KOCHARIAN ON TAX AND CUSTOMS: "A CASTE OF PARASITES..."

UNCLAS YEREVAN 000095

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD AM
SUBJECT: KOCHARIAN ON TAX AND CUSTOMS: "A CASTE OF PARASITES..."

REF: 05 YEREVAN 52

Sensitive but unclassified. Please protect accordingly. Not for
Internet distribution.

--------------
SUMMARY
--------------


1. (U) Despite acknowledging limited improvements, President Kocharian
strongly criticized the State Customs Committee and State Tax Service
for failing to coordinate and for reported cases of corruption and
smuggling which continued to undermine revenue collection during a
working meeting with Heads of the agencies. The January 11 meeting,
widely covered by local media, occurred on the one-year anniversary of
Kocharian's pledge that 2005 would be the year of tax and customs
reform (reftel). The President noted that the transportation and
mining sectors were the most problematic in the economy and were marked
by extensive illegal activity. End Summary.

--------------
LIMITED PROGRESS FAILS TO MEET EXPECTATIONS
--------------


2. (U) During a working meeting with Heads of the State Customs
Committee and State Tax Service on January 11, the President
acknowledged that improved administration in both tax and customs
collection had led to increased revenues in 2005. Despite the
progress, however, Kocharian strongly criticized the two agencies. "I
had higher expectations of proper reforms which have not happened to
date," the President noted. He emphasized the need for tougher
controls and reforms aimed at expanding the grounds for punishment and
increasing enforcement of existing laws. Kocharian noted that the
Presidential oversight service would begin to implement stricter
control in 2006 with "all due consequences." He encouraged the tax and
customs services to work closely with small and medium-sized
enterprises (SMEs) saying, "you should make efforts to ensure favorable
conditions for SMEs, because the large lucrative businesses can take
care of themselves, while SMEs remain very vulnerable."

--------------
TANSPORTATION AND MINING SECTORS TOP THE LIST
--------------


3. (U) The President said that illegal activity was particularly
evident in the transportation and mining sectors. He accused commuter
and interstate bus companies of consistently underreporting enormous
incomes. He also said that some mines producing 80 truck loads of ore
a day report only two, "which sparks the creation of a whole caste of
parasites feeding from the underreported income while the state budget
sustains losses."

--------------
A SUCCESS STORY AT MEGHRI
--------------


4. (U) Kocharian expressed satisfaction, however, with the
administrative changes instituted at the Meghri customs check point.
"It only took you two months to bring everything back in order (in
Meghri),so why did you wait for the President to interfere before
addressing the problem?" In October 2005, after receiving multiple
complaints from Iran concerning the Meghri border crossing which is
located on the Armenian-Iranian border, the Armenian President ordered
the Chairman of the State Customs Committee to reorganize the customs
checkpoint, restore order and improve services. The Chairman dismissed
the head of the Meghri customs unit and instituted a series of
administrative and procedural changes at the checkpoint. (Note: Prior
to the reorganization, the GOAM, with support from the USG, upgraded
the equipment at the Meghri checkpoint to bring it in line with
European standards. End Note.)

--------------
COMMENT: A REAL COMMITMENT TO CLEANING HOUSE?
--------------


5. (SBU) The very public nature of Kocharian's comments coupled with
the lack of significant concrete action to back them up could lead the
cynical to question the sincerity of the GOAM's efforts to clean house.
Nonetheless, we have identified tax and customs collection as key
areas for reform and USAID recently launched a five-year tax reform
project in Armenia. The International Monetary Fund has also
emphasized the need for reform in these areas, particularly customs.
Although it is likely that his comments were at least in part directed
at the international donor community, we plan to take the GOAM at its
word as we help them to move forward on reform.
EVANS