## Introduction of a Universal Declaration

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**Canonical URL:** [Introduction of a Universal Declaration](https://www.imf.org/-/media/files/publications/cr/2023/english/1armea2023001.pdf)

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### Executive summary — key characteristics and context
- The government of the Republic of Armenia has expressed its intention to introduce a Universal Personal Income Tax (PIT) Declaration for individual taxpayers who are not in business.
- Implementation stages and timing:
  - civil servants in 2024 reporting FY2023 income,
  - employees in 2025 reporting FY2024 income,
  - other individual taxpayers in 2026 reporting FY2025 income.
- The declaration would be annual and comprehensive, covering all types of income.
- At 6.1 percent of GDP in 2021, the PIT is a significant source of revenue in Armenia.
- Since 2020, PIT has been levied at flat rates on both employment and passive capital income (dividends, interest, rental income, and royalties). Taxpayers who only derive income from employment or passive capital income are not required to file a tax declaration and are taxed on a withholding basis.

### Tax policy — findings
- Armenia’s PIT exhibits strong revenue performance and low progressivity.
- The redistributive capacity of Armenia’s PIT is at the lowest end of its regional peers.
- Contributing design features to low progressivity:
  - 21 percent (2022) flat tax rate on employment income,
  - absence of standard allowance,
  - regressive mortgage interest tax credit,
  - cap on the Social Security Contribution (SSC) to the state pension system (Pillar II).
- Costly and regressive tax incentives have large fiscal costs and distributional impacts.

### Tax policy — proposed reforms and rationale
- Repeal or strictly cap costly and regressive tax incentives:
  - Repeal the mortgage interest tax credit, or at least strictly cap it. Unless the reform addresses the existing stock of mortgages, the revenue loss will continue to be significant for the next decade. Limiting the mortgage interest credit on existing contracts rather than complete removal may ease implementation with minimal revenue cost and a significant increase in progressivity.
  - Repeal the tax credit on reinvested dividends (described as overly generous).
  - Tax capital gains, with an exempt allowance for private residences calibrated to cover most or all capital gains for most taxpayers.
- Use the Universal PIT Declaration to enable more progressive instruments:
  - The Declaration makes possible a zero-rated bracket and an In-Work Tax Credit (IWTC) through aggregation and annualization of taxable income and end-of-year refunds or tax top-ups.
  - Conditionally on administrative capacity (including auditing of individuals) and fiscal feasibility:
    - A zero-rated bracket would have an upper threshold in the range of AMD 240,000-300,000 annually.
    - An In-Work Tax Credit could be introduced, annually capped at AMD 53,000 and phasing out for income above AMD 800,000. The IWTC would be better-targeted than a zero-bracket and encourage labor supply and formalization.
- Microenterprise regime:
  - The microenterprise regime should be a simplified collection mechanism, not a preferential regime.
  - Authorities plan to bring employees of microenterprises under the standard PIT regime, replacing the monthly AMD 5,000 lumpsum tax per employee; however, the exemption of individuals themselves under the regime remains.

Boxed summary of Tax Policy recommendations (verbatim)
- Repeal the tax credit on mortgage interest, with grandfathering of existing contracts with yearly interest below an upper limit in the range of AMD 245,0000-300,000.
- Repeal the tax credit on reinvested dividends.
- Introduce a 10 percent (same as on interest) withholding tax on capital gains, excluding capital gains on housing to the sale of a taxpayers’ primary residence up to a specific amount to be calibrated to cover most or all capital gains for most taxpayers.
- Conditionally on an assessment of sufficient administrative capacity (including auditing of individuals) and on the fiscal feasibility of the measure, introduce a zero-rated PIT bracket with an upper threshold in the range of AMD 240,000-300,000 annually.
- Conditionally on an assessment of sufficient administrative capacity (including auditing of individuals), consider the introduction of an In-Work Tax Credit that is annually capped at AMD 53,000 and phase out for income above AMD 800,000.
- Seek FAD assistance on micro and small enterprise taxation.

### Tax administration — system design, implementation, and risks
Foundations and requirements
- The Universal Declaration Administrative System is a major reform requiring a significant IT build, wide-ranging community impacts, and strong communication with stakeholders (particularly affected taxpayers).
- Existing foundations supportive of the reform:
  - A mature withholding tax system,
  - A register of employees,
  - Mandatory electronic lodgment of the withholding return.
- Gaps and risks:
  - Armenian banks are not required to report interest income with a unique identifier for the holder of the account, so interest income will not be pre-filled unless Bank Secrecy laws are amended.
  - No register exists of individuals who earn passive income.
  - The effectiveness of withholding depends on robust inclusion of employers and other reporting entities.

Design and governance recommendations
- Co-design and governance:
  - As a matter of urgency, create a joint SRC and MoF working party to co-design the new system so all administrative and policy issues are considered; once the design is finalized this group will cease and a steering group would be formed.
  - Implement the governance and project management structures and arrangements set out in Section III, Figure 13 and 14 of the source. As a matter of urgency, implement Stage 0 (setting up governance structure, agreeing action plans, and initiating consultations).
  - The steering group should have very senior chairmanship and members from all ministries with an interest in the reform; it will oversee a Project Management Board.
  - The Project Management Board should include experts with technical and project management skills, be chaired at the Deputy Chairman level, and manage and coordinate project teams, resources, and risks.
- Prefilling and data use:
  - SRC should prefill the Universal Declaration as much as possible through maximizing the use of third-party information and withholding taxes, including all types of income.
  - Amend the Bank Secrecy law so that it is mandatory for banks to provide the SRC with all interest payments and a unique identifier so that the interest can be pre-filled into the individual tax declaration.
  - If employees of microenterprises are brought under the standard PIT regime, employers must be included in the reporting regime and their universal declarations prefilled.
- Compliance and audits:
  - Using Compliance Risk Management principles, SRC should undertake Risk Assessments on risk areas and develop Compliance Improvement Plans, including law change recommendations.
  - Amend the Tax Code to allow tax audits of individuals. Individual taxpayers must be subject to audit based on proper risk-assessment. The Universal PIT Declaration and comprehensive information collection provide an opportunity to include natural persons in the scope of audits.

### Capacity development and technical assistance
- The SRC may consider requesting capacity development assistance from the IMF on implementation of the Universal Declaration.
- Areas where IMF assistance may be most valuable:
  - Addressing identified implementation risks.
  - Advising on international good practices to mitigate those risks.
  - Assistance on possible reform of the taxation of micro and small enterprises.

### Key statistics and fiscal figures (preserved exactly as presented)
- PIT revenue: 6.7% (2019), 6.7% (2020), 6.1% (2021) — presented in Table 1.
- Tax revenue mix (Table 1, in percent of GDP):
  - VAT: 7.7% (2019), 7.6% (2020), 8.0% (2021)
  - Excise tax: 2.1% (2019), 2.0% (2020), 1.6% (2021)
  - Profit tax (CIT): 3.6% (2019), 2.4% (2020), 2.3% (2021)
  - Custom duties: 1.5% (2019), 1.1% (2020), 1.2% (2021)
  - Social security contributions: 0.3% (2019), 0.4% (2020), 0.6% (2021)
  - Other tax revenues: 0.5% (2019), 2.2% (2020), 2.9% (2021)
  - Other revenue: 1.4% (2019), 2. 0% (2020), 1.2% (2021)
  - Total: 23.7% (2019), 24.4% (2020), 23.9% (2021)

### Implementation sequencing and immediate actions
- Immediate actions recommended:
  - Form the joint SRC and MoF working party to finalize the design; once design is complete, transition to a steering group and Project Management Board.
  - As a matter of urgency, implement Stage 0 (setting up governance structure, agreeing action plans, and initiating consultations).
  - Amend Bank Secrecy law to enable pre-filling of interest income.
  - Amend the Tax Code to allow tax audits of individuals.
  - Undertake Compliance Risk Assessments and develop Compliance Improvement Plans.

*Technical Report — Introduction of a Universal Declaration, Charles Vellutini, Graham Whyte, Andualem Mengistu; January 2023.*

### Implementation challenges and opportunities
- Implementing a Universal PIT Declaration will require a large and complex Information Technology (IT) build, communication with stakeholders, and will impact many in the community.
- It will be a new experience for taxpayers and will raise many challenges for the tax administration.

### Key features of the PIT (Labor and Capital Income)
- Armenia’s PIT is a dual income tax system with flat rates applying to both labor and capital income after the 2020 reform.
- Employment income is taxed at a flat rate of 21 percent (Will be 20 percent from January 2023) with no standard personal allowance (income taxed from the first AMD).
- Dividends are taxed at 5 percent.
- Interest, rental income and royalties attract a 10 percent rate.
- Capital gains on the disposal of personal property are not taxed (current practice).
- PIT on employment and passive income, with only few exceptions, is withheld at source by employers, banks or other sources.
- Social security contributions (SSCs) cover pensions only; no SSCs for healthcare or unemployment insurance.
- Pension system pillars:
  - Pillar I: budget-financed defined benefit component.
  - Pillar II: mandatory pension fund plan (from July 1, 2018 mandatory for employees born after January 1, 1974).
  - Pillar III: voluntary pension fund component (participation negligible: 547 participants as of June 2022).
- Pillar II contribution structure and caps:
  - Rate of contribution for Pillar II is 10 percent of gross income, of which 5.5 percent is contributed by the state and 4.5 percent by employees (Will be 5 percent from January 2023 for the state share).
  - State contribution on Pillar II is capped at 5.5 percent of a yearly income of AMD 6 million.
  - No contributions apply to yearly income in excess of AMD 12.24 million.
  - Pillar II contributions are not deductible for PIT purposes; Pillar II pension payments are tax-exempt (TEE).
  - Pillar III is deductible up to 5 percent of gross taxable income and corresponding pensions are taxable (ETT).

### Business income and microenterprise regimes
- Individual (unincorporated) businesses are taxed under regimes:
  - Yearly turnover above AMD 115 million ($ 280,000): mandated VAT taxpayers and subject to standard CIT at 18 percent of profits.
  - Turnover between AMD 24 million ($ 60,000) and AMD 115 million: can opt for turnover tax with rates determined by activity.
  - Turnover below AMD 24 million: can opt for microenterprise regime.
- Under the microenterprise regime individuals only pay a lumpsum tax of AMD 5,000 per month and per employee; an individual with no employees pays no tax under this regime and is not enrolled under mandatory pension schemes (Pillars I and II).

### Incentives — number, cost, distributional effects
- There are only three incentive mechanisms and they are all tax credits (not deductions).
- Mortgage interest tax credit:
  - 100 percent tax credit on interest paid on mortgage contracts to build or acquire individual residences from the primary market (new buildings).
  - Limits: property value must not exceed AMD 55 million; maximum tax credit is AMD 6 million per year or the annual PIT liability, whichever is lowest; one incentivized mortgage contract per physical person in their lifetime.
  - Cost: AMD 22.7 billion in 2021 (or 5.3 percent of overall PIT revenue).
  - Distribution: regressive — top decile of taxpayers claiming 90 percent of the credit.
- Tax credit on reinvested dividends:
  - 100 percent tax credit on dividends reinvested during the same fiscal year; capped by the tax paid on dividends that year (5 percent).
  - In practice can enable effective tax-free distribution of dividends: 2021 data show total due tax on dividend income was AMD 15.7 billion; taxpayers claimed back AMD 9.4 billion as a credit (60 percent), leaving an effective tax rate on dividends of 2 percent.
- Tax credit on tuition fee:
  - 100 percent tax credit claimable by students (not refundable).
  - Low cost and impact: AMD 200 million in 2021.

### Revenue performance and tax wedge
- PIT revenue: 6.1 percent of GDP in 2021.
- Comparator average PIT revenue: 3.7 percent of GDP in 2021 (simple non-weighted average).
- Average PIT rate: 22 percent in 2021.
- Labor tax wedge:
  - Overall tax wedge in Armenia: 26.5 percent (Tax Wedge = (PIT liability + Employee SCCs + Employer SCCs) / (Gross wage + Employer SCCs)).
  - Armenia ranks low among comparator countries on overall tax wedge but is regressive: the tax wedge is highest for low incomes.
  - Informal employment context: informal employment still accounts for more than one third of total employment (35.8 percent of the labor force was informal in 2020, source: Household Labor Force Survey).
- Summary taxpayer statistics (2021):
  - Number of taxpayers with positive labor income: 739,997.
  - Number of taxpayers contributing to Pillar II: 477,820.
  - Number of taxpayers not contributing to Pillar II: 260,134.
  - Number of taxpayers claiming mortgage interest tax credit (positive amount): 20,426.

### Directions of reform (policy recommendations)
- Mortgage interest tax credit:
  - Repeal for all new mortgage contracts and at least strictly cap for existing mortgage contracts.
  - Authorities intend to repeal the incentive on new mortgage contracts in the Yerevan area; recommendation is to repeal for all new and existing contracts, with possible grandfathering under limiting conditions.
  - Simulated options for existing contracts: grandfather but cap at interest of AMD 245,000 per year per taxpayer, or phase out by grandfathering only interest payments for the first three years of a contract.
- Tax credit on reinvested dividends:
  - Suppress the incentive because it enables effective avoidance of dividend taxation and contributes to regressivity.
- Capital gains taxation:
  - Tax capital gains made by individuals on immovable property and investment securities; recommended rate to be the same as that applying to interest (10 percent).
  - Allow exemption for a specific amount of capital gains on primary residences to cover most taxpayers (zero capital gains tax for most taxpayers on sale of primary residence, with high-income individuals taxed on gains above the exemption).
- Microenterprise regime:
  - Microenterprises should benefit from a simplified collection mechanism rather than a preferential regime.
  - Authorities plan to bring employees of microenterprises under the standard PIT regime (replacing monthly AMD 5,000 lumpsum tax per employee), but treatment of the individual owners themselves remains an issue and should be addressed.
- Universal PIT Declaration:
  - A Universal PIT Declaration would enable aggregation and annualization of taxable income, allowing implementation of a zero-rated bracket or an In-Work Tax Credit (IWTC) through end-of-year refunds or tax top-ups.
  - It would allow assessment of taxable income for short-year employees or employees with several income sources and facilitate progressive measures.

### Zero-rated bracket — rationale, parameter, and fiscal impact
- Rationale:
  - A zero-rated bracket would re-introduce progressivity, align with international practice, and provide incentives to enter formal employment.
  - Taxing labor income from the first dollar is described as detrimental to perceived equity and provides negative incentives to enter formal employment.
- Proposed parameter:
  - Upper threshold of AMD 240,000 (or 0.13 times GDP per capita).
- Simulation finding:
  - If implemented in isolation, the revenue impact of the measure (AMD 240,000 threshold) would be 0.46 percent of GDP.
- Administrative risk:
  - A zero-rated bracket creates opportunities for tax evasion (notably fraudulent income splitting); implementation should be conditioned on effective repeal of the mortgage interest tax credit and an assessment of administrative implementation capacity, including auditing capacity.

### In-Work Tax Credit (IWTC) — design, parameters, and impact
- Rationale and effects:
  - IWTC would improve progressivity and incentivize employment formalization, leveraging the Universal PIT Declaration.
  - Net fiscal cost can be managed via parameters and by combining with revenue-enhancing measures such as repeal of the mortgage interest tax credit.
  - Compliance and fraud risks are emphasized; IWTC implies net outlays and requires sufficient compliance management capacity, critically auditing capacity.
- IWTC parameterization used in simulations (Option 3):
  - (i) linearly increases with income from a basic amount of AMD 15,000 to a maximum of AMD 53,000 over the AMD 0 – 240,000 income range (for this segment, the Government would make net payments to taxpayers);
  - (ii) is constant in nominal (AMD) terms over the AMD 240,000 – 520,000 range;
  - (iii) linearly decreases with income from AMD 53,000 to 0 over the AMD 520,000-800,000 range.
- Fiscal cost in scenario:
  - Revenue loss associated with the IWTC reform is minimal: 0.19 percent of GDP.
- Distributional outcomes (exact preserved values):
  - Progressivity and redistributive capacity of the tax and transfer system improve from -0.32 to 2.57 and from 0.02 to 9.41 respectively (scenario with IWTC plus zero-bracket and elimination of mortgage credit).
  - Alternative comparison (standard deduction and IWTC but capping mortgage credit rather than eliminating it): progressivity and redistribution indexes increase from 0.02 to 9.28 and from -0.32 to 2.47, respectively.

### Mortgage interest tax credit — profile, reform options, and fiscal impacts
- Current profile and problems:
  - Quarterly limit for mortgage interest credit: AMD 1.5 million.
  - An apartment/house with value above AMD 55 million is not eligible.
  - Number of taxpayers claiming the credit: 20,400.
  - Total mortgage interest credit claimed in 2021: AMD 22.7 billion (5.3% of total PIT Revenue).
  - Distributional facts: 20 percent of taxpayers claim above 50 percent of the credit; the top 10 percent of taxpayers for reported income claim 90 percent of all credits.
- Eliminating the mortgage interest credit:
  - Eliminating credits would raise revenue by 0.34 percent of GDP (equivalently, 5.3 percent of current government PIT revenue).
  - Redistributive capacity index increases to 0.36 from -0.3.
  - Progressivity increases from 0.02 to 1.6.
  - Revenue from PIT in 2021 was AMD 426.7 billion.
- Cap-on-existing-contracts (Option F):
  - Cap of AMD 245,000 on annual mortgage interest tax credit limits the credit claimed to 20 percent of the current level.
  - Revenue impact: increases government revenue by 0.27 percent of GDP compared to the baseline.
  - Redistribution and progressivity indexes increase from -0.3 to 0.38 and from 0.02 to 1.68, respectively.
  - AMD 245,000 threshold corresponds to the level that preserves 20 percent of the 2021 credit claims; with a flat tax rate of 22 percent (2021) and an exchange rate of AMD 503 per USD, a credit of AMD 245,000 is equivalent to an AMD 1.12 million ($ 2,214) tax deduction.
- Legacy-stock issue:
  - If reform does not deal with the existing stock of mortgages, significant revenue loss continues over the next decade.
  - Announced policy to stop new mortgages issued after January 2023 in Yerevan from being eligible would almost completely stop issuance of new eligible mortgages (Yerevan accounts for 95 percent of all mortgages; 97 percent of mortgages are issued for properties in Yerevan and 95 percent of interest credit is from properties in Yerevan).
- Combined reform outcomes:
  - Introducing a standard deduction (zero-rated bracket) and IWTC alongside elimination of the mortgage interest credit can keep net government revenue close to the baseline.
  - Stopping the credit including for the existing stock of mortgages increases government revenue by at least 0.34 percent of GDP.
  - Grandfathering with a cap (AMD 245,000) yields a revenue increase of 0.27 percent of GDP compared to the current system.

### Combined reforms and simulation scenarios (selected)
- Current: Income tax rate of 22%; social contribution 3.5% up to AMD 6,000,000 and 10% for income above AMD 6,000,000; pension contribution cap AMD 828,000 if annual income above AMD 12,240,000; mortgage interest tax credit that does not exceed the income tax due.
- Option 1a: Elimination of the tax credit for mortgage interest.
- Option 1b: Limit (rather than full elimination) of the mortgage interest tax credit so that 20 percent of the credit is preserved (threshold AMD 245,000 per year).
- Option 2: Option 1a with zero tax rate up to annual income of AMD 240,000.
- Option 3: Option 2 with the IWTC described above.
- Zero-rated bracket (AMD 240,000; 13 percent of GDP per capita; equivalent to $ 593):
  - Chosen based on peer practice and simulations as a trade-off between revenue loss and progressivity gains.
  - Introducing this standard deduction in addition to changing the mortgage interest credit rule increases the redistributive and progressivity index by 1.9 and 5.8 percentage points, respectively.
- Overall caution:
  - Both the zero-rated bracket and IWTC produce distributional improvements but introduce compliance and fraud risks; the IWTC implies net outlays and requires stronger administrative and auditing capacity. Implementation sequencing should condition these measures on the effective repeal or cap of the mortgage interest tax credit and assessed administrative readiness.

### Tax administration — current system and Universal Declaration Administrative System
- Current system key facts:
  - The State Revenue Committee (SRC) is the national Tax Administration and will operate current system in parallel with the proposed Universal Declaration Administrative System until the current system is redundant.
  - Armenia’s tax system is a self-assessment system.
  - Current PIT withholding regime:
    - Flat employee PIT rate: 21 percent (note: Rates to change to 20 percent in 2023).
    - Withholding system scale (exact counts): 58,945 employers and 739,997 employees.
  - Current limitations:
    - SRC has no legislative power to undertake audits of PIT taxpayers; individuals are not subject to audit under current law.
    - Individual taxpayers not in business are not required to file a tax declaration or return.
    - Banks are not required to report interest income with a unique identifier for the holder of the account, undermining prefill capability.
    - There is no reporting system for private rental income arranged outside Tax Agents; extent of noncompliance is unknown.
  - IT and automation:
    - Since 2010 all functions have been automated; notable World Bank support referenced.
    - SRC advised IT build for new system would take twelve months to complete once legislation is passed.
- Universal Declaration Administrative System — high-level operation and timelines:
  - SRC continues to collect withholding tax and identifying data from employers and passive income providers.
  - Data held by SRC will be presented electronically as a prefilled return to individuals, who accept or add missing income.
  - If the taxpayer does not sign the declaration after a certain period it will be deemed acceptance.
  - Deemed acceptance parameter:
    - If the taxpayer does not sign the return within sixty days it will be deemed as accepted by the taxpayer.
  - Phasing and coverage:
    - Planned phased introduction from 2024 reporting FY2023 income.
    - Phase 1 includes State and Municipal employees, citizens holding public positions, shareholders, private entrepreneurs and notaries public, and individuals earning income without withholding tax withheld by a Tax Agent.
    - Estimated Phase 1 population: 200,000 taxpayers.
    - SRC estimates IT build duration: twelve months post-legislation.
  - Legal and governance needs:
    - Final Universal Declaration Detailed Policy not yet finalized/approved; outstanding questions on who will be included in declaration population.
    - Further legislation required to give effect (e.g., legislative power to review and alter the declaration after acceptance or deemed acceptance).
    - Indirect audit methods and access to bank information may be required for post-acceptance reviews.
  - Design principles and operational recommendations:
    - Implement on a phased approach.
    - Prefill data from third-party sources and SRC systems as much as possible.
    - Base system on principle of reporting to government agencies only once.
    - Provide a secure online system accessible on computers and other devices.
    - Consolidate incomes and all benefits (tax transfers) provided through the tax systems in one place.
    - SRC should prefill the Universal Declaration as much as possible, acting as the originator of the declaration for a majority of taxpayers.
    - SRC should use Compliance Risk Management processes to undertake Risk Assessments on: the Taxpayer Register, Rental Income, Freelancers, Seasonal Workers, and the Platform Economy, and develop Compliance Improvement Plans.

### Staged implementation, governance, and operational recommendations
- Staged approach (six key stages):
  - first two stages: lay the foundations for the reform;
  - next two stages: design, test, and sequence each separate component;
  - fifth stage: full implementation of the new system and occurs only when all individual components are performing satisfactorily;
  - final stage: learning how to refine and improve the new system once bedded in.
- Immediate priority: Stage 0 — governance and communications
  - Stage 0 establishes a transparent and accountable governance framework and effective internal and external communications strategies and should be implemented as a matter of urgency.
  - Governance framework should consist of three layers with a cross-government steering group providing strategic oversight: cross-government Steering Group; Project Management Board; specialist project teams.
- Roles and composition:
  - Steering Group: very senior chairmanship, members drawn from all ministries with interest in the reform, including SRC and MoF, and one or more nongovernment representatives.
  - Project Management Board: include experts with relevant technical and project management skills; be chaired by a senior SRC official at the Deputy Chairman level.
  - Project teams: staffed full-time by subject experts in IT, legislation, operational processes, compliance, taxpayer services, etc.
- Typical project team brief (elements to include):
  - Clear mapping of work, timelines, milestones, dependencies, connection to overarching reform, success parameters, estimated budget with contingency, key staff resources, and a workstream risk register.
- User experience (UX) based design principles:
  - Start early with users, use qualitative and quantitative research, use prototypes, share findings, and test regularly.

### Implementation risks and mitigations (summary)
- Governance risk:
  - Risk: poor governance of the reform.
  - Mitigation: Implement the structures and arrangements described in the ‘Implementation Governance and Project Management‘ sub-section.
- Planning risk:
  - Risk: poor planning.
  - Mitigation: SRC to develop a comprehensive Project Plan as soon as possible.
- Existing compliance weaknesses:
  - Risk: compliance issues with the current system (e.g., Rental income, Freelancers, Seasonal and Platform Workers, and Private Rental Arrangements).
  - Mitigation: Develop risk assessments, Compliance Improvement Plans, and consider law change recommendations; require access to bank information and powers to audit individuals.
- Staff capacity and taxpayer support risks and mitigations:
  - Risk: SRC staff do not know about the new system or can’t advise individual taxpayers.
  - Mitigation: Develop a staff skilling and training plan and ensure sufficient SRC experts to advise taxpayers.
  - Risk: Individual taxpayers have not heard about the new system.
  - Mitigation: Develop a Marketing and Communication Plan.
  - Risk: Individual taxpayers do not know how to use the new system.
  - Mitigation: Clear instructions for self-service and provision of taxpayer services (call-center, advice, education, website).
- Data and IT risks:
  - Risk: an individual taxpayer's prefill data is not complete or available.
  - Mitigation: Ensure extensive third-party data collection and quality of data.
  - Risk: Information Technology Build and Declaration interface and systems.
  - Mitigation: Ensure SRC’s current IT technology and capacity can deliver the new system.
- Compliance assurance and fraud risk:
  - Risk: the new system may generate refunds and the SRC needs to ensure integrity in the tax refund system to mitigate potential fraud.
  - Mitigation: Integrity measures for refunds and improved compliance processes.
- Notification and take-up risks:
  - Risk: Individual Taxpayers do not know that the declaration is available to review and sign.
  - Mitigation: Inform taxpayers via email or SMS.
  - Risk: Low community take-up and low participation, including taxpayers with low financial literacy and poor access to technology/internet.
  - Mitigation: Ensure taxpayers understand benefits; consider volunteer services to assist electronic lodgment.
  - Risk: Taxpayers have to pay for an electronic signature to sign their declaration.
  - Mitigation: Ensure taxpayers can sign without charge.
- Specific legal/administrative risks:
  - Risk: Senior Civil Servants will have to lodge an Anti-Corruption Declaration and a Universal Declaration.
  - Mitigation: Ensure those affected understand why.
  - Risk: The Taxpayer Register is not complete.
  - Mitigation: Make it easy for initial registration of natural persons via multiple registration channels.
  - Risk: Poor consultation with external stakeholders.
  - Mitigation: Set up a consultation forum with impacted stakeholders.

### Revenue administration — urgent recommendations
- As a matter of urgency, create a joint SRC and MoF working party to co-design the new system so that all administrative and policy issues are considered, and an efficient and effective system is implemented.
- Implement the governance and project management structures and arrangements as set out in Figure 13 and Figure 14; as a matter of urgency, implement Stage 0.
- Amend the Bank Secrecy law so that it is mandatory for banks to provide the SRC with all interest receipts and a unique identifier so that the interest can be pre-filled into the individual tax declaration.
- Amend the Tax Code to allow tax audits of individuals.

### Capacity development and IMF assistance (final note)
- SRC may consider requesting CD assistance from the IMF on implementation of the Universal Declaration, particularly to address the risks identified in Table 8 and to advise on international good practices to mitigate them.
- Authorities may also consider requesting IMF assistance on a possible reform of the taxation of micro and small enterprises (which bears on CIT and VAT); this could be the object of specific assistance.
- Assistance could also be provided on social protection.

*Source: IMF staff report (excerpts supplied in content unit 1armea2023001).*

### Introduction of a Universal Declaration

### Introduction of a Universal Declaration

### Executive summary — key characteristics and context
- The government of the Republic of Armenia has expressed its intention to introduce a Universal Personal Income Tax (PIT) Declaration for individual taxpayers who are not in business.
- Implementation stages and timing:
  - civil servants in 2024 reporting FY2023 income,
  - employees in 2025 reporting FY2024 income,
  - other individual taxpayers in 2026 reporting FY2025 income.
- The declaration would be annual and comprehensive, covering all types of income.
- At 6.1 percent of GDP in 2021, the PIT is a significant source of revenue in Armenia.
- Since 2020, PIT has been levied at flat rates on both employment and passive capital income (dividends, interest, rental income, and royalties). Taxpayers who only derive income from employment or passive capital income are not required to file a tax declaration and are taxed on a withholding basis.

### Tax policy — findings and proposed reforms
Findings
- Armenia’s PIT exhibits strong revenue performance and low progressivity.
- The redistributive capacity of Armenia’s PIT is at the lowest end of its regional peers.
- Contributing design features to low progressivity:
  - 21 percent (2022) flat tax rate on employment income,
  - absence of standard allowance,
  - regressive mortgage interest tax credit,
  - cap on the Social Security Contribution (SSC) to the state pension system (Pillar II).
- Costly and regressive tax incentives have large fiscal costs and distributional impacts.

Proposed policy measures and rationale
- Repeal or strictly cap costly and regressive tax incentives:
  - Repeal the mortgage interest tax credit, or at least strictly cap it. Unless the reform addresses the existing stock of mortgages, the revenue loss will continue to be significant for the next decade. Limiting the mortgage interest credit on existing contracts rather than complete removal may ease implementation with minimal revenue cost and a significant increase in progressivity.
  - Repeal the tax credit on reinvested dividends (described as overly generous).
  - Tax capital gains, with an exempt allowance for private residences calibrated to cover most or all capital gains for most taxpayers.
- Use the Universal PIT Declaration to enable more progressive instruments:
  - The Declaration makes possible a zero-rated bracket and an In-Work Tax Credit (IWTC) through aggregation and annualization of taxable income and end-of-year refunds or tax top-ups.
  - Conditionally on administrative capacity (including auditing of individuals) and fiscal feasibility:
    - A zero-rated bracket would have an upper threshold in the range of AMD 240,000-300,000 annually.
    - An In-Work Tax Credit could be introduced, annually capped at AMD 53,000 and phasing out for income above AMD 800,000. The IWTC would be better-targeted than a zero-bracket and encourage labor supply and formalization.
- Microenterprise regime:
  - The microenterprise regime should be a simplified collection mechanism, not a preferential regime.
  - Authorities plan to bring employees of microenterprises under the standard PIT regime, replacing the monthly AMD 5,000 lumpsum tax per employee; however, the exemption of individuals themselves under the regime remains.

Boxed summary of Tax Policy recommendations (verbatim)
- Repeal the tax credit on mortgage interest, with grandfathering of existing contracts with yearly interest below an upper limit in the range of AMD 245,0000-300,000.
- Repeal the tax credit on reinvested dividends.
- Introduce a 10 percent (same as on interest) withholding tax on capital gains, excluding capital gains on housing to the sale of a taxpayers’ primary residence up to a specific amount to be calibrated to cover most or all capital gains for most taxpayers.
- Conditionally on an assessment of sufficient administrative capacity (including auditing of individuals) and on the fiscal feasibility of the measure, introduce a zero-rated PIT bracket with an upper threshold in the range of AMD 240,000-300,000 annually.
- Conditionally on an assessment of sufficient administrative capacity (including auditing of individuals), consider the introduction of an In-Work Tax Credit that is annually capped at AMD 53,000 and phase out for income above AMD 800,000.
- Seek FAD assistance on micro and small enterprise taxation.

### Tax administration — system design, implementation, and risks
Foundations and requirements
- The Universal Declaration Administrative System is a major reform requiring a significant IT build, wide-ranging community impacts, and strong communication with stakeholders (particularly affected taxpayers).
- Existing foundations supportive of the reform:
  - A mature withholding tax system,
  - A register of employees,
  - Mandatory electronic lodgment of the withholding return.
- Gaps and risks:
  - Armenian banks are not required to report interest income with a unique identifier for the holder of the account, so interest income will not be pre-filled unless Bank Secrecy laws are amended.
  - No register exists of individuals who earn passive income.
  - The effectiveness of withholding depends on robust inclusion of employers and other reporting entities.

Design and governance recommendations
- Co-design and governance:
  - As a matter of urgency, create a joint SRC and MoF working party to co-design the new system so all administrative and policy issues are considered; once the design is finalized this group will cease and a steering group would be formed.
  - Implement the governance and project management structures and arrangements set out in Section III, Figure 13 and 14 of the source. As a matter of urgency, implement Stage 0 (setting up governance structure, agreeing action plans, and initiating consultations).
  - The steering group should have very senior chairmanship and members from all ministries with an interest in the reform; it will oversee a Project Management Board.
  - The Project Management Board should include experts with technical and project management skills, be chaired at the Deputy Chairman level, and manage and coordinate project teams, resources, and risks.
- Prefilling and data use:
  - SRC should prefill the Universal Declaration as much as possible through maximizing the use of third-party information and withholding taxes, including all types of income.
  - Amend the Bank Secrecy law so that it is mandatory for banks to provide the SRC with all interest payments and a unique identifier so that the interest can be pre-filled into the individual tax declaration.
  - If employees of microenterprises are brought under the standard PIT regime, employers must be included in the reporting regime and their universal declarations prefilled.
- Compliance and audits:
  - Using Compliance Risk Management principles, SRC should undertake Risk Assessments on risk areas and develop Compliance Improvement Plans, including law change recommendations.
  - Amend the Tax Code to allow tax audits of individuals. Individual taxpayers must be subject to audit based on proper risk-assessment. The Universal PIT Declaration and comprehensive information collection provide an opportunity to include natural persons in the scope of audits.

### Capacity development and technical assistance
- The SRC may consider requesting capacity development assistance from the IMF on implementation of the Universal Declaration.
- Areas where IMF assistance may be most valuable:
  - Addressing identified implementation risks.
  - Advising on international good practices to mitigate those risks.
  - Assistance on possible reform of the taxation of micro and small enterprises.

### Key statistics and fiscal figures (preserved exactly as presented)
- PIT revenue: 6.7% (2019), 6.7% (2020), 6.1% (2021) — presented in Table 1.
- Tax revenue mix (Table 1, in percent of GDP):
  - VAT: 7.7% (2019), 7.6% (2020), 8.0% (2021)
  - Excise tax: 2.1% (2019), 2.0% (2020), 1.6% (2021)
  - Profit tax (CIT): 3.6% (2019), 2.4% (2020), 2.3% (2021)
  - Custom duties: 1.5% (2019), 1.1% (2020), 1.2% (2021)
  - Social security contributions: 0.3% (2019), 0.4% (2020), 0.6% (2021)
  - Other tax revenues: 0.5% (2019), 2.2% (2020), 2.9% (2021)
  - Other revenue: 1.4% (2019), 2. 0% (2020), 1.2% (2021)
  - Total: 23.7% (2019), 24.4% (2020), 23.9% (2021)

### Implementation sequencing and immediate actions
- Immediate actions recommended:
  - Form the joint SRC and MoF working party to finalize the design; once design is complete, transition to a steering group and Project Management Board.
  - As a matter of urgency, implement Stage 0 (setting up governance structure, agreeing action plans, and initiating consultations).
  - Amend Bank Secrecy law to enable pre-filling of interest income.
  - Amend the Tax Code to allow tax audits of individuals.
  - Undertake Compliance Risk Assessments and develop Compliance Improvement Plans.

*Technical Report — Introduction of a Universal Declaration, Charles Vellutini, Graham Whyte, Andualem Mengistu; January 2023.*

### 4.      The implementation of a Universal PIT Declaration presents the tax administration with

### 1armea2023001 - 4.      The implementation of a Universal PIT Declaration presents the tax administration with

### Implementation challenges and opportunities
- Implementing a Universal PIT Declaration will require a large and complex Information Technology (IT) build, communication with stakeholders, and will impact many in the community.
- It will be a new experience for taxpayers and will raise many challenges for the tax administration.

### Key features of the PIT (Labor and Capital Income)
- Armenia’s PIT is a dual income tax system with flat rates applying to both labor and capital income after the 2020 reform.
- Employment income is taxed at a flat rate of 21 percent (Will be 20 percent from January 2023) with no standard personal allowance (income taxed from the first AMD).
- Dividends are taxed at 5 percent.
- Interest, rental income and royalties attract a 10 percent rate.
- Capital gains on the disposal of personal property are not taxed (current practice).
- PIT on employment and passive income, with only few exceptions, is withheld at source by employers, banks or other sources.
- Social security contributions (SSCs) cover pensions only; no SSCs for healthcare or unemployment insurance.
- Pension system pillars:
  - Pillar I: budget-financed defined benefit component.
  - Pillar II: mandatory pension fund plan (from July 1, 2018 mandatory for employees born after January 1, 1974).
  - Pillar III: voluntary pension fund component (participation negligible: 547 participants as of June 2022).
- Pillar II contribution structure and caps:
  - Rate of contribution for Pillar II is 10 percent of gross income, of which 5.5 percent is contributed by the state and 4.5 percent by employees (Will be 5 percent from January 2023 for the state share).
  - State contribution on Pillar II is capped at 5.5 percent of a yearly income of AMD 6 million.
  - No contributions apply to yearly income in excess of AMD 12.24 million.
  - Pillar II contributions are not deductible for PIT purposes; Pillar II pension payments are tax-exempt (TEE).
  - Pillar III is deductible up to 5 percent of gross taxable income and corresponding pensions are taxable (ETT).

### Business income and microenterprise regimes
- Individual (unincorporated) businesses are taxed under regimes:
  - Yearly turnover above AMD 115 million ($ 280,000): mandated VAT taxpayers and subject to standard CIT at 18 percent of profits.
  - Turnover between AMD 24 million ($ 60,000) and AMD 115 million: can opt for turnover tax with rates determined by activity.
  - Turnover below AMD 24 million: can opt for microenterprise regime.
- Under the microenterprise regime individuals only pay a lumpsum tax of AMD 5,000 per month and per employee; an individual with no employees pays no tax under this regime and is not enrolled under mandatory pension schemes (Pillars I and II).

### Incentives (number, cost, distributional effects)
- There are only three incentive mechanisms and they are all tax credits (not deductions).
- Mortgage interest tax credit:
  - 100 percent tax credit on interest paid on mortgage contracts to build or acquire individual residences from the primary market (new buildings).
  - Limits: property value must not exceed AMD 55 million; maximum tax credit is AMD 6 million per year or the annual PIT liability, whichever is lowest; one incentivized mortgage contract per physical person in their lifetime.
  - Cost: AMD 22.7 billion in 2021 (or 5.3 percent of overall PIT revenue).
  - Distribution: regressive — top decile of taxpayers claiming 90 percent of the credit.
- Tax credit on reinvested dividends:
  - 100 percent tax credit on dividends reinvested during the same fiscal year; capped by the tax paid on dividends that year (5 percent).
  - In practice can enable effective tax-free distribution of dividends: 2021 data show total due tax on dividend income was AMD 15.7 billion; taxpayers claimed back AMD 9.4 billion as a credit (60 percent), leaving an effective tax rate on dividends of 2 percent.
- Tax credit on tuition fee:
  - 100 percent tax credit claimable by students (not refundable).
  - Low cost and impact: AMD 200 million in 2021.

### Revenue performance and tax wedge
- PIT revenue: 6.1 percent of GDP in 2021.
- Comparator average PIT revenue: 3.7 percent of GDP in 2021 (simple non-weighted average).
- Average PIT rate: 22 percent in 2021.
- Labor tax wedge:
  - Overall tax wedge in Armenia: 26.5 percent (Tax Wedge = (PIT liability + Employee SCCs + Employer SCCs) / (Gross wage + Employer SCCs)).
  - Armenia ranks low among comparator countries on overall tax wedge but is regressive: the tax wedge is highest for low incomes.
  - Informal employment context: informal employment still accounts for more than one third of total employment (35.8 percent of the labor force was informal in 2020, source: Household Labor Force Survey).
- Summary taxpayer statistics (2021):
  - Number of taxpayers with positive labor income: 739,997.
  - Number of taxpayers contributing to Pillar II: 477,820.
  - Number of taxpayers not contributing to Pillar II: 260,134.
  - Number of taxpayers claiming mortgage interest tax credit (positive amount): 20,426.

### Directions of reform (policy recommendations)
- Mortgage interest tax credit:
  - Repeal for all new mortgage contracts and at least strictly cap for existing mortgage contracts.
  - Authorities intend to repeal the incentive on new mortgage contracts in the Yerevan area; recommendation is to repeal for all new and existing contracts, with possible grandfathering under limiting conditions.
  - Simulated options for existing contracts: grandfather but cap at interest of AMD 245,000 per year per taxpayer, or phase out by grandfathering only interest payments for the first three years of a contract.
- Tax credit on reinvested dividends:
  - Suppress the incentive because it enables effective avoidance of dividend taxation and contributes to regressivity.
- Capital gains taxation:
  - Tax capital gains made by individuals on immovable property and investment securities; recommended rate to be the same as that applying to interest (10 percent).
  - Allow exemption for a specific amount of capital gains on primary residences to cover most taxpayers (zero capital gains tax for most taxpayers on sale of primary residence, with high-income individuals taxed on gains above the exemption).
- Microenterprise regime:
  - Microenterprises should benefit from a simplified collection mechanism rather than a preferential regime.
  - Authorities plan to bring employees of microenterprises under the standard PIT regime (replacing monthly AMD 5,000 lumpsum tax per employee), but treatment of the individual owners themselves remains an issue and should be addressed.
- Universal PIT Declaration:
  - A Universal PIT Declaration would enable aggregation and annualization of taxable income, allowing implementation of a zero-rated bracket or an In-Work Tax Credit (IWTC) through end-of-year refunds or tax top-ups.
  - It would allow assessment of taxable income for short-year employees or employees with several income sources and facilitate progressive measures.

*Source: IMF staff report (excerpts supplied in content unit).*

### 22.      A zero-rated bracket would re-introduce progressivity into the system. Introducing a

### 22. A zero-rated bracket would re-introduce progressivity into the system.

### Rationale for a zero-rated bracket
- Introducing a zero-rated bracket (minimum income level to be liable to PIT) aligns with international practice and comparator countries.
- Taxing labor income from the first dollar is described as detrimental to perceived equity and provides negative incentives to enter formal employment.
- In the context of introducing a Universal PIT Declaration, a zero-rated bracket would be an incentive to comply.
- Proposed parameter: an upper threshold of AMD 240,000 (or 0.13 times GDP per capita).  
- Simulation finding: if implemented in isolation, the revenue impact of the measure (AMD 240,000 threshold) would be 0.46 percent of GDP.
- Administrative risk: a zero-rated bracket creates opportunities for tax evasion (notably fraudulent income splitting); its implementation should be conditioned on effective repeal of the mortgage interest tax credit and an assessment of administrative implementation capacity, including auditing capacity.

### In-work tax credit (IWTC)
- An IWTC would further improve progressivity and incentivize employment formalization.
- IWTC leverages a Universal PIT Declaration and provides incentives to comply with it, encouraging low-skill and part-time workers to join formal employment.
- Net fiscal cost of an IWTC can be managed via its key parameters (maximum credit, range of eligible income) and by combining it with revenue-enhancing measures such as repeal of the mortgage interest tax credit.
- Compliance and fraud risks are emphasized; IWTC implies net outlays and requires sufficient compliance management capacity, critically auditing capacity.
- Conclusion: implementation of an IWTC in Armenia must be subject to careful assessment of administrative implementation capacity and is not likely implementable in the short term.

### IWTC parameterization used in simulations (Option 3)
- IWTC specification:
  - (i) linearly increases with income from a basic amount of AMD 15,000 to a maximum of AMD 53,000 over the AMD 0 – 240,000 income range (for this segment, the Government would make net payments to taxpayers);
  - (ii) is constant in nominal (AMD) terms over the AMD 240,000 – 520,000 range;
  - (iii) linearly decreases with income from AMD 53,000 to 0 over the AMD 520,000-800,000 range.
- Note: 520,000 AMD is the highest income for those in the bottom two deciles (the 20th percentile).

### Mortgage interest tax credit: current profile and problems
- Rules and scale:
  - Quarterly limit for mortgage interest credit: AMD 1.5 million.
  - An apartment/house with value above AMD 55 million is not eligible.
- Number of taxpayers claiming the credit: 20,400.
- Total mortgage interest credit claimed in 2021: AMD 22.7 billion (5.3% of total PIT Revenue).
- Distributional facts:
  - 20 percent of taxpayers claim above 50 percent of the credit.
  - The top 10 percent of taxpayers for reported income claim 90 percent of all credits.
- Assessment: the mortgage interest tax credit is highly regressive and skewed to high-income earners; it likely eroded PIT revenue and may have fueled mortgage and real estate demand.

### Fiscal and distributional impact of eliminating or capping the mortgage interest credit
- Eliminating the mortgage interest credit:
  - Eliminating credits would raise revenue by 0.34 percent of GDP (equivalently, 5.3 percent of current government PIT revenue).
  - Redistributive capacity index increases to 0.36 from -0.3.
  - Progressivity increases from 0.02 to 1.6.
  - As of 2021, the government credited back AMD 22.7 billion of potential tax revenue to claimants.
  - Removing the credit could support financial-market stability by reducing mortgage demand pressure.
- Revenue context: Revenue from PIT in 2021 was AMD 426.7 billion.
- Legacy-stock issue:
  - If reform does not deal with the existing stock of mortgages, significant revenue loss continues over the next decade.
  - The announced policy to stop new mortgages issued after January 2023 in Yerevan from being eligible would almost completely stop issuance of new eligible mortgages (Yerevan accounts for 95 percent of all mortgages; 97 percent of mortgages are issued for properties in Yerevan and 95 percent of interest credit is from properties in Yerevan).
- Limiting the tax credit on existing contracts (cap approach) — Option F (cap of AMD 245,000 on annual mortgage interest tax credit):
  - The cap limits the credit claimed to 20 percent of the current level.
  - Revenue impact: increases government revenue by 0.27 percent of GDP compared to the baseline (current system).
  - Redistribution and progressivity indexes increase from -0.3 to 0.38 and from 0.02 to 1.68, respectively.
  - AMD 245,000 threshold corresponds to the level that preserves 20 percent of the 2021 credit claims; with a flat tax rate of 22 percent (2021) and an exchange rate of AMD 503 per USD, a credit of AMD 245,000 is equivalent to an AMD 1.12 million ($ 2,214) tax deduction.
- Comparison of approaches: capping existing contracts may ease implementation while maintaining revenue gains and progressivity increases relative to immediate repeal.

### Combined reforms and simulation findings
- Scenario summary (selected):
  - Current: Income tax rate of 22%; social contribution 3.5% up to AMD 6,000,000 and 10% for income above AMD 6,000,000; pension contribution cap AMD 828,000 if annual income above AMD 12,240,000; mortgage interest tax credit that does not exceed the income tax due.
  - Option 1a: Elimination of the tax credit for mortgage interest.
  - Option 1b: Limit (rather than full elimination) of the mortgage interest tax credit so that 20 percent of the credit is preserved (threshold AMD 245,000 per year).
  - Option 2: Option 1a with zero tax rate up to annual income of AMD 240,000.
  - Option 3: Option 2 with the IWTC described above.
- Zero-rated bracket (AMD 240,000; 13 percent of GDP per capita; equivalent to $ 593):
  - Chosen based on peer practice and simulations as a trade-off between revenue loss and progressivity gains.
  - Introducing this standard deduction in addition to changing the mortgage interest credit rule increases the redistributive and progressivity index by 1.9 and 5.8 percentage points, respectively.
  - If combined with elimination of the mortgage interest tax credit, on net government revenue remains close to the baseline current system.
- Overall caution: both the zero-rated bracket and IWTC produce distributional improvements but introduce compliance and fraud risks; the IWTC implies net outlays and requires stronger administrative and auditing capacity. Implementation sequencing should condition these measures on the effective repeal or cap of the mortgage interest tax credit and assessed administrative readiness.

*Source: IMF staff analysis in the provided chapter.*

### 33.      An IWTC incentivizes formalization and further increases progressivity with limited

### 33.      An IWTC incentivizes formalization and further increases progressivity with limited revenue loss

### In-work tax credit (IWTC) scenario and distributional impact
- Scenario: IWTC introduced in addition to a zero-rated bracket and the elimination of the mortgage interest tax credit; IWTC simulated with characteristics specified under Option 3.
- Design features (as specified):
  - At income below AMD 240,000 the IWTC is a net outlay (PIT rate is zero) which increases with income.
  - At higher income levels the IWTC only decreases gradually (above EUR 53,000).
  - The lowest 10 percent of labor income earners receive a net payment from the Government.
- Distributional effects (exact values preserved):
  - Progressivity and redistributive capacity of the tax and transfer system improve from -0.32 to 2.57 and from 0.02 to 9.41 respectively.
  - Alternative comparison reported (with standard deduction and IWTC but capping mortgage credit rather than eliminating it): progressivity and redistribution indexes increase from 0.02 to 9.28 and from -0.32 to 2.47, respectively.
- Behavioral rationale:
  - IWTC increases with income at low levels, rewarding additional labor supply and incentivizing formalization.
  - Gradual phase-down above higher incomes is described as incentive-compatible with increased labor supply.
- Fiscal cost of IWTC in scenario:
  - Revenue loss associated with the reform is minimal: 0.19 percent of GDP.

### Context and parameter choices for IWTC
- US EITC reference: ranges from $560 to $6,935; adjusting for GDP per capita difference implies a minimum credit of 16,000 AMD; scenario uses slightly lower value of 15,000 AMD.
- Maximum credit in the scenario is equivalent to $1,980.
- Proposed IWTC annual cap in recommendations: AMD 53,000 with phase-out for income above AMD 800,000.

### Summary of impact on revenue (mortgage interest tax credit interactions)
- Reforming the mortgage interest tax credit enables the introduction of a standard allowance and an IWTC in a close to revenue-neutral way.
- Stopping the credit including for the existing stock of mortgages increases government revenue by at least 0.34 percent of GDP.
- Revenue calculation note (exact figures preserved):
  - AMD 22.7 billion of mortgage credit as of 2021 divided by a GDP of AMD 6.983 trillion.
  - Ministry of Finance tax expenditure estimate for 2022: AMD 38 billion (difference explained by caps and limitations).
- Grandfathering option:
  - Grandfathering existing mortgage stock with a limit on the amount of credit they can claim annually (AMD 245,000) keeps the revenue gain while enabling a smoother transition.
  - In this cap-on-mortgage-credit scenario government revenue increases by 0.27 percent of GDP compared to the current system.
- Combined policy outcome:
  - Coupling standard deduction and IWTC with elimination of mortgage interest credit leads to minimal loss of revenue (0.19 percent of GDP) compared to the current scenario.
- PIT revenue across scenarios (exact values preserved in chart legends):
  - Values shown include SSC, labor income tax excluding SSC, labor income tax including SSC, net-government revenue, In-work tax credit, and Mortgage interest credit (percent of GDP scale displayed from 0 to 6 percent).

### Tax policy recommendations (preserve exact wording and numeric ranges)
- Repeal the tax credit on mortgage interest, with grandfathering of existing contracts with yearly interest below an upper limit in the range of AMD 245,0000-300,000, which could yield up to 0.27 percent of GDP in new tax revenue and significantly improve progressivity of the tax system.
- Repeal the tax credit on reinvested dividends, which could yield at least 0.13 percent of GDP in new revenue.
- Introduce a 10 percent withholding tax on capital gains, excluding capital gains on housing to the sale of a taxpayers’ primary residence, up to a specific amount to be calibrated so it covers most or all capital gains for most taxpayers.
- Conditionally, on an assessment of sufficient administrative capacity (including auditing of individuals) and on the fiscal feasibility of the measure, introduce a zero-rated PIT bracket with an upper threshold in the range of AMD 240,000-300,000 annually, which would cost about 0.46 percent of GDP.
- Conditionally, on an assessment of sufficient administrative capacity (including auditing of individuals), consider the introduction of an IWTC that is annually capped at AMD 53,000 and phase out for income above AMD 800,000, which could cost about 0.19 percent of GDP.

### Tax administration: current system key facts
- The State Revenue Committee (SRC) is the national Tax Administration and will operate current system in parallel with the proposed Universal Declaration Administrative System until the current system is redundant.
- Armenia’s tax system is a self-assessment system.
- Current PIT withholding regime:
  - Flat employee PIT rate: 21 percent (note: Rates to change to 20 percent in 2023).
  - Withholding system scale (exact counts): 58,945 employers and 739,997 employees.
- Current limitations:
  - SRC has no legislative power to undertake audits of PIT taxpayers; individuals are not subject to audit under current law.
  - Individual taxpayers not in business are not required to file a tax declaration or return.
  - Banks are not required to report interest income with a unique identifier for the holder of the account, undermining prefill capability.
  - There is no reporting system for private rental income arranged outside Tax Agents; extent of noncompliance is unknown.
- IT and automation:
  - Since 2010 all functions have been automated; notable World Bank support referenced.
  - SRC advised IT build for new system would take twelve months to complete once legislation is passed.

### Universal Declaration Administrative System: design, timeline, and implementation
- High-level operation:
  - SRC continues to collect withholding tax and identifying data from employers and passive income providers.
  - Data held by SRC will be presented electronically as a prefilled return to individuals, who accept or add missing income.
  - If the taxpayer does not sign the declaration after a certain period it will be deemed acceptance.
- Deemed acceptance parameters:
  - If the taxpayer does not sign the return within sixty days it will be deemed as accepted by the taxpayer.
- Phasing and coverage:
  - Planned phased introduction from 2024 reporting FY2023 income.
  - Phase 1 includes State and Municipal employees, citizens holding public positions, shareholders, private entrepreneurs and notaries public, and individuals earning income without withholding tax withheld by a Tax Agent.
  - Estimated Phase 1 population: 200,000 taxpayers.
  - SRC estimates IT build duration: twelve months post-legislation.
- Legal and governance needs:
  - Final Universal Declaration Detailed Policy not yet finalized/approved; outstanding questions on who will be included in declaration population.
  - Further legislation required to give effect (e.g., legislative power to review and alter the declaration after acceptance or deemed acceptance).
  - Indirect audit methods and access to bank information may be required for post-acceptance reviews.
- Design principles and operational recommendations:
  - Implement on a phased approach.
  - Prefill data from third-party sources and SRC systems as much as possible.
  - Base system on principle of reporting to government agencies only once.
  - Provide a secure online system accessible on computers and other devices.
  - Consolidate incomes and all benefits (tax transfers) provided through the tax systems in one place.
  - SRC should prefill the Universal Declaration as much as possible, acting as the originator of the declaration for a majority of taxpayers.
  - SRC should use Compliance Risk Management processes to undertake Risk Assessments on: the Taxpayer Register, Rental Income, Freelancers, Seasonal Workers, and the Platform Economy, and develop Compliance Improvement Plans.

*Source: Content unit 1armea2023001 (IMF Staff).*

### 55.      Reform projects on this scale have the potential to cause major disruption to the day-

### 1armea2023001 - 55.      Reform projects on this scale have the potential to cause major disruption to the day-

### Staged implementation: rationale and cycle
- Reform projects on this scale can cause major disruption to day-to-day activities of stakeholders who depend on the smooth running of the tax system.
- Best practice: stage the implementation to manage and mitigate risks to both the existing and the new system by:
  - comprehensive requirement mapping of each component; and
  - repeated testing and refinement until each component achieves an agreed performance standard while the existing system continues to operate until every component is proved ready.
- The implementation cycle may be divided into six key stages:
  - first two stages: lay the foundations for the reform;
  - next two stages: design, test, and sequence each separate component;
  - fifth stage: full implementation of the new system and occurs only when all individual components are performing satisfactorily;
  - final stage: learning how to refine and improve the new system once bedded in.
- The staged approach is summarized in Figure 13. Further explanation is available in the IMF Technical Note and Manual 21/01.

### Immediate priority: Stage 0 — governance and communications
- Stage 0 is critical and should be implemented as a matter of urgency.
- Stage 0 establishes:
  - a transparent and accountable governance framework; and
  - effective internal and external communications strategies.
- Governance framework should consist of three basic layers (Figure 14) with a cross-government steering group providing strategic oversight:
  - cross-government Steering Group for strategic oversight and cross-government support;
  - Project Management Board (with MoF representation) responsible for overall management and coordination;
  - specialist project teams providing detailed planning and implementation work on each strand of the reform.
- Appropriate staffing—skills and stakeholder representation—across governance layers is important to ensure scoping, budgeting, consultation, representation, and continuing high-level government support.

### Roles and composition: Steering Group, Project Management Board, Project Teams
- Steering Group:
  - should have very senior chairmanship;
  - members drawn from all ministries with interest in the reform, including SRC and MoF;
  - responsibilities: strategic leadership and direction, oversight of the Project Management Board, resolution of interdepartmental disagreements, ensuring enduring high-level political commitment.
  - include one or more nongovernment representatives (e.g., employers and tax professionals) to secure broader stakeholder support and provide external perspective.
- Project Management Board:
  - should include experts with relevant technical and project management skills and experience;
  - be chaired by a senior SRC official at the Deputy Chairman level;
  - responsibilities: manage and coordinate project teams, produce consolidated budget and timeline and reconcile with the Steering Group, identify and manage resource bottlenecks and other risks.
- Project teams:
  - should be staffed full-time by subject experts in strands such as IT, legislation, operational processes, compliance, taxpayer services;
  - responsibilities: scope detailed changes, produce realistic timetables and budgets, implement changes;
  - during Stage 1: carry out detailed scoping, produce resource budgets and implementation timelines, which are consolidated by the Project Management Board and reconciled with the Steering Group.
  - coverage must include: legislation, IT, business processes, employer reporting and electronic processes, audit and risk assessment routines, banking, accounting, debt management and arrears collection, organizational changes, transfer/recruitment/training of staff, employer and taxpayer information and education.

### Typical project team brief (Box 4)
- Each workstream brief should include:
  - Clear mapping of the work to be undertaken.
  - Timelines for delivery of each work component.
  - Milestones with delivery dates to allow tracking and early warning of risks.
  - Dependencies: internal (with other workstreams) and external (with other department and government reforms).
  - Connection between workstream activities and overarching reform.
  - Appropriate parameters to measure success of team’s delivery.
  - Estimated budget including clearly identified contingency.
  - Details of key staff resources and where/how obtainable.
  - Workstream risk register.

### User experience (UX) based design principles (Box 5)
- Start early: spend time with current and prospective users to understand perspectives and context.
- Use a range of methods of UX based design: qualitative and quantitative research to determine goals, needs, behaviors.
- Use prototypes: test assumptions and solutions with real people, in the field if possible.
- Share your findings: document and share research findings with team members, managers, and the public whenever practical.
- Test regularly: regularly test the product with potential users as it is being built to ensure it meets people’s needs.

### Learning from peers and regional cooperation
- SRC can learn from other tax administrations that have implemented such systems; Kazakhstan has already shared experiences.
- The IMF can assist SRC to connect with other tax administrations in the region that have implemented Universal Declaration Systems.

### Implementation risks and mitigations (summary drawn from Table 7)
- Governance risk:
  - Risk: poor governance of the reform.
  - Mitigation: Implement the structures and arrangements described in the ‘Implementation Governance and Project Management‘ sub-section (Figure 13, Figure 14).
- Planning risk:
  - Risk: poor planning.
  - Mitigation: SRC to develop a comprehensive Project Plan to implement the new system as soon as possible.
- Existing compliance weaknesses:
  - Risk: compliance issues with the current system (e.g., Rental income, Freelancers, Seasonal and Platform Workers, and Private Rental Arrangements).
  - Mitigation: Develop a risk assessment, Compliance Improvement Plans, and consider recommendations to change the law; require access to bank information and powers to audit individuals.
- Staff capacity and taxpayer support:
  - Risk: SRC staff do not know about the new system or can’t advise individual taxpayers.
  - Mitigation: Develop a staff skilling and training plan and ensure sufficient SRC experts to advise taxpayers.
  - Risk: Individual taxpayers have not heard about the new system.
  - Mitigation: Develop a Marketing and Communication Plan.
  - Risk: Individual taxpayers do not know how to use the new system.
  - Mitigation: Clear instructions for self-service and provision of taxpayer services (call-center, advice, education, website).
- Data and IT risks:
  - Risk: an individual taxpayer's prefill data is not complete or available.
  - Mitigation: Ensure extensive third-party data collection and quality of data.
  - Risk: Information Technology Build and Declaration interface and systems.
  - Mitigation: Ensure SRC’s current IT technology and capacity can deliver the new system.
- Compliance assurance and fraud risk:
  - Risk: the new system may generate refunds and the SRC needs to ensure integrity in the tax refund system to mitigate potential fraud; need to improve compliance with registration, withholding and reporting systems.
  - Mitigation: integrity measures for refunds and improved compliance processes.
- Notification and take-up risks:
  - Risk: Individual Taxpayers do not know that the declaration is available to review and sign.
  - Mitigation: Inform taxpayers via email or SMS.
  - Risk: Low community take-up and low participation, including taxpayers with low financial literacy and poor access to technology/internet.
  - Mitigation: Ensure taxpayers understand benefits; consider international good practices such as volunteer services to assist electronic lodgment.
  - Risk: Taxpayers have to pay for an electronic signature to sign their declaration.
  - Mitigation: Ensure taxpayers can sign without charge.
- Specific legal/administrative risks:
  - Risk: Senior Civil Servants will have to lodge an Anti-Corruption Declaration and a Universal Declaration.
  - Mitigation: Ensure those affected understand why.
  - Risk: The Taxpayer Register is not complete.
  - Mitigation: Make it easy for initial registration of natural persons via multiple registration channels.
  - Risk: Poor consultation with external stakeholders.
  - Mitigation: Set up a consultation forum with impacted stakeholders.

### Revenue administration recommendations
- As a matter of urgency, create a joint SRC and MoF working party to co-design the new system so that all administrative and policy issues are considered, and an efficient and effective system is implemented.
- Implement the governance and project management structures and arrangements as set out in Figure 13 and Figure 14; as a matter of urgency, implement Stage 0.
- Amend the Bank Secrecy law so that it is mandatory for banks to provide the SRC with all interest receipts and a unique identifier so that the interest can be pre-filled into the individual tax declaration.
- Amend the Tax Code to allow tax audits of individuals.

### Capacity development and IMF assistance
- SRC may consider requesting CD assistance from the IMF on implementation of the Universal Declaration, particularly to address the risks identified in Table 8 and to advise on international good practices to mitigate them.
- Authorities may also consider requesting IMF assistance on a possible reform of the taxation of micro and small enterprises (which bears on CIT and VAT); this could be the object of specific assistance.
- Assistance could also be provided on social protection.

*Source: IMF Staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1armea2023001.pdf_