The Armenian authorities have released new data on Armenia’s leading corporate taxpayers. The previously unreleased data reveal the first results of the government’s new crackdown on tax evasion.
The figures suggest that, while the administration of President Robert Kocharian is on course to achieve a sizable increase in the state’s very modest state revenues this year, it is clearly unwilling or unable to force the country’s wealthiest businessmen to pay up. These businessmen — all connected to the government — continue to post ridiculously low earnings that contrast sharply with their conspicuous wealth.
Tax evasion explains why few Armenians have felt the effects of economic growth that averaged 11% in the last four years. Some economists, therefore, argue that most of the extra wealth generated by the Armenian economy ended up in the pockets of the super-rich.
Proceeds from tax collection made up less than 16% of Armenia’s GDP last year, a very small proportion even by ex-Soviet standards. The resulting government budget, worth about $600 million in 2004, was thus nowhere near enough to meet the public sector’s basic needs.
Kocharian vowed to address the problem in earnest at a series of high-profile meetings with senior officials from his government’s tax and customs agencies in early January. He said he would no longer tolerate rampant corruption within their ranks and told them to ensure a 25% increase in the budgetary revenues projected for this year. The authorities are now on track to meet the target, having collected 92.8 billion drams ($200 million) worth of taxes and customs duties in the first four months of 2005, up 24% from the same period last year.
The crackdown was supposed to focus on underreported corporate revenues. Many large and small Armenian companies have long posted false losses, successfully avoiding a flat profit tax rate of 20%. Consequently, proceeds from profit taxes account for only a fraction of the government’s overall tax revenues. In a bid to combat the practice, the Armenian government introduced last year a 1% turnover tax for all businesses that claim to operate at a loss.
The measure appears to have been instrumental in a 68% surge in profit taxes collected by the State Taxation Service from January to April. The picture becomes far more mixed on closer inspection, however. Late last month, the authorities published the first list of Armenia’s 300 largest companies along with the amount of various taxes paid by them. Two-thirds of them paid less than $20,000 in profit tax during the first quarter of 2005.
The list had some glaring omissions, including several of Armenia’s most lucrative firms. Gagik Tsarukian, arguably the wealthiest man in the country, owns more than 40 medium and large companies. Only a handful of them were on the list and only one of them, a Yerevan-based winery, posted any earnings. Its first-quarter profit tax of nearly $20,000 is less than the price tag of any of the dozen cars that normally make up Tsarukian’s motorcade.
Tsarukian’s business empire has seen an incredible expansion in recent years. The former arm-wrestler started out as a minority shareholder in one of Armenia’s two largest breweries in the late 1990s. The brewery has claimed to be loss-making since then, and it is not clear how exactly the unusually beefy tycoon, who is very close to the ruling regime, has earned his millions. Some local observers suspect that more powerful individuals are behind Tsarukian’s businesses.
Another millionaire “loss-maker” is Samvel Aleksanian, whose Fleetfood company enjoys a de facto monopoly on the highly lucrative imports of wheat, sugar, alcohol, and cooking oil to Armenia. The company posted zero profits in the first quarter. Armenian importers of fuel, which run a cartel-type business, were more generous in that regard, each of them diverting between $14,000 and $140,000 of their earnings to the state budget. And yet they may well be more profitable than a copper mining enterprise that was declared Armenia’s number one corporate taxpayer after paying a $3.4 million first-quarter profit tax.
Both Aleksanian and the fuel importers are thought to be operating under the tutelage of Kocharian’s most powerful associate, Defense Minister Serge Sarkisian. The volume of their commodity imports shown in the official statistics has long caused suspicion. Many in Armenia wonder, for example, why fuel imports to the country have remained largely flat in recent years despite a substantial increase in the number of cars.
The fact that Armenia’s notoriously corrupt customs agency is run by another Sarkisian protégé, Armen Avetisian, does not add to the credibility of the official figures. Avetisian publicly (and proudly) admitted on April 15 that all of the big importers are his friends.
The information contained in the taxpayers’ lists thus suggests that businesses lacking high-level government patronage are bearing the brunt of the government crackdown, whereas the big fish can avoid the hook. Still, representatives of the Western donor community in Yerevan find the very fact of the authorities publicizing the list to be quite significant, saying that public embarrassment could force large-scale tax evaders to be less fraudulent.
James McHugh, head of the Yerevan office of the International Monetary Fund, described it to Jamestown on May 4 as “One of the most significant anti-corruption measures ever taken in Armenia.” “The government deserves a lot of credit for doing that,” he said. “The State Taxation Service is making an honest effort to raise its revenues.”
“Many companies are doing their best to avoid paying tax,” McHugh added. “Now we can see who is doing it.”
(Interview with James McHugh, May 4; RFE/RL Armenia Report, April 15)