NATIONAL BUSINESS AGENDA · Caucuses Credit Rating Bureau Chamber of Commerce and Industry of...

NATIONAL BUSINESS AGENDA

2017

PRIORITIES FOR IMPROVEMENT OF BUSINESS

ENVIRONMENT IN ARMENIA

1

BUSINESS ADVOCACY NETWORK (BAN) ………………………………………….............. 2

DEVELOPMENT OF NATIONAL BUSINESS AGENDA ……………………………................ 4

SUMMARY OF NBA PRIORITIES ……………………………………………………................ 7

PRIORITY 1 – EFFECTIVE SME POLICY DEVELOPMENT………………….......................... 8

OBJECTIVE 1.1: MODIFY SME DEFINITION CRITERIA …………............................. 9

OBJECTIVE 1.2: IMPROVE SME ACCESS TO FINANCE ……………………............. 10

OBJECTIVE 1.3: SIMPLIFY PROCEDURES FOR DISSOLUTION OF SMES….…...... 11

PRIORITY 2 – IMPROVED TAX SYSTEM …............................................................................... 12

OBJECTIVE 2.1: MODIFY INCOME TAXATION …….…………................................... 13

OBJECTIVE 2.2: IMPLEMENT TAX REVENUE DISTRIBUTION MECHANISM….... 14

OBJECTIVE 2.3: ESTABLISH TAX ADVANTAGES FOR START-UP SMES….............. 15

PRIORITY 3 – IMPROVED STATE INSPECTIONS SYSTEM……………………….................. 16

OBJECTIVE 3.1: IMPROVE THE LEGISLATION ON INSPECTIONS……………......... 17

OBJECTIVE 3.2: IMPROVE ADMINISTRATIVE FRAMEWORK OF INSPECTIONS... 18

OBJECTIVE 3.3: IMPROVE APPEAL PROCESS IN INSPECTIONS SYSTEM............... 19

CONTENT

2


The Business Advocacy Network (BAN) was

established in 2007 as an informal, non-registered

union of non-governmental organizations. The

goal of BAN is with joint efforts to support the

development of private entrepreneurship and

effective implementation of social-economic

reforms and develop public-private dialogue

culture in Armenia. The Network is formed of

chambers of commerce and industry, business and

professional associations and other business

support NGOs. As a whole, BAN represents

approximately 3,000 small and medium-sized

enterprises (SMEs).

Decisions are made within the BAN at general

meetings of members. BAN activities are

coordinated by a Secretariat, composed of BAN

members elected in general meetings. The

Secretariat coordinates the Network’s activities,

implements decisions made in the general

meetings, provides members with news and

information, and conducts meetings, roundtable

discussions, seminars and conferences and other

1 The Council was established in 2011 to promote effective dialog on

improved SME environment between the state and the business community and is chaired by Prime Minister.

2 The Council was established in 2009 for pursuit of inspection reform in

Armenia and is chaired by Prime Minister.

events. The working principles of the Network are

equality of members, solidarity, transparency,

consensus, effectiveness and political neutrality.

BAN members are represented in a number of

public-private dialogue (PPD) platforms, including

the SME Development Council 1 , Inspection

Reform Coordination Council 2 , Revenue

Administration Reforms Council3, and Advisory

Board of the National Center for Legislative

Regulation4 of Government of Armenia among

others. Participation of BAN and its members in

different PPD formats has raised the Network’s

advocacy profile in business community and civil

society.

Since its establishment, BAN has regularly

implemented public awareness raising and

advocacy activities aimed at mobilization and

active participation of private sector in electoral

processes and policy reforms. BAN has

participated actively in reform initiatives in SME,

taxation, state inspections areas and has provided

its recommendations to governmental structures.

3 The Council was established in 2016 as a consultative body to State

Revenue Committee for coordination of administration reforms in tax and

customs systems.

4 NCLR is implementing Guillotine project in Armenia

BUSINESS ADVOCACY NETWORK (BAN)

3


One of the important current tasks of the BAN is

the development and implementation of National

Business Agenda (NBA) in Armenia which is aimed

at improving the country’s business and investment

environment.

BAN MEMBERS

Armenian Association of Lawyers

“Armenian Entrepreneurship” SME Association

Association of Armenian Freight Forwarders

Association for Foreign Investment and

Cooperation

Association of Armenian Winemakers

Caucuses Credit Rating Bureau

Chamber of Commerce and Industry of Republic

of Armenia

Chamber of Commerce and Industry of Yerevan

Chamber of Commerce and Industry of Lori

Communities Finance Officers’ Association

“Consumers’ Consulting Center” NGO

Equal Opportunity Endowment Foundation

Foundation for Small and Medium Businesses

Foundation for Social and Civil Development

“Labor and Motherland” NGO

Shirak Competitiveness Center

“Taxpayers’ Protection” NGO

Union of Realtor Employers

The BAN Secretariat expresses appreciation to all

BAN members who have actively and effectively

participated in working discussions and meetings

and contributed greatly to the development of

NBA.

BAN MEMORANDUM

“Taking into consideration the role and importance of effective implementation of social-economic reforms in Armenia; Being sure that sustained private sector can be an important guarantee of the country's stable economic development; Having the goal to provide the engagement and active participation of private sector and civil society in public-private dialogue, as well as in public policy development, implementation, monitoring and evaluation processes in the social, economic and entrepreneurial spheres; We, the members of Business Advocacy Network, by this Memorandum express our will and confirm our readiness to consolidate our efforts and collaborate for the development of private entrepreneurship and effective implementation of democratic social-economic reforms in Armenia”.

4


In 2016, with support from the Center for

International Private Enterprise (CIPE), BAN

began development of a National Business Agenda

in Armenia. The NBA is an important tool for the

business community to improve the business

climate, encourage investment and stimulate

business activity by identifying the main barriers to

economic growth and by setting legislative and

regulatory priorities and clearly communicating

them to policymakers.

Survey of Businesspeople: As part of the

development process, BAN conducted a survey of

the business community in Yerevan and 5 regions

of Armenia to identify the main legislative and

administrative barriers impeding the development

of private sector in Armenia and determining the

most essential priority areas for reforms. The

survey was carried out among private sector

respondents in Yerevan and Shirak, Lori, Vayots

Dzor, Kotayk and Tavush regions through face to

face interviews. 200 respondents took part in the

survey, of which 100 were based in Yerevan, and

100 in other regions. The majority of the surveyed

entrepreneurs were involved in trade

(34%), services (38%) and industrial (28%)

sectors. Mostly micro, small and medium

companies and individual entrepreneurs

participated in the survey, and their share among

all the respondents of this survey was more than

90%. The survey helped to reveal the main

concerns of the businesses operating in Armenia.

The results obtained made it possible to draw the

following general picture. As the chart below

shows, the top obstacles for doing business in

Armenia mentioned by the vast majority of

respondents are unfair competitive environment,

corruption, unfavorable taxation system, imperfect

inspection system, limited financial resources and

ineffective SME policy.

Competitive Environment: Entrepreneurs

expressed concerns with distortions in domestic

markets and a lack of fair competition. Large

enterprises and natural monopolies create an

unfavorable environment for other sectors of the

economy (especially SMEs) to grow. Dominant

position in domestic market limits price

competition. Monopolies try to maximize profits

and increase the prices of their goods and

services.

DEVELOPMENT OF NATIONAL BUSINESS AGENDA

5


Corruption: The negative attitude of businessmen

towards corruption is prompted by the impact it

has on their business activity. Practices that survey

respondents associated with corruption included

contact with tax and customs authorities, issuing of

licenses and permits, state inspections, and the

judicial system. In general, the identification of the

above-mentioned cases of corruption-related

practices is based on personal experience of

entrepreneurs. The vast majority of respondents

indicated a desire for effective anti-corruption

measures to be implemented by the government to

improve the situation.

SME Policy: While evaluating SME policy,

entrepreneurs indicated they were not happy with

inadequate definitions of SMEs (reflected in the

current SME legislation), which do not support the

development of SMEs. Different state bodies use

different SME definition criteria, creating

confusion and making it difficult to maintain

accurate statistics for the SME sector. In this

regard, SMEs would like to see modifications to

the current policies, including a more realistic

SME definition criteria and unified approach

across state bodies to SMEs. Complicated and time

consuming procedures for closing a business was

also mentioned as one of the main concerns of

SMEs.

Tax System: According to entrepreneurs, the tax

system still remains one of the main obstacles to

business operation. The main complaints collected

through the survey were related to high tax rates

and administrative problems that create difficulties

for SMEs, despite notable improvements in recent

years to the tax system (enforcement of electronic

submission of reports and e-invoicing system).

According to survey respondents, the inspection

system is mostly perceived as a means of raising

funds for the state budget. The government has

initiated reforms in this area but one of the reasons

0 10 20 30 40 50 60

Limited Property Rights

Problems in Getting Permits, Licenses, Certificates

Complicated Starting/Closing Business Procedures

Unreliable Judiciary/Court System

Inadequate Business Development Services

Unfavorable Legislative/Legal System

Unfavorable Customs System

Ineffective SME Development Policy

Limited Access to Financial Resources

Imperfect State Inspections’ System

Unfavorable Tax System

Corruption

Unfair Competitive Environment

Main Barriers to Business (%)

6


that entrepreneurs still remain concerned with this

issue is that the reform has slowed down and very

little progress has actually occurred.

Access to Finance: Survey results showed also

access to finance for Armenian SMEs is still very

limited, and the lack of affordable financial

services negatively impacts the competitiveness of

SME sector. High interest rates and strict collateral

requirements make financing unavailable almost

for all small companies. Loan terms are short, and

collateral requirements make it extremely difficult

for SMEs to obtain loans. No any innovative

finance mechanism are being practiced.

Roundtables: After finalizing the survey results,

BAN organized and conducted five roundtables in

the regions encouraging local business people to

provide input into the NBA priorities and

proposals and contribute to the legitimacy of NBA

advocacy efforts.

The roundtables were held in Kotayk, Vayots

Dzor, Tavush, Lori and Shirak regions. Roundtable

participants (85 representatives of regional

business communities attended the events) were

asked to express their views regarding those issues

which, according to initial results of the survey,

were mentioned as the most problematic barriers to

business development by the majority of survey

respondents.

After being introduced to the NBA concept and

objectives and survey findings, the participants

expressed their opinions and recommendations on

how to solve the mentioned problems and improve

the business environment based on their own

experiences. The roundtables helped to organize a

broad discussion of survey findings and afforded

BAN the opportunity to get the opinions and

positions of business communities in provinces,

where the business development problems are

more sensitive. These discussions were very useful

and important for local business communities as

well in terms of their involvement in NBA

development process.

Working Meetings: After finalizing the results of

roundtables, BAN held a working meeting on

defining the main priorities for NBA. After

discussions and debates, a majority of BAN

members selected three main priority areas for

improvements and reforms to be reflected in the

National Business Agenda: SME Policy

Development, and Tax System and Inspections

System.

Three working groups were formed within the

BAN for 3 priority issues. The results of working

groups’ discussions were finalized and approved

by all BAN members at the general meeting.

7


Priority 2

Improved Tax System

Objective 2.1. Modify

income taxation

Objective 2.2. Implement

tax revenue distribution

mechanism

Objective 2.3. Establish tax

advantages for start-up

SMEs

Priority 3

Improved State

Inspections System

Objective 3.1. Improve the

legislation on state

inspections

Objective 3.2. Improve the

administrative framework

of inspections

Objective 3.3. Improve

appeal process in

inspections system

Priority 1

Effective SME

Development Policy

Objective 1.1. Modify SME

definition criteria

Objective 1.2. Improve

SME access to finance

Objective 1.3. Simplify

procedures for enterprise

dissolution

SUMMARY OF NBA PRIORITIES

8


Since 2000, SME development has been

considered essential for sustainable social-

economic development in Armenia. SME

development policies have been implemented

according to number of cardinal principles,

which are among the main concepts of socio-

economic development of the country

(sustainable economic growth, more jobs and

greater social cohesion).

Though positive trends have become more

visible in recent years, as demonstrated by the

“Doing Business” reports, still there is a need for

more effective policies to promote the small and

medium-sized business sector. Alongside

development trends, the SME sector is still

confronting a number of problems, including

those tied to the inadequate definition of SMEs,

limited access to finance, and difficulties in

liquidating small enterprises.

PRIORITY 1 – EFFECTIVE SME DEVELOPMENT POLICY

9


Problem: Currently, the legislative definition of SMEs is based on the number of employees, and value of

sales and/or value of assets. Despite the fact that SMEs are defined according to two criteria, the current

definition standards of SMEs are not realistic and need to be revised. The absence of an effective legal

framework is reducing the effectiveness of state support programs. The statistical reporting mechanisms are

inadequate, as a consequence of which the official SME statistics are incomplete and do not contain the

basic information on SME performance. The inadequate definition criteria hinders the understanding of the

real picture in the SME sector and the development of an effective policy of support. The development of a

clear and appropriately realistic legal definition framework of SMEs is needed through which an effective

support for the SME sector can be implemented.

Recommendations:

Make changes in the Law “On SME State Support” aimed at reducing the number of employees and

volume of annual turnover in SME definition criteria.

Harmonize SME definition in tax, customs, banking and other legislation with the ones modified in

the Law “On SME State Support”.

Expected Impact: Modification of SME definition will create adequate preconditions for new approaches

to SME state support programs. Further improvement of the SME legal definition and adjustment to sector

realities will improve the effectiveness of state support to SMEs. Clear and adequate definition of SMEs

will help to implement the SME support programs (including financial, technical and investment) and

policies with distinct constituents in a more targeted and purposeful manner.

1. Objective 1.1. Modify SME Definition Criteria

10


Problem: Access to financial tools is essential for growth of innovative SMEs. Difficulties in accessing

finance is one of the main obstacles obstructing the growth of SMEs in Armenia. There are not any legal

and regulatory instruments that enable SMEs to get access to finance without providing assets to be used as

collateral. SMEs are to a very large extent dependent on bank loans for their external financing.

In order to improve SME access to financing, there is a need to adopt appropriate legislative framework

for implementing alternative sources of financing and financial instruments or programs allowing small

businesses to obtain financial resources without providing collateral.

Recommendations:

Elaborate and adopt a Law “On Venture Funds”.

Elaborate and implement a special collaboration program with international angel investor networks

and establish appropriate advantages for stimulation of activities of such networks using the existing

“free economic zone” concept.

Expected Impact:

Implementation of innovative finance tools will stabilize SME financial markets and will enhnance venture

funds and angel investors to provide both financing and managerial experience which will increase the

likelihood of start-up enterprises surviving and growing.

1. Objective 1.2. Improve SME Access to Finance

11


Problem: Currently, the procedures of closing a business are very complicated and time-consuming. A

business is officially considered to be closed only after all the obligations set by the governmental authorities

have been fulfilled. These obligations include submitting a combined statement to governmental authorities,

complying with employment and labor laws, resolving all financial obligations, submitting the necessary

forms (dissolution documents), etc.

In reality the above mentioned procedures are very complicated and create difficulties for SMEs. Often,

closing procedures require several months or even a year or more to be fulfilled fully. Because of this, most

of entrepreneurs prefer not to undertake the closing process for their business, and legally the companies

remain officially registered although have terminated their activities. Almost half of all registered businesses

are inactive and don’t conduct any economic activities.

Recommendations:

Elaborate and adopt clear and simplified

procedures for easing and quickening the process of dissolution of SMEs.

Expected Impact: Simplification of “closing business” procedures will optimize time and cost of the

enterprise dissolution process for entrepreneurs and will motivate them to complete official procedures

rather than using temporary termination schemes.

This will also reduce the burden on state resources needed for controlling and maintaing activities of registered but

not functioning enterprises.

1. Objective 1.3. Simplify Procedures for Enterprise Dissolution

12


For the past two decades, the tax system of

Armenia has gone through a period of

development and revision. As a result of frequent

amendments to the tax legislation, the current tax

policy of the country is not based on unified

principles. New challenges and economic

development trends require a new approach to tax

issues, and significant improvement to the

regulation of tax relations. In this regard, tax

reform policy should be focused on broadening the

tax base, easing the tax burden, simplifying tax

administration and creating favorable conditions

for the development of the private sector.

PRIORITY 2 – IMPROVED TAX SYSTEM

13


Problem: The relatively high income tax in Armenia remains a burden for the recipients of low and medium

wages, increasing the labor costs for SMEs with a variety of social and economic consequences. The current

taxes on wages (from 24.4% to 36%), when coupled with pension contributions (+5%), represent a

considerable burden (29.4%-41%) on individual taxpayers and discourage formal sector employment, thus

creating problems for entrepreneurs in hiring qualified workforce.

Income tax on wages in Armenia is high compared with other countries of the region and within the

Eurasian Economic Union (Georgia- 20% flat rate, Russia- 13%, Kazakhstan - 10%, Kyrgyzstan – 10%,

Belarus – 12%). This creates an obstacle for improving competitiveness of the national economy. Due to

the existing disproportion between wages and tax rates, taxpayers often understate their wages.

Recommendations:

Introduce a 20% flat-tax rate for individual income tax instead of progressive income tax scale.

Expected Impact: Lowering the individual income tax rate will enhance growth of income of individuals

and subsequent higher consumption, poverty reduction, new employment opportunities, statement of real

wages, as there will be no leverages for understating the real wages. A flat rate will eliminate the tax gap

between different income groups of taxpayers, and reduce incentives for evasion. The recommendation on

revision of income tax rates will have positive impact on simplification and optimization of tax

administration as well.

1. Objective 2.1. Modify Income Taxation

14


Problem: The vast majority of the population, economic resources, and qualified labor force are

concentrated in Yerevan. This concentration continues to reduce labor productivity and economic efficiency

in the regions. Business support is underdeveloped outside of Yerevan.

Regional communities cannot secure adequate infrastructure for business development because of a severe

deficit of the local budgets and their dependency on the state budget. Local self-government bodies are not

financially motivated to support business infrastructure in their communities, as it does not result in

increased revenues of local budgets. This leads to the inaction of regional municipalities in the area of

business development. Armenian legislation allows for the possibility of distribution of tax revenues

between central and local budgets, but in reality this possibility has almost never been applied.

Recommendations:

Implement a tax revenue distribution mechanism in accordance with existing legislation by

contributing 10% of revenues from income, profit and turnover taxes generated in communities to

local budgets.

Expected Impact: Implementation of tax revenue distribution mechanisms will allow local government

bodies to collect the appropriate portion of taxes for the local budget and will motivate them in the area of

community business development. Such a scheme will encourage regional governments and regional

communities to re-evaluate their own resources and strengthen their business infrastructure. Directing an

appropriate portion of taxes from businesses functioning in the regions to the local budgets will enhance the

business development support capacity of small urban communities and will increase the responsibility of

local self-government bodies over business development in their communities. This will also improve

collaboration and relationships between the business community and regional governments.

1. Objective 2.2. Implement Tax Revenue Distribution Mechanism

15


Problem: It is still very difficult for a start-up micro or small business or an individual entrepreneur to enter

the market. Startups and other small businesses usually need at least 2-3 years to survive, grow and become

financially stable and self-sufficient. Paying taxes immediately after establishment often is a burden for

newly established small businesses. For example, in Georgia microenterprises are fully exempted from

income taxation.

In this regard, it is necessary to give appropriate tax advantages to startup SMEs which will greatly help

SME sector to grow. To incentivize development of the SME sector the government should provide taxation

advantages for SMEs in creative ways as part of the government’s encouragement to startup entrepreneurs.

Recommendations:

Establish a 2-year income, profit and turnover tax exemption period for startup SMEs.

Organize discussions on possibility of fully exempting microenterprises from income

taxation.

Expected Impact: Such a modification of the legislation will enable startup SMEs to gain valuable time

in setting up their enterprises and carving a niche in their target markets. A 2-year tax exemption for

start-up SMEs that are not subsidiaries of existing companies will allow these enterprises to get

organized, establish their business operations and re-invest revenues into expanding and tweaking their

businesses. Taking into account that reforming Armenia’s business inspection system is vital to increase

the inflow of investment to the country, the Armenian government initiated a comprehensive reform of

the state inspections process in 2009. The main objective of the reform was to reduce the administrative

and regulatory burden of inspections on businesses and improve the business climate through

implementation of international standards in the inspection system in Armenia.

1. Objective 2.3. Establish Tax Advantages for Start-Up SMEs

16


Taking into account that reforming Armenia’s

business inspection system is vital to increase the

inflow of investment to the country, the Armenian

government initiated a comprehensive reform of

the state inspections process in 2009. The main

objective of the reform was to reduce the

administrative and regulatory burden of

inspections on businesses and improve the

business climate through implementation of

international standards in the inspection system in

Armenia.

In the summer of 2011, appropriate changes were

introduced in the “Law on Inspections”, which

aimed to introduce a risk-based inspection system

(classification of entities in different categories, as

well as establishment of a different frequency of

inspection visits for each risk category).

Despite the mentioned achievements, however, the

process cannot be considered completed. The

reform process in the inspections area has slowed

down and is not being fully implemented.

PRIORITY 3 – IMPROVED INSPECTIONS SYSTEM

17


Problem: The 2011 amendments to the legislation on state inspections still contain shortcomings and

incomplete regulation mechanisms. The main focus of the reform was on amending the legislation as a first

step, with plans to later elaborate a new, more complete Law on State Inspections, which has been suspended

until now. Half measures in the reform process are not enough to ensure an effective inspection system

which is in accordance with international standards. The whole legal system should be reformed to assure

that the reform brings positive results. In this regard, the elaboration and adoption of a new, clear and simple

legislation is an urgent requirement.

Recommendations:

Accomplish the process of elaboration and adoption of a new Law on State Inspections which

will based on international best practices (risk-based inspections, simplified procedures for

inspections and appeals).

Organize working groups and public consultations to discuss the draft of the new “Law on

Inspections” providing active engagement of private sector and civil society organizations.

Expected Impact: Adoption of the new, simple and clear legislation on inspections will help businesses

to minimize risks, saving entrepreneurs’ time and resources and making the inspection system more

efficient.

At the same time the new legislation based on international standards will enhance to use state resources

in an optimal way, targeting businesses that involve greater operational risk, also decreasing risks for

consumers.

1. Objective 3.1. Improve Legislation on State Inspections

18


Problem: The adoption of new legislation is only a half of the work toward complete reform of state

inspection system. While the importance of adoption of good legislative policies is unquestionable,

implementing them effectively is often difficult. More specifically, although adopting a legislative

framework is important in the overall reform process, real change does not occur until the adopted policies

are implemented properly.

In this regard, an improved inspection system, including purposefulness of inspections, training of

inspectors, and introduction of available, predictable and simple inspection processes is an important

necessity. To implement inspection reforms efficiently, it is necessary also to work towards raising

inspectors’ professional qualities in parallel with institutional and legislative changes.

Recommendations:

Clarify and publicize the system of indicators for “risk-based” inspections.

Elaborate and implement a system of responsibility means and ethical rules for inspectors.

Expected Impact: Developing transparent administrative procedures will help higher-risk businesses

to identify and address their risks and will reduce corruption. Clear and predictable procedures for

inspection processes will enhance clear-cut distinction of controlling and supervising functions and will

regulate all the steps of inspection. Ethical rules and responsibility principles for inspectors will ensure

balance between inspector’s rights and obligations and will improve the level of objectivity.

1. Objective 3.2. Improve Administrative Fraamework of Inspections

19


Problem: The existing appeal procedures are complicated and time consuming. Though the amount of fines

is not always high, complicated procedures and the inconvenience of dealing with inspectors is always

problematic. While courts are also an option, going through the court system is expensive and burdensome

to businesses.

Recommendations:

Implement simple and transparent appeal procedures.

Enhance particpation of representatives of civil society and the private sector in appeal councils in

accordance with the legislation.

Provide an option to pay fines gradually within a one-year period without applying the procedure of

blocking entrepreneurs’ accounts.

Expected Impact: Simplifying appeal mechanisms will ensure speedy and transparent procedures in the

appeal process. Fast, simple and efficient appeal procedures will eliminate uncertainties for businessmen in

the appeal process and will lead to effectiveness of entrepreneurs’ expenditures and time and optimization

of expenditures for the state as well.

1. Objective 3.3. Improve Appeal Process in Inspections System

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