Saturday, June 6 2015 09:38

In the middle of May, the Finance Ministry of Armenia held a discussion with the heads of the taxation and customs agencies over regulation and improvement of the processes and procedures of integration into the Eurasian Economic Union (EEC).  On the heels on the meeting, Director-Analyst of ArmInfo Emmanuil Mkrtchyan had discussed topical issues of integration with Timur Suleymanov, the Eurasian Economic Commission Board Member-Minister of Economy and Financial Policy, who was in Armenia to attend the discussion.

Mr. Suleymanov, what are the most important issues for our country on the way to the Eurasian integration at present? Formally, our country was ready to access the Union, while in practice, there are a range of unsettled problems, aren’t they?   

Sure, the Treaty on the Eurasian Economic Union is an extensive document – an over 1,000-page text and an extensive contractual base comprising numerous treaties, agreements and decisions. Therefore, it is not easy to process such volumes of legal information and put into effect the regulatory framework in the national legislation and in the compliance practices. Our today’s discussion and the visit to Armenia, at large, were dedicated to the settlement of those problems. We analyzed how the provisions that are mandatory for all the EEU countries will be implemented in Armenia.

We analyzed the tax legislation, the Law on VAT, the Law on Excises, the peculiarities of calculating the VAT and excise tax in the transactions with the EEU countries. We discussed some interpretations of legal documents that need certain correction and the cases when it is necessary to change the compliance practices.  You must admit that Armenia has entered quite different path, as before Jan 1 2015, for instance, there was quite different system of VAT charging for mutual deliveries with partner countries.  That system has changed tangibly. That is why, with our Armenian colleagues we had many questions to each other. We discussed issues related to the VAT and excise tax for import of goods from the EEU countries, issues of how to fill declarations on import of goods, cooperation of the information systems of the taxation agencies. We coordinated the systems so that the information is provided using computer-aided procedures. We have picked up some issues that need elaboration and we will be discussing them at the bilateral level – Armenia and the Commission – and in the five-party format – at the Commission’s Consultative Committee for Taxes with participation of the colleagues from the EEU countries.  We will be developing common decisions and submitting them to the EEU countries for regulatory enforcement of many issues in the partner-countries.

Eventually, VAT has turned into a legal “casus” for the business society. Businessmen are often reluctant to pay VAT, though it was to be lifted on January 1 2015.  In Russia, Armenian exporters are still charged an 18% VAT. Why?

It is an economic rather than legal “casus” when Russian taxation agencies charge an 18% VAT while they have the right not to charge it at all. Why? Simply they fear consequences, as the contractor of the foreign economic activity – the person the exporters sold the goods to – must confirm the zero rate of VAT. If the contractor confirms that he has already paid VAT, filled the necessary application and submitted it to the customs service, which has accept it, the zero rate can be applied. As you can see, a range of procedures is required to confirm the zero rate.

 As I see it, exporters face a paper-laden process and will hardly get that money back…

Not, the money will not be returned, as an 18% VAT is still charged in Russia and a 20% VAT is charged in Armenia, unless the contractor confirms the zero rate. The problem is not so much that the money should be returned to anyone it is that we need to relieve that headache of importers and exporters. In fact, we have arrived at a conclusion on how to facilitate this procedures considering that Armenia has no borders with the other EEU countries and the customs transit declaration is anyway filled in Armenia when importing or exporting goods.  The fact of export can be confirmed by the customs agencies  - they are on the border with Georgia regardless of anything – not by the contractor. We have asked our Armenian colleagues to submit their suggestions at the upcoming meeting of the Consultative Committee for Taxes.  Hopefully, if we manage to take into account these peculiarities of Armenia, we will be able to make the necessary alterations to the general protocol on taxes. However, this process will take time. So I would not like to comfort businessmen. The agreement must be changed, which will take some time.

What about excises?

We work to harmonize the alcohol and tobacco excises – our countries have certain commitments to the EEU Treaty. We will strive to harmonize the excise taxes for the goods the prices of which depend on the excises.  It requires some time too. We will be settling the issue gradually, softly, to ensure the right and fair competition on the common commodity markets.  We have drafted agreements on the principles of tax policy concerning tobacco and alcohol excises.

EEU prime ministers met at the meeting of the Eurasian Intergovernmental Council in Burabay (Kazakhstan) on May 29. We have discussed the issue there and made a conceptual decision to complete the work on the two agreements before Dec 1 2014 simultaneously with the Agreement on Regulation of the Alcohol Market within the EEU on the basis of the peculiarities of the economic development of the new members of the Union – Armenia and Kyrgyzstan. These documents will determine the pace and dynamics of the excise rates in all the countries for the coming five years so that we could have a common spread of rates. 

Do you mean that there will be no common excise rate?

Yes, there will be a certain spread of the rates and it will be possible to deviate from it insignificantly. 

Speaking of the problems of our businessmen, I’d like to outline the so-called “parallel” import. I have recently attended a meeting of Armenian exporters-producers and, frankly speaking, they are confused. How do you settle this problem? Anyway, that meeting ended and the officials failed to give any specific answers to the questions of the business society.   

It is an extremely difficult problem. Our treaty contains a regional principle of exhausting i.e. if a copyright holder is in your territory and he has registered a trademark at the patent office, he receives legal protection for his trademark.   Consequently, an importer cannot import a similar commodity of the same trademark without the contest of the copyright holder.  This is the essence of the regional principle of exhausting and it applies to all the Union countries.

Before that, the international principle of exhausting was applied when the consent of the copyright holder was not required. Once putting a commodity in free circulation, you lose the right to protection irrespective of the borders. You produce a commodity, sell it, and it can be exported to everywhere. The regional principle of exhausting is important for the protection of investors’ rights and for development of a more attractive investment climate, especially in the high tech and scientific sectors where the share of intellectual property is not big.  There are more simple goods that do not need such high protection. Therefore, to combine various trends, we have set up a common Working Group to develop suggestions regarding the further application of the principle of exhausting to the intellectual capital. The Group comprises also representatives of Kyrgyzstan – the country is in the process of accession to the EEU. I head the Group. We are preparing proposals for our governments.  We have developed a concept under which the regional principle of exhausting is maintained in the Union with a possibility of waivers for separate groups of goods. That is, each problematic group of goods is analyzed, first of all, by anti-monopoly bodies, as well as by the ministries of industry and economy. If they see an uncompetitive situation and market abuse due to the protected trademark, they submit a proposal to the Commission Board or to the Intergovernmental Council and that group of goods may be deprived of legal protection. The international principle of exhausting will be applied for it.

So, will it be no longer necessary to coordinate ones actions with the copyright holder? Will the goods have a free access to the market?    

Certainly, they will, if it is proved that the economic situation, competitive situation and social (price) situation in this category of goods are unhealthy. In that case the goods fall under a waiver for two years until the market situation is stabilized and the competitive environment becomes fair. Actually, we analyzed the regulatory structure of the World Trade Organization and other documents and arrived at the conclusion that such a hybrid document does not run contrary to international commitments. Kazakhstan, Belarus and Kyrgyzstan are not ready to fully switch to the international principle of exhausting. In the meantime, the purely regional principle is not always convenient to Armenia and Kyrgyzstan. Therefore, I think the priority should be given to the hybrid principle. 

As we know, each country joined the Union with its own list of waivers from the common customs regime. In any case, Armenia has rather serious reasons to forward its own list of almost 800 items to protect the domestic market for the next few years at least. Do the waivers work well? Aren’t there any discrepancies among the partners or any complaints?  

This question should be addressed to the governments, not to us or to the Eurasian Economic Commission. The partner countries have no complaints against Armenia regarding the goods under the waivers. The Commission has received no such complaints. No one has told Armenia that certain goods hinder or distort the market situation.    

President of Belarus Alexander Lukashenko has some complaints against the Eurasian Economic Commission. He has repeatedly voiced them with a view to the so-called “customs war”. The President blames the Commission for being idle and for the fact that the Commission, as a supranational structure, shuts eyes to what happens to the Belarusian goods on the border with Russia.  

It is hard to comment on the President’s opinion. The Commission takes steps within the scope of the powers provided by the member states. The Commission is provided with powers under an agreement to be ratified by the parties. It is for the parties to decide whether to transfer the technical regulations from the national competence to the Eurasian Economic Commission or not. If the parties take no such a decision, the Commission has no regulatory functions. Certainly, the Commission can monitor the situation, but it can take no decisions that go beyond the scope of its powers. Believe us, we are very active within our powers and we react quite promptly to any discrepancies among the parties.

 

The technical regulations are a separate serious matter. Armenian experts are concerned over possible development of single standards that may fail to take into account the national specificity. Over the period of independence, the standardization sector in Armenia was ruined almost totally, and the system of national standards was considered to have run its course. In the partner countries, on the contrary, the state standards were developing. It is rather disadvantageous to set up new structures and a new system of standards in Armenia today. Some experts believe it is necessary to create the system, while others think it is enough to have a single system of standards within the EEU. What is your opinion?

We have technical regulations. We work on them together and these regulations apply to all countries. There are standards in Russia and Kazakhstan that will be applied in Armenia, Belarus, and Kyrgzystan too, and the vice versa.  Therefore, our technical regulations are common and are approved by the Commission Board.  As to the new standards, we have a list of standards that are developed at the initiative of the countries. For instance, if the technical regulations are adopted, it is necessary to develop, for example, 200 related standards. Russia undertakes development of 100 standards, Kazakhstan – 50, Belarus – 30, and Armenia – 10.  That is, the countries develop the standards on their own and then coordinate them and adopt the final list.  In this light, Armenia will be provided with a new system of standards as a Union member. And these standards will be effective throughout the EEU area.

Do you mean that there is no need to rehabilitate the sector and set up a committee on standards?

No, not now, there is no need to set up a Committee that would develop narrow national regulations and standards, because the standards will be common.

Let’s talk about the labor market. It is an important topic given the high migration scales from Armenia. Is everything smooth in practice?

 There are still problems, indeed. I think we have made a big progress as regards assumption of formal legal commitments under the Treaty on the EEU. However, we have some problems with implementation of these commitments.  So far, the EEU citizens are required to fill an arrival–departure record when entering Russia or Kazakhstan. We are working with the migration services, frontier guards to settle that problem in conformity with the Treaty. There are some social security problems too. We receive complaints from Kazakhstan over improper fulfillment of the national, social security standards, but these are private, not systematic complaints. One cannot say that the regulatory standards of the Treaty on the EEU are not implemented.

Is the labor market package ready?

Sure, except the part related to the pensions. The pension issue needs a special approach in line with the Treaty. We are developing and coordinating it with the Labor Ministries. It is not an easy question, as the countries sometimes show diametrically different approaches. We are negotiating with the heads of the government to soften the stands of the countries and make their approaches more flexible. If we adopt a pension package, the social package will be ready.

Parliament of Armenia has recently passed a law granting tax privileges to the companies exporting construction services. Economists say that issue was to be coordinated with partner-countries, because it may affect their tax sovereignty.

I am not familiar with the given decision.  In our regulatory framework there are issues connected with export subsidies for goods. In the given case I see no need for export subsidies, as general privileges are provided to legal entities. It is a matter of tax sovereignty, which is observed in the Treaty on the EEU. That is, the tax rates, forms, the payments types, tax reports – all this remains within competence of the countries that ensure their budget revenues for their social, budgetary, political and other purposes. 

Although it is early to speak of the single EEU currency, there are segments of the financial market where a single infrastructure or, at least, a high level of integration, should be developed.  I am speaking, for example, about a single stock exchange that will become a kind of driving force to boost mutual investments of various level, starting from portfolio investing up to strategic one. What are we going to that end?

We are working towards implementation of that idea. We have benchmarks and we know in what direction to work. By 2025, we must complete the process of mutual recognition of securities and licenses of the professional members of the capital market.

It is rather a long term for the single exchange market, isn’t it?

As you have noticed, we plan to create a single financial market: banks, insurance companies and a single financial mega regulator by 2025, rather than a single currency. Of course, the sensitivity of the banking sector and the securities market in the EEU and in the United States, where the exchange market is the key sources of financing, is quite different. Since our securities market is less sensitive, we are sure that we will be able to establish a single securities market sooner than in 2025. We have a pilot “broker-dealer” i.e. two key specialties in the securities market that are differently licensed in our countries.  We have agreement with regulators on the issue, we have prepared an agreement that will enable brokers and dealers to work at the stock exchanges of all the EEU countries, I am speaking about access to the trading floors of the professional operators in exchange markets.

It will be hard to move forward without a single trading floor…

This question should be addressed to stock exchanges. Frankly speaking, there are no hindrances to uniting the electric trading floors of our countries. If the exchanges seek to unite their trading floors, hold cross-listings, they can do it. If any infrastructure or normative barriers emerge on that way, the Commission is ready to tackle any issues. For that purpose, the exchanges that are profit-seeking economic entities are required to submit a relevant request to the Commission. Our task is to create conditions for them. With the development of economic integration processes of our countries, I think  the establishment of the single exchange market is not far off.