Tax Reform in Armenia: Flat Tax vs Progressive Tax

Prime Minister of Armenia Nikol Pashinyan has presented two proposals for tax reform for public discussion. The government says of tax reform will make the business environment more attractive while fighting against the shadow economy.

The current Tax Code (in drams)

Income tax:
Under150,000֏ – 23% income tax
150,000֏ – 2,000,000֏ – 28% income tax
Over 2,000,000֏ – 36% income tax
Profit tax: 20% + Dividend tax 5%

Armenia has a progressive taxation system, which ideally means people who are richer are paying more taxes. But Pashinyan says the current Tax Code has a lot of minuses that makes companies stay in the shadows and not pay taxes.

Pashinyan suggests:
Option 1: Double Step Progressive Taxation
Under 250,000֏: 20% income tax
Over 250,000֏: 25% income tax
Profit tax + Dividend tax: 25%

Option 2: Flat Taxation
Flat income tax 23% for everyone
Profit tax + Dividend tax: 23%

Government plans to fulfill the deficit of budget after taxes by increasing effectivity of tax collection, making businesses which is hiding their real profit to pay their taxes. Also, the Government plans increase excise tax on petroleum, cigarettes and products that contain sugar.

Lucie Garoyan, a 25-year-old content curator for successful Armenian IT company PicsArt, says he prefers flat taxation. “Currently I’m paying 28% income tax from my salary,” he said. “I will not be opposed to paying as little tax as possible. But I’m not sure what is best for the economy. For example, in the USA a person who earns more must pay more. I don’t think it’s fair that a person who earns 3 million and a person who earns 300,000 should pay the same tax rate.

“I do hope before deciding, the government will listen to professional specialists. I would be opposed to everyone paying the same rate if we can avoid tax manipulation and any need for hiding revenues.”

Tax Reform in Armenia is a huge topic of discussion in Armenia

“International experience says that if there is only flat taxation, there should also be a luxury tax. If there will be only flat taxation without a luxury tax, I’m against it,” said Sveta Muradyan, a 24-year-old financial manager. “For example, Bulgaria has flat taxation, but also Luxury tax on Expensive Cars. If there will be a flat tax, the reach people would like to buy expensive things jewelry, cars, property… And the government needs to have tax from anything that is very expensive.”- said Muradyan.

The government’s main argument in favor of flat taxation that it will be easy to pay and collect the tax. It will decrease paperwork, which makes the business environment more attractive.
Arus Khudaverdyan, 28, has been working as a financial analyst. Now she is thinking of starting a business that provides financial consultancy and believes the flat system is more favorable because she plans to hire only a few skilled specialists, pay them a high salary, and she’s satisfied with paying the 23% income tax.

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But other businesses who are producing goods and paying lower salaries may find them progressive taxation more attractive.
“I do not think flat taxation will make companies come out from the shadow economy,” said Sona Veziryan, 25, deputy director of Business Angel Network of Armenia. “Companies stay in the shadow for a lot of reasons.

“Most startup companies in Armenia are not registered, and I don’t think the government should interfere with startups. For startups, it’s very natural to have money shortages. As soon as they have enough money, they are more interested in being registered and registering their employees. This is happening very organically.”

According to Hovhannes Avetisyan, a 40-year old senior researcher from Harvard University, “changes in tax rates will not reduce or eliminate shadow salaries. The proposed changes are unnecessary and will not bring this result. More likely is they will have a negative impact on tax revenues. It is more necessary to make tax administration effective and track down the shadow economy.”

Garik Gevorgyan, a 25-year-old business consultant, says he prefers flat taxation because he earns a good salary. But he says progressive taxation is better in a country with many poor people.

“After paying utilities, nothing is left for people who earn 100,000 drams,”- he said. “For them, a 3% tax cut can make a big difference. “With the flat tax, it’s the person making 3 million drams who gets the big cut from 36% to 23%.” He fears there’s more room for corruption in progressive taxation and agrees there’s less paperwork with flat taxation.

No luxury tax reform is planned, currently, Armenia has not any luxury tax.
Public discussion will continue until May of 2019 when the government plans to send a new Tax Code to parliament for a vote.