In a move aimed at creating a friendlier investment climate and making the economy more competitive, the Albanian government approved a fiscal package last week that includes implementing a 10% flat tax — the lowest level in Southeast Europe. Corporate taxes will also be slashed to 10%.
“The fiscal revolution, including the regulatory reform, will be faster then forecasted — increasing GDP and exports,” Prime Minister Sali Berisha said after the laws were approved on Wednesday (May 30th).
Advocates of the move say it will bring many benefits. In addition to attracting Foreign Direct Investment, they say, it will encourage the legalisation of the shadow economy and simplify tax collection. Economic activity increases, and so does honest reporting of income, while tax evasion drops.
In countries that have implemented a flat tax, the results show steady or increased tax revenue within the first year, according to Adriatic Institute for Public Policy President Natasha Srdoc-Samy.
Critics, however, say the changes will mainly benefit businesses and the affluent, have little impact on most Albanians, and punish the poor. With the abolition of a progressive tax system, they say, low-income earners will see their taxes go up, while a tiny number of high-income earners will enjoy a windfall.
Meanwhile, cutting the corporate tax in half will drain the stateâ€™s budget, as the income from this tax currently makes up about 8% of total revenue, critics argue.
As part of the fiscal package, the government also approved a law that bans cash transactions of more than 2,228 euros for businesses. Approved cash transactions will be limited to 10% of each transaction.
The laws are a “fundamental condition in the fight against informality and for the further consolidation of the banking system”, Berisha said, adding that the initiative “will contribute to the fight against money laundering”.
The government hopes to implement the legislation by January 2008. However, Parliament must approve it first.
The Democratic Party-led government has already instituted various tax reductions during the past two years. The most important of these was the reduction of social security contributions from businesses, from 29% to 20%, and a lowering of taxes on small businesses.