The global anti-money laundering efforts and combatting shadow business is gaining international scale: according to estimates by the Organization for Economic Cooperation and Development (OECD), in countries with high tax rates the financial losses from unpaid taxes to the budget amount to approximately USD 200-250 billion. Moreover, the indicated number refers exclusively to legal tax planning schemes, in particular – registration of companies in other jurisdictions, which formally indicates the absence of any violations.
Today we will discuss Armenia as a country where the transparency of the tax system is on the way to establishment. We will understand in detail what requirements are fulfilled by the country at the international level, and what is yet to be done to obtain the status of a competitive state with a transparent taxation system at the world level.
International tax planning and the role of Armenia in the overall structure
Efforts to sustain competitiveness in the current reality imply that of large volumes of capital will outflow to countries which offer low tax rates, Armenia should completely revisit international tax cooperation in order to create favorable conditions for business so as to sustain capital within the country.
At this stage, a number of projects have been implemented, various agreements have been reached with the countries of Europe and Asia. Let us consider more particularly the concept of fair tax competition.
Considering that the national tax authorities of Armenia previously have not been effective in combatting tax evasion, as well as given the lack of good tax practices, the country’s government at some point resolved to join efforts with the OECD to strengthen tax control mechanisms. Let us discuss in more detail the progress Armenia has made in this area, and how the signed agreements and contracts affect business in the Armenian jurisdiction.
In analyzing the activities of the tax system in Armenia, it is worth noting that the government has already taken steps to increase the transparency and flexibility of the tax environment at the international level in accordance with modern trends. More specifically:
- in 2015 the Republic of Armenia joins the Global Forum on Transparency and Exchange of Information for Tax Purposes;
- Currently, there is an interdepartmental working group that performs and coordinates work within the framework of this membership;
- several agreements on the avoidance of double taxation have been ratified , in particular with Kyrgyzstan in 2019, an electronic exchange of tax information with the CIS countries is planned;
- the application of the Global Forum standards is envisaged in the program of actions of the Government of the Republic of Armenia;
- tax policy in relation to shadow business, terrorist financing and money laundering is approved;
- in 2016, Armenia undertook the commitments to implement the Extractive Industries Transparency Initiative (EITI);
- in 2019 the country joined the Base Erosion and Profit Shifting (BEPS) program which provides for the identification of beneficial owners of companies in Armenia.
The program envisages a comprehensive range of measures aimed at improving tax administration and tax policy within a particular state as well as between countries. BEPS helps in detecting real business entities and aggressive tax planning schemes. The second important point worth considering is that the acceptance of such commitments by Armenia completely excludes the possibility of a arranged trade schemes through bilateral tax treaties (DTT – an agreement on avoidance of double taxation).
It is important to take into account that the actions envisaged in the BEPS are not to be conducted all simultaneously. This is a comprehensive system, classified according to the degree of importance based on the development of a particular country.
In terms of international tax planning, Armenia has recorded success by joining within the BEPS framework to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, and particular, committing to the signing of bilateral agreements. This step testifies to the political readiness of Armenia to create a competitive tax environment that will fully comply with the standards of international tax cooperation.
On the basis of the Treaty, the Armenian government has provided for the same “rules of the game” for all states with which there are agreements on the avoidance of double taxation at this stage . At the same time, the Armenian government actively supports its own taxation principles.
International tax planning and the role of Armenia in the overall structure – the second side of the DTT coin
With the accession to the Convention, Armenia created a fairly broad field of activity. Namely, the agreements signed between the countries establish not only the principles of taxation in the international activities of companies, but also help prevent tax evasion. However, treaties may also restrict negotiated trade and the possibility of obtaining indirect benefits through such treaties.
As of the beginning of 2018, Armenia already had signed 46 agreements, and their number is constantly increasing. At the same time, measures are being taken in the country aimed at increasing the administrative capacity and improving the legislative base. And here it is necessary to implement a wide scale information campaign, which will allow to identify beneficial owners, as well as comprehensively analyze their activities.
And given that the forms of existing organizations enable developed countries to participate in the formation of international tax policy, Armenia faces a targeted systematic struggle against fraudulent schemes for tax evasion. It should be noted that, according to the document Conclusions on criteria and process leading to the establishment of the EU list of non – cooperative jurisdictions for tax purposes, in order to participate in international tax planning, the Armenian jurisdiction must revise and / or introduce legislative norms in relation to the owners of foreign entities.
International tax planning and the role of Armenia in the overall structure – how to become a country eligible for tax cooperation with the EU
Should Armenia (or any other country not included in the list of countries cooperating with the EU for tax purposes) plan to comply with the EU tax planning and cooperation requirements, it is required to meet certain criteria. Namely,
- be a member of the Global Forum and the Convention on Mutual Administrative Assistance in Tax Matters;
- join BEPS;
- eliminate discriminatory provisions in legislation regulating direct taxation of companies.
The beginning of the so-called Process of Screening of Jurisdictions was in 2017. Initially, the format involved verbal negotiations, during which specific dates for fulfilment of the above criteria by the country were determined. At the same time, states striving to achieve transparent taxation have financial obligations under the BEPS and the Convention (annual membership fees). Another key point in international tax planning and the role of Armenia in this process is that all legislative changes should be planned and implemented so as to minimize economic shocks for economic entities that operate on a preferential basis.
Armenia, in turn, passed the selection process according to the established criteria in December 2017, as a result of which it was included in the list of “gray countries”. What does it mean? According to EU estimates, the jurisdiction did not fully comply with the requirements (as of 2017) in relation to tax legislation. It should be noted that although there are no legal consequences for countries that are included in the list of participants that do not meet the criteria for tax transparency, however, according to unofficial data, Armenia’s insufficient involvement in international tax planning may effectively lead to less financing/funding opportunities, termination of partnerships or, eventually, sanctions.
International Tax Planning and the role of Armenia in the overall structure: Follow-up actions of the RA Government
Armenian government took active steps striving to completely remove itself from the list of “gray countries”, As a first step in this anti-gray struggle the country signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters, which was implemented at the end of 2019.
According to the conclusions of the EU experts, discriminatory provisions in the legislation of Armenia were revealed. These include the reduction in tax rates for programs that are implemented outside the Armenia by large exporters. The recommendation was to cancel the benefits by 12/30/2018 while at the same time, allowing for such companies to continue operations using the same model until 12/30/2021.
International tax planning and Armenia’s participation in a unified tax administration system will allow the state to correctly implement fiscal policy, cooperate with international organizations, and, as a result, have a well-established tax system with global competitiveness in accordance with international standards. These are the key aspects which make the country more attractive for foreign investors and entrepreneurship.
It should be noted here that the measures already taken by the Armenian government are directly related to international tax planning, namely, these are efforts aimed at becoming one of the countries with the most transparent taxation system in the near future. Such actions will also help prevent the outflow of the capital to low-tax jurisdictions, find universal solutions to overcome tax opacity and become a prominent actor in international taxation. With robust actions and planning on an international scale Armenia will be able to:
- effectively control the movement of investments;
- have access to comprehensive data on private capital;
- control cross-border trade;
- obtain legislative and administrative tools for taxing income from business activities in other countries;
- exclude erosion of the tax base;
- eliminate the movement of profits .
Incidentally, Armenia became the 127th country that joined the BEPS plan developed by the OECD. The key commitments set out for the country were the implementation of the main four standards that exclude the erosion of the tax base and the transfer of income to jurisdictions with low taxes. At the same time, Armenia has committed to file reports on tax cases of multinational companies, as well as constantly improve mechanisms for resolving tax disputes.
International tax planning and Armenia’s role in the overall framework: Italy’s Assistance
Another positive development for Armenia in striving to participate in international tax planning is the possibility of concluding agreements on assistance programs. So, in November 2019, the state signed an agreement with Italy’s Revenue Agency to launch two TIWB capacity building programs , which will be implemented by the end of 2020. Italian experts will work closely with Armenian tax officials on current audit matters to transfer knowledge, best practices and skills.
TIWB is a joint OECD/UNDP capacity building initiative. TIWB’s global assistance has enabled tax administrations to generate US $ 480 million in additional tax revenue through tackling tax evasion with large companies. Technical missions for the programs are scheduled for early this year.
If you still have questions about the tax legislation of Armenia, or you are planning to register a company in Armenia, feel free contact our experts by e-mail firstname.lastname@example.org..
What are the steps taken by Armenia for improving its tax system?
In order to increase the flexibility of the tax environment and transparency, the Republic of Armenia in 2015 joins the Global Forum on Transparency and Exchange of Tax Information. In 2019, the RA authorities signed several new agreements on the avoidance of double taxation, and also established cooperation on the electronic exchange of tax information with the CIS countries. In addition, an action plan has been developed to combat money laundering and the financing of terrorism, and in early 2020, Armenia was excluded from the “gray list” of the European Union. In 2019, the country joined the BEPS program to identify the ultimate beneficial owners of companies located in the RA.
Does Armenia comply with EU requirements for tax cooperation?
In 2019 alone, the republic has made extensive changes in tax policy and international cooperation in terms of tax planning. To effectively cooperate with the EU, each country is required to fulfill the requirements for the Global Forum on Transparency and Exchange of Tax Information, join BEPS and revise the existing legislation, removing discriminatory provisions regarding direct taxes for resident and non-resident companies. Armenia passed the initial selection process back in 2017, and this year, 2020, the state is working to improve the taxation system on the example of Europe, and the Convention on Mutual Administrative Assistance in Tax Actions was signed.
What measures are planned in Armenia to improve tax transparency?
To solve the problem of tax non-transparency, Armenia is planning a series of reforms that improve the following aspects:
set open data on the authorized capital of companies;develop a regulatory mechanism to control cross-border trade;
state level control over the foreign investment flows;
completely exclude possible erosion of the tax base and bring business out of the shadow;
to develop legislative framework to regulate profits received outside the republic;
exclude the transfer of profits, including to countries with lower taxes.
These efforts will certainly contribute to the establishment of effective mechanisms for the regulation of tax disputes at the international level.