Businessmen Lament: “They want us to practice European values while continuing Asian graft”
After meeting with a dozen or so medium and large entrepreneurs, one thing was evidently apparent – their fear. None wanted their names to be used for this article.
They were fearful for the continued operation of their businesses and their long-term prospects of remaining in Armenia.
Many were thinking of moving their businesses out of Armenia.
“The government wants us to play by European rules while continuing the Asian practice paying bribes and graft,” lamented one businessman.
Another one said that the vast majority of informed businessmen in Armenia wanted to operate according to the law, to pay their taxes, and devote their energies into growing their businesses.
“Nobody wants to line the pockets of government officials who do nothing to assist us,” he said.
They all pointed to the practice of setting arbitrary “control prices” by customs officials in Armenia as the crux of the matter. “If these prices are kept in place, if they do not allow us to breathe, then the only option remaining is to close up shop,” said one entrepreneur. “This issue must be discussed in the press so that those in government will also review the matter.”
The mechanism of customs formulations at Ararat Regional Customs
Authorized representatives of both legal entities and individuals must declare goods to the customs house after receiving documents for the imported goods from the customs warehouse.
Each organization is parceled between brokerage offices, whose directors happen to be the heads of various customs agency units operating in the “shadows”. Thus, it is absurd to say that companies can get their goods cleared through customs simply by submitting a standard customs declaration. Only one or two companies are allowed such “self declarations”, and even then, permission comes from the very top of the State Customs Committee. We are now looking into these brokerage offices and will shortly publish the actual names of their owners.
Infractions in the Valuation Division
After the initial declaration, the customs declaration and other relevant paperwork is presented to the appraisal division where the chief and his deputy apply the so-called “control prices” to the imported goods. And this takes place regardless of whether the shipment was processed by Article 87 (1st method) or Article 91 (4th method) of the Customs Code.
What really irritates businessmen in Armenia is that these “control prices” do not seem to have any connection at all to international market prices.
There is an unwritten law at work in the valuation division related to the halving of the VAT to be paid to the government. In essence, of the difference of the VAT between the value of goods imported by legal or physical entities and the value mandated by customs officials is divvied up according to a 40-60% or 50-50% formula. For example:
Version1 (Customs Code Article 87, Point 1): If the goods invoice shows a price of 1,000 dram for 1 kilo, then the control price set by customs is 1,500 dram. Customs officials then tell you to pay 200 dram rather than the planned 300 dram in VAT. At the end of the month, the importer pays 8 dram in bribes to a top level customs official for the 100 dram saved in VAT payments. This is possible because each official at customs has control of their own little fiefdom to operate as they please.
Version 2 (Customs Code Article 91, Point 4): Here the amount of bribe to customs decreases, which is why the customs officials agree to this method only grudgingly. For example, if as in Version 1 above, the invoice value of 1 kilo of an imported good is 1,000 dram and the control price 1,500 dram, the goods are processed at 1,200 dram. Thus, the VAT to be paid to the government becomes 240 dram and a bribe to be paid at the end of each month is 4.8 dram (40-60% relationship) for each 60 dram saved on per kilo.
An unsuspecting businessman accepts the “helping hand” of customs the first time (for helping to pay less taxes), without realizing that he is being moved by the customs official to “shadow” commercial activity. The bribes cannot be written off and the company’s financial books cannot account for the loss. The businessman, in order to make–up the amount of the paid bribes (which amount to a considerable sum at the end of the month), must either sell a quantity of goods at a price violation or at a low price.
After completing the shipment paperwork, the businessman falls into the clutches of employees of the Armenian State Revenue Committee (SRC), Pre-release Control Department, to overcome the final obstacle of the shipment’s examination and release.
In addition to the fact that customs examiners can arbitrarily force the emptying of the shipment in the customs terminal, saying that it has to be examined and adding more expenses for the businessman, here too the release tariffs are employed as bribes in the following way:
20 ft. container AMD 10-15,000
40 ft. container AMD 15-20,000
Cargo trucks AMD 35-40,000
Train car AMD 25-35,000
In the case of exports, examining officials demand $100 - $200 without even examining the cargo, before they stamp the cargo and allow it to pass.
Even after paying the bribe, the businessmen wait from 30 to 60 minutes for the OK from the Chief of the Pre-Control Department to receive the cargo. After this, employees at the customs warehouse Contraband Division must be paid AMD 5,000-10,000 to sign the cargo pass permit.
These tariffs are used for both import and export of legal cargo, when the shipment checks out in every detail to the accompanying cargo paperwork.
(To be continued)