The taxation system in Armenia is set to be revised again. Discussions on these new changes began in August 2022 with microenterprises—and increasing their efficiency—at the center of the proposed changes.
A new microentrepreneurship taxation system had gone into effect on January 1, 2020, which aimed to encourage the growth of small businesses. Microentrepreneurs [microbusiness is a subset of the small business community based on the number of employees within the company; usually sole proprietors or businesses with less than 10 employees] were mostly exempt from state taxes under that system.
The first document pertaining to the upcoming changes was the August 12, 2022 decision by Prime Minister Nikol Pashinyan, which approved the Tax Revenue Management Plan for 2022-2025. The purpose of these changes is to reach the tax revenue target set by the government program, which stipulates that the tax-to-GDP ratio should improve by 2.6% compared to 2020 and reach 25% by 2026.
Main Types of Taxation
Currently, Armenia has both general and special taxation systems. Under the general taxation system, a business pays value added tax (VAT) and profit tax, and sometimes other taxes (vehicle property tax, excise tax, environmental tax, road tax, real estate tax, etc.) Almost any business can opt into the general taxation system. In the special taxation system, a business does not pay VAT and profit tax, but instead pays turnover tax.
Value added tax (VAT) is a tax paid to the state budget from the sale and lease of goods and intangible assets, the performance of activities, and the rendering of services.
According to the Tax Revenue Management Plan for 2022-2025 [henceforth the Plan], VAT has provided 34-40% of revenue over the past 10 years and comprises the largest weight in tax revenue. The standard VAT rate is 20% and has not changed since its introduction. VAT has the greatest potential for increasing tax revenue, since a one percentage point increase in the rate would increase tax revenues by 28 billion AMD.
The standard VAT rate is not expected to change until 2026.
Corporate income tax (CIT) is the tax paid to the state budget from the revenue/profits of the business.
The CIT rate is set at 18%, and justified business expenses, losses and other deductions are deducted from the income when determining the tax base. Some expenses are not deductible, while others are subject to deduction limits. CIT is paid on an annual basis, but quarterly advances are also required.
According to the Plan, over the past decade, CIT provided from 9.5% to 16% of the state budget’s tax revenue.
The CIT rate was previously set at 20% and was later reduced to increase Armenian businesses’ international competitiveness and make Armenia more attractive for private investment.
No increase in corporate income tax rates is planned during the program period (2022-2025).
Excise tax applies to imported and locally produced alcoholic beverages, tobacco and petroleum products. According to the Plan, over the last 10 years, excise tax revenues made up 4.5% to 9.5% of total tax revenues.
There will be no significant changes in the composition of these taxable goods until 2026, although new rates will be determined. At the same time, it is not anticipated that the changes will cause new revenues from this type of tax to significantly increase the excise tax’s proportion of tax revenues and contribute to an increase in tax revenues in the coming years.
Turnover tax replaces CIT and VAT. It is paid from the entire turnover of the business and is calculated and paid quarterly. In some cases, for example, in the public food sector, deductions are allowed.
The rate may differ depending on the type of business activity. This option is not available to excise tax payers, financial sector firms, or interrelated businesses.
According to the Plan, the turnover tax is intended to abolish application of the turnover taxation system.
Organizations calculate and pay the income tax of their employees and individual service providers, which will constitute 20% for everyone starting January 1, 2023. Plots of land, individual residential houses, apartments, garages, public and industrial structures are all subject to real estate tax. The tax rate is determined by the type of property and its market value. Vehicle property tax is levied on automobiles, watercraft and motorcycles. The vehicle property tax amount is determined by the engine capacity of the vehicle.
Turnover Tax to Be Abolished
One of the key changes in the Tax Revenue Management Plan for 2022-2025 concerns the turnover tax. Originally, this type of tax was meant to establish simplified tax accounting standards for small businesses.
By the end of 2019, more than 60,000 entrepreneurs were paying turnover tax. However from 2020, some of them registered as microenterprises, as a result of which, in 2020-2021, the number of turnover tax payers gradually decreased to around 43,000.
The program notes that “in some cases, the turnover tax has become an actual ‘area’ to pay less (often several times less) taxes for some types of business, rather than a simple alternative to tax accounting.”
This is perhaps why there are plans to abolish the turnover tax system. The State Revenue Committee will operate a self-service system for calculating VAT for businesses, and CIT will be replaced by the distributed profit tax, putting the administrative responsibility on the tax authorities.
According to the Plan, the change is expected to have a positive impact on increasing state budget revenue, although the extent of this impact will not be significant given the low levels of economic activity in this area currently.
Ruben Osipyan, president of the Small and Medium Enterprises (SMEs) Cooperation Association, recalls that at the time, those responsible for the SME policy at the State Revenue Committee claimed that tax revenues from the SME sector were insufficient to have a substantial impact on state revenues.
“If they were right, it is worth looking at how much SME revenue is and what they will gain by introducing this VAT. They still need to assess how much SMEs spend on accounting now that it is subject to turnover tax, and how complicated it can become if VAT is included,” says Osipyan. He further notes that if these factors have been taken into account now, from the perspective of the SME and SME budget, it will not lead to critical changes and is not a negative change.
Paylak Tadevosyan, Chair at Taxpayers Rights Protection NGO, says that it is still unclear what solution will be offered in the event of abolishing the turnover tax.
“It will cause social tension. We always solve consequences instead of the problems, and this case is no exception,” Tadevosyan explains. “If they get rid of the turnover tax, everything will not necessarily fall into place; they will think of other ways to avoid tax obligations. What will operating small and medium-sized businesses do if the turnover tax is abolished? If we want to destroy SMEs, we can go ahead and remove the turnover tax.”
The Ministry of Finance reported that there is still no legislative draft on the abolition of the turnover tax.
Changes in the Microentrepreneurial System
The microentrepreneurial system has been in operation since 2020 and those registered as microentrepreneurs are mostly exempt from taxes. Perhaps this is the reason why the number of microentrepreneurs has reached 50,000 in just two years.
“The number of SMEs in Armenia has increased; however the number of medium enterprises has decreased, as have small enterprises, while the number of ultra-small ones has increased. In other words, one can assume that business separation occurred; they were re-organized and began to operate under more profitable conditions,” believes Osipyan, adding that if the micro-enterprise system was designed to make it easier to establish a business and pay taxes, then the government’s next goal should be to encourage microenterprises to become sustainable.
Paylak Tadevosyan agrees that some business owners also became used to the privileges for microenterprises, despite the fact that they should not have benefited from them.
“The government should have limited the spheres that can work under microenterprises from the beginning,” he explains. “These issues were raised prior to any changes in the law, but concerns were not taken into account.”
According to Tadevosyan, it is important for the state to distribute the tax burden evenly.
“Otherwise we demand more from whoever pays a lot of taxes, and whoever doesn’t, we say ‘we don’t want to tax them because we can’t control them.’ The role of the state should also be to maintain a sense of justice,” Tadevosyan argues.
The tax revenue management plan for 2022-2025 called for a revision of the regulations governing microenterprise entities so that the “preferential environment” of taxing did not undermine the tax bases of other forms of taxes.
On November 24, a new law was adopted on making revisions and amendments to the Tax Code, which resulted in alterations to the micro-entrepreneurial system. The law went into effect on January 1, 2023; some provisions will take effect on July 1, 2023.
Ori Alaverdyan, head of the Department of Revenue Policy and Administration Methodology of the Ministry of Finance, notes that there are three primary changes. The first change is that the current income tax of 5,000 AMD per month for employees of microenterprises will be abolished, and their earnings will be taxed at the general rate of 20%. This provision will come into effect on July 1, 2023.
The other amendment prohibits corporate income tax payers from marking gains made from microenterprise entities as a deduction from the gross income for the purpose of taxation with corporate income tax. That is, corporate income tax payers that have gains from microentrepreneurs will not be able to reduce the gross income at the expense of these gains.
Another change stipulates that a recipient of passive revenues is no longer considered a microenterprise entity.
“In other words, an entrepreneur who will earn revenue from rent or who will put a deposit in a bank and collect interest cannot be regarded as a micro-enterprise,” says Alaverdyan.
Ruben Osipyan feels that these amendments eliminate the symptoms of the disease but do not cure the ailment: “I am not sure that thorough research is done before changes are made. They tend to focus on these external factors, ‘should there be a turnover tax or not? Should it be micro or not?’ But these are merely policy tools. The issue is that the government’s policy changes so frequently that it sends out a signal to the business that it cannot establish any long-term plans with the Armenian Government in general.”
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