Armenia`s Ministry of Finance on profits with higher taxes 

ArmInfo. In Armenia, a business with a high level of documented expenses may even end up in the black as a result of the proposed tax amendments. This assurance was made  by Deputy Finance Minister Arman Poghosyan on November 19 at  parliamentary hearings on the package of bills on amendments and  additions to the RA Tax Code, concerning the transfer of certain  areas of professional activity to the value-added tax system.

The Deputy Minister recalled that the policy of the RA government is  aimed at narrowing the circle of beneficiaries of special tax regimes  - the microentrepreneurship system and the turnover tax. The goal of  this policy is to establish and strengthen the principle of tax  justice.

Thus, the Deputy Minister noted, the country's financial authorities  are trying to solve two main - diagnosed problems. The first concerns  the fact that currently a teacher or doctor engaged in professional  activities pays income tax in the amount of 20% from their salary,  while representatives of other areas of professional activity or the  same individual entrepreneurs either do not pay this type of tax at  all, working in the sphere of micro-entrepreneurship, or pay a 5%  turnover tax.

The Deputy Minister recalled that as a result of the June amendments  to the Tax Code, from January 2025 the turnover tax rates established  for the main types of activities will be increased (by two times -  ed.) with the possibility of reducing the tax payable due to  documented expenses. In particular, today a 5% turnover tax rate has  been established for entrepreneurs in the field of trade activities,  with the possibility of deducting 4% of documented expenses from  liabilities, but not less than 1.5% of turnover. 

As part of the initiative, it is proposed to set a rate of 10% of  income with the possibility of deducting 9.5% of expenses, but not  less than 1.0% of turnover. Then the effective tax will increase from  2.3% to 4.1%, providing the state treasury with additional taxes in  the amount of 4.9 billion drams. Catering companies currently work  with a 6% turnover tax with the possibility of a tax deduction of 3%  of documented expenses, but not less than 4% of turnover. 

Currently, Armenian restaurateurs pay an average of 4.3% of sales  turnover, which they assess as a low tax burden. In this regard, it  is proposed to establish a 12% turnover tax with the possibility of a  tax deduction of 9% of documented expenses, but not less than 3.5% of  turnover. In this case, the effective tax will increase from 4.3% to  6.6%, providing the state treasury with additional taxes in the  amount of 4.9 billion drams.

Changes are also planned for representatives of production  activities. Currently, the turnover tax rate is 3.5%. It is proposed  to set the rate at 7% of income with the possibility of deducting 5%  of expenses, but not less than 3.5% of turnover. In this case, the  effective tax will increase from 3.0% to 5.3%, providing the state  treasury with additional taxes in the amount of 0.6 billion drams.

,  Poghosyan explained. In particular, the Finance Ministry  representative emphasized that for other types of activities, the  current 5% turnover tax rate will increase to 10% from 2025 with the  possibility of deducting 6% of documented expenses from liabilities,  but not less than 4.5% of turnover. In this case, the effective tax  will increase from 5% to 8.5% (providing the state treasury with  additional taxes in the amount of 8.7 billion drams - ed.).

According to Poghosyan, as a result, it is expected that the  difference between the tax burden of the turnover tax system and the  general taxation system will be reduced. Thus, when comparing the tax  burden of the general taxation system (VAT and profit tax) and the  turnover tax system in certain areas of economic activity, it turned  out that in almost all industries (except for those industries in  which the main transactions are exempt from VAT), the tax burden of  the general taxation system significantly exceeds the turnover tax  burden. In particular, the total tax burden of VAT and profit tax in  the manufacturing industry exceeds the turnover tax burden by 2  times, in construction - by 2.4 times, in the trade sector - by 2.6  times, in the accommodation and catering sector - by 3 times, in the  real estate sector - by 2.1 times, in the professional, scientific  and technical activities - by 2.8 times, in the provision of legal  and accounting services - by 3.2 times.

The next problem is that when operating in the micro-entrepreneurship  system, business entities are exempt from business taxes, and the tax  burden in the turnover tax system is significantly lower than the  burden for businesses operating in the general tax field but engaged  in the same type of activity. This leads to aggressive tax planning,  underestimation of the real amount of taxes, believes the chief  financier of Armenia. In this regard, from 2025, the range of  activities prohibited from taxation in the micro-enterprise tax and  turnover tax systems will be expanded. 

In particular, from 2025 it is recommended to limit the possibility  of engaging in notarial, legal activities and organizing lotteries in  the turnover tax system, in the micro-enterprise taxation system the  activities of taxpayers engaged in the purchase and sale and/or lease  of real estate, hairdressing services, body care, car maintenance  services, software development and construction work, assessment and  measurement of real estate, activities for organizing baths and  saunas. They will have to work either in the turnover tax system or  under VAT.

As the Deputy Minister of Finance pointed out, if the new initiative  is approved, from July 2025, those taxpayers who carry out the  following types of activities cannot be microentrepreneurs or payers  of turnover tax: legal and accounting activities; head office  activities; management consulting services; building construction,  civil engineering, specialized construction activities; real estate  transactions for a fee or on a contractual basis; architectural and  engineering activities; technical testing and analysis; advertising  activities and market research; scientific research and technical  development, other professional, scientific and technical activities;  activities to provide temporary labor; healthcare.

During discussions with stakeholders, a number of areas of activity,  such as veterinary activities, social services to the population with  the provision of housing, activities to provide social services  without the provision of housing, were excluded from the list. An  early draft also proposed to limit the operation of interregional,  intraregional transport routes or the organization of bus (minibus)  passenger transportation in the microenterprise system. The entry  into force of the amendments was also postponed - from January to  July 2025. The possibilities for reducing the tax base were expanded,  in particular, administrative costs are included in the composition  of expenses, deductible income.

If the new amendments are adopted, the annual increase in state  budget revenues from VAT and income tax is estimated at approximately  13 billion drams. The previous draft, adopted in June, as previously  stated by the Ministry of Finance, promises the state treasury an  annual increase in revenues from turnover tax of approximately 17.8  billion drams.

Currently, turnover tax (replaces VAT and income tax) is paid by  business entities whose annual turnover does not exceed 115 million  drams (from January 1, 2020, Armenia returned to a non-taxable annual  turnover of up to 115 million drams). This group includes SMEs,  individual entrepreneurs and notaries. In particular, we are talking  about payments of 5% of commercial turnover and 3.5% of production  turnover.