EURASIA DAILY MONITOR
Volume 2 Issue 17 (January 25, 2005)

ARMENIAN PRESIDENT’S “CRUSADE” AGAINST TAX EVASION FAILS TO IMPRESS

By Emil Danielyan

Armenian President Robert Kocharian has announced a major crackdown on tax
evasion, which is widely blamed for the highly uneven distribution of the
benefits of Armenia’s robust economic growth. In separate high-profile
meetings with the leaders of his government’s taxation and customs
administration services earlier this month, Kocharian demanded that both
agencies tackle the acute problem in earnest and said he will no longer
tolerate rampant corruption within their ranks.

However, there is widespread skepticism about the seriousness of the war on
tax fraud. Local commentators believe that Kocharian will not address the
root causes of the problem because he himself presides over a highly corrupt
political and economic order that precludes the rule of law.

And yet Kocharian’s criticism of the tax authorities, heavily publicized by
state television and other channels controlled by the Armenian leader, was
extraordinary indeed. “I am sure that if you start from yourself, from
taxing your friends and relatives, you will not let others stay beyond the
taxation field,” he told senior officials from the State Taxation Service on
January 11.

Kocharian thus admitted that Armenian tax officials routinely give
privileged treatment to businesses owned by themselves, their relatives, and
their cronies. But several newspapers have questioned the sincerity of his
concerns. The popular weekly 168 Zham wrote on January 13 that he should
have simply ordered law-enforcement bodies to bring the taxman to account
instead of exhorting the latter to respect the law. Another paper, Haykakan
Zhamanak, went further, saying, “One should start not from the employees of
the Taxation Service and their relatives, but from Kocharian and his
relatives. That would be more fair.”

Kocharian had a similar encounter with the leadership of the State Customs
Committee on January 8. Without naming names, he bluntly accused
various-level officials from the Committee and other government agencies of
helping large-scale importers avoid taxes in return for kickbacks. This, he
said, is hampering Armenia’s post-Soviet economic recovery.

Kocharian was equally outspoken at a December 27 meeting with a large group
of businessmen that control much of the economic activity in Armenia. “Our
employers are hiding [earnings] in such volumes that do not fit into any
reasonable boundaries of decency. Be aware that there will be no concessions
to anybody on this issue [in 2005].”

The leitmotif of these meetings is the Armenian government’s budget for this
year. Worth approximately $800 million, it calls for a 25% rise in public
spending. Kocharian is anxious to ensure that the tax and customs
departments collect an extra 53 billion drams ($110 million) in taxes and
import duties to finance the increase.

But even a successful implementation of the 2005 budget would hardly deal a
heavy blow to tax evasion. The Armenian government’s tax revenues have
increased steadily in recent years on the back of robust economic growth
that hit (according to official figures) a record-high rate of 13.9% in 2003
and remained in double digits in 2004. However, tax revenue makes up less
than 16% of the GDP, a very small proportion even by ex-Soviet standards.
The International Monetary Fund highlighted the “weak” tax collection in an
extensive report on Armenia released in November 2004.

The most serious form of tax fraud is the underreporting of corporate
revenues. Many large and lucrative businesses falsely claim to operate at a
loss to avoid paying taxes on profits. Government-connected individuals,
including the millionaire “oligarchs” close to Kocharian, own many such
enterprises. Their financial and logistical support was crucial for
Kocharian’s hotly disputed reelection in 2003. These businesses have been
the prime beneficiaries of Armenian growth. Meanwhile, according to
government data, at least 43% of Armenians still live below the official
poverty line.

Employers also evade taxes by underreporting the salaries and number of
their employees. The Armenian Ministry of Labor estimates that more than
400,000 workers are affected by the practice, which Kocharian particularly
attacked. Therefore, the tax authorities launched large-scale business
inspections in early January to uncover hidden employment. The head of the
Taxation Service, Felix Tsolakian, said in a newspaper interview published
on January 20 that his agency has already identified 10,000 hidden jobs.

But there are already reports of tax authorities forcing the owners of
small- and medium-sized companies to artificially increase the number of
workers listed on their payroll. Tsolakian did not deny this, but defended
the overall integrity of the process.

The tax authorities have long harassed small firms not connected with
influential government officials to meet their growing revenue targets, and
there is no reason to believe that they will stop doing that now. Tax
evasion is likely to remain a serious problem for Armenia as long as there
is no solution to its genesis: a corrupt and unelected government not
accountable to the people.