Attachment_B_CP_on_PRS_Mod2_SOL_TRP.pdf

USAID|Armenia Pension and Labor Market Reform Project (PALM)

ԱՄՆ ՄԶԳ/ՀԱՅԱՍՏԱՆ, ԿԵՆՍԱԹՈՇԱԿԱՅԻՆ ԵՎ ԱՇԽԱՏԱՆՔԻ

ՇՈՒԿԱՅԻ ԲԱՐԵՓՈԽՈՒՄՆԵՐԻ ԾՐԱԳԻՐ

Concept Paper on Unified Income Tax and Funded Contribution

Personified Recordkeeping System

June 2011 Yerevan, Armenia

This document was made possible by the support of the American People through the U.S. Agency for International

Development. The contents are the sole responsibility of the authors and do not necessarily reflect the views of

USAID or the US Government..

akarapetyan Typewritten Text Attachment B akarapetyan Typewritten Text akarapetyan Typewritten Text SOL-111-12-000001, Amendment 2

Content

1. Pension reforms in the Republic of Armenia

1.1 Participants of mandatory funded system

1.2 Rates of mandatory funded contribution

1.3 Introduction of income tax

1.4 Introduction of personified recordkeeping system

1.5 Procedures for filing reports and making contributions

2 Institutions involved in the implementation process of pension reforms

2.1 Powers of the RA Ministry of Labor and Social Issues

2.2 Powers of the State Revenue Committee of the RA Government

2.3 Functions of the RA Ministry of Finance

2.4 Powers of the RA Central Bank

2.5 Functions of the Registerkeeper of Participants

3 Brief description of current situation

3.1 Pension system and personified recordkeeping

3.2 Information system of social security cards

3.3 Information system of taxpayers‟ registration

3.4 Registration and charging income tax and mandatory social security contributions

3.5 SRC electronic management system “Taxpayer 3”

3.6 Connectivity and network infrastructures

3.7 Hardware and licensing of software

4 Unified income tax and funded contribution personified recordkeeping system

4.1 The Goals of the system

4.2 Factors of efficient implementation of the system

4.3 Identification of data in the system

4.4 System integration to SRC‟s “Taxpayer 3” system

4.5 Approaches to the development of the main modules of the system

4.6 Main modules of the system

4.6.1 Module 1. Registration ........................................................ Error! Bookmark not defined.

4.6.2 Module 2. Declaration filling, submission and verification Error! Bookmark not defined.

4.6.3 Module 3. Reconciliation of declarations and paid sums, calculation of additional funded contributions from the state budget ........ Error! Bookmark not defined.

4.6.4 Module 4. Data exchange

4.6.5 Access to data of the individual account of the natural person (data subject)

4.6.6 Reports generated by the system

5 Challenges, risks and recommendations

5.1 Exclusively electronic submission of declarations

5.2 Creation of the preliminary database

5.3 Provision of electronic signatures

5.4 Need for additional procedures

5.5 Technical risks

5.6 Legislative changes

Abbreviations

RA Republic of Armenia

UTPRS Unified Income Tax and Funded Contribution Personified

Recordkeeping System

USAID PALM United States of America, Agency for International Development, Pension and Labor Market Reform Project

MLSI RA Ministry of Labor and Social Issues

CT MF Treasury of the RA Ministry of Finance

RA SRC State Revenues Committee of the Republic of Armenia

CDA Central Depository of the Republic of Armenia – the

RegisterkKeeper of Participants

CBA Central Bank of the Republic of Armenia

SSSS State Social Security Service

Nork IAC Nork Information-Analytical Center Closed Joint Stock Company

TIN Taxpayer Identification Number

PE Private Entrepreneur

SSC Social Security Card

FPS Funded Pension System

SPS State Pension System

MFPS Mandatory Funded Pension System

Introduction

The present document has been elaborated by the USAID PALM Project to implement the plan time table for elaborating tender package for implementation of unified income tax and funded contribution personified recordkeeping system. The purpose of the document is to present the overall picture, proposed approaches and business processes of unified income tax and funded contribution personified recordkeeping system, which are based on best international experience and, in the meanwhile, derive from the package of laws on the new pension system adopted by the RA National Assembly.

The document will allow the organizations participating in the bidding process to have a general understanding on the approaches of the designed information system, which will help them in assessing the system and submitting the bidding documents. A number of approaches and recommendations presented in the document have no legal power as such and are not approved by the state government bodies as the necessary legal acts have not been yet developed and approved. It is likely that the suggested approaches will need additional changes after the legal acts are approved.

USAID PALM experts worked in cooperation with the SRC specialists and explored the “Taxpayer 3” system to the possible extent. All the approaches presented in the document are integrated with the

“Taxpayer 3” system.

The procurement and installation of the information system ensuring the functioning of the unified income tax and funded contribution personified recordkeeping system, as well as hardware and licensed software required to ensure maintenance of the above-mentioned system in the RA State Revenue

Committee, will be implemented within the framework of the World Bank Social Protection

Administration Project.

1. Pension reforms in the Republic of Armenia

The Government of the Republic of Armenia has undertaken drastic reforms in the pension system through the approval of the Pension Reform Program under the Decree N 1487-N, dated November 13, 2008, aiming to introduce multi-pillar pension system, which besides the current pay-as-you-go component, will include another two components – mandatory funded and voluntary funded components.

In December 22, 2010, National Assembly of the RA adopted the package of laws ensuring the implementation of pension reforms, which includes the following laws:

1) RA Law “On State Pensions”;

2) RA Law “On Funded Pensions”;

3) RA Law “On Income Tax”;

4) RA Law “On Personified Recordkeeping of Income Tax and Mandatory Funded Contributions”;

5) RA Law “On Investment Funds”.

Currently the legal acts ensuring the enforcement of the laws are in the development stage.

Voluntary funded component started operating since January 2011.

The mandatory funded component will start operating from January 2014.

1.1 Participants of mandatory funded system

All employees, private entrepreneurs and notaries born after January 1, 1974, shall participate in the mandatory funded component on obligatory basis.

Employees and persons in public service, notaries, private entrepreneurs and the self-employed born before 1974 can also join the mandatory funded component on voluntary basis regardless of their age.

The decision to voluntarily join mandatory funded component is final. When the person makes a decision to join the mandatory funded component voluntarily, he/she is obliged to open a pension account in the

Registerkeeper of participants by filing an application and receiving a certifying document on opening of pension account. Based on that, from the month following the opening of pension account, the tax agent will calculate and make mandatory funded contribution from the base income.

The obligation to make mandatory funded contribution will be preserved till the start of retirement age. If the participant continues working after the completion of retirement age, then he/she will be exempt from the obligation to make mandatory funded contribution, although he/she can choose to continue participating in the mandatory funded component. After the retirement age, no additional funded contributions from the state budget will any longer be made for the participant. The participant shall continue making mandatory funded contributions unless the Registerkeeper of participants receives an application from the participant on getting funded pension and has informs the SRC about it.

1.2 Rates of mandatory funded contribution

The participants of mandatory funded component are obliged to make funded contribution of 10% from the base income in the following manner:

If the participant, who is a hired employee, receives a monthly base income (tax base) not exceeding

500000 drams, then he/she is obliged to make a monthly funded contribution in the amount of 5% of his/her base income, and the other 5% is paid from the state budget to complete the required 10%. If monthly base income exceeds 500000 drams, then the monthly amount to be paid from the state budget for the participant shall be 25000 drams, and the participant shall, on monthly basis, contribute the rest of the amount to complete the required 10%.

The participant receiving base income from several sources is obliged to make pension contribution, equal to the difference between the 10% of his/her annual base income and the contributions made by the state, after each calendar year, before April 15 of the next year.

The participant who is a private entrepreneur or a notary with an annual base income not exceeding

6000000 drams, is obliged to make funded contribution of 5% of his/her base income, and the other

5% is paid from the state budget to complete the required 10%. If the annual base income of the participant, who is a private entrepreneur or a notary, exceeds 6000000 drams, then the annual contribution made from the state budget shall be 300000, and the participant shall pay the rest of the amount to complete the required 10%.

The participant, who voluntarily joined mandatory funded component, shall make funded contributions equal to 5% of base income. No additional funded contributions will be made for him/her from the state budget.

In case of failure to make the mandatory funded contribution within the defined date, the participant of the mandatory funded contribution (the person charged with the responsibility to make his/her mandatory funded contributions – the tax agent) shall pay a fine of 0.15 percent of the mandatory funded contribution not duly paid against each expired day.

1.3 Introduction of income tax

The tax system will also undergo changes within the framework of the pension reforms. After January 1, 2013, instead of the existing income tax and mandatory social security contribution, one unified income tax will be applied. The monthly rate of the income tax for the base income of up to 120000 drams will be

24%, and in case of base income exceeding 120000 drams, it will be 29800 drams plus the 26% of the amount exceeding 120000 drams.

Figure 1 describes the flow of monetary funds and information in the new pension system:

Figure 1. Flow of monetary funds and information in the new pension system

1.4 Introduction of personified recordkeeping system

To ensure regular functioning of the pay-as-you-go and mandatory funded pension components, it is necessary to develop and implement a unified income tax and funded contribution personified recordkeeping system in the SRC of the RA, which will allow ensuring the collection, personified recordkeeping and supervision of income tax and mandatory funded contribution, transfer of mandatory funded contributions to the Registerkeeper of participants, as well as allow collecting and transferring the data, required for the functioning of the pay-as-you-go component, to the RA Ministry of Labor and

Social Issues.

The collection of income tax and mandatory funded contribution by one authority, the SRC, will also enable the following:

1) Reducing expenses and inconsistency related to the collection of the same data by different bodies;

2) Minimizing the possibility of errors and forging of submitted data;

3) Improving the service and convenience for the data submitters.

The personified information system will be formed on the basis of information submitted by the employers paying income tax and funded contributions, by those hired employees earning income within the scope of a civil-legal contract, whose employer is exempt from tax agent duties in accordance with the

Ministry of Labor and Social Issues, NORK Center

Money Flaw

Information Flaw procedures prescribed by the legislation, by private entrepreneurs, notaries, self-employed, state government bodies and the Registerkeeper of participants.

1.5 Procedures for filing reports and making contributions

The submission of personified declaration for the unified income tax and funded contributions

(hereinafter referred to as „declarations‟) and the payments shall be carried out in the following manner:

1. The employers acting as tax agents shall, before the 20th of each month, submit a personified declaration to the SRC on the incomes they paid and the income tax and funded contribution calculated from the mentioned income for the previous month. Within the same time period, he/she shall calculate the income tax and funded contribution for his/her hired employees, for those receiving income from the works and provided services on the basis of civil-legal contract, and, based on a separate payment order, pay the income tax to the unified treasury account (state budget) and the funded contribution – to the special treasury account called “Bridge”.

2. The employers exempt from tax agent‟s duties shall, before the 20th of each month, submit a personified declaration to the SRC on the salares paid during the previous month without indicating the size of the income tax and funded contribution.

3. The hired employees and those, receiving income within the scope of civil-legal contract, working for the employers exempt from tax agent‟s duties, shall, before April 15th of each year, submit to the SRC a declaration on the income they received for the previous year and the income tax and funded contribution calculated from the mentioned income, according to the social security card number or the number of the certificate on not having a social security card. They calculate the funded contribution and income tax for the income they earned last month and, based on a payment order, pay the income tax to the unified treasury account (state budget), and the funded contribution – to the special treasury account “Bridge” before the 20th of each month.

4. The private entrepreneurs, notaries and the self-employed shall submit a declaration to SRC on their income for the previous year and the income tax and funded contribution calculated for the mentioned income before April 15th of each year. They shall pay the income tax and funded contribution annually, calculated by themselves, on the basis of separate payment order, the income tax shall be paid to the unified treasury account (state budget), and the funded contribution – to the special treasury account “Bridge” before May 1st of the following year.

The tax payer, receiving income generated from entrepreneurship activities throughout the year, is obliged to make advance income tax payments. The advance payments shall be made quarterly, no later than 15th of the last month of the quarter, in the amount equal to one sixth of the actual income tax of the previous year.

5. The participants of mandatory funded contribution receiving base income from one and more sources at the same time, shall make contributions to the special treasury account “Bridge” in compliance with the notification submitted by the SRC, equal to the difference between the 10% of his/her annual base income and the contributions made by the state, after each calendar year, before April 15 of the following year.

6. Those who submit declarations can also submit corrected declaration for the purpose of correcting inaccuracies found in the submitted declaration.

The SRC shall check the data of the received declarations, compare with the data obtained from state government bodies and compare the accepted declarations with the data on payments received from the

Treasury, based on the declared amount of income, calculate the amount of additional funded contribution to be made from the budget for each employee, as well as the total sum for companies with more than 1 employee and send two orders to the Treasury: 1) on transferring the funded contribution from “Bridge” account to the CDA, and 2) on transferring the additional funded contribution from the state budget to the

CDA. The excessive amount of funded contributions transferred to the account of Registerkeeper of participants shall not be returned to the participants, instead they will be considered when calculating and paying future funded contributions.

At the same time, the SRC shall submit information to the CDA personified by TINs. For natural persons not having TINs, the information shall be submitted according to the number of social security card or the number of the certificate on not having one.

The CDA shall, in its turn, submit information to the SRC on the participants voluntarily joining the mandatory funded system, as well as on those participants with completed retirement age who presented an application on receiving funded contribution.

Figure 2 shows the scheme of the flow of monetary funds in the mandatory funded pension system:

Figure 2. Flow of monetary funds in mandatory funded pension system

The employers shall submit unified income tax and funded contributions personified declarations, without including information on funded contribution, before February 20th of 2013 for the January of 2013.

Starting from January 1, 2014, the declarations shall also include information on funded contributions.

Private entrepreneurs, notaries, the self-employed and those hired employees, whose employer is exempt from the tax agent‟s duties in accordance with the procedure prescribed by the legislation, will submit for the year of 2013 before April 15, 2014. The declarations submitted in April 15, 2015 for 2014 shall include information on funded contribution.

2. Institutions involved in the implementation process of pension reforms

The state institutions responsible for the implementation of pension reforms are the following:

1. RA Ministry of Labor and Social Issues

2. RA Ministry of Finance

3. RA Ministry of Economy

4. RA State Revenue Committee

5. RA Central Bank

Aiming to coordinate the activities of the aforementioned institutions and to accept the outcome of the works being done, a Management Board for Ensuring Implementation of Pension Reform was established on the basis of the Decree N 58-N of the RA Prime Minister, dated February 3, 2010. The Management

Board includes representatives from institutions responsible for the implementation of pension reforms, RA Ministry of Justice, RA Central Depository and the RA Government. The Chairman of the

Management Board is the Deputy Minister for Labor and Social Issues. The functions of the Management

Board are as follows:

1. Ensure implementation of the RA Pension Reforms Program.

2. Ensure implementation of actions planned under the time table approved by the RA Government

Decree N1487-N, dated November 13, 2008.

3. Discuss the issues raised during the implementation of actions envisaged under the time-table and provide recommendations on solving those.

4. Submit comments and recommendations on the drafts of legal acts, technical specifications, reports and other documents ensuring the implementation of the reforms.

5. Coordinate actions for pension reform implementation.

6. Ensure the cooperation between the bodies involved in the pension reform process.

In the process of pension reform implementation, the functions and powers entitled to the state institutions responsible for the implementation of pension reforms are presented below.

2.1 Powers of the RA Ministry of Labor and Social Issues

1) To develop and ensure uniform policy for pay-as-you-go pension component;

2) To develop and submit for the RA Government consideration the legal acts of unified income tax and funded contribution personified recordkeeping;

3) To provide the data of social security cards operated by Nork IAC to the RA SRC;

4) To complete the reforms of pay-as-you-go component and ensure regular functioning;

5) To establish and run the state pension system data base.

2.2 Powers of the State Revenue Committee of the RA Government

1) To establish and run the information system for unified income tax and funded contribution personified recordkeeping system;

2) Within the defined time, to receive declarations for unified income tax and funded contribution personified recordkeeping system from the employers, hired employees, private entrepreneurs, notaries and the self-employed exempt from the duties of tax agent, to check the credibility of the declarations, inform the person submitting the declarations about errors, if any, enter the data of the declaration into the information system;

3) To ensure the collection of unified income tax and mandatory funded contribution in compliance with the existing legislation and submit a report on the collections to the RA Ministry of Finance;

4) To examine the complaints filed by the employers, notaries, private entrepreneurs, as well as the natural persons (the subject of the data), and, where necessary, require to submit a corrected declaration replying the applications in writing;

5) To submit a personified declaration on the paid mandatory funded contributions to the

Registerkeeper of participants;

6) Based on the accepted declarations, to calculate the amount of additional funded contributions from the state budget for the participants of mandatory funded pension system born after 1974, as well as the amount of additional payments equal to the difference between the 10% of the base income and the respective contribution made by the state;

7) To provide orders on transferring mandatory funded contributions, entered on the treasury

“Bridge” account of the authorized state body of the RA Government financial sector, as well as transferring the additional funded contributions, in the cases specified by the law, from the state budget to the account of the Registerkeeper of participants, which is placed in the RA Central

Bank;

8) To implement the collection and transfer of the data, specified by the law, to the MLSI in order to ensure regular functioning of the pay-as-you-go component.

2.3 Functions of the RA Ministry of Finance

1) To develop and ensure uniform policy for the funded pension component;

2) To notify the SRC on making of the unified income tax and mandatory funded contributions; in the case of legal entities, according to TINs, for natural persons, according to the number of social security card or the number of the certificate on not having one;

3) To transfer funded contributions made and the additional funded contributions from the budget to the Registerkeeper of participants upon receiving respective order from the SRC; in the case of legal entities, according to TINs, for natural persons, according to the number of social security card or the number of the certificate on not having one;

4) To carry out projections on the amount of mandatory funded contributions made for the participants from the state budget for each financial year, which are considered when preparing the draft state budget for each year;

5) To submit recommendations on the investment restrictions to the RA Government.

2.4 Powers of the RA Central Bank

1) To define preventive requirements for the pension fund managers, including market, operational, liquidity requirements and those related to other risks;

2) To register the rules of pension fund;

3) To define the form of the declarations submitted, and also being published, to the participants by the managers of pension funds (in case of voluntary pension funds), the procedure for submitting those declarations, as well as a number of other regulations ensuring the functioning of the funded pension component;

4) Based on the reported information received from pension fund managers, to develop and publish public awareness information materials on mandatory funded component;

5) To supervise (within the scope of its competencies) the compliance of the activities of pension fund managers, custodians, Registerkeeper of participants and the account operator to the requirements of the RA Law “On Funded Pensions” and other normative legal acts;

6) To receive and analyse the declarations, submitted by the pension fund managers, custodians and the Registerkeeper of participants in compliance with the defined procedure;

7) Within the scope of its competencies, to carry out inspections/audits with the Registerkeeper of participants, account operators, pension fund managers and custodians.

2.5 Functions of the Registerkeeper of Participants

In compliance with the contract signed with the RA Government, the Registry of Participants shall be operated by the CDA. The RA CDA was established in 1996. Since 2009, NASDAQ OMX Group

Inc. is the owner of the CDA and the Stock Exchange of Armenia. As a Register Keeper of participants, CDA carries out the following functions:

1) Acts as a centralized custodian for the pension funds;

2) Develops and introduces a separate information system for the participants of mandatory funded pension system with the aim of operating the Registry of Participants;

3) Opens and runs pension accounts of the participants of mandatory funded pension system;

4) Organizes issuance of pension fund units, their entry into pension accounts, redemption of the pension units of participants and transfer of funds generated in the result of redemption of units to the insurance company;

5) Transfers the mandatory funded contributions from the special account opened in the Central

Bank to the account of respective asset manager indicated by the pension fund custodian;

6) Organizes exchange of the units of one pension fund with the units of another pension fund;

7) Organizes the payment of lump-sum and program withdrawals, as well as transfers the pension fund units held in the pension account of dead person in accordance with the expression of will by legatees;

8) Ensures the exchange of defined data with the unified income tax and funded contribution personified recordkeeping system of the SRC;

9) Provides information on pension accounts to the participants.

3. Brief description of current situation

3.1 Pension system and personified recordkeeping

At present, pay-as-you-go pension system is used in Armenia, which is based on the principle of solidarity of generations. Hired employees and their employers, private entrepreneurs, notaries and the self-employed are making mandatory social contributions, which are directed to the state budget.

Pensions are funded from the overall revenues of the state budget.

In 2005, PARNAS system for personified recordkeeping of persons involved in the mandatory social security system was introduced in the MLSI State Social Security Service. According to the RA

Government Decree N938, dated July 13, 2005, the employers shall, before April 1 of each year, submit a declaration to the regional SSSS office on the wages they paid to their employees during the last year and the calculated and paid mandatory social contributions by months. Private entrepreneurs shall also file declarations on their income and paid mandatory social contributions. The employers file a declaration also on signing and abrogation of employment contracts with natural persons.

After the introduction of unified income tax and funded contribution personified recordkeeping system in the SRC, the operation and maintenance of PARNAS personified recordkeeping system will be terminated in the State Social Security Service after they file the annual declaration for 2012 in March

2013.

PARNAS system data was initially envisaged to be used for forming the preliminary basis for unified income tax and funded contribution personified recordkeeping system. However, taking into consideration the issues related to the integration/completion of PARNAS system data, a decision was made on not using those data in the personified recordkeeping system to be implemented in the SRC. At present, within the framework of the World Bank Social Protection Administration Project, further activities are carried out in order to make PARNAS system data comprehensive and to integrate those data into the data base of newly developed pay-as-you-go pension system.

3.2 Information system of social security cards

In 2004, the system of social security cards was introduced in Armenia and is functioning since then. The objective of the information system of social security cards is the efficient organization of activities for providing social security cards to the RA citizens, foreign citizens having the right to reside and residing in the RA, persons without citizenship and those with the status of refugee.

Social security card is a document provided to the citizens of the Republic of Armenia, foreign citizens having the right to reside and residing in the Republic of Armenia, persons without citizenship and those with the status of refugee. The social security card number represents a ten-digit number, which is produced in accordance with the citizen‟s gender, day, month and year of birth, as well as contains an auxiliary sequential three-digit number and one adjusting digit. The number of the social security card issued to the citizen is unique and not subject to alteration.

The system of social security cards is designed for the establishment of a unified identification system for natural persons in the RA, which allows ensuring the identification of the person during the processing of the data of personified information system, thus coordinating the regulation, improvement of information exchange processes prescribed by legislation and ensuring confidentiality of individual data of the citizen.

The information system of social security cards is the entirety of individual data of citizens having received social security cards, which includes:

1. The number of the citizen‟s social security card or the certificate on not having one.

2. Name, surname and fraternal name.

3. Day, month and year of birth.

4. Gender.

5. Serial number of the document which serves as grounds for granting a card.

6. In case of death – day, month and year of death.

Information system is developed on the basis of applications filed by the citizens for receiving social security cards and for refusing to receive social security cards, which are parallelly adjusted or reconciled with the related information. Presently, around 2000 natural persons have refused to receive social security cards and, for the purpose of employment, have obtained a certificate on not having a social security card. The same natural person receives certificates on not having a social security card with different numbers in different time periods for being employed. However, in the social security information system there is a link established between the different numbers of certificates issued to the person, which allows identifying the persons not having social security card in the personified information systems. The information database is updated according to the database of the Citizen‟s State

Register on every 10 day basis, as well as according to the data of the Civil Acts Registration Agency, on a quarterly basis.

The information data base of social security cards was developed and introduced by Nork IAC.

Nork IAC was established in 2000 for the purpose of introducing up-to-date information technologies, as well as for comprehensive development of electronic governance infrastructure in the structural, separated and regional units of the RA Ministry of Labor and Social Issues.

Apart from the information system for social security cards, Nork IAC also maintains a number of systems and web-sites of the social protection area, implements maintenance of hardware and networks of organizations in the social protection area.

For the purpose of introducing up-to-date information technologies in the structural, separated and regional units of the RA Ministry of Labor and Social Issues, as well as for comprehensive development of electronic governance infrastructure:

The information systems of this sphere were updated and now are being integrated;

An automated information exchange system has been established;

Activities conducted to ensure intranet connectivity for all units, including regional ones, which will result in information exchange only in electronic manner.

3.3 Information system of taxpayers’ registration

As of 2011, there are approximately 160,000 taxpayers registered in Armenia, and only nearly half of them are operating. 52% of the taxpayers are centralized in Yerevan. Obligatory tax registration of the taxpayers is carried out by the SRC in accordance with the RA Law “On Tax Registration and De-registration of the RA Organizations and Natural Persons”. With view of regulating accurate registration, differentiation of taxpayers, flow of information between state institutions, as well as between them and the taxpayers, under the RA Government Decree, a system of taxpayers registration identification numbers within the territory of Armenia (TIN) has been developed. This tax identification number is unique and not subject to any concurrent alteration. It is an eight-digit number.

The information system of TINs is run by the SRC, which includes the entirety of data on provision and registration of taxpayers‟ identification numbers to organizations and private entrepreneurs, natural persons not considered as private entrepreneurs, registered with the SRC. The data of the system includes:

1. Full name of the organization or the name, surname of natural person.

2. Organizational-legal form.

3. Taxpayers identification number (TIN).

4. Date of registration with tax authority.

5. Full name of respective registration unit.

6. Serial number of state registration certificate.

7. State registration number.

8. State registration date.

9. The location of the organization, the registration address and address of residence of natural person, where it is different from the residence address.

10. Types of activities (to be completed if applicable).

11. Types of activities subject to licensing, the numbers and date of issuing licenses for those activities.

12. Full name of the authority (district unit) performing state registration.

13. Addresses, where activities are carried out.

14. Telephone numbers of the place of registration and activity (where available).

15. Name, surname, address, passport data and telephone number of the manager

(director) of the executive body of organization, passport data and telephone number of private entrepreneur or natural person not considered to be private entrepreneur.

16. Bank account numbers.

Apart from the headquarters, the SRC includes another 37 territorial units, ten of which are located in

Yerevan, including the tax inspectorate for large tax payers.

For the purpose of introducing unified income tax and funded contribution personified recordkeeping system, an analysis of taxpayers by their types was carried out, which represents quarterly and annual declarations, and also by number of employees of tax agents acting as an employer:

Type of Tax Payer Quantity Frequency of Filing Declaration

Employer Acting As Tax Agent, Including PE

40926

12419

Quarterly

Quarterly

Private Entrepreneur 27941 Annual

Notary 108 Annual

Permission Fee Payers 537 Annual

Total 69512

Employer Acting As Tax Agent Quantity Including PE

Having 2-10 employees 31754 12312

Having 10-100 employees 7203 107

Having 100-500 employees 553 -

Having over 500 employees 1416 -

Total 40926

3.4 Registration and charging income tax and mandatory social security contributions

At present, when the tax agents (organizations, private entrepreneurs and notaries) registered in the RA pay income (when calculating wages and payments equalized to it) to natural persons, they submit to the

SRC a quarterly calculation on the income paid (calculated) to the natural entities by the organization

(private entrepreneur, notary) and on the withheld income tax, before 1st of the second month following the reporting quarter, and the payment of income tax to the RA state budget for each month shall be carried out before the 20th of the month following the reporting month.

Private entrepreneurs and notaries present an annual income calculation before April 15th following the reporting year, and the final amount of income tax is paid to the RA state budget before May 1st of the year following the reporting year. Private entrepreneurs make quarterly income tax payments (advance payment or minimum income tax) during the reporting year for the cases prescribed by the RA legislation, before the 15th of the last month of the given reporting quarter.

In regard to mandatory social security contributions made by the employers, a quarterly declaration on the employers‟ mandatory social security contributions shall be submitted to the SRC before the 20th of the month following the reporting quarter, and the contributions for each month shall be made before the 20th of the month following the reporting month.

Private entrepreneurs and notaries file a declaration on annual income for mandatory social security contributions before March 1st of the year following the reporting year and pay the amount of social contributions calculated under the declaration to the RA state budget. Throughout the year, private entrepreneurs and notaries are obliged to pay a minimum of 5000 drams social contribution to the state budget for each month, before the 15th of the following month.

3.5 SRC electronic management system “Taxpayer 3”

In 2009, development of the SRC “Taxpayer 3” tax administration unified electronic management system was initiated with the objective to automate tax administration processes. There is an electronic declaration system functioning under the „Taxpayer 3‟ system, which aims at simplifying the process of filing tax reports and automating the completion and examination of tax reports. The system performs necessary checks during the completion of reports aiming to ensure accuracy of filled out fields and alphabetical calculations. It also provides information to the taxpayers on all legislative and normative amendments related to the submission of declarations, rates and formula of calculating tax liabilities, as well as notification on overdue declarations and fines.

Due to the launching of an electronic declaration system in 2010, computer terminals have been installed in regional tax inspectorates, to solve the issues of computer and internet accessibility, to extend the range of services provided for the taxpayers. The abovementioned terminals ensure accessibility of electronic declarations web portal of the SRC, enabling the following:

Use of the tax declaration forms available in the system, guidelines for completing the forms and data base of tax legislation;

Complete the tax declarations on the spot, sign with electronic signature and confirm, afterwards send electronically, as well as print those (for security purposes, currently those terminals do not allow downloading already completed electronic files);

Obtain information, within the scope of the law, from the information data base of the tax body.

Electronic declarations are submitted to the SRC only in on-line regime through the SRC web site or computer terminals. For security considerations, at present, the terminals do not allow downloading or uploading the declarations onto electronic carriers.

As of June 1, 2011, the number of organizations filing electronic declarations with the SRC was approximately 5718. 70% of electronic declarations are filed by organizations operating in Yerevan.

In 2010, with the support of WB, KPMG developed a document addressing potential possibilities for reorganization of SRC business processes, due to which SRC will implement a number of measures addressed to institutional development, structural changes, reorganization of business processes, as well as the modernization of information and communication technologies, while continuing to implement transitional reforms. The approaches of developing unified income tax and funded contribution personified recordkeeping system should be in line with business processes stipulated in the aforementioned document.

3.6 Connectivity and network infrastructures

CDA has created and maintains a sufficiently reliable and secure intranet – the CBANET, which aims at linking all financial institutions operating in the RA under one covering. CBANET is managed by ICT unit of CDA. To ensure security, CDA installs and configures network devices connected to this network and has the right to check IT security of the CBANET members.

Currently, the SRC, CDA, and also the Treasury, are members of CBANET. The CDA and RA Ministry of Finance have a connectivity of 2Mbps. At present, the central treasury of the RA Ministry of Finance provides the information on payment of all types of taxes on daily basis to the SRC by electronic mail as a DBF file, and to the territorial tax inspectorates – as an EXCEL file. The exchange of information between the central treasury and SRC is planned to have automated within the scope of the implementation of pension reforms.

Figure 3. Existing connectivity and network infrastructures

There is an internal computer network operating between the SRC headquarter and tax inspectorates.

Taking into account the increase in the levels of data communication, to maintain/preserve uninterrupted and “real-time” communication between the SRC headquarters and tax inspectorates it is envisaged to improve the present IT communication network, including upgrading of the equipment, raising the network capacity and introducing network management capacities.

At present, there is no network connection established between the SRC and MLSI (SRC and SSSS, SRC and Nork IAC). There is a fiber-optic connection between MLSI, SSSS and Nork IAC, and the mixed network connection between SSSS and its regional centers is envisaged to launch in August 2011.

The assessment of connectivity required for ensuring regular functioning of unified income tax and funded personified recordkeeping system shall be presented in a separate document.

3.7 Hardware and licensing of software

To implement and maintain unified income tax and funded contribution personified recordkeeping system, it is necessary to obtain and install hardware and licensed software in the SRC. Preliminary assessment of required hardware and software package (the list of hardware and software package is presented in a separate document) was performed. Based on the assessment, a list was prepared containing the hardware and licensed software which are comparable with the existing systems and IT infrastructure of the SRC and are also in line with the SRC IT policy and standards, and in addition to it, they derive from the need to ensure regular functioning of the unified income tax and funded contributions system.

4. Unified income tax and funded contribution personified recordkeeping system

Data on each natural person paying income tax and making mandatory funded contribution should be incorporated in unified income tax and funded contribution personified recordkeeping system establishing connection between the natural persons and their employers.

4.1 The Goals of the system

The goal of the unified income tax and funded contribution personified record keeping system is as follows:

To establish and operate a system of personified recordkeeping of natural persons making income tax payments and mandatory funded contributions that will enable:

1) the RA State bodies to receive a detailed picture on the employment statistics, calculated value of income tax revenues and actual amount of paid income tax and mandatory funded contribution;

2) Automate the procedures in SRC related to the control and collection of unified income tax and funded contributions decreasing the likelihood of mistakes, which will improve the registration of income tax and funded contributions, the collection procedure and service provision to the tax payers;

3) Ensure regular functioning of mandatory funded pension system through operation of personified information database on calculated and paid funded contributions and automated exchange of data defined by the law, between the RA Treasury and RA CDA;

4) Establish a register of employment on natural persons working in the RA creating a connection between natural persons and employers and providing for collection of data defined by the law and transferring thereof to MLSI in order to ensure the regular functioning of the state pension security system.

4.2 Factors of efficient implementation of the system

The factors for efficient implementation of the unified income tax and personified recordkeeping system are the following:

Modular structure, which will enable to easily add additional modules and make changes in configuration;

Integration with SRC‟s “Taxpayer 3” system;

Adjusting software‟s architecture with the architecture of SRC‟s “Taxpayer 3” system;

Availability of accurate and updated database of social security cards;

Ensuring data back up and security of the system;

Ensuring data reliability, integrity, veracity and timely submission;

High level protection of system‟s data accessibility with proper access control;

Accessibility of system‟s data for the entities defined by the law, security and integrity of data during the data transfer;

Ensuring data back up and system security;

Ensuring harmonious work of the system with external systems through development of external modules;

Procurement, installation and testing of compatible hardware and licensed software to ensure implementation of unified income tax and funded contribution personified recordkeeping system and to integrate it with SRC‟s “Taxpayer 3” system;

Availability of required connectivity.

4.3 Identification of data in the system

TIN serves as an identification number for legal entities in information system. RA SRC is in charge of operating the TIN database. The database contains information about the legal entities, as well as notaries and private entrepreneurs registered in RA.

The identification number for natural persons in the information system is the social security card number or the number of certificate (reference) on not having one. At present, the social security number is used as identification number in the information systems of RA state register and social security systems.

Currently, the system of ID cards is in the stage of implementation in RA, after which the ID card will serve as the identification number. It is envisaged that the ID card number and social security card number will be exactly the same.

4.4 System integration to SRC’s “Taxpayer 3” system

The uniqueness of unified income tax and funded contribution personified recordkeeping system is that it is not envisaged to be a new independent system but rather it will be one of the components of the information system “Taxpayer 3” operating in SRC and will function under one umbrella, as the income tax is only one of the tax types in RA, thus electronic submission of unified income tax and funded contribution personified recordkeeping system will mean adding another form to the current 27 forms. In this regard, the system that is being developed should be fully integrated with SRC‟s “Taxpayer 3” electronic management system and should be in line with SRC‟s ICT policy and standards.

The issues related to integration generally involve the following approaches:

1. The registration of employees and submission of unified income tax and funded contribution personified recordkeeping system should be implemented through the system of electronic submission of declarations that is currently operating in SRC.

2. The data on identification and registration of legal entities should be received from the TIN database of “Taxpayer 3” system in case, when it is required to apply and verify the mentioned data.

3. The declaration on unified income tax and funded contribution personified recordkeeping system should be integrated in SRC‟s function and logic of submission and analyses of electronic declarations.

4. The tax liabilities, calculated fines, penalties and administrative fees, including those of calculated as a result of audit act that are presented in the declarations of unified income tax and funded contribution personified recordkeeping system of legal entities should be included in the taxpayers personal account card (tax card) managed by the SRC.

5. The comparison of the declared amount size and contributions of income tax should be conducted regardless of personified recordkeeping system in accordance to the current procedure at SRC.

6. There should be established a connection between the individual account and taxpayers personal account card (tax card).

7. The verification procedure of unified income tax and mandatory funded contribution should be adjusted to verifications system currently established at SRC.

4.5 4.5 Approaches to the development of the main modules of the system

The main approaches to the development and introduction of the system are as follows:

1) The unified income tax and funded contribution declarations of employers, private entrepreneurs, notaries, self-employed people and those natural persons whose employer is exempt from the responsibilities of a tax agent, are submitted to the SRC in a personified manner and exclusively electronically, confirmed with an electronic signature, in accordance with Appendix 2 titled “Procedure of electronic submission of reports, calculations and other documents and information provided for by the RA tax legislation to the tax agency” of the

Law of the RA “On Taxes”.

2) The declarations are made in two modes:

Online, through the RA website or the terminals located at Tax inspectorates;

Offline, through the available software tool (developed within the framework of the introduction of the system) which is provided by the SRC when signing a contract about electronic declaration submission or when submitting a request, and

Offline, through accounting softwares, in accordance with the formats provided by the SRC.

Both tools create electronic…