YEREVAN. – As the statistics of recent years show, Armenia's economy has experienced a decline in foreign investments. Basically, foreign investors avoid making major investments in Armenian business environment, which is not the case, for instance, with neighboring Georgia where a significant increase in foreign investments has been observed in recent years.
What are the reasons for the absence of or decline in foreign investments in our economy? What risks does the Armenian business environment contain and how to minimize them? The Armenian News-NEWS.am talked about these issues with Hovhannes Chamsaryan - the partner and head of Legal and Tax Advisory Services of "Avenue Consulting Group" LLC.
Which are the main reasons causing decline in foreign investments in Armenia and how do you assess the protection of foreign investments in our country?
In fact the picture is more than discouraging. The amount of investments has dramatically dropped within a year due to a number of circumstances which automatically generate risks for the business sector.
Particularly, the mentioned risks include: existence of monopolies in different sectors of economy, undue interference of administrative bodies in business, unpredictability of the judicial system, violations of reasonable timeframe for litigations, complex procedure for registering branches of foreign companies, corruption, incomplete or unclear regulations of the legislation, etc.
As for the protection of foreign investments, it is worth mentioning that an atmosphere of distrust prevails among foreign investors with regards to the objectivity of decisions of Armenian courts. That is why foreign investors mostly, if possible, turn to the courts or arbitrations outside of Armenia for dispute resolution.
According to the annual survey report of 2017 in the scope of “Doing Business" project of the World Bank Armenia ranks 43rd out of 190 countries in the world as of 2016 based on the “Ease of Doing Business" index while neighboring country of Georgia ranks 23rd. Despite the fact that in Armenia there was an insignificant positive shift in 2017, it should be noted that the comparative figures are more in favor of Georgia.
Let's talk about business risks. It is clear that for eliminating monopolization it is necessary to have a political will, but how can the actions of administrative bodies or courts causing the business risks be manifested?
Administrative bodies, which should help businesses by their functions, are more likely to interfere rather than help. There are many cases when administrative bodies have adopted obviously unjustified, unfavorable administrative acts which have directly hindered the usual working procedure of the company. Companies are supposed to choose whether to appeal the administrative act and be involved in litigation for years or to put up with the situation bearing the negative risk. In most cases companies avoid appealing as courts currently violate the legal requirement for a reasonable timeframe stipulated in domestic and international legal acts, consider the cases for years, which obviously creates risks for the company from the business point of view.
Among legal risks tax risks shall be underscored. Tax risk management is an integral part of the financial management of business entities. Therefore, making professional decisions for effective corporate governance is critical for controlling business risks of organizations.
In addition, another important legal risk in business to be highlighted is the legislation. We firmly believe that business related legislation and tax legislation in particular should not only regulate and support the sphere but its content and formulations should alsobe easily comprehensible for the businessman. However, this is not valid for the Armenian tax legislation. Current tax legislation incorporates a number of provisions causing confusion or even double interpretion, again leading to risks and difficulties for the economic entities. Particularly, according to the new Tax Code, the smallest amount of expenditure is subject to capitalization or the transaction must be declared invalid by a court decision. For example, if the supplier provides the buyer with a product of poor quality and the buyer learns about the fact only after receiving the product after which based on mutual agreement between the parties the product is returned to the supplier and the supplier returns the money to the buyer (in fact the transaction is recognized as invalid), the new regulation of the law requires the parties to bring a lawsuit with a request to invalidate the transaction when there is no dispute between the parties. Otherwise, the supplier is obliged to pay the tax for the transaction. In other words, economic entities should be artificially engaged in judicial procedures for years.
Your company's services are also addressed to various financial organizations. How would you assess the likelihood of arising business risks for financial institutions?
If we talk about banks and credit organizations, it should be noted that in recent years the number of overdue loans of the Armenian banks and credit organizations has drastically increased, while the overall profitability has not decreased. The growth of the portfolio’s overdue loan’s number is based not only on the social status of the country, but also on the result of unprofessional corporate governance. The borrowers are unable to handle earlier loans to banks, which leads to re-crediting. In other words, the borrowers take a loan from a bank to repay the loan previously borrowed from another bank. According to the regulations of the Central Bank of Armenia such re-crediting, to put it mildly, is not encouraged. This is, of course, a short-term solution: at some point this financial cycle stops and banks or credit organizations are forced to bring a lawsuit to the court.
Is it more rational for financial institutions, especially for banks and credit organizations to carry out their legal functions on their own? What is the expediency of applying to a consulting company?
Main reasons for outsourcing in the banking sector include cost saving, high-quality and efficient services, use of high technology and expertise of other companies, as well as reducing or sharing the risks related to business procedures. In other words, the lender also resolves the risk of making mistakes by passing the case to a legal consulting company.
Summing up our conversation, how to avoid legal risks in business, what are the processes that the economic entity should carry out to avoid risks?
In order to avoid legal risks in business, it is important to receive timely professional advice. In our reality people mostly turn to the consultant when they are facing the issue or when the case is already in the court. However, potential risks can be excluded or at least minimized if they receive professional advice beforehand. In the market of legal services and particularly, in business consulting services, it is common to apply to a legal advisor in case of judicial disputes. In our opinion, in order to minimize business risks, it is necessary to have a permanent external legal advisor who is capable of providing quality legal advice in the course of transaction.