Chapter 5 – VAT administration

Exempted supplies

Exempted supplies are not taxable supplies. There are various situations, in which the executive
and legislative bodies decide through the changes in the VAT law to choose some supplies to be
exempted from the VAT. The only thing we need to keep in mind is that if you make exempt
supplies, you do not have the option of deducting the VAT paid on the purchases. So, if we
assume that a private university receives payments from students, and it makes purchases with
VAT, for example the purchases of internet, electricity, materials etc. These purchases are
considered as inputs of the sales but since there is no VAT on the sale and it is considered an
exempt supply, then the taxable person does not even have the opportunity to deduct the VAT
on the purchases.

Which are some effects of exempt supplies?

The main effect if the subject is selling with exempt supplies, it is that the taxable person does
not benefit the deduction of the VAT of the purchase, so in general it has no effect on VAT.

What about the case when the buyer of the exempt supplies does sell taxable supplies?

In this case the taxable person can sell with VAT, but there is no VAT on the purchase and in this
case he pays the VAT for all the sales, without having any amount of VAT on the purchases to
deduct.

Some cases of exemptions

Lands and buildings are normally excluded because the increase in their value does not depend
much on ownership but more on the fact that these are valued in the open real estate market
and since they are also owned by individuals, a business that may have an apartment or shop,
the difference in value of buying and selling is not part of value generated from economic
activity. The accommodation in hotels should be considered separately.

Financial services are exempt supplies, and everything that has to do with financial services are
exempt supplies which means that there is no VAT. There are several reasons for this
treatment, the main reason is the promotion of financial services because in this case they are
favored and other reasons comprise the problems that arise in cases of measuring the value of
the service.

Gambling is also exempt supply.

Taxable value

For the part of taxable value, there are two situations which affect the determination of the
value.

The first case is called business to business (BtB), ie sales by taxable persons to taxable persons,
so businesses sell to each other. In general, we said that buyers have an advantage from the
VAT declaration. What is the advantage? They have deductible VAT, so buyers want to have as
much deductible VAT and as much expenses as it is possible. Sometimes this is done even
through irregular invoices, and in violation of tax rules. Sellers meanwhile want to declare as
little VAT as possible because the less VAT they calculate and collect means the less VAT
payable as a difference. But since both parties have opposite interests, it is likely that the price
will be closer to reality. If both parties are looking for a price that interests them, both will
reach the midpoint to the point where the price is closer to real value of the supply.

The second case comprises the sales made to consumers (BtC – Business to consumer). These
are problematic because the value of the supply value does not have conflict of interest
between the parties. The consumer has no interest in the value of the supply or the value of the
invoice and can definitely accept a lower invoice value. For example, let’s consider the supply of
the service of lawyers. If we had a law firm that would sell a service supply to a business, it
represents a business in a certain court, for example, it represents, say, Vodafone. This business
will definitely ask for a VAT invoice. If the same law firm will represent a defendant for criminal
charges, that if the person in question is in this case an individual so the face value of the supply
of service in the invoice could be less than the real payment, as there is a pronounced lack of
conflict of interest to declare it at the most realistic value. So, the value of supply to individuals
always has a question mark whenever it comes to supplies that are not in a visible market price
conditions (the case of supermarkets that sell to the individual, but they use very visible prices
to attract the consumer).

We have said before that VAT is the last tax. What does this mean? It means that in cases,
where some taxes, fees and duties are imposed on a supply, we normally have even the
application of VAT. Taxes are special decisions of the state to increase the price of goods. If the
decision-makers in the Ministry of Finance would consider an increase (or decrease) in the
excise tax, then automatically they would consider even the VAT increase (or decrease),
because VAT calculates the tax as part of the net value, including the other taxes and fees, and
adds 20% of it. The state thinks of oil/cigarettes or energy drinks as a group of goods with which
it can increase the price because these are considered as goods that could be taxed more. VAT
is a general tax, we said from the beginning that it probably has the same rate for all but in
those cases when VAT is not enough then when some goods need to be taxed more, they
should be sold at a higher price, so then taxes, excises, customs duties, turnover taxes are used.

VAT inclusive or exclusive of the price (value)

Another very important element is related to how VAT will be considered in terms of the price,
as inclusive in the price, or exclusive (separate from the net value of the price).

I will give you an example. In USA the pricing of goods has a kind of tax exclusive approach. That
means that the price advertised on the supermarket stand is always the tax-free price (exclusive
of the tax) and when you go and pay at the checkout, the tax is added. If you buy a cell phone
and you see it on the shelf with a price of $100, and in the moment that you go to pay the price,
you will be required to pay $110 because the tax on sales is 10%. While in Europe fortunately it
is used the other approach, so the cost of the product in this case before VAT is 100 but VAT is
included both in the price on the stands (of the supermarket) and the price paid at the cash
counter. All the prices we should see when buying, should be with VAT included.

How is this full value of 100 with inclusive VAT is divided into parts? The one part is the VAT,
which is 1/6 of 100, ie 20% of 120% of the total amount of 100 leke.

In the case of VAT exclusive (not included), we should note that the value of VAT would be 20%
of the net value, and in this case 16.7 is 20% of 83 leke. Both together make 100 leke.

If we continue this analysis for a total price of 120 (VAT inclusive), we note that this amount is
easily divided into 100 and 20 leke. In this case what we see as a consumer is always the total
value with VAT inclusive, while what appears in the invoice is the net value, the and the total
value.

Full value of the final supply

Then the full value of the final supply comes to those cases when we have packages for
services, or fixed prices for cigarettes. In these cases there is an official price and this official
price normally creates an opportunity by the tax administration to collect the tax more fully.
This is actually a relatively complex scheme, and we will simply analyze it shortly. The idea is
that in the case of cigarettes or cards, these goods and services have an announced price, or
known price. For example, phone packages are known to cost 1000 leke or 1300 leke and
cigarette packs are known to cost 300 leke or other prices, so they have a fixed price for the
whole territory of Albania.

Adjustment invoices

Adjustment invoices are issues when the two parties in a supply agree to modify a previous
supply because the factual supply was not the same with the information provided in the
document of the supply. Suppose a company sells 200 tyres with a price of 5000 leke per tyre,
with a net value of 1,000,000 leke. VAT is calculated on this amount. For various reasons, even
by some mistakes that might have happened, in practice due to an error there were
transported to the client 40 tyres less than the amount presented in the invoice. As a result, the
factual supply was actually of only 160 tyres, so the invoice has billed 40 more tyres. Can we
produce another invoice and removing the first invoice of 200 tyres and replace it with another
invoice? The first invoice has been issued and while it is issued it simply needs an adjustment
and in this case since the actual sale is of 160 tires and a correction will be made by reducing 40
tires. Consider an invoice for a supply of minus 40 tyres (-40 tires) with a negative net value of
200,000 leke and a VAT of a negative amount of -40,000 leke.

This is an extra new invoice with the agreement of the parties, so the follow up invoice of the
previous invoice that the parties agreed supply 200 tyres to the buyer and agreed that the seller
will receive a net value of 1,000,000 ALL and the buyer will pay a full value of 1,200 000 (VAT
included). The adjustment invoice is a credit note because it discounts the initial value of the
supply agreed by parties. In the case of the seller he will take this invoice and write it as a
adjustment invoice of a credit note and the net value in this case will be – 200,000 leke and VAT
- 40 000 leke. The buyer will include this adjustment invoice in its own book of the purchases. In
the end, the invoice will not be created from scratch but will be the result of two invoices, the
original one and the adjustment invoice. If the actual sale would be 220 tires which means we
during the transportation of this supply, the supplier send 20 tyres more. In this case the
opposite has happened, and the adjustment invoice will have a positive value to reflect the real
panorama of the factual supply. If the factual supply was of 220 tires and the parties agree to
recognize this error that occurred, the company will issue an adjustment invoice of a debit
note. It should be noted that adjustment invoices should not be used to resolve the non-
payment of the invoices.

VAT rates and and VAT crediting

There are two VAT rates in Albania despite the fact that for countries like Albania it is suggested
to have only a single rate. The reason is mainly administrative because the more rates there
are, the more administrative costs they have in tax compliance in terms of implementation and
also bringing distortions in the market. We currently have two VAT rates. The standard rate is of
20%, which is in use for already 24 years in Albania, and the second rate is of 6% which has
been introduced lately. The 6% rate has a narrow focus with some specific supplies. These
supplies are advertisements from the audiovisual media, the supply of electric buses,
accommodation structures or in this case it is about hotels, and the agritourism activities.

Hotels with 6% and 5-star resorts for each supply within the structure. What is the difference
here? The difference is that if within such a hotel services are offered they will be taxed with 6%
VAT not with 20%.

In relation to agritourism, there are farms that receive the status of agritourism and
accommodation service whether they are inns or eat forms of accommodation for sleeping and
cooking restaurant services these are at 6%, except drinks because drinks are considered a
supply of goods which does not need to be favored.

Comparisons between different tax treatments

Let’s assume that we have supplies that have a VAT rate of 6%, with a value of sales 20,000 leke
and the value of purchases 10,000 leke. So, sales are taxes with 6% rate and purchases are
taxed with 20% VAT. What about VAT payable or VAT receivable in these cases? This could be
the case of the agritourism. What are the possible chances that this business might have VAT
receivable and could request VAT reimbursement to the TAX administration? What are the
chances that this business might have VAT payable? According to the combination of the rate of
6% with the rate of 20%, the business may have purchases up to 30% of the sales in order to be
with VAT payable. If the purchases with a VAT rate of 20% are more than 30% of the sales, than
the business should have VAT payable.

Zero rate

The zero rate is related to exports, which means that although there is no VAT on the supply it
is assumed to be multiplied by 0 on the sale with a VAT of 0, but it gives to the taxable person
the opportunity to ask for a VAT receivable, and later on a VAT reimbursement In addition to
exports it is also used in international transport because if one of the supplies passes through
several countries, definitely if it was a taxable supply it would be very difficult to be considered
to separate the values of how much each country/state is participating in an international
transport even when an aircraft passes from one country to another. If you look at the tax
returns of airlines you will see that their sales declare at 0 are the same as exports. Meanwhile
these companies have few purchases with VAT which means that if they have few purchases
with VAT they have VAT receivable and VAT to be reimbursed. As we said what is the difference
between export VAT and VAT exemptions.

And let's assume that the state for a certain term does not reimburse or delays it so as long as
we have a delay with the reimbursement of this VAT, in this case we have a total VAT, the VAT
that has been paid in Greece in customs moment and unreimbursed value in albania this value
of 20,000 lek has total VAT in both countries 7600, definitely this is a very excessive VAT
because it is a double VAT. VAT should be imposed because the principle of destination is
applied, so it is inevitable but VAT in Albania should be reversed because the value in Greece
should be totally cleared of Albanian VAT. So, by returning this value of 3000 lekë, this value of
20 000 lekë is set only on the Greek VAT. Meanwhile these two columns here talk about sales in
the case of excluded supplies. We have said that a supply for sale excluded is the value, let's
assume 3000 lekë, there is no VAT, in the purchase we have the value of 18 000 lekë here. My
question is why 18,000 ALL?

VAT crediting

In addition to the rates, let’s discuss about VAT crediting or granting VAT crediting. The VAT
crediting is definitely one of the most important elements of VAT. It is considered as the main
tax favor of the VAT. So crediting the discount value of purchases.

The purchasing of the supplies that are not intended or are not related to the activity, the
taxable person definitely has no right to credit or deduct the VAT paid for that purchase. For
example, one company is buying coffee from coffee companies. In most cases buying coffee for
staff is not related to production or service, so it is not related to economic activity but it is
simply an extra reward given to staff for motivation. As a result, it is not possible to deduct VAT.
In such cases it should be analyzed whether the purchase is related to economic activity, affects
sales or does not directly affect them.

Not allowing the tax credit (the three cases)

The first case is related to the automobiles. In Albania it is not allowed to deduct services
related to vehicles except in some cases. Suppose a marketing company buys some new but
cars what price might they have for example? Suppose 4 cars out of 2,000,000. Net value is
assumed to be 8,000,000 leke. This invoice will have a VAT of 1,600,000 leke. This VAT is not
allowed to be deducted by the tax administration, because the car can be used for 10 years. In
the first moment no one knows if the car will be used by the taxable person in the last 10 years,
as the employee could take it home and use it. This dual use of this supply, used for personal
and business use, makes it difficult for the tax administration to follow the flow of this asset for
its entire life. This commodity can be used both for work and for personal use for a very long
time. And mostly vehicles are used more for personal uses than for business use and therefore
not allowed to be VAT credited. This situation is solved by the financial leasing. VAT is allowed
to be credited if the car is contracted by a financial leasing.

The second case is about the fuel supply. The fuels itself is a dual-use good, so they can be used
for personal consumption too.

The third case is the expenses for travel and food, hotels, etc. which are not related to the
economic activity, but are more used to support the staff. In general, the expenses related to
the staff, even though they may have VAT, are not VAT credited (deductible) as they are
considered as an additional expense that could be slightly related to salary bonuses.

The normative of VAT credit on fuel

Above it was explained that the VAT deduction is not allowed on the purchase of vehicles and
on the purchases for fuel for small vehicles. Businesses use fuel/oil in their activities, and a
certain level of VAT on these purchases should be allowed to be credited.
As a result, the tax administration has determined the thresholds of VAT credit on some
activities distributed in 4 big sectors, like the construction sector, the transport sector, service
sector and the last group that includes trade sector and other activities.

Having a certain threshold for VAT deduction, means that a business that uses fuel cannot
deduct VAT on all of its fuel.

What does this mean? I am taking an example. Let’s suppose Uji i Ftohte Tepelene, which has
the plant very far from Tirana, which means that they have a high transport cost to bring it to
Tirana. In the table of norms on VAT credit, we see that the 2% is the norm for the other
sectors. What does it mean? Let’s suppose that UFT has total sales of 400,000,000 leke, the VAT
calculated and collectible of 80,000,000 leke, and 2% of the norm to credit the VAT on fuel
purchases. Let’s assume that UFT purchases around 30,000,000 leke. This purchase of fuel has a
VAT of 6,000,000 leke.

How much VAT on this fuel will be allowed to be deducted? As we saw the norm gives us 2%,
There is another norm for the transport companies. The company that has a main activity of
transporting goods can deduct the VAT of about 38% of its sales.

In the first situation, the company has water production activity. The total amount of sales is
400,000,000 lekë and the total amount of fuel purchasing is 30,000,000 lekë. How much would
this company be allowed to deduct VAT? 2%!!!

The purchase that is allowed according to the norm is 2% which means that in this case we have
2% of Sales. In this case it is allowed to deduct the VAT for purchases of fuel of only for 8 million
leke.

The UFT may have bought 30,000,000 leke fuel but according to the fuel norm this entity is
considered a producer of water and consequently the taxable person can deduct only 1.6
million leke VAT. The company bought 30,000,000 leke of oil with 6,000,000 leke VAT. At the
end it can deduct only 1,600,000 leke. How can UFT solve this problem?

There is a great need to use it for fuel because the factory is very far from the main customers,
but it is not allowed to do that because it is basically not a transport service company. The
company can create another company, as a shipping/transport company. This new company
would not have the norm of 2% on fuel VAT credit. This new company can use the threshold of
38%. Let’s suppose that the name of the new company is UFT Transport, this new company is
selling the transport service. And at the same time this new company buys the fuel that UFT
needed to transport its production to central Albania. How much is UFT Transport allowed to
VAT credit? UFT Transport uses the norm of 38% for VAT credit, which means that the
purchases that are allowed to have a deductible VAT are in this case 38% of the sales.

Importing equipment

We have the case of importing equipment investments from imports, machinery equipment. Of
course, this is a kind of large investment. The idea is that when a company invests in machinery,
in addition to the cost the company has the obligation to pay the VAT at customs. In this case,
the customs administration can allow the taxable person to postpone the payment of the VAT
for a maximum of 12 months.

How does this happen? Suppose the machine would cost 300,000,000 leke. The VAT to be paid
in the customs would be 60,000,000 leke. This VAT according to that rule we said is a VAT that
is normally deferred as payment which means that not that the payment is not made but the
payment can be deferred for up to 12 months.

Fiscalization and the invoice

The tax administration is in the process of enlarging the system of fiscalisation, that includes the
electronic invoices. This system will be very automatic.

The old invoice paper has few pieces of information. The first information includes:

 the name of the seller and it’s tax identification number (NIPT)
 the name of the buyer and it’s NIPT.
These two pieces of information were serving to identify manually the veracity of the invoice.
While with the new online system this will be automatic.

An invoice that is registered automatically to both entities and there will be no questionable
situation in the sense that perhaps the seller does not register the invoice in its books. Why
does the buyer get the original invoice? The buyer gets the biggest advantage from the invoice,
deducts VAT, increases costs, so the buyer may have the greatest motivation to manipulate the
invoice, to declare invoices with wrong values that are fake but that provide deductible VAT.

The seller is the issuer of the invoice which means he is the one who has the serial numbers but
he is also the one who actually pays more tax due to the invoice.

The body of the invoice what we see price, quantity and units. Which means that there may be
goods or services with VAT and must be filled the VAT amount of the respective goods or
services. All of these add up and give the total invoice value and this total value serves to pay
that invoice. At the bottom are the details of the seller, buyer and carrier if any.

Sales book

The sales book has several areas and in the first area is the invoice information, which means
the invoice has an invoice number, serial number and date. Let’s suppose the company UFT
sells a supply of goods to the Big Market on 1 May. The invoice number, serial number and the
date of the invoice are the main data that identify the other party in the supply. The total
amounts of the invoice, that are present in the last row of the invoice (totals), are the main data
that will fill the respective column in the Sales Book.

If the sale is related to a certain export supply, than that invoice will fill the cell that is related to
the export column. Big Market is a company within the territory of Albania, so the supply is not
an export, nor we have any information of having exempt supplies. In this case, the invoice
contains taxable supplies with the standard rate. As a result, this invoice will fill the two cells
that comprise the two columns in the Sales Book about the Taxable Sales with standard rate
and the respective VAT. These are the two columns in the sales book that have more invoices
that will line up there. If this company sells to a company in Prizren, then the supply goes in a
destination that is out of the territory of Albania.

The other special feature of the sales book is that there are 3 columns which do not have VAT.

Purchase book

In the book of purchases we have a slightly different situation which means that we have one
main column that collects all the invoices that have no VAT, are VAT exempt, or are not allowed
to deduct the VAT. All the other columns are different which means that they have VAT so as
imports with VAT, supplies from local suppliers, etc. There may be purchases from individuals
or any type of purchase that does not have VAT will be recorded in the column in question. In
the case for example I have put here. A beer company that buys coffee with a value of the
supply of 2,000 leke, and VAT of 400 leke. In this case, the beer company does not use coffee as
input in the production process. This supply is needed as a bonus or reward in kind for the
employees. This is a case of not allowed VAT deduction (case 3). The invoice has VAT but we
cannot deduct write it as a taxable purchase in the Purchase Book. We have to put the whole
amount in the first column as a not allowed deductible VAT. If the VAT is not deducted, we will
put it in the first column that we said is a kind of collector of the whole part of the invoices that
do not deduct VAT. If it is an import of goods, if it is a purchase from local suppliers, etc. These
are all recorded in the purchase book. I told you that fuel has a part that can be deducted in
VAT but another part cannot be deducted. So, there are cases when transport companies are
used, so the part that is deducted is reflected here and the part that is not deducted is reflected
in the next column.

VAT declaration (return)

After completing the Purchase Book and after completing the Sales Book at the end of all rows
are calculated the totals for all items that say have value but also for other items and all these
totals are then added to complete the VAT return (declaration). This form has 3 zones. The first
area is the sales VAT area that in general we are more accustomed to the term collectible VAT
but the tax administration uses more the term calculated VAT. All these collectible VAT (VAT on
Sales) or summed up in one item and create a subtotal of the calculated VAT. After calculating
this sub-total, the listing of all deductible VATs of the month.

This total deductible VAT (VAT on Purchases) is compared to the total collected VAT (VAT on
Sales). If the total VAT collected is greater than the total deductible VAT, we have to pay VAT.
We said that if the total deductible VAT is greater than the total VAT collected then the VAT will
be carried forward to the next month. If several months pass, the company has the right to
claim a refundable VAT, ie the VAT carried forward meets certain conditions and can then
request whether it should be returned to the entity or not. Of course, there are special rules for
this, but we will not go into that detail.