Saturday, 22 September

No Organization is Closed to the Tax Service

"The answer is simple. I don't have to convince you that you are wrong, but rather check the company that you mention on the tax front. That will be my job,” said Felix Tsolakyan, head of the State Tax Service.

Our interview with Felix Tsolakyan aimed at clarifying inconsistencies in the taxes paid by specific businessmen on the list of the top 300 taxpayers released in January of this year.

There are dozens of organizations on the list whose direct taxes, i.e. profit and income tax, form a negligible percentage of their total paid taxes. That suggests that those companies have made almost no profit and that either their workers are not registered or that their salary does not reach the taxation scale, which is very unlikely.

The taxes paid by some of the organizations listed as part of the top 300 taxpayers, for example, Barsegh Beglaryan's Flash and Samvel Alexanyan's Fleetfood, do not correspond to their actual profits-they don’t even make up 1%.

You are probably talking about the specific portion of their taxes paid within Armenia in relation to their import volumes. I cannot reveal the specific numbers for those companies, because they are considered a tax secret and are protected by law. I can say though, that the amount relating to income paid to the tax department is more than 1% of the total amount they pay. But what is important in this case is the following. To properly appreciate the contribution that a businessman makes to the state budget, one should examine the amounts paid at the customs border as well at within the country, together, especially if the business in question has a specific sphere of import activity. So one should clearly understand what amount of money the state received at the customs border as per outlined laws, before the goods were imported and sold and profit was made by the businessman in question. If we take the amount paid by the companies you mentioned at the border and compare them to the sums paid within the country, we get an incomparably large amount of money.

The same goes for companies importing alcoholic drinks, which, according to the Armenian law regarding excise tax, make most of their payments to customs.

How can you explain the fact that the direct taxes they pay are so disproportionately low?

Some of the companies mentioned on the list are companies with foreign investment, which make use of the provisions in Article 39 in the Armenian law regarding profit tax as follows - if the actual investment made by the foreign investor within the company's statutory capital is greater than 500 million Armenian drams, then the profit tax of that company, in effect from 1998, is lowered by 100% in the two years following the investment, and by 50% in the third to tenth year following the investment. The part of the law regarding the 100% discount will be in force till 2009, while the one regarding 50% is in force through 2006. Thirty-one of the companies on the list use these provisions. Due to this provision, these 31 companies did not pay around 9.1518 billion Armenian drams to the state budget in 2005.

Are inspections conducted of organizations like that?

Inspections are part of the main functions of the tax department and of course, they are periodically conducted even at the top taxpaying companies. For example, a total of around 100 inspections were conducted during 2005 of the top 50 companies on the list, including three major alcohol importers. These inspections resulted in an additional 1.5 billion Armenian drams being demanded in tax payments from these companies.

The phrase you used during your last meeting with reporters, "Businessmen are good at 'cooking the books'", has been quoted often since then. What specifically did you have in mind?

You don't have to name names, of course, but how specifically do they falsify their accounts so that even the tax department cannot find any discrepancies?

I said that certain individuals are good at 'cooking the books', but that did not pertain to all 300 top taxpayers.

The information regarding our top 300 taxpayers is real and objective. However, it has led to questions being raised-public announcements have been made in this regard in the papers and discussions have been organized. Some newspapers have done this on purpose to blacken someone's name but often there is no malice intended, it is simply a case of being inadequately informed, or of not examining the issue closely enough. Say, for example, a reporter wrote an article comparing different companies, but he didn't have the complete picture, and he couldn't even have gotten it if he'd tried, because we are not authorized to disclose such information. Then we realized that the article was not all that accurate, and that the companies in question availed themselves of certain provisions that they were entitled to, but the reporter had not known about that. Or, for example, a newspaper wrote that a certain casino was not paying profit tax, but a company paying a fixed tax amount does not pay profit tax at all.

We could not publish a similar list a few years ago. It would have broken the law. We amended that law, and I believe that this was a great achievement. But when there are concrete inquiries regarding specific organizations, we are not authorized to give out information. We know who we are up against, and there could be legal headaches afterwards, and the tax department could be sued.

Is it not possible to change Article 39 of the law on profit tax? After all, everyone knows how those companies with foreign investment were established and to whom they really belong.

The law was passed a long time ago, when we had problems due to lack of investment. Five hundred million drams was considered a huge investment back then. Exemption from profit tax was allowed for companies with foreign investment greater than 500 million drams in order to encourage investment from abroad. The fact that the top taxpayers end up paying less taxes than they otherwise would is in some part due to this provision. And this law is still in force today - a 500-million-dram investment from any country means the business is exempt from paying profit tax. They hand in the documentation regarding the investment and we have no right to reject it. We tried to tighten the rules a little bit within the given framework by disallowing, prohibiting, or convincing certain individuals otherwise, but I don’t think that is a permanent solution. Everything should be arranged by law.

The situation has changed now and I don't think that 500 million drams is an appropriate amount to exempt a company from paying profit tax. The majority of our businessmen today can arrange an investment like that through their partners and contacts abroad, and a lot of other things as well.

As the head of the State Tax Service, it is not a good thing for me that you are able to find discrepancies regarding anyone, that I cannot clarify for you. The answer is simple; I don't have to convince you that you are wrong, but check the company that you mention on the tax front. That will be my job. This is what I consider my job to be, and not to sit and explain things.

But we have companies that are very conscientious taxpayers and with whom we have no problems. We don't need to argue with them or constantly organize inspections.

What does the tax service gain by publishing this list? You have obviously analyzed the situation. What does your analysis show?

The purpose of the list is not the list itself, or to have something to show to the public. We need to draw conclusions from this ourselves. We have to consider this - the taxpayer counts his money, counts it well, and often does not check what specific kind of tax he's paying when he pays. Often, the tax department worker does not go into the details of the specific kind of tax, either - he is happy that the taxpayer has paid his taxes and the numbers are right. This complicates the task of separating the different kinds of taxes. A businessman may do his calculations and decide, for example, that paying 1 million drams in tax is normal for his company and does him no damage, but he may go and pay that as value-added tax.

Profit tax amounts are gradually increasing. Businessmen pay profit tax in advance, after calculating their estimated profit for the year ahead. But they calculate such that they do not make any extra payments, because annual accounts are finalized only in April, and if they end up paying too much, they will not be able to reclaim any of the money at that point.

If we look into specific kinds of tax, then we first collected a large amount of profit tax in 2005. We expect this figure to rise further in 2006.

Do you get many phone calls, intervening on behalf other people?

We get phone calls and attempts at intervention. If someone calls and has a point in what he is saying, then I say I will look into it. So what if he holds an official position, can't he defend his rights?

If the matter in question has an illegal angle to it then I can easily decline to help, no matter who the caller might be.

I never blindly say "yes". Our people think that officials immediately agree to anything asked by a certain category of highly-placed individuals. I always say that I'll look into it.

There's another thing, too. When we conduct inspections, the people we inspect ask "Why me?" We inspect all organizations. Nobody's books are closed to us. In any case, we have now reached the point where no organizations are closed before us. It is a separate matter that the inspections may not be perfect. A planned inspection of an organization has never been cancelled or interrupted due to someone' demand or phone call. You can never tell an inspector "Get out of there. So-and-so has friends in high places." We have very good inspectors. Three of them - from the Spandaryan, Myasnikyan and Mashtots inspection departments - won our "best inspector" prize.

Do you have difficulty collecting taxes?

The phrase "I will not pay" is now extinct. It existed once, but we're past that phase now. Now we have a different problem in managing accounts. Some of the past good workers of the tax department now manage accounts for large companies. They are paid well. They used to be paid the Armenian dram equivalent of US $250-300 at the tax department, but now they make around $ 1,500 dollars working in those companies. This is why it's sometimes difficult to find discrepancies while checking their accounts.

Have you made any enemies since you’ve held this position?

Collecting taxes is not a cause for enmity, it's not like someone was killed or anything. I don't think that I'm harming anyone. But it's possible that somebody out there might consider me an enemy.

Tax collectors have a bad reputation in general. How do you combat corruption within your department?

Tax collectors have come under fire since time immemorial. They used to take animals and wheat back then, now they take money. But they always take what belongs to the state - some people understand this, and some do not. We try to act properly in order to be able to make those demands.

We have been forced to fire people when we've felt that they've broken the rules and deserve to be punished. We are constantly informed about such things. The salary is really low - we plan to put forward the recommendation that it be raised next year. You know the kind of people that the inspectors work with sometimes. We sometimes use phrases that may be taken the wrong way. For example, we ask, "How much money did you bring?" instead of saying, "How much was deposited?" We have a number of problems, but everything will soon change, we are on the right path. Compare the figures for the last few years, and you will see how much things have changed.

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