General overview of construction industry in Albania
Construction is one of the most dynamic sectors of the Albanian economy, with a real growth of 14% for the recently period of 2008. Construction activity is concentrated in the major urban centers. State participation in the construction sector is mainly focused on infrastructure and engineering constructions. State financing for engineering constructions constitute 85 % of total state financed construction.
Private sector construction is mainly focused on flats and buildings for families, which comprise about 82% of the total financing of private construction. The more people in the economy, the greater the demand for housing. it is households that demand housing services: typically one household per house. The size and demographic composition of households is variable and not entirely exogenous.
Construction Industry - Accounting and Tax Legislation
Invoices between the owner/builder and the subcontractors should be standard GDT invoices and are required to be raised on a monthly basis. All other suppliers' invoices will be obtained as and when supplies are made, e.g. when cement and steel rods are delivered. Other accounting records such as the sales and purchase ledgers will be present together with a stock inventory. The records will follow the normal pattern of accounting, however, the accounts may relate to one particular construction. In the event a building contractor is involved in the more than one construction it will be necessary for the accounts to reflect the costs for each site separately so as to be able to determine the final cost in total. There is likely to be a building account, where all the costs relating to that particular construction are itemized.
Taxation of construction and repair works includes:
1. VAT
2. Profit tax and Personal Income Tax
3. Withholding tax
4. Dividend taxation
5. Local taxes and;
6. Employment taxes
One of the amendments to the Albanian Value Added Tax Act, includes the supply of buildings, except in the process of construction, is an exempted supply and also the renting of buildings is an exempted supply, except in cases of a) renting for a period of not more than two months; b) accommodation in hotels or resort buildings.
Since 2005 various interpretations were given by GTD to clarify misunderstandings with respect to land and buildings. To understand the implications of VAT and buildings, certain key definitions should be explained.
Land and building
The person desirous of having a building constructed is the person "erecting" such building. Leasing a land or a site is an exempted supply, except the cases when the land is used for parking of transport vehicles and other means of transport. The parking of means of transport and other movable vehicles is VAT taxable. Services supply in construction, thus the process of construction and maintenance of buildings, are taxable supplies. The renting of buildings, unless they are public property, by the central or local government authorities, is taxable. Leasing of public buildings by central or local government bodies shall be considered an exempted supply for VAT purposes. The definition of the "ground", according to this law, implies an area unprocessed, unattended, undeveloped, not containing any erections, except for simple divisive walls or fences that determine the borders of such area. Building implies a fixed construction on the ground, or part of that structure (such as a room or an apartment), which includes the ground on which it stands as well as the surroundings included in the sale, but does not comprise roulots or trailers.
Specialties of VAT treatment
On the basis of VAT Albanian law minimum taxable on buildings for dwelling purposes on the process of construction is based minimum fiscal price and the construction surface.
Minimum orientating prices for fiscal purposes on the process of construction of buildings for dwelling purposes are defined by Decision of Council of Ministers after consultation with Builders Association of Albania.
Each month the constructor is required to present a 'work in progress' report that is required to be checked by the auditor. A technical construction engineer belonging to the GTD estimates the amount of work that has taken place in the month and the auditor then reconciles the estimate with the stock movement of the goods. Additionally, account is taken of all other expenses, i.e. cost of the land, wages, and social insurance payments, electricity etc. Once the engineer has completed his work the auditor checks the movement of the stock to ensure the figures reconcile with the amount of work estimated to have been completed.
To the total estimate cost of the month's work a mark-up of between 6 - 10% is added and VAT is paid on the total. VAT from purchases is allowed to be deducted in the normal way.
On conclusion of the whole construction reconciliation is conducted between the VAT paid monthly and the VAT due on the final sale. The difference is said to be minimal!
The seller is not required to charge VAT on the eventual sale of the apartments, assuming it to be an apartment block.
If the work is paid in advance, then the taxable person receiving the advanced payment is obliged to issue an invoice and register this invoice in the register of sales belonging to the taxable period in which that advanced payment was made.
Profit tax and personal income tax
In construction and repair projects extending over one calendar year, the final determination of the profit and losses shall be made every year and not in which the project ends. The income calculated in the year in which the temporary acceptance is made is taxed under the legislation of the same year. The profit tax rate is 10%. Enterprises must file profit tax returns until March 31st of the following year and pay the tax promptly until the end of the month in which filing is made.
Sale of immovable property, land and building shall be taxed at 10% of the realized capital gains. Such condition is not applicable in the cases when there is an exchange of the right on the ownership of the land with the right of the ownership of the building constructed on that land.
Withholding tax (taxation of project-in-progress)
According to the Income Tax Law, both work advances and progress invoice amounts paid to those performing the work, i.e. contractors or subcontractors, are subject to withholding tax at a rate of 10%.
Dividend taxation
In construction projects, final determination of the profit and losses shall be made every year; profit from the project is distributed afterwards.
Under the current regulations in Albania, dividend withholding tax rate is 10% if dividend is distributed to non-residents and resident individuals. Dividend distributions to resident corporations are exempt from withholding tax. However, the bilateral tax treaties, which may determine lower tax rates, should also be considered.
Tax treatment of construction and repair works performed outside Albania
Profits from construction and repair work and technical services performed outside Albania, which are added to the income generated in Albania, are exempt from corporate tax regardless of whether such profits are transferred to Albania or not.
On the other hand, should these kinds of profits be distributed to the shareholders, they are taxed as dividends.
Special Tax Audits in case of merging, fusion or splitting of construction companies
Merging includes more than all fixed assets and liabilities of the company merging company with the company that takes over. The rights and obligations of the merging company pass to the company that takes it over. The decisions to audit a merging company are issued in the name and registration number of the company that takes it over. The authority to represent the merged company has already been transferred through merging to the company that takes over. The decision to audit a company that has been transferred through merging covers only the time to the moment of merging. If the audit needs to cover the time after the merging, then it is necessary to request another audit order for the company that has taken over the former company. If the merging occurs while the audit is in process, the parties automatically change, in other words, the entire communication is made with the company that is taking over.
The merged company is subject to taxes until the moment the merge is executed. The company that takes over is considered to have been exercising the business of the merged company since the beginning of the last fiscal year of the merged company; If the audit focuses on the review of operation dating before or after the merging day, then it is necessary to prepare to audit memos, one for each company. Through merging, one or more companies can transfer their heritage to an existing company or a new company established by them, or to a temporarily created "partnership". Through splitting, a company can also transfer its heritage to some existing companies or some new companies.
Such opportunities are open to companies in the process of liquidation, provided that the distribution of their assets among the partners has not been subject to execution. The partners of the companies transferring their heritage in the framework of the above-mentioned operations, benefit shares of the initial capital or stock from the benefiting company or companies. Sometimes they can benefit compensation in cash, the value of which cannot exceed 10% of the nominal value of the initial capital shares or stock.
If the operation includes the creation of new companies, each of them should be established according the rules that apply for the form of the company being created. Merging or splitting causes the disintegration without liquidation of the disintegrated companies and their heritage is completely transferred to the benefiting companies, in the condition it is at the moment the operation is finalized.
However, no action is taken to exchange the initial capital shares or stock of the benefiting company/companies with the initial capital shares or stock of the merged or split company/companies if such shares are owned by:
- The benefiting company or a person acting on its behalf or to the benefit of this company.
- The merged or split company or a person acting on its behalf or to the benefit of this company.
Merging or splitting enters in force:
- When one or some new companies are created: on the date when the last of the newly created companies is registered in the commercial register.
- In other cases: on the date of the last meeting of the assembly approving the operation, except cases when the contract foresees that the operation will enter in force on another date, which should be no later than the closing date of the ongoing financial year of the benefiting company/companies, and no sooner than the closing date of the closed financial year of the company/companies that are transferring their heritage.
The partners of a company can agree to re-split the company, instead of liquidating it. It often happens that there is a real split. We can talk of a real split when the partners of a company take over parts of the company's activity and run them as separate companies.
What next?...influencing compliance behaviour with tax professionals...
Being able to deal with taxpayers through their agents substantially reduces the cost of tax administration. Think of what life would be like for a tax administration if there were no tax professionals. Some people who work for tax administrations might say that life would be much easier without them. Yes, there might not be so much tax planning, or challenges to taxation, and taxpayers might be more willing to accept tax administration's view. This might make life easier for the tax officials. But given the complexity of tax system for anyone that it's no part of tax administration, despite all the efforts at simplification, think of what the disadvantages might be?
Instead of funnelling the interaction with businesses and corporations through tax professionals, it would be necessary to interact directly with an additional two-three thousands subcontractors and supply businesses and over one hundred VIP construction taxpayers. This would have huge cost implications for tax administration, as more employees would be needed to service the substantial additional contacts and queries that would ensue.
It would also be immeasurably harder for tax administration to ensure that all taxpayers understood their obligations and this would adversely affect voluntary compliance.
For these reasons, tax structures recently are trying to make it as easy as possible for tax professionals to meet their client's compliance obligations and we provide a variety of support services and measures to support and achieving client's compliance.