BUSINESS SUPPORT OFFICE - ARMENIA EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT

Transcription

1 2013 Promoting public-private dialogue, strengthening advocacy, building capacity, improving business environment and investment climate ANNUAL REPORT BUSINESS SUPPORT OFFICE - ARMENIA EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT This report provides a comprehensive overview of the EBRD BSO s activities in 2013 and oulines the work program for It features summary of engagement, key facts and figures, and illustrates main achievements.

2 1. The Business Support Office Achievements in 2013 Introduction The Business Support Office (the BSO) has been established by the European Bank for Reconstruction and Development (EBRD) in May 2007 with the objective of promoting a structured partnership and constructive policy dialogue between the state and the private sector in Armenia. The vision of the BSO is to become an integral and valuable catalyst between the Government and business community through ensuring an effective dialogue aimed at improving the country s business environment and investment climate. The mission of the BSO is to raise any key issues that affect the business environment, provide technical assistance to the Government in the process of developing strategies/reforms to address identified impediments, and, in parallel, facilitate prior consultations with the business community and transmit feedback on proposed reforms to the authorities. The BSO project is funded by the EBRD s Multi- Donor ETC Fund and submits reports to the Operation Leader, Head of EBRD s Resident Office in Yerevan. Assistance to Councils Since its establishment the BSO activities included assistance to Business Support Council, chaired by the Prime Minister, however the activities of the Council were passive due to political situation (changing appointments, elections) in Armenia. The dynamic phase of the BSO activities began since September 2009, when upon the request from the Ministry of Economy, the BSO started active cooperation with the Executive Body (the Secretariat) of the Inspection Reform Coordination Council (IRCC) to assist in increasing the efficiency of the Secretariat activities directed to maintain efficient Public Private Dialogue (PPD) at the highest level between the Government, the business community and donors through the Council

3 Based on the successful cooperation in frames of the activities of the IRCC the Business Support Office currently continues providing technical assistance to the Secretariats of two Councils: Inspection Reform Coordination Council (IRCC), established in 2010 to reform the inspection functions by introducing risk-based inspections based on EU standards; SME Development Council (SME DC), established in 2011 to serve as a platform for constructive policy dialogue aimed at identifying and resolving key constraints to the SME development. The BSO Objectives Establish a PPD platform for implementing reforms aimed at business environment development Private sector involvement activation Outline the reform agenda for the Councils, introduce the issues raised by the businesses at the Council meetings Enhance public awareness on the undertaken reforms. Cooperate with the donors operating in the field of business environment improvement, share information To achieve its objectives the BSO works in the below-mentioned directions: Assistance to IRCC Secretariat Assistance to SME DC Secretariat Facilitation of policy dialogues with the Private Sector, organization of regular meetings with business associations and NGOs Providing technical expertise for developing potential solutions to the raised issues Day-to-day cooperation with the RA Ministry of Economy Networking with Private sector, keeping it informed on the reform processes Cooperation with experts provided by the donors to address particular assignments Day to day activities aimed at achieving the BSO objectives.

4 The BSO Action Plan 2013 Th Action plan included issues, that had been set to be addressed in Below is the overview of the Action Plan issues, the achievements and their current status: 1. Issue related to exporting agricultural products (clarification of product processing to be taxed) 2. Issue related to Armenia's Industrial Policy Strategy 3. Issue related to analyzing of further development of SMEs in the RA Labor Code 4. Issue related to imposing a sequestration on all the bank accounts of entrepreneurs by tax authorities 5. Issue related to license fee for entrepreneurs involved in courier activities 6. Issues raised by SMEs Deacrease of the new Cash Control Machines purchase prices ( AMD) for SMEs Simplification of the procedure of criminal investigations of unpaid taxes (exceeding AMD) An official clarification of the article on fish processing has been published The governmental decree about the import and export process of foods has been amended: the documentation for import and the process of export has has been simplified. A number of meetings and discussions were held with SME employers and after the discussions no problems were raised regarding the Labor Code. Draft law on amendments in the Law on Taxes has been drafted which specifies and simplifies the process of bank account sequestrations The Draft law on the amendments of the law on postal communication has been designed mentioned the decrease of the license fee from to AMD Decreased prices and AMD accordingly for medium and small businesses The Draft law is now being discussed at the RA Government. partially Pending final approval Pending final approval Pending final approval Issue of VAT payers registered as turnover tax payers The Prime Minister assigned the tax authorities to register the businesses as VAT payers that have paid VAT but have not applied for becoming a VAT payer accordingly. 7. The merger of the first 2 inspectorates Formation of State Healthcare Inspectorate 8. Development of a new law on inspection bodies Draft law submitted to the RA Government

5 9. Implementation of risk- based inspection system in all the inspectorates 15 inspectorates out of 16 have fully implemented the risk based system 10. Elimination of inconsistencies and complicated regulations in RA Law ''On organizing and carrying out inspections in Armenia'' 11. Review of agricultural value chain in respect of SMEs 12. Assistance to other activities carried out by Inspection Reform Secretariat A new draft law on Inspections has been developed Is planned to be considered in 2014 Several legal acts have been reviewed, optimization concept has been drafted Not met 13. Raising awareness among the entrepreneurs in Yerevan and the regions of Armenia 20 meetings held in RA regions 14. Monitoring of turnover tax application and of other reforms carried out SME Taxation Research Office website development Press review: excerpts from news RA draft law "On inspection bodies" has been discussed April 26, 2013, lragir.am Chaired by the Prime Minister T. Sargsyan the ninth meeting of the IRCC took place at the RA Government. The RA draft law "On inspection services", which aims inspection system optimization and increase the efficiency.summarizing the Prime Minister pointed out that the law is aimed at development of an institutional basis for the formation of Ministry- Inspectorate cooperation and specification of responsibilities. Source: Cash control machines will be purchased with more favourable terms October 31, 2013, aysor.am... for taxpayers with a sales revenue from million to 500 million AMD in 2012 (including VAT) the price of the CCM will be 280 thousand AMD. for taxpayers with less sales revenue than million thousand AMD (including VAT). Source: Small businesses will be inspected again October23, 2013, According to the Government, for the authorities which implemented the risk-based system, there is a necessity to eliminate the inspection ban. State Environmental Inspectorate under the staff of the Ministry is also included in the list approved by the Council, as the latter has completely finished the implementation of the risk-based system after the IRCC 9th meeting. Source:

6 The BSO achievements for High-level Coordination Council meetings, chaired by the Prime-Minister press articles highlighting each SME DC and IRCC meeting, 2 TV channels highlighted the Council meeting in news, 15 press articles including 1 interview on the BSO issues under settlement. Positive feedback from the SMEs on the Turnover tax (based on the results of the monitoring carried out after the first term of implementation). Meetings with SMEs in RA regions, inclusion and consideration of the specifics of the businesses operating in regions in elaboration of future reform projects. 4 meetings of NGOs supporting Private Sector to discuss sustainable support for the SMEs. Inclusion of new business associations and NGOs in the regular roundtable meetings format. 5 focus group meetings with businessmen on Inspection reform, consideration of their suggestions on Inspection reform development and Inspection system optimization drafting. Timely settlement of the issue related to improvement of conditions of purchasing new Cash control machines for SMEs. Issue related to complex requirements on submission of documentation during importing food has been settled, the procedure is simplified. A comprehensive research on SME Taxation Field Merger of first two inspectorates has been completed. Issue related to registration of Turnover tax payer as VAT payer has been solved. 15 inspectorates out of 16 have fully implemented the risk based system and have confirmed checklists. Achievements at a glance SMEs claim Turnover tax regime 90% predictability Accounting costs for SMEs reduced twice: AMD per month AMD SME tax yearly reports reduced 12 4 Food import documentation cut twice + only risk based checks on border Turnover Tax payers among SMEs Turnover tax payers Income tax/vat payers 27% 73% 1 Detailed information on Council meetings is available on

7 Achievements: main directions covered The BSO activities during the reporting period covered the following directions: Strengthening of PPD, more intensive cooperation of the Government and Private sector in terms of reform development. Effective implementation of new simplified taxation system for SMEs Increase of the level of timely addressing and settlement of urgent issues raised by businesses. Establishment of an effective cooperation format among the business associations in elaboration of a common approaches and unified policy to represent the private sector. Increase of the level of inclusion of SMEs in regions into the reform process Armenia: Doing Business 2014 Fact Sheet Rank in Doing Business 2014: 37 Rank in Doing Business 2013: 40 Increase in rankings in the following areas: Starting a Business, Paying Taxes, Enforcing Contracts Press review: excerpts from news (Deputy Minister of Economy) K. Minasyan sees a necessity for deep reforms for facilitating Doing Business October 29, 2013, "Armenia will introduce a pretentious reform program for facilitating DB. Armenia has improved its position in DB 2014 "Assessment preception for SMEs 2014" report with 3 points which speaks of efficiency of the work undertaken". Source: Armenia's entrepreneurial activeness level is the highest in the region. WB September 8, 2013, www. tert.am The World Bank (WB) in the recent study results indicate that the activeness level of entrepreneurial activities is the highest among the South Caucasus 3 states. Source: -armenia/

8 Research on SME taxation field 2013 As a result of a series of meetings with SMEs in the regions of Armenia a research on the implementation of the new Turnover Tax in the first half of 2013 was carried out. The general outcome of the research is as follows: SME units are satisfied with the idea of the new tax, as they are not obliged to do a complex accounting anymore, as well as do not face difficulties in obtaining unfounded and undocumented purchases. Instead, they develop simple quarterly reports, make quarterly estimated tax payments and perform a simple tax calculation. The research helped to reveal particular problems that need to be regulated, such as development of one common classification criteria for the definition of SME units instead of the existing two ones, taxation relief for trade area SMEs, etc. A comprehensive study on SME units in the taxation system of the RA has been carried out. As of the first quarter of 2013, the volume of taxes paid by the microsized units is around 45.2 billion AMD, the abovementioned number makes 9, 7% of the overall tax revenue (467, 7 billion). The research showed the quantitative dominance of the trading sphere over the others and the necessity to address taxation relief for the trade area, as taxpayers who are involved in trade, make around 62% of micro taxpayers. The turnover tax rate of retailers was increased by approximately 1 % in regard of the turnover, which is equal to a 45% increase of tax burden. If in 2012 taxpayer s estimated tax was 2 to 2.4% of total turnover, now according to the operating law, it constitutes 3.5%. Currently, this issue is under consideration at the SME Development Council It was also calculated that around 50 % of all the micro taxpayers operate in Yerevan. The anonymous questionarried helped to understand the concerns related to the activities of tax authorities voiced by the taxpayers of the regions,among which are forced tax collection actions, problems with Supervision procedures for maternity benefits, checks of deployment of cash control machines, manipulations in provision of official documents and admission of reports See full text of the research here:

9 2. The Business Support Office work program for 2014 Introduction In 2013 the BSO continued focusing its activities on establishing a private- public dialogue aimed at effective reforms for the business environment improvement. Regional meetings with entrepreneurs were vital for understanding the actual needs of SMEs, revealing new problems, outlining the further reform directions and informing them on the reform processes. The BSO not only addressed the issues preliminarily mentioned in its annual Action Plan, but also undertook the settlement of issues raised by the businesses throughout the year. In frames of its assistance to IRCC Secretariat the BSO experts worked the draft RA Law On inspection bodies dicussed it with all the relevant structures and introduced to the RA Government for approval, focused their activities on optimization of the inspection system aimed at increasing the inspection effectiveness and efficiency by merging the inspection areas and separating inspectorates from the ministries. The first successful merger of State Hygiene and Anti-Epidemic Inspectorate and State Labour Inspectorate took place after the IRCC 9th meeting. The BSO succeeded to set a format of regular meetings of NGOs and business associations supporting Private Sector to discuss sustainable support for the SMEs. 3 Targeted areas Based on the work done in 2013 the BSO considered the background and the prerequisites for upcoming reforms, outlining the following areas to address in 2014: SME taxation relief, turnover tax percentage decrease mechanism for trade area businesses. IT sector support legislation elaboration Reconsidering the import-export procedures Agricultural value chain consideration Implementation of institutional optimization of the inspection system

10 Ensuring further operation of risk- based inspection system in all the inspectorates Separated rates of local fees for SMEs Support in implementation of industrial policy strategy. Press review: excerpts from news The Ministry of Economy discusses establishment of favourable regime for IT sector. Karine Minasyan October 19, 2013, In parallel with deepening the Public- private cooperation and IT infrastructure development the Ministry of Economy is going to discuss the issue of tax benefits. Source: Inspection Reform Leads To Improved Business Environment 16 January, 2014, gov.am A Cabinet sitting was held today, chaired by Prime Minister Tigran Sargsyan. The meeting approved a sample checklist and a methodology for risk-based checkups to be carried out by the Ministry of Urban Development-affiliated State Urban Development Inspectorate, as well as the summary description of risk criteria. Source: SME Tax Regime Facilitation Discussed January 17, 2014, Chaired by Prime Minister Tigran Sargsyan, a regular meeting of the SME Development Council was held today in the Office of Government. Addressing the SME representatives in attendance, the Prime Minister said that the proposed amendment seeks to reduce the turnover tax from the currently applicable 3.5% to 1% through more accurate documentation covering all transactions. Source: Action plan 2014 See the Action Plan 2014 in Annex Expected results, indicators and measurement In 2014 the BSO is planning to measure the effectiveness of assittance to Councils on the basis of preliminarily identified indicators plus the indicators thet will be revealed in course of the reform development. The effectiveness measurement will be applied to each reform and will be amended to the issues available in the Avtion plan 2014.

11 The table below includes the outlined reform areas for 2014 and the relevant result indicators that can be estminated now. Depending on the course of activities additional result indicators and/or reforms can be included. N Targeted reform areas Result indicators 1. SME taxation relief, turnover tax percentage decrease mechanism for trade area businesses. 2. IT support legislation consideration for startups 3. Separation of a product expertize from the procedure of providing a certificate of origin. 4. Separated rates of local fees for SMEs 5. Agricultural value chain consideration 6. Implementation of institutional optimization of the inspection system drafting training programs for new inspectors 7. Optimization draft concept paper drafting and approval 8. Continue and complete testing checklists for risk-based inspections and launch applying the checklists 9. Creation of Management boards in each inspectorate 10. Approval of the draft law on inspection bodies by the RA Government. 11. Approval of the package of the draft laws on market surveillance by the RA Government: 1. Number of business entities opertating under the simplified mechanism of turnover tax (trade area) 2. The average tax percentage of turnover tax payers for trade area 1. Comparative amount of registered startups 2. Amount of provided certificates 1. The cost decrease for exporters. 2. The days/period decrease for exporters. 1. The decreased amount of the local fees for small shops. 2. The increased amount of the local fees for big stores/supermarkets. Agricultural concept approved by the SME Development Council. 1. Number of merged inspectorates 2. Number of professionally trained inspectors 3. No duplication in common support services and facilities Concept approved by the Government. Number of checklists tested and applied per inspectorate 1. Number of available Management boards 2. Amount of meetings held by Management boards Adoption of the draft RA law On inspection bodies Adoption of the draft RA law On general safety of non-food products Adoption of the draft RA law On market

12 Amendments to a range of laws related to market surveillance surveillance 12. Raising the level of awareness among the entrepreneurs in Yerevan and the regions of Armenia. 13. Development of a video tutorial on starting business in Armenia. 1. Number of meetings with SMEs held. 2. Overall number of participants. 3. Amount of flyers/brochures circulated. Number of watches, likes and comments of the video in social sites and other websites. Cooperation with IFIs and donor organizations Throughout the year the BSO continued its cooperation with donor organizations by means of exchanging information, jointly working on materials to raise awareness among the businesses on ongoing reforms, organizing a range of focus group meetings with businessmen Collaboration with IFC in the scope of the Inspection Reform USAID EDMC assistance to the Inspection Reform The BSO consultants were invited to USAID EDMC staff meeting, where the BSO activities were introduced and directions for future collaboration were outlined. Institutional changes affecting the business environment and the BSO activities During the reporting period there were no institutional changes affecting the BSO activities in frames of assistance to Councils. There is an ongoing cooperation with the RA Minsitry of Economy as well with the new Minister who took the office in May The First Deputy Minister of Economy is actively involved in both Council Secretariats activities. Lessons learned Keeping regular contacts and roundtable consultations format with business associations to ensure private sector constant engagement in the reform making process and avoid loss of credibility towards the activities of the Councils and the BSO. Due to regional meetings with SMEs it was estimated that the specifics of small businesses operating in remote areas should be taken into account in the reform making process. (e.g. when reconsidering the Turnover tax percentage change).

13 On the organizational aspect of the Council meetings: it was estimated that whenever there are preliminary discussions with the Private sector Council members on the agenda before the Council meeting, they develop a unified approach of representing the issues thus ensuring an effective course of the meeting. Independence of BSO The BSO continues to be a mediator in Private- Public Dialogue thus keeping independence while arranging contacts and negotiations and representing the Private sectors concerns at the Council meetings. Conclusion Throughout the year 2013 the BSO continued its activities fostering proactive involvement of business associations and NGOs directed at uniting efforts to address the private sector s concerns. By means of providing assistance to IRCC and SME DC the BSO continued implementing a more constructive PPD between the Government, business community and donors. The BSO concentrated its efforrs on communication and outreach strategy by means of more effective networking with private sector, timely information exchange and raising awareness on the activities of the Councils and the reform processes. The year 2013 resulted in the increase of the role of the Private Sector as a stakeholder in policymaking. More information on the SMEDC and IRCC meetings and the meeting munutes are available on the BSO website: For the activities highlighted in newsfeed see here:

14 Action Plan 2014 EBRD Business Support office - Armenia # Issue/Problem Expected outcome Activities Deadline 1 2 As a result of SME taxation research 2013 carried Decrease of tax burden for the out by the BSO it was clear that for the numerous entrepreneurs involved in trade entrepreneurs involved in trade area the tax burden are and application of diversified has increased by 45%. approach. IT sector is one of the most perspective sectors in Armenia. Many developing countris have established previliges for start-ups in IT sector. These kind of previliges create more SMEs and brings to the development of the sector. SME Development Council Exemption from business taxes for IT sector strart-ups, dcrease of the Income tax for the employees, and provision of other privileges. Making corresponding changes in RA Law "On Turnover Tax" Drafting the relevant legislative package for the IT sector support. September, 2014 September, The Armenia's Industrial Policy Strategy is being implemented through industrial councils who may need some technical assistance in regard of development of sectoral business environments. Continous Support in implementation of industrial policy strategy. Review or development of December, 2014 legal acts which will contribute to the implementation of industrial policy strategy. 4 The exporters that need a certificate of origin have to apply for the expertize of their products for each exporting procedure, though the products are the same and they have not been modifed after the previous expertize. It takes 3 days and AMD from the exporter for each expertize. Separation of a product expertize The Governmental decree that from the procedure of providing a describes the procedure of certificate of origin. The exporters providing a certificate of origin will be able to get the certificate of needs to be amended. origin within a day by paing AMD if they have once passed the expertize procedure for the exporting product. May, 2014

15 5 Local fees defined for cigarettes and alcohol drinks sales vary only in accordance with geographical location of the sales point. As a result, a supermarket and a small shop located in the same area pay the same price for the fee. Identification of the local fee amount based on the sales point location and the size of the latter. Identification of the size of the business entity in the law "On local fees" as an indicator to pay the fee. July, The agricultural value chain in Armenia needs to be reviewed and developed, mostly in respect of small and medium entrepreneurs involved in agricultural activities. Our studies in 2013 showed that the main problem in the agricultural chain is the sales. Another important issue in regard of agriculture is the absence of business planning skills. Provision of new diversified opportunities of selling agricultural products, as well as increase in business planning skills for entities involved in the area. Design of an agricultural development concept for Armenia. Organization of Agricultural business planning seminars in RA regions. December, 2014 Issues under settlement 7 In case of failure to fully complete tax liabilities tax authorities impose a sequestration on all the bank accounts of the entrepreneur, which temporary suspends the business activities of the latter. Imposing a sequestration on the bank account or accounts of the entrepreneur by tax authorities only correspondingly to the disputed amounts. Relevant agreement signed between the Central Bank of the RA and tax institution. July, As a result of amendments made in RA Law "On postal communication" in 2011 entrepreneurs involved in courier activities pay the same license fee as those involved in postal activities AMD License fee reduction for entrepreneurs involved in courier activities Making corresponding changes in RA Law "On postal communication" June, 2014

16 9 The liability of investigating economic crimes is often used by the tax authorities not in order to identify the crmies, but to apply an additional inspection on the basis of the decision of the Investigator. To conduct an investigation and criminal prosecution the tax authorities base on the Criminal Code article about fraudulent avoiding taxes, where crime qualifications are defined by the subjective decision of the investigator. In addition, the Article's sanctions are not proportionate to the conducted acts. Establishment of judicial control of Drafting the relevant changes the implementation of in the criminal legislation. investigative functions of tax authorities.to change the relevant Article's sanctions making them proportionate to the conducted acts., as well as to abridge and clearly define the Article's scope of application. August, Since January 2013 an monthly patent fee has been set for each employee working for a company providing realtor services, which has lead to an essential increase of tax burden and creation of incompetititve conditions. As a result, the majority of the companies have suyspended their activities and have decreased the number of their employees to a minimal. This, in its, turn, has lead to a drastic reduction in tax receipts. Decrease of tax burden for the companies providing realtor services and increase of the number of the businesses in the field. Decrease of the patent fee and establishment of the procedure for realtors' registration. October, Discussion and resolution of other issues raised by SME-s. December, 2014 Inspection Reform Coordination Council Bodies, authorised to apply suervision, are mostly included the policy making bodies, e. g. ministries which leads to conflicts of interest and limits the inspectorates' independence and sovereignty. Decresing the number of Adoption and implementation inspecting bodies and specification of the inspection system of areas subject to control in line optimization project. with the separation of policy December, 2014

17 12 Simultaneously, the diversity of the inspectorates leads to dublications of the areas under control and ineffective use of state resources. implementing bodies (inspection bodies) from policy drafting bosides (ministries). Adoption of the Law on Inspection Bodies July, The main targets, areas of inspection and PPD based managmend boards methodical options of the inspectorates are not discussing the main programms, being discussed with the private sector. The targets and other issues related to management system of the inspectorates need to be the inspectorates. reviewed and a PPD boards should be created for each inspectorate. Creation of a management board in each inspectorate. June, There are a number of inconsistencies and complicated regulations in RA Law ''On organizing and carrying out inspections in Armenia'', mostly the points regarding the carrying out observations need to be reviewed and clarified. Availability of simplified and clear procedures of regulating inspections. Final design and adoption of a new RA Law on Inspections November, There is no specific regulation of market surveillance in Armenia. The system used for inspection of non food products doesn't comply with the international experience. Non food products safety and market surveillance need specific regulation. International system of Market Surveillance implemented in Armenia. Adoption of the draft laws on Market Surveillance and on General safety of non food products. October, Assistance to other activities carried out by Inspection Reform Secretariat December, 2014 General activities of Business Support Office

18 17 A number of entrepreneurs, SME-s (particularly in RA regions) are unaware of the reforms that took place, as a result of which those reforms are not fully applied. Raising the level of awareness among the entrepreneurs in Yerevan and the regions of Armenia. Organizing 25 meetings in Yerevan and the regions of Armenia, preparation of information sheets (bulletins) and circulation by means of various business networks and social networks. December, 2014 (continuous) Monitoring of reforms carried out December, (continuous) 19 Development of a video tutorial on starting business in Armenia June, 2014