Albania - Government Revenues and Expenditures

Government revenues and expenditures

Tax collection had been a serious problem in the Albanian-populated lands at least since the Ottoman Empire extended its rule over the region and probably since Roman times. The government eliminated personal income taxes in 1967 and all personal taxes in 1970. For the next twenty years, central and local governments collected revenues primarily through turnover taxes and revenue deductions from state and collective enterprises. In 1984 these collections accounted for a record 96 percent of government revenue. Chaos overtook Albania's fiscal and taxation systems in 1990, revenues dried up, and the government had to issue unbacked currency to continue operations. In 1991 the government announced that the country's fiscal system had to be strengthened because "no market economy exists without taxes." The People's Assembly set to work on a battery of revenue measures, including a tax on profits, a sales tax, a business registration tax, a motor vehicle tax, and excise taxes on cigarettes, alcoholic beverages, and oil products. Predictably, talk of taxes fueled resentment among neophyte entrepreneurs.

The law on taxation of profits, which the government hoped to implement in early 1992, appeared to offer significant incentives to private enterprise and foreign investment. It required payment of a 30 percent tax on yearly profits but exempted private persons from payment for three years from the time they began business activities. Joint ventures and foreign-owned firms were required to pay a 30 percent profit tax. Upon completing ten years of business activity in Albania, a joint venture or foreign firm would receive tax reductions. Foreign enterprises and persons who reinvested profits in Albania received a 40 percent tax reduction on the amount reinvested. The proposed measure, however, would require all joint ventures and foreign-owned enterprises engaged in mining and energy production to pay a 50 percent profits tax. Foreign persons were required to pay a 10 percent tax on all repatriated profits.

With only limited capacity to generate tax revenues, the government emphasized reducing the overall budget deficit and public debt. Proceeds from the legitimate sale of international aid items were used to maintain essential government functions and the social safety net. Local government reform depended on the development of a new system of financing based on users' fees, local taxes, and central-government grants. Albania's local governments were in dire need of technical assistance to establish a local finance system and train government staff in planning and financial management.

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