Journal of US-China Public Administration, ISSN 1548-6591

October 2011, Vol. 8, No. 10, 1149-1155

VAT Threshold and Some Implications in Albania

Oltion Rrumbullaku
University of Tirana, Tirana, Albania

The tax legislation of Albania explicitly provides under what conditions and in which taxable persons who are
entrepreneurs are obliged to register for VAT (value added tax). The main tool to determine the inclusion in or
removal from the system depends on the level of turnover realized in a certain taxable period, the so-called VAT
registration threshold. This paper examines all existing changes in VAT threshold through a simple rule of
determining VAT threshold. Then it is important to include the analysis of different ways of managing special taxes
that are used below the threshold of VAT. Finally, it concludes that Albanian tax system is in a great need of
decreasing VAT threshold.
Keywords: value added tax, VAT threshold, Albania, small business

Value added tax (VAT; Albanian TVSH) was introduced in the Albanian legal system in 1995. Law
No. 7928 on Value Added Tax, date April 27, 1995 was published in Fletore Zyrtare (official gazette) No. 12
on June 16, 1995 (page 469). According to the Transitional Provisions, Article 60 of that Law, VAT was to be
applied from the fourth quarter of 1995 (October). Nevertheless the application of VAT did not happen so
another Law was approved, and in Article 1 of the Law No. 8070, date February 15, 1996 on Postponement of
Value Added Tax, published in official gazette No. 3 on March 22, 1996 (page 84), VAT implementation was
postponed until July 1, 1996. Furthermore July 1, 1996 was confirmed by a Decree of the President of Albania,
(Decree No. 1510, date June 28, 1996) related to some amendments of Law No. 7928 on VAT, which entered
into force on July 1, 1996.
Prior to introduction of the VAT, a single stage retail tax was applied in Albania as a general consumption
tax. This retail tax had poor results, based only on goods except those which were taxed by excise and had used
a tax rate of 15 percent.

Troubles With VAT Concerning Political Context

It is worth describing the troubles with the timing of VAT introduction in Albania, concerning general
political context. Law on VAT was officially published on April 17, 1995, and it should have been applied
beginning in October 1995. However, parliamentary elections were to take place in May 1996. The right wing
government concluded that due to probable publicly expressed discontent, the introduction of VAT (and
possible retail price raise) could have politically harmful effects. The implementation of the VAT consequently
was postponed for another year (i.e., until July 1, 1996), and such a long vacatio legis (the deferment of the
coming into force of law) was justified by the need of practitioners to get better used with the new tax.
It seems that the VAT rate attracts wrong shifts from every government. For example, the present
Corresponding author: Oltion Rrumbullaku, lecturer, Department of Finance, Faculty of Economy, University of Tirana;
reseach fields: taxation, VAT, corporate tax, corporate finance. E-mail: oltion.rrumbullaku@unitir.edu.al.

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VAT THRESHOLD AND SOME IMPLICATIONS IN ALBANIA

government (May 2009), right centered, announced in June 2005 the lowering (decrease) of general VAT rate
to 17%. This was in the context of its electoral program in accordance with some promises quickly given
during electoral campaign. Only a few days after coming in power, this announcement was reversed. It left an
impression of a lack of caution and sincerity when the most important taxes were in question.

History of VAT Threshold in Albania

VAT legislation of each country explicitly states the conditions in which taxable persons should be
obliged to register for VAT. The main tool to decide which legal person should be included or removed from
VAT is the level of turnover realized within a taxable period (usually a year), and this tool is called VAT
registration threshold.
Law No. 7928 on Value Added Tax, date April 27, 1995 determined the first ever VAT registration
threshold at a level of 2 million Lek1 per year (average exchange rate in 19952 was 92.79 Lek/$, in 1996 was
104.5 Lek/$, and in 1998 was 150.64 Lek/$).
Council of Ministers approved a Decision (Albanian Vendim) No. 36, date January 17, 1998 stated as
the minimal threshold of VAT registration. The level of threshold was laid down at 5 million Lek of yearly
turnover (approximately $32,000 according to IMF calculations).
Council of Ministers approved another Decision (Albanian Vendim) in 2000 to raise further the VAT
registration threshold. Decision of CoM3 No. 727, date December 28, 2000 related to the minimal threshold
of VAT registration laid down another level of 8 million Lek and this Decision entered into force from
January 1, 2001. This raise was the last increase in VAT threshold and remained unchanged for at least nine
years. On January 1, 2010, the VAT threshold was reduced to 5 million Lek and Ministry of Finance still
planned to reduce it further.

Activities Registered in VAT Without Threshold

On the other hand, VAT registration threshold levels were not the only provision stated in law regarding
VAT registration for economic activities in Albania. There were some other changes that were done during the
years, which had tried to enlarge the VAT companies tax base.
The first non-threshold provision was stated for the first time in Udhezim (Directive) of Ministry of
Finance No. 8, date January 5, 2000 on Value Added Tax4. This provision obliged the registration on VAT of
every legal or natural persons, who were engaged in export-import activities regardless the level of turnover.
The second non-threshold provision was stated in Udhezim (Directive) of Ministry of Finance No. 7,
date February 10, 2004 on Value Added Tax5. This directive obliged the registration on VAT of every legal or
natural person, who realizes economic activities related to wholesale trading regardless the level of turnover.
Wholesale trading includes the supply of goods in quantities that surpass the individual consumers needs,
and that later are used for resale (not for ultimate consummation of the customer).
The third non-threshold provision was stated in a less important document, which we found difficult to
trace. It was related to production activities, which were included in VAT taxable persons provisions regardless
1
2
3
4
5

Lek = Albanian currency.

According to Bank of Albania.
Decision by Council of Ministers (Albanian Vendim i Keshillit te Ministrave).
Official gazette, No. 8 extra, date September 21, 2002, page 3.
Official gazette, No. 15, date March 22, 2004, page 725.

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VAT THRESHOLD AND SOME IMPLICATIONS IN ALBANIA

their level of turnover. These activities were included in VAT taxable persons regardless of their annually
turnover.
These provisions reduce the effects of VAT registration thresholds, and on the other hand create bigger
incentives for service and other activities to exist outside VAT tax base.

EU Council Directive of VAT and Registration Threshold in the Region

The EU Council Directive, in the part relating to exemptions for the supply of goods and services by small
enterprises, lays down the minimum VAT registration threshold of EUR 5,000 ($7,000). However, Member
States are allowed to determine higher thresholds subject to certain conditions.
The tax legislations of individual countries explicitly provide under what conditions and in which taxable
persons who are entrepreneurs are obliged to register for VAT. The inclusion in or removal from the system
depends on the level of turnover realized in a certain taxable period (usually a year), the so-called VAT
registration threshold. Entrepreneurs participating in the VAT system are obliged to charge VAT on all supplies
of goods and services, but are also entitled to deduct the VAT declared on their input invoices for the
purchased goods and services. Entrepreneurs who do not qualify for VAT registration due to their low
turnovers, do not declare VAT on their delivery invoices, and are not allowed to deduct VAT paid on the
purchases of goods and services.

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VAT threshold in EU joining countries com pared to Albania (thousand euros)

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60
40
20
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Figure 1. VAT threshold in Eastern Europe. Source: IBFD6 (2008).

Albania is almost a special case compared to new EU Member States in the level of VAT threshold (see
Figure 1). It should be noted, however, that a number of new EU Member States changed their levels of VAT
threshold at the time of their accession to the EU. Thus, Romania lowered its threshold from EUR 57,000 to
EUR 35,000; Czech Republic from CZK 3 million to CZK 2 million and further to CZK 1 million. Slovakia
doubled its threshold, from SKK 750,000 to SKK 1,500,000, as well as Hungaryfrom HUF 2 million to HUF
4 million. Slovenia raised its threshold from EUR 20,000 to EUR 25,000. The levels of threshold remained
unchanged in Bulgaria, Cyprus, Estonia, Lithuania, Latvia, Malta and Poland. However, as from January 1,
2008, Poland raised its VAT threshold from EUR 10,000 to EUR 14,700, and Hungary from EUR 15,700 to
16,900 (IBDF, 2008). Based on the experience of the new Member States, it can be concluded that Albania
should use the pre-accession period to reconsider its current VAT threshold, justify, and change it prior to join
the EU.

A Simple Rule of Determining VAT Threshold

One obviously central consideration in choosing the threshold is the need to trade off the tax revenue that
6

International Bureau of Fiscal Documentation.

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VAT THRESHOLD AND SOME IMPLICATIONS IN ALBANIA

is lost by raising the threshold against the administrative and compliance costs saved by (respectively) the tax
authorities and taxpayer (Keen & Mintz, 2000). Focusing on this trade-off alone gives rise to an attractively
simple rule for the optimal threshold. Then this threshold can be taken in analysis further. If it were not of the
cost of administering a VAT (incurred by tax authorities) and the costs of complying with it (incurred by
taxpayers), the best threshold would be zero, so that it would maximize tax revenues at any given tax rate,
while also minimizing distortions of competition between firms with different size (Grandcolas, 2004). As a
result, the need of some threshold arises from the willingness to forsake some revenues in order to save on
collections costs (Ebrill, Keen, Bodin, & Summers, 2001).
To see what this exchange might imply for the appropriate level of the threshold, suppose that the
government values an additional 1 Lek of revenue at Lek. Clearly one expects > 1, since the only rationale
for raising revenue is the belief that resources are more valuable to society in the hands of government than in
those of taxpayers. If its explained differently, since taxation involves costs to the private sector additional to
those of the resource transfer itself, because it distorts economic activity, an additional 1 Lek if revenue should
only be raised if the uses to which is put are valued by society at more than 1 Lek. Indeed 1 can be thought
of as corresponding precisely to the deadweight loss associated with the distortion of economic behavior.
Suppose than the government considers raising the threshold level of turnover, denoted z, by 1 Lek (taking
as given the rate at which VAT is levied).
For each firm consequently taken out of tax net, the government loses revenue of z (where denotes
value added per unit output, so that tax paid at the threshold level of turnover is z) but saves administration
costs of A; each firm taken out of tax, on the other hand, gain after-tax income of z and saves compliance
costs of C. Weighting the net loss to the government by and equating it to the gain to the private sector gives
an optimal threshold of:

z' =

A + C
( 1)

(1)

As it would be expected, the optimal threshold is higher. The more costly is administration or compliance
and the less urgent is the need for funds (the lower is ). Clearly too it is higher and the lower is the ratio of
value added to sales (Ebrill, 2001). All else equal, it is needed a lower threshold for more profitable and/or
labor intensive activities.
More important than these qualitative insights, however, are the illustrative calculations that the simple
rule above allows. As for OECD countries, Cnossen (1994) estimated that a well-functioning VAT involved
administration costs in the order of $100 per registrant and compliance cost of around $500. Studies for the
United States suggest a value for the marginal value of dollar of tax revenue on the order of $1.2 to $1.5; for
illustration, take = 1.2. Leks take the tax rate of 20 percent and the ration of value added to sales is 40 percent,
the simple rules thus suggest a threshold of about:

z' =

1.2 100 + 500

620
=
= $38,750
(1.2 1)0.2 0.4 0.016

(2)

One of the striking features of the rule stated above is that it defines the optimal threshold without
reference to the underlying size distribution of firms. On the other hand it allows the possibility to have
different threshold for some very different sectors. The threshold is calculated not by reference to an explicit
calculation along the lines above, but rather as whatever is needed to restrict the number of taxpayers to fit

VAT THRESHOLD AND SOME IMPLICATIONS IN ALBANIA

1153

some given (usually very limited) administrative capacity. This is simply the same rule in another context; the
key feature is simply that when capacity is limited the administrative cost A is implicitly very large (Keen &
Mintz, 2000).
More generally, it is important to recognize that administrative costs are not unrelated to this tool: the
costs of coping with each taxpayer depend on such design choices such as the frequency of audit, the nature of
audit, the complexity of tax structure, and so on. Thus one interpretation of the regularity with which IMF has
advised thresholds higher than those subsequently adopted is that IMF has thought the proper costs of audit to
be greater than the authorities having stated in their evaluations.

Above and Below the Threshold

Another and potentially important set of issues that arise in considering the VAT threshold are the
potential distortions of competition, and tax burden, associated with the differential treatment of those above
and below the threshold. This raises several issues.
First, as noted, there are important circumstances in which it is commercially advantageous to be fully
liable for VAT. They include firms selling zero-rated items and, potentially even more important, those selling
to other firms would wish to register for VAT in order to effectively reclaim tax paid on their own inputs. For
these reasons, it is normal practice to allow firms to register for VAT voluntarily. As Albania has very limited
exporting capacities, this practice is not still useful to be used.
Even when it is commercially advantageous to be below the threshold, however, the extent of that
advantage should not be overestimated. Small trader will be unable to recover VAT on their inputs: it is only
their own value added, not the full value of their sales, which escapes taxation. Nevertheless, there clearly is
potentially some cause for concern. In particular, firms characterized by a high ratio of value added to sales and
selling to unregistered purchaserssmall traders providing services directly to final consumers being the key
group hereare likely to find it worthwhile to be exempt from VAT (International Tax Dialogue, 2005).
Distortions of this kind have both equity and efficiency aspects.
In equity terms this is, in a sense, an odd worry, since although the size of an enterprise is not necessarily a
reliable indicator of equity concerns, the presumption would be that smaller traders are generally poorerand
so presumably more deserving of supportthan large. Thus equity considerations would tend to point toward
higher thresholds than that would otherwise be the case.
The implication of the existence of a threshold for economic efficiency, and their consequences for the
appropriate level of that threshold, are complex. One distortion arising from the exemption of small traders is
the potential for cascading that exemption always introduces. Of greater concern is the potential distortion of
competition, in favor of smaller enterprises, implied by additional costs, in terms of both the tax liability itself
and compliance costs, imposed on those above the threshold. Since smaller firms are likely to be characterized
by higher costs than larger enterprises, this effect tends to reduce the efficiency of the market outcome. Indeed
the presumption in contexts of imperfect competition is that it is the small firms, if any, which should be
disfavored by the tax policy7. Moreover the threshold may itself distort output decision as those firms that
would otherwise find attractive to produce some amount in excess of the threshold choose instead to remain
below the threshold, the saving on tax and compliance costs more than setting the reduction in sales volume.
7

See Lahiri and Ono (1988). In a dynamic context, however, smaller firms may be especially important for longer-term growth.

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VAT THRESHOLD AND SOME IMPLICATIONS IN ALBANIA

Moreover, quit apart from the potential distortion of real economic activity is the potential scope that the
threshold creates for the avoidance of VAT by organizing production in a series of sufficiently small enterprises.
Legislation typically provides for related firms to be aggregated for the purposes of applying the threshold
though the detection, and identification of common control needed for this purpose can be problematic.
Artificial splitting of firms has certainly been a concern in some countries. Again, while the most effective
response on this issue is likely to be in terms of anti-avoidance rules, it may also on this account be appropriate
to set a somewhat lower threshold than that would otherwise be the case, as a means of raising the cost of
avoidance by this route.

Relevance of Special Taxes on Those Below the Threshold

The extent and nature of the distortion between those above and below the threshold will depend on how
those below the threshold are taxed. Before, Albania has applied a gross receipt tax, at a low rate (from 1.5 to 4
percent) to such firms, and sometimes this tax has had its own threshold. Technically however, this is some
form of presumptive tax. In the presence of a simple turnover tax on those below the threshold, the calculation
underlying (1) must be recast in terms of differential revenues and collection cost associated with the two taxes
around the threshold8. Assume for instance, that one retains the same parameter values as in the illustrative
calculation above, but now supposes a turnover tax of 3 percent to be charged below the threshold (2005 in
Albania). Assuming too that the collection costs associated with the turnover tax are half of those of the VAT,
the optimal threshold decreases to $31,000. More generally, the more expensive is the alternative tax to collect,
and the lower is the rate at which it is levied, the lower is the optimal threshold for the VAT.

Conclusions
Experience in Albania indicates that setting a too high threshold can significantly compromise the political
and administrative feasibility of a VAT. There is a remarkable degree to which the VAT base in concentrated
among a relatively small number of taxpayers, and the limited administrative capacity in many countries, lends
support to set a relatively high threshold.
The tax treatment of those below the VAT threshold has received a big attention, and practice variations.
Given however the potential importance of treatment below the threshold for the extent of registration under the
VAT, for the development of compliance capacity and (not least) the importance that government appears to
attach to the competitive positions of those above and below the threshold. A simple tax below the VAT
threshold may have a beneficial effect, but with disproportionate revenue yielded, so Albania does not use that
anymore.
Finally, through a simple rule on determining a VAT threshold we conclude that our tax administration
should decrease the actual level of VAT threshold. A system of simple turnover tax does not satisfy the equity
issues and can create many potential distortions and commercially disadvantages. Halving the actual threshold
resolves some of these problems and is in line with actual levels of VAT threshold in new EU member states.

References
Bank of Albania. (2007). Annual report. Albania: Bank of Albania.
8

More precisely z ' =

( A A' ) + C C ' where t is the rate of turnover tax and a prime refers to the sales tax regime.
( 1)( t )

VAT THRESHOLD AND SOME IMPLICATIONS IN ALBANIA

1155

Cnossen, S. (1994). Administrative and compliance costs of the VAT: A review of the evidence. Tax Notes, 63, 1609-1626.
Ebrill, L., Keen, M., Bodin, J. P., & Summers, V. (Eds.). (2001). The modern VAT. International Monetary Fund.
Godvin, M. (1998). The VAT registration threshold. British Tax Review, (6), 541-545.
Grandcolas, C. (2004, January). VAT in the Pacific Islands. Asia-Pacific Tax Bulletin, (1), 12.
IBDF. (2008). Tax survey. Retrieved from http://online2.ibfd.org/eth
International Tax Dialogue. (2005, March). The value-added tax, experiences and issues.
Keen, M., & Mintz, J. (2000). The optimal threshold for a value-added tax. Journal of Public Economics, 88(2004), 559-576.
Kresner-Skreb, M., & Fell, D. (2008). Value added tax in Croatia vs EU: Tax threshold, zero rate, building land taxation and
exemptions. Newsletter No. 36. Croatia: Institute of Public Finance.
Lahiri, S., & Ono, Y. (1988). Helping minor firms reduces welfare. Economic Journal, Royal Economic Society, 98(393),
1199-1202.

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