Armenia and Conventions to Avoid Double Taxation

Armenian News Network / Groong
January 31, 2006

By Shushanik Hakobyan and David Joulfaian


Since 1994, shortly after its independence, Armenia signed tax
treaties to avoid double taxation of income and profits with 27
countries. In many ways these efforts reflect the expansion in
economic activity in Armenia, and the flow of foreign investments.

Tax treaties deal with problems that arise when residents, individuals
and business entities, of one nation earn income in another
country. More specifically, these agreements set out a framework for
the tax treatment of income and profits flowing between Armenia and
treaty partner countries.  Furthermore, they provide a road map and
set up mechanisms to settle disputes arising from double taxation of
income and prevent tax evasion.

Tax treaties have the benefit of eliminating double taxation in
Armenia, and bring a degree of certainty to foreign investors, as well
as the Armenian treasury. By doing so, they facilitate trade and
investment flows as they eliminate tax impediments to international
trade.


1. THE BENEFITS OF TAX TREATIES

Virtually all income taxes have built-in provisions to avoid the
double taxation of the income of a resident earned in a foreign state
by granting them a foreign tax credit or exempting foreign source
income altogether. The US corporate tax, for instance, unilaterally
allows a foreign tax credit to American corporations for taxes paid to
foreign jurisdictions.  So why is a tax treaty necessary?

There are many situations where the built-in provisions of worldwide
tax systems fail. Notwithstanding these provisions, at times double
taxation may not be avoidable in particular when residency and the
determination of taxable income are not well defined. Should the
profits from an investment by a US pharmaceutical corporation in
Armenia, for instance, be taxed in Armenia, or should the profits be
treated as a return to Research and Development expenditures in the US
and thus taxed as US income? Similarly, should the profits of Austrian
Airlines from serving Armenia be taxed in Austria or Armenia? At what
point or length of time does a foreigner residing in Armenia become an
Armenian taxpayer?

The above questions, and many more, are addressed in tax treaty
provisions.  The benefits of such treaties include:

a. Clarify rights of each country

Double taxation treaties clarify the taxation rights between
states. They clearly state the taxes to which the treaty applies to,
as well as the nature of the taxpayer (individual, partnership,
corporation, etc.) of a particular country. In the case of income and
profits, generally the agreement will provide that the income will
either be taxed solely in Armenia or, if it remains taxable in both,
that the taxpayer's country of residence will grant a credit for the
tax paid in Armenia. Furthermore, a treaty clearly spells out when a
foreign individual or entity becomes an Armenian taxpayer. The
agreements also usually provide for a specific treatment or
withholding taxes on dividends, interest, and royalties. These
withholding tax rates under the Armenian-Thai treaty, for instance,
are generally limited to 10, 10, and 15 percent respectively. [1]

b. Provide for problem resolution mechanism

Despite of the best of intentions and planning, disputes between
taxpayers and the host country over the proper identification and
measurement of taxable activity are inevitable.  Taxation treaties are
important tools to ensure that disputes do not arise in the first
place, and that if they do, to provide procedures for resolving
them. An important feature of tax treaties is the designation of a
"competent authority" to tackle and resolve (arbitrate) disputes or
situations not intended by the tax treaty. In the case of the US, the
competent authority is the Secretary of the Treasury Department, or
his/her delegate. In the case of Armenia, the competent authority is
the Minister of Finance and Economy and the Minister of State Revenues
or their authorized representatives

c. Prevent tax evasion and avoidance

All tax treaties provide for the exchange of information on taxpayers
between authorities. Such exchange of information should enable
countries to protect their tax base. However, such provisions may be
more effective in combating fraud and perhaps less so in tackling tax
avoidance.

d. Provide concessions to developing countries

Some treaties provide for some concessions or tax preferences in the
tax treatment of income and profits from investment in low income
developing economies. As an example, a number of developed countries,
excluding the US, provide for tax sparing in tax treaties, as a
concession to developing countries including Armenia. A tax sparing
provision makes it possible for a foreign taxpayer to receive a tax
credit for exempted Armenian tax against the tax liability of the home
country as if the tax had actually been paid in Armenia. This is
important as Armenia provides tax holidays whereby much of the profits
of large foreign investors are exempted from taxation.[2] Such tax
sparing provisions make it possible for foreign investors in Armenia
to benefit from tax holidays without having their home countries
subject the underlying profits to taxation. In effect, Armenia's tax
incentives or subsidies benefit the foreign investors and does not
represent a mere transfer from the Armenian treasury to the foreign
government, as would be the case in the absence of a treaty. [3]


2. TAX TREATIES ENTERED INTO BY ARMENIA

Since its independence, Armenia has signed tax treaty agreements with
27 countries, of which 25 have been ratified by the Armenian
Parliament. A notable exception is the United States, with which
Armenia does not have a tax treaty. The following is a list of these
countries, along with the date a treaty was signed, and the date of
its ratification.

    COUNTRY		DATE SIGNED			DATE RATIFIED
    -------             -----------                     -------------
1.  Austria		February 27, 2002		December 1, 2003
2.  Belarus		July 19, 2000			November 7, 2001
3.  Belgium		June 7, 2001			September 23, 2003
4.  Bulgaria		April 10, 1995			September 26, 1995
5.  Canada		June 29, 2004			December 29, 2005 [4]
6.  China		May 5, 1996			October 8, 1996
7.  Estonia		April 13, 2001			November 7, 2001
8.  France		December 9, 1997		February 7, 2001
9.  Georgia		November 17, 1997		March 17, 1999
10. Greece		May 12, 1999			October 11, 2000
11. Iran		May 6, 1995			October 8, 1996
12. Italy		June 14, 2002			September 23, 2003
13. Latvia		March 15, 2000			February 7, 2001
14. Lebanon		September 16, 1998		September 13, 2000
15. Lithuania		March 13, 2000			February 7, 2001
16. Moldova		October 6, 2002			October 22, 2003
17. Netherlands	October 31, 2001			October 9, 2002
18. Poland		July 14, 1999			November 7, 2001
19. Qatar		April 22, 2002			October 23, 2002
20. Romania		March 25, 1996			October 8, 1996
21. Russia		December 28, 1996		December 26, 1997
22. Syria [5]		June 29, 2005
23. Tajikistan[5]	July 1, 2005
24. Thailand		November 7, 2001		October 9, 2002
25. Turkmenistan	June 5, 1997			March 17, 1999
26. UAE			April 20, 2002			September 23, 2003
27. Ukraine		May 14, 1996			October 8, 1996


These treaties address a number of taxes. In the case of Armenia,
these include the individual income tax, the enterprise profit tax,
the property tax, and the land tax. In addition, these treaties govern
the tax treatment of repatriated income such as dividends, interest,
and royalties. Tax treaties also govern the treatment of pension
benefits under the income tax.  A Canadian citizen retiring in
Armenia, for instance, will have the pension benefits taxed by Canada
at a maximum rate of 15 percent. [6]


3. TREATY WITH THE US?

In a number of countries that have yet to sign tax treaties with
Armenia, tax relations continue to be regulated by the provisions of
tax treaties entered into with the Soviet Union. In general, these tax
treaties will continue to remain in force until they are replaced by a
new treaty or revoked by one party.

The United States signed a tax treaty with the USSR in 1973. From the
US perspective, the US-USSR tax treaty remains in force and governs
tax relations with Armenia as a successor state to the Soviet Union.
The USSR, at the time of signing of the treaty, and even up to its
dissolution, did not have a fully developed private sector and a
market oriented tax system.  Thus the treaty provisions are very
limited, and provide little benefit to investors and taxpayers. The
treaty, for instance, does not provide for a mechanism to break a tie
between jurisdictions over taxpayers. On the other hand, tax
exemptions are accorded to scholars and researchers during their
tenure in the respective countries. Similarly, students benefit from a
tax exemption of $10,000. This exemption also extends to the employee
share of US social security taxes. [7]

The Office of the International Tax Counsel (ITC), of the Office of
Tax Policy of the US Department of the Treasury, is responsible for
negotiating income tax treaties.  The ITC is typically staffed with
experienced attorneys who come from the private sector for a short
tenure at Treasury.  The staff works closely with the business
community to ensure that they are aware of their priorities. [8] Most
other countries have similar institutions, albeit staffed with
permanent professionals that engage the ITC in tax treaty
negotiations. However, some of the smaller countries opt to delegate
to US law firms, or other third parties, the task of negotiating on
their behalf, at least during the earliest part of negotiations.


4. CONCLUDING COMMENT

Tax treaties serve to avoid double taxation in situations in which a
taxpayer could be taxed twice, once by the country in which the income
arises and once by the country where the taxpayer resides. The
treaties may also help to reduce excessive withholding taxes on
certain types of income, such as investment income and royalties.

Some may argue that the tax laws in Armenia, and other countries, are
sufficient to alleviate potential problems of double taxation. Of
course, an analogous argument can be made that the laws in Armenia are
sufficient to protect private property and foreign investments. Yet,
even in the case of foreign investments, and despite the laws of
Armenia, protection is commonly secured or sought after by bilateral
treaties on investments. Indeed, Armenia has signed a number of
bilateral treaties on Reciprocal Promotion and Protection of
Investments as early as 1992. Treaty countries include:

    COUNTRY		DATE SIGNED			DATE RATIFIED
    -------             -----------                     -------------
1. Argentine		April 16, 1993			September 27, 1993
2. Austria 		October 17, 2001		October 9, 2002 
3. Belarus 		May 26, 2001			November 21, 2001 
4. Belgium		June 7, 2001			February 20, 2002
5. Canada		May 8, 1997			March 17, 1999
6. China 		July 4, 1992			October 6, 1992
7. Cyprus 		January 18, 1995		June 12, 1996
8. Georgia 		June 4, 1996			February 18, 1997
9. Germany		December 21, 1995		June 23, 1997
10. Greece 		May 25, 1993			October 13, 1993 
11. Israel 		January 19, 2000 		March 21, 2001
12. Italy		July 23, 1998			October 11, 2000 
13. Qatar		April 22, 2002			October 23, 2002
14. Romania		September 20, 1994		October 11, 1995
15. Switzerland 	November 19, 1998		October 9, 2002
16. Tajikistan		April 22, 2002			November 4, 2002
17. UAE			April 20, 2002			November 4, 2002
18. UK			May 27, 1993			October 13, 1993
19. USA 		April 2, 1992			September 26, 1995
20. Uruguay		May 6, 2002			March 25, 2003
21. Vietnam		December 13, 1992		April 28, 1993

The dramatic growth of international trade and the flow of foreign
investment to Armenia are likely to raise a number of taxation
issues. [9] Indeed, unresolved international tax disputes can
discourage investment. By pre-empting such disputes, as well as
reducing the burden of double taxation, tax treaties may facilitate
the free movement of capital, goods, and services.


FOOTNOTES:

1. See http://www.rd.go.th/publish/766.0.html

2. Foreign businesses, investing about $1 million or more in Armenia
through 2007, benefit from complete exemption from taxes on their
profits for two years, and 50 percent reduction in taxes in the
following two years.

3. Note, however, that the benefit of tax sparing provisions may be
overstated in light of the benefit of tax deferrals. Indeed, profits
earned in Armenia by foreign investors may not be taxed in the home
country until they are repatriated.

4. Date treaty entered into force and not actual date of ratification
by the Armenian parliament.

5. To the best of our knowledge, these treaties are yet to be
ratified.

6. See article 18, item 2(a) in
http://www.fin.gc.ca/treaties/armenia_e.html, or visit
http://www.fin.gc.ca/treaties/notices/Armenia_e.html

7. See http://www.irs.gov/publications/p54/ch06.html for an overview
of the benefits common to current US treaties.

8. Visit http://www.treas.gov/offices/tax-policy/offices/itc.shtml for
additional detail.

9. Armenia's foreign trade turnover, i.e. imports plus exports,
roughly doubled between 2000 and 2005.


--
The authors are Washington based economists. The above represents
their personal views.