
Challenge 2

14
2.4 FINDINGS - INFORMALITY

- Tax evasion is confirmed as the main form of informality in years, followed by undeclared work and non-
registration.
- Unfair competition - as the main factorChallenge 2
driving informality, but this perception prevailed until 2024, when it
was replaced by fiscal burden at the central level.

15
2.5 FINDINGS – INFORMALITY, FISCALIZATION

- Businesses - concerned that the recently approved revenue law will potentially increase informality.
- On the contrary, positive discriminationChallenge
in the taxation
2 of business activity can help to reduce the level of
informality, as is the case with the reduction of VAT in the tourism sector.
- Businesses perceive the fiscalization system as a tool to decrease informality.

16
2.6 FINDINGS - PRODUCTIVITY
- Companies perceive similar levels of productivity compared to their domestic competitors.
- However, they have a pessimistic view of their level of productivity when compared to competitors
operating in regional markets and beyond.
- This weakness potentially hinders the ability2 of Albanian companies to compete effectively in the
Challenge
common regional and wider markets.

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2.7 FINDINGS - PRODUCTIVITY, SECTORS

- Productivity, either as a perception or measured as added value per unit of work, has a very important
sectoral dimension to be understood and reflected in economic/fiscal policies.
- The traditional sectors of agriculture Challenge 2
and construction, industry, trade have high levels of productivity
unification - this means mature sectors, with a competitive structure and little room for structural changes.
- Energy and ICT, Professional Services - sectors with a sectoral structure dominated by leading
companies in productivity, new sectors (not mature) and with spaces to attract investments.

Perception of Companies on Productivity Compared to Competitors

80%
68%
70%
60% 60%
60%
50% 47% 46% 47%
44% 43%
40% 40%
40% 33% 34% 33%
32%
30% 27%
24%
20% 20% 20%
20% 16% 16% 17%
13%
10%
0%
0%
Bujqesia Energjia Industria ICT Sherbime Turizmi Ndertimi Tregtia
Produktivitet me I ulet se konkurentet Produktivitet I Njejte me konkurentet Produktivitet me I larte se I konkurenteve 18
2.8 FINDINGS - Labour Productivity
Average Labour Productivity per Employee (in Euro,
o Productivity, estimated as added value for Annual 2019-2022)
35,000
one employee, is 11,888 Euros/Year. 30,000 32,545
o During 2019-2022, labor productivity 25,000
20,000
29,158

22,852
increased at an average annual rate of 11%. 15,000 18,048 18,636
15,569 14,760
o The sectors with the highest labor 10,000
5,000 9,952 9,442
7,331 8,741 9,415
12,615
10,876 11,888
5,663
productivity are extractive industry, energy, -

professional services, real estate and ICT.

o The sectors with the highest increase in labor
productivity are tourism, processing industry,
extractive industry, recreation and leisure
sector.
Average Change Rate Of Labour Productivity Per
o Sectors such as health, public administration, Employee (In %, Yoy 2019-2022)
education, water supply and waste
33%
processing report an increase in labor
23%
productivity (crowding out effect from public 21%
16% 16% 14%
12% 10% 11%
investments). 8%
5%
8% 7% 6% 6%

o High productivity sectors report modest -6%

growth rates; a slowdown in productivity for

sectors such as energy, ICT and the
construction sector. 19
2.9 FINDINGS - INNOVATION AND TRAINING

- Companies recognize the importance of innovation in increasing their productivity and competitiveness in
the markets. Challenge 2
- BUT only a small number of companies (6%) allocate funds specifically for R&D, employee training (16%).

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2.10 FINDINGS - COMPETITIVENESS

- In 2024, the availability of the labor force - is prioritized NR 1, over all other elements related to the
integration / competition of Albanian companies.
- Of the indirect factors, Informality, Trade Policies2and Access to Financing are considered the main
Challenge
obstacles to integration.

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2.11 FINDINGS - REGULATORY BURDEN AND
BUSINESS CLIMATE
- According to business perception, the regulatory burden has increased over the past three years.
- Tax legislation is rated as the area withChallenge 2 administrative burden for companies, followed by
the biggest
inspections and unfair competition.

How has the overall regulatory burden on your

business changed over the past three years?

It hasn't changed 34%

Decreased 9%

Increased 58%

0% 10% 20% 30% 40% 50% 60%

22
2.12 FINDINGS - BUSINESS CLIMATE

- Businesses consider business registration and licensing/authorization procedures the most favourable
elements for doing business in Albania.
- However, borrowing procedures and costs, fiscal
Challenge 2 burden and inspections are among the least
favourable elements.

How would you rate the climate of doing business in the

sector where you operate, based on the following elements:
(favorable)

Registration 78%

licensing 66%

Relations with public administration 48%

Qualification of employees 43%

Legal basis, its complexity 42%

Inspections 36%

Fiscal burden 33%

Borrowing procedures/costs 31%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 23

 3. RECOMMENDATIONS
Add title text

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CONCLUSIONS
Positive
reviews
• Improved communication with the tax administration,
mainly because of easier electronic tax access
• Better customer service related to fiscalization
• The impact of fiscalization and the reduction of VAT
in tourism on the formalization of the economy
• Reduction of tax controls
• The process of business registration and obtaining
permits is positively evaluated.
Thoughtful and carefully planned actions are necessary to
tackle challenges concerning data security, formalization in
sectors like agriculture, trade, and services, as well as
unforeseen expenses for small and medium-sized
enterprises (SMEs) related to tax compliance or frequent
changes in tax regulations. Meanwhile, regarding
competitiveness on a company level, local entrepreneurs
endorse innovation but often do not allocate sufficient
resources or funding for Research and Development
(R&D). They still perceive themselves as competitive within
the domestic market, even though they acknowledge that
the rise in wages in the private sector isn't attributed to
increased productivity within their businesses but rather
stimulated by public sector initiatives. Their perception of
competitiveness doesn't incentivize investment in
innovation. With the opening of new markets and evolving
standards coupled with declining productivity, the risk of
bankruptcy naturally escalates. 25
3.1 RECOMMENDATIONS – POLITICAL VISION

Recommendation 1. Approval of a Strategy on Revenue Collection as a

comprehensive document for all the stakeholders in public and private
sector.
• Such strategy should be subject to a prior consultation process and discussion with the public
(businesses, associations and chambers of commerce, academia, think tanks, partners for
development and international institutions). It should be able to clearly underscore the goals,
objectives, and actions at medium-term which shall facilitate its periodical monitoring and
institutions’ accountability on the use of taxpayers’ money. The strategy should not only aim
at revenue collection, but also productivity and competitiveness improvements through better
tax administration and the right dispersion of the tax burden. The strategy goals must be
harmonized with the sectoral strategies, the 2024-2026 Economic Reform Program and the
Growth Plan.

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3.2 RECOMMENDATIONS - INNOVATION

Recommendation 2. To further stimulate business innovation by

releasing funds at the firm level to boost capital/technology investment,
relevant analyses should be initiated focusing on: (a) accelerated depreciation
(b) supplementary depreciation (c) recognition of sponsorships and
donations for Research and Development (R&D) as eligible deductible
expenses.

27
3.3 RECOMMENDATIONS - FISCAL STABILITY

Recommendation 3. Ensuring fiscal stability – coherence and

consolidation of tax procedures through a new law.

• The new law should unify all the tax procedure practices currently envisaged by several laws,
by-laws, and regulations applicable at both central and local level. The adoption of the new
law should aim for the endorsement of best practices related to the organization of tax
administration operations as envisaged by OECD and should be associated with a detailed
Commentary that provides for clear tax rulings, directly applicable to business scenarios.
Without prejudice to the options at the disposal of legislators, the new law should be the
outcome of a comprehensive and large-scale political agreement, and possibly at the level of
the Code (like the Customs Code).

28
3.4 RECOMMENDATIONS - PROCEDURES

Recommendation 4. Approval of a new Instruction on bilateral

agreements for the avoidance of double taxation that shall provide for
automation and electronic procedures followed by the businesses and
tax administration (like the system on VAT reimbursement.

• The solution envisaged by the instruction does not necessarily need to be based on a genuine
procedure, but to follow an EU country model and update the agreements based on the new
formats of documents issued from European Tax Departments as for example Certificates of
Residence issued in electronic formats and without inked signatures and stamps. It should be
applied rigorously through a dedicated team of experts at the level of GDT.

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3.5 RECOMMENDATIONS - PRODUCTIVITY

Recommendation 5. Given the interaction between fiscal policy,

innovation, and productivity it is recommended that productivity
should be a guiding principle in designing fiscal policy and direct
support to R&D/innovation.

• The lower productivity of the economy if compared to regional or European economies

identifies a space for improvement and calls for urgent policy interventions targeting.
Moreover, in-depth sectorial analyses would shed light on regulatory and policy interventions
needed to correct resource misallocation and inefficiencies at the sectoral level, with special
focus MSME’s. We recommend that at least three inter-ministerial working groups with the
mandate to perform sectorial analyses on productivity are established at least for the tourism
sector, agriculture, and energy and waste management. These analyses could lead to
coordinated policy actions on R&D innovation, fiscal measures, and growth rooted in
economic productivity. The ICC analyses show that economic productivity could be improved
by 24 %.
30
3.6 RECOMMENDATIONS - INNOVATION

Recommendation 6. Sectors with a space for productivity boost

through labour productivity are energy, water and waste
management, construction, and real estate. We recommend these
sectors be put under the focus of the innovation strategy inducing
more AI/digitalization in support of labour productivity.

• The productivity gap at the sectorial level identifies sectors that need to address the
productivity of labour while being capital-intensive. Improved labour productivity would
improve the return from capital and sector performance overall. These sectors could benefit
from digitalization or AI of labour processes as well as from on-the-job training and upskilling
of existing labour. Measures to deduct labour expenses or subsidize highly skilled specialists
engaged in research and development, circular economy, and renewable energy would pay
off in terms of efficiency and productivity of capital-intensive industries..

31
3.7 RECOMMENDATIONS - PRODUCTIVITY

Recommendation 7. The tourism sector, manufacturing, extractive

industries as well as ICT sector, demand more capital to match the
labour at the sectorial level and improve productivity.

• Regulatory measures or standards of operation or fiscal support to release funds within firms,
aiming the intensification of capital investments with a focus on innovative and green
investments, would lead these sectors toward a more sustainable productivity growth path.

32
3.8 RECOMMENDATIONS - INNOVATION

Recommendation 8. Ministry of Economy, Culture, and Innovation

should design and lead an awareness campaign and communicate
with businesses and financial institutions to induce more funding
and investment toward innovations.

• There is a strong need to raise awareness among businesses/MSME’s on the importance and
benefits of innovation and R&D as ways to address low productivity and lack of
competitiveness. The insignificant share of financial resources dedicated to innovative
investments and R&D is persistent. Policy measures addressing R&D/innovation are
intensified, however, more needs to be done to trigger an organizational change at the firm
level able to create a mass of innovative investments.

33
DISCUSSIONS

Entrepreneurs must now prioritize enhancing workplace

productivity and integrating innovation across all sectors
of the economy. This shift is critical for bolstering their
businesses and fostering sustainable economic growth
within the country.

Companies' constrained abilities to advance technology

and enhance competitiveness locally and globally
necessitate greater support from fiscal and sector-
specific policies, along with financial institutions.

34
III. QUESTIONS FOR DEBATE

Informality and unfair competition as essential market constraints

•Continuous effort, but the perception of increasing informality (non-declaration, non-registration)

•Sectoral integrated approaches - (increase quality and standards, regulate the market in the framework of EU
integration, and reduce informality (e.g. tourism, transport - not shares...)

Business climate and systemic problems

• Legal and institutional unpredictability

• Expensive loans (second-tier bank)
• AIDA schemes for investment in technology are suspended
• Increasing cost for small business (cost of electronic signature certificate)
• Deregistration of the business is a problem even after so many years and legal improvements
• Inspections - problems in frequency and quality
• Data protection and security (e-Albania)
35
III. QUESTIONS FOR DEBATE
Is there a consolidated and structured vision on fiscal policy and good governance?

• Draft Mid-Term Strategy for Revenue Collection 2022 ("draft strategy") prepared in 2021-2022 is still an unapproved draft...
• There is a wide perception that the “will” of legal changes may have been positive, BUT the implemented fiscal policies have an
approach to deal with "ad-hoc" problems and not as a function of the integrated treatment of systemic issues... (VAT to compensate
farmers unstable (6%, 14%, 20%, 0%, 6%, etc.)
• Fiscal policies mainly consider the budget impact… Integration in the EU is also bringing new challenges for the tax administration - the
adequate handling of applications to avoid double taxation....?!
• Measuring the impact of fiscal policies on productivity and competitiveness does not have a sectoral approach…

Legislation and good fiscal administration are conditioned by sustainability, coherence of

interventions, administration capacities and transparency

• Legislation "On Tax Procedures" (24+ amendments/additions, lack of cohesion in the basic principles (self-declaration vs revaluation),
distributed procedures, ongoing reforms (e-tax/”fiscalization”), confusing system of applied penalties, etc.) A Is it time for a new law?
Tax Code?
• The Law "On Income Tax" - "regulated" taxation of professions, but did not bring innovation to the deductible expenses for individuals or
the total tax treatment of all incomes... The adoption of the law showed that the administration was not ready to implement it (e.g:
normative act for new declarations in the system)
• Integration in the EU is also bringing new challenges for the tax administration - the adequate handling of applications to avoid double
taxation…
• Laws "On Strategic Investments" (2015), "On TEDA" (2015), and “On the support and development of startups” (2022) – What are the
achievements, impact, failures, and opportunities for improvement? Is there a report on the achievement of objectives and
opportunities for improvement?
36