In one the biggest-ever overhauls of Albania’s taxation system, corporation tax is halved from its previous 20% rate, while the many different rates of income tax and social security contributions are now also capped at 10%.
The change, which came into force on January 1, is part of the efforts of Prime Minister Sali Berisha’s centre-right government to improve the business climate in a bid to increase foreign direct investment.
The Albanian Minister of Finance, Ridvan Bode, believes the new system will produce a more efficient fiscal system in which tax payers will no longer try to manipulate their sources of income to pay the tax with the lowest rate.
“The flat tax helps eliminate the potential arbitrage between corporate tax, dividend taxes and income tax,” he told the local media.
The reform of the tax system has received the support of the IMF, which has tightly controlled Albania’s fiscal reforms since 1997, after the collapse of a series of fraudulent pyramid investments schemes brought the country to the verge of economic disaster and triggered an uprising against the administration of Berisha who was president at the time.
“We will negotiate with the Albanian government about tax reductions, depending on the rate of tax collection,” former IMF representative in Albania, Ann-Margaret Westin, told the local media in November.
According to the Ministry of Finance, Albania generated a revenue growth of $1.1 billion (€750 million) in 2007, due in part to improved rates of tax collection.