Tax Compliance Costs and Business Formalization in Kosovo: Firm-Level Evidence and Policy Implications

This study examines how tax compliance costs shape business formalisation and ongoing tax compliance among micro and small firms in Kosovo. Compliance costs are treated as a multidimensional burden, including direct monetary costs (e.g., paid accounting services and filing-related expenses) and indirect costs (e.g., managerial time, uncertainty, and administrative complexity). The empirical design combines firm-level survey evidence with institutional context from Kosovo’s tax administration reforms and compliance diagnostics. Kosovo’s business environment data indicate that senior management spends a non-trivial share of time dealing with government regulation (10.4% on average) and that a large share of firms report being visited or required to meet with tax officials (82.9%), suggesting a compliance environment where administrative interaction is frequent. Complementing this, tax registry-based diagnostics document persistent late payment behaviour in the VAT system, where late payments are described as endemic, and, conditional on paying, more than 90% of taxpayers submit payments after the monthly due date. Results are interpreted through the lens of capacity constraints: firms with limited administrative capability are more sensitive to perceived complexity, while adoption of digital tools and professional accounting support can offset burden and raise compliance propensity. This interpretation aligns with Kosovo’s ongoing digitalisation agenda in revenue administration, including mandatory e-filing and e-payment reforms introduced in 2022 and the rollout of a taxpayer portal to facilitate online declarations and payments. Policy implications emphasise simplification, clear guidance, and targeted support for micro and small firms, particularly through standardised reporting procedures, practical taxpayer education, and digital uptake incentives.