[Draft] Fiscal Package 2019

2019 Fiscal Package, Presentation to the Parliamentary Commission on Economy and Finance Minister Ahmetaj's Speech During its first two terms, the “Rama” government has implemented a series of fiscal measures guided by the basic principle on which we came to power: progressivity and fair taxation, under the motto “whoever earns more, pays more.” and “whoever earns less, pays less.” Our fiscal policies over these years have aimed at and enabled reducing the tax burden on businesses and citizens, improving and simplifying procedures, and easing the business climate. I would like to bring to your attention that this government remains committed to continuing fiscal consolidation. In this framework, we are balancing the necessary spending for public investments; the financing of the solidarity package as an instrument that now characterizes this government, in direct reflection of our focus on citizens; financing the reforms that enabled the economic turnaround that is now being consolidated, while on the other hand maintaining the pace of revenue growth, the continued reduction of public debt, and lowering the fiscal burden. After stabilizing the financial situation and clearing the stock of outstanding debts in 2014–2015, from 2016 onward the Government's fiscal policies and reforms have aimed at gradually reducing the tax burden through tax cuts. It is a long list of fiscal measures that we have presented here before this Commission, and for your interest you can refer to the presentation to see the history of tax cuts. The 2016 package for simplifying tax and customs procedures was a “revolution” in the country's business climate, a concrete example of government-business cooperation, which again sets us apart from previous governments where policies were dictated from government offices without any consultation with the economic realities on the ground. In those procedures, I should remind you that for the first time a relationship was established with the business for tax audits, where the business has the opportunity to self-correct for a period beyond 12 months without penalty; it has the right to negotiate the timing of the tax audit with the tax authorities; It has the right, upon notification of a audit, to self-correct with half the penalty, and for an in-depth audit it must be notified 30 days in advance. In May 2018, we launched a broad consultation process with all stakeholders on the June package, a large portion of whose measures take effect on January 1, 2019, as well as this year's new package, which we are presenting today. We began consulting with the business community on the package as early as April 2018. We have held continuous, individual consultations with associations, public and private representatives, in the Tax Council, and in the National Economic Council. So, broad and in-depth consultations to reach the conclusions we have reached. The changes presented in the 2019 fiscal package also aim to further reduce the tax burden, incentivize sectors, and improve the business climate.  Purpose of the Fiscal Package

• reduction of the tax burden on citizens and businesses, through lowering the income tax rate, profit tax, and other obligations;
• facilitating business, through simplifying procedures, reducing the time for business deregistration;
• incentivizing certain sectors and industries through tax reliefs and exemptions;
• establishing transparent rules in taxation, preventing abuse of the law and obtaining unfair tax incentives;
• the protection of the country's fiscal interests and tax base, by foreseeing new rules, applicable also at an international level.

The June 2018 package, which is worth reiterating, includes:

Measures of the June 2018 Package

• A threefold reduction of the profit tax rate from 15 percent to 5 percent for businesses with revenues of 8–14 million lek.
• 11,000 businesses, or 50 percent of businesses taxed at a 15 percent rate, benefit.
• After this measure, only 9 %, this is very important to emphasize and re-emphasize together, after this measure only 9 %, or 10 thousand of the total number of taxpayers, are taxed at a rate of 15%, while 65% of them, or 71,000 entities, will pay ZERO tax. So, 65% of Albanian businesses have zero profit tax. 26 percent, or 28,000 entities, have a tax rate of only 5 percent.
• Which means that the 91% of the Albanian enterprise today has a profit tax of either 0 or 5%.

A huge difference from what it used to be: the unfair, impoverishing 10 percent in favor of the top 1 percent of entrepreneurs and placing a burden on small and medium-sized enterprises and on all employees with average and low wages. The 10 percent has been a measure against the 99 percent of employees and businesses. Incentivizing farmers incorporated in Agricultural Cooperation Societies by cutting the corporate profit tax rate in three from 15 percent to 5 percent.

The effect on agricultural cooperation societies

• Over 50 registered Agricultural Cooperatives benefit, while such a measure would encourage cooperation and the creation of new entities.

Allow me to jump from today to yesterday to remind you that in 2019 agriculture will be one of the most funded and supported sectors, both in terms of funding and through fiscal and economic frameworks. The funding support is substantial: 2.6 billion lek are direct budget support for farmers, 1+3 billion, so 4 billion is the budget + IPARD, and then we have the Guarantee Fund, which, if the institutions that manage the sector work well, allows us to inject over $100 million into agriculture in direct investments or support for farmers alone. I want to remind you that when we refer to the problems in agriculture, it is fragmentation, that is, the lack of economies of scale. Through the fiscal instruments I'm mentioning here today—the incentives for Agricultural Cooperation Associations—we have the opportunity to correct that flaw in the economic structure of agriculture. But, of course, it is a challenge for our institutions to steer agricultural development toward economies of scale. The fiscal instruments are already in place, serving the policy I referred to.

Other incentives for farmers and businesses

• Incentivizing farmers to join Agricultural Cooperatives, by removing the turnover threshold of 5 million lek for reimbursement benefits. A difficult debate, but an incentive instrument along the same lines as I mentioned above.
• Incentivizing businesses that are licensed and operating in the field of agritourism:
• by reducing the corporate income tax rate from 15 percent to 5 percent;
• by reducing the value-added tax rate from 20 percent to 6 percent for services provided on the farm (accommodation, food, etc.);
• By exempting agribusiness entities from the “infrastructure impact tax” for constructions intended for agritourism, and thus giving them the same incentive benefits as those for elite tourism.
• Exemption from VAT for solar energy investments, with the aim of reducing costs and promoting them.

Fiscal Package 2019

Reduction of dividend tax

• The dividend tax is reduced from 15 percent to 8 percent.
• Over 15,000 companies or about 50,000 individual investors benefit from capital investment.
• A stimulus is provided for all accumulated/capitalized profits from previous years, applying an 8% tax rate to those distributions if the tax is paid within a period specified by law, which is expected to be the first half of 2019.
• Reduction of the payroll tax threshold by 23 %:
• 400 employees with a salary of over 130,000 Lek per month benefit 25.8 million Lek each month, or 310 million Lek per year.

We want to remember that by dismantling the flat tax, an enemy of all employees, especially those with lower wages, we established the progressive tax, through which today, based on the total employment and the total wage fund in the Republic of Albania, 120 million dollars, which once went to the state budget, now benefit citizens. And don't forget that we are also fiscally consolidating and reducing debt. So, 120 million dollars go into the pockets of citizens. Now, another 3 million dollars are added, making it 123 million dollars going into the pockets of citizens. Don't forget that we are reducing public debt and improving public finances. Therefore, two processes are happening simultaneously: easing the burden and reducing debt. At the center of this is the responsibility of this government. Regarding entrepreneurial profits It reduces the plastic packaging tax by 2/3 and the glass packaging tax by 1/2, which means a reduction in production costs for domestic manufacturers in the food industry.

New VAT Exemptions

• Exemption from VAT for raw materials of the pharmaceutical manufacturing industry, placing it on equal competitive terms with imported medicines which are exempt.
• Exemption from VAT for the import of agricultural machinery, with the aim of facilitating opportunities for farmers and stimulating the domestic market for their import and trade.
• Reduced rate of 10% VAT on the import of electric buses intended for public transport, as a measure aimed at limiting the use of environmentally polluting vehicles.
• Exemption from VAT for subcontractors in the garment industry for export, with the aim of:

1. reducing exporter costs
2. simplification of the VAT refund scheme,
3. easing the cash flow situation, i.e., liquidity circulation, for subcontractors, who were paid only when the exporter reimbursed VAT.

• Simplest and most transparent business registration and de-registration procedures by reducing time and bureaucracy.

Regarding the aspect of public finances, the Package foresees measures and changes that aim to protect Albania's tax base and limit the misuse of low tariffs and zero taxes:

Measures against the abuse of the zero-rate tax

• Large businesses registered as small with multiple TINs, meaning strict rules.
• Individuals traditionally with employment contracts and high-paying salaries, who fictitiously become small businesses to benefit from zero tax.
• We foresee measures such that for income and profits related to the country's assets, the tax will be paid in Albania. The Bankers' case: When Bankers was sold outside Albania, Albania did not benefit from the sale. It could not tax it due to the fiscal system and rules that it has not yet adopted, and is adopting with this advanced package from the OECD.

The country's fiscal rights are protected by requiring the payment of capital gains tax by non-residents. The example I gave you with Bankers, who sells shares outside Albania, and the Republic of Albania doesn't receive a single cent. The internationally accepted principles regarding the anti-abuse clause on taxes and aggressive tax planning are implemented, thereby avoiding taxes. FISCAL PACKAGE CONTENT 2019 Law “On Income Tax”

Changes to the income tax law

1. Reduction of the dividend tax rate from 15 percent to 8 percent.
2.  Increase of the taxable pay threshold from 130,000 lek to 150,000 lek, taxed at 23%.
3. Tax provision for capital gains of non-residents, in relation to sales of shares in companies or assets located in Albania.
4. Clarifying provision regarding withholding tax on services for non-residents.
5. I am concerned about the expenses for diets, which were a type of tax base avoidance, personal income tax.

Law “On National Taxes”

1. Transition from taxing plastic packaging to taxing plastic materials. A two-thirds reduction in the tax rate. A 50 percent reduction in the tax rate for glass packaging as well.
2. The increase in the mining rent for chromium exports from 6% to 9%, which I also mentioned yesterday.

Law “On Value Added Tax”

1. Exemption from import of raw materials for pharmaceutical manufacturing plants.
2. Exemption from VAT for subcontracted services for contractors in the garment industry.
3. Exemption from VAT for the import of agricultural machinery according to the list approved by the Council of Ministers, by any importer.
4. Reduced VAT rate of 10% on the import of electric public transport buses.
5. Reduced rate of 6 % for television advertising services.

Law “On Excise Taxes”

Changes to the Excise Tax Law

1. Imposition of an excise duty of 1 lek/kg on bituminous gravels used as alternative fuel.
2. The removal of excise tax on fireworks, lamps, and batteries, also suggested by the International Monetary Fund.
3. Increase in excise duty for processed tobacco and its substitutes, heated tobacco, and cigars.

“Law on Tax Procedures”

• General anti-avoidance provision, in compliance with the European Union Directive.
• The anti-avoidance provision regarding the registration of more than one business by individual traders; it refers to the evasion practiced by various individuals when they create different entities, render them passive, abandon them burdened with tax debts, and establish another individual entity. This anti-avoidance provision will reduce, if not eliminate, this detrimental phenomenon for the tax base.
• Simplification of business deregistration procedures.

Law “On local taxes”

• Procedural regulations aimed at clarifying the application of the law by local government units, primarily referring to the infrastructure tax; concerning cases of construction by individuals, construction with a company, or construction of a residence or commercial building.

 Law “On Fees”

• Review of some fees and their unification for the same goods.

This is the summary in principle of the entire Fiscal Package for 2019.