5% Income Tax: Another Project Supporting the IT Sector Without Economic Justification

The Ministry of Economy has proposed to reduce the income tax for employees in the IT (Information Technology) sector to 5%. As reported by Hetq, the current income tax rate in Armenia is 20%. Many IT companies are currently benefiting from a 10% income tax rate exemption.

However, the Ministry of Economy believes that this sector has been significantly impacted by the appreciation of the Armenian dram against foreign currencies, particularly the decline in the US dollar exchange rate, thus necessitating further state support.

Many companies in the IT sector earn revenues from overseas in US dollars. This project has been made available for public discussion on e-draft.am. The ministry suggests implementing a 5% income tax for IT companies whose gross revenue from sources outside the Republic of Armenia exceeds 80% in the previous tax year.

The justification for the project notes that the ongoing depreciation of foreign currencies, especially the US dollar, has a direct negative impact on the operations of Armenian businesses, whose financial flows are largely dependent on foreign partners. As a result of around a 20% depreciation of the US dollar, local companies' financial receipts have diminished significantly, hindering their natural development and advancement.

The ministry anticipates that this new exemption will ensure the stability of developments within the IT sector.

The following sub-sectors of IT can benefit from this exemption: "Publication of Computer Programs," "Software Development, Consulting, and Related Activities in the Field of Computer Technology," "Data Processing, Information Distribution on the Internet, and Related Activities, and Operations Related to Web Portals."

Project Lacks Economic and Financial Justifications

The published project does not provide any economic or financial justification for how a 5% income tax will 'save' or stabilize the sector. Instead, Ministry experts have cited examples from other countries, such as Portugal, Cyprus, Belarus, and Kazakhstan, where the IT sector enjoys certain privileges.

In our written inquiry to the Ministry of Economy, we requested to present the underlying economic or financial calculations for this project. However, it appears that such calculations do not exist. In response to our question about the absence of these calculations, the Ministry stated, "The rate of the proposed exemption considers the issues raised by sector representatives and international experience, particularly examples from comparable countries (e.g., Georgia, the Russian Federation, etc.)."

To implement the 5% income tax exemption for the IT sector, amendments are needed to be made in the "Tax Code of the Republic of Armenia", as well as to add provisions in the "Law on Currency Regulation and Currency Control" allowing that for IT organizations whose gross revenue from sources outside the Republic of Armenia exceeds 80% in a fiscal year, employee salaries and payments equivalent to salaries may be denominated in foreign currency.

Budget Will Suffer, But How Much?

We inquired with the Ministry of Economy about how much the state budget would lose as a result of this decision. The draft states that the proposed changes would lead to a decrease in state budget revenues, but this is the only detail provided. The Ministry did not disclose further information.

However, they mentioned that the anticipated slight decrease in tax revenues from the acceptance of the draft is justified by the decision of many companies interested in relocating to Armenia, creating new jobs, and facilitating the exchange of experiences and knowledge, and this initiative would promote the continuity of operations for many companies that have already relocated to Armenia, enhancing Armenia's appeal as an investment destination.

Other sectors of the economy are also suffering from the appreciation of the dram in Armenia, such as exporters. However, special attention is given to the IT sector. On December 1, 2022, the Government decided to provide 10 billion drams in state support to organizations operating within the IT sector. The necessity for this support was explained by the losses incurred due to the appreciation of the dram against the dollar. The identities of companies that received state support under this program are kept confidential by the Ministry of High-Tech Industry, and Hetq has filed a lawsuit against the Ministry to uncover the names of these companies.

When asked why they chose to support the IT sector again this time, the Ministry of Economy responded that the proposed assistance aimed to mitigate certain risks faced by organizations in the field of information technology due to the depreciation of foreign currencies, considering that the IT sector is viewed as having vast potential for development, which requires ensuring competitive conditions with other countries.

"We would also like to emphasize that all sectors of the economy are within the Ministry of Economy's focus, and their balanced development is one of the Ministry's main goals. All support programs are presented on the official website of the Ministry of Economy," they added.

Head of the Center for Economic Law: "Frequent Privileges to the IT Sector Contradict Public Finance Management and Tax Strategy"

Moses Aristakessian, the President of the Center for Economic Law, disagrees with Ministry experts who claim that the IT sector currently needs state support. Moreover, he is convinced that it contradicts the policies established by the state in its strategic documents.

"Awarding frequent exemptions to the IT sector contradicts public finance management and tax strategy. We have a Tax Code that states that exemptions should only be established in strictly necessary situations. But, for some reason, exemptions are continually given to IT companies and their employees, claiming that inflationary pressures and exchange rate fluctuations affect their economic activities. The same factors also affect other sectors of the economy, and the general public, particularly vulnerable societal groups, including pensioners and aid recipients. They offer exemptions to the IT sector, saying it is a superior direction of the economy. They are doing well. What achievements do we have in the IT sector, and what role does this sector play in the economy? Why is there no such analysis underlying this project?" he said.

He points out that the IT sector is already benefiting from numerous exemptions. Many employees in IT companies pay 10% income tax instead of 20%, salaries in this sector are high, and employees also benefit from income tax refund programs when purchasing homes through mortgages.

“Moreover, many Russian businesses are also operating within Armenia's IT sector. We are providing privileges to Russian businesses at the expense of Armenian taxpayers. The amount of the exemptions given will not compensate for the losses in the budget,” stated Moses Aristakessian.

The public discussion phase regarding this project to grant a 5% income tax exemption to the IT sector concluded yesterday, June 6. On e-draft.am, 34 people voted in favor of the project, while 19 opposed it. It still needs to be discussed in the government and the National Assembly.