UNCLAS YEREVAN 000085
SIPDIS
E.O. 12958: N/A
TAGS: ECON, EFIN, AM
SUBJECT: PAY YOUR TAXES, WIN THE LOTTERY!
SUMMARY
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1. (SBU) In an effort to encourage greater tax compliance by
both retail sales outlets and consumers, the State Revenue
Committee this month introduced a lottery that pays prizes to
persons holding a winning cash register receipt. This
follows regulations issued last fall requiring all retail
sellers to install cash registers. The GOAM has adopted this
strategy to reduce the size of Armenia's "gray" economy and
increase its low rate of tax collections. The lottery is
supported by an extensive public awareness campaign. The Head
of the State Tax Service reports that the lottery and
increased enforcement have led to a 20-fold increase in the
use of cash registers by retailers, though the impact of the
lottery itself is not clear. END SUMMARY
MANDATING CASH REGISTERS TO STEM GREY ECONOMY
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2. (U) In October 2008, the GOAM introduced a requirement
that all retail markets install cash registers and provide
receipts to customers, and began to enforce this requirement
on January 1. The GOAM estimates that 30-40 percent of
economic activity in Armenia occurs, unrecorded and untaxed,
in a gray economy. This is one contributory factor to
Armenia's 2008 tax/GDP ratio of 17 percent, which while an
improvement over the 16.1 percent ratio of 2007, remains the
lowest among CIS countries. The cash register requirement,
according to Aharon Chilingarian, Deputy Chairman of the
State Revenue Committee, applies to all retail vendors,
except in the most remote regions of the country.
3. (SBU) Chilingarian told Econoff that the GOAM found the
idea of a lottery by studying the experiences of several
other countries --including Singapore--that had sought to
improve retail tax compliance. He reports that through a
combination of increased enforcement and the lottery, the
number of cash registers deployed in markets has increased
from 400 to over 8,000 (Note: He did not provide an estimate
of how much each measure has contributed to this increase.
End Note)
PROMOTING A CULTURE CHANGE?
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4. (U) The GOAM hopes that the lottery will encourage
customers to demand receipts from shop owners and market
sellers, and estimates that the lottery--which it plans to
run for three years--will increase tax revenues by USD 17
million per year, equal to just over one-half percent of the
federal budget. The winning number must match an eight-digit
number printed on the back of each cash register receipt.
The first drawing was held on Friday, February 6, with two
winners each receiving approximately USD 1,800. A single
prize could be as high as USD 16,400. In all, AMD 115
million (about USD 375 thousand) will be available as prizes
each month. The GOAM is supporting the lottery with an
extensive public awareness campaign, including television
commercials featuring Armenia's best-known comedian. Early
anecdotal evidence suggests that the strategy is working;
customers--often spurred by their children, as one of our own
FSNs related from experience--are increasingly demanding
receipts for their transactions, no matter the low odds of
winning.
COMMENT
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5. (SBU) While we fully support the GOAM's efforts to
increase tax compliance at all levels of the Armenian
economy, the lottery provides little direct incentive for
retailers to install cash registers, though if consumers
start to favor receipt-providing businesses that would bring
market pressure. Consumers have already begun to clamor for
the government to award more prizes, even if at lower prize
values. We suspect enforcement penalties have likely been
the greater motivator to date. It remains to be seen how
strong a factor this will become in changing consumer and
retailers' behavior. Nonetheless, it is possible that the
lottery, combined with a public awareness campaign, could
bring about a cultural change in a country accustomed to gray
markets and tax avoidance. Aside from enlisting consumers'
help in boosting shop owners' compliance, the tactic may also
help build a positive political constituency among consumers
for the new cash register mandate, which is deeply unpopular
with small business owners and had provoked angry muttering
in parliament questioning the wisdom of imposing higher costs
on the business community at a time of rising economic
distress. At any rate, the GOAM earns points for creativity.
YOVANOVITCH