Publication: Eurasia Daily Monitor Volume: 2 Issue: 17

Armenian President Robert Kocharian has announced a major crackdown on tax evasion, which is widely blamed for the highly uneven distribution of the benefits of Armenia’s robust economic growth. In separate high-profile meetings with the leaders of his government’s taxation and customs administration services earlier this month, Kocharian demanded that both agencies tackle the acute problem in earnest and said he will no longer tolerate rampant corruption within their ranks.

However, there is widespread skepticism about the seriousness of the war on tax fraud. Local commentators believe that Kocharian will not address the root causes of the problem because he himself presides over a highly corrupt political and economic order that precludes the rule of law.

And yet Kocharian’s criticism of the tax authorities, heavily publicized by state television and other channels controlled by the Armenian leader, was extraordinary indeed. “I am sure that if you start from yourself, from taxing your friends and relatives, you will not let others stay beyond the taxation field,” he told senior officials from the State Taxation Service on January 11.

Kocharian thus admitted that Armenian tax officials routinely give privileged treatment to businesses owned by themselves, their relatives, and their cronies. But several newspapers have questioned the sincerity of his concerns. The popular weekly 168 Zham wrote on January 13 that he should have simply ordered law-enforcement bodies to bring the taxman to account instead of exhorting the latter to respect the law. Another paper, Haykakan Zhamanak, went further, saying, “One should start not from the employees of the Taxation Service and their relatives, but from Kocharian and his relatives. That would be more fair.”

Kocharian had a similar encounter with the leadership of the State Customs Committee on January 8. Without naming names, he bluntly accused various-level officials from the Committee and other government agencies of helping large-scale importers avoid taxes in return for kickbacks. This, he said, is hampering Armenia’s post-Soviet economic recovery.

Kocharian was equally outspoken at a December 27 meeting with a large group of businessmen that control much of the economic activity in Armenia. “Our employers are hiding [earnings] in such volumes that do not fit into any reasonable boundaries of decency. Be aware that there will be no concessions to anybody on this issue [in 2005].”

The leitmotif of these meetings is the Armenian government’s budget for this year. Worth approximately $800 million, it calls for a 25% rise in public spending. Kocharian is anxious to ensure that the tax and customs departments collect an extra 53 billion drams ($110 million) in taxes and import duties to finance the increase.

But even a successful implementation of the 2005 budget would hardly deal a heavy blow to tax evasion. The Armenian government’s tax revenues have increased steadily in recent years on the back of robust economic growth that hit (according to official figures) a record-high rate of 13.9% in 2003 and remained in double digits in 2004. However, tax revenue makes up less than 16% of the GDP, a very small proportion even by ex-Soviet standards. The International Monetary Fund highlighted the “weak” tax collection in an extensive report on Armenia released in November 2004.

The most serious form of tax fraud is the underreporting of corporate revenues. Many large and lucrative businesses falsely claim to operate at a loss to avoid paying taxes on profits. Government-connected individuals, including the millionaire “oligarchs” close to Kocharian, own many such enterprises. Their financial and logistical support was crucial for Kocharian’s hotly disputed reelection in 2003. These businesses have been the prime beneficiaries of Armenian growth. Meanwhile, according to government data, at least 43% of Armenians still live below the official poverty line.

Employers also evade taxes by underreporting the salaries and number of their employees. The Armenian Ministry of Labor estimates that more than 400,000 workers are affected by the practice, which Kocharian particularly attacked. Therefore, the tax authorities launched large-scale business inspections in early January to uncover hidden employment. The head of the Taxation Service, Felix Tsolakian, said in a newspaper interview published on January 20 that his agency has already identified 10,000 hidden jobs.

But there are already reports of tax authorities forcing the owners of small- and medium-sized companies to artificially increase the number of workers listed on their payroll. Tsolakian did not deny this, but defended the overall integrity of the process.

The tax authorities have long harassed small firms not connected with influential government officials to meet their growing revenue targets, and there is no reason to believe that they will stop doing that now. Tax evasion is likely to remain a serious problem for Armenia as long as there is no solution to its genesis: a corrupt and unelected government not accountable to the people.

(RFE/RL Armenia Report, January 10-11; 168 Zham, January 13; Haykakan Zhamanak, January 12; Hayots Ashkhar, January 20;