Law. Fiscal.

Transparency

AL-Tax Center
Fiscal Documents,
No. 2012/12/13
www.al-tax.org
altax@consultant.com
Date 24.12.2012
Tirane, Albania

Tax Gap (Missed Taxes) in Albania, 2012

Methodology and approaches for evaluation the tax gap in fiscal year 2011. Tax
gap in Albania. Comparison with the Balkan countries and the world.

SUMMARY
The AL-Tax Center (Albanian Taxation Association) in this study represents the first organised attempt to assess the
scale and map of the distribution of the tax gap. The calculation 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 not like 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 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

Law. Fiscal. Transparency

Terms and acronyms

Tax gap / Missed

Tax gap is defined as the difference between taxes collected with the theoretically

taxes

estimated taxes must be collected.

Tax burden

The total amount of taxes paid on the basis of the relevant income tax (include
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

Final consumption expenditure of households is the market value of all goods and

Expenditure

services, including durable products (such as cars, washing machines, and home

(former Private

computers), purchased by households. It excludes purchases of dwellings but

Consumption)

includes imputed rent for property owners. It also includes payments and fees to the
government to obtain permits and licenses. Here, household consumption
expenditure includes non-profit institutions that serve households, even when
reported separately by the state.

VAT

Value Added Tax

EU

European Union

GDP

Gross Domestic Product

IMF

International Monetary Fund

Law. Fiscal. Transparency

AL-Tax Fiscal Documents

December 2012
Tax Gap (Missed taxes) in Albania, 2012
Methodology and approaches for evaluation the tax gap in fiscal year 2011. Comparison with
the Balkan countries and the world. Tax gap in Albania.

Prepared and distributed

A. Gjokutaj

General Description
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 2011. This document is a work in group in a cooperation with some
fiscal studios in Albania and countries of the region for several months during 2012. Statistical
information used in this document relates to the results of the services associated with both levels of
public revenue management, but also with the performance and the interaction of institutions across
the spectrum of public administration. 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. The study is divided into four parts. 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, Albania, Europe, Balkans, taxes, fees, VAT,
2011

Law. Fiscal. Transparency

CONTENT

Introduction

page 5

What is the tax gap?

page 6

1.1

Evasion, avoidance and quality of administration services

page 6

1.2

Defining the term 'tax gap'

page 7

1.3

The purpose of the study

page 8

1.4

What is needed tax gap calculation?

page 8

1.5

Estimation methodology

page 8

1.5.1

The approach with macroeconomic data

page 8

1.5.1.1

How can be estimated the VAT gap with this method?

page 9

1.5.2

The approach with microeconomic data

page 9

1.6

The integration of the country into the EU and effect of measuring of the tax

page 10

gap
1.7

What counted as tax gap?

page 11

1.8

Composition of the elements of the tax gap?

page 13

1.9

The effect that comes from the implementation of the policy of narrowing

page 15

the tax gap

1.10

Risks arising from fiscal paradises in creating tax gap

page 16

II

Tax gap in the World and Europe

page 17

III

Tax gap in the Balkans

page 21

IV

Tax gap in Albania

page 23

4.1

VAT gap

page 23

Conclusion

page 25

References

page 26

Law. Fiscal. Transparency

Introduction
Being careful with preparing data for the tax gap map, AL-Tax Center is based on the comparison of the
indicators from different sources in order to assess the tax gap. The term that describes the missed
taxes 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' i E glish or trou fiscal in French would be 'boshllku tatimor in Albanian.

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 best way to assess how well the taxpayers have paid taxes to the state budget is the measuring of
the tax gap. In Albania there are no comprehensive studies on the tax gap. Some statistics and analysis,
describing the productivity of taxes are statistical series for all countries of the world (including Albania)
conducted by USAID in online editions, for fiscal years 2008-2010. While, many 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).

The tax administration of Albania has made some efforts in estimation of the tax gap, and it is in the way
of his determination by evaluating the depth and map of tax gap distribution according geographic areas,
but also according taxes that are part of the tax system. An estimation and publication of the tax gap
would help Albanian fiscal experts to improve risk management strategies and risk tools for tax
administration. The study of AL-Tax Center is an attempt to somehow managed to sensitize all
concerned public about the concept, but on the other hand also in linking common interests of
taxpayers, government and legislators, to engage in discussion on the topic and ways to limit the tax gap.

Law. Fiscal. Transparency

I. What is the tax gap?

The main goal of mapping of delineation of the tax gap is to create 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 80 to
90 percent.
Firstly, 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. In explanation of the tax evasion in
this document are understood as non-payment of taxes and not implementation of the legislation
through the use of (a) forms of false declaration of income derived by a person or business, (b) due to
the undeclared and unpaid portion of undisclosed liabilities, (c) false declaration of higher expenses.
Secondly, the tax gap is also a result of tax avoidance. In explanation of tax avoidance in this document is
understood as an attempt to reduce the obligations to be paid. This attempt takes life by the use of legal
space, or from 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.

Law. Fiscal. Transparency

Thirdly, the tax gap is related to errors in the calculation of tax liabilities and tax culture in the country.
Fourthly, 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'

At least in the last decade, various fiscal authorities or non-governmental organizations have studied the
informal economy and the tax gap.
In many countries there are different definitions related to clarify the tax gap, but 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, 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 .

Law. Fiscal. Transparency

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.

1.4.

What is needed 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.

Estimation methodology

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.

1.5.1. The approach with macroeconomic indicators

This methodology can be applied through the use of different macro indicators that otherwise could be
said a top-down approach (or indirectly). This approach can answers the main question how much taxes
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Law. Fiscal. Transparency

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, that 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.

1.5.1.1. 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. Similarly should be calculated the excise tax gap.

1.5.2. 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

Law. Fiscal. Transparency

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
according to macro data. Otherwise can be accepted that the the macro data approach is the more
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.

1.6.

The integration of the country 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
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Law. Fiscal. Transparency

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.

1.7.

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, that 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
information 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

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Law. Fiscal. Transparency

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
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 tax gap, in different countries of the
world estimates these types of taxes:
For the calculation of missed VAT are used data from private consumption, studies on
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

For the calculation of missed personal income tax are used data from analytical studies

Personal Income Tax

for this tax, data from tax audits, administrative data

For the calculation of missed excise tax are used data from analytical studies for this

Excise Tax

tax, data from tax audits, administrative data

For the calculation of missed social contributions are used data from analytical studies

Social Contributions

for this tax, data from labour tax audits, administrative data

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Law. Fiscal. Transparency

1.8.

Composition of the elements of the tax gap

Most of the taxes and fees

SCHEME OF TAX GAP (MISSED TAXES)

paid voluntarily. Another

part

of

the

voluntary

Tax paid with

enforcement measures

payment as long as they

the

interest

penalties

and

related

of
to

liabilities that are paid late.

Tax collected

are responsible for paying

Tax that should be collected

part paid late, but that is

Gross Missed Tax

Missed tax
(Unpaid tax)

in Albania are declared and

Net Missed
Tax

that determine tax system

Tax paid voluntarly

But still some of fees and

taxes are not paid at all, or
are part of payment with
enforcement
after

tax

Source: OECD

measures
audits

investigations.

and
These

The total amount of tax remaining unpaid for a fiscal period after enforcement action
The total amount of tax not paid voluntarily for a fiscal period
The total amount of tax that would be collected by perfect application of the tax laws.
The total tax collected from all reported & assessed tax liabilities.

revenues, along with other revenues that cannot be identified (are not part of the tax burden to the
country), consist the missed part of tax revenues.

The tax gap is created by a series of behaviors of individuals and businesses, which are summarized:
-

Negligence / 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;

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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 the study of AL-Tax, Fiscal Documents, No. 2012/11/11,
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..

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1.9. 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
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
self-employment or businesses with employee family members. For the same reason fiscal policy can

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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 (selfemployed 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.

1.10

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 fro

export . Different category from 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.

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II. Tax gap in the 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 the tax gap in the world is estimated to be 3.55 trillion
US.Dollars. This means that the informal economy is around 12 trillion US.Dollars, which means that 18%
of all global GDP is consumed outside world countries.

The main share of this tax gap belongs to the member states of the EU (27 countries) with about 1,000
billion US.Dollars, and with an informal level of the economy of 20% of GDP. Other European countries
not members of the EU (23 countries) have a tax gap of 300 billion US.Dollars While Asian countries (50
countries) and the Pacific countries have a tax gap of approximately 1,100 billion US.Dollars with a level
of informal economy of 16% of GDP.

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Law. Fiscal. Transparency

The North American countries (23 countries) have a tax gap of 500 billion US.Dollars with an informal
level of the economy of 11% of GDP. The South American countries (24 countries) have a tax gap of 400
billion US.Dollars with the highest level of informality of economy in six continents from 37% of GDP.
The African countries (52 countries) have estimated a tax gap of US.Dollars of 255 billion with a 35%
level of informality of GDP.

Estimation of Tax Gap and effect of informal economy in the coutries with bigest GDP, 2011
Budget
Health
expenditures expenditures/
/ GDP
GDP
(mln. US.D)
(%)
(%)

(%)

(mln. US.D)

(%)

1 Russia

1,857,770

34.1

4.8

43

798,841

36.9

294,772 307,000

344

9.6

2 Brasil

2,476,652

51.3

8.4

39

965,894

34.4

332,268 350,000

168

66.2

3 Italy

2,194,750

49.9

8.7

28

614,530

42.6

261,790 297,500

156

120.1

4 Spain

1,490,810

43.6

24

357,794

37.3

133,457 139,000

104

68.5

5 Germany

3,570,556

43.3

10.5

16

571,289

40.6

231,943 268,000

71

81.5

6 France

2,773,032

55.9

11.2

15

415,955

44.6

185,516 213,000

69

86.3

7 China

7,318,499

19.6

4.3

12.7

929,449

17

158,006 170,000

54

25.8

8 Great Britain

2,431,589

49

8.7

12.5

303,949

39

118,540 137,500

65

82.5

9 Japan

5,867,154

20.6

8.3

11

645,387

28.3

182,645 205,000

42

229.8

10 U.S.A

14,958,956

26.7

15.2

8.6

1,286,470

26.9

346,060 421,000

19

102.9

No.

Country

GDP

Informal economy

Tax Burden

Tax Gap(mln. US.D)

Net

Gross

Tax Gap/
Public
Health
debt/ gdp
expenditures
(%)
(%)

Source: Tax Justice Network, World Bank, WHO, Ministry of Finance of Albania, Instat

In the above table are ranked the countries by the amount of the tax gap over the value of 100 billion
U.S. Dollar, in order to show the impact of the phenomenon of tax evasion and tax losses in the fiscal
system network, only as a result of the impact of not finding a balance between law enforcement
compliance with his absence. These data are not out of curiosity or only to create an impression about
the situation between the two countries or more.

But, what is the most important it is the fact that in the case of large countries, Russia has 3.4 times
more missed taxes than the costs for health care, followed by Brazil with 1.7 times more and continuing
to the United States, that even though they have a tax loss in the amount of 1.28. trillion U.S. Dollars,
what is more worrying is that consumes of 19% of health care cost.

18

Law. Fiscal. Transparency

The Europe has a tax gap in the amount of 1 trillion US.Dollars, a cost that is equal to what is spent by
European governments on health services for a fiscal year. If we compare the fiscal loss from the tax gap
with government spending, it can be said that European governments have a loss at a level of 18% of
total expenses they perform. This means less public spending and a violation of constitutional principles.
In the European economies there is an informal economy to the extent of 18.4%, which is not part of
taxable base by throwing the burden on the formal economy to the extent that it remains at 81.6%.

From this relation between two parallel economies (formal and informal) in European countries seem
that for every 5.4 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.

If these missed taxes would be used to pay budget deficit would result in a situation where governments
more likely will not suffer from budget anxiety and even also will have 39% more revenues into their
budgets. And if this would happened, then would quickly result that public debt will reduced
considerably in less than 8 years.

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

19

Law. Fiscal. Transparency

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.

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Law. Fiscal. Transparency

III. Tax gap in the Balkans

In the analysis of the Balkan region, for the reasons linked with doubt mentality and sharing of the data
and conclusions in common is difficult to have an overall approval for the important topics, such as tax
gap. Although different countries may have other data from these that are presented in this study, this
means that there is not the problem of calculation and of approach to the sources of informationbut
happens to be underestimated or not to be used correctly, neither sources of information, but either
data to assess realistically the phenomenon. For example, the HM Revenue and Customs have
estimated tax gap for 2011 in the amount of 32 billion pounds, while the Tax Research UK has estimated
a value of over 2 times higher.
What contain these results are made by the experts that assess the truth of statistics and figures.
Everyone can have the access at these information's and it's free to make the proper comment on the
method of calculation and presentation of statistics.

Estimation of Tax Gap and effect of informal economy in the Balkan coutries, 2011
No.

Country

Budget
Health
expenditures/ expenditures/
GDP
GDP
(mln. US.D)
(%)
(%)
GDP

Informal economy

Tax Burden

Tax Gap(mln. US.D)

(%)

(mln. US.D)

(%)

Net

Gross

Tax Gap/ Public debt/

Health
gdp
expenditures
(%)
(%)

1 Kosovo

6,446

31.9

2.1

35

2,256

23.1

521

573

385

5.6

2 Romania

179,794

37.7

5.4

32.6

58,613

28.1

16,470

19,764

204

33

3 Macedonia

10,165

24.5

6.8

37.6

3,822

29.3

1,120

1,344

194

28.1

4 Bosnia-Herzegovina 18,088

50.3

10.3

33.6

6,078

41.2

2,504

3,005

161

40.6

5 Bulgaria

53,514

35.2

7.1

35.3

18,890

34.4

4,609

5,531

146

17

6 Albania

12,959

28.6

6.8

33.4

4,328

23.1

1,000

1,226

139

58.9

7 Croatia

63,850

40.6

7.8

32.1

20,496

26.6

5,452

6,542

131

45.6

8 Montenegro

4,550

41.7

9.1

35

1,593

28

368

441

107

45.8

9 Greece

298,734

46.8

10.1

27.5

82,152

30

24,646

29,575

98

160.8

10 Serbia

45,043

21.6

10.4

29.1

13,108

34.1

3,028

3,633

78

47.9

693,143

33.7

7.6

33.1

211,335

29.8

59,717

71,635

164

48.3

Total/Mesatare

Source: Tax Justice Network, World Bank, WHO, Ministry of Finance of Albania, Instat

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Law. Fiscal. Transparency

Comparing indicators of table, one can see that:

Firstly, the data suggests that part of the economy, which is not part of the fiscal system constitutes one
thirds of the GDP of the Balkans. This means that 1 in 3 US.Dollars circulating in the Balkans and are not
included in the fiscal system and taxable. This ratio is better in Greece (1 to 4) and Serbia (1 to 3.4). The
ratio it is worse in Macedonia (1 to 2.7), in Bulgaria (1 to 2.8) and Kosovo and Montenegro (1 to 2.9). If
compared with the global ratio (1 to 6) and in Europe report (1 to 5), the Balkans shows that is far away
from the formal economy of EU states and is close to the levels in Latin America (1 to 2.7) and Africa (1
to 2.9).
Secondly, the data suggests that the tax gap comes mainly from tax evasion, but also from uncollected
taxes, as well as the effects of the implementation of international schemes to avoid tax until the tax
rates on profit taxes in Balkan are in the same flat rate. All this tax gap it is a share of 10% of GDP
Balkans.
Thirdly, the data shown that the informal economy in the Balkan states it is at the same level as the
extent of government spending budget Balkans, a share of 33% of GDP of Balkan states. This high level
tells that tax evasion hidden in this high level of informality is a crime against the democracy in
development, but also to society and its morality. This is a social illness that shatters economy that
actually needs more funds than in previous periods of trouble moments of global crisis or the impact of
the crises of other neighbor countries. The economy and citizens need to increase public services, but
that do not take them because of the low level of fiscal contribution to the budget, but also that fact
influence the behavior and tax burden of the compliant taxpayers. In similar conclusions can reach
everybody if tend to compare statistics with each other.
A final conclusion can be drawn from the Balkans. Even though there is not a high public debt in Balkans
(48.3% of GDP), again the governments should be much tougher against tax evasion and careful to
internal problems of tax administrations. The strategic goal to narrow the tax gap to just 5% will affect
the public debt versus to the lowest level ever for less than 10 years including in this fiscal trend also the
Greece, which since 3 years is the fiscal sick of the Balkans.

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Law. Fiscal. Transparency

IV. Tax gap in the Albania

Most of the Albanian taxpayers pay their tax liability (>80%). The Central and local tax administration
(together with the customs administration, in the tax agent's role) were collected for 2011 amount 292
billion ALL (2.75 billion US.Dollars) taxes and fees (including Insurance Contributions). However, not all
businesses and citizens have paid their share of taxes. The tax administration could collects the tax
revenue more, if can deals with narrowing the gap of tax evasion, minimising the tax avoidance, solving
the errors in calculation, low levels of tax education and services, and by the strong will against
corrupted politicians and the high management level of public finances as part of politic patronage.
Estimation of Tax Gap and effect of informal economy in Albania, 2011
Country

Albania

Budget
Health
expenditures/ expenditures/
GDP
GDP
(mln. US.D)
(%)
(%)

Informal economy

GDP

12,959

28.6

6.8

Tax Burden

Tax Gap(mln. US.D)

(%)

(mln. US.D)

(%)

Net

Gross

33.4

4,328

23.1

1,000

1,226

Tax Gap/
Public
Health
debt/ gdp
expenditures
(%)
(%)

139

58.9

Source: World Bank, Ministry of Finance of Albania, Instat

The Gross tax gap has a share of 9.46 % in GDP, and is worth as 44% of the tax burden in 2011. The Net
tax gap has a share of 7.7% in GDP.
Gross tax gap for 2011 it is at the level of 30.8%. While the net tax gap it is at the level of 26.6%.
If the tax gap will be narrowed by 1% of GDP per year, then we would have an annual budget deficit
reduction to 25% and an increase of revenues by 5% for the first year and with an increase of 1% more
than the increase for years to come. If the tax gap could be narrows to 5% of GDP, will have an effect in
reducing the level of public debt below 20% of GDP within a period of 7 to 8 years. An additional effect
will be the growth of the formal economy and GDP, where for every 1% formalization of the economy
per year will have a GDP growth of 2% per year.
4.1. VAT gap
VAT gap is based on statistical national accounts, including the account of Final Consumption
Expenditure. According to World Bank data for 2011 this ratio shows a share of 89% of Albania's GDP.
Compared to 2010 this indicator is 8.8% higher in the absolute value. In the year 2010 the Final
Consumption Expenditure show a share of 87.4% of the GDP.

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Law. Fiscal. Transparency

To calculate the VAT gap Net, should be made exemptions become final consumption, according to the
list below.
From this final consumption is not included in calculations
- The agricultural sector,
- The financial sector,
- The education sector;
- Electronic and print media
- International export services,
- VAT refunds and,
- Other exceptions in the VAT domestic law
The calculations do not include the exchange of goods and services to segments of taxpayers, who are
below the threshold for VAT registration (mainly micro and small business segment).
The calculation of the VAT gap, 2011
The VAT gap is calculated for the two VAT rates and it is at 2.9% of GDP, or 33.8% of the VAT payable in
2011. The share of VAT, which is part of the 2011 budget revenues is at the level of 8.67% of the GDP.
Theoretical estimation of the VAT revenues is at the level of 11.5% of GDP.
The net VAT gap is 25.2% of theoretical assessment of the VAT to be collected in 2011.
If we compare the VAT gap in Albania with the average of VAT gap of EU member countries, can be
noticed a difference of 13.2 percentage points higher. If we make a comparison between some specific
countries, then Albania has a gap of VAT by 4.8 percentage points lower than Greece and 2.8 percentage
points lower than Slovakia.

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Law. Fiscal. Transparency

Conclusion
Albania has a tax gap that is located on the map of tax evasion of countries with high level.
The Tax gap for 2011 it is at the level of 30.8%.
The VAT gap is at the level of 25.2%.
If compared with average tax gap of Balkans, then Albania is 3.4 percentage points higher. The tax gap
with higher level in the Balkans can be found in Macedonia at the level of 31.1%.
The tax gap with lower level in the Balkans can be found in Serbia at the level of 19.1%.

Estimation of Tax Gap for the balkan countries, 2011

No.

Country

Tax
Burden

Tax Gap (mln. US.D)

Net Tax
Gap

Gross Tax
Gap

Net Tax Gap

Gross Tax
Gap

(mln. US.D)

Net

Gross

(mln. US.D)

(mln. US.D)

(%)

(%)

Macedonia

2,978

1,120

1,344

4,098

4,322.2

27.3%

31.1%

Albania

2,994

1,000

1,226

3,993

4,219.8

25.0%

29.1%

Bosnia-Herzegovina

7,452

2,504

3,005

9,956

10,457.0

25.1%

28.7%

Romania

50,522

16,470

19,764

66,992

70,286.4

24.6%

28.1%

Croatia

16,984

5,452

6,542

22,436

23,526.4

24.3%

27.8%

Kosovo

1,489

521

573

2,010

2,062.3

25.9%

27.8%

Montenegro

1,274

368

441

1,642

1,715.4

22.4%

25.7%

Greece

89,620

24,646

29,575

114,266

119,194.9

21.6%

24.8%

Bulgaria

10 Serbia
Total/Average

18,409

4,609

5,531

23,018

23,939.9

20.0%

23.1%

15,360

3,028

3,633

18,387

18,993.1

16.5%

19.1%

20,708

59,717

71,635

266,799

278,717

22.4%

25.7%

Source: Tax Justice Network, World Bank, WHO, Ministry of Finance of Albania, Instat

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Law. Fiscal. Transparency

References
Dr. Klarita Grxhani, Prof. Dr. Arthur Schram. , May 2003. Tax Evasion and the Source of Income: An Experimental
Study in Albania and the Netherlands. AIAS orking Paper 03/11
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Studies.
CEI OECD. December 2004. The Informal Economy in Albania: ANALYSIS AND POLICY RECOMMENDATIONS
Reckon Llp. 21 September 2009. Study to quantify and analyze the VAT gap in the EU-25 Member States, DG
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Dr. Dr.h.c.mult. Friedrich Schneider, Department of Economics, Johannes Kepler University of Linz, September
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USAID. December 29, 2010. Albania Gap Analysis Strategic Planning & Analysis Division E&E Bureau USAID
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WB. 2011. Private household consumption expenditure.
Instat. Databaza statistikore. Statistika sipas temave: Publikime mbi treguesit e llogarive kombtare vjetore 2011
Richard Murphy FCA Director, Tax Research UK. 10 February 2012. Closing the European Tax Gap- A report for
Group of the Progressive Alliance of Socialists & Democrats in the European Parliament
Banka e Shqipris. 30 Prill 2012. Raporti vjetor i Banks s Shqipris 2011
Buletini fiskal, i Ministris s Financave. 2011-2012. Tremujort I, II, III, IV
IOTA, 2012. Strategic Management Benchmarking of Tax Administration data
A. Gjokutaj. AL-Tax Center. Dokumente Fiskale 2012/11/11. Vlersimi i barrs tatimore sipas qarqeve n Shqipri
pr 2011 dhe krahasimi me vendet e rajonit ballkanik dhe n bot: Analiza dhe prshkrimi i metodologjis. Barra
tatimore m e ult dhe m e lart n Shqipri dhe Bot

Statistical data and information on economic and fiscal websites:

www.imf.org; www.worldbank.org; www.oecd.org; www.minfin.gov.al; www.iota-tax.org; www.hmrc.gov.uk
http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home; www.who.int; www.tradingeconomics.com
www.al-tax.org; www.indexmundi.com; www.nationmaster.com; www.economywatch.com; www.taxjustice.net
www.factfish.com

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