24-04-2013

Indirect Taxation - Value Added Tax

Authors

  • Eniana Dupi, LL.M., Attorney at Law
    Partner at Aeco Consulting - Tax Advisors

VAT Law

Value Added Tax Law and related Instructions issued for the implementation of the law is a well established law in Albania1. The main law can be easily found also in its English version2.

Law 7928 is based on the Sixth Council Directive on VAT3, being by far however a much reduced version of it. In any case such first approximation since its inception, has made this Law subject of very few subsequent amendments, mainly due to the necessity of responding to the new business developments, in the internal and external market and of the attempt to introduce some tax reliefs by reducing/postponing the payment or removing VAT rates for certain economic activities as mentioned in this article.

The general definition of the VAT is missing in the Law, but it is implied within its articles as a tax on sales/ turnover after deducting the VAT on the purchases occurred for the purpose of generating such sales, and “as a tax which is applied on the supplies of the goods and services against payment from a VAT subject as part of its economic activity in Albania as well as on the imports made in the territory of the Republic of Albania by the VAT subjects”4.

The VAT subjects

Article 2 of the Law 7928 and the relevant Instruction issued for its implementation5 defines the VAT subjects as the juridical or natural persons who carry out economic activity in Albania by generating a turnover higher than ALL 5 million6. The public institutions or organizations either local or central and non for profit organizations are also subject of the VAT law when they carry out an economic activity subject of the VAT law.

The above are subject of the VAT law in case they make imports and exports as an economic activity in Albania, commencing from zero turnover. Exceptionally to the above VAT subjects, different rules apply for the following:

(a) Specialized professional services: lawyer, auditor, certified accountant, notary public, real estate evaluators, doctor, dentist, architect, engineer, pharmacist, hospitality services, agronomist, are subject of VAT commencing from zero annual turnover7.

(b) Tax representatives: In case a foreign juridical or natural tax resident person who supply in Albania services related to real estate located in Albania (engineering, supervisory/architectural services, etc), it should register for VAT purposes in Albania commencing by 0 turnover threshold by appointing a VAT representative in Albania, who will register and pay VAT on the services rendered by the foreign tax resident in Albania on behalf and for the account of the foreign tax resident, commencing by zero annual turnover threshold8. In difference with other sanctions of the Law which are related directly to the offender, in case of failure to register the tax representative by the foreign tax resident, the domestic beneficiary of the service, i.e. the Albanian tax resident, is liable of the unpaid VAT obligations and of the penalties for non registration9.

The term “economic activity” is not specifically defined in the Law but it is implied throughout as any activity which is “for profit” scope and as a supply of goods or services for which “full payment” is received. Supply of sample goods are considered as supplies against no payment, i.e. not chargeable with VAT, whereas gifts are considered as supplies against full payment and hence are subject of VAT10.

VAT exempted supplies11

The main VAT exempted supplies are as follows:

  • Financial services and interest on financial leasing
  • The supply of gold from National bank and of the secondary level banks, and of the banknotes issued from the National Bank.
  • The leasing of land and buildings, unless they are leased for a period of up to two months or the accommodation in hotels or holiday places12. Despite of such exemption in case the taxpayer would like to charge VAT on leasing services as per article 16 of Law 7928 it has the right to do that based on a request submitted to the tax authorities by providing data on the lessee (s), including the leasing contract in which it should be specified the VAT charged on the leasing services13.
  • The supplies from non for profit organizations against reduced payment in case it is a supply rendered by philosophic or religious organizations for spiritual benefit purposes or from non for profit organizations which have the status “for public benefit” as granted by authorization of the Minister of Finance14.
  • The import of (i) goods in case when their supply within Albania is a VAT exempted supply, with exception of imported books and magazines of any kind, (ii) goods helping the paraplegic and tetraplegic individuals including the import car for their usage, (iii) ships as per the Harmonized Nomenclature of Goods15, (iv) goods placed under customs transit/temporary or active improvement, (v) goods and services which are related to the research and development phases of the hydrocarbons operations, imported by the main contractors or by their subcontractors who are engaged in such operations. The exemptions are granted to them only in case they have obtained the authorization for exemption from VAT from the National Agency of the Natural Resources16.
  • The supply of ID cards17.
  • The supply of educational services from public or private institutions18.
  • The supply of services rendered outside the territory of Albania, from an Albanian tax resident, the place of the economic activity of which is in Albania, or in case of a natural person the usual place of residence of that person is Albania19.
  • In case of services supplied by a foreign tax resident which are not related to an immovable property in Albania, the reverse charge scheme is applied, by registering the invoice as a purchase and sales invoice in the VAT books of the Albanian taxpayer.
  • The recent changes in Law 7928 exempt from the VAT on the import of steel and iron used in the construction of the hydropower plants in Albania. Moreover, the taxpayers who will import machinery and equipment in Albania for a value higher than ALL 50 million will be exempted from the VAT on import. The taxpayers who will import machinery and equipment to invest in production under customs active improvement regime, in agribusiness, or small businesses who import machinery and equipment for production purposes, are exempted from the VAT on those machinery and equipment on import, despite of the value of such imported machinery and equipment20.

VAT Reimbursement

According to article 50 of Law 7928 the taxpayer can ask for VAT reimbursement in case it carries forward for a period of more than three consequent months an accumulated VAT on credit for the amount of higher than ALL 400,000. The tax authorities should reimburse the taxpayer within a period of 30 days after he has submitted the request for reimbursement. The reimbursement for the taxpayers whose sales constitute at a hundred per cent exports, and whose activity is considered at zero risk for VAT purposes, the reimbursement of the amount from ALL 450,000 to ALL 2 million is done automatically. As for the other categories of exporters and other taxpayers different facilitating priority conditions for the reimbursement apply for the amounts between ALL 450,000 -ALL 2 million21. The diplomats and international organizations based on the concept or reciprocity have the right to reimburse the VAT paid on monthly purchases for a total higher than ALL 10,000, by submitting a request for reimbursement format to the Protocol Department of the Ministry of Foreign Affairs22.

However, point 20 of Instruction 17 states that with exception of the cases of automatic reimbursements for the rest of the requests for reimbursements the tax authorities should audit the taxpayer and either acknowledge or refuse its request for reimbursement, and the taxpayer should wait for its turn to be audited based on the registered chronological order of the requests for reimbursements kept by the tax authorities. This means that the period from the request for reimbursement up to the acknowledgement of the VAT to be reimbursed and its relevant reimbursement the period would be usually longer than thirty days.

Moreover, given the difficulty of the tax authorities to reimburse the VAT on credit required by the taxpayer, the remedy that the law offers to the taxpayer in case the tax authorities do not reimburse the VAT on credit as per the request of the taxpayer when the conditions for the reimbursement are met, is the automatic right of the taxpayer to compensate the acknowledged VAT to be reimbursed with other tax obligations due from the taxpayer (tax on profit installments, personal income tax and withholding tax)23.

VAT payment postponment

There have been various changes concerning the VAT tax relief on the postponement of the payment of VAT in case of the import of machineries and equipment for carrying out any type of economic activity, beginning with a postponement for a period of up to six months24. Additional amendments postponed the VAT payment for a period up to twelve months25.

In case the investment cycle is longer than twelve months, i.e. the production or the supply of services would begin after twelve months, the taxpayer can benefit from a VAT postponement scheme of longer than 12 months up to the beginning of the production/ service based on a decision for longer postponment issued by the Minister of Finance26.

VAT in construction services

Article 13.6 of Law 7928 - “Moment of supply” specifies that “the sale fiscal invoice in a construction activity should be issued every month”.

Furthermore point 8.1.2 “The method of implementation of VAT on construction services” of Instruction 17 dated 13 May 2008 issued for the implementation of the abovementioned Law, determines: “Vat in construction applies:

(a) In case the construction companies build to sell or lease, the VAT is calculated or paid on a monthly basis, on the value of the monthly statement of works. Attached to each monthly statement of works there will be a VAT invoice with a serial number. The value of the monthly statement of works will be the taxable on which VAT is calculated at the rate of 20%. The taxable person is required to calculate VAT every month. The total value of the monthly statement of works is recorded in the sales book.

(b) In case the construction companies build to use for themselves, for the purposes of their economic activity (offices, storage, production, etc), they still should prepare monthly statement of works and issue a fiscal invoice as aforementioned, but in this case the invoice would be issued to themselves as a self supply and recorded both in the VAT purchase and sales books. The VAT on purchases related to such development is deductible at hundred per cent upon the condition that the sales activity of the developer is subject of VAT, and partially or zero, depending whether the sales activity of the developer is partially or fully exempted. Moreover, in any case the nature and usage purposes of the building (for “self use”) should be specified on the construction permit granted to the developer before the beginning of the construction works.”

Administrative sanctions on VAT offences

Starting from July 2008 the administative offences and the related sanctions concerning VAT are imposed by Law no. 9920 dated 19 May 2008 “On tax procedures in Albania27. In case of non issuance of sales invoices the penalty imposed is that for tax evasion and is equal to the value of the unpaid VAT28, whereas in case of incorrect higher reimbursement requests or issuance of incorrect sales invoices the penalty is equal at 50% of the amount of the unpaid VAT29.

Reduced and zero VAT rates

The generally applicable VAT rate is at 20%. Notwithstanding the above, zero and reduced VAT rate is applied on the following:

  • Export of goods outside the territory of Albania at zero VAT
  • The international transport of goods and passengers and the related supply of goods and services at zero VAT
  • The supply of goods and services relate to the commercial or industrial activity in the sea30 at zero VAT
  • The supply of drugs and medical services is a supply subject of a VAT reduced rate at 10%31.

Deductibility of VAT on credit

Aritcle 33 of Law 7928 defines the cases when the taxpayer has the right to deduct the VAT on purchases:

  • Fully deductible, when the purchases are done for the purpose of its economic activity and such economic activity is charged with VAT on sales and not a VAT exempted activity
  • Partially deductible, in case such purchases serve to VAT exempted and chargeable supplies, or for private purposes and chargeable supplies
  • Non deductible, in case such purposes serve exclusively for private purposes,
  • Non deductible on invoices for purchases of fuel unless it is used for technological purposes or for resale purposes, for expenses of allowances and hotel accomodation, for purchase of cars and fuel used for them unless the activity is that of car resale, for expenses on publicity and advertising materials32.

VAT practical issues and expected changes

There are areas in the VAT law which can be used to facilitate the VAT burden on the chain of supply of goods and services up to the final consumer. The reduction or zeroing of the VAT rates for certain types of products is not always the best approach, especially in countries where the fiscal insfrastructure is not yet solid, as far as it might not give the expected results, due to the increase of the administrative compliance costs for different types of VAT rates, of the incapability of ensuring budget neutrality from reduction of VAT rates or by zeroing its effects due to the increase of another type tax as far as the expected results were not shown as needed. However, some improvements can be made by easing the compliance from part of the taxpayers as follows:

  • The liberalization of use by all taxpayers of electronic VAT invoices and not invoices filled in by hand.
  • The VAT declaration and payment to the tax authorities to be performed at the month when the client makes the payment of the invoice and not when the invoice is issued to him. The law as it is considers the bad debt, i.e. the unpaid invoice issued to the client, only when it is not collected for a period of more than six months and when the taxpayer is in possession of the Court Decision which ascertains the debt and the insolvency of the client. This creates real difficulties for the taxpayer to ever be reimbursed for the VAT paid to the tax authorities on such unpaid invoices, as in most of the cases the aforementioned clients are not insolvent and have not filed for bankruptcy.
  • The amount of the VAT to be reimbursed in the upcoming year to be estimated separately in the annual governmental budget, as a decrease of the annual tax collections and not as part of such positive figure.
  • Partial VAT reimbursement on the annual consumption of goods and services to the final consumer as part of its annual individual integral declaration of income33. Such reimbursement would reduce tax evasion by compelling the final consumer to ask for the issuance of fiscal invoices from the taxpayers.

During year 2011 - 2012 a new draft Law on VAT was prepared in the frame of IPA Project 2007 (March 2010 - May 2012) addressed to the General Tax Directorate, with the aim of approximation of the domestic law with that of the Acquis Communitaire as part of IPA Component 1, by having a law which will not distort the competition in the local and european market.

The draft Law is envisaged and structured in full compliance with Directive 2006/112/EC dated 28 November 2006 as subsequently amended up to 10 December 2010 (Directive 2010/88/EU). It is expected that the new draft Law would enter in force during year 2013.


1. Law no. 7928 dated 27 April 1995 “On VAT”, as amended (herein “Law 7928”).

2. Updates of the Law may not be available in the English language.

3. SIXTH COUNCIL DIRECTIVE of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes -Common system of value added tax: uniform basis of assessment (77/388/EEC).

4. Article 1 of Law 7928.

5. Point 1.1 of Instruction no. 17 dated 13 May 2008 (herein “Instruction 17”).

6. Decision of Council of Ministers no. 1058 dated 21 October 2009 and effective as of 01 January 2010 “On establishing the minimum turnover threshold of registration for VAT purposes”.

7. Decision of Council of Ministers no. 18 dated 10 January 2011“For some changes in Decision 1058 dated 21 October 2009”.

8. Article 55 of Law 7928 and point 6.2 of Instruction no. 17.

9. Article 4 of Law 10003 dated 06 October 2010.

10. Point 7.2 of Instruction 17.

11. Articles from 20 to 26.1 of Law no. 7928 “On VAT” as amended, the legal references on the following paragraphs of this section refer to the subsequent amendments on Law 7928.

12. Law no 9712 dated 16 April 2007 “On VAT” for some changes in Law 7928.

13. Instruction no. 2 dated 28 January 2010 “On some changes of Instruction 17”.

14. Article 2 of Law no 10003 dated 06 October 2008 on some changes in Law 7928.

15. Article 3 of Law no. 10003 dated 06 October 2008.

16. Article 3 of Law no. 10068 dated 02 February 2009.

17. Article 2 of Law no. 10068 dated 02 February 2009 “on some changes of law 7928 on VAT.

18. Article4 ofLaw 10215dated 21 January 2010 and entered in force on01October2010“For some changesin Law 7928.

19. Article 5 of Law 10215.

20. Law 125/2012 “On some changes of Law 7928”. Such exemptions were granted some years ago also by Decision no. 267 dated 19.06.1997.

21. Instruction 3 dated 26 February 2007“On VAT and point 20 of Instruction 17”, issued for the implementation of Law 7928.

22. Point 8.6 of Instruction 17.

23. Law no 10148 dated 28 September 2009 “On some changes on the Law 9920 dated 09 May 2008 “On tax procedures in Albania”.

24. Decision of Council of Ministers no. 559 dated 16 August 2006 and Instruction no. 8 dated 05 June 2007.

25. Decision of Council of Ministers no. 319 dated 19 March 2008 “for some changes in Decision 559” and article 2 of Law no. 10003 dated 06 October 2008 “On some changes of Law 7928”.

26. Article 2 of Law no. 10003 dated 06 October 2008 “On some changes of Law 7928”.

27. Article 1 of Law 9944 dated 26 June 2008 “On some changes of Law no.7928”.

28. Article 124 of Law 9920 dated 19 May 2008 “On tax procedures in Albania (herein “Law 9920”).

29. Article 128 of Law 9920.

30. Article 7 of Law no. 10215 dated 21 January 2010 “on some changes of Law 7928”.

31. Instruction 5 dated 31 January 2011.

32. Point 19 of Instruction 17.

33. Law no. 20/2012 dated 01 March 2012 “On some changes of the Law 8438 dated 28 December 1998 “On income tax”, as amended”.

GREEK LAW DIGEST REPUBLIC OF ALBANIA MINISTRY OF INTEGRATION Union of Chambers of Commerce and Industry of Albania
Nomiki Bibliothiki ALBANIA INVESTMENT DEVELOPMENT AGENCY Foreign Investors Association of Albania
     

 

Login

Log in to your account or