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Taxing Times for Armenians

IMF pressure prompts government to shed light on skewed tax system.
By Naira Melkumyan

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.

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