Analysis of the Effect of Simplified Profit Tax on SMEs at the Level of
Factual Budgeted Revenues in Albania
SHPRESA ÇELA
Department of Finance and Accounting,
Agricultural University of Tirana,
Rr. Elbasanit, Tirana,
ALBANIA
ALBANA GJONI (KARAMETA)
Department of Finance and Accounting,
Agricultural University of Tirana,
Rr. Dritan Hoxha, Laprakë, Tirana,
ALBANIA
FIONA SHEHI
Faculty of Economy and Agribusiness,
Agricultural University of Tirana,
Rr. Marie Logoreci, Tirana,
ALBANIA
BRENDON DULI
Faculty of Economy and Agribusiness,
Agricultural University of Tirana,
Rr. Kongresi Manastirit, Tirana,
ALBANIA
Abstract: Small and medium enterprises are very important part of Albanian Economy, they represent almost 99%
of Albanian registered enterprises and generate more than 80% of jobs in the labour market. They also contribute
60-75% of Gross Domestic Product. SME-s are key elements of the Albanian economy. This study tries to
investigate the effects of changes in fiscal policies to SMEs in Albania, which is also the reason why this topic is of
interest to many researchers. If we compare Albania’s number of SMEs with other countries that stand for the same
level of economic development, they are almost at the same level. Moreover, turnover and the number of
employees have increased for SMEs, while revenues collected from this tax have decreased. The study tends to
explain how the simplified corporate profit tax rate affects budget revenues, its impact and the changes over the
years. We use secondary data to analyze periods from the year 2000 to the year 2019. Also, to analyze if the
simplified profit tax is important or statistically significant and it has an effect on the budget revenues, we use an
econometric regression model. In a conclusion, this study will also show the government measures during the post-
Covid-19 period taken for SMEs. Besides conclusions, we give our recommendations based on our econometric
model analysis.
Key words: SME, growth rate, employment rate, turnover, tax rate, regression model
JEL: F21, H25.
Received: October 11, 2021. Revised: July 24, 2022. Accepted: August 17, 2022. Published: September 6, 2022.
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1 Introduction
Small and medium-sized enterprises (SMEs) play an
important role in the future growth of Europe and can
be found in many countries around the world. [6] In
countries with growing economies and transitions,
including the Albanian economy here, SMEs play a
truly significant role. Small and medium-sized
enterprises in transition countries arose because of
privatization and the demise of large state-owned
enterprises and because of several new ones, mostly
very small enterprises that arose as a result of market
liberalization. [27] Small and medium-sized
enterprises represent 99% of Albanian registered
enterprises and create more than 80% of jobs in the
labor market. They also contribute 60-75% to the
gross domestic product. Their main role is that SMEs
reduce unemployment and create new jobs. Given the
huge growth of the SME sector in the region, the lack
of a real culture of voluntary compliance and weak
tax administration capabilities, simplified taxation is
an important strategy to address the challenges of the
growing informal economy.[9] In Albania, during the
transition period of the year, various measures were
taken by the government regarding the performance
of small and medium-sized enterprises. These non-
aligned actions led to inefficiencies. There are
several unsuccessful legislative and institutional
reforms for SMEs that have not contributed to the
development and improvement of the business
environment. Some of them are as follows:
facilitation of business registration, permits and
licenses, regulatory impact assessment / RIA, ICT
support, Free Trade Agreement, CEFTA, provision
of financial instruments, training, growth of
electronic communications, etc. Albania has also
applied all the principles of the Small Business
Administration (SBA) [1]. This is one of the most
important agreements in the agenda of the European
Commission for the development of small and
medium-sized enterprises, not only for EU member
states, but also for the countries of the Western
Balkans, currently applied in Albania.[10]
The Albanian government applied two different
fiscal regimes in 2009–2019. The first falls into the
years 2009-2014 and the second falls into the years
2014-2019, which are represented by different
political directions. Regarding the first policy
direction, in the 1st fiscal period there is a flat tax of
10% until 2014. The aim was to increase the tax base
to achieve the target of increasing tax revenue. This
would be achieved if the economy had greater
investment capacity, higher consumption, and
income.
In 2014, with a change in political direction, the
fiscal policy brought the ideology of fair taxation by
increasing the tax burden to 15% for profit tax,
dividend, and income tax. Meanwhile, the simplified
profit tax for small and medium-sized enterprises was
replaced by an increased tax that was applied during
this period. During the mentioned period, there was
also a change in the definition of small and medium-
sized enterprises. They were first classified based on
the criteria of the Albanian government. After 2014,
they were classified based on EU principles. Despite
the frequent fiscal variability that indicates the
achievement of precise results for each study
conducted in the mentioned period, this study
highlights how the simplified rate of tax on the profit
of small and medium enterprises affects the actual
budget revenues. What impact does this tax have on
local and council tax revenue? in 2019, according to
the annual report of local finances issued by Coplan
and the Ministry of Finance, the revenue collected
from the simplified profit tax for small businesses
was ALL 376.3 million, an increase of ALL 46.8
million compared to 2018. [2]. The share of these
revenues in total local tax revenues is 2.4%. 1.5% is
involved in revenues from municipal resources. With
respect to the study period, shown in the figure
below, the revenue collected from the simplified
SME profit tax decreased [11]. This is the reason that
drives the study, and it is important to analyze
whether the tax rate of the simplified SME profit tax
affects the income, in other words, whether it is
significant or not. This connection and importance
are demonstrated through an econometric model.
Ultimately, SMEs, along with other taxpayers,
benefit from a well-functioning tax administration
system. [29]
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Fig.1: The revenues from the simplified profit tax of small business
Source: INSTAT, 2022
According to the fiscal issues research center
ALTAX, the simplified profit tax for SMEs is 0.02%
of GDP in 2019 and has not changed in the previous
three years [12]. From 2007 to 2012, the simplified
profit tax was 0.2% of GDP; from 2013 to 2015, it
was reduced to 0.1% of GDP; and from 2016 to
2017, it was reduced to 0.04% of GDP. [13] As
shown in the table below, the Simplified Profit Tax is
variable during the period of the study
Table 1. Data of the analysis
2 Literature Review
In this chapter, will be explained three main issues of
the study. The first part of the literature explains the
meaning of SMEs, the second part explains their
importance in economy and the third part explains
their performance over the years 2018 and 2019.
1. Definition of SMEs:
Small and Medium Enterprises (SMEs) are
recognized all over the world as backbone of modern
economies because they make major contributions to
global economic growth and sustainable development
through employment generation, poverty alleviation,
wealth creation and food security [25]. SMEs play a
major role in economic growth in the OECD area,
providing the source for newest jobs [23]. Moreover,
SMEs are effective tools for poverty alleviation. [28]
They represent about 90% of businesses and more
than 50% of employment worldwide [24]. The
definition of
SMEs varies from country to country. SMEs are
defined as non-subsidiary, independent firms, which
employ fewer than a given number of employees.
This number varies across national statistical systems
[22]. Most SME jobs are in the service sector, which
now accounts for two-thirds of economic activity and
employment in OECD countries. Based on various
studies, for example, based on OECD publications,
the best practice policies for SMEs include financing,
business environment, technology, management
capabilities and access to markets.
SMEs are enterprises that have income, assets or the
number of employees below a certain threshold. The
main criteria for classifying them by size used by
many countries are: number of employees, turnover
and / or value of assets [5]. Until 2014, Albania
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Tax revenue 20.8 20.3 21.1 21.5 22.5 22.9 23.5 23.6 24.5 23.7 23.3 23.4 22.6 22.2 24.1 23.9 25.1 25.7 25.7 25.2
From taxes and customs 16.2 15.6 16.1 16.1 16.7 16.9 17.8 18.3 19 18.3 18 18.1 17.5 17 18.2 18 18.7 18.9 18.7 18
Income from special funds 4 4 4.2 4.2 4.5 4.5 4.5 4.3 4.4 4.4 4.3 4.4 4.3 4.4 5 5 5.4 5.6 5.7 5.8
Revenues from local government 0.6 0.7 0.9 1.2 1.3 1.5 1.3 1 1 1.1 1 0.9 0.8 0.8 0.9 0.8 1 1.2 1.3 1.4
Local tax 0.3 0.4 0.4 0.7 0.8 1 1 0.7 0.7 0.7 0.6 0.6 0.5 0.5 0.5 0.4 0.7 0.9 1 1
Property tax (building) 0.1 0.1 0.2 0.1 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.3
Simplified profit tax of small business 0.3 0.4 0.4 0.4 0.6 0.5 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.04 0.02 0.02 0.02
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applied its own criteria for the classification of
SMEs, since that the Albanian economy in terms of
size is very small compared to other EU countries.
According to this economic definition, are considered
as small enterprises the economic enterprises which
met the three following criteria:
1. They own a relatively small part of their
market
2. They are managed by the owners themselves
and not through a formal management
structure
3. They are not part of a big business, they are
independent,
On the other hand, Law no.8957, dated 17.10.2002,
"On small and medium enterprises" used the
following classification [19]:
1. Micro enterprices, with up to 5
employees
2. Small enterprises, with 6 to 20 employees
3. Medium enterprises, with 21 to 80
employees.
The European Commission, to solve the problem of
defining small and medium-sized enterprises, took
the initiative to unify a single definition at EU level.
After almost a decade it became necessary to revise
this definition of the European Commission and so in
2005, a new definition for SMEs was adopted [7].
An enterprise is an entity engaged in an economic
activity regardless of its legal form. This definition
has been given in advance by the European Court of
Justice. So, it is the economic activity, the
determining factor and not the legal form of business
[3].
The new EU definition adopted in 2005 considers the
three following criteria: 1) number of employees, 2)
annual turnover, and 3) annual balance sheet. Based
on these three criteria, enterprises are divided into 3
categories, with the following characteristics [14]:
Table 2. European Commission Classification of SMEs
Source: European Commission Recommendation of 6 May 2003 on the definition of micro, small and medium-
sized enterprises.
Category
No. of employees
Annual balance sheet
Medium
<250
(in 1996: € 40 million)
<€ 43 million
(in 1996: €27 million)
Small
<50
(in 1996, € 7 million)
≤ € 10 million
(in 1996: €5 million)
Micro
<10
(wasn't previously defined)
≤ € 2 million
(wasn't previously
defined)
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So the EU and a large number of OECD countries,
transition and developing countries have set the
maximum limit of number of employees for SMEs at
200-250, with a few exceptions: such as Japan
(leading up to 300 employees) and in the US (500
employees).
Currently in Albania, the simplified Profit Tax for
SMEs is determined on the basis of annual turnover.
Enterprises that have an annual turnover of up to 5
million ALL, the tax is zero. For enterprises with a
turnover of 5 to 14 million ALL per year, which are
also considered small enterprises, this tax is 5% and
for enterprises with a turnover over 14 million ALL
per year, which are considered medium and large, the
profit tax is 15%.
2. SMEs importance in economy:
The role of small and medium enterprises is
worldwide acknowledged for their unique
contribution to the economic development.
(SAVLOVSCHI. L, ROBU. N, 2011) Various
researches show that there is a positive correlation
between SME development and economic growth
[20]. SMEs are vital actors for enhancing innovation,
competitiveness, entrepreneurship and the
establishment of an effective innovation system for
developing countries [17]. An important involvement
of the external impact of small and medium
enterprises is the fact that their contribution in the
development is not limited to the sector of SMEs of
the economy, but more than that, it is extended as
impact on the enterprises not in this sector, with
significant influences [26].
The fact that the role of SMEs in an economy
appears to increase with country income level might
indicate that SMEs are themselves a driver of
economic growth [14]. In developing countries, small
and medium enterprises (SMEs) account for more
than half of all formal employment. [15] The SME
sector’s contribution to GDP also confirms its
economic importance. Countries with a higher level
of GDP per capita have larger SME sectors in terms
of their contribution to total employment and GDP
[4].
There is considerable interest in SMEs in developing
countries. There are probably two main reasons for
this. One is the belief that SME development may
prove to be an effective antipoverty program. The
second is the belief that SME development is one of
the building blocks of innovation and sustainable
growth [17].
In particular, SMEs:
-boosting competition;
-Has the flexibility to respond to rapidly changing
demand;
-Provide mostly employment, including in times of
crisis;
-Enables self-realization of citizens;
-Creates conditions for the formation of the middle
class that provides stability in society [18].
3 SMEs Performance for the year 2018
to 2019
SMEs have to improve and develop their
performance to survive and achieve their goals and
objectives. The main argument is that SMEs require a
performance measurement system specifically
designed and tailored to their characteristics and
needs [16]. However, despite the flurry of research
on SMEs' performance, there is no consensus on the
factors that drive SME's performance [21].
According to the latest data from the Institute of
Statistics [13], by the end of 2019, the number of
active SMEs was 162,342, almost the same as in
2018. Their main activity is trade and enterprises in
this sector occupy 23.0% of enterprises registered in
2019, compared to 23.2% registered in 2018. While
small enterprises as a result of fierce competition that
the trade chains are creating more and more, as well
as the weak consumption of the economy, are in
great difficulty. According to INSTAT
1
2019, the
number of small enterprises with 1-4 employees,
excluding the agriculture sector was 116.6 thousand
in 2019 marking a decrease of 2.5% due to the
closure of about 4 thousand enterprises.
The trade and industry sectors had the largest
contraction in business. In the trade sector, this
decline has been with 2300 businesses and continues
to decline. The same can be said for the industry
sector, where there was a decrease of 2000 thousand
less active businesses, compared to 2018 as a result
of closing their activity and 600 new businesses less
compared to 2018. While the construction sector,
telecommunications and other services have grown.
To reduce the negative effects of "Covid 19", the
government has implemented two financial rescue
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packages focusing on employees and the self-
employed in small enterprises. The government has
also approved packages that guarantee business
support funds, which helped but didn't solve the
whole business problem. The International Monetary
Fund (IMF) has estimated that Albania's direct and
indirect support packages were equal to 2.9% of
GDP, from 5.8% for the Western Balkans average,
due to the high public debt which reached 79.9%.
Also, there has been a reduction to -23.8% of the
simplified profit tax on small businesses during the
period 2015-2019. This income created from the
simplified profit tax for small businesses according to
the law "On local taxes" goes to municipalities
budget. The government through the tax
administration collects this tax which is allocated to
98% of the municipal budget while only 2% goes to
the government budget. Following the measures
taken, the current government issued the decision
that starting from 2021 to 2029 will remove the profit
tax for entities with an annual turnover of up to 14
million ALL per year, for SMEs which were most
affected by the pandemic. According to General
Directorate of Taxes data, there are 91 thousand
enterprises with turnover from 0 to 14 million ALL
per year in the whole country, 80% of which or
72,800 businesses declare less than 5 million ALL
annual turnover. Only a difference of 18,200
enterprises is in the category with annual turnover
between 5-14 million ALL, who pay a simplified
profit tax of 5%. So is the number of businesses that
benefit from the prime minister's promise. According
to the ALTAX study center, this decision does not
violate the law, but, "It is not a good thing, as long as
it does not reconcile with all factors." [8]. Experts
estimate that the head of government is promising the
abolition of a tax that actually belongs to the local
government, while no alternative is given as to how
the municipal budget will compensate for this
missing revenue.
Hypothesis(H1): The simplified
2
Profit Tax Rate
on SMEs affects the level of tax revenues.
Hypothesis(H0): The simplified Profit Tax Rate
on SMEs dose not affects the level of tax revenues.
4 Methodology
Importance of the study:
First, the question under consideration is obviously
clear because there is a logical relation among the
factors. In this connection, we have considered as an
independent variable the profit tax rate, while as a
dependent variable the factual budget revenues from
this tax
Definition of variables:
Based on available data for this analysis, in support
of the hypothesis, it is appropriate to utilize the
logistic regression (single-factorial linear model).
This model can be described by the equation:
Y=a+bX1+e.Y is a dependent variable and X is the
independent variable.
Data:
In our study we have used secondary data which have
widely contributed to the analysis presented here.
The sources of data include reports, bulletins and
various studies.
Method Used:
The econometric model is based on single-factorial
linear model. Using the INSTAT and ALTAX data,
the statistical analysis on the relationships and impact
among factors will be carried out.
Whether this model is of importance or not will be
established by the comparison of the factual
fisher (Ff) with critical fisher (Fk) that are calculated
by the following formulas:
𝐅𝐟 =𝐑2/(𝐤−𝟏) / (𝟏−𝐑2) /(𝐧−𝐤)
𝐅𝐤 = 𝛂; (𝐊 − 𝟏); (𝐧 − 𝐤)
𝛼 is the percentage of error that has the values: 1%,
5% and 10%.
K is the number of parameters in the model. n is
amount of data under consideration.
R2 is coefficient of determination. It indicates what
percentage of dependent variable is determined from
independent variable and is given by the formula:
𝐑2 =𝐒𝐇𝐊𝐑/𝐒𝐇𝐊𝐏
SHKR and SHKP are calculated by these formulae:
𝐒𝐇𝐊𝐏 = ∑ (𝐘 − 𝐘)2
𝐒𝐇𝐊𝐑 = ∑ (𝐘 − 𝐘)2
where 𝐘= 𝐚 + 𝐛𝐗
𝑌 is the average of dependent variable data.
Factual fisher can be determined by formula: 𝐅𝐟
=𝐒𝐇𝐊𝐑 / (𝐤−𝟏) ⁄ 𝐒𝐇𝐊𝐌/ (𝐧−𝐤)
If Ff > Fk the model is statistically significant and
alternative hypothesis (H1) is accepted.
If Ff < Fk the model does not show statistical
significance and the prime hypothesis (H0) is
accepted.
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5 Results and Interpretation of
Regression Analysis: Model 1: OLS, using observations 2000-2019 (T = 20)
Dependent variable: Tax Revenues
Coefficient
Std. Error
t-ratio
p-value
Const
24.8006
0.428400
57.89
<0.0001
***
Simplified Profit
Tax Rate
−6.75844
1.54244
−4.382
0.0004
***
Mean dependent var
23.28000
S.D. dependent var
1.571657
Sum squared resid
22.70976
S.E. of regression
1.123233
R-squared
0.516114
Adjusted R-squared
0.489231
F(1, 18)
19.19881
P-value(F)
0.000360
Log-likelihood
−29.64939
Akaike criterion
63.29879
Schwarz criterion
65.29025
Hannan-Quinn
63.68754
Rho
0.573978
Durbin-Watson
0.682473
Tax Revenues = 24.8 - 6.758 Simplified Profit Tax
Rate
R2=0.51=51%
P-value <0.05
P-value(F) <0.05
Intepretation 1: With a 1-unit increase in the
simplified profit tax rate, tax revenues will be
lowered by 6.16 units.
Intepretation 2: R2=51%, shows that 51% of the
change in tax revenue depends on simplified tax rate.
Intepretation 3: The factual Fisher is larger than the
critical fisher. This shows that the model is signifiant
or statistically important.
Heteroskedasticity test: H0: Heteros missing ; H1:
Heteros not missing
White's test for heteroskedasticity
OLS, using observations 2000-2019 (T = 20)
Dependent variable: uhat^2
coefficient std. error t-ratio p-value
---------------------------------------------------------------
--
const 0.805653 0.647030 1.245
0.2300
simplified tax rate ~ −1.78864 5.54218
−0.3227 0.7508
sq_ simplified tax rate ~ 9.49284 9.62046
0.9867 0.3376
Unadjusted R-squared = 0.229771
Test statistic: TR^2 = 4.595419,
with p-value = P(Chi-square (2) > 4.595419) =
0.100489
Interpretation: Prob=0.10 greater than 0.05, H0
stands.
NORMALITY test:
H0: Normal distribution; H1: Abnormal
distribution
Frequency distribution for residual, obs 1-20
number of bins = 7, mean = 4.26326e-015, sd =
1.12323
interval midpt frequency
rel. cum.
< -1.6625 -1.9731 3
15.00% 15.00% *****
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-1.6625 - -1.0412 -1.3519 0
0.00% 15.00%
-1.0412 - -0.41998 -0.73061 3
15.00% 30.00% *****
-0.41998 - 0.20128 -0.10935 5
25.00% 55.00% *********
0.20128 - 0.82253 0.51190 4
20.00% 75.00% *******
0.82253 - 1.4438 1.1332 3
15.00% 90.00% *****
>= 1.4438 1.7544 2
10.00% 100.00% ***
Test for null hypothesis of normal
distribution:
Chi-square(2) = 1.078 with p-value 0.58334
Interpretation: Prob=0.58 with a large than
0.05 H0 stands, the time series has normal
distribution
2010
2011
2012
2013
2014
2015
2016
2017
2018
TOTAL INCOME
324,721
330,469
330,384
327,178
366,721
379,206
407,021
430,397
449,465
Monetary assistance
4,605
3,811
5,559
5,737
10,186
11,215
14,639
11,085
8,133
of which: budget support
from CE
3,562
2,738
2,251
Tax revenue
288,564
303,927
300,862
299,888
335,868
342,308
369,884
398,629
419,334
From taxes and customs
223,019
235,509
232,591
229,031
253,413
258,882
275,780
293,386
304,318
Value added tax
113,998
119,189
116,533
111,940
123,730
125,783
131,390
139,541
143,464
Profit tax
17,606
19,712
16,853
15,119
28,852
24,968
29,151
31,645
34,461
Axcise
38,788
40,403
36,421
38,151
32,606
39,027
41,896
45,105
44,987
Personal income tax
27,058
27,967
27,989
29,570
21,479
29,661
31,412
32,102
36,517
National taxes and other
18,295
21,388
28,677
28,454
40,894
33,647
35,794
38,502
38,673
Customs tax
7,274
6,850
6,118
5,797
5,852
5,796
6,137
6,492
6,217
Revenues from local
government
11,898
11,791
10,859
10,825
12,447
11,700
14,951
18,447
21,863
Local tax
7,684
7,279
6,210
6,396
7,060
5,746
9,675
13,273
16,354
Property tax (buildings)
1,896
1,942
2,506
2,454
3,678
3,921
4,678
4,879
5,192
Simplified profit tax of small
business
2,318
2,570
2,143
1,975
1,709
2,033
598
296
316
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Simplified profit tax rate 2010-2021
6 Conclusion
1. In developing nations such as Albania, SMEs have
a significant impact on economic growth and
employment; they also generate more than 80% of
jobs and contribute 60-75% of GDP.
2. Albania has backed all the major small business
acts (SBA). This is one of the most important accords
on the European Commission's agenda for the
development of SMEs, not only for the EU Member
States but also for Western Balkan countries, with
Albania having previously implemented it.
3. The money received from the simplified profit tax
on small businesses was 376.3 million ALL in 2019,
according to the Annual Report of Local Finance
released by Coplan and the Ministry of Finance.
These revenues account for 2.4% of overall local tax
receipts, and they provide 1.5% of municipal revenue
streams. The revenues received from the simplified
profit tax on small and medium firms have declined
over the study period of 2009-2019.
4. During the time period studied, the simplified
profit tax rate for SMEs was variable and not a long-
term fiscal policy, resulting in a decrease in revenue
collected from this rate.
5. Through our econometric model, we confirmed the
hypothesis that the tax rate of the simplified profit tax
has a strong negative correlation with the factual
budget revenues collected from this tax. With a 1-
unit increase in the simplified profit tax rate, tax
revenues will be lowered by 6.16 unit.
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Shpresa Çela, Albana Gjoni (Karameta),
Fiona Shehi, Brendon Duli
E-ISSN: 2224-2899
1515
Volume 19, 2022
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US
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2022.19.135
Shpresa Çela, Albana Gjoni (Karameta),
Fiona Shehi, Brendon Duli
E-ISSN: 2224-2899
1516
Volume 19, 2022