Tax Gap in Kosovo and Albania 2014

Law. Fiscal.
Accountability
AL-Tax Center
Fiscal Documents,
No. 2014/06/22
www.al-tax.org
altax@constultant.com
Date 23.06.2014
Tirane, Albania
Tax Gap (Missed Taxes) in Kosovo and Albania,

2014
Methodology and approaches for evaluation the tax gap in fiscal year 2013.
Comparison with the Balkan countries. Tax gap in Kosovo and Albania.
ABSTRACT
The AL-Tax Center (Albanian Taxation Association) in this study represents the second organised attempt to assess
the weight and map of the distribution of the tax gap. In this second edition, a special place has the assessment of
tax gap in Kosovo. The calculation of tax gap is difficult and a subject for debate by experts and scholars of fiscal
and tax system. Evaluation of gap is possible, as direct taxes, as well as for indirect taxes including two levels of tax
administration in the country: the central and local government level.
The purpose of introducing this evaluation is about attracting the attention of lawmakers and the media, as well as
critics who might have comments about this assessment or have questions about the methodology.
Based on the data obtained from different sources are used the approachs of calculation and use of data reports.
This document is prepared by the AL-TAX, in a series of thematic collections, with the aim of becoming a source of
discussion for all those interested that have integral relationships with taxes and the implementation of their
practices. The content in the first and second part are the same of the first edition.
The copyright belong to AL-TAX and anyone who will use this material as required to mark authorship reference
materials to be used.
The document is available on the website www.al-tax.org
If you have requests and questions send email to altax@consultant.com
Tax Gap (Missed Taxes) in Kosovo and Albania, 2014
Law. Fiscal. Accountability
Terms and definitions
Tax gap/ Missed
Tax gap is defined as the difference between taxes collected with the theoretically
taxes
estimated taxes must be collected.

The total amount of taxes paid on the basis of the relevant income tax (include
Tax burden
income taxes, capital tax and labor taxes) by a specific group of taxpayers, industries,
regions, and states.etc., comparable to what pay other groups, industries, regions,
states, etc..
Final consumption expenditure of households is the market value of all goods and
Final Consumption
Expenditure
3
services, including durable products (such as cars, washing machines, and home
computers), purchased by households. It excludes purchases of dwellings but includes
imputed rent for property owners. It also includes payments and fees to the
(former Private
Consumption)
government to obtain permits and licenses. Here, household consumption expenditure

includes non-profit institutions that serve households, even when reported separately
by the state.
Non payment of taxes through non compliance with tax laws escaping (a) the real
Fiscal Evasion
turnover declaration (b) non calculation and non payment of proper taxes and dues
and, (c) presenting more or false expenses for calculation of taxes.
An attempt to diminish tax dues using the spaces and gaps in tax laws and other
Tax avoidance
VAT
Value added tax
EU
Europian Union
GDP
Gross domestic product
legislation, but without treading the taxes
AL-Tax Fiscal documents

June 2014

Methodology and approaches for evaluation the tax gap in fiscal year 2013. Comparison with
the Balkan countries. Tax gap in Kosovo and Albania.
Prepared and distributed
A. Gjokutaj
Summary
Tax gap (missed taxes) is a sum of money that misses from the state budget. The study comes as the product of
experts of the AL-Tax Center that pointed to the tax gap evaluation, considered as a difference between taxes that
should go into the state budget (theoretically) and the taxes and fees that are actually collected in fiscal year 2013.
This document is a work in group in a cooperation with some fiscal studios in Albania and countries of the region
This study presents three parts connected to the tax gap evaluation. At the begining of paper are presented
concepts and statistical information for the results and methodology. In the second part, in the paper are
presented statistics of the tax gap for balkan countries. In third part is presented the data and calculation of tax
gap in Kosovo and Albania. In this publication for the second time, the pape ris more oriented toward the output
and productivity of tax administrations in Kosovo and Albania. The evaluation of tax gap may result in a deviation
errors to 5 percent, based on the use of many different sources.
A summary of the methodology involves assessing the tax gap for the most important taxes in the actually tax
system. The notes and revisions to this result are welcomed by businesses, experts, scholars and academic staff,
and interested parties to achieve the most accurate assessment possible based on the typical methodology and
data correctly. For comments on the report and for explanation on the methodology used for this ocasion, please
contact altax@consultant.com.
Keywords: tax gap, tax evasion, tax avoidance, tax planning, Kosovo, Albania, Europe, Balkans, taxes, fees, VAT.
CONTENT
Introduction
page 5
What we mean about tax gap?
page 6
1.1
Evasion, avoidance and quality of tax administration
page 6
services
1.2
Defining of the term tax gap
page 7
1.3
The purpose of the study
page 8
1.4
What is the purpose of tax gap calculation?
page 8
1.5
The integration into the EU and effect of measuring
page 8
of the tax gap

1.6
Composition of the elements of the tax gap
page 9
1.7
The effect that comes from the implementation of
page 11
the policy of narrowing the tax gap

1.8
Risks arising from fiscal paradises in creating tax gap
page 13
II
Tax gap in Balkan countries
page 14
2.1
The data about tax gap in world and Europe
page 14
2.2
The data about tax gap in world and Europe
page 15
III
Tax gap in Kosovo and Albania
page 20
3.1
Tax gap in Kosovo and Albania
page 20
3.2
VAT gap in Kosovo and Albania
page 22
3.2.1
The vcalculation of VAT gap in Kosovo and Albania
page 22
Conlcusion
page 23
Methodology
page 24
ANNEX
Introduction
AL-Tax Center is based on data that includes as much as possible information in order to assess the real tax gap.
The term that describes the missed taxes from state budget is less used in the fiscal vocabulary in Albania, but also
in the daily vocabulary. In an effort to find the most useful word associated with the meaning of the missed taxes
term, the experts of AL-Tax Center have concluded that the most comprehensive and understandable term and
synonym for the tax gap in English language or trou fiscal in French would be boshllku tatimor in Albanian.
Even the other term in albanian language pronounced as hendeku tatimor could be also acceptable, after a long
discussion about the proper and adequate meaning that describes as well as proper the tax gap situation we think
that this term does not express the proper dimension of taxes that missed from the state budget.
While, more studies have been published for Albania and countries of the region and the European Union
countries, related to the informal economy, tax evasion and tax burden and its distribution (see the References).
Some of statistics and analises tha describe the productivity of taxes in balkan region belong to the statistical data
editions published by USAID for the period 2008-2010. The study of AL-Tax Center is an attempt to sensitize all
concerned public about the concept and dimensions. On second place the study aims also in linking common
interests of taxpayers, government and legislators, to engage in discussion on the topic and ways to limit the tax
gap.
Any tax system in the world constantly face the challenge of the tax gap. It is a negative phenomenon inherent to
the process of administering taxes. If we analyse from this perspective, the tax gap cannot be minimized without
the support from politicians and citizens in unison with the mission of tax administration and governance model.
Who contributes to maintaining or increasing the tax gap directly helps in increasing the tax burden on honest
taxpayers expense. The lack of knowledge and failure to estimate the tax gap affects the indivisibility of the good
and bad in pure economic system and impairs processes of economic growth hitting equal application of law to all
alike. The tax administration of Albania and as far as we know also in Kosovo, they have made some efforts in
estimation of the tax gap. An estimation and publication of the tax gap would help Albanian fiscal experts to
improve risk management strategies and risk tools for tax administration.
AL-Tax Center
I.
What is the tax gap?
The main goal of mapping of delineation of the tax gap is to build an informative presentation and a
general picture of this tax policy phenomenon. The presentation and analysis of occurrence of tax gap in
the 'body' of the economy along with its components gives to everyone the view of the facts that we
know and that need to know about what's next. An analysis of the tax gap creates to each interested
party to judge what is worth to see about the gap in the system and what changes should be made to
the system.
1.1.
Evasion, avoidance and quality of administration services
The country's tax gap is due to the failure of implementation of laws and lack of voluntary compliance in
their implementation. If anyone would voluntarily implement fiscal laws (with the necessary education
and information) then there would be no tax gap. However, if tax evasion will rise, then the space
between the complement (law enforcement) and a portion of the complement (lack of law
enforcement) will increase, and so the tax gap will grow up. In this way, the tax gap goes proportionally
to the size of tax evasion. From calculations of share that tax evasion takes in the tax gap, the ratio
ranges from 76 to 90 percent.
In the first place, tax gap is result of related mostly with tax evasion, but tax gap is not tax evasion.
Measuring the tax gap is not simply and the same thing as measuring tax evasion. If you can see the
terms and definition on this study, you can understand by yourself the meaning of tax evasion;
In the second place, the tax gap is created also, as a result of tax avoidance1, where taxpayers attempts
to avoid taxes by using of legal space, or irregularities of exemption schemes and tax incentives, which
do not constitute a violation of the law, but they serve their users to reduce the amount of actual
liability.
See the explanation to the terms and definition in this paper
In the third place, the tax gap is related to errors in the calculation of tax liabilities and tax culture in the
country.
In the fourth place, the tax gap is related to the low quality of service of the administration. The tax gap
is more present where there is lack of the professionalism, lack of attention to complaints of taxpayers,
and presence of the corruption and bribery, thus enabling a loss in the correct amount of duty payable.
1.2.
Defining the term 'tax gap'
In the last decade, various fiscal authorities or non-governmental organizations have studied the
informal economy, tax evasion and the tax gap.
In many countries there are different definitions related to clarify the tax gap, but all have the same
meaning. The tax gap settings in most publications is considered as a lot of uncollected taxes and fees,
as a result of non-compliance with laws and from the gaps in implementation of laws and management.
Evaluation of the tax gap does not take into consideration the fact of non-payment of taxes. In
identifying the level of the tax gap are included all the tax revenues that come from non-registration of
activities, omission, the tax avoidance schemes, errors in calculation of taxes, the errors that come from
self-estimation of tax declarations, deficiencies and lack of attention of the administration in
implementing its tasks.
In the case of Albania and Kosovo, in the absence of an official definition and of any document published
by study and research organizations, by public institutions, AL-Tax Center has set down a definition that
considers most appropriate in relation to the objectives of the tax gap evaluation.
Tax gap is the difference between taxes and fees, to which must be regarded as payable to all citizens
and businesses, and taxes that currently pay the taxpayers within a fiscal year and collected by the tax
administration with its resources and tax agents.
1.3.
The purpose of the study
This study aims to make a description and analysis of elements of the tax gap. The main element is tax
evasion and the lack of voluntary compliance with law. The occurrence of tax evasion enables flow in
budget revenues in fiscal administrations anywhere in the world. Is recognition and analysis of these
elements that make up the core of this study? Lets see together.
1.4.
What is purpose about tax gap calculation?
The discussion on tax gap helps to focus the attention on the events and lives of fiscal management that
is a face to face match with the fiscal culture, the tax evasion and the tax avoidance. This discussion
should provide guidance to the tax administration's dilemma, where efforts to promote voluntary
compliance in the calculation and payment of taxes should to oppose strong measures to disarm those
that do not apply the same principles of voluntary compliance.
The tax gap helps to validate a trend for future fiscal policy and to support the fiscal debate for all
concerned parties to set a clear dividing line between voluntary compliance and not, according to the
needs of tax system to adapt for the level of the tax gap.
1.5.
The integration into the EU and effect of measuring of the tax gap
The EU is sensitive to all its members in the calculation of the VAT gap. To the same request, the EU is
enough consistent for countries to enter, or have the status to start accession procedures into EU. This
policy explains the fact why the EU budget includes an obligation according to the VAT and tax gap in
the Member States. The greater is the tax gap, the greater will be the obligation of Member States.
Same logic applies to newly entering countries, but also for aspiring countries. This means that as long as
the tax gap is by far the EU average, will be paid more obligation from the state budget in the period
when they will enter. In other words, is one of the fiscal criteria that will be made public when the
country does not have time available to narrow tax gap as required by the EU. If the tax gap is different
among the countries, as well the obligation to pay into the EU budget will be otherwise reflection of the
level of the VAT gap. But, these transactions need for component elements related with the tax gap,
including VAT fraud and the level of equality of the tax burden. For this purpose, private companies in
EU make estimation and measurements of the VAT gap and excise tax gap in the Member States, or in
countries that may require such a calculation.
1.6.
Composition of the elements of the tax gap
Most of the taxes and fees that
SCHEME OF TAX GAP (UNPAID TAXES)
MISSED TAXES
GROSS TAX GAP
declared and paid voluntarily. Another

part paid late, but that is part of the
penalties related to liabilities that are

paid late. But still some of fees and taxes
are not paid at all, or are part of payment
TAX PAID VOLUNTARLY
TAX COLLECTED
responsible for paying the interest and of
TAX COLLECTED BY
ENFORCEMENT
IDEALLY TAX POTENTIAL
voluntary payment as long as they are
NET TAX
GAP
determine tax system in Albania are
with enforcement measures after tax

audits
and
investigations.
These
revenues, along with other revenues that
Amount of tax that miss to state budget
cannot be identified (are not part of the
Amount of tax collected by enforcement measures
tax burden to the country), consist the
Amount of tax that ideally would be collected by state budget
missed part of tax revenues.
Amount of tax that is not collected
The tax gap is created by a series of behaviors of individuals and businesses, which are summarized:
-
Neglect / non accountability in bookkeeping and tax accounting, and reflected as bad
consequence in tax returns;
Lack of knowledge of legislation and obligations in respect of the law;
Conducting deliberate evasion, and the use of tax avoidance schemes for the purposes of
reporting false or not reporting;
Failure and unpaid obligations;
These features also show the approach how should split missed taxes. In calculating of gross gap it is
theoretical gap that estimates taxes that should be paid. In calculating of net gap are the taxes that are
remained undeclared, unreported and unpaid.
In this evaluative analysis, the tax gap is influenced by the effects of national policy, but also by
international law. For the first factor it is explained above how it affects in the creation of the tax gap.
The influence of the international politics, comes through scheme of movement of capital and
transactions between companies resident in Albania with the links that are in place as related persons,
according to the principles involved in the transfer pricing, cross-border movements of goods and
services, and the schemes involved in aggressive tax planning.
The tax gap should be required between absence of budget money, arising from the constitutional
obligation to pay income tax according to the tax books of the citizens or businesses with what everyone
really pays, expressed as a tax burden (see Fiscal Documents, No. 2012/11/11, Fiscal Documents, No.
2014/03/21 at www.al-tax.org).
In this relations process there is a difference between the responsibility for taxes determined for each
citizen and business and collection of the due amount under the legislation in force. However, even if
could exist the entire legal framework to close the net of 'fiscal holes', remains the possibility of tax
evasion and informality, because of many forms to hiding of incomes. It is important to distinguish
between the gap relating to the definition and tax policy that creates the tax gap with the gap created
by the tax administration model. Summing both they have to do with tax gap.
If we begin from the theoretical definition of the tax gap in different countries or state unions, can be
seen that the hypothetical reasoning used to connect the cause with the consequence, or the approach
how should be revised the model of fiscal managementThis means that the estimation of tax gap cannot
be viewed outside the reality of the fiscal environment in which it is analyzedThe estimation process it
should consider the level of institutional administration and taxes, level and the pattern of economic
development, fiscal culture of citizens, level of credibility in public governance, the model of public
financial system applied in the country and disturbing indicator for countries in transition such as:
corruption, economic freedom, frequent legal changes, continuous circulation of public administrators,
the distribution of the tax burden in the country etc.
10
Box 1. The difference between tax evasion and tax avoidance

The two sides of the same coin, which is called tax gap are the tax evasion and the tax avoidance.
While tax avoidance is full use of the law to reduce the tax burden by avoiding the taxesthe tax evasion makes the
disappearance of the business data that serve for taxes using all illegal tools and methods for not paying taxes. The
approach of avoidance is based on sophisticated schemes and usually use specific jurisdictions and expertise to
realize their deviations using information about weaknesses and deficiencies of legal frameworks and lack of the
coordinated information between different jurisdictions. In the same way, in terms of international tax avoidance
schemes, which are very close in committing of tax evasion schemes use transfer pricing approach. This way of
conducting transactions between related persons, or not is the most used approach at the current times. With the
advancement of technology is even more difficult for tax jurisdictions to identify and reach the transactions.
However, tax administrations have an increased exchange of information and best practices, aiming to be
successful for the taxation of such transactions. With the advancement of technology is even more difficult for tax
jurisdictions to identify and reach the transactions. However, tax administrations have an increased exchange of
information and best practices, aiming to be successful for the taxation of such transactions.
With the tax evasion are involved as citizens and businesses that are registered as taxpayers, as well as those who
refuse to follow legal obligation and principles of tax compliance with tax legislation. In this group, although there
are a formal registration of the taxpayer, he does not fulfill the legal obligations about the declaration, payment
and reporting of the total turnover. In the most extreme cases, this type of taxpayer becomes part of schemes of
tax fraud known as 'Carousel', 'Phoenix' and other popular schemes that are familiar with the practice and
technical publications.
Already, the fiscal administrations in their adaptation tactics to respond in optimal time about these schemes and
doubt transaction methods, that create budget gaps and enrich individuals, that in the worst case are members of
organized crime and in the best case are individuals who commit the corruption by public funds, and grow rich by
shifting the tax burden on others, or are supporter of organized crime sooner or later.
1.7
The effect that comes from the implementation of the policy of narrowing the tax gap
The mission of the tax system is to finance the public expenditures and to be as much as more neutral
about businesses and citizens and their economic decisions. To achieve the neutrality it is important use
of internal resources in order to reduce the tax gap and set of the equity in the distribution of the tax
burden. What happens with the effect that comes from the increased tax gap is the destruction of
equality between the consumption and saving in general, or otherwise between attempts to attract
investment funds and deployment of 'filters' to differentiate their insight on the economy (like
sunglasses for solar radiation). The value of the study and of other studies of a similar nature is precisely
oriented with informations on the benefits and risks associated with the use of policies and their
management in view of the specific conditions of the economy. This right belongs to those who
recognize the economic and fiscal situation, surrounded by tax education in accordance with the level of
citizenship and democratic culture in the country. The effect of the implementation of tax policies in
Albania is not related only with the country's borders, but in some cases these effects can be
11
international. Even worse, if policies are intentional, or not transparent for taxpayers. In these cases, i.e.
if can be approved policies for taxation of fuels, their influence in the international markets for what
they have relations with the volume of transactions with the Albanian resident companies can give
effect increasing or decreasing the tax gap and the impact on domestic economic and fiscal policies.
Such actions as increase of number of tax audits without obvious reason, the impact of fiscal policies
imposed by the reduction of tax administration capacities can break the supply and demand chain on
the stock exchange market that is fragil and can be influenced in any time from these actions.
Fortunately (inside the context), in Albania the transactions in stock exchange market are off line from
the network of international capital market.
The impact of fiscal policy on the tax gap narrowing should influence tax culture and behaviors of the
citizens and businesses. Certain activities that are thought to be formal or actually are formalized in the
economy cannot be part in the future of the scheme of the formal economy, because of the tax burden
they can't keep.
Why?
This means that their services or goods become more expensive and they are not searchable from the
market. In this group are included mostly commercial activities and services that are considered as selfemployment or businesses with employee family members. For the same reason fiscal policy can also
affect formal businesses, which are in the formal market, but not have the equal treatment by the tax
administration. Based on this logic is quite natural that the policies about of narrowing the tax gap
should be developed based on limited segments and activities defined as much as more possible as
problematic about the tax gap impactIn the measurement of the tax gap, attentive monitoring of the
mapping should be dedicated about the tax gap distribution in the segments of taxpayers (self employed
and micro business, small business, medium business, large business). The main part of the tax gap in
Albania is performed by large businesses with a share over 70% of the total tax gap.
Meanwhile, in different countries a good portion of the tax gap comes from the segments of small and
micro business (including the self-employed). Such studies and surveys were conducted in different
years from one country to another. For example, in Denmark this segment creates a tax gap at 3.4% of
the total tax gap at the country level; in Sweden as 9% of the total; in Great Britain as 8% of the total; in
the United States is only 16% of the total; in Chile is as 11% of the total, and in Mexico is as 27% of the
total tax gap.
12
1.8
Risks arising from fiscal paradises in creating tax gap
For all countries that have problems with tax gap, a big risk comes from international extension of the
tax gap as a product from export. Different category of segments of taxpayers (including wealthy
individuals) are looking of fiscal systems with tax breaks and exemptions for investors of money and
capital, without very strong demand on their capital sources, which in everyday language are considered
as tax havens (i.e. tax havens, offshore, etc.).
The tax administrations that need to identify problems and their bearers are in very difficult positions to
get the right information about the tax burden estimate for this category, where the latter ones are
more successful users of gaps in the legislation and all of instruments that help them to avoid or cheat
the tax systems of the countries where they are resident.
New evidence one can be find for every country. For example, the latest report of Global Financial
Integrity in its publication 'Illegal movement of funds from developing countries, 2001-2010' largely
reflects the fact that the phenomena associated with the uses of the countries and areas that are
known, as fiscal havens for capital transfers and illegal money.
13
II. Tax gap in Balkan

2.1.
Indicators of tax gap in World and Europe
Different countries have estimated and calculated the missing tax for each year. Suitable examples of
countries that have estimated the tax gap are the Great Britain, the United States, the Sweden, the
Ireland, the France, the Netherlands, and the Belgium. The main estimation of the tax gap in EU
countries, but also in most of the world it is the VAT gap. The estimation of the VAT gap is done regularly
every year in the largest countries of the EU. The main approach used for the estimation is according on
the macroeconomic data according to the measurement from the top down. Depending on possession
of other data could become the junction with the approach to micro data from the bottom up.
In addition to their studies, as well as the IMF and World Bank chose fiscal jurisdictions to make their
own tax gap estimate for internal management purposes and also as an instrument for the
measurement of fiscal performance to these countries. The IMF requires an estimate of the tax gap in all
jurisdictions that supports and assists, as a criterion for the continuation of assistance. The World Bank
also assesses government performance evaluation using the tax gap, as an indication which is
coordinated with other indicators of performance of governance and economy countries.
Based on trusted sources used in this study, from the publications of calculations that scholars of
different countries have conducted show that 15% world GDP is consumed out of formal economy of
the entire world. Menawhile, the tax gap in the world is estimated to share as 5% of the world economy2.
From this relation between two parallel economies (formal and informal) in European countries seem
that for every 5 Euro (turnover) is hidden 1 Euro in "shelters" of the informal economy of these
countries. As a result, the informal economy remains still strong and the tax evasion continues in
informality and in extension, as is mentioned above.
When we assess the tax gap, the result shows a share of 16.6% of GDP of EU (CPB and CASE Report,
2013). If these missed taxes would be used to pay budget deficit would result in different scenario,
14
T dhnat e publikuara nga OECD Stat extracts dhe EU Stats
where the government would suffer the budget nightmares (the public debt of EU as 92.2% of GDP).
Even would have about 1 trilion euros even more money into the annual budget revenues. If held to the
same budgetary terms, the public debt would shrink from year to year by the tendency preceded his fall
by 1.2 percentage points each year.
2.2.
Indicators of tax gap in Balkan
In the analysis of the Balkan region for year 2013 compared with year 2011, can be noticed a new trend
of public finances, linked with the growth of public debt (+ 50 billion US.D) and decline of GDP (- 50
billion US.D). When we compare two of columns of tables as below, the main fact during years 2011 to
2013, that is more notable belong to the increase of public debt in all balkan countries: in Bulgaria and
Kosovo an increase with 1 percentage point, followed respectivly with 2, 5 and 8 percentage point in
Bosnia, Romania and Croatia; a notable increase with 11 percentage points in Albania, Montenegro, 14
percentage points in Greece and 17 percentage points in Serbia.
Table 1. Estimation of tax gap and share of informal economy of Balkan countries, 2013
No.
Country
GDP
Budget
expenditures
/ GDP
(mln. US.D)
(%)
(%)
(mln. US.D)
(%)
Net
Gross
(%)
Informal economy
Tax
burden
Public
debt/ GDP
Bosnia-Hercegovina
18,870
50.0
33.6
6,340
46.3
2,936
3,376
42.7
Bulgaria
53,700
38.7
31.2
16,754
36.3
6,082
7,298
17.6
Greece
243,300
58.5
23.6
57,419
35.1
20,154
24,185
175.1
Kosovo
6,788
23.4
35
2,376
26.8
637
700
6.3
Croatia
59,140
45.9
28.4
16,796
37.9
6,366
7,893
59.8
Montenegro
4,518
20.4
35
1,581
38.8
614
706
56.8
Macedonia
10,650
45.0
35
3,728
28.5
1,062
1,254
35.8
Romania
188,900
35.0
28.4
53,648
31.7
17,006
20,408
39.3
Serbia
43,680
48.5
30
13,104
36.3
4,757
5,565
65.8
12,850
28.4
32.7
4,202
24.0
1,008
1,160
70.5
642,396
39.4
31.3
175,947
34.2
60,621
72,544
57.0
10 Albania
Total/Average
Source of info: tradingeconomics.com, economywatch.com, theodora.com, F. Schneider, VIES, IMF, MoF
15
Tax Gap (mln. US.D)
Table 1.1. Estimation of tax gap and share of informal economy of Balkan countries, 2011
Budget
Tax
Tax Gap (mln.
GDP
expenditures Informal economy
No.
Country
burden
US.D)
/ GDP
Public
debt/
GDP
(mln. US.D)
(%)
(%)
(mln. US.D)
(%)
Net
Gross
(%)
Bosnia-Hercegovina
18,088
50.3
33.6
6,078
41.2
2,504
3,005
40.5
Bulgaria
53,514
35.2
35.5
18,890
34.4
4,609
5,531
16.3
Greece
298,734
46.8
27.5
82,152
30
24,646
29,575
160.8
Kosovo
6,446
31.9
35
2,256
23.1
521
573
5.3
Kroatia
63,850
40.6
32.1
20,496
26.6
5,452
6,542
52.0
Montenegro
4,550
41.7
35
1,593
28.0
368
441
46.0
Macedonia
10,165
24.5
37.6
3,822
29.3
1,120
1,344
35.0
Romania
179,794
37.7
32.6
58,613
28.1
16,470
19,764
34.7
Serbia
45,043
21.6
29.1
13,108
34.1
3,028
3,633
48.5
12,720
28.6
33.4
4,248
23.1
981
1,208
58.9
692,904
35.9
33.1
211,256
29.8
59,699
71,616
49.8
10 Albania
Total/Average
Source: tax justice network, WB, WHO, VIES, MoF, INSTAT
The increase of public debt (Sami Nabi, 2009) has increased the productivity of the economy by
helping to overcome the crisis and economic growth respiration. But, also reduced capital
accumulation dynamic making the informal sector more attractive to private enterprises, due to
lower costs of the tax burden. Based on this conclusion, policymakers should consider the
sensitivity of the informal sector when adopt strategies to reduce public debt.
In analyzing the indicators of Table 1 and Table 1.1, can be noticed that:
Firstly, the Balkan informal economy accounts for about one third of GDP Balkans and has a
drop of 1.8 percentage points from 2011 to 2013. The informal economy in the Balkans has a
value equal to the GDP of 2013 Kosovo and Albania together. The lowest level of informality for
the Balkans continues to Greece, which has a drop of 3.9 percent from 2011. This shows that
the measures taken have given its effects on Greece aid recovery from the financial crisis.
Likewise, Romania, Bulgaria and Croatia (three EU member states) decreased respectively is 4.2,
4.1 and 3.7 percentage points. Meanwhile, Macedonia and Albania declined respectively by 2.6
and 0.9 percentage points, which is another indication of the government's efforts against
16
informality. While, three Balkan countries, Bosnia, Montenegro and Kosovo have remained
subject to alike levels of informality in the economy without changing the bow of three years.
Secondly, the tendency of lowering / raising the informality shows influential effect on the tax
gap. Balkan states that have not informality decline they don't have decline of net tax gap, but
the gross tax gap fluctuations. In comparing the gross tax gap estimates3, increases are not in
same level with the year progressed during 2011-2013. In this comparison, the trend of
increasing gross tax gap is at different levels in over half of the Balkan states. The changes are
notable to Bosnia (drop), Croatia (increase), Montenegro (drop), Macedonia (drop), Serbia
(decline) and Albania (decline). The Greece is the only one that has oriented the fiscal policy
towards reducing the level of addition to reducing the tax gap informality. While, Romania,
Croatia, Bulgaria, although declining level of informality have an increase in a low tax gap.
Although there have been few changes to fiscal policy (tax rates revised) main effect of
contradiction of trends have sought to increase the administrative capacity and the cooperation
of institutions committed to antievasion. Also, countries that are not yet members of the EU
show that the trend of informality has the same indications that the new member states of the
EU, in relation to measures to reduce the tax gap, but adding in this occasion the ineffective
measures detrimental to informality.
Thirdly, budget expenses Balkans in 2013 increased by 5.6 percentage points compared to 2011.
The largest increases occurred in Serbia (26.9 points), Macedonia (20.5 points), Greece (11.7
points), followed by Croatia (5.3 points) and Bulgaria (3.5 points). The biggest decline occurred
Montenegro (-21.3 points), Kosovo (-9.7 points), followed by Romania (-2.7 points), Bosnia (-0.3
points) and Albania (-0.2 points). In a connection between budget expenditures and the tax gap,
the ratio is proportional irregular and appears to have no direct impact on the level of the tax
gap. Budget expenses increased in Macedonia, Serbia, but the level of the tax gap is growing in
Serbia, and decline in Macedonia. Likewise, budget costs have decreased in Kosovo, Romania
Depending on weight and sound fiscal evasion with legal exemptions nvelet taxable in the tax gap every Balkan state (76 to 90
percent) is made calculating the net tax gap. In assessing gross weight including the impact of other factors (tax avoidance)
17
and Albania, but the level of the tax gap is growing in all three states. This inverse relationship
between the two indicators is needed to be viewed in light of in-depth analysis of (i) how many
part of budget expenditures go into the formal economy, (ii) how many other parts are exempt
from taxation, and (iii) how many parts of the expenditures goes to capital expenditure and
investment budget funds.
Table 2. Estimation of tax burden and tax gap for Balkan countries, 2013
No.
Country
Tax
burden
Tax gap (mln. US.D)
Net Tax
Gross Tax
Gross Tax
Net Tax gap
burden
burden
gap
(estimation)
(estimation) (estimation)
(estimation)
(mln. US.D)
Net
Gross
(mln. US.D)
(mln. US.D)
(%)
(%)
Bosnia-Hercegovina
8,737
2,936
3,376
11,672
12,112.7
25.1%
27.9%
Bulgaria
19,493
6,082
7,298
25,575
26,791.3
23.8%
27.2%
Greece
85,398
20,154
24,185
105,552
109,583.1
19.1%
22.1%
Kosovo
1,819
637
700
2,456
2,519.6
25.9%
27.8%
Croatia
22,414
6,366
7,893
28,780
30,307.4
22.1%
26.0%
Montenegro
1,753
614
706
2,367
2,458.6
25.9%
28.7%
Macedonia
3,035
1,062
1,254
4,098
4,288.8
25.9%
29.2%
Romania
59,881
17,006
20,408
76,888
80,288.8
22.1%
25.4%
Serbia
15,856
4,757
5,565
20,613
21,421.2
23.1%
26.0%
3,084
1,008
1,160
4,092
4,243.7
24.6%
27.3%
221,471
60,621
72,544
282,092
294,015
21.5%
24.7%
10 Albania
Total/Average
Source of info: tradingeconomics.com, economywatch.com, theodora.com, F. Schneider, IMF, MoF
In comparing the indicators of Table 2 with Table 2.1, the main difference is the level of tax
burden. Between the two periods, the tax burden has a significant difference in rise in Croatia
(11.3 points) and Montenegro (10.8 points), followed by Greece and Bosnia (5.1 points). Less
visible growth record Kosovo (3.7 points), Romania (3.6 points), Serbia (2.2 points), Bulgaria (1.9
points) and the last Albania (0.9 points). From the comparison between the fiscal burden and
level of informality seen that in countries where the fiscal burden has increased, the informality
decline.
18
Table 2.1. Estimation of tax burden and tax gapin Balkan countries, 2011
Tax Burden (mln.
Tax burden Tax Gap (mln. US.D)
No.
Country
US.D)
Tax Gap (%)
(%)
Net
Gross
Net
Gross
Net
Gross
Bosnia-Hercegovina
41.2
2,504
3,005
9,956
10,457
25.1
28.7
Bulgaria
34.4
4,609
5,531
23,018
23,940
20
23.1
Greece
30
24,646
29,575
114,266
119,195
21.6
24.8
Kosovo
23.1
521
573
2,010
2,062
25.9
27.8
Kroatia
26.6
5,452
6,542
22,436
23,526
24.3
27.8
Montenegro
28.0
368
441
1,642
1,715
22.4
25.7
Macedonia
29.3
1,120
1,344
4,098
4,322
27.3
31.1
Romania
28.1
16,470
19,764
66,992
70,286
24.6
28.1
Serbia
34.1
3,028
3,633
18,387
18,993
16.5
19.1
23.1
981
1,208
3,938
4,164
25.4
29.4
29.8
59,699
71,616
266,743
278,660
23.3
26.6
10 Albania
Total/Average
Source: tax justice network, WB, WHO, VIES, MoF, INSTAT
In the graph below does not look the same ratio as above the gap between fiscal and tax
burden. Bosnia and Kosovo there's not change in the tax burden, but they have increased the
tax gap. While, Greece, Croatia, Romania, Albania have the burden falling, but rising tax gap.
Among various reasons, the most significant is the adjustment of fiscal policy and
administration by reflecting the change environment of economy and business.
Difference of tax burden and tax gap, 2013/2011
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Bosnia
Bulgaria
Greece
Kosovo
Croatia
Montenegro Macedonia
-2.0%
-4.0%
Tax burden 2013/2011
19
Tax gap 2013/2011
Romania
Serbia
Albania
III. Tax gap in Kosovo and Albania

3.1 Tax gap in Kosovo and Albania
Most of the tax burden in Kosovo (72.2%) and Albania (71.8%) is paid in their respective state
budgets. Kosovo's state budget has received for 2013 an amount of revenues to 1.9 billion
budget US.D . While Albania's state budget has received 3.1 billion US.D. Although, the levels of
tax administration could have collected more tax revenue if not dealt with tax evasion, tax
avoidance, errors in calculation from tax administration.
Table 3. Estimation of tax burden and tax gap for kosovo and Albania, 2013
No.
Country
Tax gap
Tax gap
(mln. US.D) (mln. US.D)
Net Tax burden

(estimation)
Gross Tax
Gross Tax
Net Tax gap
burden
gap
(estimation)
(estimation)
(estimation)
GDP
Tax burden
(mln. US.D)
(mln. US.D)
Net
Gross
(mln. US.D)
(mln. US.D)
(ne %)
(ne %)
Kosovo
6,788
1,916
671
738
2,587
2,653.9
25.9%
27.8%
Albania
12,850
3,084
1,008
1,160
4,092
4,243.7
24.6%
27.3%
19,638
5,000
1,679
1,897
6,679
6,898
25.1%
27.5%
Total/Average
Source of info: tradingeconomics.com, economywatch.com, theodora.com, F. Schneider, IMF, MoF
Albania. Gross tax gap for 2011 was 29.1%, while in 2013 is 27.3%. Net tax gap for 2011 was
25%, while in 2013 is 24.6%.
Kosovo. Gross and net tax gap have remained unchanged over the time period 2011 - 2013
respectively maintained a level of 27.8% and 25.9%.
Albania gross tax gap is estimated at 1.16 billion US.D absolute and has a share as 9,42 % of
GDP, as well as worth 27.3% of the estimated gross tax burden in 2013. Compared to 2011, the
share of the tax gap in GDP has fallen by 0,04 percentage points. Net tax gap it is in the absolute
value of 1 billion US.D (as 7.8% of GDP) and has a slight increase compared to 2011 (0.8%
more).
20
Kosovo gross tax gap is estimated at 738 million US.D in the absolute value and has a share as
10.3% of GDP, as well as worth 27.8% of the estimated gross tax burden in 2013. Compared to
2011, the share of the tax gap in GDP has fallen by 1.4 percentage points. Net tax gap is in the
absolute value of 671 million US.D (as 9.3% of GDP) and has increased in comparison with 2011
(1.3% more).
Box 2. Tax gap impact on public debt and the formal economy
In Albania
To reduce the tax gap by 1% of GDP each year, then we would have a reduction of public debt to 1.4% and an
increase in revenues of 4.2% for the first year and with an increase of 0.12% - 0.15% more than the increase for
years to come. If the tax gap narrows to 3% of GDP, then we will have an effect in reducing public debt below 50%
of GDP within a period of 5 to 6 years. An additional effect will be in the formal economy. For every 1% reduction
in the tax gap would result formalization of the economy by at least 0.2% per year.
In Kosovo
To reduce the tax gap by 1% of GDP each year, then we would have a reduction of public debt to 16% and an
increase in revenues of 3.5% for the first year and with an increase of 3.4% more than the increase for years to
come. An additional effect will be in the formal economy. For every 1% reduction in the tax gap would result
formalization of the economy by at least 1.1% per year
21
3.2 VAT gap in Kosovo and Albania
VAT gap reference calculation takes into consideration the national statistical data, including
the account on Final Consumption Expenditure. According to World Bank data for 2013 this
ratio shows a share of 87.6% of Albania's GDP, meantime for Kosovo this ratio it is at 90.5% of
GDP. Compared to 2011 this indicator is 0.6% higher in Albania and 2.8% lower in Kosovo.
3.2.1 Calculation of VAT gap, 2013

In Albania, the share of Gross VAT4, calculated for the two VAT rats (10% and 20%) should be
as 14.6% of GDP (79% more than 2013 VAT receipts). The share of VAT to the state budget of
2013 was 8.2% as of GDP ($ 1.06 billion US.D5). Considering that domestic consumption in 2013
was at 87.6% of GDP, and given the standard VAT rate weighting more than 99.8% in VAT, then
the theoretical assessment of the value of gross VAT, which must collect the state budget is
about 1.86 billion US.D (10.3% of GDP). Gross VAT gap is estimated that has a share as of 43%
of the theoretical evaluation of gross VAT for 2013 (800 million US.D).
Net VAT gap6 is estimated that has a share as of 18.4% of the theoretical evaluation of net VAT
for 2013 by calculating exclusionary effects by sectors and segments of taxable persons. The
effect of the lack of net VAT it is as 1.9% of GDP (US.D 240 million), or 22.6% of the total VAT
receipts in year 2013.
In Kosovo, the share of Gross VAT calculated for the standard VAT rate (16%) should be as
12.4% of GDP (26.5% more than 2013 VAT receipts). The share of VAT to the state budget of
2013 was as 10% of GDP (680 million US.D). Considering that domestic consumption in 2013
was at 90.5% of GDP, and given the standard VAT rate weighing more than 100% in VAT, then
4
The share of gross VAT is based on calculation of the share of final expenditures in GDP. This figure is the base of
calculation for the gross VAT gap in ideally conditions (no exemptions, differentiation, evasion or avoidance)
5
Exchange rate 1 us.d=105.7 lek, as official exchange rate of Bank of Albania, 2013
6
Estimation of Net VAT gap excludes from the calculation all the exempted activities, see Box 4.
22
the theoretical assessment of the value of gross VAT, which must collect the state budget is
about 850 million US.D7 (12.5% of GDP).
Gross VAT gap is estimated to a share of 20.1% of the theoretical evaluation of gross VAT for
2013 (171 million US.D).
Net VAT gap8 is estimated with a share as of 13.4% of the theoretical evaluation of net VAT for
2013 by calculating exclusionary effects by sectors and segments of taxable persons. The effect
of the lack of net VAT it is as 1.5% of GDP (106 million US.D), or 15.2% of the total VAT receipts
in year 2013.
Conlusion
Albania and Kosovo have a tax gap that is ranked on the list of countries with high tax evasion.
Although the VAT gap for Kosovo is among the lowest levels, remains to be analyzed at each
main tax, where to improve and adjust fiscal policy management.
If compared with the average tax gap of Balkan (gross and net), Albania is respectively 2.6 and
3.1 percentage points higher. Kosovo is 4.4 and 3.1 percentage points higher.
Tax gap in Balkan, 2011
Tax gap in Balkan, 2013
Bosnia
35.0%
Albania
30.0%
Bosnia
30.0%
Bulgaria
Albania
25.0%
Bulgaria
25.0%
20.0%
20.0%
15.0%
15.0%
Serbia
Greece
10.0%
10.0%
Serbia
5.0%
Net Tax Gap
0.0%
Gross Tax Gap
Romania
Kosovo
Macedonia
Greece
5.0%
Net Tax Gap
0.0%
Gross Tax Gap
Romania
Kroacia
Monetengro
Kosovo
Macedonia
Kroacia
Monetengro
Exchange rate 1 Euro =1.3281685 us.d, see http://www.ecb.europa.eu

8
The calculation of Net VAT gap is calculated excluding Final Expenditures, see the Box 4.
23
ANNEX
Methodology of tax gap calculation

Tax gap can be calculated in several ways. One of the ways it is based on the level of voluntary
compliance. Another way is based on the type of taxes and taxpayer groups. In the calculation that will
be presented in this document we will refer in the gap based on the macroeconomic model.
The approach with macroeconomic indicators

This methodology can be applied through the use of different macro indicators that otherwise could be
said as top-down approach (or indirectly). This approach can answers the main question how much
taxes and fees should be paid in a certain area? According to this approach can be measured VAT gap
and excise tax gap. These data derived from the relevance of the declarations and payments, and when
compared with the appropriate level of taxes and fees, which must be declared and paid, then results in
a difference that is the tax gap. This approach determines the absolute gap, which must be filled by
making all possible managerial and operational modifications oriented by the fiscal management policy.
This approach determines the size of the area or of activity that escapes taxation by providing the
appropriate explanations or reasons why this happens.
But this approach has its limitations, because gives no explanation related to how the gap is present in
different parts of the measured area. Another difficulty relates to the fact of the complexity of the tax
system. In this case, it is difficult to measure the tax effects of activities that are not subject to taxation,
or for activities that are part of the global exemption from VAT (financial services). On the other hand,
macroeconomic data cannot identify the size of the areas and taxes that escape taxation (i.e. tax gap can
not be identified if we have different types of tax rates of VAT). In summary all as described, this is the
best way to summarize all activities and taxes, which left traces in national statistics due to their
specifications
24
Box 3. How can be estimated the VAT gap with this approach?
For the calculation of the VAT gap can be used data from the flow of production and total consumption of goods
and services. On this basis, it is calculated a recoverable theoretically VAT. This reflects the correct part of VAT,
which is deemed to be collected, if all goods and services should be taxed. The theoretical calculation of VAT can
be reached, using a commonly average rate that is influenced by the share that has each of rates of VAT
considering the exemptions of VAT, and non standard VAT rates (in Albania is 10%), and the threshold of annually
turnover for being part of VAT scheme. After we have the results of the theoretical calculation should be
compared with VAT actually collected and the result is the VAT gap.
What counted as tax gap?

Work for calculating the tax gap and its mapping is done in several stages:
- Adaptation of definitions, of terms and methodologies about tax gap / missed taxes, which are used in
countries with experience, such as UK, USA, Sweden, Ireland, France and the several Balkan states;
- Analysis of their studies, taking into consideration the combination of various components that are
analyzed, according to fiscal periods;
- Appointment of a structure for presentation of data and information from Albania and the other
countries;
- Presentation of the calculations performed and technical comments, summarized from the results
obtained from this study;
At the time of commencement of work on the calculation and determination of database and
nformation one can raise various questions to answer, as for instance - in cases of tax fraud, should be
included declaration and payment of taxes for these activities (are registered for tax purposes, but
under declare sales and taxes)? Should be the outstanding obligations against the budget (tax debt)
object in this calculation? Can be included the taxpayer that not declares, not pays and the debtors?
For all questions parts of this study answers to those all.
Measurement of the tax gap is based in data and indicators, as parts of the reports published by the
Bank of Albania, Institute of Statistical, Central Tax Administration, and various sources of interest
groups and publications of international and local organizations, such as: USAID, World Bank and
International Monetary Fund. One concern in calculating of the tax gap it is the lack of data on tax
25
administration. Information on compliance of declaration on time, payment and about the actions and
the audits against tax evasion are random and do not are constant data and consistent. But, given the
fact that the tax gap includes the evasion as consequence of informality , for this study it was important
to determine the boundaries of the tax gap, and the insight into elements where there were possible
the data availability, from the media information and analysis of the various thematic information. The
estimation of the tax gap should be calculated for each fiscal year. The total amount of receipts from
taxes and customs is published annually in the official website of the Ministry of Finance, of Institute of
Statistics and of Bank of Albania. The amount of the tax gap is a lot that can change from one year to
another and is not related to the performance of work of a specific institution, but with the work
coordinated with all institutions that have in their mission to fight the phenomena of informality, of
evasion and to increase the capacity of public institutions.
The approach with microeconomic data

Another approach to evaluate the tax gap is the bottom - up approach, where calculations are based on
data from individuals or businessesWhen is used this approach should be conducted surveys and the
polls about the behavior of taxpayers, getting their answers relating to the tax gap for certain groups of
activities and taxpayers. In this way there are included all data that result from the random tax audits,
evasion cases audits, and surveys done from the administration for estimating the industries risks.
Audits that performs tax administration have as the main objective identifying and correcting the
irregularities identified from tax books and reports of businesses from which they have estimated and
have paid their taxes. Based on identification of the tax gap (for each tax) on certain activities and
selected groups of taxpayers, the audit result is used, as template to serve as guide note for all
taxpayers, for all the segments that include the taxpayers, and selected activities. However, if the tax
gap is the hidden tax and what is found to a taxpayer is a certain amount of the tax gap, then with
extrapolating of results can be made the estimation for the entire segment where is part the taxpayer
(assuming that this result will be if will audited all the segment).
The tax gap according to tax audit, when compared with the approach according on macro data, so we
can see what is actually the tax gap. For industries and taxpayers, which have been object of several tax
audits one can be considered that should be closer to the truth about the real tax gap than approach
26
according to macro data. Otherwise can be accepted that the the macro data approach is the closer
estimation to the reality of tax gap. When the data from surveys are part of estimation, then the
responses are a more structured and systematic description than other data for certain industries or
areas. An important point for surveys is the inclusion of a wider group of taxpayers to make as more as
possible a realistic assessment of the tax gap. In surveys is likely to be included more data than can be
accessed by tax administration by providing a more accurate assessment of total risk and the type of
error made by the taxpayer. In these conditions, the possession of this information could make possible
a more comprehensive assessment of multiple data. In the above description of the two approaches one
can conclude clearly that what can't manages to fulfill one of approaches can be corrected by another
approach, so we have beneficial interest in clarifying the real tax gap.
The tax gap, in different countries of the world estimates these types of taxes:
VAT
evasion and informality, administrative data, and data from tax audits
Profit Tax (Corporate
For the calculation of missed profit tax are used data from analytical studies for this tax,
Income tax)
data from tax audits, administrative data
Personal Income Tax
Excise tax
27
For the calculation of missed VAT are used data from private consumption, studies on
For the calculation of missed personal income tax are used data from analytical studies
for this tax, data from tax audits, administrative data
For the calculation of missed excise tax are used data from analytical studies for this
tax, data from tax audits, administrative data
Social and health
For the calculation of missed social and health contributions are used data from
Contributions
analytical studies for this tax, data from labour tax audits, administrative data
Box 4. List of Economic activities included in calculation of Net VAT gap

- agricultural sector,
- financial services,
- education services;
- media
- export of international services,
- reimbursement of VAT,
- exemption scehmes for goods
In the calculation of Net VAT gap is included also the segmentation of taxpayer that are under the VAT turnover
threshhold.
28
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29

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Tax Gap in Kosovo and Albania 2014

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Law. Fiscal.

Tax Gap (Missed Taxes) in Kosovo and Albania,

Tax Gap (Missed Taxes) in Kosovo and Albania, 2014

Law. Fiscal. Accountability

Terms and definitions

Tax gap/ Missed

estimated taxes must be collected.

government to obtain permits and licenses. Here, household consumption expenditure

Value added tax

Gross domestic product

legislation, but without treading the taxes

Tax Gap (Missed Taxes) in Kosovo and Albania, 2014

Law. Fiscal. Accountability

AL-Tax Fiscal documents

Tax Gap (Missed Taxes) in Kosovo and Albania, 2014

Tax Gap (Missed Taxes) in Kosovo and Albania, 2014

Law. Fiscal. Accountability

What we mean about tax gap?

Evasion, avoidance and quality of tax administration

Defining of the term tax gap

The purpose of the study

What is the purpose of tax gap calculation?

The integration into the EU and effect of measuring

of the tax gap

Composition of the elements of the tax gap

The effect that comes from the implementation of

the policy of narrowing the tax gap

Risks arising from fiscal paradises in creating tax gap

Tax gap in Balkan countries

The data about tax gap in world and Europe

The data about tax gap in world and Europe