Declaring Income and Assets: Risks and Opportunities

On May 31, 2022, Prime Minister Nikol Pashinyan announced that starting from 2024, the declaration of income and assets will be mandatory for all citizens of Armenia. 

“I want to emphasize our political determination to implement a universal declaration system,” said Pashinyan. “All citizens of Armenia must declare their income, which will come into force in 2024 for their 2023 income.” He also noted that the introduction of this system has great economic, political and cultural importance.

Advantages of the System

According to economist Suren Parsyan, a universal income tax declaration system is an important and necessary feature for governing. “It allows us to understand, control and evaluate the cycle of incomes and expenses within the country, and based on this we can implement economic and social policies,” he explains. “When the state has sufficient data on income and expenses of citizens, it can implement targeted policies and not waste large sums of money.”

Parsyan cites existing situations where the state provides benefits to a family that receives substantial funds from abroad but does not support someone who receives, for example, a 200 thousand AMD salary, but provides for 3-4 people.  An income declaration requirement can address this.

One of the goals of the universal income declaration system is to reduce the shadow economy in the country. Parsyan brings the example of the U.S., where a universal declaration has existed since the beginning of the 20th century: the state compares a person’s expenses and income, and in cases where expenses exceed the income, it can require more information about that income. If no reasonable explanation is given, then that person has to pay taxes on that expense. This means that it is essentially viewed as a shadow income and taxed again.

Considering the advantages of this system, Parsyan is in favor of its implementation. He notes, however, that several steps must be taken, including legislative regulations, organizational work, and public awareness.

For example, it is important to revise the country’s taxation policy before introducing the system and to have a progressive income taxation policy. In addition, a tax-free income threshold should also be taken into consideration. For example, the tax-free income threshold in the U.S. is $26,000 per year.

“We currently do not have a tax-free threshold. Whether you have a salary of 100,000 AMD or 5,000 AMD, tax is deducted from both,” explains Parsyan. “But if an income declaration system is implemented, a tax-free threshold is needed. For example, when a person receives a gift from abroad for a wedding, birthday or other occasions, it should not be taxed depending on its amount.”

Informing citizens about the advantages and opportunities of the system as well as the procedure for filing income tax reports is also something Parsyan considers very important. “Obviously, not everyone has the necessary knowledge to file an income report,” Parsyan observes. “Even some of our MPs and officials have been submitting their declarations incorrectly for years, not being able to distinguish between their net salary and gross salary, or business loans from their salary.”

The Capacity to Implement the System

From 2014 to 2019, Sirunush Sahakyan was the chair of the Commission on Ethics of High-Ranking Officials, currently the Corruption Prevention Commission. Among its other functions, the Commission regulates the income declaration process of high-ranking officials, and verifies and analyzes their declarations.

“The introduction of infrastructures to be used for the implementation of the universal declaration system is useful and can contribute to the detection of corruption crimes or tax-related offenses,” says Sahakyan.

She also notes that it is still too early to implement a universal income declaration system for individuals in Armenia, considering that the declaration system is a complex process that is interconnected with other systems.

Sahakyan notes that before the Commission on Ethics of High-Ranking Officials was formed, a procedure obligating civil servants and state officials to declare their income was introduced in Armenia and was overseen by the State Revenue Committee. However, until the formation of the Commission, this declaration body was never put into operation.

According to Sahakyan, this procedure, which had substantial resources and leverage and had collected data on people’s incomes, was not able to establish a declaration system for officials and public servants. It was thus decided that this function would be assigned to a new body – the Commission on Ethics.

“It has become clear that for some reason the State Revenue Committee, which has thousands of employees, was unable to perform this function,” said Sahakyan. “Meanwhile, the Commission on Ethics of High-Ranking Officials with its limited number of employees was able to carry this out and the reasons for this should be examined.”

Currently, the Corruption Prevention Commission does not target all public servants, only those that hold high public office and those who belong to certain categories of public service which are considered more of a risk group.

“In case of a gradual expansion, the system is not yet established enough to include all public servants,” said Sahakyan, adding that if the Corruption Prevention Commission is still not able to serve tens of thousands of public servants, how can the State Revenue Committee or any other newly formed body be able to implement the universal income declaration for everyone?

“Since the declaration system today has not yet expanded from those officials who do declare their income and assets, this means that the state, through its actions, confirms that it does not have the capacity to implement a universal income declaration system,” said Sahakyan.

According to Sahakyan, it will be possible to introduce a universal income declaration system in Armenia when at least this same system for officials and public servants is established.

Risks 

As the former chair of the Commission, Sahakyan recalls that during her tenure, she received a large number of requests regarding the procedure for filing declarations. She’s convinced that it’s still difficult for officials to fill out their income returns without additional instructions and guidelines.

“Officials and public servants are generally better educated and receive support and advice from state bodies. However, even then, it is quite difficult for these officials to submit a declaration,” Sahakyan explained. “These problems are more visible when it comes to ordinary working class citizens for whom the system is unfamiliar.”

Sahakyan says that if many citizens fail to submit their declaration, this in turn will lead to its failure because the State Revenue Committee will not have enough resources to prosecute citizens for not submitting their returns.

Using international experience as an example, Sahakyan noted that there are countries, including those in Western Europe, which have successfully implemented an income declaration system. However, these have been time-consuming and they succeeded thanks to the development of other infrastructure.

“In those countries where the income declaration system has been introduced artificially and without the proper prerequisites, the system failed,” said Sahakyan. “For example, if they cannot control cash transactions or hinder the black labor market, but introduce income declaration, they fail. However, if they have gradually prepared the entire infrastructure, the declaration system is a very useful tool.”

Current Issues 

Director of the Corruption Prevention Commission Haykuhi Harutyunyan describes the current difficulties in the declaration process. According to her, the most significant issues of the system is related to the electronic declaration system, which was created about 20 years ago and does not have an appropriate service tool (սպասարկման գործիք).

“Digital technologies have developed significantly over the years,” says Harutyunyan. “However, we are forced to use an old version, which is very limited in terms of solutions, and does not allow us to collect automated reports and to identify data.” At the same time, she notes that the problem is currently being addressed; a local organization is developing an entirely new electronic declaration system, which already uses artificial intelligence, significantly easing the burden of the person filling out the declaration.

“In other words, the databases already collected by the state are entered automatically as essential information for a declaration,” says Harutyunyan. “And there is no difficulty for the person who fills out the declaration in this format. I think that if this same principle is installed and operated for the general declaration system as well, without subjecting the citizen to additional constraints, then there will be no problem.” As for analyzing the collected data, Harutyunyan says, it can also be solved using digital technology.

The idea, according to which all citizens of Armenia have to declare their incomes, has not yet turned into a draft bill. Ministry of Finance Spokesperson Rona Aharonyan says that currently, discussions of the policy are in the development stage and that leading international experiences of universal income declaration in Russia, Uzbekistan, Kazakhstan, and neighboring countries, as well as Armenia’s legislative regulations, are being studied.

“After these studies are concluded, the Ministry of Finance will provide directives,” Aharonyan said.

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