The business is confused, simplify laws

October 23, 2015

The business is confused, simplify laws

The heavy burden caused by tax audits, unclear and ever-changing legislation, ineffective appealing system, low capacities of the administration, are some of the main complains from the business. Proposed recommendations…

An interview with Ms. Diana Leka, Head of Investment Council Secretariat

Simplify the laws, train the inspectors, fight informality and unregistered businesses, reward honest taxpayers. These are some of the recommendations that the Investment Council gives to the Albanian government, after carrying out a survey with businesses and holding meetings with main associations representing the entrepreneurs in the country. In this interview for Monitor, head of the Investment Council Secretariat, Ms. Diana Leka talks more on the findings of the assessment and on some of the proposed recommendations.

Summing up from the findings of the survey and from the discussions held with the associations, what are some of the main problems which concern the business?

First of all, I would like to say that some of the main problems for the business in Albania, as highlighted in international reports and from the business associations are:

  • Informality in the Albanian economy.
  • The functioning of the rule of law where we could include legislation (inaccuracies since the drafting process, improper execution, frequent amendments), bureaucratic procedures of the administration including recruiting, logistic and professional/human capacities. A special attention has taken the need for a contemporary bankruptcy law and the enforcement of contracts.
  • Corruption, which often comes as a consequence of the two above factors.

Regarding the tax inspection, more specifically, where we focused and worked in the last three months, we could mention briefly:
So, while the business assesses positively investment on the online declaration of the Tax on Personal Income, new customs code, new VAT law, or payment of arrears, we have received some strong comments in terms of:

  • The big burden caused by the tax inspections, either from full inspections or from fiscal visits. In fact, this process “drains” human and financial resources, for both, the business and the tax administration. For example, from the assessment it resulted that the big companies, a good part of them, have undergone a full inspection in the past three years (2013-2015) with a mean duration of the inspection from one week to one month, while the small business, from its very nature, is more subject of on-sight inspections.
  • Businesses are not clear why they are being audited. They are concerned because the audits, according to them, are performed without a reason, as a premeditated campaign to put penalties to the business. Clear comments have arrived from the business as well as from the discussions with associations regarding this issue and especially regarding penalties. Moreover, specific inspection procedures are being requested to specific sectors such as for example in the service sector (bars and restaurants as well as big telecommunication and banking companies).
  • Unclarity of the tax legislation and tax procedures. Different interpretations of the legislation, frequent amendments to the legislation have been highlighted as a concern from the business for example Law for Tax Procedures has been amended 12 times (2008-2015) including the latest amendment done in October 2015, as well as limited preliminary consultations and non-inclusiveness of the stakeholders, in particular of the business. According to Doing Business Report of the World Bank, in average, a company makes 34 payments, spends 357 hours a year for documents preparation/tax payment. Furthermore, tax legislation interpretations and explanations from the tax administration remain a concern from the business, clearly highlighted from the big business and service sector. There is no unification practice for similar cases treated by the Tax Administration and the Courts in order to guide the tax inspectors as well as the business.
  • The capacities of tax administration remain low according to the businesses responding to the survey. According to them, the tax administration is not specialized per sector specifics and the logistic support of the tax administration is not at the desired level.
  • Ineffective Tax Appeal Process. There is a high level of dissatisfaction on the tax appeal procedure, doubts on the independence of the institution and its capacities in treating the high volume of complains accompanied by a high level of disbelief on the process where according to statistics only 4% of the issues being treated come down in favour of the taxpayer.
  • Information and awareness of the business and the role of the Taxpayers’ Advocate are issues that need to be addressed. In particular, the small business lacks substantial information on legal and procedural amendments. The business demands to be considered as a partner and have more communication and transparency from the administration’s side. The role of the Taxpayers’ Advocate is considered limited and therefore a higher presence is demanded.

What are your recommendations to address these issues and how are you going to monitor them?

The Investment Council Secretariat, after a thorough analysis in several dimensions, it addressed to the Investment Council a list of recommendations, tacking the concerns raised above, which may affect both legal and administrative amendments. The recommendations, after being subject of prior discussion with experts in the area, have been approved by the Investment Council and will be submitted to the Minister of Finance and a copy to the Prime Minister’s cabinet. Meanwhile, we will continue our efforts to ensure the inclusion of the recommendations in the legal and tax institutional framework. More specifically, I am mentioning some of the main recommendations:

  • To consider in the mid-term the selection of the inspections on risk-based model from the electronic system, for all the types of taxes up to 90% of cases. Currently, the selection on risk-based model has been approved only for the reimbursement of VAT. According to the Regulation of the GTD, the ratio is 60% from the system and 40% from the inspectors, but there is still room for subjectivism and abuse with the predefined criteria in the selection. It should be made the detailing of the basic criteria and publication according to the taxpayers’ and industry profile; of course, we are not talking about the formula or the relevant algorithm of the system. In the relevant legal framework like the Tax Procedures Law and by-laws there should be a clear description of the inspection based on the risk model and risk criteria.
  • To clearly define a timeline of 10 calendar days for the notification sent to the taxpayers prior to the inspection, except to on-sight inspections, in the Tax Procedures Law, section X.
  • Enlarge the role of the Taxpayers’ Advocate in the Tax Inspection especially in the re-inspection and be reflected in the Tax Procedures Law. In the meantime, it has been suggested the restructuring of the Taxpayers’ Advocate Office to increase its independence in the area of collaboration and partnership with the taxpayers.
  • Specific recommendations on the facilitation of procedures in the Tax Appeal.
  • Capacity building of inspectors where appointments should be made upon the taxpayers profile and sectoral specifics. In the meantime, motivating packages should be offered to the inspectors based on criteria such as ethics, communication, professional skills and not only on the level of “penalties”. Of course, specialized trainings should continue in partnership also with professional associations, such as the association of certified accountants or auditing and consulting companies.
  • Capacity building in the legal analysis is necessary for the tax administration and herewith it has been requested with persistence the unification of practices and the development of the Annual Commentary of the Issues Treated by the GTD.
  • Increase the transparency of the Tax Administration where it has been suggested organization of public consultations and the development of an annual communication programme with the businesses on sectoral bases for problems on the tax procedures legislation.
  • Publication of annual reports of the GTD and TAD. Decisions of TAD should be published systematically.
  • Simple manuals and information sessions for SMEs.

To sum up, using a comment received in the Survey: “Simplify the laws, train inspectors, fight informality and unregistered businesses, reward honest taxpayers.”

One of the striking results from the survey is the low confidence that businesses have in the Tax Appeal. What are your recommendations in this regard?

The Secretariat of the Investment Council, in order to create a complete picture on the existing problem with the tax inspection procedures, conducted electronically, a completely anonymous survey. In close collaboration with various business associations, this Survey was distributed to a large number of companies. Despite the short time available, we are very satisfied that a considerate number of businesses of nearly 120, appreciated it and took the time completing it in time during the period 24 August – 14 September 2015. Indeed, a large number of responses and comments from the business where regarding the problematic implementation of Tax Inspection procedures. From the analysis of the comments and responses performed by the Secretariat, it came evident the lack of trust of the business in the tax inspection procedures especially also to the manner that the whole Tax Appeal works in general. I think it is of interest to share with you that the business considers the decisions of the Tax Appeal Directorate as formal, almost always in favour of the tax administration, not based on argument etc. In addition, it has been strongly emphasized the lack of independency of the Tax Appeal Directorate from General Tax Directorate, which makes businesses disbelief the independence of this structure. It also remains a concern for the business paying in advance 100% of the liability, subject for the appeal process, considered as discouraging and disproportional.
Regarding this issue, the Secretariat submitted to the Investment Council in its meeting held on 5th October 2015 some practical recommendations for improvement, mainly to the Law No. 9920 “For the Tax Procedures” consisting in: easing the barriers to the business in initiating the Appeal proceeding, i.e. business should not be obligated to pay in advance the whole liability amount, subject for the appeal process, but pay in advance only part of it. The Secretariat has proposed to be paid in advance only 50% of the amount – however more than the concrete amount, which is part of a technical debate, to the businesses it should be given the signal that the access to the appeal proceedings is an effective opportunity for them to protect their own interests and not an opportunity for the tax administration to fulfill their revenue plan. The Tax Appeal Directorate should give clear interpretations and have a more active role in treating uniformly same or similar cases, as well as reflect the provisions of the final judicial decisions when considering cases dealing with the same problem. Of course, this requires the capacity building of the professionals in the Tax Appeal Directorate in the legal field and not only, as well as a coherent approach in treating business problems without the impact of the tax administration. In this framework, it is recommended to review from the structural point-of-view the positioning of the Tax Appeal Directorate as an independent structure and not as a close section of the tax administration structure. Meanwhile, the government should also consider the need to provide public funds to the tax administration, because more should be done in this regard.

These are also part of the recommendations and demands arrived from the business in the comments section of the Survey.

Foreign investors have presented a much lower assessment of the tax inspectors’ capacities compared to the local business. How do you explain this?

The tax administration in general, and the tax inspectors in particular have been constantly in the center of continuous critics from the business. The business has raised concerns regarding the quality of the tax inspections carried out by the inspectors, noting that they are made deliberately and without legal basis, while the inspectors are considered unprofessional, tendentious, in some cases corrupted and without ethics. This was found not only in the Survey responses, but also in various reports from international institutions reviewed by the Secretariat. In fact, from the Survey it was observed that the foreign entrepreneurs assessed more negatively the professional capacities, ethics in communication and the logistic level of the tax inspectors. I think that this comes also from the comparisons of standards that the foreign entrepreneurs find in Albania with those in their own countries.

Investment Council is a new platform. What are the next planned steps and in what direction?

Actually, we were established as a platform in March 2015 with the support of the EBRD. The model that we must bring, requires a lot of professionalism and high standards either in analyzing the problems in the business climate, or in providing acceptable options from the stakeholders. Therefore I think that there is a lot of work to be done, and we are currently working strongly in some main pillars, which will be submitted to the Investment Council in its meeting scheduled in December 2015. Some of the items being considered are inspection, energy, informality in agriculture, problems in property rights etc.

Published on Monitor Magazine, 19 October 2015.

Investment Council is supported by the Ministry of Finance and Economy, the EBRD and the Swiss State Secretariat for Economic Affairs (SECO)