VAT apportionment coefficient for mixed transactions

Mixed transactions are where most mistakes occur. If part of the activity is exempt from VAT, not all VAT on purchases is deductible. Failure to use the apportionment key results in an excessive deduction, which upon audit is rectified with a fine.

Typical cases include leasing, financial and educational services alongside a regular commercial activity. The list of exempt supplies is on our website. exemptions from VAT.

Conditions for exercising the right of deduction

In implementation of Law No. 92/2014, dated July 24, 2014 “On Value Added Tax in the Republic of Albania”, as amended, the exercise of the right to deduct VAT on expenses incurred by a taxable person depends on the simultaneous fulfillment of the resulting conditions.
from the provisions of the law, according to which supplies/expenses must:

a) to be used for the needs of a supply made against payment with the right of deduction;

b) not to be explicitly included in the specific supplies for which the right to a discount is restricted, pursuant to Article 74 of the law;

c) be justified by an invoice containing all the information required by law.

Mixed transactions

On the other hand, the law sets out the rules and conditions under which taxable persons who carry out only intra-Community transactions and are entitled to a deduction—that is, partially taxable persons—may exercise their right to deduct VAT.

The amount of the VAT reduction

In practice, the amount of VAT deducted on a good or service may vary from one good or service to another, depending on the use of the good or service.

In relation to the use of the goods/service, the following are determined:

i) the taxability coefficient:

The proportion of use of the goods or services for an activity for which the person is considered taxable, and the use of the goods or services by the same person for purposes unrelated to his economic activity.;

ii) VAT deduction rate:

The portion of the use of the good or service for supplies in the field of VAT application, for supplies that entitle to a deduction.;

iii) the limitation coefficient:

The supply of goods or services is expressly subject to the limitations of Article 74 of of the law. Thus, the VAT deduction on the goods or services is equal to the product of the above elements.

Read more about how the Value Added Tax works. here.

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Source: General Directorate of Taxes.