On 24 January, a group of non-governmental organizations addressed a letter to the Prime Minister Nikol Pashinyan with a statement, presenting the negative consequences of the draft amendments to the RA Tax Code submitted to the public discussion yesterday.

This document provides for limiting the possibility for the persons providing legal and accounting services, including the advocates and consulting firms, to be considered as persons that pay turnover tax.

Mr. Vahagn Hambardzumyan President of the “Association of Accountants of SME of Armenia” Non Governmental Association, noted that in case of adoption of this document, the burden of taxation and legal services will increase several times. At present the turnover tax is 5%, however in the case of VAT it will be at least 25%. This implies that the prices for services will also increase: the service provider will try to place the tax burden on the client.

On the other hand, these changes would not be in favor of the fight against the shadow, but they rather would be a push to a part of workers of the legal field go to advance to the shadow field in order to hide the real turnover and pay less taxes.

“For us, as a body consolidating the potential of lawyers, the fact of putting such burden on advocacy and consulting services is of course concerning,” Mr. Karen Zadoyan, President of the Armenian lawyers’ Association NGO said and added that this is a dangerous draft and will raise a number of risks. In particular, as a result of this, advocates conducting private entrepreneurship activities who will appear in the value added tax field will unwillingly be forced to compete with large companies and absorbed by the latter.

It should be noted that the letter addressed to the Prime Minister was signed today by 10 organizations and has already been sent. It is also mentioned in the note that before the inclusion of the draft in the agenda of the Government session, on the initiative of a number of non-governmental organizations and entities, accounting and legal services companies, including the advocates and consulting firms it is planned to organize an open and professional public discussion, to present the evidence based most negative and adverse consequences of this legislative initiative, as well as to listen their comments. The discussion will be organized on 30 January 2019, from 15:00 to 17:00 pm, at the “Nairi” Hall of “Ani” Hotel (19 Sayat-Nova str., Yerevan).

The initiative is open for all interested persons.

Arguments presented in the letter addressed to the Prime Minister, substantiating the negative consequences of such undertaking:

1. The shadow continues to have a significant impact the area of ​​accounting and legal services, as well as in the other professional services sector, and the RA State Revenue Committee does not possess and cannot have effective tools and mechanisms for struggle against it. Instead of focusing on the activities aimed at reducing the existing shadow, such an initiative will undoubtedly deepen the shadow, and the state will definitely lose tax revenues.
2. Even if we theoretically assume that accounting and legal service providers will act in the legal field (which, in our opinion, is very difficult to justify), rather than in the shade, this initiative will raise the cost of services provided to small businesses and will increase the SME expenditures, because the businesses currently working on the basis of turnover tax provide legal and accounting services mainly to the small businesses which operate on the basis of turnover tax or conduct family business entrepreneurship, as well as to the individuals. In contrast, major accounting and legal services providers companies provide services to major companies which work in the VAT tax field, and the latter demand the service providers to work in the VAT tax field, so that will have the opportunity for set off of Consequently, the above-mentioned provision cannot be a tool for providing equal field coverage for all service providers.
3. From the point of view of developing the field of professional services, this is an obvious retrospective step, since the adoption of the Tax Code, from 1 January, 2018, the companies providing accounting services were provided with the opportunity to work on the basis of turnover tax as well (before the adoption of the Code only the individual entrepreneurs were provided with such opportunity, which led to operating in shadow or operating as an individual entrepreneur). From the aspect of formalization the sector has recorded a positive shift.
4. Business entities with a small turnover in the professional field will be excluded from the market, giving way to VAT payers working in the field of general taxation, since they will not have a relative advantage in terms of price. Whereas the major ones will appear in a more favorable conditions. We hope the Armenian government does not intend to implement such a policy.
5. It is unclear, in general, the idea of ​​bringing the sphere of professional services out of the field of turnover tax, in case when the sector of non-professional services will have further opportunity to operate on the basis of turnover tax. Only the circumstance that the providers of professional services have sufficient capacity to keep records of value added tax independently, it is still insufficient to distinguish this sector from the aspect of taxation, because the difference in tax burden between general taxation and special taxation systems is significant. With the same logic, professional service providers can also carry out excise tax calculations individually. However, in such case, the negative outcomes of the planned legislative action will far exceed the benefits that the state will have.