## 1albea2019002 ## Source details **Canonical URL:** [1albea2019002](https://www.imf.org/-/media/files/publications/cr/2019/1albea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1albea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1albea2019002.pdf.json) --- ### PREFACE — Mission, Purpose, and Executive Summary - Mission: IMF Fiscal Affairs Department technical assistance for revenue administration capacity building in Southeast Europe; mission visited Tirana during November 19–December 3, 2018. - Mission leadership and team: Led by Mr. Stephen Vesperman (FAD). Team: Mr. Allan Jensen (IMF Regional Revenue Administration Advisor), Mr. Paul Duffus, Ms. Telita Snyckers, Mr. Michael O’Grady (external IMF experts). Assisted by Mr. Keith Cartwright (FAD external expert). - Key interlocutors: Mr. Erjon Luci (Deputy Minister, MOFE); Mr. Nikolla Lera (Advisor to the Minister, MOFE); Mr. Xhavit Çurri (Acting Director General, GDT); GDT HQ and regional managers and staff; Ms. Mirlinda Karçanaj (NAIS); Mr. Dashamin Begaj (Albanian Institute of Certified Accountants); donor representatives. - High-level conclusions: - GDT is making good progress modernizing tax administration driven by Minister and reform-minded Director General leadership. - Reform initiatives across people, processes and technology are delivering tangible outcomes (workforce competency, CRM and arrears collection process changes, IT system implemented from 2015). - Risk: pace of change must be maintained; ongoing budget and legislative support are essential to move performance closer to international good practices, increase revenue yield, reduce the tax gap, and influence future compliance behavior. - Key priorities highlighted: - Large Taxpayer Office (LTO): sharpen risk focus and improve auditors’ skills. - Consolidate core functions (beginning with arrears collection) to achieve efficiencies and process uniformity. - Strengthen Compliance Risk Management (CRM): broaden access to third-party data, procure data-warehouse and analytical tools. - Integrity and anti-corruption: develop systemic strategy and greater transparency. - Address delayed VAT refunds; root cause linked to weak tax forecasting and government cash management. ### FISCAL CONTEXT AND REVENUE PERFORMANCE - Economic and revenue context: - GDP growth expected to exceed 4 percent in 2018. - For January–September 2018, revenues from taxes and customs were up 3.8 percent year-on-year. - GDT collected around 54 percent of all tax revenues (including social contributions) in 2017. - Table 1 (Revenue amounts in ALL billions; Revenue GDP % reported) — selected figures preserved exactly: - Personal income tax: 2015 — 29.7 2.1; 2016 — 31.4 2.1; 2017 — 32.1 2.1 - Social contributions: 2015 — 71.7 5.0; 2016 — 79.2 5.4; 2017 — 86.8 5.6 - Profit tax: 2015 — 24.2 1.7; 2016 — 28.5 1.9; 2017 — 31.6 2.0 - VAT: 2015 — 124.8 8.7; 2016 — 128.1 8.7; 2017 — 139.5* 9.0 - Note: * VAT revenues are overstated as they do not reflect VAT refund arrears, which amounted to ALL11.7 billion at end-2017. - Total: 2015 — 340.6 23.8; 2016 — 366.0 24.7; 2017 — 399.0 26.0 - Revenue underperformance: - On average over the last 10 years, tax revenues underperformed relative to plan by close to 1.5 percent of GDP. - Table 2 (GDT Collected Revenue 2017 — Collection vs. Budget Forecast, ALL billions): - PIT: Net Collected 32.1; Budgeted 36.2; Percent Difference - 11.2 - Social security contributions: Net Collected 82.8; Budgeted 80.1; Percent Difference + 3.46 - VAT gross: Net Collected 48.9; Budgeted 55.3; Percent Difference - 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 - Total: 214.7; 221.7; - 3.17 - VAT refunds were 16 percent less than forecast for 2017; special arrangements deferred refunds for some large infrastructure projects. ### GOVERNANCE, ORGANIZATIONAL ARRANGEMENTS, AND IT - Governance framework: - Three permanent senior management committees chaired by DG: Reform Management Committee; Operations Management Committee; Compliance Management Committee. - Issues: Reform Management Committee met only once in the calendar year; overlap between committee mandates. - Recommendations: - Reform Management Committee to meet at least quarterly, take overall responsibility for transformational reform, ensure resources and monitor implementation, resolve impediments. - Review Strategic Plan after two years and consider additional reform initiatives (community consultation, integrity strategy, KPI review). - Structures and staffing: - Function-based HQ with three business streams; network includes 13 regional offices and an LTO. - Approximately 200 vacancies including a Deputy Director position; vacant Deputy Director post has at least 17 direct reports currently reporting to the DG. - Recommendation: grant GDT greater autonomy to adjust organizational structure and personnel deployment; accelerate filling vacancies. - Consolidation recommendations: consolidate arrears collection into three sites (South, Central, North); consolidate three Transfer Pricing Units into a single unit in the LTO; review field inspection vs. complex tax fraud deployment (about 180 field inspection staff performed 52,702 checks in 2017). - 2017 field inspection results: 646 unregistered businesses; 2,702 tax coupon violations; 1,962 unregistered employees; a further 6,100 unspecified violations. - Information Technology: - COTS revenue administration system deployed 2014–2016; SLA and supplier support in place; contract/SLA due to expire April 2019. - NAIS managing procurement and proposes fixed price SLA and in-house contractor provision. - Fiscal cash register replacement (real-time sales data, coupon return) being procured; eventual expansion to e-invoice and data warehouse functionality. - Recommendation: GDT should have mandate to identify and prioritize future development needs; ensure fiscalization/e-invoicing integrates with compliance processes and central system. - Integrity and anti-corruption: - Internal Affairs Department: Director and eight inspectors; telephone line for reporting; structured disciplinary process; more serious cases to disciplinary committee. - Several media-reported corruption instances by GDT staff during the past year undermining trust. - Recommendations: develop overarching integrity strategy, be more transparent about anti-corruption activities, publish aggregated data, adopt strategic prevention and detection measures. ### LARGE TAXPAYER OFFICE (LTO) — Composition, Risk, and Audit Capability - LTO current population and criteria: - Current LTO taxpayer population comprises 680 taxpayers and 125 non-active taxpayers. - Current criteria: turnover threshold ALL 350 million; active for five years; annual tax payments greater than ALL 20 million; specific categories (banks, insurance, telephone card operators, cigarette companies). - Recommended criteria changes: remove 5-year active requirement; remove annual payment > ALL 20 million requirement. - Current mismatches and impact of adjusting population: - 351 taxpayers with turnover > ALL 350 million (total tax revenue ALL 11.73 billion in 2017) are managed by regional offices. - 135 taxpayers with turnovers < ALL 350 million (total tax revenue ALL 4.4 billion) should be transferred to regional offices. - 125 passive (non-active) taxpayers should be transferred from the LTO to the passive register. - If adjusted, LTO taxpayers would increase to 897 and LTO share of total revenue would increase from 38.4 percent to approximately 42 percent (interim step toward international norms of at least 50 percent). - Risk identification and RMD role: - Risk Management Department (RMD) leads CRM for all segments; risk rules currently skewed to small and medium taxpayers and not targeted to large taxpayer risks. - Weaknesses: very limited audit selection reasoning, financial statements not considered, lack of feedback loop from audits to RMD, weak LTO audit results on VAT refund and specific issue audits. - Recommendations: establish a structured risk analysis process at LTO (profile using financial and tax indicators), establish LTO risk unit, implement Risk Differentiation Framework (RDF), build specialist intelligence and data analysis capability, LTO to decide audit selections once risk unit established. - Mr. Keith Cartwright provided RDF guidance and an RDF Implementation Action Plan with time-bound steps. - Audit capability and organization: - LTO Audit Directorate: 64 auditors and three audit managers. - Industry specialization currently identified as 22 sectors—recommend restricting to key sectors (banking and finance, energy and hydrocarbons, pharmaceuticals, construction, communications). - Recommend six audit teams with around ten auditors each for better supervisor-to-auditor ratio. - Desk audit tasks include many low value activities; 2018 desk audits averaged ALL 0.29 million yield per intervention. - Transfer pricing: consolidate three existing units into a single unit within the LTO; initial focus on assessing transfer pricing risks and identifying transfer pricing audits. - Training: current training largely general; recommendation to review learning & development to build specialized workforce; additional donor support needed. ### COMPLIANCE RISK MANAGEMENT (CRM) - Recent developments: - Appointment of RMD Director and filling vacancies improved traction; basic risk register compiled and risk rules reviewed; sector research and improved assignment of relative risk scores. - Tourism campaign outcomes (highlights): - Taxpayer Service: distribution of 3,090 leaflets; 12 meetings with tourist guides; contact with 3,886 taxpayers; personalized letters to 1,841 taxpayers; 1,615 contacted by Call Center. - Tax Audits: 1,500 audits by RTOs; 13 percent increase in declared employees; 12 percent increase in VAT turnover declared; 13 percent increase in VAT payable. - Enforced Collection: 229 taxpayers contacted securing ALL 47 million. - Field Inspections: 9,486 visits resulted in ALL 127 million in penalties, 452 undeclared employees found, 296 unregistered taxpayers detected. - Fiscal cash register checks: 10.9 percent increase in turnover year-on-year; 10 percent increase in number of cash receipts issued year-on-year. - Areas needing improvement: - GDT needs automated access to a much broader range of third-party data including bank account information; large-scale automated cross-checking not yet possible; automatic access to bank/financial data will require legislative change. - Risk of focusing on simpler under-declaration cases from fiscalization/e-invoicing data at expense of sophisticated evasion with greater revenue at risk. - RMD future focus areas: environmental scans; specific risk analysis to identify major risk clusters and quantify revenue at stake; identify systemic causes of non-compliance; support Compliance Management Committee in prioritization and multi-year compliance programs; establish baseline measures and impact assessment; identify opportunities to reduce compliance burden. - Recommendation: procure data-warehouse and analytical tools; develop a data management strategy including e-fiscalization data; review RMD organization, processes, infrastructure, resources and skills; strengthen case selection and central coordination for highest-risk targeting. - CRM recommendations summarized: - Broaden 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 optimizing use of data from all sources, including the e-fiscalization system. - Review RMD organizational structure to support business process changes and data/analytic capability. - Enhance CRM work program to develop a multiyear compliance improvement plan. ### REGISTER ACCURACY, TAXPAYER SERVICES, AND VAT REGISTRATION EXPANSION - Register accuracy improvements: - Validation and updating of NACE Rev. 2 codes completed with INSTAT cooperation. - New protocol with NBC (2017) expanded cooperation and automated reclassification processes between GDT and NBC. - Safeguards introduced: prevent deregistration where tax unpaid; stop multiple registrations for simplified profits tax. - Field-detected NACE mismatches now notified electronically to NBC; GDT runs publicity campaigns encouraging online contact detail updates. - Constraints and recommendations: - Legal constraint: substantive changes to NBC register require taxpayer request (except NACE corrections); recommendation to allow GDT authority to update register where field evidence shows inaccuracies. - Recommend program to test taxpayer register accuracy, including passive register (passive flagged after 12 consecutive months of no declaration; list published). - VAT register expansion (April 2018): - VAT registration threshold reduced from ALL 5 million to ALL 2 million. - About 13,000 small businesses brought into VAT system (~one-third increase in VAT register). - Of ~13,000 businesses, 96 percent filed VAT declarations on time, without penalty. - Ongoing consequence: increased GDT workload and small business compliance costs with little revenue yield and unlikely material impact on tax gap reduction. - Taxpayer services: - Advances: move to mostly paperless interactions; e-payment and electronic tax certificates via e-Albania; manual certificates issued in 2017 were 245,000 less than in 2016; live chat development; high mystery shopper rankings. - Gaps: need for overarching taxpayer service strategy and governance; Albania taxpayer time to comply 255 hours vs. 119 hours in Macedonia FYR and 154 hours in Kosovo (Paying Taxes 2019, PWC/World Bank); limited published interpretive guidance; website searchability needs improvement. - Register and service recommendations: - Legislative change to allow GDT to update register on clear field evidence. - Program to test taxpayer register accuracy with NBC. - Develop taxpayer service strategy and governance. - Engage taxpayers and tax intermediaries in product/process design. - Expand published technical interpretive guidance. ### TAX ARREARS — STOCK, AGEING, AND COLLECTION REFORMS - Total tax arrears: - ALL 107.3 billion at 31 October 2018 compared to ALL 111.5 billion at end of October 2017. - ALL 15.5 billion of total stock is subject to dispute. - Approximately 56 percent of debt is overdue by more than 2 years. - Table 4 (Tax Debt, Amounts in ALL millions): - Total stock of tax debt (GDT): 2015: 100,373; 2016: 147,068; 2017 (Oct): 111,509*; 2018 (Oct): 107,286# - Notes: 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. - Drivers of arrears reduction: 1. Write off strategy for 2010 and earlier debt (write-off amnesty). 2. Waiver of penalties and interest for 2010–14 debt (provided primary tax paid). 3. Call center early intervention. 4. Stronger arrears collection management. - Active vs. Inactive taxpayers with arrears (Table 5, end-October 2018): - Active: Number of taxpayers 51,278; Tax arrears ALL Billions 47.5; Percent of total arrears 44 - Inactive: Number of taxpayers 85,985; Tax arrears ALL Billions 59.8; Percent of total arrears 56 - Total: Number of taxpayers 137,263; Tax arrears ALL Billions 107.3; Percent of total arrears 100 - Areas needing improvement: - Significant proportion of arrears uncollectable; recommendation to implement ongoing write-off strategy with legislative provisions to write off uncollectable arrears after reasonable collection steps. - Need for stronger enforcement measures beyond current tools (outbound call, instalments, garnishee) including seizure of assets, bankruptcy/wind up proceedings. - Recommend establishing firmer action unit in pilot to consolidate arrears management and develop legal enforcement procedures. - Consolidation pilot design tasks (Box 5) — selected tasks preserved exactly: - Develop the detailed implementation plan. - Identify project risks and mitigation strategies. - Determine the full range of functions to be consolidated. - Determine the workload for the consolidated site including active/inactive taxpayers; tax arrears inventory; age of tax arrears. - Develop organizational structures for routine and specialized collection work (e.g. insolvency, phoenix case management, debt write-off). - Decide staffing numbers and team structures. - Determine any necessary IT changes. - Address accommodation and equipment requirements. - Revise the standard operating procedures (Enforcement manual) where necessary. - Develop the reporting format. - Resolve workforce planning issues e.g. selection of staff for the consolidated site and staff placement of arrears staff who do not transfer to the consolidated site. - Identify any immediate skilling needs. - Change management processes to help staff understand and embrace the organizational change. - Decide the implementation phases. - Develop success indicators. - Phoenix activity: - Described as new company continuing business of a deliberately liquidated company to avoid paying debts. - Recommended cross-government approach and review of legislative/detection measures; cited Australian Taxation Office Phoenix Taskforce example. - Arrears recommendations excerpt: - Develop a strategy to write-off uncollectable tax arrears. - Appoint the project manager of the consolidated tax arrears pilot and progress the detailed design. - Pilot to include firmer enforcement tools and legal processes. ### AUDIT PERFORMANCE AND REFORM - Desk audit and overall audit performance: - New comprehensive desk audit manual developed to standardize operations and case allocation. - Improvement in strike rates and average value of audit assessments across most categories except desk audits in RTOs. - Managers estimate only about 20 percent of audit assessments are paid. - Desk audit tasks often include non-audit work; one regional office suggests only about 35 percent of desk audit tasks are audit related. - 2018 desk audit average yield per intervention: ALL 0.29 million. - Audit performance (Table 6, Regional Offices, amounts in ALL millions) — selected figures preserved exactly: - Desk audit 2017: Total audits 14,265; Audits > ALL 50,000 = 2,996 (21%); Money value Total 5,423; Average 0.38 - Desk audit 2018 (end-October): Total audits 7,864; Audits > ALL 50,000 = 1,337 (17%); Money value Total 2,253; Average 0.29 - VAT refund audit 2018 (end-October): Total audits 586; Audits > ALL 50,000 = 369 (63%); Money value Total 959; Average 1.64 - Comprehensive audit 2018 (end-October): Total audits 829; Audits > ALL 50,000 = 688 (83%); Money value Total 2,866; Average 3.46 - Audit recommendations: - Analyse reasons for low collection rates on audit assessments and develop appropriate responses. - Analyse role and performance of desk audit function to improve outcomes and eliminate low value work. ### TAXPAYER APPEALS - Organizational placement and issues: - From January 2017 first-level administrative appeals were transferred from GDT to MOFE. - International good practice: first-level independent reviewer within tax administration, separate from audit. - Concerns: MOFE deciding individual tax outcomes may undermine GDT operational independence and create perception of political interference. - Lack of transparency: few appeal decisions on MOFE website; no regular anonymized statistical reporting. - Procedural fairness and timeliness: - Strict pre-conditions: payment of tax in dispute or guarantee, 30-day time limit; during January–October 2018 Tax Appeals Directorate completed 3,406 administrative reviews, of which 854 were refused for not meeting pre-conditions; Tax Appeals Review Committee received 40 appeals of which 16 were refused. - Time to finalize administrative reviews (percent of total cases finalized): - 2015: Within 30 days 4; Within 60 days 31; Within 90 days 65 - 2018 (10 months): Within 30 days 5; Within 60 days 54; Within 90 days 41 - Under TADAT a ‘D’ rating applies unless administrative review stage is completed for at least 90 percent of cases within the lower of 90 days or statutory deadline. - Appeals recommendations: - Transfer the MOFE’s taxpayer appeal function back to the GDT. - Publish anonymized summaries of administrative appeal outcomes and appeal statistics. - Allow flexibility in payment/guarantee and appeal time limit pre-conditions in genuine exceptional circumstances. - Reduce time to finalize appeals and review low-value penalty appeal procedures. ### TIMELY PAYMENT OF VAT REFUNDS - Current situation and issues: - VAT refund delays recurring since December 2000; current delays related to overoptimistic government revenue forecasting. - At end-October 2018 VAT refund arrears constituted ALL 14,439,208 (an ALL 3,1 billion increase from end-September 2018). - Previously approved unpaid refunds amounted to ALL 14.8 billion (December 2017 mission: payment backlog ALL 9.878 billion). - Contemporary practice: VAT return showing net credit treated as refund application; statutory refund timelines: refund within 60 days (30 days for certain exporters); current payment delay ~4–6 month (except three installment arrangements). - Authorities applied zero VAT rate to imports and domestic supplies to three largest debtors from January 1, 2019 to limit further build-up. - International good practices (VAT refund): - Recognize refunds as integral; calculate revenue net of approved VAT refunds; use automated risk assessment software; pay legitimate refunds or offset within legal timeframe (good practice: within 30 calendar days); pay interest on late refunds. - VAT refund recommendations: - Pay the outstanding stock of VAT claims as quickly as possible. - MOFE to improve forecasting of net tax revenue to ensure funds are available to pay all legitimate VAT refund claims immediately. - MOFE to seek legislative amendment to refund credits without any minimum carry forward period and without requirement for taxpayers to submit a separate refund claim. ### OTHER ANALYTICAL FINDINGS — TAX GAP AND TADAT FOLLOW-UP - VAT compliance gap: - Finding: VAT compliance gap of over 30 percent of potential VAT revenues. - Finding: Equivalent estimate cited as (or 3 percent of GDP) for 2015. - Construction and business services identified as sectors with particularly significant gaps. - Recommendation: deepen RMD analysis of compliance indicators to assess size and composition of the compliance risk and tax gap. - TADAT follow-up (selected scores and progress): - Accurate and reliable taxpayer information (Score: C) — NACE Rev. 2 validation completed; GDT needs a register accuracy testing project. - Identify, assess, rank and quantify compliance risks (Score: C) — risk register started; need more external data access and structured outcomes evaluation; establish data warehouse. - Stock and flow of tax arrears (Score: D+) — stock trending downwards; legislative changes in 2019 Fiscal Package to enable instalment agreements and write-off provisions; recommendation to progress arrears consolidation pilot and enforcement tools. - Scope, currency and accessibility of information (Score: D) — need wider interpretive guidance and tailored information for intermediaries. - Monitoring the extent of inaccurate reporting (Score: D) — no estimates of total tax gap; VAT gap analysis carried out by IMF TA in November. ### CAPACITY BUILDING AND NEXT STEPS - 2019 technical assistance focus under EU/SECO program agreed to target: - Large Taxpayer Management. - Consolidation of arrears collection. - Strengthening compliance risk management. - Upskilling auditors in the large taxpayer office. - Compact recommendations (condensed): - Schedule regular Reform Management Committee meetings and review Strategic Plan. - Appoint third Deputy Director and accelerate filling vacancies. - Amend legal framework to give GDT greater authority over organization and resource deployment. - Establish governance for new IT contract at senior GDT level. - Develop an overarching integrity culture strategy and address corruption risks. *Source: PREFACE and EXECUTIVE SUMMARY and selected sections from IMF Fiscal Affairs Department mission report, Tirana, November 19–December 3, 2018 (content unit 1albea2019002).* ### PREFACE _________________________________________________________________________________________ 6 ### PREFACE ### Mission and Purpose - Component of the IMF Fiscal Affairs Department’s (FAD) technical assistance program for capacity building in revenue administration in Southeast Europe. - Mission visited Tirana during the period of November 19–December 3, 2018 to assist authorities in taking stock of reform progress in the General Directorate of Taxes (GDT) and provide advice on future efforts. - Mission leadership and composition: - Led by Mr. Stephen Vesperman (FAD). - Team comprised Mr. Allan Jensen (IMF Regional Revenue Administration Advisor), Mr. Paul Duffus, Ms. Telita Snyckers and Mr. Michael O’Grady (external IMF experts). - Assisted by Mr. Keith Cartwright (FAD external expert) working with the GDT during the mission. - Key interlocutors included: - Mr. Erjon Luci, Deputy Minister of Finance and Economy; - Mr. Nikolla Lera, Advisor to the Minister, Ministry of Finance and Economy (MOFE); - Mr. Xhavit Çurri, Acting Director General, and managers and staff from the GDT’s Headquarters (HQ) and regional offices; - Ms. Mirlinda Karçanaj, National Agency for Information Society; - Mr. Dashamin Begaj and other representatives of the Albanian Institute of Certified Accountants; - Donor representatives: Mr. Philipp Keller, Deputy Head of Mission, Embassy of Switzerland and Mr. Stephen Stork, First Counsellor, Delegation of the EU. - Mission acknowledgements: thanked Mr. Endi Cekani, Chief of Cabinet, GDT, and Mr. Sokol Mici, Advisor to the DG for excellent mission support. ### Executive Summary — High-level Conclusions - GDT continues to make good progress in modernizing its administration of the taxation system. - Reform momentum driven by strong support from the Minister of Finance and Economy and a reform-minded Director General. - Evidence that reform initiatives in the three components—people, processes and technology—are delivering tangible outcomes. - Key improvements: - Investments to improve competency and professionalism of the workforce. - Business process changes in compliance risk management (CRM) and arrears collection supporting transition to a more modern administration. - Information Technology system (successfully implemented from 2015) providing platform for more efficient internal operations and increased availability of e-services for taxpayers. - Warning: pace of change must be maintained or recent achievements will dissipate. - Ongoing budget and legislative support from the Minister and the government are essential to: - move GDT’s performance closer to international good practices; - increase revenue yield; - reduce the tax gap; - influence future compliance behavior of taxpayers. ### Executive Summary — Key Priorities - Large Taxpayer Office (LTO): - Must have a sharper focus on risk and improve auditors’ skill levels. - Government and GDT must be confident LTO effectively manages largest taxpayers with appropriate scrutiny, risk assessments, profiling and engagement. - Consolidation of core functions: - Program to consolidate some core functions into fewer regional locations—beginning with arrears collection—should be accelerated. - Rationale: increased use of electronic services and telephone contact centers reduces need for face-to-face contact and creates opportunity for consolidation to achieve efficiencies, better use of staff, improved performance quality, and greater process uniformity. - Compliance Risk Management (CRM): - GDT must strengthen CRM capability, including broader access to third-party information (particularly bank and other financial institution information) and data-warehouse facilities with automated analytical tools. - Current range and depth of available data falls well short of international trends. - Increase capacity to develop compliance strategies focusing on key areas of non-compliance that contribute to the tax gap. - Integrity and anti-corruption: - Develop a strategy to deal systemically with integrity-related issues and be more transparent around anti-corruption activities. - Note: several instances of corruption by GDT staff featured in the media during the past year, undermining trust and voluntary compliance. - VAT refunds: - Ongoing issue of delayed VAT refunds must be addressed. - Root cause lies in weak tax forecasting and government cash management. - Integrity and credibility of VAT system relies on legitimate VAT credits being quickly refunded. - Concerning that the issue has re-emerged after being largely addressed previously. ### List of Recommendations (selected highlights by section) - Section II: Improving Governance and Organizational Arrangements - 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. - Section III: Strengthening the Large Taxpayer Office - 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 tasks undertaken by LTO Desk Audit and determine more appropriate organizational arrangements for non-audit work. - Finalize arrangements to consolidate the three existing transfer pricing teams into a single unit within the LTO. - Section IV: Strengthening Compliance Risk Management - Broaden 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 program. - Review the current RMD organizational structure to support business process changes and the introduction of data warehouse and analytical tools capability. - Enhance the CRM work program to develop a multiyear compliance improvement plan. - Section V: Improving Registration and Taxpayer Services - Propose a legislative change allowing the GDT to update the taxpayer register where there is clear evidence from field reports that register data is inaccurate. - Develop a program to test taxpayer register accuracy, in cooperation with the National Business Center (NBC), including accuracy of the passive register. - Develop a taxpayer service strategy and put in place clear governance arrangements to steer coordinated implementation. - Engage taxpayers and tax intermediaries in tax product and process design to simplify compliance and reduce costs. - Expand the range of published technical interpretive guidance. - Section VI: Improving Tax Arrears Collection - Develop a plan to write-off uncollectable tax arrears. - Appoint a project manager for the consolidated tax arrears pilot and progress the detailed design. - Section VII: Improving Audit - Undertake analysis to understand reasons for low collection rates on audit assessments and develop appropriate responses. - Analyse the role and performance of the desk audit function to improve audit outcomes and eliminate low value work. - Section VIII: Getting Taxpayer Appeals Right - Transfer the MOFE’s taxpayer appeal function back to the GDT. - Improve transparency by publishing anonymized summaries of administrative appeal outcomes and 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 time taken to finalize appeals and review procedures for dealing with low-value penalty appeals. - Section IX: Timely Payment of VAT Refunds - Pay the outstanding stock of VAT claims as quickly as possible. - MOFE to improve forecasting of net tax revenue to ensure 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 taxpayers to submit a separate refund claim. ### I. Context and Overview of Reforms — A. Fiscal Context - Broad fiscal context: - 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. - For the period January to September 2018 revenues from taxes and customs were up 3.8 percent year-on-year. - GDT collected around 54 percent of all tax revenues (including social contributions) in 2017; most remaining taxes collected by Customs at the border. - Table 1 summary (Revenue amounts in ALL billions; Revenue GDP % reported): - Personal income tax: 2015 — 29.7 2.1; 2016 — 31.4 2.1; 2017 — 32.1 2.1 - Social contributions: 2015 — 71.7 5.0; 2016 — 79.2 5.4; 2017 — 86.8 5.6 - Profit tax: 2015 — 24.2 1.7; 2016 — 28.5 1.9; 2017 — 31.6 2.0 - VAT: 2015 — 124.8 8.7; 2016 — 128.1 8.7; 2017 — 139.5* 9.0 - Note: * VAT revenues are overstated as they do not reflect VAT refund arrears, which amounted to ALL11.7 billion at end-2017. - Excises: 2015 — 39.0 2.7; 2016 — 41.9 2.8; 2017 — 45.1 2.9 - Customs duties: 2015 — 5.8 0.4; 2016 — 6.1 0.4; 2017 — 6.5 0.4 - Other taxes: 2015 — 33.7 2.4; 2016 — 35.8 2.4; 2017 — 38.5 2.5 - Local govt. revenue: 2015 — 11.7 0.8; 2016 — 15.0 1.0; 2017 — 18.4 1.2 - Total: 2015 — 340.6 23.8; 2016 — 366.0 24.7; 2017 — 399.0 26.0 - Source: MOFE and IMF staff calculations and estimates. - Revenue underperformance relative to budget: - Despite 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 attributed mainly to unrealistic forecasting. - Table 2: GDT Collected Revenue 2017 — Collection vs. Budget Forecast (Revenue amounts in ALL billions) - PIT: Net Collected 32.1; Budgeted 36.2; Percent Difference - 11.2 - Social security contributions: Net Collected 82.8; Budgeted 80.1; Percent Difference + 3.46 - VAT gross: Net Collected 48.9; Budgeted 55.3; Percent Difference - 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). - Specific VAT refund note: - 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 addressed separately in Section IX. *Source: PREFACE and EXECUTIVE SUMMARY (IMF Fiscal Affairs Department mission report, Tirana, November 19–December 3, 2018).* ### 3. Recent tax policy reforms have narrowed the tax base and complicated tax ### 3. Recent tax policy reforms have narrowed the tax base and complicated tax ### Recent tax policy reforms and tax base effects - Tax policy focus in recent years: tax cuts and sector-specific incentives (examples: a low VAT rate for accommodation and special concessions for 4/5-star hotels and pharmaceutical manufacturers). - Continued in June 2018 and the (recently announced) 2019 fiscal packages. - Specific measures and effects: - CIT rate cut from 15 to 5 percent for some 11,000 businesses. - VAT threshold reduction brought some 13,000 micro-businesses into the VAT system from April 2018, with little revenue impact. - Proposed 2019 fiscal package headline items include: - Dividend tax almost halved (from 15 to 8 percent). - Widening of the employee PIT lower tax bracket. - Further sector-specific VAT reductions. - Risks identified: - Some changes complicate an otherwise simple and well-structured tax regime. - Open tax avoidance opportunities (examples: shifting higher taxed income into dividends; CIT threshold manipulation). ### Broad overview of reform progress at the General Department of Taxation (GDT) - Modernization drivers: - Implementation of the new IT system in 2015. - Reform-minded Director General (DG) with strong managerial skills and an energetic management team. - Reform program underpinnings: - A Strategic Plan for 2017—21 endorsed in December 2016. - Annual operational plans aligned to the Strategic Plan. - Outcomes from the 2016 TADAT performance assessment; identified weaknesses are being actively addressed. - Cultural and operational initiatives: - Upgrading of accommodation signaling a more professional workforce approach. - Increased use of online services (including the e-Albania portal for tax payments and tax certificates) and outbound electronic notices to shift routine matters away from face-to-face contact. - Stronger relationships with MOFE, Customs, National Business Center (NBC), National Agency for Information Society (NAIS), and e-Albania. - Evidence of tangible results: - Stock of collectable debt on a downward trend due to early intervention strategies and outcomes from the recent arrears amnesty program. - Improved register accuracy through cooperation with NBC and Institute of Statistics (INSTAT). - Organized approach to VAT register expansion after registration threshold reduction and execution of tourism sector compliance campaign. - IMF recommendation integration: - Many of the 39 recommendations from the December 2017 IMF HQ mission have been implemented, substantially progressed, or integrated into operational plans. ### Remaining priority areas for the GDT - Priority areas requiring attention (as discussed in the report): - Strengthening core functions of the LTO. - Taking a more strategic approach to compliance risk management, including expanding automatic access to third-party data. - Consolidating regional office functions (starting with arrears collection) and fine-tuning organizational structures. - Increasing competency of field auditors and improving collection rate of audit assessments. - Improving integrity of the GDT’s administration of the tax system. ### Improving governance and organizational arrangements - Governance framework: - Three permanent senior management committees, all chaired by the DG: 1. Reform Management Committee — strategic direction and supervision of the reform plan. 2. Operations Management Committee — managing annual planning and monitoring performance. 3. Compliance Management Committee — implementation of a CRM system for integrated risk mitigation strategies. - Three issues-based working groups: strategic management, IT system management, and employee disciplinary measures. - Comprehensive reporting framework: extensive operational reports generated by the tax administration information system monitored by the Operations Management Committee and senior leadership. - Identified governance weaknesses: - Overlap in practice between Operations Management Committee and Reform Management Committee mandates. - Reform Management Committee has met only once this calendar year; monitoring of the strategic plan continues to be undertaken by the Operations Management Committee. - Recommended governance actions: - Reform Management Committee should have overall responsibility for implementing transformational reform initiatives, including: - Ensuring plans and adequate resources (people and financial) are in place. - Monitoring implementation progress. - Resolving impediments to progress (e.g., resources, law changes, liaison with other agencies). - High-level reform committees should typically meet at least quarterly. - Review the Strategic Plan after two years in operation to consider updates and inclusion of additional reform initiatives, such as: - Strengthen community consultation on taxation administration. - Strategy to increase community trust and confidence in GDT administration. - Review key performance indicators for value in monitoring operational performance. ### Structures, operations, and staffing - Organizational structure: - Function-based headquarters with three business streams: program design, delivery, and support; each managed by a Deputy Director (one Deputy Director position currently vacant). - Network includes 13 regional offices and an LTO. - Some consolidation achieved (centralized Call Center and Payment Center); early work to assess consolidation of arrears collection functions. - Resource allocation and inefficiencies: - Major mismatch in ratios of tax revenue to staff deployment across the regional network; inefficiencies due to current workload, need for specialization, and extensive automation use. - Potential efficiency gains from consolidating functions (examples: arrears collection, audit of complex tax fraud, inbound/outbound call centers, legal support). - Specific consolidation and reorganization recommendations: - Actively pursue consolidating the arrears collection function into three sites (e.g., South, Central, North) to improve efficiency and capacity to prioritize case work. - Finalize consolidation of the three Transfer Pricing Units into a single unit in the LTO (currently three small teams in HQ, Tirana Regional Office, and the LTO). - Separate field inspection work (currently in Investigation Department) from complex tax fraud unit; about 180 field inspection staff in three sites performed 52,702 checks in 2017. - 2017 checks resulted in discovery of 646 unregistered businesses; 2,702 tax coupon violations; 1,962 unregistered employees; and a further 6,100 unspecified violations. - Determine whether field inspection work is an appropriate use of resources and its impact on future compliance behavior. - Autonomy and vacancies: - GDT needs greater autonomy to adjust organization structure and personnel deployment without Ministerial approval; options for greater autonomy in staff recruitment are being explored with the Department of Public Administration. - Approximately 200 vacancies including a Deputy Director position in headquarters; the vacant Deputy Director position has at least 17 direct reports currently reporting directly to the DG. - Extended delays in filling key positions will adversely affect operational performance and reform pace. ### Information technology support - Current IT arrangements: - GDT uses a “commercial off-the-shelf” (COTS) revenue administration system deployed over the 2014-2016 period; supplier supports system via a service level agreement (SLA) and provides development upgrades as required. - System provides a comprehensive suite of modules essential to modern tax operations. - Contract and procurement: - Current IT contract and SLA due to expire in April 2019. - National Agency for Information Society (NAIS) managing drafting of terms of reference and procurement for a replacement contract. - NAIS proposes a fixed price SLA to cover maintenance of software and hardware, software changes for legislative amendments, and development needs for the life of the agreement; proposed contractual arrangements include a provision to locate IT contractors “in-house” at the GDT. - Mission concern: bidders may not be able to sensibly price development needs when future development requirements are not specified; NAIS noted fixed price models have been used successfully in other agencies. - GDT should have mandate to identify and prioritize future development needs. - Fiscal cash register system: - NAIS managing procurement of replacement fiscal cash register system requiring businesses to provide sales data in real time to the GDT so an official coupon number can be sent back to the business for printing on consumer receipts (coupon). - System will eventually be expanded to include all business-to-business sales (e-invoice) with risk analysis and data warehouse functionality. - Critical requirement: design and implementation must integrate with GDT’s broader compliance management processes and interface with the central revenue administration system. ### Community trust, integrity, and anti-corruption - Integrity challenges: - Several instances of corruption by GDT staff have appeared in the media during the past year, undermining community trust and voluntary compliance. - Current integrity arrangements: - Internal Affairs Department comprising the Director and eight inspectors. - A telephone line for taxpayers to report potentially corrupt behaviour and a structured disciplinary process; more serious cases submitted to a disciplinary committee. - Recommended integrity actions: - Develop a strategy to deal systemically with integrity-related issues and be more transparent about anti-corruption activities. - Take a more strategic approach to assessing, quantifying, and developing risk mitigation responses focused on prevention and detection. - Publish more information about anti-corruption activities, including aggregated data. - Example cited: Australian Taxation Office Fraud and Corruption Control Plan 2018–19 (prevention, detection and response strategies). ### Compact recommendations (from report) - 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 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 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. *Source: 1albea2019002* ### 30. The GDT has recognized the need to strengthen the operations of the LTO. It is ### 1albea2019002 - 30. The GDT has recognized the need to strengthen the operations of the LTO. It is ### Strengthening LTO operations — recent support and context - The mission was assisted by Mr. Keith Cartwright (FAD external expert) who worked 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. - Technical assistance has been provided over the last 12 months to assist the LTO in applying the risk differentiation framework (RDF). 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. ### Areas needing improvement — Taxpayers allocated to the LTO - The LTO taxpayer population currently comprises 680 taxpayers and 125 non-active taxpayers. - The current criteria include: - turnover threshold of ALL 350 million, - requirement that the business has been active for five years, - requirement to make annual tax payments greater than ALL 20 million, - specific taxpayer categories (banks, insurance companies, telephone card operators and cigarette companies). - Recommended changes to criteria: - remove the requirement to be active for five years before transfer to the LTO, - remove the requirement to make annual payments greater than ALL 20 million. - Current mismatches: - There are 351 taxpayers with a turnover of more than ALL 350 million with total tax revenue of ALL 11.73 billion in 2017, which are managed by regional offices. - There are 135 taxpayers with turnovers less than ALL 350 million (with a total tax revenue of ALL 4.4 billion) that should be transferred to regional offices. - There are 125 passive (non-active) taxpayers that should be transferred from the LTO; regulation specifies passive taxpayers should be transferred to the passive register, but in practice this has not happened. - Impact of adjusting LTO population: - Number of large taxpayers administered by the LTO would increase to 897. - LTO share of total revenue would increase from 38.4 percent to approximately 42 percent. - This should be regarded as an interim step towards moving closer, over time, to international norms for the percentage of domestic revenue managed by the LTO (at least 50 percent). ### Risk identification - Current structure and capacity: - The Risk Management Department (RMD) is responsible for the GDT’s compliance risk management function for all taxpayer segments. - Primary focus has been development of a risk register, associated risk rules, and selection of audit casework (70 percent) for the regional offices including the LTO. - Risk rules are skewed towards small and medium taxpayers and do not specifically target risks posed by large taxpayers. - Weaknesses in current RMD risk identification and selection for large taxpayers: - Very limited information on reasons why a taxpayer has been selected for audit. - Financial statements are not considered. - No feedback on audit outcomes to the RMD to refine risk rules. - LTO’s audit results, particularly for VAT refund and specific issue audits, are relatively weak. - Audit results from selections made by the LTO are better than outcomes from cases selected by the RMD. - Needed improvements: - A more structured risk analysis process: profile all large taxpayers using financial and tax-specific indicators, routinely undertaken by the LTO using information from all sources, including the RMD. - Implementing the RDF will develop a more robust approach to risk identification and assessment; the LTO will need to build a specialist intelligence and data analysis capability. - Mr. Cartwright provided guidance on risk indicators to underpin the RDF and emphasized using information in financial statements; he provided an RDF Implementation Action Plan with time-bound steps. - Once LTO risk unit is established and RDF profiling commenced, the LTO should be responsible for deciding which taxpayers to audit. - Tax revenue volatility analysis: - The LTO needs to develop a tax analysis capability to better understand volatility in tax revenues and to determine reasons for significant variations from budgeted forecasts during the year. - Developing this capability would enhance the GDT’s input to government revenue forecasting and revenue estimating processes. - International tax risks: - The LTO has limited experience with transfer pricing; only one audit has been undertaken over recent years despite training by various international organizations. - Recommended preliminary risk analysis to identify potential exposure to transfer pricing risks using basic risk filters, which could include: - Reported losses for several years. - Excessive debt and/or interest expense. - Significant transactions with low tax jurisdictions using service arrangements and fees or commissions paid to related parties. - Unrealistic profitability compared to industry trends. - Substantial payments of interest to non-resident related parties. ### Audit capability - LTO auditors require technical expertise and advanced audit skills. - To build an effective audit function, LTO needs to strengthen: - audit examination techniques (e.g. indirect audit methods and capacity to detect tax avoidance), - core competencies training in tax accounting and financial analysis, tax technical and interpretative expertise, and effective decision making. - Additional donor support will be needed to assist the LTO to develop its audit capability. ### Organizational issues - Industry specialization: - LTO has identified 22 industry specializations, which dilutes in-depth specialization. - Recommendation: restrict specialization to a small number of key industry sectors including banking and finance, energy and hydrocarbons, pharmaceuticals, construction and communications. - Audit team sizing: - LTO Audit Directorate has 64 auditors and three audit managers. - Recommendation: introduce smaller audit teams — six teams with around ten auditors — to provide a more effective supervisor to auditor ratio and enable more coaching, direction and mentoring. - Desk audit tasks: - Some desk audit tasks have low revenue impact (verification work, follow-up of late filers, processing correspondence, responding to information requests). - Recommendation: review tasks and determine extent they could be stopped, re-engineered or reassigned to more appropriate non-audit staff. - Transfer pricing function: - Transfer pricing staff currently in headquarters, the LTO and the Tirana Regional Office. - Recommendation: centralize transfer pricing staff into one unit within the LTO to consolidate expertise, provide economies of scale and more effective management. - Planning is underway to consolidate the three units. - Initial focus for transfer pricing program: - assessing transfer pricing risks; - determining specific information requirements to identify related party transactions; - identifying a small number of transfer pricing audits; - identifying capacity building opportunities. ### LTO skilling programs - Current training needs assessment: - Training needs are assessed through an annual process and training is provided mainly through the customs and tax academy. - LTO indicated training is largely general and not at the advanced and specialist level needed (e.g. complex law interpretation). - Recommendation: - GDT should review its approach to learning and development to ensure it effectively builds a specialized workforce with high levels of expertise. ### High Net Wealth Individuals (HNWI) - HNWI pose significant compliance challenges due to complexity, potential aggressive tax planning, and community impact on tax system integrity. - Recommendation and sequencing: - Over time the GDT needs to increase focus on risks posed by HNWI. - Current priority: strengthen the LTO, address taxpayer non-compliance, reduce the tax gap, strengthen risk identification and build audit capability and expertise. - Once improvements are made, develop a strategy to improve compliance management of HNWI as part of the reform program. - An IMF Technical Note provides guidance on developing a HNWI strategy. ### Recommendations for the LTO (section C) - 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. ### IV. Strengthening Compliance Risk Management — A. Recent developments - Progress made in implementing the CRM approach: - Appointment of a Director for the RMD and filling of several long-term vacancies in that department have resulted in IMF advice finding more traction over the past year. - Efforts include compilation of a basic risk register, structured review of risk rules, encouraging research from a local university into taxpayer attitudes towards compliance, improving results from risk-based audits and increasing ability to assign relative risk scores to different sectors. - Tourism campaign structured process: - Use of a phased approach and a variety of channels and tools, including targeted letters to selected taxpayers, broadly follows IMF advice given in 2016 and 2017. - Highlights of the impact of the tourism compliance campaign (Box 2): - Taxpayer Service: - distribution of 3,090 leaflets; - 12 meetings with tourist guides; - contact made with 3,886 taxpayers; - personalized letters sent to 1,841 taxpayers encouraging review of tax returns; - 1,615 taxpayers contacted by the Call Center. - Tax Audits: - 1,500 audits done by RTO’s; - a 13 percent increase in the number of employees declared; - a 12 percent increase in VAT turnover declared; - a 13 percent increase in VAT payable. - Enforced Collection: - 229 taxpayers contacted, securing ALL 47 million in payments. - Field Inspections: - 9,486 visits resulted in ALL 127 million in penalties being imposed, 452 undeclared employees found, and 296 unregistered taxpayers detected. - Fiscal cash register checks: - a 10.9 percent increase in turnover over the previous year, and a 10 percent increase in the number of cash receipts issued over the previous year. ### IV. Strengthening Compliance Risk Management — B. Areas needing improvement - Range of available data: - GDT needs automated access to a much broader range of third-party data, including bank account information. - While access to (and analysis of) Customs data is showing progress, other third-party data sources are largely accessed on an ad hoc basis and large-scale automated cross-checking is not possible. - Automatic access to key data sources, such as bank and other financial information, will require legislative change. - Risk: unless carefully managed, large volumes of data from the new fiscalization and e-invoicing system could lead the GDT to focus on simpler under-declaration cases at the expense of more sophisticated tax evasion schemes with more revenue at risk. - Role of the RMD: - Future major focus areas for RMD should include: - Undertake environmental scans globally and domestically to identify emerging risks. - Conduct specific risk analysis to identify major risk clusters and quantify revenue at stake. - Identify broader systemic causes of taxpayer non-compliance. - Support the Compliance Management Committee in prioritizing risks to be mitigated. - Develop compliance strategies to mitigate sectoral and other prioritized risks. - Support the Compliance Management Committee in developing multi-year comprehensive compliance programs. - Establish baseline measures and assess impact of compliance interventions. - Identify opportunities for reducing the compliance burden for taxpayers. - Necessary review of RMD: organization structure, work processes, technical infrastructure (e.g. data warehouse and analytical tools), resource allocation and skills. - Case selection: - Strengthen case selection and allocation to ensure highest risk areas are targeted by: - Reviewing, updating, and enhancing risk rules based on audit activity outcome and wider risk analysis using more data and analytical tools. - Rationalizing and coordinating analytical work across GDT organizational units (e.g. investigations department and VAT refunds team). - Increasing the number of operational activities that are selected centrally. - The current risk rules and case selection system are not appropriate for large taxpayers; identification of compliance risks in large taxpayer cases is more complex and should be overseen by the LTO. ### IV. Strengthening Compliance Risk Management — 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. *IMF mission report text.* ### 57. Good progress has been made during the past year to improve register accuracy ### 57. Good progress has been made during the past year to improve register accuracy ### Register accuracy improvements and inter-agency cooperation - Validation and updating of economic activity (NACE Rev. 2) codes for all Albanian businesses were completed in cooperation with INSTAT. - A new protocol with the NBC (agreed in 2017) expanded the scope of cooperation and information exchange between the GDT and the NBC, supplementing an earlier electronic exchange agreement. - Arrangements for reclassifying cases between active and passive status in the GDT and NBC registers have been streamlined and automated. - Safeguards introduced: - Prevent deregistration where tax is unpaid. - Stop multiple registrations by the same person for simplified profits tax. - GDT staff in service and control areas received training on establishing correct economic codes. - Field-detected NACE mismatches are now notified electronically to the NBC and codes are changed on both registers. - The GDT now runs regular publicity campaigns encouraging taxpayers to update contact details through an online facility. - Audit case selection in 2018: the RMD selected 876 audit cases and the RTOs 786 cases. The RMD has had little influence on case selection for investigation and field inspection. ### Constraints on legal authority and need for register testing - Current legal constraint: no substantive change to the NBC register can be made without the explicit request of the taxpayer (except for updating NACE codes found incorrect by the GDT). - Practical problem: taxpayers cannot be relied upon to notify register changes (e.g., changes to a secondary business address); sanctions for non-notification appear generally not enforced by the NBC. - Recommendation: the GDT should have authority to update the register where there is clear evidence from field inspector reports that register data is inaccurate. - The accuracy of the taxpayer register should be tested (in cooperation with the NBC), including the accuracy of the passive register. - A case is automatically flagged as passive if no declaration is filed for 12 consecutive months. - The list of passive cases is published on the website and carries significant consequences for trading, but some passive-flagged cases are likely still carrying on economic activity. ### Recent expansion of the Value-Added Tax register (2018) - Change: VAT registration threshold reduced from ALL 5 million to ALL 2 million (effective April 2018). - Impact: about 13,000 small businesses brought into the VAT system for the first time in April 2018 — an increase of almost one-third in the VAT register. - GDT implementation measures: - Strategy from 2017 targeting communication and developing a simplified quarterly declaration. - Coordinated campaign: meetings with accountants and business associations; dedicated small business “windows” in regional offices; media and social media awareness; taxpayer assistance program. - Example: during October 2018, GDT provided 350 small businesses with assistance to fill in sales and purchases books and complete the VAT declaration. - Outcome: Of the ~13,000 businesses coming into the VAT register, 96 percent filed their VAT declarations on time, without penalty. - Ongoing consequence: expansion increases GDT workload and small business compliance costs with little revenue yield and unlikely material impact on reducing the tax gap. ### Taxpayer services: advances and gaps - Advances: - Move to predominantly “paperless” interactions. - Expansion of e-payment facilities and electronic tax certificates through the e-Albania portal. - Result: the number of manual certificates issued by the GDT in 2017 was 245,000 less than in 2016. - Development of initiatives such as live chat in the call center. - High rankings on “mystery shopper” surveys; GDT regularly ranked in the top two public agencies for quality service by IDRA. - Gaps: - Need for an overarching taxpayer service strategy and clearer governance arrangements (current governance appears to be by the Reform Management Committee, which meets infrequently). - Need for regular and structured interaction with service users and tax intermediaries to improve product/process design and simplify compliance. - Albania compares unfavorably on taxpayer time needed to comply: 255 hours in Albania vs. 119 hours in Macedonia FYR and 154 hours in Kosovo (Paying Taxes 2019, PWC/World Bank). - Limited range and depth of published technical interpretive guidance on complex issues (despite twice-yearly bulletins since 2017 outlining technical decisions and judicial outcomes). - Website searchability and breadth of interpretive materials need improvement. ### Recommendations (Register accuracy and taxpayer services) - Propose a legislative change allowing 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 passive register. - Develop a taxpayer service strategy and establish clear governance arrangements to implement it. - Engage and involve taxpayers and tax intermediaries in tax product and process design to simplify compliance and reduce costs. - Expand the range of published technical interpretive guidance. ### Improving tax arrears collection — background and recent developments - Since the 2016 TADAT assessment (which highlighted high and ageing arrears), GDT has pursued legislative, process, data analysis, and management improvements. - Total tax arrears: - ALL 107.3 billion at 31 October 2018 compared to ALL 111.5 billion at end of October 2017. - Of the total stock, ALL 15.5 billion is subject to dispute. - Approximately 56 percent of debt is overdue by more than 2 years. - Factors contributing to arrears reduction: 1. Write off strategy for 2010 and earlier debt (write-off amnesty). 2. Waiver of penalties and interest for 2010-14 debt (provided the primary tax was paid). 3. Use of the call center as an early intervention strategy. 4. Stronger management of the arrears collection function. - Table 4 (Tax Debt, 2015–18) — debt figures (Amounts are in ALL millions): - Total stock of tax debt (GDT): 2015: 100,373; 2016: 147,068; 2017 (Oct): 111,509*; 2018 (Oct): 107,286# - Age of tax debt: - Total debt (less than one-year overdue): 2015: 31,717; 2016: 35,020; 2017 (Oct): 22,671; 2018 (Oct): 30,625 - Total aged debt (more than one-year overdue): 2015: 68,656; 2016: 112,048; 2017 (Oct): 97,383; 2018 (Oct): 76,679 - Notes: 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. - Reform initiatives progressing: - Draft legislative changes expected in the 2019 fiscal package, including: 1. Enabling instalment agreements for VAT, PIT, social and health contributions. 2. Eliminating requirements for paper notifications and enabling electronic communication with taxpayers and banks. 3. Provision to write off uncollectable debts. 4. Allowing excess VAT credits to be offset against other tax types. - Instalment management functionality added to IT system in November 2018; staff training underway. - Strategy to follow up taxpayers who did not participate in the amnesty: letters, Call Center contact, tax investigation. - Arrears collection manual developed March 2018. - Training of regional office staff in collection procedures and improved debt inventory analysis. ### Areas needing improvement in arrears collection - Uncollectable arrears: - Significant proportion of tax arrears are not collectable; 56 percent relates to inactive taxpayers. - Table 5 (Active and Inactive Taxpayers with Arrears — end-October 2018): - Active: Number of taxpayers 51,278; Tax arrears ALL Billions 47.5; Percent of total arrears 44 - Inactive: Number of taxpayers 85,985; Tax arrears ALL Billions 59.8; Percent of total arrears 56 - Total: Number of taxpayers 137,263; Tax arrears ALL Billions 107.3; Percent of total arrears 100 - Recommendation: implement a write-off strategy and legislative provisions to write off arrears declared uncollectable; write-off should be ongoing after reasonable collection steps. - Need for stronger enforcement measures: - Current treatments: outbound call facility, instalment arrangements (limited), garnishee action. - Gaps: limited action beyond these interventions. - Recommendation: deploy the full suite of arrears collection strategies (see Box 4) and signal progressively firmer action where taxpayers do not engage. - Typical arrears collection measures (Box 4): - Outbound call center/reminder letters/text messages. - Payment by instalment/flexible payment arrangements. - Garnishee notices from third parties. - Withhold government payments to debtors. - Guarantees/securities. - Freezing orders/close business/cancel license. - Tax clearance for the granting of government contracts. - Imposing penalties on company directors. - Offsetting credits with debits. - Liens over assets/Seizure of assets. - Debt write-off. - Insolvency/bankruptcy action. - Legal enforcement tools recommended: seizure of assets, bankruptcy and wind up proceedings. - Short-term operational step: establish a firmer action unit within the pilot to consolidate arrears management, develop procedures for legal enforcement tools, and build expertise. - Organizational consolidation and pilot - Opportunity: consolidate tax collection sections into a smaller number of units to increase efficiency, consolidate expertise, strengthen workload management and deliver economies of scale. - GDT actions: considering a pilot for consolidation; technical assistance provided in 2018; GDT requested IMF technical assistance for detailed pilot design to commence in the first half of 2019. - Oversight recommendation: the Reform Management Committee should provide high-level oversight, approve the pilot design, and monitor progress against reform objectives. - Pilot objectives: beyond relocation, introduce improved operational and collection processes, eliminate non-value add tasks, increase productivity. *1albea2019002 - 57. Good progress has been made during the past year to improve register accuracy* ### Box 5. Design Tasks for a Pilot to Consolidate Tax Arrears Collection ### Box 5. Design Tasks for a Pilot to Consolidate Tax Arrears Collection ### Design tasks for a pilot to consolidate tax arrears collection - Develop the detailed implementation plan. - Identify project risks and mitigation strategies. - Determine the full range of functions to be consolidated. - Determine the workload for the consolidated site including active/inactive taxpayers; tax arrears inventory; age of tax arrears. - Develop organizational structures for routine and specialized collection work (e.g. insolvency, phoenix case management, debt write-off). - Decide staffing numbers and team structures. - Determine any necessary IT changes. - Address accommodation and equipment requirements. - Revise the standard operating procedures (Enforcement manual) where necessary. - Develop the reporting format. - Resolve workforce planning issues e.g. selection of staff for the consolidated site and staff placement of arrears staff who do not transfer to the consolidated site. - Identify any immediate skilling needs. - Change management processes to help staff understand and embrace the organizational change. - Decide the implementation phases. - Develop success indicators. ### Phoenix activity — risk, detection, and suggested actions - Phoenix activity described as new company created to continue business of a company deliberately liquidated to avoid paying debts including tax. - Phoenix activity can result in the loss of significant government revenue if left unchecked. - Legislative improvements require taxpayers to file all outstanding tax returns and pay arrears before deregistration occurs. - Recommended actions for the GDT: - Work with other government agencies (e.g., the NBC) to assess extent of the risk and consider detection/response techniques. - Review good practices adopted by other tax administrations including legislative responses. - Promote a cross government agency approach. - Example good practice cited: Australian Taxation Office is a member of a Phoenix Taskforce comprising 33 Federal and State government agencies; the Taskforce developed sophisticated data matching tools to identify, manage and monitor suspected illegal phoenix activity. ### Arrears consolidation — recommendations (excerpted) - 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. ### Improving audit — current situation and issues - A new comprehensive desk audit manual has been developed to standardize operations and provide more appropriate case allocation. - More attention is 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 and the average value of audit assessments has increased across most categories. - Managers estimate only about 20 percent of audit assessments are paid. - Low payment rate for audit assessments and penalties reduces effective compliance impact. - Desk audit functions include many non-audit tasks; one regional office suggests 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. - Further analysis needed to: - Understand reasons for low collection rates on audit assessments. - Identify desk audit tasks that should be eliminated, automated, or reassigned. - Understand factors contributing to low revenue results. ### Audit performance — selected figures (Table 6: Regional Offices, 2017–18; amounts in ALL millions) - Desk audit - 2017: Total number of audits 14,265; Audits with results above ALL 50,000 = 2,996 (21%); Money value of assessments Total 5,423; Average 0.38 - 2018 (end-October): Total number of audits 7,864; Audits with results above ALL 50,000 = 1,337 (17%); Money value of assessments Total 2,253; Average 0.29 - VAT refund audit - 2017: Total number of audits 534; Audits with results above ALL 50,000 = 278 (52%); Money value of assessments Total 326; Average 0.61 - 2018 (end-October): Total number of audits 586; Audits with results above ALL 50,000 = 369 (63%); Money value of assessments Total 959; Average 1.64 - Comprehensive audit - 2017: Total number of audits 1,124; Audits with results above ALL 50,000 = 888 (79%); Money value of assessments Total 6,552; Average 5.83 - 2018 (end-October): Total number of audits 829; Audits with results above ALL 50,000 = 688 (83%); Money value of assessments Total 2,866; Average 3.46 - Single issue audit - 2017: Total number of audits 750; Audits with results above ALL 50,000 = 383 (51%); Money value of assessments Total 640; Average 0.85 - 2018 (end-October): Total number of audits 655; Audits with results above ALL 50,000 = 354 (54%); Money value of assessments Total 1,009; Average 1.54 ### Audit — 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. ### Getting taxpayer appeals right — organizational placement and issues - Since 2017 first-level tax appeals were transferred from the GDT to MOFE. - International good practice: first-level independent reviewer within the tax administration, separate from audit, to resolve disputes early. - Concerns with MOFE involvement: - MOFE deciding tax outcomes for individual taxpayers undermines GDT operational independence and may create perception of political interference. - Media article cited as illustrating perception of politically motivated dismissal of an appeal. - The percentage of taxpayer appeals upheld following transfer to MOFE is broadly in line with outcomes when reviews were carried out in GDT prior to 2017. - Insufficient transparency: only a small number of appeal decisions have appeared on the MOFE website; no regular anonymized appeal outcome or statistical reports are published. - Procedural fairness and timeliness: - High level of appeal refusals without review due to strict pre-conditions (e.g., payment of tax in dispute or providing a guarantee; strict 30-day time limit). - During January–October 2018: Tax Appeals Directorate completed 3,406 administrative reviews, of which 854 were refused because they did not meet pre-conditions; Tax Appeals Review Committee received 40 appeals of which 16 were refused. - The absolute pre-condition for full upfront tax payment or guarantee is considered unduly harsh; some flexibility recommended (e.g., part-payment or deferral on genuine economic grounds). - Table 7: Time to finalize administrative reviews (percent of total cases finalized) - 2015: Within 30 days 4; Within 60 days 31; Within 90 days 65 - 2018 (10 months): Within 30 days 5; Within 60 days 54; Within 90 days 41 - Under TADAT, a ‘D’ rating applies unless administrative review stage is completed for at least 90 percent of cases within the lower of 90 days or the statutory deadline. ### Appeals — 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. ### Timely payment of value-added tax refunds — current situation and issues - Authorities are far behind with payment of legitimate VAT refunds; recurring problem noted since December 2000. - Reimbursement delays now relate to overoptimistic forecasting of Government revenues rather than tax administration technical issues. - At end-October 2018, VAT refund arrears constituted ALL 14,439,208 (an ALL 3,1 billion increase from end-September 2018). - Clearing the current stock of VAT refund arrears while honoring new refund claims requires much more accurate Government revenue forecasts. - Authorities entered into installment agreements with the three largest debtors shown in Table 8. - To limit further build-up of VAT arrears, authorities decided to apply a zero VAT rate to imports and domestic supplies of goods and services to the three large debtors from January 1, 2019 — may reduce further build-up but can introduce compliance risks and does not solve forecasting deficiencies. - Statutory requirement to carry forward VAT credits should be removed: - Current law: taxpayers (except certain exporters) cannot claim VAT refunds unless refund claimed exceeds ALL 400,000 and taxpayer has carried forward a tax credit for three consecutive months. - Refund is to be made within 60 days (30 days for certain exporters). - Current payment delay (except for the three installment arrangements) is about 4–6 month according to GDT personnel. - Contemporary practice: VAT return represents final self-assessed liability; returns showing a net credit are treated as refund applications without separate refund request. ### VAT refund management — international good practices (Box 6) - Recognize refunds as integral to VAT system, not extraordinary. - Understand that only net revenue remaining after refunding excess credits is real VAT revenue to Government. - Revenue performance calculated net of approved VAT refunds and compared to targets net of refunds. - Subject VAT registration to proof of identity checks to prevent fictitious traders. - Use purpose-built automated risk assessment software to review VAT refund claims against risk criteria; high-risk claims subject to pre-refund audits; lower-risk to post-refund verification. - Pay legitimate VAT refunds, or offset credits against other tax liabilities, within the legal timeframe (good practice: pay refunds within 30 calendar days from refund claim). - Treat VAT returns showing a credit as automatic refund requests; no separate refund request required. - Pay interest to taxpayers where legitimate refunds are delayed. ### VAT refund — recommendations - Pay the outstanding stock of VAT claims as quickly as possible. - MOFE to improve the forecasting of net tax revenue to ensure 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. ### Capacity building assistance (2019 focus) - Technical assistance under the EU/SECO program for 2019 agreed to focus on: - Large Taxpayer Management. - Consolidation of arrears collection. - Strengthening compliance risk management. - Upskilling auditors in the large taxpayer office. *Source: 1albea2019002 - Box 5 and accompanying sections (provided content).* ### Section III. Improving the Governance of the GDT ### Section III. Improving the Governance of the GDT ### Governance reforms and management committees - Remove MOFE representation from the GDT management committees. - Implemented. A new Order (02.03. 2018) setting out management committee structures is in place. - Improve liaison between the GDT and the MOFE on important issues such as proposals for legislative change. - Implemented. There is good cooperation between GDT and MOFE on proposals for legislative change. - Review the mandates of all management forums and map reporting pathways to peak decision-making bodies – and widely publish the information. - Implemented. A new Order (02.03. 2018) setting out management committee structures is in place. - Clarify the role of the MOFE in interpreting the tax laws. - Ongoing. While GDT has exclusive competence on interpreting tax law relating to an individual taxpayer, MOFE retains an interpretation role on how the law is to be applied in certain circumstances. Where the line is to be drawn between these respective roles is not always clear. ### Consolidating tax administration structures and operations (Section IV) - Consolidate the arrears collection function into a fewer offices (guide: no more than four offices). - Ongoing with support of FAD TA. The GDT has carried out significant preparatory work and is well advanced in its thinking on the location and operation of a pilot collection enforcement center. Further TA will be provided early in 2019, with a view to having the pilot operational by mid-2019. - Consolidate the three existing transfer pricing units into a single unit within the LTO. - Ongoing. The GDT has drafted an amendment to the organizational structure to consolidate the transfer pricing units in headquarters, the LTO and the Tirana Regional Office into one organizational unit in the LTO. - Reintegrate the enforcement units, including the HQ-based taskforce, into the audit structure. - No progress to date. A broad review of the field work undertaken by the HQ based taskforce and the field work undertaken in RO’s field is necessary to assist with designing new organizational arrangements. New design needed to reduce inefficiencies from duplicated activities and optimize risk-based case selection processes that improve future compliance behavior. - Consolidate the analysis units of the investigations department into a single unit supporting all four divisions. - No progress to date. - Review the organization and management structures of smaller ROs to identify opportunities for reducing management overheads. - Ongoing. Initial work done on establishing a consolidated collection function. - Provide more flexibility to the DG in making changes to organization structures and internal management forums. - Ongoing. Draft legal proposals have been developed to give the GDT more autonomy on recruitment. - Accelerate the process for recruitment of key persons, in cooperation with the Department of Public Administration. - Ongoing. The HR Directorate has registered 203 vacancies and progress is being made with the Department of Public Administration to fill these vacancies. The vacant Deputy Director post remains unfilled. ### Information Technology support to tax administration (Section V) - Establish a Working Group, comprising MOFE, GDT and NAIS, to improve the management and governance of the GDT’s IT system. - Implemented. A joint GDT/NAIS working group has been established to prepare TOR for the new contract. - Build a data warehousing capability that is supported by modern analytical tools. - Ongoing. Funding for a data warehouse has been requested for 2019. Terms of reference are not yet agreed with NAIS for this project. - Undertake a feasibility study to decide on how to modernize the fiscal cash register system. - Contract awarded for new fiscalization project. A market survey (but not a feasibility study) was carried out and the tendering process for a modernized cash register and e-invoicing system has now been finalized. The contract has recently been awarded and will be implemented in phases. ### Strategic compliance risk management (Section VI) - Increase the proportion of compliance improvement effort delivered through projects aimed at lifting compliance across whole industries or other identified taxpayer segments. - Ongoing. Compliance Committee approved a risk register in April. Following a sector analysis, detailed action plan prepared for tourist sector – with satisfactory results. Continuous sector analysis action plan prepared with FAD TA support. - Test the accuracy of industry codes allocated to taxpayers and engage with other stakeholders to plan and implement a refresh exercise if necessary. - Implemented. In cooperation with INSTAT and NRC, NACE codes for all businesses have been validated and cases where NACE Rev 2 code was missing have now been updated. - Broaden and automate the GDT’s access to internal and third-party data. - Ongoing. The GDT is consulting with NAIS to initially facilitate access to third party data through the Government information platform. Greater use is being made of Customs data. - Establish a modern data warehouse. - Ongoing. See Section V, second bullet. - Invest on an ongoing basis in raising the RMD’s data analysis capability (skilled people and modern analytic tools). - Ongoing. During 2018, RMD staff received training from INSTAT on use of economic activity codes; from OECD on CRM processes, SME compliance and strategies for tackling informality; as well as TA from FAD on sector analysis and identification of risk groups. ### Taxpayer services and registration (Section VII) - Implement a program to test the accuracy of the taxpayer register – following the first year of the revised cooperation agreement between the GDT and the NRC. - Ongoing. Testing of the GDT/NRC electronic communication protocol is continuing for issues such as automatic reactivation and web service elements. All cases of missing NACE Rev 2 codes have now been updated. Some limited accuracy testing is being done for new registrations and de-registrations. A wider accuracy testing program will be discussed with NRC after new systems requirements under the e-communication protocol have been finalized. - Prioritize the simplification of declaration forms and compliance procedures – with a view to improving Albania’s ranking in the PWC/World Bank “Paying Taxes” survey. - Ongoing. VAT statement for small businesses (ALL 2m to 5m) has been revised and simplified. - Provide greater clarity on the GDT’s interpretation of tax laws – by widening and deepening the range of guidance material and catering for the needs of tax advisers. - Ongoing. A technical decision bulletin is now being published and additional explanatory material has been published on the web. ### Large Taxpayer Management (Section VIII) - Invest in significant up-skilling programs in both auditing techniques and law interpretation for audit and taxpayer service staff. - Ongoing. During 2018 LTO staff received training in National Accounting Standards and transfer pricing risk analysis, documentation requirements and reporting obligations. - Conduct specific risk profiling for all LTO taxpayers. - Ongoing. LTO undertakes data analysis using available information to assess risk based on tax revenue changes and industry trends. Technical assistance is being provided to introduce the risk differentiation framework. - Reduce the size of the LTO field audit teams and increase specialization within each team. - Ongoing. Consideration is being given to the appropriate level of sector specializations and changes to reduce the size of the audit teams to provide for a more effective supervisor to auditor ratio. - Increase the number of staff in the taxpayer service, debt management, and desk audit units of the LTO. - Ongoing. This recommendation will be reconsidered taking account of the outcomes from the technical assistance visit on the risk differentiation framework and the recommendations from this mission relating to arrears management and desk audit. ### Tax audit (Section IX) - Invest in significant up-skilling programs in both auditing techniques, commercial awareness, and law interpretation. - Ongoing. Training provided in National Accounting Standards as well as specialist training of a small number in Transfer Pricing and Digital Economy taxation. This upskilling is still very limited and narrow, and additional up-skilling programs will be required. - Automate desk audit activities and redeploy staff to higher value-add work. - Ongoing. The Audit Manual has been updated to focus on size and risk rather than time intervals since last audit. The more experienced auditors are now being allocated the largest and most complex audits. - Refine audit performance measures to ensure they are meaningful. - Ongoing. Audit strike rates are now calculated using a materiality threshold of ALL50,000. Additional performance measures have been developed to allow better monitoring of levels of detection and numbers of controls completed per inspector. - Reintegrate field investigations units into the audit structures. - Ongoing. See Section 4, third bullet. ### Arrears collection (Section X) - Improve the legislative framework to strengthen the arrears collection capability of the GDT. - Implemented. Proposals for law changes made to MOFE and have been included in the 2019 Fiscal Package. - Design and deploy the instalment management function in the arrears collection module of the IT system. - Ongoing. Instalment functionality in joint testing with the supplier. - Establish a clear arrears collection strategy to follow-up on taxpayers who have not taken advantage of the amnesty legislation. - Implemented. Analysis carried out and rework of strategy completed. Joint task forces are enforcing stricter collection measures, including seizure of up to 50 percent of the defaulting taxpayer’s daily turnover. ### VAT refund (Section XI) - Fully automate the VAT risk review process and regularly review and update the risk parameters. - Ongoing. A review of risk parameters has been completed. Risk review is not fully automated but is undertaken in two phases across two organizational units: Automatic review is followed up by a manual review. - Pay VAT refunds within the prescribed time frames. - Not implemented. ### Taxpayer appeals (Section XII) - Transfer the first instance taxpayer appeal function back to the GDT. - Not implemented. - Adopt an approach under which: failure to pay tax-in-dispute does not affect the right to have an appeal heard; and the GDT is empowered to enforce payment where a deferral application is denied. - Not implemented. Law change proposal made to exclude interest from the tax payment/guarantee pre-condition for admitting an appeal. ### Appendix 2 — Progress on addressing 2016 TADAT Assessment weaknesses - Accurate and reliable taxpayer information (Score: C) - Issue: Inaccurate industry codes and other data. - Progress: In cooperation with INSTAT, industry codes for all businesses have been validated and updated to NACE Rev. 2 standard. An expanded cooperation agreement was agreed in 2017 between the GDT and NRC, which automated and streamlined passive/active classifications, with safeguards preventing deregistration where there are tax arrears. GDT staff can notify the NRC to change industry codes where incorrect. Address change can still only be made by taxpayer notification to NRC. - IMF comment: Need for a project to test the accuracy of the register (in cooperation with NBC), including the accuracy of the passive register. - Identify, assess, rank and quantify compliance risks (Score: C) - Issue: Risk assessment limited to internal sources; unstructured processes. - Progress: Work has commenced on developing a risk register, and on developing compliance indicators for the various categories of taxpayer obligations. - IMF comment: Need for more structure in outcomes evaluation; improve access to external data; stronger analytical capacity; review methodology to calculate registration and declaration compliance; establish a data warehouse; structured approach on using data from cash registers to drive field verification activities. - Mitigation of risks through compliance plan (Score: C) - Issue: Underdeveloped compliance plan; not implemented GDT-wide. - Progress: The GDT is awaiting completion of the risk register before developing a new compliance plan. More operational audits are being selected through the risk process and resulting in improved strike rates. Pilot projects targeting high-risk sectors (e.g. tourism) have been undertaken. - IMF comment: Develop a multi-year compliance plan with the features outlined in Box 2, Page 22 of the TADAT field guide. - Monitoring and evaluation of compliance risk mitigation activities (Score: C) - Issue: Limited efforts to monitor and assess impact of actions on compliance behaviour. - Progress: Reports of outcomes from pilot sectoral projects have been prepared. Some monitoring has been done of the impact of the ongoing informality campaign (e.g. under-reporting from cash registers). Audit reports to the HQ distinguish between central risk-based case selection outcomes and locally-selected outcomes. - IMF comment: Develop a structured CRM outcomes evaluation and monitoring framework to assess the impact of GDT activities on taxpayer behaviour. - Scope, currency and accessibility of information (Score: D) - Issue: No tailoring of information for intermediaries; no reliable data on phone response times. - Progress: Technical interpretation and court decision bulletins, which are of special interest to tax intermediaries, are published twice-yearly. The call center has reliable data on response times and has developed a widely-used live chat facility. A range of new information brochures and booklets was published with support from the European Bank for Reconstruction and Development. - IMF comment: Need for a wider – and deeper range of interpretive guidance and more tailored information to tax intermediaries (particularly on the more complex issues). - Initiatives to reduce taxpayer compliance costs (Score: C) - Issue: Initiatives to reduce compliance costs are limited and ad hoc. - Progress: A simplified VAT declaration has been developed for 13,000 small businesses coming into VAT system from April 2018. The initiative with e-Albania has reduced the number of manually-issued tax certificates by 245,000 in 2017 (compared to 2016). Time to comply with tax obligations is still high compared to regional peers. - IMF comment: Need for greater emphasis on tax process design – particularly on simplification of procedures and declaration requirements. - Obtaining taxpayer feedback on products and services (Score: C) - Issue: No statistically valid surveys; taxpayer input to process and product design is ad hoc. - Progress: The GDT’s website has questionnaires and surveys requesting feedback on experiences using the website, the call center and service centers. The quality of GDT services is also compared with the other main public service providers using “mystery shopping” methods (by consulting firm IDRA) – and GDT is regularly ranked in the top two agencies for service quality. - IMF comment: Need to further develop taxpayer perception surveys (preferably using independent and statistically valid methods). Need to engage and involve business and tax intermediaries in initiatives to simplify compliance and improve process design. - Stock and flow of tax arrears (Score: D+) - Issue: The stock of arrears is high and comprises a significant proportion of old debt. - Progress: The stock of tax arrears is trending downwards as a result of the write-offs under the amnesty law (2010 and earlier debt), the waiver of penalties and interest for 2010-14 arrears (provided the primary tax was paid), the use of the call enter as an early intervention strategy and stronger management of the arrears collection function. Legislative changes including enabling instalment agreements for VAT, PIT, Social and Health securities and introducing provision to write-off uncollectable arrears are part of the 2019 Fiscal Package. Instalment agreement functionality has been incorporated in the IT system and a strategy is in place to follow up those taxpayers who failed to take the opportunity provided by the amnesty law to clean up outstanding arrears. - IMF comment: A strategy is needed to use the write-off provisions and the broadening of the instalment agreement arrangements in the 2019 Fiscal Package. The consolidation of the arrears collection into a smaller number of sites should be progressed as a reform priority with a pilot commencing in early 2019. The pilot should also include the development and use of firmer enforcement tools including seizure of assets and using legal processes such as bankruptcy and wind up proceedings. - Scope of verification actions taken to detect and deter inaccurate reporting (Score: C) - Issue: Insufficient audit focus on high risk taxpayer segments; limited scope for large-scale automated cross-checking to verify tax declarations. - Progress: More audits are now selected centrally through the risk analysis process. The RMD has been involved in the design of several campaigns aimed at high-risk sectors, for example medical services and tourism. There is little structured evaluation of audit impacts on compliance. There is still no special focus on high wealth individuals, and there is concern about a reducing share of revenues from LTO cases. A Risk Differentiation Framework is being introduced for LTO cases – with a view to extending this framework to the regions in the future. Audit quality generally throughout the GDT is a concern. Audit training has been improved (including development of a new Audit Manual) and quality assurance is monitored by HQ. Large scale data matching (for verifying tax declarations) is still not in place for key third party information sources. There is no automatic reporting of bank information to the GDT. - IMF comment: Need for clearer outcome expectations for audit activity and more structured evaluation of audit impacts. Need for automatic reporting of bank and other financial information to GDT for Albanian residents – Albania is already committed to cross-border automatic exchange of such information from 2020 - using the OECD’s Common Reporting Standard. - Extent of proactive initiatives to encourage accurate reporting (Score: C) - Issue: Coverage of binding rulings is limited; there are no cooperative compliance arrangements with taxpayers. - Progress: The Law on Tax Procedures was recently changed to require the GDT to publicize interpretations given to taxpayers (while respecting taxpayer confidentiality). The GDT is also required to publish the outcomes of court decisions. - IMF comment: Cooperative compliance arrangements may not yet be appropriate given the GDT’s stage of maturity. Need to improve the breadth and depth of published technical interpretations – in an easily accessible way. - Monitoring the extent of inaccurate reporting (Score: D) - Issue: No estimates of the size and composition of the tax gap for Albania. - Progress: A VAT gap analysis was carried out by an IMF technical assistance mission in November. *Source: IMF mission report content provided in the supplied PDF content unit.* ### 2016. This indicated a VAT compliance gap of ### 1albea2019002 - 2016. This indicated a VAT compliance gap of ### VAT compliance gap and sectoral findings - Finding: VAT compliance gap of over 30 percent of potential VAT revenues. - Finding: Equivalent estimate (or contextual figure) cited as (or 3 percent of GDP) for 2015. - Finding: The gap in the case of construction and business services was particularly significant. - Finding: The RMD has conducted early compliance indicator estimates, which include an analysis of reporting accuracy and composition of the compliance risk and resulting tax gap. - Recommendation: Further deepen the RMD’s analysis of compliance indicators to assess the size and composition of the compliance risk and resulting tax gap. ### Existence of independent, workable, and graduated dispute resolution process - Rating: C+ - Finding: Appeal process is flawed. - Payment of disputed tax a pre-condition for appeal right; RO can appeal decision of the Tax Appeals Directorate. - First level (administrative review) appeals are dealt with by the MOFE from January 2017. - Where the tax-in-dispute exceeds ALL 20 million, the appeal is dealt with by an Appeals Committee (under the jurisdiction of the MOFE); otherwise the appeal is dealt with by the Tax Appeals Directorate in the MOFE. - There is insufficient transparency around the workings of the MOFE appeal bodies. - Procedural fairness issues arise because the taxpayer must – in all cases, without exception – pay the tax in dispute (or provide a bank guarantee for that amount) as a precondition for exercising appeal rights. - A law change proposal to exclude interest from the payment requirement is welcome, but this absolute tax payment pre-condition is too rigid. - Recommendations: - Need for first-level administrative reviews to be dealt with by the GDT – in line with good international practice. MOFE should not be involved in deciding tax outcomes for individual taxpayers. - The advance payment precondition needs to be moderated on genuine economic grounds. - Flexibility on appeal time limits is also needed (for cases of illness etc.). ### Time taken to resolve disputes (timeliness) - Rating: D - Finding: Time taken to complete administrative reviews is well outside international good practice. - Finding: While there has been some improvement in appeal finalization timeliness since the TADAT assessment, timeliness is still inadequate (a ‘D’ rating) having regard to the TADAT standard. - Time taken (days) to finalize 1st-level reviews (in % of cases finalized): - Period 30 days 60 days 90 days - 2015 4% 31% 65% - 2018* 5% 54% 41% - * 10 months - Recommendation: Need to improve the speed of resolution of first-stage appeals – to move closer to international good standards. - Finding/implication: Given that only 30% of appeals relate to tax audit decisions, it may be possible to streamline processes for finalizing low-value penalty appeals. ### Adequacy of tax refund processing - Rating: D - Finding: The risk assessment process is ineffective. - Finding: Refunds are not paid within the 30-day TADAT standard; interest is not paid on late refunds. - Finding: There has been some improvement in the risk assessment process. - Finding: At the time of this mission the GDT was largely 4-6 month behind with paying VAT refunds. - Finding: The unpaid refunds (which had been approved) amounted to ALL 14.8 billion. - Finding: At the time of the December 2017 mission, the payment backlog was ALL 9.878 billion. - Finding: No progress has been made to remove the legal impediments to meeting the TADAT standards. - Recommendations: - Keep VAT refund claim risk criteria under review. - Ensure that refunds are made promptly. - Remove legal obstacles to meet TADAT standards. - Improve revenue forecasting to ensure that sufficient funds are available to pay refunds on time. ### Writing-off uncollectable arrears (Appendix 3) - Context: Write-off is appropriate when the tax authority discontinues collection because the amount is uncollectable; write-off removes the tax debt from the books of account after all reasonable steps to collect the debt have been taken. - Situations where write-off is generally appropriate: - The tax debt is not economical to pursue—typically small amounts or where the taxpayer cannot be located. - The taxpayer has no funds or other assets (e.g., company ceased operations and there are no assets or debtor has died and left no assets). - The debt is not legally recoverable (e.g., balance outstanding after a final dividend has been paid under bankruptcy or liquidation proceedings). - Common features of write-off systems: - Legal authority to write-off tax debts is provided under a country’s financial management and accountability laws (not tax laws), with write-off powers given to a limited number of senior tax officials. - Write-off approvals (and supporting reasons) are fully documented and reviewed—sometimes by a committee, in the case of large debts. - The write-off system is subject to audit by the government’s external auditor, and the total value of debts written-off is published annually. - Except where the amount is irrecoverable at law, the debtor is not absolved from ever having to pay the liability (the tax debt may be re-raised if the debtor’s financial position improves). - Tax debts are considered for write-off on a case-by-case basis. - Uncollectable debts are written-off without the knowledge or involvement of the debtors concerned (write-off is an internal accounting function). - Amounts withheld from employees’ wages for personal income tax and social contribution amounts may have seniority (as preferred creditor claims). - Coherent joint processes to deal with both tax/SSC and private sector debt, including on an out-of-court basis, may be adopted (on an exceptional basis), to assist private sector lenders and facilitate future credit access by tax/SSC debtors. *Source: 1albea2019002 - 2016. This indicated a VAT compliance gap of* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1albea2019002.pdf_