AMBASSADOR DISCUSSES TAX REFORM WITH STATE REVENUE

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000069 SIPDIS E.O. 12958: DECL: 01/26/2019 TAGS: PGOV PREL EAID ECON EFIN AM SUBJECT: AMBASSADOR DISCUSSES TAX REFORM WITH STATE REVENUE CHAIRMAN REF: YEREVAN 001 Classified By: Ambassador Marie L. Yovanovitch. Reasons 1.4 (b/d) ¶1. (C) Meeting with State Revenue Committee Gagik Khachatrian, Ambassador encouraged planned institutional reforms at the State Tax Service, while emphasizing the importance of establishing performance benchmarks and ensuring the political independence of the agency. Khachatrian outlined planned restructurings of the agency that would make it more efficient and also preclude tax evasion and other opportunities for corruption. He agreed with the need to establish benchmarks to assess new programs--especially those funded by USAID--and asserted that the agency does not engage in politically-motivated enforcement. He claimed that the GOAM will soon eliminate the backlog of VAT refunds to exporters and noted that the tax/GDP ratio (now lowest in the CIS) continues to improve. End Summary. COURTESY CALL--PART II -------------- ¶2. (C) Ambassador met January 26 with Gagik Khachatrian, Chairman of the State Revenue Committee, which combines the GOAM's tax and customs services. Their first meeting on December 19 focused largely on Customs issues (reftel),so emphasis this time was placed on tax matters. (NOTE: In fact, Ambassador had requested to meet the tax chief, who has a reputation as a reformer, but Khachatrian hijacked the meeting away from his deputy. END NOTE) Khachatrian said that the GOAM has approved a 109-point action plan intended to change the prevailing culture of the agency and the mindset of the taxpaying public that does not appreciate the need to contribute to budget revenues. These measures include organizational changes such as restructuring and merging regional tax offices for operational efficiencies; creating a "Large Taxpayers Unit (LTU)" (to focus on wealthy individuals and large businesses who frequently dodge a significant share of their tax obligations); introduction of international accounting standards; improving training programs and facilities; making the tax appeals process more user-friendly and efficient; and making the tax system more electronically-based. ¶3. (C) Khachatrian stressed his goal of improving voluntary taxpaying compliance, moving from full or sometimes arbitrary auditing to a risk-based approach, and in general reducing systemic vulnerability to corruption. This will include training a new group of staff--40 of whom are currently in training--and dismissing some of the less competent personnel. Pending changes to tax legislation will also make it more difficult for businesses to maintain two sets of books and reduce other corruption opportunities, in part by making use of third-party information against which the GOAM can compare taxpayer submissions. PROGRESS ON KEY ISSUES -------------- ¶4. (C) Khachatrian said that Armenia's tax/GDP ratio, the lowest in the CIS, increased from 16.1 percent in 2007 to over 17 percent in 2008. On the subject of Value Added Tax (VAT) refunds, long a sore point for U.S. businesses (at least one firm was until recently owed over USD two million), Khachatrian said that in 2008 the GOAM paid AMD 25 billion in VAT refunds (about USD 82 million),and expects soon to pay an additional AMD 2.5 billion (USD 8.2 million). Khachatrian said that of an additional AMD 25 billion claimed in prior years, taxpayers could only document AMD 8 billion (USD 26.2 million) (Note: In addition to being slow to pay off overdue VAT refunds, the GOAM has often imposed difficult hurdles for companies applying for the refunds they are owed, often requiring audits by the tax service for every application. This has discouraged some firms from even applying for their refunds. While Khachatrian seemed to be suggesting that the backlog is nearly cleared out, some of our contacts continue to report difficulties in obtaining their full refunds; one major firm successfully sued the tax service for the right to offset the refund owed against their other tax liabilities, a decision the tax service is appealing. End Note). SIX-POINT PLAN FOR USAID ASSISTANCE -------------- ¶5. (C) Khachatrian noted that there are six areas in which the tax service hopes to receive USAID assistance, including development of a risk-based system for audit selection; improving guidelines, techniques and skills for performing tax audits; improving the mechanism for VAT refunds; improving taxpayer services (through e-declarations and notifications); assisting the tax service in implementing YEREVAN 00000069 002 OF 002 their reorganization into a more modern and efficient service; and other assistance determined to be of high priority during the process of institutional reform. While supportive of these efforts, Ambassador expressed concern that previous USAID-funded projects with the tax service had not been very successful, and asked how the USG could ensure better results from any future project. Khachatrian agreed that the tax service and USAID need at the outset to establish benchmarks for a successful program and clear expectations for results. DEPOLITICIZING THE TAX SERVICE -------------- ¶6. (C) Ambassador asserted that the tax service is perceived by many to have been deployed against political opponents, and that such a perception undermines public confidence in the system. While the USG expects everyone--including U.S. companies--to pay appropriate taxes and comply with local laws, the tax service needs to apply the law without regard to the political orientation of the taxpayer. Khachatrian asserted that the tax service is politically independent and that ongoing reforms, which will make the tax-administration process more arms-length and document-based, will leave no room for political manipulation. ¶7. (C) Khachatrian insisted he understands the concern about perceptions of political interference, and suggested that since many businesspersons are involved in politics, some will politicize the situation if they come under review or pressure from tax authorities. (Comment: While it is probably true that some opposition members will claim political motivation behind tax enforcement efforts even when there is none, it is difficult to believe that some of the initiatives undertaken against political opponents over the past year--particularly the multiple measures taken by both tax and customs services against companies of the SIL Group, owned by fugitive oligarch and LTP supporter Khachatur Sukiasian--were merely routine business; at best they were examples of selective enforcement. End Comment). COMMENT -------------- ¶8. (C) It is difficult to judge Khachatrian's sincerity about bringing reform to Armenia's dysfunctional system of tax administration, given his longstanding history with the notoriously corrupt State Customs Committee. Previous reform efforts assisted by USAID have experienced mixed success, and USAID's Tax Improvement Program was ended in July 2008 due to insufficient progress and cooperation from the GOAM. Projects now under consideration will require rigorous setting of benchmarks and evaluation of performance. We hope that Khachatrian is serious that the tax service will not be used as a political weapon against government opponents, but his claims that this has not occurred in the past--in particular over the past year--are not credible. The most encouraging indicator of the agency's commitment to reform is that Khachatrian's deputy in charge of the tax service, Aharon Chilingarian, who joined the agency in April 2008, enjoys an excellent professional reputation, and a good working relationship with the Embassy. Unfortunately, Khachatrian did not include him in the meeting. End Comment. YOVANOVITCH