THE TAX SYSTEM IN ARMENIA
How the system works -- and doesn't work
Reprinted from an Interfax article
The tax system in Armenia is generally favorable for business. Unlike the tax systems in several other CIS countries, Armenia's system is structured such that most of the taxes are federal and are paid directly to the budget. Annual tax revenue in 2001 totaled $301.4 million.
Russian Ministry of Taxes figures were used in this article.
Armenia has seven main taxes - value added tax (VAT), profit tax, income tax, property tax, land tax, the so-called simplified tax, and excise. Various fixed payments of simplified taxes can also be set under special legislation.
Most taxes are paid exclusively to the federal budget. Local budgets receive revenue only from the tax on property in municipalities and several duties and local payments, in addition to federal budget subsidies. These duties are very high and the list of factors that result in assessment of these duties is extensive.
The most characteristic local duties are:
Duty for the construction, reinforcement, restoration and modernization of buildings;
Duty for razing buildings and structures;
Duty for the sale of alcohol and tobacco products;
Duty for street trade:
Duty for working on local territory after midnight;
Duty for keeping pets in cities;
Duty for advertising;
Duty for issue of documents from city archives.
The distribution of various taxes in total tax collection is similar to that in Georgia and Tajikistan, where trade plays a larger role in the economy than industry.
Value added tax is the biggest revenue item, contributing more than a third of budget revenue. VAT accounted for 45% of tax revenue in 2001. Analysts expect this to increase this year, since Armenia decided at the end of last year to collect VAT for imported goods at the border.
In the early 1990s profit tax was essentially the main source of tax revenue, but starting in 1998 its share declined significantly. Problems in economic development are affecting profit tax collection. Profit tax currently accounts for less than 15% of tax revenue, which is even less than excise.
The share of excise in total tax collection increased the most in 1996 when political stabilization fuelled a sharp increase in the trade of tobacco, alcohol products, rugs, and jewelry. The share of excise in tax revenue increased from 4.3% to 15.1% that year and continued growing to top 18% in 2001.
Poor tax administration is one of the biggest problems in the tax system and has drawn frequent comments from the International Monetary Fund. The situation in tax collection improved considerably last year and the State Revenue Ministry collected 97.4% of targeted tax revenue, up from 88.8% a year earlier.
The tax revenue target for the first quarter of this year was met at 99% (40.2 billion dram).
SHARE OF MAIN TAXES IN STATE BUDGET REVENUE
VALUE ADDED TAX
The value added tax (VAT) in Armenia is 20%. However, Armenia has an expanded application of zero VAT for some transactions and operations.
The zero VAT has caused numerous disputes between Armenia and its trade partners, particularly Russia, which opposes the zero VAT and supports a broader use of tax breaks.
Fixed payments that replace VAT are used for some taxpayers, transactions and operations.
VAT is paid quarterly except when taxpayers declare monthly payments. VAT is paid to the state budget by the 20th of the month following the tax period.
CHANGE IN VAT COLLECTION IN ARMENIA
Excise in Armenia provides 10% - 15% of state budget revenue. This is the only revenue item that has grown annually in absolute and relative terms since Armenia gained independence.
Excise is charged on: beer, wine, wine materials, alcohol and alcoholic beverages, tobacco substitutes, tobacco products, gasoline, crude oil and petroleum products, diesel fuel, petroleum gases and other gaseous hydrocarbons, with the exception of natural gas.
CURRENT EXCISE TAX RATES
In addition to these rates, excise on some goods is set under special legislation depending on current market trends. This applies to products such as gasoline and tobacco products.
Product group Tax base Tax rate
Beer 1 liter 70 0,12
Wine and fruit wines, wine 1 liter 100 0,17
materials, of which:
Sparkling 1 liter 180 0,31
Champagne 1 liter 300 0,51
Vermouth and other grape- 1 liter 500 0,86
based fortified wines
Other fermented beverages 1 liter 180 0,31
Ethyl alcohol 1 liter 600 1,03
Alcoholic beverages, of 1 liter 1500 2,57
Brandies produced 1 liter 1200 2,06
through distillation of
wine or wine materials
(cognac and other
Vodka, liqueurs, 1 liter 300 0,51
Tobacco substitutes 1 kilogram 1500 2,57
Crude oil and petroleum 1 tonne 27000 46,35
Diesel fuel 1 tonne 11500 19,74
Petroleum gases and other 1 tonne 1000 1,72
(except natural gas)
* - Tax rate for each percentage proof above 40% increases by 7.5 drams
(about one cent
Excise on goods imported to Armenia must be paid within 10 days of import. Taxpayers in this case do not present tax authorities calculations on the taxes.
Others report to the Ministry of State Revenue at the end of each month. Taxpayers pay excise and submit tax authorities reports on the tax by the 15th of the month following payment.
CHANGE IN COLLECTION OF EXCISE IN ARMENIA
Average annual profit tax collection in Armenia for the past five years has been about $40 million, making it the third largest revenue item.
The profit tax is 20% but fixed payments can be set for some taxpayers that replace this tax.
Taxpayers calculate the profit tax at the end of each year and submit balance sheets to the tax inspectorate by April 15th. The tax must be paid by April 25 (inclusive).
Taxpayers in Armenia are required to pay estimated profit tax during the year based on 1/16th the actual tax for the previous year and payment must be made by the 25th of the month. New companies are not required to make the advance payments until April 25th of the following year but must notify the tax inspectorate in advance.
If a company did not show taxable profit for the previous year or the profit tax was less than 500,000 dram (about $860), it can be exempt from the advance payments.
Non-resident taxpayers working through divisions in Armenia determine profit tax as follows: If the profit tax for the previous period exceeded 2 million dram (about $3,500), the non-resident will pay advances twice
during the year based on actual tax for the previous year in equal installments on July 1 and December 31.
CHANGE IN COLLECTION OF PROFIT TAX
Non-residents must submit annual income statements and reports on activities to the tax inspectorate by April 15 of the year following the tax year.
The tax inspectorate assesses the profit tax for non-residents that have divisions or offices in Armenia based on income statements. The taxpayer is issued notification within 10 days after submitting income statements on the amount of profit tax due.
Income tax provides a smaller portion of tax revenue in Armenia than in many other CIS countries at less than 10%. This is largely because the system for collecting taxes from individuals is not as efficient as it should be and due to a number of national characteristics.
Analysts said that Armenia has the highest relative level of cash transfers in individual incomes. Nearly $250 million in aid is transferred from abroad each year by relatives. This money essentially bypasses the tax authorities.
The shadow economy also has a large share in the economy (unregistered private trade).
The government's efforts to harmonize the income tax and mandatory insurance payments could result in a temporary drop in income tax payments. The government estimates the under collection of revenue on this tax this year due to an easing of the tax burden at 9 billion dram.
Income tax is assessed at the following rates:
10% on monthly taxable income up to 80,000 dram ($137);
8,000 dram plus 20% of the amount exceeding 80,000 dram for incomes above 80,000 dram a month.
Income tax on royalties, lease of property and interest is 10% not including deductions.
The tax is withheld with each payment. The taxable income and tax are calculated progressively. The tax must be paid within two business days following payment of income.
The taxpayer determines the final tax independently and includes it in annual tax returns, which must be submitted by March 1 of each year. Taxpayers that are self-employed must pay quarterly advance estimates of 1/6 the actual income tax for the previous year by the 15th of the final month of each quarter.
The final income tax is paid by May 1 of each year.
Tax agents withhold taxes on income paid to foreign citizens (except when income is the result of activity related to independent contracting).
Income tax for foreigners is set as follows:
5% on insurance compensation and income from transport (freight); 10% on income from royalties, interest, lease of property, increase in value of property and other passive income receive from sources in Armenia (including entrepreneurial activity).
CHANGE IN COLLECTION OF INCOME TAX
TAX BREAKS FOR SMALL BUSINESSES, TRADE AND RESTAURANT BUSINESS
Armenia has a favorable status for small businesses that allows this sector of the market economy to develop rapidly. Tax laws include the concept of 'simplified' tax for this purpose.
The simplified tax, also paid to the state budget, provides an exemption from VAT and profit tax (for independent contractors from the income tax).
Small enterprises that pay the simplified tax are those that have turnover on the sale of goods and services (not including VAT) for the previous year of less than 30 million dram ($51,500). This does not apply to trade through stores, kiosks, and the restaurant business, which can also pay the simplified tax. Taxpayers that pay excise and other fixed payments, or banks and insurance companies, are not eligible for the simplified tax status.
The turnover on the sale of goods and services in the reporting period is used as the tax base for the simplified tax. Taxpayers must pay VAT and profit tax and maintain separate records.
The following simplified tax rates currently apply:
Tax is paid on trade through stores and kiosks at 4% of turnover and 7% for restaurant businesses;
Other payers calculate the tax using the following rates on sales turnover:
7% on amounts up to 30 million dram ($51,500);
12% on amounts over 30 million dram.
Taxpayers that pay the simplified tax submit calculations of the tax and make payment quarterly by the 25th of the month following the end of the quarter.
White Paper on Tax Reform
White Paper on Taxes in Armenia
World Bank Armenia Report
IMF Armenia Report
Central Bank of Armenia
Armenian Embassy: Business and Economy