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Document of
The World Bank
Report No: 23565-RU
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF US$100 million
TO THE
RUSSIAN FEDERATION
FOR A
SECOND TAX ADMINISTRATION MODERNIZATION PROJECT
September 19, 2002
Poverty Reduction and Economic Management DepartmentEurope and
Central Asia Region
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CURRENCY EQUIVALENTS
(Exchange Rate Effective July 31, 2002)
Currency Unit = RubleRuble I = US$0.0317
US$ I = 31.5
FISCAL YEARJanuary 1 -- December 31
ABBREVIATIONS AND ACRONYMS
APL Adaptable Program Loan MoEDT Ministry for Economic
Development and Trade
CAS Country Assistance Strategy MOF Ministry of FinanceCBR
Central Bank of Russia NN Nizhniy Novgorod (TAMP I pilot site)CFAA
Country Financial Accountability Assessment NPV Net Present
ValueCIS Commonwealth of Independent States OECD Organization for
Economic Cooperation and
DevelopmentConOps Concepts of Operation (report) PCU Project
Coordination UnitDPCs Data Processing Centers PIP Project
Implementation PlanERR Economic Rate of Retum PIT Personal Income
TaxEU-TACIS European Union-Technical Assistance for PIU Project
Implementation Unit
Commonwealth of Independent StatesFCPF Federal Center for
Project Finance POM Project Operations Manual
FDPC Moscow Interregional Inspection for RDPC Interrayon
Inspection for Centralized Data ProcessingCentralized Data
Processing
FMR Flnancial Monitoring Report RF Russian FederationGDP Gross
Domestic Product SAL (I/II/III) Structural Adjustment Loan
(I1I/III)
GPN General Procurement Notice STS State Tax ServiceHR Human
Resources TA Technical AssistanceIBRD Intemational Bank for
Reconstruction and TAMP (I/Il) Tax Administration Modemization
Project
Development (first/second)ICR Implementation Completion Report
TIN Tax Identification Number
ILO Intemational Labor Organization UNDP United Nations
Development ProgramIMF Intemational Monetary Fund USAID US Agency
for International Development
IT Information Technology UTA Unified Treasury Account
LTU Large Taxpayer Unit VAT Value Added TaxMinTax Ministry of
Taxes and Fees VG Volgograd (TAMP I pilot site)
Vice President: Johannes F. Linn
Country Director: Julian F. SchweitzerSector Director: Cheryl W.
GraySector Manager: Helga W. Muller
Task Team Leader: Carlos D.C. Ferreira
-
RUSSIAN FEDERATIONSECOND TAX ADMINISTRATION MODERNIZATION
PROJECT
CONTENTS
A. Project Development Objective Page
1. Project development objective 22. Key performance indicators
2
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal
supported by the project 32. Main sector issues and Government
strategy 5
3. Sector issues to be addressed by the project and strategic
choices 7
C. Project Description Summary
1. Project components 92. Key policy and institutional reforms
supported by the project 133. Benefits and target population 144.
Institutional and implementation arrangements 15
D. Project Rationale
1. Project alternatives considered and reasons for rejection
162. Major related projects financed by the Bank and other
development agencies 173. Lessons learned and reflected in the
project design 194. Indications of borrower comnmitment and
ownership 195. Value added of Bank support in this project 21
E. Summary Project Analysis
1. Economic 212. Financial 22
3. Technical 23
4. Institutional 23
5. Environmental 24
6. Social 25
7. Safeguard Policies 27
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F. Sustainability and Risks
1. Sustainability 27
2. Critical risks 27
3. Possible controversial aspects 30
G. Main Loan Conditions
I. Effectiveness Condition 30
2. Other 30
H. Readiness for Implementation 30
I. Compliance with Bank Policies 31
Annexes
Annex 1: Project Design Summary 32Annex 2: Detailed Project
Description 40
Annex 3: Estimated Project Costs 48
Annex 4: Cost Benefit Analysis Summary 49
Annex 5: Financial Summary 54
Annex 6: Procurement and Disbursement Arrangements 55
Annex 7: Project Processing Schedule 70
Annex 8: Documents in the Project File 72
Annex 9: Statement of Loans and Credits 74
Annex 10: Country at a Glance 76
Annex 1 1: Summary Diagnostic of Ministry of Taxes and Fees'
Constraints 78
Annex 12: Institutional Analysis 83
Annex 13: Supervision Plan 92
MAP(S)IBRD Map No. 32112
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RUSSIAN FEDERATIONSecond Tax Administration Modernization
Project
Project Appraisal Document
Europe and Central Asia RegionECSPE
Date: September 19, 2002 Team Leader: Carlos D. C. Ferreira
Sector Manager: Helga W. Muller Sector(s): Central government
administration (100%)
Country Director: Julian F. Schweitzer Theme(s): Tax policy and
administration (P)
Project ID: P066155Lending Instrument: Specific Investment Loan
(SIL)
Project Financing Data -_[X] Loan [ ] Credit [ Grant [1
Guarantee [ Other:
For Loans/Credits/Others:Loan Currency:: United States
DollarAmount (US$m): $100 million
Borrower Rationale for Choice of Loan Terms Available on File: 3
Yes
Proposed Terms (IBRD): Variable-Spread Loan (VSL)Grace period
(years): 5 Years to maturity: 17Commitment fee: 0.75 Front end fee
(FEF) on Bank loan: 1.00%
Payment for FEF: Borrower to Pay from Own ResourcesFiniancing
Plari (US$m): Source- . Local Foreign TotalBORROWER 58.00 0.00
58.00
IBRD 10.00 90.00 100.00
Total: 68.00 90.00 158.00
Borrower: RUSSIAN FEDE'RATIONResponsible agency: MINISTRY OF
TAXES AND FEESAddress: Ministry of Taxes and Fees of the Russian
Federation23 Neglinnaya StreetMoscow, Russia 103381Contact Person:
Mr. Mikhail Mishustin, Deputy MinisterTel: (095) 209-2918 Fax:
(095) 209-7507 Email: Mns000lNalog.Ru
Other Agency(ies):Ministry of Finance
Address: 9 Ilyinka StreetMoscow, Russia 103097Contact Person:
Mr. Sergei Shatalov, First Deputy MinisterTel: (095) 298-9137 Fax:
(095) 921-8624 Email:
Estimated Disbursements ( Bank FY/US$m):.Q. :2Q- - 05 -.
2006'.''268- 20- ;lFY -5-......-: 2003-.- 200!4 . _ '
2005-.7i............ 06., Kf 2 07:' ;200 : 09_
Annuao 1.88 28.16 37.44 17.77 9.47 4.08 l.2uCumulative 1.88
30.04 67.48 85.25 94.72 98.80 100.00
Project implementation period: 2003-2008Expected effectiveness
dalte: 01/01/2003 Expected closing date: 06/30/2008
DCS PAO Fo- .V Ul1W
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A. Project Development Objective
1. Project development objective: (see Annex 1)
The development objective of the Project is to carry out a
systematic reform and modernization of the taxadministration of the
Russian Federation (RF), so as to: facilitate voluntary compliance,
increaseadministrative efficiency, strengthen enforcement capacity,
enhance professional integrity and skills, andimprove tax
legislation and fairness in the implementation of tax laws. As a
result, the project wouldsupport the strategic goals of promoting
macro-economic stability, improving the environment for
privatesector development, and strengthening public
institutions.
The project wouldfacilitate voluntary compliance by: (a)
instilling a service culture within the taxadministration; (b)
improving the quality of taxpayer services; (c) fostering the
development of taxpayeradvisory services both in the tax
administration and the private sector; (d) simplifying forms
andprocedures; (e) developing e-Government capacity to enable
filing of tax declarations, payment of taxes,and provision of
information and services to taxpayers electronically; and (f)
promoting understanding ofthe tax system by the general public
through communication campaigns and possible inclusion
oftax-related topics in school curricula.
The project would increase administrative efficiency by: (a)
supporting the development of a functionalorganizational structure
at the headquarters of the Ministry of Taxes and Fees (MinTax) and
in regionaland local offices; (b) creating Data Processing Centers
(DPCs) at the federal and regional levels toexploit economies of
scale in routine data processing; (c) consolidating local offices;
(d) standardizingworkflows based on re-engineered business
processes; and (e) automating key operational andmanagement
processes.
The project would strengthen enforcement capacity by: (a)
implementing a third-party informationsystem to enable improved
monitoring of taxable transactions; (b) enhancing tax audit and
investigationcapacity; (c) improving collection of tax arrears; and
(d) increasing effectiveness in management of largetaxpayers.
The project would promote professional integrity and skills by:
(a) establishing a clear code of ethics andconduct; (b) improving
the incentive structure; (c) implementing strategies and business
processes thatreduce the opportunity for breeches in professional
ethics; (d) strengthening human resourcemanagement; (e) training
managers and staff in different functional areas; and (f) creating
a professionaldevelopment infrastructure for continuous upgrading
of skills.
The project would improve tax legislation and equity andfairness
in the implementation of tax laws by:(a) assisting MOF in proposing
changes to tax legislation and regulatory acts; (b) educating
taxpayersabout the tax code, administrative procedures, taxpayer
services, and taxpayer rights and obligations; (c)improving the tax
administration's capacity to administer the tax laws uniformly and
consistentlythroughout the country; (d) increasing the objectivity,
impartiality, and efficiency of dispute resolutionmechanisms; and
(e) enhancing the responsiveness of the tax administration through
improvedinteraction with taxpayers and other stakeholders.
2. Key performance indicators: (see Annex 1)
The following are broad performance indicators for the project.
During project appraisal baselinevalues have been established and
project targets agreed with MinTax on those indicators,
information
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on which was available at appraisal. In addition, and as a
complement to these indicators, Annex Ilists more detailed
indicators that would be used to validate the achievements of each
projectcomponent.
Macro-economic Stability and Private Sector Development
* Average time taken by new businesses to register with tax
authorities
Voluntary Compliance* Number of tax declarations received on
time/Total number of tax declarations filed* Change in a ratio "Tax
revenues paid voluntarily/Total tax revenues collected" in each
project region as compared to its change for Russia average
* Average time taken by selected categories of taxpayers to
prepare their tax declarations* Perception of taxpayers regarding
the quality of service provided by the tax administration,
as measured through periodic surveys
Efficiency* Average number of days taken to identify and notify
registered taxpayers who fail to file
tax declarations or pay taxes* Change in a ratio "Amount of
taxes collected in a project region (adjusted for large
taxpayers migration)/Number of tax administration civil
servants" in each project region ascompared to its change for
Russia average
* Change in a ratio "Total current expenditure of regional
departments of the Ministry ofTaxes and Fees/Total amount of tax
revenue collected in all project regions (adjusted forlarge
taxpayers migration)" as compared to its change for Russia
average
Enforcement Capacity* Ratio "Additional taxes collected after
tax audits/ Number of tax audits conducted" in each
project region as compared to Russia average
Professional Integrity and Skills* Perception of taxpayers and
other stakeholders regarding the level of honesty of tax
administration staff, measured through periodic surveys*
Perceptions of managers and staff regarding the level of
professional skills in selected
functional areas, measured through periodic surveys
Equity and Fairness* Perception of taxpayers and other
stakeholders regarding impacto of tax policy on business
climate, its predictability, uniformity and consistency in
administration of tax laws, andimpartiality and fairness of
administrative appeals mechanisms, measured through
periodicsurveys
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal
supported by the project: (see Annex 1)Document number: 24127-RU
Date of latest CAS discussion: June 6, 2002
This project supports the objective of strengthening public
sector management, one of three pillars of the
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-
joint Bank-IFC CAS approved in June 2002, and fits well with
overall country objectives. The projectaims at improving govemance
and increasing transparency within the tax system and will
supportsystemic reforms for economic recovery and private sector
development as an integral part of an overallpublic sector
management reform program. Necessity of modernization of the tax
service was reflected inthe 1999 CAS, and subsequently endorsed by
the 2001 CAS Progress Report, as a priority area for theBank
support to the reforms in the public sector.
The Bank has adopted a phased approach to these reforms. The
objective of the first Tax AdministrationModernization Project was
to demonstrate the applicability of key modern tax administration
concepts inthe Russian environment. The project consisted of pilot
operations in the Volgograd and NizhnyNovgorod regions (for
business taxes) and in Moscow (for personal income taxes), and
supported theintroduction of Large Taxpayer Units. The second
project includes the national deployment of theinstitutional
development instruments resulting from the the first project, but
go much further bystrengthening the whole institution of tax
administration and its systems. Since the fiscal crisis of 1998,the
Bank has been reformulating its strategic approach to country
assistance in Russia. One dimension ofthis has been to place more
emphasis on developing the institutional basis for effective
macroeconomicstabilization, and within this effort to concentrate
on effective implementation of reform efforts. Tax andcustoms
administrations, on the revenue side, along with the Treasury
system on the expenditure side, arethe three key elements of
building government capacity for fiscal management.
In this respect, the Bank loan to strengthen the National
Treasury is intended to ensure effectiveimplementation of the
budget, and enable the Ministry of Finance (MOF) to maintain budget
oversight. Italso is meant to provide a transparent system of
accounting that accurately depicts the use of financialresources to
the country, and facilitates management and auditing of these
resources. It includes, amongothers, a revised budget
classification structure and chart of accounts; effective public
expenditurecontrol regulations to manage the levels and timing of
expenditures; and a fully functional automatedTreasury and
associated systems to serve as instruments for budget execution and
cash management, aswell as staff trained in Treasury/MOF and line
agencies to use and maintain the new systems. Taxliability payments
made by taxpayers would flow efficiently into the appropriate
revenue accounts andsub-accounts. The project would enable timely
electronic communication between the Treasury andMinTax after
receipt of tax payments, thus allowing MinTax to identify the lack
of payment for knowntax liabilities quickly.
A customs administration reform project being prepared would
seek to promote a comprehensiveinstitutional reform to facilitate
international trade, reduce compliance costs, and promote a level
playingfield for trade agents, while ensuring that the budget
receives the amount of customs duties and othertaxes on
international trade in compliance with the legislation. This is to
be achieved by implementingorganizational, procedural, legal, and
human resources reform of the State Customs Committee,supported by
the deployment of modem customs technologies and techniques.
In addition, a Bank-financed project on Fiscal Federalism and
Regional Fiscal Reform was approved bythe Board in January 2002 and
became effective in June 2002. This project will create incentives
anddevelop the capacity for fiscal reform at the regional level in
the Russian Federation. The objectives areto: (i) improve the
overall framework for intergovernmental finance; and (ii) support
the regions in thedevelopment and implementation of fiscal reform
programs at the sub-national level that promotefinancial
transparency, budgetary accountability, and strengthened fiscal
management policies andpractices. An important component of the
project is to develop a modem debt management system,smooth
Treasury budget execution, clear and stable assignment of revenue
and expenditureresponsibilities, and the development of an
intra-regional equalization transfer formula. The Governmentand the
Bank are now preparing projects to address the need for public
service reform, including policies,
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practices, and regulations, an anti-corruption-focused project,
and a project to develop e-governmentbased on internet
technology.
Under an earlier assistance strategy, the Government prepared
the first Tax AdministrationModernization Project (TAMP I), with
Bank and IMF assistance, which became effective in mid-1995.The IMF
and the US Treasury were essential partners in the implementation
of TAMP I and areproviding key technical advice and cooperation in
the preparation of TAMP 11. The IMF has appointed asenior tax
administration advisor who previously worked closely with and is
highly trusted by MinTax.He is providing technical assistance at a
strategic level, in cooperation with the Bank. The US Treasuryhas a
resident team in Moscow, and has assigned short-term consultants,
as needed, for projectpreparation. The UIS Treasury has been very
helpful in the re-engineering of business processes,developing an
overall IT strategy, and in the area of project management. The IMF
and the US Treasuryparticipated in the development of the first
strategic plan for MinTax, as well as the project
identificationworkshop, hosted by MinTax in November 2000, which
convened international technical experts anddonors in an exchange
of views about the project concept and technical details of TAMP
11.
In addition, EU-TACIS has launched three projects to assist
MinTax in three areas: (i) human resourcemanagement and
development, (ii) internal and external information exchange,
including a taxpayerservice component., and (iii) tax policy
advice. In this respect, TACIS activities dovetail nicely with
theoverall project design of TAMP II.
2. Main sector issues and Government strategy:
Fiscal reforms are central to the Government's medium-term
agenda of structural reforms.Notwithstanding improvements in fiscal
performance over 1999-2001, serious institutional weaknessesand
fiscal risks undercut the sustainability of these improvements. Tax
administration reforms arecritical to addressing these weaknesses
and risks, and contribute to sustaining macroeconomic stability.The
importance of timely and accurate collection of revenue cannot be
understated, as the total revenuecollection for 2000 is about 38
percent of GDP, including federal, regional and local tax and
non-taxrevenues, as well as social contributions. MinTax is
currently responsible for the collection of socialcontributions and
all tax revenues--except the revenue collected by Customs, which
represents about 5percent of GDP.
The recent improvement in fiscal discipline has been possible
largely because of a sharp increase infederal revenue, which rose
to 16 percent of GDP in 2000 and accounts for 17.6 percent of GDP
in 2001,compared to 13.4 percent in 1999-despite a substantial
reduction in tax rates. The increase in revenueswas, in large part,
due to higher revenues associated with the oil and gas sectors,
some increase inintensity of the tax collection effort
(particularly with respect to monitoring financial conditions of
thelargest taxpayers), and tax buoyancy from a rebound in growth.
Furthermore, all revenues collected at thefederal level since 2000
have been in cash. With federal expenditures kept in check at under
15 percentof GDP, the federal budget for the first time showed an
overall surplus of over 1.5 percent of GDP. Theregional budget also
showed a surplus of 0.7 percent of GDP, with total revenues
equivalent to 16percent and expenditures 15.1 percent of GDP,
respectively.
While the improved fiscal position also reflects a renewed
Government emphasis on establishing controlover Russia's public
finances-and recognition that strong fiscal discipline is essential
for industrialrecovery-the sustainability of the fiscal position
remains vulnerable for several reasons. First, prospectsfor
sustainable growth and the resulting revenue buoyancy remain
questionable in view of the timeneeded for implementation of
structural reforms. Second, given the huge agenda of reforms and
the
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accompanying fiscal costs, the budget needs to plan for a
well-sequenced, integrated, and affordable
program of structural reforms; otherwise, fiscal stability may
be at risk. Third, budget revenues are
highly sensitive to changes in the international price of
Russian oil. Fourth, the dynamics of Russia's
external outflows are onerous, with peaks in debt repayments in
2003, 2005, and 2008. In the absence of
an integrated fiscal strategy, the debt dynamics pose a serious
risk to budgetary outcomes and
macroeconomic management. Andfinally, institutional arrangements
for budgetary management remain
underdeveloped, particularly in the regions, which undermine
effective budget preparation,
implementation, and evaluation.
Recent government initiatives to address the above risks in the
short run include the development of a
Program of Priority Measures for 2000-2001 (Directive No. 1072-p
dated July 26, 2000), which seeks to
accelerate a program of macroeconomic, social, and structural
reforms in an integrated manner. The
implementation of the fiscal components of this program already
has resulted in improvements in
inter-governmental fiscal arrangements, strengthening of
treasury management, a substantial reduction in
budgetary arrears and nonpayments, and initiation of detailed
analyses of expenditure efficiency. Tax
policy and tax administration reforms are key elements of this
program. The main objectives of
reforming the tax system are: (i) improving the investment
climate and creating conditions for achieving
a balanced budget; (ii) lowering tax rates and sharing them more
equitably; (iii) simplifying the taxsystem; and (iv) improving tax
administration.
The Government objectives for development of the tax system in
the long-run have been described in
detail in the so-called "Gref II" strategy report, Basic Trends
in Social and Economic Policy of the
Government of the Russian Federation over the Long Term, 2001,
and further developed in the
medium-term program of social and economic development of the
Russian Federation for 2002-2004
(Government Order #910-r, July 10, 2001). Both reports describe
the govemment aim of substantial tax
policy reforms and the necessity of these reforms to simplify
the tax system and eliminate features of the
system that create obstacles to private sector development. The
importance of fairness and neutrality of
the tax system for private sector development and of reducing
the overall tax burden for law-abiding
taxpayers is emphasized. This requires a balanced and
comprehensive approach to tax reform. Tax policy
reform objectives, which reduce the revenue potential of the tax
system--such as the reduction of the
VAT rate, and the phasing out of the sales tax-must be
supplemented by measures to increase the
efficiency of tax administration so as to avoid overall revenue
losses. The Gref H strategy report-in
addition to proposing a number of legal changes to facilitate
the detection and prosecution of tax evasion
cases and adjusting the balance between taxpayers' rights and
obligations in Part I of the Tax Code-goes
into considerable detail outlining a number of specific tax
administration reforn requirements, and
directly supports a number of key initiatives proposed by the
TAMP II project. These include calling for
organizational changes, such as the creation of regional
inspectorates, reform of the dispute resolution
mechanisms, better cooperation and information exchange with
other government agencies, and creation
of efficient data processing centers.
The Government strategy recognizes, partially as a consequence
of TAMP I outputs, that current taxadministration organization,
management, and operations do not facilitate an efficient and fair
collectionof tax revenues, and have led to widespread tax evasion
and frustration in the business community. Thisis the perception of
the general public as well, which was revealed in a recent taxpayer
survey carried outin Moscow and Nizhny Novgorod (Taxpayer and Tax
Inspector Survey, PricewaterhouseCoopers, June2001). The results
showed that on average more than 50 percent of taxpayers are
convinced that anytaxpayer can easily hide his income, and that tax
inspectors are unable to detect tax evaders.
It is generally recognized that the tax policy has a direct
impact on budget revenues and tax compliance.The Russian Government
is engaged in a comprehensive program to reform the tax code that
is now
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producing improvernents. In general, tax policy issues will be
addressed in the context of theGovernment's own tax policy program
and corresponding IMF and Bank operations. As a result of thetax
policy reform, P'art II of the Tax Code came into effect in 2001,
introducing significant changes in
and reducing statutory tax burdens. The Government is committed
to support fundamental tax
administration reform, and reforming the Ministry of Taxes and
Fees, building on the results of the
TAMP I project, by developing a full-scale tax administration
reform based on the Russian FederationResolution 25.05.1995, No.
527, to improve tax administration, as well as the Program of
Cooperationbetween the Russian Federation and the World Bank for
the calendar years 2002-2004. MinTax hasprepared, with assistance
from the IMF and US Treasury, an initial strategic plan to
strengthen the tax
admini stration. The strategic plan was revised in March 2001
and incorporated the new priorities of the
Government, taking full account of the experience and lessons of
TAMP 1, and the results of the project
identification seminar organized in November 2000.
This strategic plan forrned the basis of a federal earmarked
program for development of tax
administration, which was approved by the Government. The
Government is already actively reformingthe tax system and its
administration. Corresponding tax policy reforms to improve and
simplify tax
legislation are on-going and will reinforce the results of the
tax administration reform. The adoption ofPart 11 of the Tax Code,
implemented from January 1, 2001, contains a number of
substantialadministrative reforms, such as the introduction of a
unified social tax collected by the Ministry of Taxes
and Fees, and new 'VAT thresholds to ease the compliance burden
on small businesses, which willsignificantly enhance operational
efficiency. Adoption of chapters of Part II of the Tax Code
oncorporate profit tax and tax on extraction of mineral resources,
which became effective January 1, 2002,further simplifies the tax
system and moves it towards internationally accepted tax accounting
practices.
The Government enacted changes to Part I of the Tax Code in 2001
to remove a number of administrativeobstacles to efficient tax
administration.
3. Sector issues to be addressed by the project and strategic
choices:
Sector Issues. TAMP I focused on demonstrating the feasibility
and advantages of key tax administrationconcepts in the Russian
environment. It did so by implementing pilots to improve the
organization,processes, procedures and automation at the
operational level. It demonstrated the effectiveness of a
number of tax administration concepts in the Moscow, Nizhny
Novgorod, and Volgograd regions, whichwere imnplemented under the
jurisdiction of the State Tax Service (STS) of the Russian
Federation, withfinancial and technical assistance from the Bank
and the IMF, starting in 1996. The specific objectivesof TAMP I
were to: pilot tax administration reforms in two regions with about
110 local offices through
(i) reorganization of structures and processes, (ii) automation
of tax systems, and (iii) staff training; andto assist in the
institutional development of tax administration by (i) building the
technical capacity of thetax administration, (ii) preparing for
nationwide implementation of tax administration reforms, and
(iii)
providing support for project management.
The tax administration as an institution, however, is still
characterized by uneven regional revenuecollection performance,
significant tax arrears, and insufficient efforts to improve
revenues and the
investment climate. The IMF observed that based on the
experience of tax administrations inindustrialized market economies
measures to improve tax payment compliance and reduce the
incidence
of arrears should include some or all of the following in the
Russia context: (i) improving taxpayereducation and services to
prevent debt from arising; (ii) amending the tax code to limit
deferrals to
exceptional situations, and making directors personally liable
for debts of legal entities; (iii) more timely
and systematic follow-up actions where nonpayment is detected;
(iv) greater emphasis on direct contactwith delinquent taxpayers to
ascertain capacity to pay and to enforce payment; (v) the use of
modemtelephone and information technology equipment for
large-volume direct contact with taxpayers; (vi)
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eliminating offset schemes/barter arrangements in the tax
payment process; and (vii) more use of modemtechnology systems to
support the overall debt collection process.
MinTax now has a strong desire to deal with the issues that
constrain its performance and many measurescurrently are being
taken to improve it. To this end, the Ministry prepared a Strategy
for the Developmentof Tax Authorities for the Period 2002-2006,
which elaborates a reform agenda for dealing with thenumerous
issues that need to be addressed through a comprehensive
institutional developmentframework. TAMP II draws on and
incorporates the MinTax strategic framework as well as
IMFrecommendations into a comprehensive tax administration reform.
Focus will be on organization,management, and operational
weaknesses at the federal, regional, and local levels. It is
expected that theinstitutional reforms promoted by the project will
strengthen the tax administration countrywide, whilethe
implementation of modernized systems will initially taking place in
13 regions, representing over 35percent of total tax revenues. All
project components are closely related to the goals and objectives
of theFederal Targeted Program Development of Tax Authorities (2002
- 2004) approved by the RussianFederation, Resolution No, 888,
December 21, 2001.
Other sector issues to be addressed by the project include: (i)
putting in place a uniform functionalorganization structure in 13
regions; (ii) improving resource allocation; (iii) improving
supervision,management, and performance evaluation systems; (iv)
implementing modem information systems andIT infrastructure; (v)
improving coordination with external agencies, e.g., customs and
financial police;(vi) increasing adequacy of tax policy and
compliance analysis; (vii) creating a more adequate humanresource
management system; (viii) promoting taxpayer services; (ix)
creating an integrated taxpayerregistration system; (x) creating
the capacity to consolidate taxpayer accounts; (xi) improving
processingof tax declarations; (xii) improving data processing
capacity, including regional and federal dataprocessing centers to
consolidate information processing, and the capacity to manage
informationcountrywide; (xiii) developing and enhancing the
capacity of specialized inspectorates dealing with thelargest
taxpayers; (xiv) implementing systematic collection of arrears; and
(xv) improving the appealsmanagement system and requisite
administration. (A summary diagnostic of MinTax constraints
andactions under the project to deal with them appears in Annex
11.)
Strategic Choice. Although it might have been desirable to
extend the modernization effort to all areas ofthe Russian
Federation, indications are that such an approach would not be
feasible given the time andresource constraints of a Bank project
environment, staff limitations of the Ministry, and the sheer size
ofthe country. A strategic decision was taken to employ a
two-pronged approach to modernization: (i)countrywide institutional
development and (ii) selected regional automation (DPCs). Five
inter-rayonDPCs will be created in centers of federal districts
(i.e., Moscow, Nizhniy Novgorod, Yekaterinburg, St.Petersburg, and
Volgograd). The shares of federal revenues collected respectively
are 70 percent inMoscow (central federal district), St. Petersburg
with 40% in the Northwest federal district,Yekaterinburg with 12.5
percent of the Urals federal district collection, Nizhniy Novgorod
9.83 percentof the Volga federal district collection, and Volgograd
16.7 percent in the Southern federal district.Some of the key
elements of institutional development including reorganization of
offices, training, andmany business procedures would be adopted
countrywide so as to establish a reasonable level of
businessstandardization and taxpayer equity. Meanwhile, the
investment in automation would place priority onthe regions that
contribute the most to revenue collection, while ensuring that most
of the federal districtsare covered so that eventually the reform
can be expanded. The investment in automation and
automatedprocedures would have direct impact on collection, audit,
and enforcement activities, and hence fiscalpressure. Considering
the lessons learned during the first project, the Ministry
currently estimates it cancarry out the modernization of 12-16
regions.
-8 -
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C. Project Description Summary
1. Project components (see Annex 2 for a detailed description
and Annex 3 for a detailed costbreakdown):
The project will provide consulting services, training and goods
to support activities under the threegeneral areas of Tax
Administration Management, Tax Administration Operations, and
ProjectManagement. These are divided into 11 components:
Organization and Management; HumanResources and Training;
Infrastructure; Legal, Regulatory and Appeals Framework; Unified
StateRegister of Taxpayers; Development of Electronic Filing and
Tax Payment Accounting Systems;Audit and Investigation; Arrears
Management; Taxpayer Services Development; Largest TaxpayerUnits;
and Project Management.
I. Tax Administration Management
A. Organization and Management - US$ 3.6 million (base cost,
including US$ 0.01 millionrecurrent cost)
Sub-component 1: Organizational structure - US$ 0.4 million
(base cost)This sub-component will support the implementation of
the functional structure at the regional, and locallevels including
the reorganization of territorial and local tax offices and the
refurbishment of offices tosupport the reorganization. The
sub-component would also support further development of the
federallevel structure based on the findings of the organizational
structure analysis.
Sub-component 2: Management System - US$0.4 million (base
cost)This sub-component will support activities aimed at reviewing
and strengthening the organizational unitsin MinTax and at the
regional level for formulation of operational strategy, setting
targets for differentoperational areas, developing indicators to
measure performance, preparing annual business plans,preparing
budgets, assessing workload and allocating resources. It will also
assist in strengthening theInternal Audit Department and review and
improve communication systems between and within MinTaxand
tenitorial offices and between MinTax and other related government
agencies.
Sub-component 3: .Development of standardized workflows in tax
administration at all levels - US$0.2million (base cost)This
sub-component will support the re-engineering of business processes
for organization andmanagement in inter-regional, regional and
local offices including the development of manualsdocumenting
standard processes to be followed by all offices.
Sub-component 4: Revenueforecasting and tax modeling - US$ 1.0
million (base cost)This sub-component will assist in developing and
implementing a revenue forecasting and tax modelingsystem.
Sub-component 5: Change Management - US$1.6 million (base
cost)This sub-component will support activities aimed at developing
and implementing appropriate strategiesfor managing organizational
change at all levels of the tax administration, including
communicationstrateg:ies to explain the rationale and potential
impact of proposed changes to all managers, staff,taxpayers and
other stakeholders.
B. Human Resources and Training - US$11.9 million (base cost,
including US$ 0.2 millionrecurrent cost)
-9-
-
Sub-component 1: Human Resource Management - US$0.6 million
(base cost)The sub-component will support, as a long-term
objective, the development of transparent and standardprocedures
for the recruitment, selection, hiring and dismissal of personnel
and developing career pathsbased on the new functional organization
occupational categories. In the short-term, this sub-componentwill
assist MinTax in development of a salary and benefits reform
package to the extent possible,including building in performance
incentives based on transparent criteria for wage setting and
benefits.
Sub-component 2: Training Delivery - US$11.0 million (base
cost)This sub-component will assist in developing the actual
training that will be delivered to the projectregions and
headquarters during project implementation. Training will be
focused on the implementationneeds of each technical component of
the project and will be provided in packages by experts
andsubsequently delivered to the regions.
Sub-component 3: Improve Professional Ethics - US$0.3 million
(base cost)This sub-component will assist in improving the
Ministry's capacity to manage professional ethics bydeveloping
legislation and other regulatory and legal acts related to the
protection of tax officials fromillegal encroachments, and
provision of technical assistance in developing and implementing a
strategyfor the prevention of potential offences on the the part of
certain tax authority officials and developingmethods for
assessments of staff integrity and the fair treatment of the
taxpayers, including developmentof the code of ethics.
C. Infrastructure - US$111.0 million (base cost, including US$
7.7 million recurrent cost)
Sub-component 1: Establishment of the FDPC - US$14.9 million
(base cost)This sub-component will assist in establishing a FDPC in
Moscow through legislative changes,preparation of physical
facilities, procurement and implementation of adequate hardware,
software andtelecommunications equipment, and optimization of the
number of personnel and redistribution offunctions among the FDPC,
RDPCs and territorial tax authorities.
Sub-component 2: Establishment of RDPCs - US$28.0 million (base
cost)This sub-component will assist in establishing RDPCs through
legislative changes, preparation ofphysical facilities, procurement
and implementation of adequate hardware, software
andtelecommunications equipment, and optimization of the number of
personnel and redistribution offunctions among the FDPC, RDPCs and
territorial tax authorities.
Sub-component 3: IT Infrastructure - US$50.5 million (base
cost)This sub-component will assist in the design of a corporate
telecommunications network and the design,development and
implementation and maintenance of an advanced information
technology system tosupport all aspects of tax administration. This
component will also assist in the design andimplementation of a
human resource management information system and a Financial
Management andFinancial Asset Management Information system to
enable MinTax to manage its administrativeresources
effectively.
Sub-component 4: Physical Infrastructure - US$10.1 million (base
cost)This sub-component will adapt the current physical
infrastructure of the tax administration to thestandards necessary
to support automation and functional distribution of work. It will
assist inrefurbishment and overhaul of administrative buildings,
buildings of interregional inspectorates;improvement of storage
facilities for tax documents, as well as carrying out activities to
establish securitysystems for facilities of the tax administration,
including fire protection and protection of data from
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criminal actions.
II. Tax Administration Operations
A. Legal, Regulatory and Appeals Framework - US$3.5 million
(base cost; no recurrent costs are
planned for this component)
Sub-component 1: Legal and Regulatory Framework - US$3.0 million
(base cost)This sub-component would support Ministry of Finance in
the development comprehensive tax policy in
Russia. It would also assist the Ministry of Finance and the
Ministry of Taxes and Fees in reviewingcurrent tax legal and
regulatory framework and preparing proposals for introducing
amendments to legaland regulatory acts, as well as drafting new
legislative and regulatory acts to take into account short- and
long-term policy priorities. The component would assist in
improving consistency between various legal
and regulatory acts and in harmonizing laws and rules at
federal, regional and local levels. It would alsoassist in
simplifying procedures and ensuring the tax administration has
sufficient powers to administertax laws.
Sub-component 2: Appeals - US$ 0.5 million (base cost)This
sub-component will assist in strengthening the overall appeals
system through carrying outinformational campaigns for taxpayers
relating to the new system; conducting experiencing-sharingmeetings
with the judiciary to improve the efficiency and effectiveness of
the court appeals system,specifically what court procedures can be
undertaken when tax decisions are appealed; and thedevelopment of a
database of precedents from court decisions of tax cases that can
be used to help
MinTax decide what cases to pursue in court and and how to
prosecute them.
B. Unified State Register of Taxpayers - US$1.1 million (base
cost, including US$ 0.1 million
recurrent cost)
This component will support the software development and
implementation to improve the Unified State
Register of Taxpayers, including reviewing and proposing changes
to legislation and regulations to
require the application of a taxpayer identification number
(TIN) to specific economic transactions.
C. Development of Electronic Filing and Tax Payment Accounting
Systems - US$ 6.7 million (basecost, including US$ 0.3 million
recurrent cost)
Sub-comiponent 1: Electronicfiling - US$5.1 million (base
cost)This sub-component will support preparing requirements
analysis and specifications, developing andimplementing a system
for e-filing. The component will also assist in devising incentives
for taxpayers to
use e-filing, and carrying out conmmunication campaigns and
training of taxpayers to encourage e-filing.
Sub-com ponent 2: Tax Payment Accounting Systems - US$ 1.3
million (base cost)This sub-component will assist in the
development of the architecture of the system for data
interchange
with the treasury system, as well as the procurement of
software, hardware, and telecommunicationsservices.
D. Audit and Investigation - US $7.9 million (base cost,
including US$ 0.1 million recurrent cost)
This component will help strengthen the audit capacity of MinTax
through the development of athird-patty information system,
development and implementation of computerized desk and field
auditsystems, development and implementation of a computerized
system for selection of field audit cases,
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-
piloting the system for checking VAT invoices, strengthening
intelligence and investigation operationsand cooperation with
financial police, as well as implementing a system for processing
and accumulatingdata on citizen incomes and property.
E. Arrears Management - US $1.1 million (base cost; no recurrent
costs are planned for thiscomponent)
This component will support activities to improve the techniques
and procedures for recovery of taxarrears, assist in improving the
data exchange system with the Bank of Russia to retrieve data on
theamount of arrears accumulated by problem banks, review and
implement the arrears managementinformation system and policy, and
develop guidelines and procedures to write off uncollectible
arrears.
F. Taxpayer Services Development - US $1.8 million (base cost,
including US$ 0.01 millionrecurrent cost)
Sub-component 1: Develop the conceptfor a comprehensive tax
education system for RF citizens -US$ 0.1 million (base cost)This
sub-component will assist in designing a national strategy for
production and dissemination ofeducational materials related to
taxation.
Sub-component 2: Taxpayer information and consultancy service -
US$1.6 million (base cost)This sub-component will support the
development of taxpayer information and consultancy
servicesincluding the development of service standards for the
whole country and explanatory materials to guidetaxpayers in
compliance with tax laws. It will further assist in the design and
implementation of portalsand web sites of MinTax and its regional
departments for disseminating materia's on current taxlegislation
issues.
Sub-component 3: Introduction of the self-assessment
principlefor thefiling of tax returns andrelated documents - US$0.1
million (base cost)This sub-component will assist in simplifying
and unifying tax forms while ensuring that data necessaryfor
auditing and reconciliation of tax returns is provided by
taxpayers, and in developing easilyunderstandable tax return filing
instructions for taxpayers.
G. Largest Taxpayer Units - US $0.7 million (base cost; no
recurrent costs are planned for thiscomponent)
This component will develop methodologies for effective
management of the largest taxpayers, includingan analysis of the
organizational characteristics of these enterprises and the impact
of their restructuringon the tax base and tax revenues, as well as
develop and implement methods and software for forecastingthe
revenues and tax burden of these taxpayers.
111. Project Management - US $4.0 million (base cost; no
recurrent costs are planned for thiscomponent)
Sub-component 1: Project Management - US$3.7 million (base
cost)This sub-component will assist in managing project
implementation and cover the costs of projectmanagement, including
Project Advisor.
Sub-component 2: Development of an evaluation system to assess
the effectiveness of activities carriedout in the Tax
Administration Modernization Project - US$0.4 million (base
cost)
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This sub-component will assist in analysis of the implementation
progress based on the referenceassessments and introduction of
proposals aimed at increasing effectiveness of the activities.
Periodic
surveys of taxpayers, managers and staff of MinTax, and other
stakeholders will also be conducted to
solicit their perceptions about improvements made in the tax
administration, to identify continuing
problems, and to propose measures that might be taken to improve
agency performance.
. , - $ a i Fi-. - --J S idicative Bank- %of
~~ ~~~ ~ ~ ~ :SJ~~~~~ ~~cost~ 7%1f. &anifcinig
~Bink-6.ra,.jt '~ I t-~4j~
-
management and training strategy and capacity, increasing the
motivation and technical knowledge ofstaff, and reducing motives
and opportunities for corruption.
In particular, TAMP II will support:
* Improvements in the organizational structure of the tax
administration to increase the efficiencyand integrity of revenue
collection
* Improvements in taxpayer advisory services to create the
necessary conditions to introducevoluntary compliance-based
declaration of tax liabilities
* Strengthened institutional accountability mechanisms,
increased administrative integrity, andimproved appeals and dispute
resolution environment to promote an honest, fair, and
equitablerelationship between the tax administration and
society
* Improvements in tax policy and tax legislation to ensure
predictability and consistency of taxlaws and regulations and
contribute to better the business development climate
* Strengthened institutional capacity to carry out the key
functional tasks of taxpayer audit andarrears collection as part of
a compliance management strategy
* Improved exchange of information and dialogue with other
stakeholders in the public and privatesector to reduce the
opportunities for tax evasion and improve both feedback mechanisms
and theability to respond to taxpayer concerns
* Improved ability of MinTax headquarters, regional and local
managers to ensure a moreeffective, results-oriented operation of
the tax administration
* Introduction of more efficient tax payment processing, which
will be supplemented by thecountry-wide automation of govermment
financial transactions to be implemented under theTreasury
Modemization project
3. Benefits and target population:
The benefits of TAMP II will accrue to the citizens of the
Russian Federation in the form of more stableand predictable
revenue flows. This, in tum, should promote better economic and
financial managementof public resources based on improved
collection of social expenditures, as well as stimulation
ofproductivity through stronger business incentives, accompanied by
a commensurate reduction in informaleconomic activity.
Taxpayers will benefit from reduced compliance costs and a
possible overall reduction of the tax burdenfor honest or complying
taxpayers as a result of increased compliance rates. The project is
intended tospread the tax burden more evenly, and the burden for
noncompliant taxpayers actually increasing, asevasion becomes more
costly and time-consuming. Development of tax policy will improve
businessclimate by increasing predictability of tax legislation and
reduction of inconsistencies between differentlaws and regulations
that would make it easier for the taxpayers to understand and apply
tax laws.Taxpayers will also benefit from improved taxpayer
services, access to better information from the taxadministration,
and elimination of time spent in queues to file tax retums.
Taxpayers' rights will bestrengthened through more efficient and
equitable appeals processes.
- 14 -
-
In addition, compliant businesses and the self-employed will
benefit from quicker processing of taxrefunds, faster registration
processes, and by suffering less from competition from underground
businessactivities. Honest tax inspectors also will benefit from
improvements in internal integrity andprofessional development
opportunities created by the project. In addition, there will be
greaterincentives for private sector development in light of
clearer "rules of the game" that should lead to a morefavorable
investment climate.
4. Institutional and implementation arrangements:
TAMP II will change dramatically the way MinTax conducts its
management and operations, as well asthe way it relates to
taxpayers and other economic agents. Because it will impose
extensive changemanagement requirements affecting all areas of
MinTax business, the project will be personally led bythe Minister
of Taxes and Fees, who will chair a Steering Committee consisting
of key members of hisstaff, regional representatives, and
representatives of key government agencies, including the Ministry
of
Finance (MOF) and the Ministry of Economic Development and Trade
(MOEDT). The Minister ofTaxes and Fees will nominate as Project
Director one of the Deputy Ministers, who will have
overallresponsibility for project implementation.
A Modernization Department, responding directly to the Minister,
has been created at Headquarters with27 staff to concentrate
exclusively on the day-to-day management of modernization of the
Ministry. Toensure adequate coordination of project activities, a
Project Coordination Unit (PCU) will be created inthe Ministry. The
PCU will be chaired by the Head of the Modernization Department and
comprise headsor deputy heads of other MinTax functional
departments responsible for implementation of differentprojeclt
components, as well as regional representatives and representatives
from MOF and MOEDT. ThePCU will be responsible for the design and
overall administration of the project including, inter alia,project
monitoring and evaluation, and quality assurance, and will have the
authority to executeadministrative actions necessary to implement
the project. To date, no special administrative authorityhas been
given to either the Modernization Department or its Head. This will
be included in theprovision for the PCU, and approved by the
Steering Committee. The Modernization Department willalso be the
focal point for internal and external relations with respect to the
project. Last, it will beresponsible for benchmarking and tracking
agreed project indicators, some of which will be based onperiodic
taxpayer and staff surveys, and tracking day-to-day progress in
project implementation together
with the PIU.
It was decided, that no special implementation arrangements will
be created in MOF for managementactivities on legal policy
development. Instead, organizational structures created within
MinTax will be
used for this purpose.
Federal Center for Project Finance (FCPF) will be contracted as
a Project Inplementation Unit (PIU) to
execute the back-office project functions of procurement,
accounting, and project reporting activities.FCPF will report to
the Project Director and will discharge its responsibilities in
close cooperation andcoordination with the Modernization
Department. The FCPF's responsibilities will include maintenanceof
the financial management system, including preparation of periodic
financial monitoring reports(FMRs) and ensuring the annual audit of
project accounts, annual reports, the mid-term review and
theImplementation Completion Report (ICR).
Actual project implementation entails the execution of a large
number of project activities in manyfunctional areas of
headquarters, regional offices, and local tax inspectorates.
Accordingly, specialproject implementation arrangements have been
created at all three levels of MinTax's structure. Theexecution of
implementation activities is coordinated through the Project
Coordination Unit.
- 15 -
-
The responsibility to implement the modernization of
headquarters functional areas activities has beengiven to those
areas of MinTax responsible for the specific tax administrative
function being modernized.This was done to promote the
internalization of the modernization process. Thematic
groupscorresponding to these functional areas have been created at
headquarters with the participation ofregional staff. The heads of
the Thematic Groups belong to the Project Coordination Unit.
Similarly, each regional office has created a special structure
to manage the modernization process in theregion. A deputy regional
director heads the regional modernization structure. The structure
includes aRegional Coordination Committee that coordinates the
modernization activities at the regional office andat the tax
inspectorates. It also includes a Project Management Unit that
provides the logistical andtechnical support to all modernization
activities in the region, with an average of 10 to 12 staff.
At the local level, each of the targeted tax inspectorates has
also created a special structure to manage themodernization
process. The head of the local inspectorate has been put in charge
of the localmodernization activities. The project modernization
management structure at the local level consists ofsix staff per
local inspectorate.
Access to international best practice is of fundamental
importance to the success of the project. Duringthis process, every
effort will be made to seek technical assistance from donors,
particularly those withtax administrations that exhibit pockets of
excellence. The Modernization Department will coordinatewith donors
operating within the context of the project to ensure consistency
of approach and avoidduplication. Donors currently include, among
others, the EU, US Treasury, Denmark, and USAID. InApril 2002,
MinTax has organized a Donors' meeting, when assistance and
conmnitment was sought in amanner fully consistent and coordinated
within the project concept and framework. The
ModernizationDepartment will be fully involved in coordination of
resulting technical assistance, calling on the Bankfor quality
assurance as needed.
The project organization arrangements necessary to support the
operation will be presented in detail inProject Operations Manual
to be prepared and agreed with the Bank prior to the Board
Presentation.
D. Project Rationale
1. Project alternatives considered and reasons for
rejection:
The Ministry and the Bank considered four alternatives, three of
which were rejected.
First alternative considered: The first alternative considered
was to continue along the lines of the firstTax Administration
Modernization Project. Under this alternative, the project would
concentrate oncreation of an adequate automation infrastructure for
the Ministry, based on RDPCs, by deploying thenew business
processes successfully developed and implemented in Volgograd,
throughout the country.This alternative had a strong appeal to the
Ministry because, as a natural extension of the first project,
itwould have been well focused and relatively easy to manage.
Moreover, the Ministry already had inplace an effective project
management structure that could be easily upgraded to manage
further regionaland local tax office modernization. Also, there was
evidence that automation was an effective tool topromote overall
modernization. This alternative was rejected because the TAMP I
pilot projectdemonstrated that a full reorganization of
headquarters was required to support the functionalorganization
model adopted by pilot local and regional offices. Moreover, the
Ministry and the Bankwould forego the opportunity to address a
number of serious systemic weaknesses of the tax
- 16 -
-
administration management system pointed out in Section 2,
above.
Second alternative considered: The second alternative called for
full countrywide modernization. Insome sense, this alternative was
at the opposite range of options from the first alternative, and
had quiteappealing characteristics. First, it would have enabled a
more uniform and egalitarian tax regime for allRussian Federation
citizens at the earliest time. Second, it would have reduced the
risk of neverachieving a countrywide uniform system because of
future inability of MinTax to access further funds forautomation.
Third, it would have avoided the political problem of several
regions being left out of thefull modernization process. This
alternative was rejected because the time and financial
resourcesrequired would be beyond the normal scope of a World Bank
project. Moreover, the project size wouldhave greatly diluted
management attention, and scarce existing financial and human
resources would notnecessarily have been allocated to the areas of
maximum return.
Third alternative considered: During project concept discussions
and considering the long-terminstitutional building characteristics
of the project, it was suggested that the project team consider
anAdaptable Program Lending (APL) approach for the loan structure
and financing. The two mainadvantages of such an approach would
have been, first, to provide a stable long-term financial strategy
toachieve full countrywide modernization in the long run, and,
second, to permit a slower pace ofinstitutional reform of the tax
administration. This alternative was rejected as inadequate for
theRussian Federation context because the proposed project is
already itself the second stage of theprocess of modernization of
the tax administration. The institutional development being sought
underTAMP II is part of a coherent package, and lack of advancement
in any of its constituent parts wouldseverely reduce the
anticipated gains, therefore precluding the breakdown of activities
across multiplestages of an APL. The advantage of a guarantee of
financing for the countrywide deployment of thecomputer systems
developed during the first two TAMP projects would remain valid
(note thatmanagement systems are being deployed to all regions as
part of the proposed project). Nevertheless, theadded value of Bank
involvement in an APL stage consisting primarily of the deployment
of computerinfrastructure to low revenue regions would be
questionable. Also, the Government has indicated that itdoes not
anticipate the need for further Bank loans for the tax
administration five years hence.
The selected alternative is that of modernizing the headquarters
organization so that it can provide thebest possible guidance to
all regions, and strengthening the central data processing and
analyticalcapacity to promote improvements in taxpayer compliance
countrywide. To improve countrywide equityand promote similar
levels of fiscal pressure, some key tax administration
policies--such as officeorganization, taxpayer services, and appeal
procedures-would be promulgated in all regions. To focusthe
substantial investment required for automation, the project would
concentrate most of the automationinvestment on the tax processing
operations of the regions that represent significant contributions
to thefederal budget.
2. Major related projects financed by the Bank and/or other
development agencies (completed,ongoing and planned).
Listed below are projects focusing on revenue collection that
were carried out in the 1990's and thatfollow to some extent the
same modernization direction included in the proposed project.
(Projects are inRussia unless otherwise noted.)
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1f | Latest SupervisionSector Issue Project (PSR) Ratings
(Bank-financed projects only)Implementation Development
Bank-financed Progress (IP) Objective (DO)
Low tax compliance, narrow tax base, Tax Administration Modem- S
Sinequitable tax rates, out-of-date tax ization Project I (TAMP
I)policy framework; inadequate taxpayer (completed)information
systems; and lack of afunctionally organized taxadministration
Rapidly expanding tax base, lack of Hungary: Tax Administration
S S
taxpayer information systems Modemization Project
(TAMP)(hardware, software), low compliance (completed)rates, lack
of functionally organizedtax administration
Inadequate budget classification Treasury Development
Projectstructure, a need to revise public (approved by the
Board)expenditure control regulations and tomanage the timing of
expenditures,and a need to fully automate Treasuryand associated
systems for betterbudget execution and cashmanagement
Thematic issues (focused on, e.g., Bureau of Economic Analysis S
Staxation) where basis for significant Project (ongoing)policy
decisions that are likely toimpact savings, revenues,
andexpenditures are identified; includes acomponent to improve
nationalaccounts
Improvement of budget management SAL I S Sand revenue
collections
Fiscal management SAL II S S
Fiscal management and reform of the SAL III U S
tax structure
Need to rationalize and bring Public Service Reformtransparency
to public service policies, (planned)practices, and regulatory
framework
Other development agencies
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Danish Technical Assistance Agency Tax AdministrationAutomation
in St. Petersburginspectorate
US Treasury Department Workflow Processes andTransfer to
FunctionalStructure
EU-TACIS Tax Administration TrainingInformation Exchange
IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U
(Unsatisfactory), HU (Highly Unsatisfactory)
SAL Ill project was implemented at a time when Russian
Government was struggling with the consequences of amajor financial
crisis of 1998. The project's design included too many conditions
that could not been fulfilled at thetimeframe specified, including
the conditionality related to introducing legislative amendments in
the area of privatesector development ancl financial sector reform.
As a result, the outcome of the project was rated unsatisfactory.3.
Lessons learned and reflected in the project design:
The project incorporates lessons learned from tax reform efforts
in other regions of the world, includingthose in transition
economies. The following figure among the most important:
(i) A tax administration reform can succeed only with the strong
will and commitment of theBorrower and the Tax Administration.
(ii) A medium to long-term strategic vision, owned by the
agency, is needed to carry out a deep taxadministration reForm and
build the requisite capacity.
(iii) For tax refonns to be successful they must address
institutional constraints to tax administrationperformance, and not
center reforms exclusively on information technology and systems
solutions.
(iv) B3usiness process re-engineering and related automated
applications must be fully integratedthroughout the tax
administration, with appropriate management of the
organizationaltransition-including human resource and training
aspects-as a central part of this process.
(v) Development of application systems software is often a major
bottleneck. Application systemssoftware should be developed and
fully tested early in the project cycle, and equipment
purchasesmade after the software is successfully piloted.
(vi) Performance benchmarks and indicators need to be
established for the tax administration ingeneral as well as for
staff to develop the technical skills needed to sustain
reforms.
(vii) Modemnization of local tax offices requires their full
participation and an adequate diagnostic oflocal capacity, taling
into account technical and managerial constraints and local tax
environments.
(viii) Efforts to control the potential for corrupt behavior by
tax officials requires a comprehensivestrategy aimed at reducing
the motive and opportunity for corruption, and providing incentives
forintegrity to take hold.
(ix) Creation of a sustainable revenue collection system
requires both tax policy and taxadministration reforn.
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4. Indications of borrower commitment and ownership:
The Govemment has requested the Bank's assistance to implement
its project based on the positive
results of TAMP 1. The Government of the Russian Federation is
fully committed to establishing a
modem tax administration based on proven methods to manage
compliance, especially arrears, and
strong auditing and enforcement built on enhanced institutional
arrangements that balance the rights and
obligations of taxpayers. The Ministry of Taxes and Fees is not
only committed but also highly
enthusiastic about rapid development and modemization of its
activities.
To this end, the Ministry of Taxes and Fees prepared a proposal
and received Government approval for a
three-year Federal Target Program, Development of Tax
Administration (2002-2004), to implement a
new national strategy, reform plans, modemized procedures, a new
IT system, and training that would
culminate in an improved national tax service, which has been
approved by the Govemment. The
government-developed project was conceived in four phases.
First, an improved work environment
comprising improved institutional arrangements, revised legal
and regulatory frameworks, and new work
procedures would be developed. Second, the basic conditions for
modernization comprising educational
and training programs would be developed, a telecommunications
infrastructure established, and new
computer systems developed, tested and placed in operation.
Third, a countrywide institutional
development modernization process, not critically dependent on
computers, would be deployed. Fourth,deployment of automation
infrastructure would take place at headquarters and selected
regions, whichwould carry out the modemization program based on the
framework prepared under the first three
phases. The TAMP II project components are closely aligned to
the goals and objectives of the Federal
Targeted Program.
In addition, the Government has prepared the Program of Social
and Economic Development (Gref II
Report), which delineates a govemment-wide reformn strategy
incorporating both tax policy and tax
administration elements. Expectations are high that the tax
policy modemization strategy outlined in the
Gref 11 Report would be carried out independently of IMF and
Bank balance of payments operations in
the country.
Although the second modemization project is still to be approved
by the Executive Directors of the
World Bank, MinTax has already launched the following important
activities, among others, that form
the foundation for project implementation.
(i) MinTax has created and staffed a Modemization Department
that responds directly to the
Minister, formally appointed a dozen operational managers to
manage the preparation and
implementation of the project's 11 components, and already
created implementation organizations in
most regions and rayons that will be automated by the project. A
total of some 500 staff countrywide
have been appointed and are being trained to implement the
project.
(ii) MinTax has introduced a set of functional structures, using
the TAMP I pilot regions as a model,
in all regions, commencing in the second half of 2001. The
structures assume a minimum local tax
inspectorate office size of 40 staff. Inter-district tax
inspectorate offices are being created to cover
tax administration needs of areas with smaller offices. As of
February 2002, over 1,000 offices have
been closed with total staff reductions at about 16,000
systemwide. It should be noted that some
mobile offices will remain during the consolidation, local
offices will have a taxpayer advisory unit,
and tax retums will be simplified.
(iii)A decision has been made to introduce, as part of the
project, large data processing centers at the
regional level (with special arrangements for Moscow and St.
Petersburg), to anchor modemizationof tax processing automation.
RDPCs will enable the consolidation of information processing
work
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and create the potential for major gains in efficiency,
integrity, and equity in tax administration.
(iv) A server for information storage and processing has been
installed in MinTax HQ as a first stepto the powerful federal
computer center which will operate the national information
infrastructure,including a countrywide telecommunications network,
enabling comprehensive information ontaxpayers to be stored
centrally for tax management, analysis, and policy evaluation
purposes.
(v) MinTax has participated in preparation of the legislation
necessary to support the adoption of keytax operations reform such
as e-filing, electronic signature, a single tax identification
number, andsimplified registration and filing procedures and is
currently involved in development of the legalacts needed for
establishment of DPCs.
5. Value added of Bank support in this project:
The Bank's comparative international experience will assist the
Russian Federation and MinTax inparticular to benefit from the
Bank's increasing institutional knowledge in the development of
successfultax administration projects, both in countries with
transitional economies as well as in countries in otherregions of
the world. The momentum for reform engendered by TAMP I will also
be sustained andwould provide further impetus to mount a much more
comprehensive reform than otherwise would havebeen possible without
this experience. The coordination of the Bank with the IMF and
other donoragencies can be expected to provide a solid foundation
of support and cooperation, thus addingsignificant value to the
Bank's role in the ongoing process of tax administration reform in
the RussianFederation. A special Donors' Conference was held in
Moscow in April 2002 with donors from theFrench and Swedish
governments, EU-TACIS, UNDP, OECD, and the US Treasury, which is
expectedto provide the basis for on-going support, coordination,
and cooperation to the TAMP II project.
E. Summary Project Analysis (Detailed assessments are in the
project file, see Annex 8)1. Economic (see Aninex 4):*Cost benefit
NPV=US$ 14869.2 million; ERR= % (see Annex 4)
! Cost effectiveness
' Other (specify)E. Summary Project Analysis
1. Economic (see Annex 4):
The project rationale is based on the gains the enlarged
government and law-abiding private sector willobtain as a result of
development of capacities of MinTax and application of modem tax
administrationtechniques, which significantly reduce the taxpayer
compliance burden.
The most significant economic benefits of the project will be
reaped from widening the tax base,improving voluntary tax
compliance rates, reducing taxpayer compliance costs, and leveling
the playingfield for all taxpayers.
The quantifiable benefits include: (a) additional revenues
generated by improvements in tax compliancerates; (b) tax revenues
from reduction of the 'shadow' economy; (c) interest rate savings
from earlypayment of tax arrears; and (d) private savings from
reducing time spent by accounting staff of privatecompanies to
comply with tax legislation.
There are many other positive outcomes of the project that have
not been quantified. Among them the:
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(i) increase of legal business activity resulting from
improvements in the business and investment climate
stemming from lower risks due to inconsistent interpretation of
tax regulations and procedures by taxinspectors and to putting
'shadow' competitors out of business; (ii) improvement in the
reputation of thetax administration and reduction of corruption;
(iii) economic growth and growth of competitiveness,which will take
place after possible reduction of statutory tax rates, generating
higher overall taxrevenues; (iv) efficiency increase of MinTax from
re-engineering business processes, better organizationof internal
and external information flows, and improved professionalism and
performance incentivestructure.
On the negative side, implementation of the project may require
intra and interregional reallocation ofMinTax staff, its retraining
and partial dismissal, especially in rural and less advanced
regions. Thesefactors have not been quantified but are not believed
to be significant.
The following table summarizes the annual economic benefits of
the project for the Russian Governmentand the private sector (for
details and assumptions see Anhex 4).
Annual economic benefits under TAMP II
Benefits,$ million
Total benefits 2622.3Including:
Tax revenues (government) 2428.8Interest rate savings
(government) X0.5Savings on compliance costs (taxpayers) 193.0
It follows that the annual economic benefits exceed project
costs, attesting to a very high public and
private return on investment. The table below presents results
of the cost-benefit analysis, which support
this conclusion.
Costs, benefits and NPV of TAMP HI
$ millionCosts, present value (PV) 208.0Public benefits, PV
13851.3Private benefits, PV 1225.8NPV 14869.2
ERR 66.5
Results of cost-benefit analysis indicate that the project's
success is largely independent of unfavorablechanges in assumptions
or perfornance. Key risks for the project are mnainly
implementation capacity aswell as those associated with internal
resistance to change within MinTax, risks which will be offset
by
mitigating strategies.
2. Financial (see Annex 4 and Annex 5):NPV-US$ 13640.3 million;
FRR = % (see Annex 4)
Based on available data, the project's financial impact is
evaluated for the consolidated budget only.Improvements in tax
collection rates and broadening tax base in the Volgograd region
under the TAMP I
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project were used as a benchmark for the TAMP II financial
impact assessment. The Table belowpresents key results of the
financial analysis, highlighting high fiscal returns of the
proposed TAMP IIproject-even if it does not go beyond the
accomplishments of TAMP I.
Financial benefits and NPV of TAMP II
$ million
Fiscal benefits (annual) 2428.8Fiscal benefits, PV 13848.3NPV
13640.3FRR 61.0
It is very likely that factors not represented, i.e., positive
GDP growth, real appreciation of nationalcurrency, will contribute
to even higher fiscal benefits of TAMP II. Taking into account the
governmentcommitment to prevent public expenditures from increasing
relative to GDP, fiscal savings expectedunder the project will
likely be shared with the law-abiding private sector through
reduction of statutorytax rates. It also will decrease project
financial benefits of the project while further increasing
theeconomic benefits.
Project cash flows, assumptions, and details of the financial
analysis are presented in Annex 4.
Fiscal Impact:
N/A
3. Technical:
To identify strengths and weaknesses of the tax administration
as well as external constraints, a diagnosisbased on the Bank's
diagnostic framework for revenue administration was carried out, a
workshop withmanagers and senior technical staff was organized, and
consultations with external stakeholders wereheld. Activities
ultimately included in the project were those that the client
identified as high priorityand attainable. They take into account
the current level of technological and functional sophistication
ofMinTax and its capacity to absorb planned project inputs. Project
costs are based on best-judgmentestimates, guided by the actual
experience of TAMP I. The modernization of 13 regions,
thedevelopment of federal and regional Data Processing Centers, as
well as the implementation of new workprocess re-engineering will
require careful technical coordination and appropriately developed
andadministered training. These activities will also require
institution-building in such a way that initialefforts can be
broadened to include all tax offices throughout the Russian
Federation. For this reason,systems integration and management will
be at the forefront of institutional development issues for
theagency, including human resource and training requirements that
the expansion of new systems willentail.
4. Institutional:
4.1 Executing agencies:
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Ministry of Taxes and Fees will be an Implementing Agency for
the project. In the Ministry, day-to-day
project management will be carried out by a special
Modernization Department, already legally created
in MinTax. It will be supported, as agreed with the Ministry of
Finance and at the direction of the
Government, by FCPF, a specialized firm, experienced in managing
World Bank projects, contracted to
execute procurement, accounting, and project reporting
activities. Special departments have been created
to execute modernization in the regions and in the local
offices. Change activities to modernize
functional areas of the tax administration will be managed by
Project Coordination Unit comprising
functional area managers. The Modernization Department will be
kept informed of the progress in
implementing their part of the modemization effort and, as
needed, ensure coordination of all project
activities.
FCPF will report the progress in project implementation to the
Bank and to the Ministry biannually prior
to and as a key input to supervision missions. Because this is a
new arrangement, efforts will need to be
made to ensure that no unnecessary bureaucratic layers develop
that could potentially lead to delays in
implementation. Proper staffing of the Modernization Department
will be critical to successful project
execution.
Ministry of Finance, another beneficiary of the project, will
participate in project management throughorganizational structures
to be created in MinTax.
4.2 Project management:
At the highest level, the project will be personally led by the
Minister of Taxes and Fees, who will chair
a Steering Committee consisting of key members of his staff,
regional representatives, and possibly key
representatives of the Government. A Deputy Minister of MinTax
has been appointed to concentrate
exclusively on the day-to-day management of the modemization of
the tax administration and given the
authority to execute the administrative actions necessary to
implement it. Cooperation and coordination
between FCPF, the Ministry of Taxes and Fees, Ministry of
Finance, and the Project Manager (Deputy
Minister), component unit directors, and the tax agency staff at
all levels will be critical to project
management. Full support will be needed to ensure that the many
elements and activities of the envisaged
reforms receive appropriate oversight, with clear lines of
accountability established. The Project
Operations Manual describes these arrangements in greater detail
(see project files).
4.3 Procurement issues:
Procurement under TAMP I did not encounter major problems-with
the notable exception of the
procurement of training, which, although eventually successfully
implemented, was subject to repeated
delays. Because of the increase in the scope of TAMP II, and the
commensurately large role of training
systems development, in addition to the critical sequencing of
technical, human resources, and training
activities in the regions covered by the project, it will be
important to carefully monitor procurement to
lessen possible implementation delays that could occur.
4.4 Financial management issues:
Financial management of the project, as is the case for
procurement, will be the responsibility of the
Federal Center for Project Finance. This entity has a necessary
capacity to implement
Bank-financed project. The FCPF is in compliance with its audit
covenants of existing Bank-financed
projects. FCPF's previous and current project financial
statements and auditing arrangements are
satisfactory and it has been agreed that these will be
replicated for TAMP2. The annual audited project
and entity financial statements will be provided to the Bank
within six months of the end of each fiscal
year and also at the closing of the project. In accordance with
WB audit policy the first and final audits
can cover the period up to 18 months. In this context, however,
coordination and supervision of the FCPF
work by the Ministry of Tax and the flow of project funds,
including co-financing, are important and the
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procedures have been formalized.
5. Environmental: Environmental Category: C (Not Required)5.1
Summarize the steps undertaken for environmental assessment and EMP
preparation (includingconsultation and disclosure) and the
significant issues and their treatment emerging from this
analysis.
The project does entail some minor civil works. Any such
construction will be carried out in compliancewith Russian
environmnental standards. The Bank will ensure compliance in its
supervision of theproject.
5.2 What are the main features of the EMP and are they
adequate?
N/A
5.3 For C'ategory A and B projects, timeline and status of
EA:Date of receipt of final draft: N/A
5.4 How have stakeholders been consulted at the stage of (a)
environmental screening and (b) draft EAreport on the environmental
impacts and proposed environment management plan?
Describemechanisms of consultation that were used and which groups
were consulted?
N/A
5.5 What mechanisms have been established to monitor and
evaluate the impact of the project on theenvironment? Do the
indicators reflect the objectives and results of the EMP?
The project includes minor civil works for refurbishment and
upgrading of tax administration buildingsto the standards necessary
to support a highly automated environment. Any such civil works
will becarried out in compliance with Russian environmental
standards. The Bank will ensure compliancethrough its supervision
of the project.
6. Social:6.1 Sumrnarize key social issues relevant to the
project objectives, and specify the project's socialdevelopment
outcomes.
The project does not target social development per se, but the
modemization of the Russian Ministry ofTaxes and Fees under the
project will involve assistance to manage a revenue collection
environment thatnow includes the new responsibility of collecting
social tax contributions. The ultimate result should bea much more
efficient collection of social contributions, which will benefit
directly from improvementsin the tax paying culture and compliance
sought by the project. Indirectly, this may lead to improvementsin
the social benefits available to the population. The project, by
promoting a stronger relationshipbetween taxpayers and the tax
administration, will instill more confidence in government, lead to
greatersocial inclusion, and increase equity and transparency.
6.2 Participatory Approach: How are key stakeholders
participating in the project?
Key stakeholders are the Russian taxpaying public, Ministry of
Taxes and Fees, Ministry of Finance,Ministry of Economic
Development and Trade, and the Government of the Russian
Federation. Specialattention has been given to the international
and local chambers of commerce, which are key to privatebusiness
development. Further details are given in section 6.3 below.
During project preparation, the project team consulted with the
Ministry of Finance, the Ministry ofEconomic Development and Trade,
as well as the Financial Police, and is coordinating activities
with theBank-financed Treasury Project, recently approved by the
Board. A cooperation agreement has beensigned between MinTax and
the Ministry of Finance and the Ministry of Economic Development
and
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Trade to better coordinate intergovernmental issues and
concerns.
6.3 How does the project involve consultations or collaboration
with NGOs or other civil societyorganizations?
During project preparation consultations were carried out with
regional and local taxpayer associations,chambers of commerce, as
well as tax accountants and private consultants, to better
understand theproblems taxpayers face in their interactions with
tax authorities. These consultations provided theproject team and
MinTax with a better understanding of the issues and enabled a
project design thatbetter reflects these concerns. For example, the
lack of easily accessible and relevant taxpayerinformation has been
identified as a major proble