Armenian market has registered certain increase in cigarette prices, conditioned by harmonization of tax and customs systems within the frames of Eurasian Economic Union (EEU), in particular, approximation of excise duty rates. Bank.am talked to Deputy Finance Minister of Armenia Davit Ananyan to clarify the issue.  

- Mister Ananyan, what exactly does harmonization of tax and customs systems imply? Could you name tax types to be involved?

Before touching upon EEU tax harmonization, I would like to introduce some formats of collaboration on tax systems of different states. The first main principle is unification, when member states agree on unified tax legislation, and the second is harmonization, when states agree on certain taxing principles, administrative norms and rates for trade turnover or other cross-border activity with their internal legislative independence preserved.

The whole process is aimed at free movement of goods and services in EEU area. The turnover between the member states will be provided upon similar (equal to local) taxing terms, which will ensure healthy competition and non-discriminative attitude.  

EEU incorporated new unified Customs Code (in Armenian) to come into force on January 1 of 2018. This is the only example of unification within the frames of EEU so far.

On the other hand, harmonization includes indirect taxes: value added tax (VAT) and excise duty, which may cause certain obstacles in free movement of goods. EEU agreement clearly provides for national legislative independence of member states when it comes to harmonization, which will be applied only for cross-border activities.

- Can we assume that similar indirect tax rates will be applied in member countries?

- There is no current issue with VAT rate harmonization, as importing countries are free to establish their own rates and tax the incoming goods accordingly. Nevertheless, they have already reached agreements on documentation and administration of VAT payments with unified procedural system incorporated.  

Excise duty issue has some specifics though. VAT is the value added to prices of goods at the moment of selling, while excise duty is included in the initial price, which makes it impossible for importing countries to tax in accordance with their legislations. Consequently, the countries need to set an approximate excise rate to solve the issue.

EEU decided to set indicative excise duty rates for tobacco and alcoholic products, the most sensible excisable goods in this context. The member states will have to make necessary changes in their national legislations to meet this requirement.

EEU also attaches special importance to free movement of workforce, so respective agreement was reached on income tax as well. The agreement implies that foreign workers’ income will be taxed in accordance with the legislation of given country, i.e. similar tax for similar income.

However, countries preserve their unique sovereignty when it comes to corporate taxes (profit tax).

- How would you estimate tax rates in Armenia in comparison to other EEU countries? How will harmonization unfold in Armenia?

-Excise duty rates are several times lower in Armenia compared, for example, to Russia. So, we proposed to apply gradual transition to the indicative excise duty rates in Armenia so that we are able to avoid abrupt changes in case of tobacco and alcoholic goods.  

We conditioned our statement by the fact that Armenia is the only country in EEU area, which does not have any direct border with other member states. Our goods pass a third country (for example Georgia) before reaching the targeted one, which implies additional charges from our exporters (transit customs clearance, significant transportations fees etc.). As a result, the original price will increase, while the attractiveness of goods will decrease on the market. Consequently, lower excise duty rates can not possibly lead to “dangerous” competition for similar production in any of EEU member state.

Armenia’s offer was accepted as a result of the negotiations and became an example for everyone. The indicative rate and certain permitted divergences were set for the tax (individual for each country).

For instance, the indicative tax rate for hot drinks, depending on percentage of alcohol per liter, was set at EUR 9 (in corresponding national currency) for 2022 ( the rate makes around EUR3 in Armenia). Our country was allowed to reach the EUR 9 rate gradually, raising it by 15% annually and setting the possibility of 40% decrease. Thus, we’ll have a EUR 5,4 rate by 2022, which is a permitted divergence.

The circumstances were that the negotiations on rate alignment coincided with amendments to the Tax Code in Armenia, and we put the excise rate change of the next 5 years in legislation immediately. Thus, the excise rates for alcohol and tobacco will rise by 15% from 1 January 2017, and if you noticed a certain price rise, that would be caused by the alignment. Rate increase by the same percent will happen in the next 4 years as well.

- Did you hold discussions on the raise of excise tax with Armenia’s private sector? Won’t the tobacco and alcohol price rise cause social problems in our country?

- Of course, there were discussions with the private sector representatives. It would be untrue to say the business people took the decision with enthusiasm, as surely that will lead to rising prices and affect their competitiveness. But since most of our tobacco and alcohol products are for export, the private sector won’t be affected substantially.

Yes, there will be certain price rise in the domestic market, but by our estimation, its impact on a citizen with average purchasing power will be minimal. Let me explain that. The higher the ABV, the higher the excise tax, so the hot drinks of average ABV will be little affected. As for tobacco, increased prices can become a part of the anti-smoking campaign, but of course, that wasn’t the original goal.

- Do you think Armenia’s decision to join EAEU was economically justified?

- People always ask, “What would happen if we didn’t join the EAEU, but signed a free trade agreement with the European Union instead?” While making that comparison, we need to take into consideration that EU and EAEU aren’t compatible. The basis of EAEU is the free transportation of goods and services, while EU has a different ideology. It’s not just a political territory, but a single economic area with single currency, the European Central Bank, bonds, and a common monetary policy.

There’s another important factor: joining the EU or signing a free trade agreement doesn’t mean that the market will open to the given country. The European Union has high standards for goods and services and you need to have product compliant with those standards if you want to sell it in the EU market. Otherwise, the given country’s product won’t be able to enter the EU while the European products will “flood” the new market and most likely win in the competition with local production.

If we continued the negotiations on the EU-Armenia Association Agreement and joined the union soon after, Armenia would probably be flooded by the EU products and our dream to have a good balance of foreign trade wouldn’t come true, and I say this as an expert. Armenia’s only guarantee of developing economy is to have an export-oriented economy. I’d qualify our future in the EU as unclear in this regard.

I also cannot say that membership in EAEU guarantees us a developed economy, but at least it offers preconditions for that. Our future is clearer there. I’m certain if we put in proper efforts domestically we’ll be able to use the 182m market’s potential and our unique position, becoming the bridge between Iran, EAEU, and Europe. I don’t praise EAEU, but our future is clearer there.

It doesn’t matter what were the initial reasons for the EAEU foundation, even if they were political, as that doesn’t hinder us to use the organization to our economic interests. We need to stop being emotional and use the opportunities that the union provides.

Siranush Simonyan talked to Davit Ananyan