Fiscal Reform in Taxation: What is an Optimal Taxation System for the Republic of Kosovo?

Gjonlleshaj, Gjon K.; Kamberaj, Altina Article Fiscal Reform in Taxation: What is an Optimal Taxation System for the Republic of Kosovo? ENTRENOVA - ENTerprise REsearch InNOVAtion Provided in Cooperation with: IRENET - Society for Advancing Innovation and Research in Economy, Zagreb Suggested Citation: Gjonlleshaj, Gjon K.; Kamberaj, Altina (2025) : Fiscal Reform in Taxation: What is an Optimal Taxation System for the Republic of Kosovo?, ENTRENOVA - ENTerprise REsearch InNOVAtion, ISSN 2706-4735, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb, Vol. 10, Iss. 1, pp. 105-125, https://doi.org/10.54820/entrenova-2024-0011 This Version is available at: https://hdl.handle.net/10419/317954 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/4.0/ 105 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Fiscal Reform in Taxation: What is an Optimal Taxation System for the Republic of Kosovo? Gjon K. Gjonlleshaj South East European University, Tetovo, North Macedonia Altina Kamberaj South East European University, Tetovo, North Macedonia Abstract This paper explores the Taxation system in the Republic of Kosovo. It researches the need and reasons for the optimal taxation system that the Republic of Kosovo should develop as part of the proposed Taxation reform (based on recommendation). The Republic of Kosovo is the newest country in Europe. Since 2000, one of its core pillars has been the Tax Administration, which serves as the primary public finance income generator. Its further development, reform, and adaptation with updated Taxation mainstreams is imperative. Taxation systems should implement the best practices in digitalization and innovation. The paper uses secondary data with analyzed findings based on the quantitative empirical approach. The findings show that there is room for the Republic of Kosovo to apply Taxation reforms to further enrich, innovate, and upgrade its Tax system. As stated, the country's economic and business development significantly depends on how its taxation system meets its development and strategic goals. This research paper concludes with concrete recommendations that the Republic of Kosovo is advised to undertake in reforming its Taxation system. Keywords: taxation system, socioeconomic development, innovation, digitalization, reform, tax administration, public finance. JEL classification: H20, H21, H23, H24, H25, H26, H27, H29, H50, H51, H61 Paper type: Research article Received: 8 March 2024 Accepted: 29 July 2024 DOI: 10.54820/entrenova-2024-0011 106 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Introduction At the beginning of 1999, NATO forces intervened in Kosovo with the purpose of stopping the ethnic cleansing of the local Albanian population. On June 9th, 1999, the "Kumanovo Agreement" was signed between NATO and ex-Yugoslavian (At that time, the Yugoslav federation consisted of Serbia and Montenegro) military. The following day, on June 10th, 1999, The United Nations Security Council approved the 1244 resolution, which helped end the war in Kosovo and established UNMIK (United Nations Mission in Kosovo). The UNMIK was structured in functional pillars, and one of the pillars was to establish provisional democratic institutions in Kosovo. As a result, in 2000, under the guidance of UNMIK, the Tax Administration of Kosovo (TAK) was established. In 2003, the TAK transferred from UNMIK to the sole responsibility of the Kosovar Ministry of Economy and Finance (The Government). Since then, TAK has advanced and developed in newly established country. Since its establishment, the Kosovo tax system has been heavily based on consumption and income taxes, which have reached up to 25% of the country's GDP. In other words, consumption taxes (value-added taxes -VAT, customs, and excise taxes) are Kosovo's primary revenue source. Other tax channels remain underdeveloped with the potential to further develop as part of tax reform or other means of reaching optimality in the tax system. Although TAK strives to further implement the above-mentioned aspects, the results show different factual situations. Therefore, there is an imperative need to further reform of TAK. The scope of this research is to explore and argue further needs that TAK should undergo to reform itself in aiming to reach the optimal system for the benefit of the Republic of Kosovo and its people. The empirical findings in this paper scientifically prove that TAK reform is imperative to reach its optimal level of tax collection even though based on literature review, the tax optimality is doable within the theoretical framework, but very hard achievable in real application. Therefore, based on above mention aspects, this research paper aims to further fill the research gap in this domain from what other researchers were not able to research and or conclude based on until now performance aspect of TAK. Background As stated in the introduction, the TAK was greatly supported from the international mission in Kosovo. Further, even in its two decades and some of its operation, the international support is still provided through different means of technical assistance and other aspects of operational support. As seen below in the table, the Kosovo has a well-defined structure of taxation system that does present the standard framework of tax channels that are also employed in other developed countries. The following is the Tax structure in Kosovo (Table 1): tax type, threshold of application, and tax rate % applicable (as of 2024). Under the guidance of domestic legislation and foreign institutions (e.g., USAID, GIZ, others), the Republic of Kosovo successfully implemented the following Laws that regulate the taxation system in Kosovo (as of actual 2024) (Table 2). 107 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Table 1 Tax structure in Kosovo Tax Type Turnover Threshold Tax Rate Value Added TaxVAT 30,000 EUR 8% and 18% Corporate Income Tax - CIT Manufacturing, trading and transporting industry, etc. Service Industry under 50,000 Euro 3% 9% Personal Income Tax - PIT Manufacturing, trading and transporting industry, etc Service Industry under 50,000 Euro 3% 9% Corporate Income Tax - CIT Manufacturing, trading, transporting industry, etc. Service Industry over 50,000 EURO 10% Personal Income Tax - PIT Annual Income from 0 to 960 Annual Income from 960 to 3000 Annual Income from 3000 to 5400 Annual Income from 5400 to over over 50,000 EURO 0% 4% 8% 10% Tax on Wages (monthly) Annual Income from 0 to 80 Annual Income from 80 to 250 Annual Income from 250 to 450 Annual Income from 450 and over 0% 4% 8% 10% Tax on Rents, Interest and Royalties 10% Tax on Special Categories 3% Tax on non-resident 5% Source: Tax Administration of Kosovo (Tax Administration of Kosovo, 2024) Table 2 Regulation of the taxation system in Kosovo No. Name of the Law No. of the Law No. of the Administrative Instruction 1 Law on Tax Administration and Procedures No. 03/L222 No. 04/L102 No. 04/L - 223 No. 03/2016 No. 15/2010 2 Law on Value Added Tax - VAT No. 05/L - 037 No. 03/2015 No. 06/2016 3 Law on Personal Income Tax - PIT No. 05/L - 028 No. 01/2016 4 Law on Corporate Income Tax - CIT No. 05/L - 029 No. 02/2016 5 Law on Person Contributions - PC No. 04/L - 168 No. 04/L - 101 No. 05/L - 116 6 Law on Game of Chance No. 04/L - 080 No. 03/2023 Source: Tax Administration of Kosovo. (Tax Administration of Kosovo, 2024) 108 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Nevertheless, of the above taxes, laws, and regulations, TAK is still considered relatively as a new institution and in much need of further organization, innovation, digitalization, and transformation of its operation toward an optimal tax system (based on findings/sources also found from other authors). TAK's mission is to: • Increase tax collection in the Republic of Kosovo, • Improve the efficiency of tax collection and its operation, • Implement adequate and enhanced compliance, • Implement and align with international taxation standards. Literature Review No country is without Tax Administration system as its primary public financing income generator. Nevertheless, not all countries have reached the point where their Tax Administration is efficient and optimal per their country’s needs (Note: optimality of the countries’ Tax Admin. varies subject to counties’ specifics). The ongoing dilemma among scholars and researchers is how much the optimal tax theory indeed finds its practical application in the real world (Explanation: “Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximizes a social welfare function subject to economic constraints [Gregory, Matthew, Danny 2009]”). Below are a few reviews and researchers about the optimality of the tax systems. The optimal taxation theory explains that the country achieves the optimal Tax Administration if the desired revenue/income is achieved with efficient tax administration. With this logic in place, an international tax competitive index has developed, which appraises which countries within the OECD rank as the most optimal regarding their tax administration, system/policy. By surprise, the most developed countries do not necessarily rank among the biggest and the economically most robust countries in the world. Having resources, high buying power, and a large and robust economy does not necessarily present that the country has an optimal Tax Administration. In worldwide Taxation literature, there are strong arguments with pros and cons about the optimality of Tax Administration. The subject matter is very wide and has been explored both qualitatively and quantitatively so far. a) Literature review about Optimal Taxation (Globally): According to (Alm, 1996), in his research paper "What is an 'Optimal' Tax System?" the models for optimal tax system do not indeed correlate between reality (Socioeconomics) and tax policies. He further argues that countries should consider the following: • The impact of social and political institutions on proper taxation policies • The cost that the country should bear in administrating different tax types. (As we know, not all tax types result in optimal revenue for the country), • The direct effect of taxes on people’s behavior in the country. (The sentiment that taxpayers have and build toward tax types). James Alm, among others, considers the above-mentioned aspects to be practical issues for designing a tax system that reaches optimality worldwide. Moreover, James Alm delves deeper into his paper, highlighting the intricate nature of optimal tax theory, which advocates for a taxation system with a multitude of tax rates (tax types). He points out that inefficiency can also be found in inefficient tax types, which are therefore costly to administer. Alm also challenges the effectiveness 109 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 of a 'Progressive or regressive tax’, citing theoretical models suggesting zero taxes on the wealthy may not be politically correct or feasible for generating sufficient revenue. In summary, James Alm raises the concern that it is imperative to consider actual/objective world reality when designing and implementing any tax system. Gathered: Countries' reality and specifics should be the base on approaching the draft theoretical part regarding the optimality of the Tax Administration. Three authors: N. Gregory Mankiw, Mathew Weinzierz, and Danny Gogan (2009), in their research “Optimal Taxation in Theory and Practice,” Elaborate on tax optimality. On pros (The theoretical insights), they derived eight “lessons” that should be considered while aiming to design an optimal taxation system. The authors further focused on efficiency (Maximizing economic efficiency). Also, they elaborated on distribution, equity, and simplicity vs. complexity. By distributing equity, they suggested designing attractive tax rates for taxpayers and promoting an equitable taxation system. On a simplicity vs. complexity framework, authors argue that the optimal system should have many tax brackets within the simple taxation bureaucracy that is easy to administrate. On the Cons (The Practical Considerations), the authors argue about the theoretical vs. real world. They say that the optimal taxation theory frequently makes norms that do not present the real world (Its application in practice). At its core, countries should apply a balanced approach, which means balancing theoretical efficiency and considering the taxation system's political feasibility and administrative cost to develop and implement an optimal one successfully and efficiently. In the paper "Do Countries Really Deviate from the Optimal Tax System?" (Sepulveda, 2023)elaborates on and investigates the fundamental gap between the Optimal Tax Theory and its actual application. Sepulveda links the development of the tax system with the development of the country's economy. As the country develops economically, the tax system will become more efficient. b) Literature about Kosovo and Western Balkan countries (Regionally): In the paper "Understanding Tax Evasion and Professionalism of Tax Administration in Kosovo," Diamanta Skenderi and Besnik Skenderi (2022) investigate tax compliance in Kosovo, and they came up with a few essential recommendations about how the Tex Administration can improve in Kosovo. Per the Authors, Kosovo's Tax admin should come up with the following: • Further development and capacity building. • Increase awareness. • Further investment in technology and taxing system(s). In the research paper "Tax Incentives in Western Balkan Countries," the researchers Šimovič and Žaja (2010) elaborate on different tax incentives in the domain of the CIT (Corporate Income Taxes). It explores a) Reduced tax rates, b) Holiday taxes, and c) other investment incentives. Per the paper, incentivizing business may a) boost economic growth, b) develop job creation, and c) develop and promote specific industries that may be strategic to the country's development. The paper explains various taxation incentives that may ultimately promote the economic development of the Western Balkan Countries." The" Taxation and Budgetary Policies in the Western Balkans" by Marting Hutsebaut (2015), researches the taxation system in Western Balkan countries and the budget policies applied in these countries. The author elaborates on the following: • Low revenue collection from the Tax administrations directly impacts Tax Administration efficiency. 110 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 • A high budget deficit is a phenomenon in the Western Balkan countries. • And Inefficient Tax administrations. The Author explains that Western Balkan Countries must standardize their Tax Administration with EU legislation as they aspire to join the EU. The Author sets recommendations that countries should a) fight tax evasion, b) proceed with fiscal consolation, c) and conduct Tax Administration Reforms. In general, Hustsetbaut argues that improving Taxation and budget policies will contribute to further economic development and toward EU membership. Summary from presented Literature reviews: By reading literature reviews two main characteristics appear: • The optimality of the Tax Administration within the framework of the Theory is a well-understood concept. However, its application in the real world remains the biggest challenge for many scholars arguing within this domain, and it is an ongoing concern. • Western Balkan Countries, particularly Kosovo, present gaps in the Tax Administration domain, with challenges in tax revenue collection, technology development, informality, and tax compliance. Research Methodology Although the scope of this research paper is Tax Administration in Kosovo, have been analyzed quantitative and qualitative Data from [1] Kosovo and [2] Western Balkan Countries. Widening the research with additional Data (Especially from the Western Balkan Countries, which have similar market, economic, political, and socioeconomic regional anatomy) is within the scope of this paper. On the contrary, it provides a much better understanding of the tax administration systems in the region and their level of optimality/efficiency. This approach helps develop and present factual recommendations that further help Kosovo reform and develop its tax administration system. The literature review shows that optimality on the theoretical level vs. absolute application level does very. Consequently, many Tax Administrations worldwide have yet to reach the optimal point or desired efficiency. In Kosovo’s case, the literature review points out that there is room for improvement and further development of the Tax Administration, which through research pointed out in this paper does show: 1] some improvements have been made, this is also scientifically reported, 2] there is much more to be done further. This is also scientifically reported. The second part of empirical findings (as in point I) includes a carefully balanced approach based on Quantitative research methodology. We utilized a comparison of DATA from different sources/reports (Actual vs. Budgeted performance, behavioral Data) that were generated from the TAK, IMF, OECD, etc.). Statistical, empirical findings are generated from STATA statistical software, including statistical models with the aim to reach to the significance of the studied model(s). I) Comparing and explaining tendencies: During the COVID-19 pandemic, the Government of Kosovo (similarly adapted models from other countries applied during the COVID-19 pandemic) took incentive measures to support Kosovo’s economy and trade. These measurements presented substantial benefits to the businesses and workforce, which were also reflected in future years, e.g., 2022 and 2023. The measurements are reflected in the formalization of both workforces (registered workers could apply for extra-governmental stimulus as per earning threshold) and businesses (businesses could apply for incentive 111 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 [economic recovery] incentive). This approach increased TAK efficiency in operation during this period, which resulted in better performance, as seen in Figure 1 below. Figure 1 Changes in Taxes 2019-2022 Source: World Economic Outlook, IMF. (International Monetary Fund, 2024) According to the above chart, Kosovo relies heavily on consumption taxation and is the least developed country in the region. However, during the COVID-19 pandemic, tax revenue increased, positioning Kosovo in a leading position compared to five other Western Balkan counties. When comparing tax rate structures (CIT, PIT, VAT Customs duty), as seen in Figure 2 (Attractiveness of the tax rate structures) in Western Balkans, Kosovo presents a favorable structure. Nevertheless, Kosovo is still affected by high informality in tax compliance, mainly characterized by an unformalized workforce (Companies are allowed to employ staff and not report them to the Tax Administration) and not proper Corporate Income Taxes reporting and contribution by business entities (Tax Administration does allow business entities to declare underperformance in operation, while its business operation grows during the operation periods) (Data: 10 years performance [2012 → 2022] on AVG the PIT = shows only 9% standing, CIT = shows 6%, while VAT = shows 51%). The comparison conclusion shows that regardless of tax rate attractiveness, the Tax Administration of Kosovo lacks mechanisms to increase balanced tax collection compliance, primarily by stimulating PIT and CIT collection increase. Figure 2 Tax rates in Western Balkans and share of different taxes in total tax revenues 20122022 Source: Country tax office websites, Kosovo Ministry of Finance and IMF. (Ministry of Finance, Labour, and Transfers, 2024) and (International Monetary Fund, 2024) 112 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Time cluster analysis of VAT, CIT, and PIT performance in Kosovo 2019→2022 VAT On the other hand, regardless of unbalanced tax collection among VAT, CIT, and PIT, Kosovo showed an increase in performance in time clusters in 2019→ 2022. As seen from the table below, the change in total VAT revenue in 2021 has jumped significantly by 34.8% due to increases in formalization and new Government policies regarding Tax audits, controls, and tax return benefits. In 2022, per the report, the revenue dropped, but not to a lower scale, as seen in 2020 and 2019. Collection improvements & formalization improved significantly in 2021 and 2022 compared to 2020 and 2019, which supported the narrowing of the revenue GAP%. Table 3 Value added taxes: Revenue Change and Contributing Factors Millions of euro Percent Cumulative Cumulative 2019 2020 2021 2022 20202022 2019 2020 2021 2022 20202022 ValueAdded Taxes (VAT) Change in total VAT revenues 46.6 -76 268 190.1 382.7 5.8 -8.9 34.8 18.3 100% Contribution factors Inflation 49.2 10.5 130 146.4 287.0 6.2 1.2 16.9 14.1 75% Change in real demand -8.3 -9.1 -7.5 -1.9 -18.5 -1.00 -1.1 - 1.00 -0.2 -5% Buoyancy 7.6 -53 39.6 0.00 -13.2 0.9 -6.2 5.1 0.00 -3% Change in effective tax rate 0.6 -8.2 12.3 4.5 8.6 0.1 - 1.00 1.6 0.4 2% Collection improveme nt, including formalization -2.5 -16 93.7 41.1 118.7 -0.3 -1.9 12.2 4 31% Sources: Tax Administration Authority of Kosovo and IMF staff calculations Conclusion: circa third of VAT revenue has increased in 2019→2022 because of efficiency improvements in tax administration by increasing formalization. PIT Improvements in the mix undertaken are also evident for Personal Income Taxes (PIT) revenue that increased from 2020 → 2022. As seen in Table 5 below, changes in total 119 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 2022 2 359, 794 183,128 183,134 49,349,9 39.27 1,109,912,265.2 2 1002 2022 3 368, 140 280,551 280,561 60,444,8 13.64 1,472,485,133.1 9 1054 2022 4 371, 407 185,444 185,450 54,768,5 14.75 1,402,826,693.7 6 926 2022 5 374, 132 186,576 186,582 55,397,2 30.61 1,393,421,971.2 1 1034 2022 6 376, 848 282,878 282,888 67,269,9 07.90 1,593,870,322.3 9 979 2022 7 375, 189 189,395 189,401 64,396,4 86.46 1,663,025,457.5 5 1070 2022 8 376, 229 190,704 190,710 69,636,3 04.10 1,819,921,217.8 6 872 2022 9 376, 420 286,986 286,996 67,533,7 31.24 1,593,554,559.2 3 794 2022 10 378, 752 191,962 191,968 63,500,1 38.99 1,582,733,504.7 1 852 2022 11 381, 577 192,527 192,533 62,313,9 34.76 1,569,636,662.0 4 978 2022 12 379, 481 319,694 319,813 271,142, 649.09 2,507,145,392.9 9 872 2023 1 372, 351 196,298 196,304 65,304,1 07.39 1,304,759,761.2 1 905 120 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 2023 2 375, 301 197,790 197,796 59,539,7 76.10 1,263,766,634.8 7 1093 2023 3 382, 103 292,255 292,265 70,012,1 24.81 1,624,835,631.5 0 1237 2023 4 384, 417 199,736 19,742 63,828,8 40.36 1,442,570,595.3 1 746 2023 5 387, 971 200,927 200,933 65,427,8 38.61 1,587,734,804.4 0 1054 2023 6 392, 387 294,348 294,358 73,441,2 21.59 1,614,114,086.8 5 939 2023 7 394, 578 202,245 202,251 76,545,5 80.75 1,785,940,976.4 8 1026 2023 8 393, 379 202,869 202,875 78,772,2 48.70 1,905,230,964.5 0 951 2023 9 396, 057 292,432 292,442 75,252,0 72.42 1,690,485,852.2 5 949 2023 10 395, 380 202,026 202,032 69,852,4 51.87 1,703,733,935.0 6 1143 2023 11 397, 559 199,024 199,030 71,174,3 18.51 1,667,594,716.2 8 966 2023 12 396, 211 275,969 276,054 240,478, 465.32 2,163,764,133.1 6 882 Source: (Tax Administration of Kosovo, 2024). Note: Tests have been run without the stated adjustments, and no significant deviation was noticed in the applied statistics. 121 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Statistical analysis OLS analysis according to the multiple linear regression: Table 9 Multiple linear regression Source: Authors’ work According to the formula of multiple linear regression we substitute the current values from the table above as follows: 0 1 1 2 2 1 ... i i i p p i y x x x      = + + + + + (1) Y(Income) = a + b1 (turnover) + b2 (entities)+ b3(employed) + b4 (taxpayers)+ b5 (declarations) 2 Y (income) = a + b1 (.1306403) + b2 (-84170.35) + b3 (-780.5747) + b4 (-78.28443) + b5 (273.8426)3 According to the realized results, it can be seen that we have four meanings and one not. According to this, turnover and the number of declarants have a positive significance, while the number of registered subjects, and the number of employees have a negative significance. In the end, the number of taxpayers turns out to have no significance in the model. Fixed effects analysis accordingly the multiple linear regression formula as follows: Income Observations Coefficients t p>t [95% conf. interval] Turnover 60 .1306403 8.11 0.000 .0983432 .1629374 Number of RegisteredEn -tities 60 -84170.35 -3.15 0.003 -137752.1 - 30588.55 Employed 60 -780.5747 -3.94 0.000 -1177.907 - 383.2428 Numberoftax payers 60 -78.28443 -0.95 0.346 -243.2047 86.63579 NumberofDe clarations 60 273.8426 2.80 0.007 78.03787 469.6473 constant 60 2.10e+08 3.59 0.001 9.28e+07 3.28e+08 R-squared 0.6955 F (5, 54) 24.67 122 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Table 10 Fixed effects in multiple linear regression Source: Authors’ work After applying the fixed effects, we see that we have only two realized significances, between income and turnover, it remains positive, while the negative one between income and the number of registrations of subjects. Table 11 Correlations Variables Correlations Income 1.0000 Turnover 0.6822 1.0000 NumberofRe~s -0.0962 0.2708 1.0000 Employed 0.2908 0.7606 0.3090 1.0000 NumerofTax~s 0.4334 0.5885 0.2763 0.4497 1.0000 NumberofDe~s 0.4888 0.4371 0.1644 0.3092 0.7133 1.0000 Source: Authors’ work Based on the correlation analysis, we have a strong positive correlation between revenue and turnover, a negative correlation between revenue and the number of registered entities, a low correlation between revenue and employees, and a medium correlation between revenue and the number of declarants. On the other hand, we have no correlation between income and the number of taxpayers. Income Observations Coefficients t p>t [95% conf. interval] Turnover 60 .1328242 8.27 0.000 .1005634 .1650851 Number of Registered Entities 60 -77211.3 -2.81 0.007 -132342.5 -22080.08 Employed 60 -606.5972 -1.49 0.143 -1424.437 211.2424 Number of taxppayers 60 181.4205 1.11 0.272 -146.7926 509.6336 Number of Declarations 60 86.07221 0.59 0.556 -205.8422 377.9866 constant 60 1.30e+08 0.91 0.367 -1.57e+08 4.17e+08 R-squared: Obs per group: Within = 0.7158 min = 12 Between = 0.8423 avg = 12.0 Overall = 0.6240 max = 12 F(5, 50) = 25.19 corr(u_i, Xb) = -0.5642 Prob > F = 0.0000 123 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Practical implications By researching and understanding reports, trends, findings, and empirical results, the following is the conclusion and recommendation: Further Tax compliance mechanisms and better processes: As far Kosovo, it has been proven that [1] incentivizing [2] subsidizing in the domain of Taxation, provides a solid ground of attractiveness for employees and businesses to formalize further and become compliant with Tax laws and regulations. Therefore, as part of its path with the reform, TAK must develop sustainable mechanisms and processes that will attract much greater compliance with tax laws and regulations. E.g., Tax model in the USA: tax preparation and reimbursement for Private Individuals on PIT, is a great model that supports both: better compliance with the tax obligations and laws, and much efficient Tax Administration in collection and serving its population, Better and much effective Audit processes: The TAK needs to reform its tax audit functionalities and processes in order to improve its tax administration. Currently, TAK lacks sufficient staff for tax audits that will efficiently cover tax audit tasks for optimal tax compliance. It is imperative that TAK has an internal special audit task force that controls audit functionalities, processes and effectiveness of the audit staff (An Audit of the Audit). The TAK should strengthen internal Compliance structures. The passive, active audits and controls should be much efficient by checking businesses in more effective cross-examination format. In addition, TAK should further strengthen cross institutional cooperation with other Governmental Institutions, e.g. more efficient cooperation with Central Bank of Kosovo, Kosovo Statistics Agency, Ministry of Finance, Labor, and Transfer, etc. It should also develop much efficient reporting format. TAK should professionally and performance wise adhere for the best proven Taxation trends and mechanizes that already are implemented, especially in OECD countries. Tax Laws should update: Tax laws should further update to eliminate loop holes. TAK relies heavily in the format of Tax Law interpretation from its client care department. In one hand this seems as added value to the clients, but in the other hand presents reinterpretation of Laws/Regulations and sets presidents that may have adverse effect on Taxation. Staffing and training: TAK should increase staffing and training, especially in the domain of Tax inspectors. Better technology coverage: For the purpose of communicating with taxpayers, the TAK has developed EDI system (IT system) that recently has been updated. Nevertheless, further digitalization should be strategic priority by applying the most modern Taxation trends in technology. Technology and digitalization are one of the pre-requirements toward much efficient Tax Administration and its optimality. Awareness: TAK should contribute aggressively toward tax culture through awareness programs. Tax culture and benefits should well develop in Kosovo. By having tax benefits information, and other taxation law requirements, Kosovars will further contribute to 124 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 tax paying and as such minimize informality and contribute toward efficient tax system. Conclusion Tax administration has been one of the main pillars of public finance revenue generation. Kosovo has continued to be stable in consumption taxes when usually consumption taxes (value added taxes-VAT, excise, and customs) have been the main source of income for the Government on a traditional basis. The countries of the Western Balkans are considered regions that share similar socioeconomic typologies, as well as political ones. On the other hand, corporate income taxes-ATK and personal income taxes-TAP are still inefficient, representing a suboptimal operating trend that requires attention. The research is mainly related to the data obtained from secondary data, which show that the Republic of Kosovo has room to implement tax reforms, or more specifically to further improve its tax system. The limitations of this work are mainly the fact that the database is not very prominent, and the statistical analysis is not very detailed. References 1. Alm, J. (1996). What is an" optimal" tax system? National tax journal, 117-133. doi:10.1086/NTJ41789190 2. Hutsebaut, M. (2014). Taxation and budgetary policies in the western Balkans. SEER: Journal for Labour and Social Affairs in Eastern Europe, 207-235. Retrieved from https://www.jstor.org/stable/43294046 3. International Monetary Fund. (2024). Retrieved from World Economic Outlook: https://www.imf.org/en/Publications/WEO 4. N. Gregory Mankiw, Mathew Weinzierz, and Danny Gogan (2009). Optimal taxation in theory and practice. Journal of Economic Perspectives, 147-174. doi:10.1257/jep.23.4.147 5. Ministry of Finance, Labour, and Transfers. (2024). Retrieved from Share of Different Taxes in Total Tax Revenues: 2012-2022: https://mfpt.rks-gov.net/ 6. Sepulveda, C. F. (2023). Do countries really deviate from the optimal tax system? Public Finance Review. Sage Journals, 76-131. doi:10.1177/10911421221132670 7. Šimović, H. and Žaja (2010). Tax incentives in western Balkan countries. International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, 731-736. Retrieved from file:///C:/Users/Admin/Downloads/475512.Tax-Incentives-in-Western-BalkanCountries%20(1).pdf 8. Skenderi, D. & B. (2022). Understanding Tax Evasion and Professionalism of Tax Administration in Kosovo. ELS, 55(39), 70-75. IFAC. doi:10.1016/j.ifacol.2022.12.013 9. Tax Administration of Kosovo. (2024). Retrieved from Taxes: https://www.atk-ks.org/ 10. TAX FOUNDATION. (2023). Retrieved from International Tax Competitiveness Index 2023: https://taxfoundation.org/research/all/global/2023-international-tax-competitiveness-index/ 11. Official website of OECD, update 2024, https://www.oecd.org/about/members-andpartners/ 12. Official website of Internal Revenue Services, update 2024, https://www.oecd.org/about/members-and-partners/ 13. Official website of Ministry of Finance, Labor, and Transfers, update 2024, https://mfpt.rksgov.net/ 14. Official website Kosovo Agency of Statistics, update 2024, pages: 15. ASK public Data https://askdata.rks-gov.net/pxweb/en/ASKdata/ 16. Official website International Monetary Fund-IMF, update 2024, page: https://www.imf.org/en/Data 125 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 About the Authors Gjon K. Gjonlleshaj is a senior executive working in baking sector. He has almost 20 years of Banking experience in different roles starting form sales, credit risk, operations, finance, IT, and administration. Since 2015 he holds the position of the CEO and Chairman of the management board at Raiffeisen Leasing in Kosovo (Network unit of Raiffeisen Bank International). In addition, since 2023 he holds the position of the member of the supervisory board at Raiffeisen Insurance Broker Kosovo. The author has experience in lecturing financial, managerial accounting and risk management. Contact email: [email protected] or gjo[email protected]om Altina Kamberaj currently engaged in the academic field as a lecturer assistant in subjects quantitative/qualitative analysis, and business management. She is a member of the board of directors at the microfinance institution TimiInvest (Pristina, Kosovo). Contact email: [email protected]