Institute for War & Peace Reporting
Aug 18 2005

TAXING TIMES FOR ARMENIANS

IMF pressure prompts government to shed light on skewed tax system.
By Naira Melkumian in Yerevan

Big businesses in Armenia pay far less tax than their counterparts
in other post-Soviet countries, with the burden of taxation borne by
ordinary citizens and small companies, official statistics reveal.

After urging from the International Monetary Fund, IMF, the state tax
department recently published two lists of the country’s 300 highest
taxpayers, which paint an extraordinary picture of the country’s
economy that is embarrassing to both government and big business.

According to the latest list, published last month, the Armenian
treasury received a total of 78.4 billion drams (178 million US
dollars) in the first half of this year, an amount that James McHugh,
the IMF’s representative in Armenia, said was very disappointing.

“The tax collection level in Armenia is the lowest among the countries
of the CIS,” McHugh told IWPR.

Economists say this is because some of the country’s best-known
businesses are not paying big tax bills – a fact that although
commonly believed in Armenia for many years has now been proved by
the publication of the two lists detailing which taxpayers pay what
into the treasury.

Even Armenian president Robert Kocharian expressed his concern with
tax collection recently. Meeting leading tax officials last month,
he said of their work, “The results are not bad, but they are hardly
satisfactory.” He promised more reforms of the tax system.

In the latest list, as with the last published in April, Armenians
learned that the biggest taxpayer in the country was not one of
the big businesses based in the capital but the Zangezur copper and
molybdenum factory which contributed more than 24 million dollars to
the budget in the previous six months.

Asked to comment on the nature of the list, one of the government
officials dealing directly with the issue, Vakhtang Mirumian, who
is the head of the finance ministry’s department of tax methodology,
told IWPR that he had “nothing to say”.

Only two big companies, Grand Tobacco and International Masis Tabak,
are among the leading taxpayers in the current list.

Grand Tobacco is in fifth position having paid 2.3 billion drams
(more than five million US dollars) for the first half of this year
or 2.9 per cent of all taxes collected by the tax department.

Other big Armenian business concerns, running big factories and making
well-known products, however were not high up on the list.

According to the IMF 2004 report, the country’s biggest businessmen
pay only 23 per cent of all taxes while they can potentially contribute
75 per cent.

McHugh says that the lists are bringing transparency to Armenia’s tax
collection system and highlighting what needs to be done to raise
more taxes. “All Armenians should pay more taxes, and most of it
should come from large businesses,” he said.

The tax revenue figures have led to accusations that the system
delivers tax breaks to some companies while penalising others.

“There is a unique situation in Armenia – a businessman’s success
does not depend on the quality of business at all, it only depends
on how close they are to authorities,” former statistics minister
Eduard Aghajanov told IWPR.

There has been criticism for example that Kotaik Beer, which dominates
60 per cent of Armenia’s lucrative beer market, has paid no profit
tax at all – at the same time as its smaller competitor Yerevan Beer
paid 128 million drams (290,0000 dollars).

Tigran Mejlumian, chief accountant for the Kotaik factory, 71 per cent
of which belongs to the French firm Castel, told IWPR that because
it receives foreign investment it does not have to pay profit tax.

Under the law, companies that acquire more than one million dollars
of over overseas funds every two years are exempt from such taxation.

With big businessmen paying far less than their counterparts in other
post-Soviet countries, the brunt of Armenia’s tax burden is being
borne by ordinary citizens and small businesses.

Opposition parliamentary deputy Viktor Dallakian argues that because of
the heavy tax bill they paid, small businesses were being “destroyed,
while the oligarchs remain free to play”.

Dallakian estimates that large businesses actually earn 300-350
million dollars every year – equivalent to half the country’s budget.

However, top businessman Hachik Manukian, who heads the Max Group,
a prominent group of businesses, argued that the main tax burden
should indeed fall on small and medium enterprises.

Manukian rejected the IMF recommendations. “They want 300 large
taxpayers to provide 70 per cent of the collections,” he told IWPR.
“Who told them that it is correct?

“Large businesses are transparent enough and it is necessary to audit
the medium enterprises.”

When asked to declare the amount of the taxes paid by Max Group –
only some of its companies appear on the tax department list – the
businessman declined to comment, saying only, “Why are you interested
in this?”

Most of the taxes collected in Armenia are collected indirectly.
Parliamentary deputy Victor Dallakian estimated that 80 per cent of
revenues come from indirect taxes, while developed economies collect
around 70 per cent of their revenue from direct taxes.

According to the finance ministry, 46.2 per cent of tax revenues come
from VAT, while profit tax provides only 17.4 per cent, and income
tax 8.4 per cent of the budget.

“Filling the budget through VAT is like picking pockets, in other
words, the state is putting its hand in every consumer’s pocket,”
said Arthur Tamarjian, deputy head of the department for legislative
analysis and legal control in the Armenian parliament.

Felix Tsolakian, head of the tax department, told IWPR that over
the last two years there has been a 40 per cent increase in the
proportion of direct taxes in total tax revenues. He said the lists
of taxpayers had been published in accordance with the law and the
president’s wishes.

Naira Melkumian is a freelance journalist in Yerevan and IWPR
contributor.