KOCHARIAN SCOLDS TAX AND CUSTOMS OFFICIALS

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SUBJECT: KOCHARIAN SCOLDS TAX AND CUSTOMS OFFICIALS


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SUMMARY
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1. (U) President Kocharian took an unusually hard stance with
Customs and Tax officials during an annual January meeting with key
government officials. He said the tax and customs services lacked
the will to combat the shadow economy and described their work as
"unsatisfactory." Despite some successful reforms and growing state
rev2enues, the tax collection to GDP ratio remains low in Armenia,
at less than 16 percent. The President also warned tax and customs
officials to steer clear of politics during upcoming parliamentary
elections scheduled for May 2007. END SUMMARY

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HARD WORK NEEDED TO MEET STATE BUDGET TARGETS
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2. (U) For the third year in a row, Kocharian strongly criticized
the tax and customs services at a January meeting of key government
officials, including the Prime Minster Andranik Margarian, the
Finance and Economy Minister, the Heads of Customs Committee and Tax
Service, and the National Police Chief. Kocharian reminded tax and
customs officials that the 2007 State Budget assumes a significant
increase in revenues (12.3 percent higher than 2006 approved
receipts). Tax and stamp duties are expected to account for 93.6
percent of total revenues, an increase of more than 20 percent from
2006 levels.

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ARMENIA'S LOW TAX/GDP RATIO
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3. (U) Despite active reforms in tax and customs administration, and
considerable improvement in tax revenues in recent years, Armenia's
tax to GDP ratio of 16 percent remains one of the lowest in the
former Soviet Republics. For example, according to the IMF, the tax
to GDP ratio for Georgia is 19.8 percent, for Ukraine 19.4 percent
and for Russia 36.3 percent.

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MORE REFORM IN THE WORKS
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4. (SBU) The donor community has identified the need to improve tax
to GDP ratios as a priority for Armenia. With significant support
from the USAID-funded Armenia Tax Improvement Program (ATIP),the
Armenian tax service has developed a new three-year strategic plan
for tax administration which is scheduled to be finalized in
late-January. The Chief of Party of ATIP told us that the
President's remarks would benefit reform and that the President's
office has become increasingly aggressive in pushing for reform, not
only publicly, but also on a semi-weekly basis at the working level.


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LET'S KEEP POLITICS OUT OF IT
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5. (SBU) The President also strongly and publicly warned tax and
customs officials to have "no connection whatsoever" with the May
2007 parliamentary elections. Kocharian added that the quality of
tax and customs services must not be influenced by pre-election
politics. Recent changes in Armenian legislation allow senior civil
servants, including tax officials, to affiliate with political
parties. Some observers worry that senior tax officials may join
the ruling Republican Party or other influential political factions,
compromising the integrity of their official positions.

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COMMENT:
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6. (SBU) American businesses consistently cite tax and customs
administration as one of the most challenging aspects of working in
Armenia. Political will is essential to combating the endemic
problem of corruption in the notorious tax and customs services.
While it is good that the President is willing to be so publicly
critical of these agencies, it was not clear whether Kocharian's
statement was merely pre-election campaign P.R. or a more specific
warning not to choose sides in intra-elite power politics. The
impact of his comments, if any, has yet to be determined. Similar
anti-corruption "woodshed" meetings in previous years have had a
modest impact at best, but have generally been less sharply worded.
In this election season, the president might have greater than usual

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incentive to keep his senior revenue agency bureaucrats out of
political mischief.

GODFREY