The new Law no. 29/2023 "On Income Tax" dated 30 March 2023 introduces some changes and novelties to the depreciation methods and the inventory valuation method to be used starting from 1 January 2024. In the following issue, KPMG in Albania has summarized the most important changes to the depreciation methods and the inventory valuation method for tax purposes.
In comparison to the existing provisions, the new Law on Income Tax indicates some important changes regarding the depreciation rules and rates applicable to non-current assets.
In accordance with the new Law, the responsible person for calculation and consequently be entitled to deduct depreciation expense at the extent allowed by the law would be either the (a) the owner of the assets, or (b) the person who bears the risk of loss or damage to assets, in the case of leased assets, usufruct or any other form provided by legal provisions.
Financial assets and tangible fixed assets, which are not subject to consumption and obsolescence, such as: land, works of art, antiques, jewelry, metals, and precious stones, are not depreciated. The cost related to the acquisition, construction or improvement of fixed assets that are not subject to depreciation are deductible in the tax year in which the fixed assets are disposed, provided that the disposal proceeds are included in the taxable profit.
Starting from 1 January 2024, entities in Albania are required to switch the depreciation method from the residual value to the straight-line method in order to calculate the depreciation of non-current assets for tax purposes. Non-current assets of each category are depreciated individually.
The depreciation method is required to change in 2024 also for the assets acquired before the entry into force of the new Law for using different depreciation method from the straight-line method. The depreciation base for these assets for the year 2024 and onwards will be their net book value at the end of 31 December 2023 and the depreciation expense for tax purposes will continue to be calculated until the moment that the net book value of the asset will be zero.
The tax depreciation rates applicable for each category of assets would be as follows:
- Buildings, installations, improvements, and constructions with a useful life of more than 15 years are depreciated at an annual rate of 5%;
- Intangible assets are depreciated at an annual rate of 15%;
- Computers, IT equipment, software products and information systems are depreciated at an annual rate of 25%;
- All other non-current assets are depreciated at an annual rate of 20%.
The new Law on Income Tax also introduces a limitation on the depreciation expenses for vehicles used by the personnel having a capacity up to 1+4 passengers. The asset's depreciation base shall not be higher than 50% of the purchase price and any repairing costs, including VAT and at the same time should not exceed the value of ALL 10 million.
The depreciation tax base is equal to the cost of acquisition or creation of the asset, increased with any related cost for the improvement of the asset during the tax year. When the depreciation tax base is lower than ALL 10,000, the total residual value shall be considered as a deductible expense for corporate income tax purposes.
In case where a non-current asset is disposed of during a tax year, the remaining book value for tax purposes is deductible in that year, while potential disposal proceeds are included in the taxable profit.
Similar to the existing legislation, where the depreciation tax base is a negative amount, this amount is added to the taxable profit and the depreciation tax base will be considered equal to zero. Also, in cases of revaluation of non-current assets, for tax purposes no depreciation will be allowed for the revalued amount.
The new Law on Income Tax stipulates that the taxpayer must consistently use the same accounting method for inventory valuation and work in progress as specified by the accounting legislation. However, the inventory valuation method chosen by the taxpayer should be applied for at least 5 consecutive years.
According to the new Law on Income Tax, the expenses for consumable items are recognized at 50% in the year of acquisition and 50% in the subsequent year.
Same as it is currently regulated, the impairment revaluation of inventory, after initial recognition, according to the provisions of the Law on Accounting and Financial Statements, are not recognized for the purpose of calculating the taxable profit. This rule also applies to financial assets and intangible assets.
Associate Partner, Tax
KPMG in Albania
Senior Manager, Accounting Solutions, Tax
Tel: +355 (4) 2274 524