Historical analyses show that exemptions, tax cuts, and excessively long deadlines granted without competition and public transparency may be favored by politicians, as they can serve as an easy route to enrich predetermined individuals or companies driven by questionable interests.

By Arben Malaj

The inclusion of every asset—whether individual, business, or public property—into the economic cycle efficiently and effectively must be at the heart of our challenges for higher, more sustainable, and more beneficial economic growth, especially for the middle and lower classes. I have supported the creation of the Albanian Investment Fund, strongly backing this important financial institution, which primarily aims to reintegrate dormant and unused public assets into the economic flow.

Collaboration with private companies in the management of these assets should be based on strict criteria, promoting transparency, supporting free competition, and professionally analyzing both the known and hidden risks and costs. The selection of beneficiaries for tax incentives should not be based on negotiations for unsolicited offers, but rather through competitive processes, providing equal opportunity for all potential competitors.

Albania, after the 2000s, around 35 years later, is no longer the Albania of 1992. Our natural resources are not infinite, and our dormant, unused properties cannot be offered as “charity” to every self-proclaimed investor, let alone phantom investors who only aim to exploit tax breaks.

The Eastern Germany “One Deutsche Mark” package and the current “Albania – One Euro” packages both aim to: (i) accelerate the transition, and (ii) create new jobs. The benefits of these schemes were the increase of foreign direct investment, the restructuring of enterprises, and the creation of new jobs. Foreign investments in Eastern Germany reduced high unemployment and facilitated the transfer of technology and managerial knowledge. However, this has not occurred with the “One Euro” package.

But neither the “One Deutsche Mark” nor the “One Euro” packages are miracle cures. The costs include the loss of tax revenues, reducing the government’s ability to finance public services and infrastructure.

Unfair competition increased reliance on foreign investments, making economies more vulnerable to fluctuations in foreign markets and exacerbating social issues and taxpayer dissatisfaction. Beneficiary businesses increase political pressures for the expansion and prolongation of benefits, as is currently happening in our country. This heightens the risk of increased corruption and state capture. Tax exemptions, reductions, and excessively long exclusion periods have a negative impact on the quality of public services and the sustainability of public finances. Due to the increasing risks of extended exemptions and delays in tax breaks, a global database on tax incentives and tax expenditures has been created, collecting data from 102 countries. The findings reveal that, on average, during the thirty-year period from 1990 to 2020, governments forgo tax revenues (due to tax breaks) by approximately 3.7% of GDP and around 23.5% of tax revenues. For OECD countries, these figures are 4.7% of GDP and 27.9% of tax revenues. If we calculate the exemptions and tax cuts for our country based on the “One Euro” package at about 4% of nominal GDP, the lost or “donated” revenue through tax breaks, given that the nominal GDP in 2023 is around $23 billion, amounts to approximately $920 million.

Given that tax revenues are around 450 billion lek, and tax exemptions are approximately 25%, the revenue loss is around 112 billion lek. This puts a strain on the country’s financial stability and on the financial resources needed to better support, without raising taxes, sectors like education, healthcare, social protection, agriculture, and the knowledge economy. The European Commission, in its “better tax” strategy, defines the EU’s priorities in the area of taxation, including the fight against: (i) tax evasion, (ii) tax avoidance, and (iii) unfair tax competition. The EU is working to address such distortions against fair competition, seeking transparency and accountability regarding responsibilities and compliance with state aid rules.

In the Western Balkans, tax incentives are widespread. The types of tax incentives and tax expenditures in the region appear in four main forms: (i) tax reductions for small and medium-sized enterprises (SMEs), (ii) tax exemptions for sectors like agriculture and tourism, (iii) tax incentives for foreign investments, (iv) tax breaks for companies with low income, and (v) tax incentives for individuals with disabilities. Tax incentives reduce economic revenues and hinder the achievement of specific social goals. They create an unequal competition for businesses.

Tax incentives should be subject to transparency and public consultation, as they reduce public resources needed for essential funding to achieve social and environmental objectives. Despite the risks of tax exemptions, this does not mean such schemes should not be applied, but the beneficiaries must be selected based on real economic benefits, reducing their fiscal advantages, aligning more effectively with the objectives, and providing maximum effectiveness and efficiency. The largest cost of tax incentives is the distortion of competition, damaging the rules of the game in the economy and depleting financial resources. Tax incentives often harm the quality of investments by beneficiaries, as they significantly reduce their investments after losing not just tax benefits. Some sell their benefits to other companies, while others leave. Recall the case of “Mak Albania”—it arrived with much fanfare and left quietly, perhaps because its tax incentives period had ended.

Generous packages like “Albania One Euro” should not have long or extended periods for tax exemptions, as they are essentially state aid funded by Albanian taxpayers. Even concession contracts with tax benefits should not be prolonged. They must be closely monitored. If the beneficiaries have not fulfilled the business plan upon which they received tax incentives, the property should be reclaimed and reintroduced into circulation with a new public offer. Concessions with 99-year terms should be a relic of our difficult transition period, where financial capital, managerial knowledge, and ever-evolving technologies were scarce.