US embassy cable - 05YEREVAN1453

UNCLAS SECTION 01 OF 02 YEREVAN 001453 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EAID, AM 
SUBJECT:  ARMENIA TAX REVENUES CONTINUE TO RISE 
 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY. 
 
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SUMMARY 
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1. (SBU) One of the GOAM's main stated goals remains to 
increase tax revenues in order to support social spending 
while making the business environment fairer and more 
inviting.  During the first half of 2005, tax revenues grew 
by 21.1 percent compared to the same period of previous year 
and comprised 18.8 percent of GDP.  Nevertheless, the 
results are not yet fully satisfactory for either the GOAM 
or international community.  The GOAM has introduced several 
tax reforms over the past two years, but implementation 
remains weak and still reflects a lack of willingness to 
ensure equal treatment of all taxpayers.  The GOAM's new 
policy of publishing a list of the top 300 large taxpayers 
was intended as a tool to promote compliance with tax laws, 
but instead demonstrates that favored conditions still exist 
for oligarchs.  Some of Armenia's most successful businesses 
paid little or no profit tax.  "Our main enemies are 
favoritism and clan-style practices" admitted President 
Kocharian in a recent press statement.  End Summary. 
 
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TRANSPARENCY INCREASES? 
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2. (SBU) Starting in 2005, the State Taxation Services has 
published the list of the top 300 large taxpayers -- the 
list, however, does not include some of the businesses 
belonging to Armenia's major oligarchs.  Moreover, those 
included in the list appear not to pay any profit taxes 
which casts doubt on the accuracy of the data provided by 
those companies to the State Taxation Services.  For 
example, one of the major flour and sugar importers 
"Fleetfood" which one would expect to show high profits 
(especially given the 28.8 percent appreciation of local 
currency since 2003) paid no profit taxes for the first six 
months of 2005.  Another oligarch-owned company, "Kotayk 
brewery," with a wildly popular product line, paid no profit 
taxes whatsoever.  Construction was up 43 percent over the 
first six months of the year; the two major cement 
producers, however, "Mika-cement" and "Araratcement," only 
paid about USD 100 thousand and USD 79 thousand in taxes, 
and profit taxes of only USD 4 thousand and USD 11 thousand, 
respectively.  Though this list does not present a complete 
picture (VAT and excise taxes collected at the border by 
Customs services are not taken into account, for example), 
it is clear that Armenia's shadow economy continues to 
thrive in the face of limited GOAM reforms.  "I doubt that 
the listed companies showed all their tax payments.  This is 
normal in any country" claimed Karen Chshmarityan, Minister 
of Trade and Economic Development, in comments made to the 
press. 
 
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TAX REVENUES UP BY 21.1 PERCENT 
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3. (SBU) Tax revenues increased by 21.1 percent for the 
first six months of 2005 compared to the same period of 
previous year, to USD 286.47 million.  The increase is due 
to higher VAT collections of USD 132.25 million (up USD 
39.95 million or 18.8 percent) and higher profit tax 
collections of USD 49.89 million (up USD 24.49 million or 
62.9 percent).  There is a positive trend of decrease in the 
share of indirect taxes (VAT and excise tax) in the total 
tax revenues; 58.7 percent from January to June 2005 vice 
64.3 percent from January to June 2004. 
 
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BUDGET EXPENDITURES INCREASE 
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4. (SBU) Budget expenditures increased along with the growth 
in tax revenues.  From January to June 2005, the GOAM spent 
USD 335.11 million (up by 28.4 percent over the same period 
of previous year).  This includes a substantial increase in 
expenditures for education and science, USD 22.44 million 
(3.4 percent of GDP vice 2.7 percent over the previous six 
months).  Despite a slight increase in health expenditures 
of USD 9.32 million, their share of GDP is still very low, 
1.7 percent in 2005 vice 1.5 percent in 2004. 
 
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COMMENT: STRONGER POLITICAL WILL IS NEEDED TO SUCCEED 
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5. (SBU) Though we see some improvement in tax 
administration such as increased tax collections or 
increased transparency, the results of the actions taken by 
the State Taxation Services are far from perfect.  The 
Taxation services make public the list of top 300 large 
taxpayers but they have not taken the logical next step and 
analyzed the information to take action to eliminate the 
shadow economy and cronyism.  The tax services claim that 
they have identified about 200 employees who are involved 
somehow in private businesses, but they have yet to take 
action.  We will continue to support the reform of State 
Taxation Services through a new USAID program implemented by 
Booz Allen Hamilton to advance tax reforms in Armenia.  The 
project will focus on improving tax administration and looks 
to increase the tax/GDP ratio.  The project will succeed, 
however, only with genuine, sustained political will for 
change. 
GODFREY