A. Fiscal Context

1. Tax and social contribution revenues are buoyant, reflecting strong economic growth. Albania’s economy has rebounded from a low-point in 2013 and GDP growth is expected to exceed 4 percent in 2018. Table 1 shows that tax and social contribution revenues have grown steadily in recent years. Revenue buoyancy has continued into 2018 – for the period January to September revenues from taxes and customs were up 3.8 percent year-on-year.¹ The GDT collected around 54 percent of all tax revenues (including social contributions) in 2017; most of the remaining taxes were collected by Customs at the border.

Table 1.

Overall Tax and Social Contribution Revenues, 2015–17

(Revenue amounts in ALL billions)

Source: MOFE and IMF staff calculations and estimates.

^*VAT revenues are overstated as they do not reflect VAT refund arrears, which amounted to ALL11.7 billion at end-2017.

Table 1.

Overall Tax and Social Contribution Revenues, 2015–17

(Revenue amounts in ALL billions)

Tax Type	2015		2016		2017
	Revenue	GDP %	Revenue	GDP %	Revenue	GDP %
Personal income tax	29.7	2.1	31.4	2.1	32.1	2.1
Social contributions	71.7	5.0	79.2	5.4	86.8	5.6
Profit tax	24.2	1.7	28.5	1.9	31.6	2.0
VAT	124.8	8.7	128.1	8.7	139.5*	9.0
Excises	39.0	2.7	41.9	2.8	45.1	2.9
Customs duties	5.8	0.4	6.1	0.4	6.5	0.4
Other taxes	33.7	2.4	35.8	2.4	38.5	2.5
Local govt. revenue2	11.7	0.8	15.0	1.0	18.4	1.2
Total	340.6	23.8	366.0	24.7	399.0	26.0

Source: MOFE and IMF staff calculations and estimates.

^*VAT revenues are overstated as they do not reflect VAT refund arrears, which amounted to ALL11.7 billion at end-2017.

View Table

Table 1.

Overall Tax and Social Contribution Revenues, 2015–17

(Revenue amounts in ALL billions)

Tax Type	2015		2016		2017
	Revenue	GDP %	Revenue	GDP %	Revenue	GDP %
Personal income tax	29.7	2.1	31.4	2.1	32.1	2.1
Social contributions	71.7	5.0	79.2	5.4	86.8	5.6
Profit tax	24.2	1.7	28.5	1.9	31.6	2.0
VAT	124.8	8.7	128.1	8.7	139.5*	9.0
Excises	39.0	2.7	41.9	2.8	45.1	2.9
Customs duties	5.8	0.4	6.1	0.4	6.5	0.4
Other taxes	33.7	2.4	35.8	2.4	38.5	2.5
Local govt. revenue2	11.7	0.8	15.0	1.0	18.4	1.2
Total	340.6	23.8	366.0	24.7	399.0	26.0

Source: MOFE and IMF staff calculations and estimates.

^*VAT revenues are overstated as they do not reflect VAT refund arrears, which amounted to ALL11.7 billion at end-2017.

2. Despite the increases, revenues have persistently fallen short of budget forecasts—putting pressure on the GDT, particularly on deferring payment of VAT refunds. On average over the last 10 years, tax revenues underperformed relative to plan by close to 1.5 percent of GDP. Collection shortfalls against budget have continued into recent years and have been attributed in the main to unrealistic forecasting. ³ Table 2 shows the collection-versus-plan comparison for 2017 for each of the revenue sources collected by GDT. The biggest shortfalls were in VAT, PIT and Circulation and Fuel Taxes. VAT refunds were 16 percent less than forecast for 2017 and there were special arrangements for deferring VAT refunds for some large infrastructure projects. Issues relating to VAT refunds are dealt with separately in Section IX.

Table 2.

General Directorate of Taxes—Collected Revenue 2017— Collection vs. Budget Forecast

(Revenue amounts in ALL billions)

Source: GDT Annual Report 2017 (Table 1, Pages 11/12).

Table 2.

General Directorate of Taxes—Collected Revenue 2017— Collection vs. Budget Forecast

(Revenue amounts in ALL billions)

Revenue Source	Net Collected 2017	Budgeted 2017	Percent Difference
PIT	32.1	36.2	- 11.2
Social security contributions	82.8	80.1	+ 3.46
VAT gross	48.9	55.3	- 11.49
VAT refunds	(13.9)	(16.6)	(-16.44)
VAT net	35.0	38.7	- 9.36
Profit Tax	31.6	29.2	+ 8.22
National Taxes	12.4	13.3	- 6.63
Circulation and Fuel Taxes	15.2	19.3	- 21.47
Gambling Taxes	5.3	5.0	+ 7.00
Administrative fines	0.2	0.0
Total	214.7	221.7	- 3.17

Source: GDT Annual Report 2017 (Table 1, Pages 11/12).

View Table

Table 2.

General Directorate of Taxes—Collected Revenue 2017— Collection vs. Budget Forecast

(Revenue amounts in ALL billions)

Revenue Source	Net Collected 2017	Budgeted 2017	Percent Difference
PIT	32.1	36.2	- 11.2
Social security contributions	82.8	80.1	+ 3.46
VAT gross	48.9	55.3	- 11.49
VAT refunds	(13.9)	(16.6)	(-16.44)
VAT net	35.0	38.7	- 9.36
Profit Tax	31.6	29.2	+ 8.22
National Taxes	12.4	13.3	- 6.63
Circulation and Fuel Taxes	15.2	19.3	- 21.47
Gambling Taxes	5.3	5.0	+ 7.00
Administrative fines	0.2	0.0
Total	214.7	221.7	- 3.17

Source: GDT Annual Report 2017 (Table 1, Pages 11/12).

3. Recent tax policy reforms have narrowed the tax base and complicated tax administration. Tax policy in recent years has focused on tax cuts and sector-specific incentives (e.g. a low VAT rate for accommodation and special concessions for 4/5-star hotels and pharmaceutical manufacturers). This trend has continued in the June 2018 and the (recently announced) 2019 fiscal packages. The CIT rate has been cut from 15 to 5 percent for some 11,000 businesses. On the other hand, a VAT threshold reduction brought some 13,000 micro-businesses into the VAT system from April 2018, with little revenue impact. Headline items for the proposed 2019 fiscal package include an almost halving of the dividend tax (from 15 to 8 percent), a widening of the employee PIT lower tax bracket, and further sector-specific VAT reductions. Some of these changes complicate an otherwise simple and well-structured tax regime and open tax avoidance opportunities—e.g., through shifting higher taxed income into dividends or CIT threshold manipulation.

B. Broad Overview of Reform Progress

4. The GDT continues to make good progress in modernizing its administration of the taxation system. A combination of the success of the implementation of the new IT system in 2015 and a reform-minded Director General (DG) with strong managerial skills, and an energic and committed management team, have created the momentum for real change across the organization. There is clear evidence of a leadership team focused on delivering the outcomes from their reform agenda, including implementing IMF recommendations (Appendix I). The reform program is underpinned by:

• A Strategic Plan for 2017—21 which was endorsed in December 2016;

• Annual operational plans which are aligned to the Strategic Plan;

• The outcomes from the 2016 TADAT⁴ performance assessment from which the identified weaknesses are being actively addressed (see progress report at Appendix 2).

5. Several key initiatives are supporting a cultural change across the GDT. The upgrading of accommodation is signalling a more professional approach by the workforce to tax administration. The increased use of online services (including the use of the e-Albania portal for tax payments and tax certificates) and the use of outbound electronic notices are facilitating a shift from face to face contact with taxpayers for more routine matters. Stronger and more productive relationships have been established with the MOFE and other government agencies including Customs, the National Business Center (NBC), the National Agency for Information Society (NAIS), and e-Albania. In addition, the senior leadership team has fostered an environment of driving and embracing change and directors are more engaged in management decision-making processes.

6. Evidence is emerging that reform initiatives for some core functions are achieving tangible results. The stock of collectable debt is continuing a downward trend resulting from the implementation of early intervention strategies and building on the outcomes from the recent arrears amnesty program (Section VI). Register accuracy has been improved through cooperative initiatives with the NBC and the Institute of Statistics (INSTAT). The GDT also adopted a highly organized and professional approach to the expansion of the VAT register following a reduction in the registration threshold, and in executing its compliance campaign for the tourism sector.

7. The GDT has implemented or actioned many of the recommendations made by the December 2017 IMF HQ mission⁵. Many of the 39 recommendations from that report have been implemented, substantially progressed or integrated into operational plans. It is evident that the leadership team highly value and are integrating IMF advice into their reform agenda. (see progress report at Appendix II).

8. There are still significant improvements that can be made to the GDT’s operations and structures to achieve a fully modernized administration. The GDT’s Strategic Plan sets out a good framework for taking the organization forward over the next three years, however the following priority areas, which are discussed in detail in this report, require specific attention:

• Strengthening core functions of the LTO.

• Taking a more strategic approach to compliance risk management, including expanding the GDT’s automatic access to third-party data.

• Consolidating regional office functions (starting with arrears collection) and fine-tuning organization structures.

• Increasing the competency of field auditors and improving the collection rate of audit assessments.

• Improving the integrity of the GDT’s administration of the tax system.

A. General Department of Taxation Governance

9. The GDT has a strong governance framework in place including a senior management committee structure. There are three permanent senior management committees: (1) the Reform Management Committee responsible for the strategic direction of the GDT and the supervision of the reform plan; (2) the Operations Management Committee responsible for managing the annual planning process and monitoring the GDT’s performance; and (3) the Compliance Management Committee responsible for the implementation of a CRM system that facilitates the design and execution of an integrated suite of risk mitigation strategies. All three committees are chaired by the DG and written mandates for each committee are in place.

10. Several other less formal “issues-based” working groups support the work of the peak management committees. Currently, there are three working groups focusing on strategic management, IT system management, and employee disciplinary measures.

11. A comprehensive reporting framework is used to monitor the operational performance of the GDT. There is an extensive suite of operational reports, generated by the tax administration information system, that is monitored by the Operations Management Committee and the senior leadership team.

12. Although written mandates are in place, in practice the focus of the Operations Management Committee overlaps with the Reform Management Committee mandate. The Reform Management Committee has only met once this calendar year. The role of monitoring implementation of the strategic plan continues to be undertaken by the Operations Management Committee.

13. The Reform Management Committee should have overall responsibility for implementing the key transformational reform initiatives. The reform committee should take responsibility for: (1) ensuring that plans are in place to take reform initiatives forward and adequate resources are mobilized (both people and financial); (2) monitoring progress on implementation; and (3) resolving impediments to progress (e.g., resources, law changes, liaison with other agencies). High level committees of this type would typically meet at least quarterly and more often when time-critical decisions and directions are required.

14. At the end of this year, the current Strategic Plan will have been in operation for two years and needs to be reviewed. Although it is a very comprehensive plan, it would benefit from a review to consider if existing strategies require updating or if additional reform initiatives should be included. For example, the GDT may wish to consider including in the sub-objectives of the strategic plan (1) a specific focus to strengthen community consultation on taxation administration (see Section V); (2) the GDT’s strategy to increase community’s trust and confidence in its administration of the taxation system (see Section II below); and (3) other reform recommendations from this report. A review of the existing key performance indicators and the value they add to monitoring operational performance would also assist in developing a more targeted suite of indicators.

B. General Department of Taxation Structures and Operations

15. The GDT has a strong function-based headquarters structure in place. It consists of three business streams: program design, delivery, and support. In the organizational structure each business stream is managed by a Deputy Director (however one of the Deputy Director positions is currently vacant—see below).

16. The organizational structure includes a network of 13 regional offices and an LTO. Some consolidation of functions has been achieved through the establishment of a centralized Call Center and a Payment Center. Following a recommendation made by the December 2017 HQ mission, some early work has been undertaken to assess the possibility of consolidating some arrears collection functions into fewer sites.

17. The allocation of resources and the number of regional offices and their structure are inefficient. Table 3 shows a major mismatch in the ratios of tax revenue to staff deployment across the regional network given current work load, need for specialization, and extensive use of automation. Significant effectiveness and efficiency gains can be achieved from further consolidation of certain core functions into fewer locations. Almost all advanced tax administrations have consolidated functions and tasks, particularly where there is little need for face-to-face contact with taxpayers and where functions benefit from specialization or economies of scale (e.g., arrears collection, including specialized enforced collection, i.e., bankruptcy and liquidation actions), audit functions (e.g., complex tax fraud), inbound and outbound call centers, and legal support. The experience of modern taxation administrations is that when certain functions are consolidated in one (or a few) locations, effectiveness, performance quality, and efficiency increase and there will be greater uniformity in processes and decision making.

Table 3.

Comparison of Field Resources and Collection

Sources: GDT Annual Report 2017 (collection); GDT Organization Charts provided (field staff distribution).

Table 3.

Comparison of Field Resources and Collection

Area of Work	LTO	Tirana	Durres	Fier	Other ROs	Total
Total Field Staff (Excl. Investigation Dep.)	114	257	105	92	474	1,042
Service	7	39	20	15	7	184
Collection	10	39	16	14	46	144
Audit	72	129	45	43	21	460
Analysis/ICT	7	17	7	7	177	89
Support	18	33	17	13	50	165
Tax Collected 2017 (ALL Billion)	88.5	83.2	12.6	7.2	30.0	228.6
Percent of collection	39	36	6	3	16	100
Percent of field staff	11	25	10	9	45	100

Sources: GDT Annual Report 2017 (collection); GDT Organization Charts provided (field staff distribution).

View Table

Table 3.

Comparison of Field Resources and Collection

Area of Work	LTO	Tirana	Durres	Fier	Other ROs	Total
Total Field Staff (Excl. Investigation Dep.)	114	257	105	92	474	1,042
Service	7	39	20	15	7	184
Collection	10	39	16	14	46	144
Audit	72	129	45	43	21	460
Analysis/ICT	7	17	7	7	177	89
Support	18	33	17	13	50	165
Tax Collected 2017 (ALL Billion)	88.5	83.2	12.6	7.2	30.0	228.6
Percent of collection	39	36	6	3	16	100
Percent of field staff	11	25	10	9	45	100

Sources: GDT Annual Report 2017 (collection); GDT Organization Charts provided (field staff distribution).

18. The GDT should actively pursue the initiative to consolidate the arrears collection function into three sites. The GDT now has a more methodical approach to managing tax arrears cases supported by a modern IT system and a comprehensive user manual for arrears collection staff. Consolidating this core function into three sites (e.g. South, Central, North) facilitates a more efficient use of skilled resources and greater capacity to channel resources to higher priority case work. This initiative is covered in more detail in Section VI. It would also be an ideal pilot project to gain experience in managing further consolidation of core functions (e.g. VAT refund checks) and support functions.

19. Immediate action should be taken to finalize the consolidation of the three Transfer Pricing Units in the LTO. Currently there are three small teams based in HQ, the Tirana Regional Office and the LTO. It would be more efficient to consolidate all transfer pricing staff into a single unit in the LTO. This initiative is covered in more detail in Section III.

20. Field inspection work, currently based in the Investigation Department should be separated from the unit that undertakes the complex tax fraud work. Currently there are approximately 180 field inspection staff based in three sites (South, Central, North) that largely perform “unannounced” spot checks. In the 2017 year, they made 52,702 checks.⁶ Further analysis is necessary to determine more appropriate organizational arrangements, considering the medium-term direction of consolidating offices and functions. In addition, the opportunity should be taken to determine if this work type represents an appropriate use of resources and the extent of the impact this work has on influencing future compliance behaviour.

21. The GDT needs greater autonomy to enable it to adjust its organization structure as required to respond to operational needs. It is essential that the GDT’s organization structure and personnel deployment match its business needs at any given time. Options to achieve greater autonomy in staff recruitment are being explored with the Department of Public Administration. However, the GDT must also have the authority to continuously adjust structures and resource allocation to match changes to risks and operational needs and align to more modern organizational arrangements without the need to seek Ministerial approval.

22. The GDT has many unfilled vacancies for managers and key employees. Currently there are approximately 200 vacancies including a Deputy Director position in headquarters. This vacant Deputy Director position has at least 17 direct reports (including the regional offices and the LTO) which are currently reporting directly to the DG. While other Deputies are assisting with this workload it is an unsustainable ongoing practice, as the DG must have a significant reform focus and not be distracted by daily line operational matters. Extended delays in filling this and other key positions will adversely affect operational performance and the pace of reform.

C. Information Technology Support

23. The GDT currently uses a “commercial off-the-shelf” (COTS) revenue administration system. The system was deployed over the 2014–2016 period with the IT provider continuing to support the system through a service level agreement (SLA). The supplier also provides development upgrades on an “as required” basis. The system provides a comprehensive suite of modules essential to the operation of a modern tax system.

24. The GDT’s current IT contract and SLA are due to expire in April 2019.The National Agency for Information Society (NAIS), a separate government agency, has taken over the responsibility for drafting the terms of reference and managing the procurement process for a replacement contract.

25. NAIS is proposing to procure, through a tender process, a fixed price SLA. This new contract is to provide for the maintenance of both software and hardware, software changes to accommodate legislative amendments and any development needs required by the GDT for the life of the agreement. The mission expressed concerns as to how potential bidders could sensibly arrive at a competitive tender price when the requirements (particularly around potential future development needs) are not specified. However, NAIS advised that this fixed price model for maintenance and development needs has been used successfully to meet IT requirements in other agencies and were confident it will meet the GDT’s IT requirements. The proposed contractual arrangements include a provision to locate IT contractors “in-house” at the GDT. In addition, the GDT should have the mandate to identify and prioritize future development needs.

26. A modern and agile IT system is a critical component for a revenue administration in ensuring the flow of revenue to Government. Any significant interruption to this revenue flow can result in serious consequences. Most tax administrations have some dependency on external contractors to support their IT operations. However, this requires professional management of the contract and the SLA.

27. NAIS is also managing the procurement of a replacement fiscal cash register system for the GDT. This system will require businesses that make sales to consumers to provide sales data in real time to the GDT so that an official coupon number can be sent back to the business for printing on the consumer’s receipt (coupon). This system will eventually be expanded to include all business to business sales (e-invoice), which will include risk analysis and data warehouse functionality. If managed effectively, it will be a valuable source of information for the GDT’s compliance risk management teams. It is essential that the design and implementation of this system recognizes that there is enormous potential to deliver both strategic and operational outcomes if it is integrated with GDT’s broader compliance management processes with essential interfaces to the GDT’s central revenue administration system.

D. Community Trust and Confidence

28. The GDT needs to develop a strategy to deal systemically with integrity related issues and be more transparent around its anti-corruption activities. During the past year, several instances of corruption by GDT staff have featured in the media. Corrupt behaviour by staff undermines the efforts of the GDT in gaining the trust and confidence of the community in its management of the taxation system―a critical influence on the level of voluntary compliance. The GDT has an Internal Affairs Department (comprising the Director and eight inspectors). There is a telephone line where taxpayers can report potentially corrupt behaviour, and a structured disciplinary process where more serious cases are submitted to a disciplinary committee. The GDT would benefit from taking a more a strategic approach to assessing, quantifying and developing risk mitigation responses, which focus on prevention and detection. It should also publish more information about its anti-corruption activities, including aggregated data.⁷

E. Recommendations

• Schedule more regular meetings of the Reform Management Committee to drive the reform agenda and undertake a review of the strategic plan.

• Appoint a third Deputy Director into the vacant role as soon as possible and accelerate the filling of other vacancies across the organization.

• Amend the legal framework to give the GDT greater authority to adjust organizational structures and to deploy resources.

• Establish a strong governance process for the management of the new IT contract at the senior level in the GDT.

• Develop an overarching strategy to build a strong integrity culture across the workforce and address corruption risks.

A. Introduction and Recent Developments

29. Strengthening the compliance management of large taxpayers is an important strategy to increase revenue collection. Typically, tax administrations put in place a range of strategies to secure and protect revenues from this critical taxpayer segment, which in many countries contributes more than 50 percent of tax revenues. Consistent with international practice the GDT has put in place specific organizational and management arrangements to deal with its large taxpayer segment.

30. The GDT has recognized the need to strengthen the operations of the LTO. It is improving risk identification processes and aims to develop much stronger audit capacity and expertise. The mission was assisted by Mr. Keith Cartwright (FAD external expert) who was working with the LTO during the mission to provide more practical guidance on the risk differentiation framework. Key issues identified by Mr. Cartwright have been incorporated in this report.

31. Technical assistance has been provided over the last 12 months to assist the LTO in applying the risk differentiation framework (RDF).⁸ The assistance has included workshops to explain the features of the RDF and the benefits from adopting tailored compliance interventions based on the level of risk. An initial selection of 20 taxpayers representing the highest risk was used to build experience with the RDF. Additional assistance has been provided to give more practical exposure to the RDF concepts and to develop concrete steps to adopt the RDF for the large taxpayer population.

32. The GDT expressed concern on the extent of tax declaration under-reporting in key industries. Tax revenues in trade, construction and fuel industries have reduced, however, at this stage full analysis work has not been undertaken to assess the reasons for this change.

B. Areas Needing Improvement

C. Recommendations

• Revise the large taxpayer criteria to ensure that all of the largest taxpayers are managed by the LTO.

• Establish a risk management unit in the LTO to support implementation of the risk differentiation framework, including tax revenue analysis and taxpayer profiling.

• Review the range of tasks undertaken by LTO Desk Audit and determine more appropriate organization arrangements for non-audit work.

• Finalize the arrangements to consolidate the three existing transfer pricing teams into a single unit within the LTO.

A. Recent Developments

50. The GDT has made some progress in implementing the CRM approach. The appointment of a Director for the RMD and the filling of several long-term vacancies in that department have resulted in IMF advice finding more traction over the past year. This has resulted in some commendable efforts focusing on the compilation of a basic risk register, taking a more structured review of the risk rules, encouraging research from a local university into taxpayer attitudes towards compliance, improving the results from risk-based audits and increasing the ability to assign relative risk scores to different sectors.

51. The structured process applied in the tourism campaign has yielded encouraging results. The use of a phased approach using a variety of channels and tools, including sending targeted letters to selected taxpayers, broadly follows IMF advice given in 2016 and 2017. Highlights of the impact of the tourism compliance campaign are included in Box 2.

B. Areas Needing Improvement

C. Recommendations

• Broaden the access to and use of third-party data, including automatic reporting of bank data―and procure a data-warehouse and analytical tools.

• Develop a data management strategy that optimizes the use of data from all sources, including data from the e-fiscalization system.

• Review the current RMD organizational structure, including the division of work between organizational units, to support changes to business processes and the introduction of data warehouse and analytical tools capability.

• Enhance the CRM work program to progress the development of a multiyear compliance improvement plan.

A. Tax Register Accuracy

57. Good progress has been made during the past year to improve register accuracy and to streamline interactions with NBC. The main advances were the validation and updating of economic activity (NACE¹⁴) codes for all Albanian businesses, in cooperation with INSTAT, and a new protocol with the NBC, which expanded the scope of cooperation and information exchange between the two agencies. A summary of the main developments is in Box 3.

58. Notwithstanding these improvements, constraints on the GDT’s legal authority to make register changes are still problematic. While progress has been made on updating NACE codes on the register—where these are found by the GDT to be incorrect—no other substantive change to the NBC register can be made without the explicit request of the taxpayer. However, the reality is that taxpayers cannot be relied upon to notify register changes to the NBC (e.g., changes to a secondary business address). While there are penalties for non-notification, it appears that sanctions for non-compliance are generally not enforced by the NBC.¹⁵ The GDT should have authority to update the register where there is clear evidence from field inspector reports that register data is inaccurate.

59. The accuracy of the taxpayer register should be tested (in cooperation with the NBC), including the accuracy of the passive register. The impact of the new cooperation and information exchange arrangements with the NBC needs to be tested to provide assurance that the new arrangements are having the desired effect of improving register accuracy. It is particularly important to test the accuracy of the passive register. A case is automatically flagged as passive if no declaration is filed for 12 consecutive months. While the list of passive cases is published on the website—and there are significant consequences for trading by or with a passive taxpayer—some cases flagged on the system as passive are likely to be still carrying on an economic activity.

B. Recent Expansion of the Value-Added Tax Register

60. The GDT faced a major challenge in 2018 in managing a big expansion of the VAT register following a reduction in the registration threshold. A large reduction in the annual turnover threshold for VAT registration―from ALL 5 million to ALL 2 million—brought some 13,000 small businesses into the VAT system for the first time in April 2018. This represented an increase of almost one-third in the VAT register.

61. GDT approached this challenge in a highly organized and professional manner. Starting in 2017, the GDT developed a clear strategy for targeting communication to this group of taxpayers and developing a simplified declaration for reporting on a quarterly basis. A highly coordinated campaign included meetings with accountants and business associations, dedicated small business “windows” in regional offices, media (including social media) awareness, and an ongoing taxpayer assistance program.¹⁶

62. GDT’s efforts resulted in a smooth transition into the VAT system for this group of small businesses, with high filing compliance rates. Of the 13,000 or so small businesses coming into the VAT register for the first time in April 2018, 96 percent have filed their VAT declarations on time, without penalty.

63. This expansion of the VAT register will have an ongoing negative impact on the GDT’s workload—and compliance costs for small businesses—without significant revenue yield. GDT is to be commended on successfully transitioning 13,000 micro-businesses into the VAT system in 2018. Managing this cohort of taxpayers on an ongoing basis places an added burden on the GDT with little return in terms of revenue yield. It also puts additional costs on smaller businesses and is unlikely to have any material impact on reducing the tax gap.

C. Taxpayer Services

64. The GDT is committed to taxpayer service as a key element of CRM, but there is a need for an overarching strategy and better governance in this area. The GDT has made significant advances in improving taxpayer services, most notably in moving to predominantly “paperless” interaction with taxpayers, including the recent expansion of e-payment facilities and electronic tax certificates through the e-Albania portal¹⁷ and the development of initiatives such as live chat facilities in the call center. The GDT also scores highly on “mystery shopper” surveys of the quality of services provided by public service agencies in Albania.¹⁸ While these advances are commendable, there needs to be an overarching vision of the future of taxpayer services (including a strategy on contact channels and how services can support compliance risk management with tailored products). There is also a need for clearer governance arrangements in this area to ensure coordinated action to achieve that vision. At present, the overall taxpayer service strategy appears to be governed by the Reform Management Committee, which meets only infrequently.

65. There should be more regular and structured interaction with users of GDT services (including key intermediaries) to improve product and process design. Modern tax administrations have recognized the benefits of regular engagement with service users to better design and simplify products and processes; such engagement also fosters greater trust in the tax administration.¹⁹ While developments such as the simplified VAT declaration for small business are a step in the right direction, the GDT needs to do much more in this area—to better understand compliance difficulties and frustrations from the taxpayer’s perspective, leading in turn to better process design (Albania still compares unfavorably with neighbors Former Yugoslav Republic of Macedonia and Kosovo in terms of taxpayer time needed to comply with tax obligations).²⁰ Also, in recognition of the key role played by tax intermediaries, the GDT should consider establishing a regular liaison forum with representatives of accountancy and other professional bodies dealing with taxation matters to engage on how to improve and simplify tax administration.²¹

66. The range and depth of published technical interpretive guidance is limited and needs to be expanded. While there is good range of guidance material on the GDT website on general tax obligations, guidance on more complex technical issues is limited. Since 2017, the GDT publishes on its website a twice-yearly bulletin outlining technical decisions made on its own initiative and those made in response to requests from taxpayers. A similar bulletin is published giving the outcome of judicial decisions on tax appeals. These are welcome developments (which were mandated by a 2016 law change) and help to ensure that all taxpayers are aware of GDT interpretations and court decisions. However, a wider and deeper range of published technical interpretation guidance material would be expected having regard to the level of complex technical issues likely to arise (e.g., on the major changes to the VAT code following realignment with the EU VAT Directive). The scarcity of such published technical guidance was highlighted at a meeting between the mission and accountancy body representatives. As well as expanding the range of technical guidance, the website could be redesigned to make it easier to search for these interpretations.

D. Recommendations

• Propose a legislative change that allows the GDT to update the register where there is clear evidence from field reports that register data is inaccurate.

• Develop a program to test the accuracy of the taxpayer register, in cooperation with the NBC, including the accuracy of the passive register.

• Develop a taxpayer service strategy and put in place clear governance arrangements to steer its coordinated implementation.

• Engage and involve taxpayers and tax intermediaries in tax products and process design with a view to simplifying compliance and reducing costs.

• Expand the range of published technical interpretive guidance.

A. Background and Recent Developments

67. The GDT has embarked on a range of initiatives to strengthen the tax arrears collection function. The 2016 TADAT assessment highlighted that the stock of arrears was high and trending upwards and comprised a significant proportion of aged debt. Since then, the improvement agenda pursued by the GDT includes strengthening the legislative framework, improving business processes, enhancing data analysis and more focused management of the arrears collection function.

68. The stock of tax arrears has trended downwards since 2016. The total tax arrears were ALL 107.3 billion at 31 October 2018 compared to ALL 111.5 billion at end of October 2017(see Table 4). Of the total stock of arrears ALL15.5 billion is subject to dispute. A large percentage of debt (approximately 56 percent) is overdue by more than 2 years. The reduction in debt can be attributed to: (1) the write off strategy for 2010 and earlier debt (write-off amnesty); (2) the waiver of penalties and interest for 2010–14 debt (provided the primary tax was paid); (3) the use of the call center as an early intervention strategy; and (4) stronger management of the arrears collection function.

Table 4.

Tax Debt, 2015–18

(Amounts are in ALL millions)

Source: GDT.The figures include overdue interest and fines except for 2015.

^*Stock of debt was ALL 95.505 billion at end 2017.

^#Includes ALL 15.5 billion in disputed debt.

Table 4.

Tax Debt, 2015–18

(Amounts are in ALL millions)

Debt type	2015	2016	2017 (Oct)	2018 (Oct)
Total stock of tax debt (GDT)	100,373	147,068	111,509*	107,286#
Age of tax debt
• Total debt (less than one-year overdue)	31,717	35,020	22,671	30,625
• Total aged debt (more than one-year overdue)	68,656	112,048	97,383	76,679

Source: GDT.The figures include overdue interest and fines except for 2015.

^*Stock of debt was ALL 95.505 billion at end 2017.

^#Includes ALL 15.5 billion in disputed debt.

View Table

Table 4.

Tax Debt, 2015–18

(Amounts are in ALL millions)

Debt type	2015	2016	2017 (Oct)	2018 (Oct)
Total stock of tax debt (GDT)	100,373	147,068	111,509*	107,286#
Age of tax debt
• Total debt (less than one-year overdue)	31,717	35,020	22,671	30,625
• Total aged debt (more than one-year overdue)	68,656	112,048	97,383	76,679

Source: GDT.The figures include overdue interest and fines except for 2015.

^*Stock of debt was ALL 95.505 billion at end 2017.

^#Includes ALL 15.5 billion in disputed debt.

69. Several reform initiatives to improve the arrears collection function are progressing, including:

• Legislative changes have been endorsed by the MOFE and are expected to be approved as part of the 2019 proposed fiscal package. The changes include: (1) enabling instalment agreements for VAT, PIT, social and health contributions; (2) eliminating the requirements for paper notifications as well as electronic communication with taxpayers and banks; (3) provision to write off uncollectable debts; and (4) allowing excess VAT credits to be offset against other tax types.

• An instalment management functionality has been incorporated in the IT system in November 2018; and training of staff is now underway.

• A strategy is being implemented to follow up taxpayers who failed to take the opportunity provided by the amnesty law to clean up outstanding arrears. The strategy includes writing to taxpayers, contact by the Call Center, and tax investigation.

• Improved operational processes have been adopted including the development of an arrears collection manual in March 2018.

• Training of regional office staff in collection procedures and improved analysis of the debt inventory to better inform the setting of arrears collection priorities.

B. Areas Needing Improvement

Writing-off Uncollectable Tax Arrears

70. A significant proportion of tax arrears are not collectable.²² As shown in Table 5, 56 percent of the tax arrears relates to inactive taxpayers.

Table 5.

Active and Inactive Taxpayers with Arrears––end-October 2018

Table 5.

Active and Inactive Taxpayers with Arrears––end-October 2018

Activity status	Number of taxpayers	Tax arrears ALL Billions	Percent of total arrears
Active	51,278	47.5	44
Inactive	85,985	59.8	56
Total	137,263	107.3	100

View Table

Table 5.

Active and Inactive Taxpayers with Arrears––end-October 2018

Activity status	Number of taxpayers	Tax arrears ALL Billions	Percent of total arrears
Active	51,278	47.5	44
Inactive	85,985	59.8	56
Total	137,263	107.3	100

71. A write-off strategy is needed. The draft legislative changes include new provisions to write off tax arrears declared uncollectable. Taking steps to write-off uncollectable arrears will give the GDT a much clearer picture of its collectable arrears. Good international practice is for write-off to be an ongoing action once all reasonable steps to collect the arrears are taken. Key features of a write-off regime are set out in Appendix III.

C. Recommendations

• Develop a strategy to write-off uncollectable tax arrears.

• Appoint the project manager of the consolidated tax arrears pilot and progress the work to develop the detailed design.

A. Current Situation and Issues

80. There are some positive developments in the audit function; however, further capacity building is necessary. A new comprehensive desk audit manual has been developed, which will help to standardize operations and provide more appropriate case allocation based on auditor experience and skills. More attention is now paid to whether audit selections are producing material audit results in terms of additional tax assessed. Except for desk audits in the RTO’s, all audits have shown an improvement in strike rates,²⁵and the average value of audit assessments has increased across most categories (see Table 6). However, the continued focus on building audit capability should remain a priority.

Table 6.

Audit Performance for Regional Offices, 2017–18

(Amounts are in ALL millions)

Table 6.

Audit Performance for Regional Offices, 2017–18

(Amounts are in ALL millions)

	2017					2018 (end-October)
Organizational Units and audit types	Total number of audits	Audits with results above ALL 50,000		Money value of assessments		Total number of audits	Audits with results above ALL 50,000		Money value of assessments
		No	%	Total	Average		No	%	Total	Average
Desk audit	14,265	2,996	21	5,423	0.38	7,864	1,337	17	2,253	0.29
VAT refund audit	534	278	52	326	0.61	586	369	63	959	1.64
Comprehensive audit	1,124	888	79	6,552	5.83	829	688	83	2,866	3.46
Single issue audit	750	383	51	640	0.85	655	354	54	1,009	1.54

View Table

Table 6.

Audit Performance for Regional Offices, 2017–18

(Amounts are in ALL millions)

	2017					2018 (end-October)
Organizational Units and audit types	Total number of audits	Audits with results above ALL 50,000		Money value of assessments		Total number of audits	Audits with results above ALL 50,000		Money value of assessments
		No	%	Total	Average		No	%	Total	Average
Desk audit	14,265	2,996	21	5,423	0.38	7,864	1,337	17	2,253	0.29
VAT refund audit	534	278	52	326	0.61	586	369	63	959	1.64
Comprehensive audit	1,124	888	79	6,552	5.83	829	688	83	2,866	3.46
Single issue audit	750	383	51	640	0.85	655	354	54	1,009	1.54

81. Only a very small percentage of audit assessments are collected. GDT managers estimate that only about 20 percent of audit assessments are paid. With the low payment rate for both audit assessments and penalties, the effective compliance impact of audit (in deterring taxpayers inclined to under-report tax liabilities) is diminished. More analysis is required to understand the reasons for the low collection rates to assist in developing appropriate responses.

82. Desk audit functions include a range of tasks of which many are not audit related.

These include following up on taxpayers who have not submitted returns, pursuing collection of new debts, helping taxpayers to make corrections to earlier returns, conducting “other validations” like verifying taxpayers’ financial statements, and responding to taxpayer queries. Information from one of the regional offices suggests that only about 35 percent of desk audit tasks are audit related. In 2018, desk audits resulted in an average yield per intervention of ALL 0.29 million.

83. Further analysis of the role and performance of desk audit is needed. This analysis should: (1) identify those tasks that should be eliminated, automated, or assigned to more appropriate areas, and (2) understand the factors contributing to the low revenue results.

B. Recommendations

• Undertake analysis to understand the reasons for the low collection rates on audit assessments and develop appropriate responses.

• Undertake analysis of the role and performance of desk audit function to improve audit outcomes and eliminate low value work.

A. Organizational Placement of the Appeals Function

84. Contrary to international good practice, first-level tax appeals are not reviewed within the GDT—this function was transferred to MOFE in 2017. International good practice places emphasis on resolving tax disputes at the earliest possible stage by an independent (i.e. separate from the audit function) reviewer within the tax administration. This allows for mistakes and over-aggressive assessments or penalty notices to be quickly rectified at the least cost to the taxpayer and immediately flags for the tax administration any deficiencies in interpretation guidance or operational procedures. Since 2017, the GDT no longer independently reviews taxpayer appeals; all such administrative reviews are now dealt with by either the Tax Appeals Directorate of MOFE or, where larger amounts are involved, by a Tax Appeals Review Committee, which is also under the MOFE.²⁶

85. The MOFE should not be involved in deciding tax outcomes for individual taxpayers. The transfer of the appeal function to the MOFE was apparently motivated by the desire to have a more “arm’s length” review of first-level tax appeals. However, involving the MOFE in deciding tax consequences for individual taxpayers is inappropriate. It not only undermines the operational independence of the GDT in interpreting tax law as applied to particular facts, it may also create a perception that the tax appeal process is not sufficiently insulated from political interference. A recent media article about a VAT refund appeal dismissed by one of the MOFE tax appeals bodies, which contained a suggestion of politically motivated reasons for dismissing the appeal, illustrates the perception of risks in this area.²⁷

86. The new arrangements have not increased the ratio of decisions in the taxpayer’s favor. The mission was advised that the percentage of taxpayer appeals upheld following the transfer to the MOFE is broadly in line with appeal decision outcomes when first-level administrative reviews were carried out in GDT prior to 2017.²⁸

87. There is insufficient transparency around the MOFE tax appeal decisions and activity. While the Tax Procedure Law allows for publication of anonymized administrative appeal outcomes,²⁹ only a small number of appeal decisions have appeared on the MOFE website. No regular anonymized appeal outcome or statistical reports are published on the activities of the Tax Appeals Directorate and the Tax Appeals Review Committee.

B. Procedural Fairness and Timeliness

88. There is a high level of appeal refusals (without review), reflecting strict preconditions for exercising appeal rights and rigid application of those conditions. During the period January–October 2018, one-quarter of all appeals dealt with by the Tax Appeals Directorate (and 40 percent of those completed by the Tax Appeals Review Committee) were refused without being considered further—because of an inability to meet the conditions for a valid appeal. These refusals mostly related to failure to pay the tax in dispute (or to provide a guarantee for that amount) or failure to lodge the appeal within the 30-day time limit, which is strictly adhered to.³⁰ As highlighted in previous reports, the absolute pre-condition for full upfront tax payment or guarantee is unduly harsh—there should be some possibility to allow the appeal to be admitted upon part-payment or deferral on genuine economic grounds. A recent law change proposal to exclude interest from the payment requirement is welcome but there is still too much rigidity in the tax payment pre-condition, which can result in procedural unfairness in some cases. Also, provision should be made for extension of the 30-day time limit where the failure to lodge the appeal on time is due to illness or other genuine reason outside of the taxpayer’s control.

89. The timeliness of first-level appeal resolution still falls well short of international good practice. As shown in Table 7, the percentage of administrative reviews completed within the 60-day statutory deadline has improved compared to 2015. However, while all cases are finalized within 90 days, the timeliness of review completions is still inadequate having regard to the TADAT standard.³¹ Given that only 30 percent of appeals relate to tax audit assessments, there may be possibilities to streamline processes in the Tax Appeals Directorate for finalizing the remainder, which mainly involve low-value penalty appeals.

Table 7.

Comparison on Time Taken to Finalize Administrative Reviews

(In percent of total cases finalized)

Source: GDT.

Table 7.

Comparison on Time Taken to Finalize Administrative Reviews

(In percent of total cases finalized)

Period	Within 30 days	Within 60 days	Within 90 days
2015	4	31	65
2018 (10 months)	5	54	41

Source: GDT.

View Table

Table 7.

Comparison on Time Taken to Finalize Administrative Reviews

(In percent of total cases finalized)

Period	Within 30 days	Within 60 days	Within 90 days
2015	4	31	65
2018 (10 months)	5	54	41

Source: GDT.

C. Recommendations

• Transfer the MOFE’s taxpayer appeal function back to the GDT.

• Improve transparency by publishing anonymized summaries of administrative appeal outcomes, statistics relating to appeals and outcomes.

• Improve procedural fairness by allowing, for genuine cases in exceptional circumstances, some flexibility to the tax payment/guarantee and appeal time limit pre-conditions.

• Reduce the time taken to finalize appeals and review procedures for dealing with low-value penalty appeals.

A. Current Situation and Issues

90. The authorities are far behind with payment of legitimate VAT refunds due to taxpayers. This is not a new situation; numerous IMF missions since December 2000 have commented on this reoccurring problem and have provided mitigation advice. However, reimbursement delays are no longer due to tax administration technical difficulties—they relate to overoptimistic forecasting of Government revenues. Throughout the years, when revenue falls short of forecasts, budget gaps have been fully or partially financed through “loans” from taxpayers by delaying the payments of their legitimate VAT refunds. Table 8 shows that at end-October 2018, VAT refund arrears constituted ALL 14.4 billion. This is an ALL 3.1 billion increase from end-September 2018.

91. The integrity and credibility of the VAT system requires that legitimate VAT credits due be quickly refunded. There is recognition that just as the tax authorities require the taxpayer to pay the right tax at the right time, so do the tax authorities have a corresponding obligation not to retain refunds to which the taxpayer is legally entitled. The GDT’s inability to honor its payment responsibilities towards its taxpayer population—because of revenue forecasting deficiencies—may have an adverse impact on taxpayers’ trust in the administration of the tax system and can influence non-compliance behavior. Box 6 outlines key good practices in VAT refund management.

Table 8.

Value-Added Tax Refund Situation at End-October 2018

(Amounts in ALL 000)

Source: Authorities and IMF staff calculations.

Table 8.

Value-Added Tax Refund Situation at End-October 2018

(Amounts in ALL 000)

Businesses	Stock of VAT refund claims in payment arrears			Stock of VAT refund claims not in payment arrears
	Number of cases	Number of taxpayers	Amount	Number of cases	Number of taxpayers	Amount
Pipeline	4	1	7,389,980	1	1	1,067,080
Hydro power	1	1	2,257,442
Oil exploration	2	1	417,617
Exporters	240	197	3,755,830	92	87	1,157,436
Other businesses	46	46	627,339	20	20	428,918
Total	293	246	14,439,208	113	108	2,653,434

Source: Authorities and IMF staff calculations.

View Table

Table 8.

Value-Added Tax Refund Situation at End-October 2018

(Amounts in ALL 000)

Businesses	Stock of VAT refund claims in payment arrears			Stock of VAT refund claims not in payment arrears
	Number of cases	Number of taxpayers	Amount	Number of cases	Number of taxpayers	Amount
Pipeline	4	1	7,389,980	1	1	1,067,080
Hydro power	1	1	2,257,442
Oil exploration	2	1	417,617
Exporters	240	197	3,755,830	92	87	1,157,436
Other businesses	46	46	627,339	20	20	428,918
Total	293	246	14,439,208	113	108	2,653,434

Source: Authorities and IMF staff calculations.

92. Clearing the current stock of VAT refund arrears—in parallel to honoring new refund claims—requires Government revenue forecasts that are much more accurate. It may take a long time before all VAT refund arrears are cleared. The GDT has entered into installment agreements with the three largest debtors shown in Table 8. Other debtors (exporters and other businesses) are paid in the sequence in which their VAT requests are approved―and when the budget situation makes payment possible. To limit further build-up of VAT arrears, the authorities have decided to apply a zero VAT rate to imports and domestic supplies of goods and services to the above-mentioned three large debtors from January 1, 2019. While this initiative may reduce the further build-up of VAT refund arrears, it may also introduce some complex taxpayer compliance risks in the domestic supply chain to these three businesses, particularly if the suppliers also trade with other businesses. What the “reverse charge-type” arrangement will not solve is the deficiencies in the forecasting of net tax revenues, which (combined with wider weaknesses in cash management and budgetary controls) for many years have been the causes of the continuous VAT refund problem. Thus, it is essential to improve considerably in this area.

93. The statutory requirement to carry forward VAT credits should be removed. Currently, taxpayers (except for certain exporters) cannot claim VAT refunds, unless the refund claimed exceeds ALL 400,000 and the taxpayer has carried forward a tax credit for three consecutive months. To receive the refund a special refund request is required. Under the law the refund is to be made within 60 days³² from the submission of the request. Except for the three installment arrangements, the current payment delay is about 4–6 month according to GDT personnel. In contemporary tax administrations, each VAT return represents the final self-assessed liability for the period. If the return reflects a net debit, the amount is paid by the taxpayer when filing; if the return reflects a net credit amount, it is treated as a refund application by the tax administration and processed in accordance with the risk management framework for VAT refunds (no separate refund request would be required and there would be no carry forward requirement). Any change in this area would need to be implemented on a phased basis to ensure that the cash-flow impact on the budget is manageable.

B. Recommendations

• Pay the outstanding stock of VAT claims as quickly as possible.

• MOFE to improve the forecasting of net tax revenue to ensure that funds are available to pay all legitimate VAT refund claims immediately.

• MOFE to seek a legislative amendment to refund credits without any minimum carry forward period and without the requirement for taxpayer to submit a separate refund claim.