27 June, 2020 10:53

Armenia Votes to Raise Property Taxes in Bid to Help Cash-Strapped Local Governments

By Mark Dovich

On June 24, Armenia’s National Assembly voted 74-14 to approve amendments to the country’s tax code that considerably raise property taxes. The amendments, first put forward for consideration last month, enter into force on January 1, 2021 and will be implemented gradually over the course of a three-year period.

The amendments envisage three major changes. First, property taxes will be based on a property’s market value rather than its cadastral value, as is currently done. A cadastral value is an estimate of a property’s worth calculated by the government, rather than by the market. Since a property’s cadastral value is oftentimes significantly lower than its market value, Armenia’s move to a market-based system is expected to considerably raise tax revenues for the state.

Second, after calculating the market values, the government will introduce progressive tax brackets for all apartments and individual residential buildings, with higher taxes to be paid on properties falling in higher brackets. For instance, under the new system, all properties valued at 10 million drams or less—the vast majority of properties in Armenia—will be taxed at a rate of 0.05 percent, while, at the other the other end of the spectrum, properties that fall into the highest tax bracket—with a value of 100 million drams or more—will be taxed more than 30 percent.

Finally, the bill contains a provision removing the non-taxable threshold, currently in place, whereby properties valued at 3 million drams or less are exempt from property tax altogether. According to data from the Ministry of Finance, 63 percent of apartments in Armenia fall below that threshold, with about 40 percent of those apartments located in Yerevan.

Finance Minister Atom Janjughazyan, who has voiced his support for the amendments, estimates that the government’s tax revenues could more than quadruple as a result of these changes. Janjughazyan argues that Armenia’s cash-strapped local governments, whose budgets are largely dependent on property tax revenues, particularly stand to benefit from the tax hike.

Likewise, Deputy Finance Minister Arman Poghosyan, who personally presented the bill to the National Assembly, has called Armenia’s real estate market “extremely undervalued” and highlighted the fact that Armenia’s current property tax-to-GDP ratio of 0.2 percent is one of Europe’s lowest. “For comparison,” Poghosyan added, “in Georgia it [the ratio] amounts to 1.1 percent, and in Russia [it amounts to] 1.2 percent.”

Although the majority of lawmakers in the 132-seat National Assembly ultimately voted in favor of the amendments, representatives from both the ruling My Step alliance and the opposition Bright Armenia party raised concerns about the tax hike. The other opposition party represented in the legislature, Prosperous Armenia, boycotted the session entirely.

During the bill’s reading, representatives from Bright Armenia argued that the changes would disproportionately affect lower-income and socially vulnerable families. One prominent critical voice to emerge from Bright Armenia on this issue was lawmaker Mane Tandilyan, who also expressed regret that the amendments were debated under a special “24-hour regime” allowing the government to push bills through more quickly than usual. According to Tandilyan, the government’s rush to approve the changes denied lawmakers the opportunity to familiarize themselves with the bill’s content and raise important questions on its broader economic and social implications.

Meanwhile, My Step lawmakers expressed concerns that the tax hike may place an unreasonable financial burden on residents of Soviet-era apartments in central Yerevan and other expensive districts in the capital. Many of these people were provided housing by the Soviet authorities at no-to-low cost and retained ownership of their apartments following the Soviet Union’s collapse in 1991. As a result, many people in central Yerevan own apartments that are priced far higher on the market than their incomes would otherwise allow them to buy—and will likely not be able to afford the drastic increases in property tax that the amendments envisage.

The government’s move to raise property taxes comes against the backdrop of a deepening economic recession in the country, largely the result of social restrictions that were imposed in March to mitigate the public health impact of the ongoing coronavirus pandemic. Preliminary data released this month shows that Armenia’s index of economic activity in the period January-May 2020 declined by 3.9 percent, as compared to the same period last year. The National Assembly is now predicting a GDP growth rate of -2.0 percent for Armenia in 2020, down from an original forecast of 4.9 percent.

Nairi Sargsyan, the president of Armenia’s Chamber of Auditors, criticized the timing of the changes in a recent interview with CivilNet, arguing that the government should not have moved to increase taxes during a period of economic hardship.