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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.  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. 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.  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  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  June 29, 2005 23. Tajikistan 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.  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.  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.  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.  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.