Mpplelental Letter No. 2 REPUBLIC OF, - June 13, 2013 International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Re: Loan No. 7471 HR (Revenue Administration Modernization Project) Revised Performance Monitoring Indicators Dear Sirs and Mesdames: This refers to the provisions of Part A of Section II of Schedule 2 to the Loan Agreement of dated July 3, 2007 between the Republic of Croatia (the Borrower) and the International Bank for Reconstruction and Development (the Bank), as amended, for the above-captioned Project. The Borrower hereby confirms to the Bank that the revised indicators set forth in the attachment to this letter shall serve as a basis for the Borrower to monitor and evaluate the progress of the Project and the achievement of the objective thereof. Very truly yours, REPUBLIC OF CROATIA By: 2 Authorized R res ve Attachment -3- Republic of Croatia: Revenue Administration Modernization Project Performance Monitoring Indicators Indicator Name Unit of Baseline End Target _ Measure Project Development Objective Indicators Increase in taxpayer compliance rates, Percentage 2.7 At least 5% based on internationally accepted T(ax gap as (Dec. 31, 2008) improvement method for estimating the tax gaps. percentage to (Jun. 30, 2015) the GDP) Decrease in taxpayer compliance Percentage CIT: 1.2% At least 10% costs, as assessed by taxpayer Small Taxpayers: improvement surveys. 0.8% (Jun.30,2015) Individuals: 0.03% Perception of taxpayers regarding the Percent At least 5% quality of service provided by CTA, improvement as measured by periodic surveys (June 30, 2015) Perception of tax officers regarding Percent At least 5% the terms of employment and working improvement environment, as measured by periodic (Jun. 30, 2015) surveys. Intermediate Results Indicators A Pilot LTO in Zagreb that would No genuine A full-fledged report directly to the head of the CTA National LTO national level LTO established exists with the CRMS (Nov. 30, implemented and 2010) based on the BPR. (Jun. 30, 2015 Ratio of staff in tax audit function in 57% LTO as a percentage of total staff in (Dec. 31, 2012) LTO (inspectors/total staff) Training per CTA staff (including Hours 8 20 distance learning) (Dec. 31, 2011) (Jun. 30, 2015) E-leaming modules developed and Number 2 10 implemented (Jun. 30, 2013) (Jun 30, 2015) Number of stop filers Percentage Less than Of the medium and small taxpayer VAT 2.81 % VAT 2 % segments: CIT 4.44 % CIT 2% VAT PIT 3.68 % PIT 2% CIT (Dec. 31, 2011) (Jun. 30, 2015) PIT Annual average assessments per EUR 348,075 EUR 500,000 EUR inspector (Dec. 31, 2007) (Jun. 30, 2015) Total declarations by legal entities Percentage 3.0% 90.0% filed electronically (Dec. 21, 2007) (Jun.30, 2015) -4-