Property Taxation in Armenia

Property Taxation in Armenia: Steps Toward Reform and Decentralization BY R. JEROME ANDERSON

Armenia was the first former Soviet republic to privatize land. Other real estate objects were also privatized early in the period following independence. Subsequent to privatization, municipal enabling legislation was enacted and taxation on land, buildings and apartments was instituted. This article describes the administration of land and property taxes, showing how central government control over tax administration is gradually devolved to Armenian communities. The article also analyzes the model used to value apartments in Armenia. In spite of early movement toward privatization, official resistance to market valuation is still strong, leading to the continued use of residual Soviet valuation concepts. Finally, the article discusses the issues which must be addressed if true property tax reform is to continue. The author acknowledges the long-time assistance of BearingPoint, Inc. colleagues Dana W. Frey, Joseph K. Eckert and Annette

N. Brown over the course of property tax reform in Armenia. Credit is due to Gurgen N. Musheghyan and Petros M. Soghomonyan and their colleagues for yeoman’s efforts in collection and analysis of Armenian real estate market data. This article was made possible through support provided by the Office of Procurement, Bureau for Europe and the Newly Independent States, United States Agency for International Development, under the terms of Contracts EPE-I-00-9500070 and 111-C-00-01-00096-00. The opinions expressed herein are those of the author and do not necessarily reflect the views of the U.S. Agency for International Development.

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he purpose of this article is to describe and evaluate the administration of property taxation in the Republic of Armenia. This article is based on the author’s experience as a land registration and property tax advisor in Armenia from 1999 through 2004.

R. Jerome Anderson has been a land registration and property tax advisor in Armenia since 1999 working on reform projects funded by the United States Agency for International Development and implemented by Ronco Consulting Corporation and BearingPoint, Inc. He is also a post-graduate researcher in the School of Architecture, Planning and Landscape, University of Newcastle upon Tyne, UK.

Journal of Property Tax Assessment and Administration • Volume 1, Issue 2

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At the outset, it should be noted that “real estate objects,” as land, buildings, apartments, rooms in communal apartments, garages and other structures are collectively known, are taxed under two separate laws. Land is subject to the land tax, which is governed by the Land Tax Law. This article does not discuss the land tax. The Armenian Property Tax Law imposes a tax on motor vehicles and boats in addition to the tax on all real estate objects except land. This article will primarily discuss the tax on buildings, apartments and other structures, and will only peripherally address the tax on motor vehicles. With fewer than twenty registered boats, the tax on watercraft is de minimis. The article will first describe the local government environment in Armenia to provide some understanding of the setting in which the property tax operates. The next section will discuss the 1997 Armenian Property Tax Law (herein sometimes “1997 PTL”) and some of the problems which arose in its administration. The following section will explain the 2002 Property Tax Law (herein sometimes “2002 PTL”) and show how its provisions did or did not meet the problems which arose under the 1997 law. The conclusion will then evaluate the state of property tax reform in Armenia.

The Political Setting of the Armenian Property Tax Armenia became an “independent socialist republic” in 1920 (Suny 1993, 138). By early 1924 it became a member of the Soviet Union. At the time Armenia joined the Soviet Union, the country was primarily rural in character, with few large settlements and an agrarian economy (Suny 1993). As part of the USSR, Armenia both industrialized and urbanized. However, the growth of towns and even cities over time did not mean that local governments were financially independent. Rather, Ar16

menia, like all Soviet Republics, had a centralized government and a parallel centralized Communist Party structure. This centralized form of government had significant impacts on the organization of local government. Local governments were largely dependent on the central government for financing. While some local taxes and fees did exist, virtually all funding for local government came from the central budget, with funding for some social services provided by enterprises. Local governments were weak politically. Their plans could be overridden by the “power ministries” such as the Ministry of Defense or the various industrial ministries that controlled sectors of the economy. In short, there was no meaningful responsible local government and, concomitantly, no strong tradition of local government finance. (French 1995, Gel’man 2003). In January 1991, Armenia began the first comprehensive program of land reform in the republics of the Soviet Union (World Bank 1995). Agricultural land was first privatized, followed by the privatization of other real estate objects. Armenia became independent on 21 September 1991. Given the history of strong centralized government under the Soviet Union, it is not surprising that upon independence Armenia adopted a strong centralized form of government with few powers given to communities. From 1991 until 1996, the thirty-seven territorial divisions (“raions”) that existed in Soviet times were continued. During this time both the raions and the communities in Armenia were governed by local councils elected by the citizens of the communities. Each council would select a chairperson from among its members, and the chairperson would function as the head of the community or raion. In addition to local self-government through their councils, twenty-two Armenian cities reported directly to the central government and five other cities reported directly to their respective raions (Soghomonyan


et al. 1999, Soghomonyan 2002). Financing of community budgets was accomplished largely by shared taxes and by transfers from the state budget (Raimondo et al. 1984). Communities also had non-tax revenues such as rents from community property. The raions were not permitted to levy taxes and received all their financing from the state budget, a practice continued from Soviet times. However, the communities did impose both income and property taxes on individuals. Individuals paid up to thirteen percent of their gross income to the communities. Property taxes were imposed on private dwelling houses. In the villages, a tax was imposed on privately-owned animals (Asatryan 2002). The Land Tax was enacted in 1994 and the Property Tax in 1995. When first enacted, ninety-five per cent of these tax revenues were allocated to the communities; the balance was paid to the state budget (BearingPoint 2002a). In 1996, both the Law on Territorial and Administrative Division of the Republic of Armenia and the Law on Local Self Government (“LLSG”) took effect. Marzes were created as an intermediate unit of government under the Law on Territorial and Administrative Division. The marz is not, however, an independent unit of self-government. In Armenia, there are only two levels of government, central (or state) and local. The marz is an arm of the state government. There are ten marzes throughout the Republic. The City of Yerevan, Armenia’s capital, is given the status of a marz, making eleven marzes in total. Unlike the heads of the other marzes, the head of Yerevan is called “mayor.” The heads of all marzes, including Yerevan, are appointed by the Prime Minister. There are 930 communities in Armenia. Twelve urban communities comprise Yerevan. Another 47 urban communities are found throughout the country. The remaining 831 communities are considered as rural communities or villages. This distinction between urban and rural

communities, however, does not give rise to different enabling legislation. All communities, regardless of size or status, are governed by the LLSG. Armenian communities range in size from Yerevan, with approximately one million inhabitants, to small villages with as few as one or two hundred inhabitants. Giumry and Vanadzor, the second and third largest cities, respectively, have more than 100,000 inhabitants each. The next largest city, Kapan, has approximately 40,000 inhabitants. Other communities are much smaller. The LLSG provides for a mayor-council form of government. Elections are held every three years. The size of the council varies according to the number of residents of the community. The council has powers to pass municipal regulations, supervise the performance of the budget, request or demand information relevant to the community from state officials and request the head of the marz to remove the head of the community (LLSG, Chapter 2, Article 16). The head of the community has executive powers and is responsible for substantive work in the field of finance, community planning, enforcement of law and order, public utilities, trade and services, social services and other matters (LLSG, Chapter 4, Article 32). While the head of the community may make preliminary budget plans prior to the adoption of the state budget, the real budget preparation process cannot begin until the state budget is adopted for a given year and the anticipated amount of subsidies for the budget year is known. Once those figures are available, the head of the community, per Article 55 of the Law on Local Self-Government, has two months to prepare the community budget and submit it to the council. The council has one week to consider the budget and return it to the head of the community. The head of the community may make changes to the budget, taking no more than one week to do so, before submitting it to the council for final ap-


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proval. Once the budget is approved by the council, the budget must be submitted to the head of the marz. The head of the marz must review the budget to insure that it follows all appropriate guidelines. After approval by the head of the marz, the head of the marz prepares a summary of all community budgets in the marz and submits the summary to the Ministry of Finance and Economy (Law of the Budgetary System of the Republic of Armenia, Article 32 Section 7). In response to pressure from the Council of Europe, of which Armenia became a member in 2001, amendments were made to the Law on Local SelfGovernment in 2002 which presumably strengthened the powers of local government. Among scholars and practitioners of local government in Armenia, however, there is disagreement as to whether the amendments met their stated purpose of strengthening local government. Some commentators believe the amendments were actually a step backwards. While a detailed examination of the changes made to the LLSG is beyond the scope of this article, it should be noted that in spite of international pressure for greater empowerment of local government, that issue is still contested to some degree in Armenia. As noted above, when first enacted, the Property Tax Law provided that ninetyfive per cent of its revenues would be paid to the communities; the balance would go to the state budget. In 2000 this was changed to give communities one hundred per cent of the revenues. Communities are funded by local taxes (land and property), local fees and duties, fees from rental of communityowned property and transfers from the central government budget. Property tax revenues constitute an important part of community revenues. An examination of property and land tax figures over the 1998-2001 period shows that actual collections increased from 1,566,507,100 Armenian drams (around $3,102,609) to 3,866,587,600 Armenian drams (around 18

$6,965,569) (BearingPoint 2002b). Of course, the collection rate varies from community to community. The precise percentage of community revenues attributable to property tax is difficult to ascertain because of problems with the relevant statistics and fluctuations in the receipt of both transfers from the central government and property and land tax payments. Data from different sources are also not entirely consistent. One source reported that in the years 1997 through 1999, the percentage of local government budgets funded by the central government varied from a high of 38% in 1997 to a low of 19% in 1999, meaning that from 62% to 81% of community revenues came from local sources. Other figures show an increasing reliance on central government financing. In 1999, this source reported that transfers from the central government accounted for 21 per cent of local government revenues on both a budgeted and an actual basis. By 2001 this ratio had risen to 34 per cent (budgeted) and 44 per cent (actual). This means that only 56% of local government revenues may come from local sources (BearingPoint 2002a). Even so, local revenues, including the property tax, are an essential part of the budgets of Armenian communities.

Early Armenian Property Tax Laws In order to give communities some measure of own-source revenues, the National Assembly of the Republic of Armenia enacted the Land Tax Law in 1994. With the further strengthening of local governments under the LLSG in 1996, there was a recognition that communities required additional revenues. Contemporaneous with the enactment of the LLSG, the property tax was introduced in Armenia in 1996 (the law was passed in 1995 but did not take effect until 1996), being replaced by a new law on 27 December 1997. That law took effect


on 1 January 1998. The law as enacted in 1997 imposed a tax on buildings, motor vehicles and watercraft. Rates varied depending on the type of property and type of owner. Amendments to the law in 1998 simplified the provisions for taxation of watercraft and motor vehicles other than automobiles. The amendments also clarified the obligation of physical persons to pay property tax from and after the date of their acquisition of the property. Amendments in December 2000 made necessary changes in tax administration to permit continuation of existing valuation procedures. Also in December of 2000, the law was amended to allow legal entities to file annual declarations, and make annual payments, as opposed to the quarterly declarations and quarterly payments required under the original law. This change, however, only applied to the year 2000. In December of 2001, the law was amended to simplify the definition of motor vehicles subject to the tax (BearingPoint 2002b).

physical persons for buildings and apartments. All receipts from property tax, regardless of who collected them, were paid into the State Treasury. The funds were credited to the municipalities’ accounts and after a delay of approximately two weeks were available for use by the communities. Many communities, however, reported that their collections were passed to the state budget and were not credited to their accounts. This was one of the sources of tension between the communities and the STS and its predecessor bodies. Another source of tension was the communities’ view that the STS really did not make a wholehearted effort to collect the tax, as the money collected was to be credited to the communities’ accounts. Because the STS was under pressure to meet state budget revenue targets, most (if not all) of tax collectors’ efforts were concentrated on those taxes which were paid into the state budget.

Responsibility for Tax Administration

Identification of real estate objects taxed under the Property Tax Law was the responsibility of the State Cadastre Committee. Inasmuch as the SCC was the agency responsible for the registration of real estate objects, this was, in theory, a proper allocation of responsibility. However, in practice, not all properties were identified by the local offices of the SCC. This was true for several reasons. First, registration was not initiated until after the privatization of property began in the early 1990s. The early laws governing registration were unclear, and many individuals and entities receiving properties simply did not register them. A second reason is that when registration first took place, it was done en masse. Large numbers of people were hired to perform registration quickly. Because registration was a new phenomenon, the people hired did not necessarily know how to perform it. Officials demanded that the registration be carried out quickly, and as a result training was

Under both the 1995 and 1997 Property Tax Laws, administration of the property tax was given to organs of the state administration. The Tax Inspectorate, subsequently merged with the Customs Committee to become the Ministry of State Revenue (and then subsequently split from the Revenue Ministry to become the State Tax Service [herein “STS”]) was responsible for overall administration of the tax. Identification and valuation of real estate objects were the responsibility of the State Committee of the Real Property Cadastre (herein “State Cadastre Committee,” “Cadastre Committee” or “SCC”). Communities had an ambiguous role under these laws. Officially, administration was in the hands of the state bodies just mentioned. As a practical matter, in many (but not all) communities, the communities collected the tax, at least the tax paid by

Property Identification


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slighted or overlooked completely, and the work performed by these untrained people was often less than satisfactory. A third factor is that many rural properties which were not brought into state ownership during Soviet times have been in the same family for generations. A grandchild or great-grandchild often sees no reason or benefit in registering property which has been in his or her family for many years. Many of the individuals who have inherited their properties simply do not register them. A fourth reason why properties were not registered is that the Civil Code of the Republic of Armenia prohibits the registration of illegal constructions. Any building which has been constructed illegally cannot be registered, and is thus not subject to property tax. (This problem was rectified in the 2002 amendments to the Property Tax Law.) Fifth, in spite of the legal requirement that all property transactions be registered, many people believe that there is no tangible benefit to registration. In fact, they often feel that registration simply brings a tax bill, and so to avoid the property or land tax (and registration fees) they do not register their ownership interests in their properties. Sixth, the local Cadastre Committee Offices have neither the legal mandate nor the resources to discover unregistered properties and gather the data necessary to register them. The State Cadastre Committee does have an ongoing program to survey lands in the cities and villages of Armenia and to register properties which have not been registered. In large part, the cost of surveying and property identification is funded by donor agencies such as the United States Agency for International Development, the World Bank and the Food Security Program of the European Commission. This program of surveying is unrelated to the current needs of the STS and the communities to identify properties for real estate taxation purposes, and will take several more years to complete. For all of these reasons, the 20

local Cadastre Committee Offices simply do not have accurate and complete lists of property ownership (Barents Group LLC 2001). The local offices of the SCC compile monthly lists of changes to the property register, based on transactions processed in the preceding month. Annual lists are also compiled. Under the 1997 law, these lists were sent to the local offices of the STS for entry into the database of property taxpayers. However, in two local STS offices, the author personally verified cadastral data were not entered by STS personnel due to pressure to work on taxes which were paid to the state budget. Presumably, this same problem existed in other offices as well, although it should be said that at least two communities reported that the data on properties kept by the STS for their communities was relatively complete. In any event, the fact remains that the system of transfer of data from the local SCC offices to the property tax database maintained by the STS broke down in many instances and properties which should have appeared on the tax rolls did not. In a study conducted by the author of nine communities for which data were available, it was found that the STS databases contained 23,985 fewer records than the corresponding databases of records held by those communities for property tax for physical persons (56,392 records versus 80,377 records). This failure to identify all potential taxable properties results in diminished revenues to the communities (Barents Group LLC 2001). A related issue was the prohibition on municipal identification of properties for taxation. The SCC was statutorily empowered to register properties and send lists thereof to the local STS offices. If community officials called the SCC’s attention to the fact that properties were missing, the SCC’s typical approach was to ignore the officials. Because there was no legal authority for the communities to place properties on the tax rolls, they


were at the mercy of the local SCC officials, who could choose or not, at their whim, to include properties identified by community personnel (Barents Group LLC 2001). A further problem with the identification of properties was caused by the fact that uniform identifiers for both taxpayers and tax objects have not been established. Data may be entered in the property tax database, but there is no accurate way to ensure that data entered later, to update the original data, will be posted to the correct records. Many records are entered multiple times simply because it is easier for the operators to re-enter the data than to post new data to existing records. This duplication corrupts the property tax database and makes collection statistics unreliable. This problem has yet to be solved (BearingPoint 2003).

Property Valuation With respect to valuation, a number of different methodologies were used under the 1997 Property Tax Law. None of them were based on market value. Legal entities simply reported the depreciated book value of their properties, but in no case could these values be less than twenty per cent of the original cost of the buildings. Based on Soviet construction costs, the book values were generally low, thus depressing property tax collections. Buildings used for public or productive purposes owned by physical persons were not valued; a flat tax of either 3,000 Armenian drams or 10,000 Armenian drams (depending on building material) was imposed on those buildings (1997 PTL Article 26). Residential properties were valued by means of a “cadastral valuation” formula (1997 PTL Article 5). The cadastral valuation formula was multiplicative, in that it started with a base price per square meter and then multiplied that value by coefficients for various factors, such as the area of the real estate object, the ceiling height, the presence or absence

of balconies, the number of floors in the building, the floor on which the unit was located, etc. The cadastral valuation formula was based on old Soviet formulae used to calculate the value of residential units in high-rise apartment blocks for purpose of assessing housing maintenance fees. At the time the property tax was introduced in Armenia, it was probably not possible to use market valuation, at least for the majority of properties outside Yerevan. Cadastral valuation was introduced as a substitute for market valuation. There are, however, a number of problems with cadastral valuation. The two biggest problems are that it does not approximate market values and it is not uniform. These problems were identified in a study of market values in Yerevan conducted in 2000 and 2001. This study involved 2,982 observations of properties listed for sale in the Yerevan real estate market. The study was repeated, with 1,377 observations, in 2003 after the adoption of the 2002 Property Tax Law. These studies are referred to herein as the 2001 Study and the 2003 Study, respectively (Barents Group LLC 2001 and BearingPoint 2003). Cadastral valuation both overstates and understates market values, in different parts of Armenia. This simultaneous overvaluation and undervaluation is one indication of the perverse nature of cadastral valuation. Outside Yerevan, cadastral values are greater than market values. In 1999, community officials outside of Yerevan reported to the author that market values were approximately one-half of cadastre values. Conversations with community officials in late 2003 indicated the same situation in communities outside of Yerevan. In Yerevan, however, the pattern has been the opposite. Cadastre values typically are lower than market values, especially as values increase. The 2001 Study showed that cadastral values were significantly understated as compared with market values. Data were also collected in two communities outside of Yerevan for


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comparison purposes. The results are shown in table 1. The variation between cadastral and market values in Yerevan is shown in more detail when statistics are presented for each of the eight valuation districts of Yerevan. Those statistics are shown in table 2. As can be seen, in no case does the ratio of cadastral value to market value exceed .86, and that was in only one of the eight districts. The under-valuation is most pronounced in Zone 1, where the highest value properties in Yerevan are located. Those figures indicate that the cadastral valuation formula under the 1997 Property Tax Law significantly understated property values in Yerevan, while, as the figures in table 1 show, property values outside of Yerevan are overstated. Cadastral valuation’s second weakness is lack of uniformity. This can be seen to some extent in the figures in table 2. The ratio rises, then falls again, through the

various zones. Another way to analyze the uniformity issue is to examine the cadastral values of properties having the same market value. Selecting randomly from the 2,982 observations collected in the 2001 Study, table 3 shows the extreme variation in cadastre values for properties having the same market value. The data in table 3 also confirm the understatement of values by the cadastral formula. To more rigorously verify the degree of uniformity (or lack thereof), coefficients of dispersion and concentration were calculated using the 2001 Study data. The coefficient of dispersion is a measure of uniformity based on the average absolute deviation from the median, and widely used to measure uniformity in ratio studies. The ideal value of this coefficient is fifteen or less. The coefficient of concentration is another measure of uniformity ascertained by finding the percentage of ratios within a stated percentage of the median. This coefficient

TABLE 1. Ratio of Cadastral to Market Values, Selected Areas of Armenia, 2001 Study

TABLE 2. Ratio of Cadastral to Market Values in the Eight Valuation Zones of Yerevan, 2001 Study

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TABLE 3. Comparison of Market and Cadastre Value for Three Discrete Market Values, 2001 Study—Yerevan Properties Only

TABLE 4. Comparison of Coefficient of Dispersion and Coefficient of Concentration, 2001 Study

TABLE 5. Coefficient of Dispersion, Eight Location Zones in Yerevan, Ratio of Cadastre Value to Market Value, 2001 Study

should be as high as possible (Eckert 1990). The results of those calculations are shown in table 4. When viewed by valuation district in Yerevan, the coefficient of dispersion is still out of range. Table 5 shows the coefficient of dispersion for the eight valuation zones existing at the time of the 2001 Study. Clearly, cadastral valuation fails the property tax system in Armenia because of the perverse nature of the results it gives—simultaneously overvaluing and undervaluing properties in different parts of the country, while giving results that lack uniformity. Changes were made to the cadastral valuation

formula in the 2002 Property Tax Law, but those changes did not remove all these perverse affects. The changes will be discussed below in the section on the 2002 Property Tax Law.

Rate-Setting, Appeals, and Enforcement The 1997 Property Tax Law set all rates for property tax in Armenia. Communities have no authority to set rates. As noted above, physical persons pay a flat tax on buildings used for public or productive uses. Legal entities pay 0.6% of the value of buildings for public and productive purposes. Rates for dwellings are set in the law and are based on the


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TABLE 6. Property Tax Brackets for Dwelling Units, 1997 Property Tax Law

cadastre value of the dwelling, as shown in table 6. The 1997 Property Tax Law contained no provision for appeal. While it is generally accepted that the State Cadastre Committee will change arithmetic errors in calculations of cadastre value, there is no appeal of a cadastre value, even if two adjacent, similar properties have markedly different cadastre values. Because cadastre value is calculated according to a set formula, there is no appeal from the proper calculation of that formula. Enforcement of the property tax is rather effective in the case of motor vehicles. The State Traffic Police, or GAI, requires all vehicles to be inspected annually. As a precondition of the inspection, the vehicle owner must present a paid receipt for the property tax on the vehicle. Because drivers in Armenia are stopped at random by the GAI to have their papers inspected, it behooves drivers to pay the property tax on vehicles and have their vehicles inspected annually. This is an effective enforcement mechanism for the tax on vehicles. With respect to buildings, there is no such easy enforcement mechanism. Taxes do not constitute liens upon the property of the taxpayer, and thus there is no provision for a tax sale of a property having delinquent property taxes. If taxes remain unpaid, fines and penalties accrue, but without a lien provision, many taxpayers simply ignore the accumulated arrears because they have no intention of paying the tax, regardless of the amount. Article 30 of the Law on 24

Taxes provides that the communities may request the STS to bring a civil action against a delinquent taxpayer. If the suit is successfully prosecuted, an execution procedure may follow. As in most litigation, however, the costs of bringing the suit, in terms of money and time, often outweigh the potential benefit. Thus, unpaid arrears constitute a significant problem under the Armenian Property Tax Law.

The 2002 Property Tax Law In large part due to donor pressure (The Council of Europe, The World Bank and The United States Agency for International Development), but also in part due to pressure from the communities, the Government of the Republic of Armenia drafted, and the National Assembly enacted, a new property tax law at the close of 2002. While structurally similar to the 1997 Property Tax Law, it did contain provisions which addressed, at least in part, the deficiencies in the 1997 law.

Responsibility for Tax Administration The most significant change in the 2002 Property Tax Law was a provision which gives the communities the responsibility to administer the tax beginning in 2006 (2002 PTL Article 23). At first blush, this may appear to be a delay in reform. However, two other provisions made significant changes to property tax administration and facilitated early transfer of tax administration to the com-


munities. One was Article 14 Section 3, which provides that communities will now levy the tax, under authority given them by the state. The second provision was Article 10 Section 3, which permits communities to “calculate” the tax on vehicles, buildings and apartments of individuals beginning in January 2003. Mayors of two of the largest Yerevan communities, Kentron and Avan, petitioned the government to assume property tax administration early in 2003. In response, the government promulgated Decision 192-N, which established a schedule for community administration of the tax. The twelve communities of Yerevan were to begin administration on or before 30 June 2003; the forty-seven urban communities outside of Yerevan were to begin administration on or before 31 December 2003 and the rural communities were to begin administration by 30 June 2004. Following promulgation of Decision 192-N an intense period of activity began. STS property tax personnel, community personnel and advisors funded by USAID worked to train community personnel, establish community property tax departments and begin tax administration. GTZ, the German technical assistance agency, had its own program to help the communities of Armenia. Recognizing the importance of property tax devolution to its program, GTZ contributed 151 computers to the urban communities outside Yerevan for property tax administration. Funds provided by USAID enabled purchase of the necessary software. By the end of August all twelve Yerevan communities were administering the tax, and by the end of December 39 of the 47 urban communities outside Yerevan were trained and had begun to implement the tax. Given the amount of work required to implement the tax and the paucity of resources available to the communities, the implementation rate was nothing short of astounding. Those communities which have several months of collections experience report significant increases in collections, some

as high as 229% for certain periods. Clearly the communities of Armenia were ready and able to administer the property tax.

Property Identification One problem under the 1997 Property Tax Law was the inability of the communities to provide data on taxable objects to the SCC. The 2002 Property Tax Law corrected that deficiency by providing in Article 14 Section 1 (3) that “Local self-government bodies shall provide the bodies carrying out cadastre of real estate with the necessary information on current records.” This provision mandates the sharing of data between the communities and the local offices of the SCC. The communities that have implemented property tax administration are now vigorously cleaning their databases, working with their local SCC offices, local STS offices and the GAI to remove inaccurate data and input correct data. While the work is extremely labor-intensive, time-consuming and difficult, at the end of the process, the communities should have rather complete and accurate property tax databases. A second change with respect to identification of properties is found in Article 4 Sections 7 and 8 of the 2002 Property Tax Law. Those sections now permit the taxation of unfinished constructions, regardless of registration, as well as constructions which have not yet been registered. If these provisions are in fact implemented, significant numbers of properties could be added to the tax rolls.

Valuation Under the 1997 Property Tax Law, there were only two cadastral valuation formulae—one for apartments in multiunit buildings and one for detached houses. Personnel in the SCC realized that the formulae in the 1997 law were outdated. The base values taken as a starting point for the formulae were


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too low, and many of the values of the coefficients were no longer valid. In addition, the SCC believed that the number of valuation zones should be increased from eight to nine. Preparation of the 2002 Property Tax Law represented an opportunity for the SCC to make the changes it felt were needed, and to introduce new formulae for real estate objects for which cadastral valuation formulae had never been prepared. Accordingly, new cadastral valuation formulae for apartments, detached family houses, separately standing public buildings, separately standing industrial buildings and commercial units located in apartment blocks were included in the 2002 Property Tax Law. Market valuation was seen as a distant goal. Donor-funded advisors urged the SCC to adopt market value, at least in the larger urban areas, but such advice was not accepted. Following passage of the 2002 Property Tax Law, the author’s project collected additional data on market and cadastral value data on apartments in Yerevan, referred to earlier as the 2003 Study. Data on 1,377 apartments across the city were collected. The data were analyzed and

the results compared with data from the 2001 Study. While some improvement was noted, the same basic problems of understatement of value and lack of uniformity were evident. Under the original cadastral formula there were eight valuation zones, as shown in table 2. The SCC created nine valuation zones for use in the formulae in the 2002 law. For all properties in the 2003 Study, the ratio of cadastre values to market values improved by four points, from .62 to .66, as shown in table 7. The range of values did narrow somewhat, a positive development. But as table 7 shows, cadastre value still understates the market, especially at the extremes. Turning to the issue of uniformity, the 2002 cadastral valuation formula for apartments does show some improvement as compared with the previous formula. table 8 presents three market values similar to those presented in table 3. While the data shows improvement with respect to the understatement of values (note that cadastral values for the middle market value in table 3 did not reach the market value), there is still a significant

TABLE 7. Ratio of Cadastral Value to Market Values in the Nine Valuation Zones of Yerevan, 2003 Study

TABLE 8. Comparison of Market and Cadastre Value for Three Discrete Market Values, 2003 Study

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uniformity problem, as well as an understatement of cadastral values at the high end of the range. Both the coefficient of dispersion and the coefficient of concentration showed improvement as compared to the 2001 data. Table 9 presents both sets of figures. But even with improvement, both coefficients are outside the range considered appropriate in United States’ valuation practice. Looking at the uniformity issue within valuation zones (see table 10), only in Zone 8 did the coefficient of dispersion approach a proper level. In contrast, the coefficient in Zone 9 was almost double the coefficient in Zone 8. Under the revised formula, cadastral valuation still yields perverse results with respect to uniformity. One other issue with respect to valuation should be mentioned. In the years since property tax was introduced in Armenia, the real estate market, especially in the larger cities, has matured. Although in the period from 1999 through perhaps 2001 or 2002 the residential real estate market was largely a

buyer’s market, as many more families left Armenia than were returning, 2003 saw a rapid and steep escalation of housing prices, at least in Yerevan. This price increase is largely due to investments made in Yerevan real estate by members of the Armenian Diaspora, principally those working in Russia (Soghomonyan 2003). Because the cadastral valuation formula undervalues high-value properties, even under the revised formula, this rapid price escalation means that as time goes on, the disparity between market and cadastral values will only increase. The cadastral values are to be revised every three years; 2004 is a revaluation year. This may help communities capture some of the appreciation, but with the formula based on fixed square meter values established before the price increases, it is likely that most, if not all, properties will be valued at a much smaller percentage of market value than they are now. This will only take money from city budgets unnecessarily. Perhaps this rapid price escalation will help the SCC understand the wisdom of market valuation.

TABLE 9. Comparison of Coefficient of Dispersion and Coefficient of Concentration, 2001 and 2003 Studies

TABLE 10. Coefficient of Dispersion, Nine Location Zones in Yerevan, Ratio of Cadastre Value to Market Value, 2003 Study


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Rate-Setting, Appeals, and Enforcement Under the 2002 law, rate-setting remains the province of the state. The rates for apartments and private houses remain the same as they did under the 1997 law. Rates for buildings of public and productive use were reduced from 0.6% of value to 0.3% of value. Presumably this change was made because the cadastre value which will be used under the 2002 law will result in higher values than the depreciated book value of the 1997 law. Rates for passenger cars with high horsepower have been significantly increased. This change was made to increase the tax on expensive imported automobiles. No appeal procedure was enacted in the 2002 law. Enforcement procedures remain unchanged.

Conclusion Armenia has taken two rather bold steps in land reform since 1991: it was the first Soviet republic to privatize land and other real estate objects, and it was the first former republic to decentralize administration of property tax. Both of these reforms are significant, and set Armenia apart from other former Soviet republics. In spite of these advances, there are a number of significant obstacles to robust municipal government and finance in Armenia. One of those obstacles is a lingering (perhaps even overt) distrust of local government by central government officials. Attitudes and to some extent actions have not kept pace with the letter of the law. A second problem is a reluctance on the part of the SCC to move quickly to market valuation, at least in those areas in which there is a developed real estate market. Until market valuation is adopted, taxpayers will face perverse valuations due to the inequities built into the cadastral valuation formulae. Concurrently with the adoption of market valuation, an appeals process should be defined and enacted. 28

A third problem is the lack of ratesetting capacity by local governments. Rate-setting is an essential component of local financial responsibility. At present, communities do not have this power. Having granted communities the right to administer the property tax for physical persons, communities now understand how important it is for them to aggressively administer these taxes so they can collect the revenues which for so long have not been paid due to poor administration by the STS. Legislation passed at the end of 2003 gives communities some rights to administer the property tax for legal entities as well. As the communities gain experience administering the property tax, their capacity to take even greater roles in the management of their affairs will increase, and they will demand more and more responsibilities. The donor community certainly hopes that this experiment in local government democracy will result in robust democratic processes eventually permeating the central government. Devolution of property tax administration offers a significant opportunity to strengthen democracy in Armenia. It can only be hoped that this reform will be made permanent, and that other former Soviet republics will follow Armenia’s example.

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R. C. Stuart. Armonk, NY: M.E. Sharpe, Inc. Soghomonyan, P. M. 2002. Interview with the author. Soghomonyan, P. M. 2003. Interview with the author.

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