Higher revenue, easier filing for taxpayers in Armenia

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Photo credit: Dmitry Karyshev

Armenia was faced with a slowing economy, sinking remittances, and inefficient tax administration. At the same time, ordinary taxpayers had to navigate arduous processes when paying taxes. The Armenian government was eager to reform its tax administration. Below is a transcript of what we learned when we spoke to World Bank experts working with Armenian tax officials to make things better.
Julia: I’m Julia Oliver.
Maximilian: I’m Maximilian Mareis.
Julia: And we have been talking with tax experts around the World Bank to find out about what they do.
Maximilian: So, let’s start with this project in Armenia. Why did we get involved?

Julia: Well, the global financial crisis hit Armenia and its three million people pretty hard. In 2012, when the World Bank began working with policymakers to improve the country’s tax administration, the country faced a pretty bleak picture. Foreign remittances were low, and the domestic economy was slowing. In addition the country had high levels of informal employment.

Maximilian: Wait, what do you mean by informal employment?

Julia: By that, I mean people who were working, but not paying taxes. Street vendors, or workers who got paid in cash, for example.

Maximilian: Part of the problem was that the government didn’t have the money to make things better. The ratio of the country’s taxes to its GDP was 16.3 percent.

Julia: Wait, why is that important? Why does it matter what the ratio of taxes to GDP is?

Maximilian: To put that in perspective, experts generally agree that countries that collect less than 15 percent of their GDP in taxes have trouble providing basic services such as education, healthcare and infrastructure. Essentially, it’s hard for a state to function if it’s not collecting enough taxes. While Armenia was just above this threshold, it was below others in the region, and below other countries in the lower-middle-income category.

Julia: Here’s Sebastian Eckardt, a senior economist at the World Bank, and the person who initially led the 12 million dollar project in Armenia. He spoke to us on the phone from his current post in Vietnam:

Sebastian: Basically, revenue collection was overall relatively low in Armenia, which then in turn constrained essentially the government’s ability to deliver services and invest in public infrastructure… So in a way, there was a mismatch between spending needs and revenue.

Maximilian: From the taxpayer perspective, things were not great, either. In comparison to other countries with the same level of development, Armenia’s tax system was archaic and frustrating to deal with. 

Sebastian: That was reflected, for example, in firm surveys. Inefficient tax administration always came out as a top constraint in the perception of firm. So this kind of tax administration burden on the private sector was the second constraint. And I think that one of the things that contributed to that was that the tax administration was still heavily based on essentially paper, and manual processing, and face-to-face interactions with taxpayers, which is not the most efficient way of doing tax collection these days.

Julia: Indeed, both businesses and ordinary citizens faced high costs for complying with tax regulations. There was some evidence of bribe-seeking and informal payments.

Maximilian: Whoa, what do you mean, like, bribes?

Julia: Well, things like that are difficult to measure, but whenever you have face-to-face interactions with tax auditors, that’s a risk. There were also burdensome filing requirements. The average taxpayer spent 581 hours annually filing taxes.

Maximilian: So, that’s why, in 2012, the Armenian government decided to reform its tax administration. The goal of the reform program was clear: to have a more service-oriented tax administration, with modern business processes and trained tax officials.
Efficiency would increase and the government would collect more tax revenue without raising tax rates. There was strong support within the government and in the business community. Here’s Sebastian talking about local technical capacity.

Sebastian: In Armenia, actually, it turns out that the tax administration had fairly solid IT capacity, especially sort of when it comes to managing contracts, defining requirements and so on.  And also there is a fairly solid local IT developer business environment, basically. You have a lot of companies there that offer IT development services.

Julia: Now, Migara De Silva, also a senior economist at the World Bank, is leading the project. It’s scheduled to close next year. New services, such as electronic filing, have been introduced to taxpayers – this is not only faster, but it eliminates those face-to-face interviews where there is a risk of informal payments changing hands. Now 90 percent of taxpayers file their taxes electronically. A training center is under construction, and 35,000 tax administrators have been trained. There’s a call center and a hotline to answer taxpayer questions. Here’s Migara.

Migara: If somebody like you do not know about some procedure, you can call. We have 12 people standing there in a special room that we established through this project. They have seven days a week access.

Maximilian: While the World Bank’s support was important for these achievements, they wouldn’t have happened without the enthusiastic leadership within the Armenian government and local experts. Though there have been hurdles along the way, Migara says this project has been swift to produce results.

Migara: The number of tax audits, for instance, and then if you look at the collected taxes, over time, per capita have gone up significantly. The number of active VAT taxpayers, the number of active CIT taxpayers, meaning corporate income tax. These are the critical indicators to show whether the project was moving ahead.

Julia: Indeed, the tax administration is now collecting 20 percent of GDP in taxes, up from 16.3 percent. And this has happened without a big jump in operating costs. Migara said the vision over the next ten years is to have the country reach the level of a world-class tax administration. He thinks it’s possible.

Migara: The project is doing what it is supposed to do.

Julia: For the World Bank, I’m Julia Oliver.

Maximilian: And I’m Maximilian Mareis.

Check out more information on the World Bank’s tax work and work on governance.
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