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The government should treat the income from self-employment in the same way as the income from employment, in order to avoid tax evasion in self-employment, which according to the latest calculations of the World Bank in Albania is at high levels.
For example, an employee who earns ALL 14 million annual income (net) (ALL 1,116,666 per month) can reduce the effective income tax rate from 21.4 percent to 0 percent by reorganizing as self-employed and declaring a turnover below VAT threshold (ALL 10 million) and a monthly salary equal to the minimum wage.
In a recent diagnosis of economic developments in Albania, the World Bank expertise noted that the self-employed in Albania, including farmers were about 375 thousand people, but 98.7 percent of them have paid zero tax on wages in 2019.
According to the Bank’s analysis, this shows not only the prevalence of self-employment among low-income individuals, but also under-reporting. Self-employed employees are registered as entrepreneurs at the National Registration Center for tax purposes and are only responsible for income tax.
Self-employed contractors register with the National Registration Center as a ‘natural person’. Self-employed workers registered as natural persons operate mainly in professional services, such as accountants, architects, business consultants, computer programmers, dentists, engineers, medical professionals, etc.
According to the latest amendment to the Law on Income Tax, starting from January 1, 2021, every taxpayer with a business that generates turnover over ALL 14 million during the fiscal year was subject to a tax rate of 15 percent. For taxpayers with a turnover of less than ALL 14 million, the tax rate is 0 percent and the tax base is taxable profit.
The different tax system for employees and the self-employed has led many high-paid employees to register as self-employed.
Referring to tax data, the World Bank reported that in about 8000 self-employed individuals in Albania, more than 60 percent are lawyers, dentists and information technology.
Unlike other countries in the Western Balkans, Albanian law does not exhaustively include income from work from self-employment among the sources of income subject to progressive TAP.
Since income from work from independent activities is not covered by TAP, the self-employed can register as entrepreneurs and pay zero tax for any income below ALL 14 million instead of TAP.
The Bank estimated that more than ALL 1 billion in revenue could be generated by applying progressive TAP to self-employment income.
According to the Bank, this would increase the collection of general and average income, with some variations between occupations. Although self-employment is mainly prevalent among low-income and low-skilled workers, applying TAP progressively would not translate into an increased tax burden for any income below 30,000 lek (244 euros).
The World Bank suggests that TAP in Albania is designed to achieve vertical equity by taxing higher income levels with higher tariffs. But TAP could be made even more progressive by reviewing, introducing an intermediate tax group.
But introducing a higher tax rate for high-wage earners can increase income more than introducing an intermediate tax group.
The bank suggested the introduction of an intermediate tax group of 18 percent for revenues of 80 thousand ALL per month./Monitor/
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