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Corporate tax reform can improve Albania

Over time, various policy changes have made it easier for businesses to enjoy the
benefits of corporate status without being subject to the corporate income tax. Reform
should reflect the guiding principle that firms engaging in similar activities and enjoying
similar legal benefits should be taxed at similar rates.
When businesses headquarter, invest, and produce their goods and services in Albania,
they help increase country living standards through the jobs they create and the tax
revenues they produce. In seeking to promote the Albania as a hub for business activity
and investment, many have focused on the notion of competitivenessthe idea that
policies can attract profitable activities to this country or develop such activities
domestically. For instance, consider calls for the reduction in the Albania statutory
corporate tax rate from its current level of 15 percent in the name of competitiveness.
As a standalone policy, a lower corporate rate would enhance incentives for investment,
reduce the gap between effective tax rates on corporate businesses and SMEs and microbusinesses, narrow the tax preference for debt financing relative to equity financing, and
reduce pressures on multinational firms regarding the location of headquarters,
production, or tax avoidance.
However, an obvious disadvantage is that each percentage point reduction in the
corporate tax rate reduces revenues by roughly ALL 6 billion per year, leading many to
consider revenue-neutral options for corporate tax reform.
By definition, revenue-neutral reform options involve a trade-off between reductions in
the statutory rate and an increase in taxes somewhere else. Adjudicating those trade-offs
is particularly difficult within the corporate tax system because many of the tax
provisions being eyed as revenue raisers are themselves policies intended to promote
one specific avenue of competitiveness and often also apply to non-corporate
businesses.
Each option provides for meaningful reductions in the corporate rate. Many would also
reduce some of the negative tax distortions that contribute to inefficiencies in the
corporate sector. For instance, limiting the deductibility of interest expense would help

equalize the treatment of debt-financed investments relative to equity-financed


investments, and reviewing the boundary between corporate and SMEs could help level
the playing field between similar businesses currently operating under unequal tax
regimes. But even seemingly beneficial reforms are not without potential economic or
political drawbacks. It is clear that the current income tax law needs to be improved to
promote Albania living standards and competitiveness. The challenge will be agreeing
on a reform that levels the playing field across different industries and different
investments in the face of the competing need to maintain revenues.
The goal of corporate tax reform should be to promote economic growth and to build a
sustainable revenue base for government, without compromising the equity and fairness
of the system.
Corporate tax revenues are now at historical lows as a share of the economy, at a time
when the Albania faces deficits and debt that are expected to remain like this to
unsustainable levels. Although the statutory corporate tax rate is higher than in some of
neighboring countries with Albania, the average tax rate -- that is, the share of profits
that companies actually pay in taxes -- is substantially lower because of the tax law's
many preferences (deductions, credits and other write-offs that corporations can take to
reduce their taxes). Moreover, when measured as a share of the
economy, Albania corporate tax receipts are actually low compared to other balkan
countries. All parts of the budget and the income tax law, including corporate taxes,
should contribute to deficit reduction. Well-designed corporate tax reform can improve
economic efficiency and help on the deficit-reduction front at the same time.
However, if tax reform is packaged together with social security reform to alleviate the
increased burden on them, it may make such tax reform politically feasible. It is possible
to alleviate the burden for the poor through the social security system and through the
personal income tax system.
If policymakers decide for the statutory corporate tax rate to be well below the
top individual (personal) tax rate, they should also establish safeguards to prevent highincome individuals from sheltering their income in corporations in order to pay taxes at
a lower rate.
ALTAX,

October 2015