The World Bank Tax Administration Modernization Project (P127734) REPORT NO.: RES34344 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF TAX ADMINISTRATION MODERNIZATION PROJECT APPROVED ON JUNE 6, 2016 TO REPUBLIC OF MOLDOVA GOVERNANCE EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Satu Kristiina J. Kahkonen Senior Global Practice Director: Edward Olowo-Okere Practice Manager/Manager: Daniel J. Boyce Task Team Leader: Iryna Shcherbyna The World Bank Tax Administration Modernization Project (P127734) ABBREVIATIONS AND ACRONYMS AVR Ad-valorem rate CBA Cost-benefit analysis CIT Corporate Income Tax COTS Commercial off-the-shelf solution DLI Disbursement Linked Indicator DLR Disbursement Linked Result ECA Europe and Central Asia EEP Eligible Expenditure Program EUR Euro FS Feasibility study GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development IDA International Development Association IMF International Monetary Fund IT Information technologies ITMS Integrated Tax Management System MDL Moldovan Leu MoF Ministry of Finance NPV Net Present Value OECD Organization for Economic Cooperation and Development PAD Project Appraisal Document PDO Project Development Objective PIT Personal Income Tax RBF Results Based Financing SDR Special Drawing Right SR Specific rate SSC Social Security Contribution STA Swedish Tax Agency STEP Systematic Tracking of Exchanges on Procurement STS State Tax Service TA Technical Assistance TAMP Tax Administration Modernization Project ToR Terms of reference VAT Value added tax USD United States Dollars The World Bank Tax Administration Modernization Project (P127734) BASIC DATA Product Information Project ID Financing Instrument P127734 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 06-Jun-2016 31-Dec-2021 Organizations Borrower Responsible Agency Republic of Moldova Main State Tax Inspectorate Project Development Objective (PDO) Original PDO To improve revenue collection, tax compliance and taxpayer services in the Republic of Moldova OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-86250 06-Jun-2016 28-Jun-2016 25-Jan-2017 31-Dec-2021 12.58 0 12.58 IDA-58290 06-Jun-2016 28-Jun-2016 25-Jan-2017 31-Dec-2021 7.42 .89 6.43 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Tax Administration Modernization Project (P127734) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. The Project Development Objective (PDO) of the Tax Administration Modernization Project (TAMP) is to improve revenue collection, tax compliance and taxpayer services in the Republic of Moldova and it remains relevant. However, progress towards achievement of the PDO and implementation progress continue to be rated moderately unsatisfactory (MU) due to implementation delays primarily attributed to a change in the State Tax Service’s (STS) vision for the Integrated Tax Management System (ITMS). The Project Appraisal Document (PAD) identified using a commercially available option as the key IT solution. Over the last four years, while even the TAMP was under preparation, the STS continued to strengthen and add components to their suite of tax applications, data integration and functionalities. During the Bank team mission in January 2018, the STS proposed to change the approach from the initially planned commercial off-the-shelf (COTS) solution to a hybrid solution which is a mix of COTS and custom development building on some existing IT systems. To ensure informed decision making, the Bank team and STS agreed to carry out a Feasibility Study (FS) of the proposed solution. The STS developed the FS and was evaluated by an independent international expert confirming the detailed project description and implementation plan of this new approach meets the legal description and PAD definition of ITMS. 2. The considerable increase in donor assistance after project preparation also impacted project implementation. The STS pursues modernization activities that fall within the scope of TAMP either by its own resources, or, mostly, with the extensive ongoing and planned technical assistance programs of the International Monetary Fund (IMF), US Treasury and Swedish Tax Agency (STA) in areas of policy and institutional development. Considering the availability of grant resources for technical assistance (TA), the STS proposed that all initially planned TAMP activities aimed at improving tax policy and part of the activities for strengthening institutional and operational development of the STS be pursued instead through a Results Based Financing (RBF) approach using Disbursement Linked Indicators (DLIs). On October 5, 2018, the Ministry of Finance (MoF) sent an official request to consider the use of RBF for all of Component 1: Tax Policy Reform; part of Component 2: Institutional Development; and part of Component 3: Operational Development. 3. The last implementation support mission in December 2018 confirmed that the PDO remains relevant and that all five PDO level result indicators can be expected to be achieved by the proposed new project closing date. Likewise, some indicators will need to be adjusted during the restructuring to better reflect recent developments and the inclusion of the DLIs in the results framework. 4. Implementation progress by component is summarized as follows: As mentioned above, due to availability of grants from other donors, STS did not launch the procurement of originally planned consultancy under Component 1: Tax Policy Reform, Component 2: Institutional Development, and Component 3: Operational Development. These components are now proposed to be pursued using an RBF approach. Component 1. Tax Policy Reform The MoF is in charge of the tax policy reform. The originally planned scope of this component included a TA on review and drafting of the Tax Code, including tax ruling review, tax administration issues, and local taxes and fees reform. However, with support of other donors (DFID, EU Delegation, IMF), several legal changes, including The World Bank Tax Administration Modernization Project (P127734) changes to the Tax Code were introduced. Considering that, and given the continuation of such a support, the MoF proposed to restructure the whole component to the RBF. There were no activities conducted under TAMP. Component 2. Institutional Development The original planned scope of this component included TA for carrying out a comprehensive review, redesign and implementation of the revised STS organization structure. However, the major TA activities have been or are being pursued with support from other donors. Under TAMP, a Taxpayer Satisfaction Survey was developed (USD 19.0K), communication equipment was installed (USD 121.4K) and licenses for internal communication systems were procured (USD 76.4K). To strengthen the capacity of officials to assimilate international best practices and to interact more effectively with external assistance, an English- language center was selected, and the training is ongoing (USD 26.1K). An institutional co-operation project between STS and STA supports the establishment of effective administrative staff procedures, strengthening the capacity of HR specialists to develop strategic competencies in the field of organizing and conducting professional development courses, and sharing the STA experience on non- monetary incentives for employees. Sets of individual, operational and high-level result indicators were adopted by the STS in 2018 and a "Management and leadership" training was conducted. In 2019, the STS with the assistance of the STA will develop and introduce a concept of strengthening the STS management and leadership. The STS initiated a new way of communications through publicity on the www.sfs.md websites in October 2018 and, there were 977 placed STS documents as of end of December 2018. The US Treasury supports strengthening taxpayer service, communications and internal audit capacity. Thus, 2018-2020 Taxpayer Service Strategy was developed. It is focused on modernization of taxpayer service by expanding electronic services, improvement of conditions to serve taxpayers with special needs and development of the professional capacities of tax officials through in-service training. The STS updated the Internal Audit Standards and Procedures and developed a Program for Internal Audit Assurance and Improvement. In 2019, US Treasury will continue such a support and extend it to areas of cyber-security and other internal audits. Component 3: Operational Development The original planned scope under this component is to provide TA for strengthening STS operational efficiency through modernization of all critical tax collection operational functions and the analysis of case-workflow management for appeals, audits and collection. There were no actions or procurement done by TAMP due to the broad support of the IMF, STA and US Treasury as well as STS use of its own resources. In the area of modernization of tax collection functions, the IMF provides assistance to strengthen the integrity of the taxpayer registration database, improving the case management approach, strengthening the risk based compliance management across the STS, including the Large Taxpayers Office (LTO). With IMF assistance, the STS: deployed the control and outcome planning process; risk assessment methodologies and case selection as supported in planning controls; and continued to improve the compliance of large taxpayers, (individuals and legal entities). For its part, STA, using its own resources, has been developing the catalog for continuous professional training, introducing new methods and techniques for estimating training needs, keeping records and synthesizing statistical data to determine the category of participants and the types of training courses planned and conducted according to the catalog, and conducts training of employees according to the training catalog. With US Treasury support, STS will design and implement a pilot to improve prioritization of arrears cases by assessing collection potential using public records of asset ownership; improve the utility of Tax Control manual, with particular focus on e-commerce and the Case Management System; develop procedures to improve The World Bank Tax Administration Modernization Project (P127734) compliance in reporting rental income paid to natural taxpayers; assess compliance options for selected income issues of non-resident taxpayers; develop recommendations to improve taxation issues related to dual citizenship; and develop procedures concerning taxation of capital gains on jointly-owned property. Component 4. IT Infrastructure and System Modernization As described above, the STS proposed to change the approach to the IT Solution. The STS developed the FS without TAMP’s financing. Under TAMP, the STS selected an individual international IT consultant to evaluate the FS (USD 12.0 K), who positively evaluated the FS. During the December 2018 mission, the STS and Bank agreed that the high-level design of ITMS and its Implementation Plan are ready, and that the STS should proceed towards developing an appropriate tender. The TOR for a consultancy for the development of technical specifications for the ITMS has been prepared by the STS and the team provided comments in the first part of March 2019. In addition, TAMP supported the procurement of 400 computers using National Competitive Bidding (USD 549.K) to update outdated hardware of STS. This was to enable STS to provide all necessary services at the regional and national level with existing IT solutions which was necessary to effectively deliver under its reorganized structure pending the development of the ITMS. 1 Component 5. Project Management and Change Management Instead of hiring consultants to perform project management functions, the STS created a designated division responsible for the implementation of TAMP in Q1 of 2018 calendar year by re-deploying its own staff. Currently the fiduciary tasks are being carried out by the staff of that designated division. Since the creation of the division, coordination of project implementation has significantly improved, albeit capacity remains limited and the division would benefit from hiring a professional procurement specialist. The staff of the division took the Bank’s training on the Systematic Tracking of Exchanges on Procurement (STEP). The Project Procurement Plan was uploaded in the STEP and procurements were organized in line with the Bank procedures, but with delays due to the limited experience of the STS staff mentioned above. The STS prepared Annual Progress Reports based on agreed timeline. Despite some delay, the STS finalized the description of current business processes which is an important input for the further development of the ITMS. The Unit coordinated the development of the FS on ITMS new approach. During the last mission, the Project Implementation Division was deeply involved in the collection of information and identification of the specific issues related to the project restructuring, including disbursement linked indicators, and revised result framework and procurement plan. The Bank team proposes for STS to hire a Procurement Specialist and an IT Technical Lead soonest to ensure the supervision of the development of ITMS, based on the results of the project restructuring. The Procurement Plan will be adjusted after restructuring to reflect the changes in the scope of the project. No post reviews have been carried out by the Bank under this project as limited procurement activities have been conducted. 5. Status of Disbursement/Commitment. The project is financed by an IDA credit (58290) and an IBRD Loan (86250). The total amount disbursed under the Project as of March 29, 2019 is USD 0.89 million (or 4.4 percent of total project amount) against the IDA credit. To date, there are no disbursements against the IBRD Loan. Commitments to date represent USD 0.9 million. As requested by the Ministry of Finance, the currency for the IBRD Loan was converted from USD to Euro. The conversion was executed by the World Bank on the loan unwithdrawn amount on March 04, 2019 by applying the EUR/USD exchange rate of 1.13335.2 1 Procurement of equipment was not originally planned under component 4 but were planned under component 2 and 5. 2The notification about this conversion will be sent to the Government as part of the project restructuring package. The currency of IDA credit remains in SDR. The World Bank Tax Administration Modernization Project (P127734) 6. The project financial management arrangements remain adequate. The project is in compliance with the financial reporting and auditing requirements. There are no overdue issues on FM side. The first project audit report will cover the period ended December 31, 2018. B. Rationale for Restructuring 7. The PDO will not be revised. The proposed restructuring has two key objectives: (1) to improve the performance of the Project and ensure the achievement of the PDO; and (2) to better align the Project with the STS’s ongoing tax modernization activities. Within the scope of boosting disbursements and further supporting the tax administration modernization, there are a number of areas in the project that require revisions, including: (a) an extension of the project closing date by 23 months, to complete and operationalize the ITMS; (b) modifications to the Results Framework to reflect recent developments, adjust target values against implementation progress and reflect the DLIs; (c) the introduction of a new RBF component to incentivize effective implementation of reforms; DLIs will be disbursed against expenditures for specific budget line items (Eligible Expenditures Program) in support of the relevant reform supported by the project; (d) revision of component descriptions to reflect the introduction of the RBF component and the availability of other funding sources for originally planned TA now being pursued with donor support; and (e) reallocation of the credit and loan proceeds across components and a new category of expenditures to reflect the introduction of the new RBF component. The Government requested such a restructuring in its letter dated October 5, 2018. II. DESCRIPTION OF PROPOSED CHANGES 8. A Level 2 restructuring is proposed and includes the following key changes: (a) modifications to the Results Framework; (b) the introduction of a new RBF component3 and revisions to component descriptions to reflect the introduction of the RBF component and the availability of other funding sources for originally planned TA now being pursued with donor support; (c) an extension of the project closing date by 23 months; (d) reallocation of the credit and loan proceeds across components and the addition of a new category of expenditures to reflect the introduction of the RBF elements. Other changes, including an update to the economic and technical analysis of the project, will also be made to reflect the impact of the abovementioned key changes. A. Results Framework 3For activities initially planned under Component 1: Tax Policy Reform; part of Component 2: Institutional Development; and part of Component 3: Operational Development, with a total amount of RBF financing equal to SDR 2, 200 mln or equivalent of USD 3 million. The World Bank Tax Administration Modernization Project (P127734) 9. The PDO will not be revised. However, some changes to the results indicators are necessary to reflect the proposed restructuring and recent developments. Table 1 below summarizes those changes. Table 1: Revision of TAMP’s Results Framework Indicators Revisions Justifications Improve Revenue Collection PDO Indicator 1: Delete Support will be provided by the IMF’s ongoing program. TAMP will have no direct Overall efficiency of VAT collection impact to achieve this indicator. This is a PDO Indicator 2: Delete new development compared to the time of project preparation. Efficiency of VAT collection by STS DLI 1: Increased nominal value of Add with three Disbursement To reflect the tax policy reform supported the Specific and Minimal Excise Linked Results (DLRs) by the new RBF component Rates for all tobacco products under tariff position 240220 DLI 2: Ensured that supplies of Add with two DLRs goods by insolvent subjects are taxed with VAT on the reverse charge principle. Improve Tax Compliance PDO Indicator 3 Revise to clarify and increase STS has understood since the time of annual target levels based on 2017 project preparation that this indicator aims Share of Active taxpayers filing results that were achieved without to measure legal entities only. Therefore, income declarations in total project intervention. STS requested to clarify the indicator’s registered taxpayers description, as well as to increase annual New formulation: target levels to reflect recent development. Share of active taxpayers (legal entities) filing income declarations in total active taxpayer (legal entities) (Percentage) PDO indicator 4: Increase in Adjust annual target levels, except Proposed adjustment is needed considering additional tax assessed per audit the end target level. the delay with the implementation of ITMS and recent legal changes4. Also, to clarify that the annual targets are measured as % increase against the baseline (not year on year increases). 4The target level for 2018 year ( +15%) was not achieved ( actual was +8.7%) due to legal changes. The Law no. 180 of 26.07.2018 On Voluntary Declaration and Tax Incentive significantly limited audits on the correctness of the calculation, declaration and payment of taxes, duties and other payments. Those audits are not allowed anymore for tax periods until 1 January 2018. The World Bank Tax Administration Modernization Project (P127734) Indicators Revisions Justifications DLI 3: Improved the usability of the Add with two DLRs To reflect STS’ efforts to improve STS website compliance under the new RBF component. Improve Taxpayer Services PDO indicator 5: Time required to Adjust the annual target levels Proposed adjustment is needed considering comply with taxes the delay with the implementation of ITMS. DLI 4: Strengthened the capacity of Add with two DLRs To reflect STS efforts to improve its STS staff to deliver taxpayer taxpayer services under the new RBF services component. DLI 5: Introduced an Electronic Add with two DLRs Taxpayer Survey Tool Intermediate Results Indicators (IR) IR 1: Share of income tax returns Delete The Subsystem for Submission of Tax filed electronically Declarations already exists and is functional, so the implementation of ITMS (Percentage) will not add value to the indicator. IR 2: Share of large taxpayer audits Delete Achievement of this indicator will be fully which includes related parties in assisted by the IMF’s ongoing program, cases when related parties exist implemented for the period 2016-2019. (Percentage) This is a new development compared to the time of project preparation. IR 3: Number of hits to the STS Adjust annual target levels, Currently, reporting of the indicator implies web-site including increased end-target cumulative number of hits of www.sfs.md value. and www.servicii.fisc.md. (number of visits in 2017 was for www.sfs.md - 1 228 211 and www.servicii.fisc.md - 4 878 396). Thus, taking into account the DLI indicator proposed to be implemented by the end of 2019 "the launch of the new website of STS, " a single web page will be created that will merge the two existing sites. IR 4: Decrease in tax arrears Adjust the annual target levels to Adjustment is needed to reflect the delay (Percentage) reflect the project’s extension with implementation of ITMS. IR5: The Training Center capacity in Revise to read: The ongoing STA Institutional Cooperation permanent training program (Text) Project (2018-2021) will fully support the The distance learning system for the achievement of the initially planned most important workflows indicator. However, TAMP supported the developed. purchasing of video- conferencing equipment items to be used for distance learning of STS employees across the whole country. The World Bank Tax Administration Modernization Project (P127734) Indicators Revisions Justifications IR6: Taxpayer satisfaction (Text) Adjust annual target values to The adjustment will reflect the delay with reflect the project’s extension the implementation of the first Taxpayer Satisfaction Survey (baseline) and the extension of the project. B. Components and Costs 10. The original Components 1 (Tax Policy Reform) and 3 (Operational Development) are proposed to be deleted and to be replaced with new Results Based Financing Component. No activities under TAMP were implemented. Accordingly, the original cost allocations for these components will be fully reallocated. Activities under these components are now being implemented with support from other donors. 11. The new Component 1 is the Results Based Financing to Support Tax Policy, Tax Administration Reforms and Operational Development. This RBF Component to be funded from IDA Credit through reallocation from original components and its objective is to provide incentives for undertaking tax policy and administration reforms and achieving results along the three outcome areas of the PDO: improved revenue collection, improved tax compliance, and improved taxpayer services. Specifically, those reforms will be in the areas of increasing the collection of Excises and VAT, which are core tax revenues of the State Budget of the Republic of Moldova; establishment of favorable conditions for tax compliance; improving the quality of taxpayer services and strengthening institutional capacity of STS for improved taxpayer satisfaction. These are among the priority areas identified by the IMF Tax Administration Diagnostic Assessment Tool (TADAT) Report (2017) and the subsequent Action Plan on Improvement of Tax Administration, adopted by STS’s Order #168 dated March 29, 2018. The Action Plan demonstrated a clear implementation roadmap and MoF and STS have strong institutional arrangements to achieve the reform objectives. 12. The RBF Component, rather than financing inputs and specific activities, will disburse against agreed Eligible Expenditure Programs (EEPs) upon achievement of key results as measured by five DLIs for a total allocation of SDR 2.2 million (or the equivalent of USD 3 million payable in USD). Accordingly, no procurement is expected under this component. To this end, this Component will support the: Provision of financing for EEP to support the Government of Moldova in increasing efficiency of the tax policy and tax administration, including strengthening the operational capacity of the State Tax Service of Moldova, through inter alia: (i) Increasing nominal value of the specific and minimal excise rates for all tobacco products under tariff position 240220 for the year 2021 by at least 15 percent compared to the excise rates from 2020 (DLI 1, SDR 513,300) (ii) Ensuring that supplies of goods by insolvent subjects are taxed with VAT on the reverse charge principle (DLI 2, SDR 476,700); (iii) Improving the usability of the STS website, through the launching of a single STS website which would inter alia: (i) support requirements of people with special needs; (ii) allow taxpayers to submit income statements electronically through their personal account created on the site; (iii) be synchronized with the state web sites through the automated information exchange (open data); (iv) have a new searching system (i.e., search functionality) which will reflect the final version of the legal documents, specifying all The World Bank Tax Administration Modernization Project (P127734) amendments and additions; and (v) have a feedback mechanism through the online (chat) assistance service (DLI 3, SDR 440,000); (iv) Strengthening the capacity of STS staff to deliver taxpayer services by developing a manual on taxpayer services and training the STS staff on its use (DLI 4, SDR 220,000); and (v) Developing and carrying out of an electronic taxpayer survey tool (DLI 5, SDR 550,000). 14. The DLIs related to tax policy reforms are: (i) DLI1: increasing nominal value of the specific and minimal excise rates for all tobacco products under tariff position 240220 for 2021 by at least 15 percent; (ii) DLI2: supplies of goods by insolvent subjects taxed with VAT on the reverse charge principle. These are expected to contribute to improving tax collection.5 DLIs which will reflect the result of STS activities aimed at improving taxpayer services, compliance and strengthening STS’s institutional and staff capacity are: (i) DLI3: improving the usability of the STS website; (ii) DLI4: strengthening the capacity of STS staff to deliver taxpayer services; and (iii) DLI5: introducing an electronic taxpayer survey tool. The detailed description of the DLIs is presented in Annex 1. 15. All proposed DLIs are verifiable. The MoF will provide, for verification by the Bank, appropriate draft laws, final laws approved by the Parliament and links to the official publications of those documents. The STS will share adopted Orders and develop specific reports, which will then be reviewed and verified by the Bank team. If needed, the Bank, at its discretion, may engage an external reviewer for support in the verification process. The results framework provides for the agreed verification protocol. 16. For each of the DLIs, the Recipient will be able to withdraw Credit proceeds in the amount specified for each target by presenting: (i) evidence of the achievement of the agreed disbursement linked results (DLRs), which are subject to verification; and (ii) the detail of expenses incurred under agreed budget lines. Annex 4 presents the list of budget line items eligible under the EEPs, which consists of non-procurable items. While both DLIS and DLRs are not time-bound, an indicative timetable for the achievement of the DLRs under each DLI are presented in Annex 2. 17. The scope of original Component 2 (Institutional Development) will be revised with cost allocation reduced. The activities that are being implemented with support from other donors will be deleted. This component will now be limited to the: Provision of support for strengthening STS performance and service delivery, including through inter alia: (a) the purchase and installation of technical hardware and software to support the functioning of the existing and future IT and communication systems, and training equipment; (b) the carrying out of training activities; (c) the carrying out of regular taxpayer satisfaction surveys; and (d) the technical development and establishment of the new STS`s website with improved usability and broadened functionality to replace the two existing websites. 18. Two activities of the Component 2 will complement the RBF Component. First is a consultancy for development and establishment of the new STS web-site (whereas, STS will develop the concept, technical specifications, tender documents and necessary changes of STS business processes). Second, the procurement of specific gadgets (tablets) to support implementation of an electronic tool for assessing the degree of taxpayer satisfaction with services provided by STS. 5 Taxation of tobacco products currently has two important purposes: to reduce the consumption of tobacco products in line with the recommendations of the World Health Organization and to generate budget revenues to cover budget expenditures for social and medical purposes. In order to collect VAT not transferred to the budget by insolvent subjects, it is proposed to tax these supplies on the reverse charge principle, which implies that sellers do not tax these supplies with VAT and buyers calculate by themselves VAT and transfer it to the budget. MoF’s estimates that increasing the excise rates should bring around USD 16.5 million to the budget annually and applying the reverse charge principle will bring to the budget around USD 1.6 million accordingly. The World Bank Tax Administration Modernization Project (P127734) 19. The original Component 4 (IT Infrastructure and System Modernization) will now be referred to as Component 3. Likewise, relative to the change in approach for the ITMS solution, the allocation for this component will be increased to finance additional procurements, including: (i) development of technical specifications and bidding documents for the IT solution; (ii) antivirus licenses for the system operating equipment and for servers; and (iii) additional computers. 20. The original Component 5 (Project Management and Change Management) will now be referred to as Component 4. Given abovementioned changes, the legal description for the change management activities of this component will need to be revised to refer to Components 1, 2 and 3. Likewise, original allocation will be reduced and reallocated given utilization of own staff by STS to perform most of the functions envisaged under project management. 21. Following the changes in components, the revised costs per component are presented in Table 2 as follows: Table 2. Costs per Component Component Costs Component 1 (Results Based Financing to Support Tax Policy, Tax Administration Reform USD 3 million and Operational Development) Component 2 (Institutional Development) USD 0.65 million Component 3 (IT Infrastructure and System Modernization) USD 15.76 million Component 4 (Project Management and Change Management) USD 0.59 million Total Costs USD 20 million C. Closing Date 22. The project closing date is proposed to be extended by 23 months from December 31, 2021 to November 30, 2023. Given the project implementation delays, the extension is necessary to facilitate achievement of the PDO as the additional 23 months will allow for adequate completion of project activities as well as full disbursement of the loan and credit proceeds. Accordingly, the implementation schedule will also be adjusted, including the date for the Project Mid-Term Review which is now re-set for September 30, 2021. In this regard, a timebound action and implementation plan has been agreed with MoF and STS. D. Reallocation between Disbursement Categories 23. Reallocation of the credit and loan proceeds is necessary to accommodate the changes in components and costs. Moreover, the new RBF component will be fully financed under the IDA Credit No. 58290. The reallocation will be as presented in Table 3, Revised Withdrawal Schedule below: Table 3. Revised Withdrawal Schedule The World Bank Tax Administration Modernization Project (P127734) Category IDA Credit Amount Percentage of IBRD Loan Amount Percentage of (SDR) Expenditures to be (EUR)6 Expenditures to be Financed Financed (Inclusive of Taxes) (Inclusive of Taxes) (1) Goods, non-consulting 3,100,000 100% 11,099,836.77 100% services, consultants’ services, Training and Operating Costs for the Project (2) Disbursement under the 100% of achieved EEPs for: DLI/DLR amount DLI1: Increased nominal value 513,300 of the specific and minimal excise rates for all tobacco products under tariff position 240220 DLI2: Ensured that supplies of 476,700 goods by insolvent subjects taxed with VAT on the reverse charge principle DLI3: Improved the usability 440,000 of the STS website DLI4: Strengthened the 220,000 capacity of STS staff to deliver taxpayer services DLI5: Introduced an electronic 550,000 taxpayer survey tool Total Amount 5,300,000 11,099,836.77 E. Disbursement and Procurement Arrangements 20. The non-RBF components of the project will continue to be disbursed as originally planned while the RBF Component will only utilize the reimbursement method. The reimbursement of funds which the MoF and STS utilized to achieve the DLIs is the key feature of this mechanism. In this regard, the annual current expenditures of MoF and STS (i.e., maintenance costs without capital investments) were identified as the eligible expenditures for the TAMP’s RBF Component. The annual amount of those expenditures is equal to around USD 5.9 million (Annex 3). As part of financial management assessment, during the World Bank team’s visit in December 2018, a review of accounting and internal control processes for the proposed expenditures was conducted and concluded that the existing arrangements satisfy the Bank’s requirements: appropriate records are detailed and complete, all procedures and controls are adequately documented, contract monitoring, and invoice payment procedures are consistently adhered to and documented. Disbursements against eligible expenditures under the RBF Component will be report-based and as such will utilize the budget execution reports prepared by MoF on a regular basis. These reports show both planned expenditures for the year and actual expenditures executed to-date and will be included in the annual project audit. 21. A disbursement condition for the RBF component would be added for payments with respect to each DLRs under the relevant DLIs. Payments will be made against the Government’s withdrawal requests, upon receiving 6 Converted from USD on March 4, 2019 as per Ministry of Finance request. The World Bank Tax Administration Modernization Project (P127734) from the MoF and/or the STS evidence satisfactory to the Bank that the DLRs have been achieved. The payments will be in USD and USD value will be determined at the day of each payment. The EEP budget execution report per the agreed template for the corresponding period will be enclosed to this submission. The Bank will verify both achievement of the DLIs/DLRs and the execution of the eligible expenditures per the agreed Verification Protocol prior to disbursement. It was agreed that project proceeds against achieved DLIs/DLRs will be channeled to a specific USD Budget Account of the State Treasury, indicated by the Government. 22. The Project Operational Manual will be updated to detail the changes in financial management and disbursement arrangements, including reporting, annual auditing, and flow of funds for the RBF component and detailed description of DLIs and DLRs with verification and confirmation procedures. That will be an effectiveness condition for the amendment related to the restructuring. 23. The disbursement estimates will also be revised to reflect the changes introduced in this restructuring. 24. Procurement under the RBF component: There are several activities which will support the achievement of the DLIs under the RBF component, such as: TA for the development of a new STS website which foresees the development of the concept, technical specification, tender documents and necessary changes of STS business processes; support to the implementation of an electronic tool for assessing the degree of taxpayer satisfaction with services provided by STS; and development of a manual on Taxpayer Service and trainings of the STS staff. Other proposed additions relate to the changed concept of ITMS. However, no procurement is foreseen under the RBF component. Activities whose implementation would require procurement of any type will be financed from the respective Project Components for which traditional disbursement procedures apply. If, however, the need will arise to carry out any procurement as part of the RBF component, this procurement will also follow the applicable Procurement and Consultant Guidelines. 25.Procurement under other components: Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers, dated January 11 and revised July 2014 and Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers, dated January 11 and revised July 2014 will continue to apply to the activities under Component 1-4 of the project. Updated Procurement Plan resulting from the revision of Project components and costs covering the remaining project implementation period has been discussed and agreed, but will be uploaded in STEP after the project is restructured. The World Bank procurement team will continue to provide support and guidance to STS throughout the project implementation period. F. Economic and Financial Analysis 26. Considering the proposed extension of project implementation and the introduction of the RBF component, the economic and financial analysis of the project was revised. The analysis considers direct benefits and costs to the STS and taxpayers as a result of a successful project implementation. The revised economic and financial assessments focus generally on the impacts derived from (i) savings on tax compliance costs for the private sector (economic analysis); (ii) temporary increases in relevant tax elasticities; and (iii) increases in tobacco excise rates (financial analysis). The economic analysis has focused on the direct cost implications to tax payers from the reduction in the time required to comply with taxes and the time spent on dealing with tax inspections, applying a high social discount rate. The assumptions on the time savings for both tax-related activities as a result of the successful implementation of reform efforts foreseen in the project are uncertain but achievable. With the calculated ERR of 27 percent with NPV of USD 3.59 million, the project appears to be economically feasible and desirable from a society point of view. The estimates of ERR and NPV are conservative assuming a limited number of quantifiable benefits. For a more detailed discussion of economic analysis of the project, see Annex 5. The World Bank Tax Administration Modernization Project (P127734) 27. From the financial point of view, the project is expected to generate additional budgetary revenues through: (i) higher collections of tobacco excise taxes and (ii) enhanced overall compliance (both volunteer and enforced) with other major taxes administrated by the STS. The financial analysis of the project is based on the project outflows and higher budgetary revenues (inflows) estimated using the elasticity approach whereby the increase in revenue for each major tax is interrelated with the growth in the tax base (GDP used as a proxy). Elasticity estimates are obtained for Personal Income Tax (PIT) (1.13), Social Security Contributions (SSCs) (1.09), Value Added Tax (VAT) (1.66) and Corporate Income Tax (CIT) (1.84) over the 2013-2018 period. The financial analysis builds on a modest temporary increase of tax elasticities for PIT and SSCs, up to 1.15 in each case, during 2021-2025. The elasticities of CIT and VAT are assumed conservatively to remain unchanged. As a result of a successful TAMP implementation, the budget would additionally benefit from increased collections of tobacco excise taxes and one-time contribution of VAT collected on the principle of the reverse charge. In the revised financial analysis, the benefits from tobacco taxes represent the main budgetary in-flow of the project, originating from 15 percent increase in excise tax rate in 2021. By separating the effects of changes in excise tax rates and tax base, we project, on average, USD 35.4 million/year in additional budgetary revenues during 2021-2025. At the IRR of 174 percent and NPV of USD 74 million the project appears to be very beneficial from an investment point of view. Details of financial analysis are presented in Annex 5. I. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Implementation Schedule ✔ Economic and Financial Analysis ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ The World Bank Tax Administration Modernization Project (P127734) Cancellations Proposed ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Marked for Tax policy reform 1.50 0.00 Deletion Institutional development 1.20 Revised Institutional development 0.65 Marked for Operational development 1.30 0.00 Deletion IT Infrastructure and system IT Infrastructure and system 15.00 Revised 15.76 modernization modernization Project management and change Project management and 1.00 Revised 0.59 management change management 0.00 New RBF 3.00 TOTAL 20.00 20.00 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE The World Bank Tax Administration Modernization Project (P127734) LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-86250 Effective 31-Dec-2021 30-Nov-2023 30-Mar-2024 IDA-58290 Effective 31-Dec-2021 30-Nov-2023 30-Mar-2024 OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-58290-001 | Currency: XDR Current Expenditure Category: Goods, non-consulting services, consultants’ iLap Category Sequence No: 1 services, Training and Operating Costs for the Project 5,300,000.00 639,399.68 3,100,000.00 100.00 100 iLap Category Sequence No: 2 Current Expenditure Category: (ii)Disbersement under the EEP for DLIs 0.00 0.00 2,200,000.00 100 Total 5,300,000.00 639,399.68 5,300,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2016 0.00 0.00 2017 0.20 0.10 2018 3.00 0.70 2019 4.00 3.70 2020 12.80 9.20 2021 0.00 4.20 The World Bank Tax Administration Modernization Project (P127734) 2022 0.00 2.00 2023 0.00 0.20 . The World Bank Tax Administration Modernization Project (P127734) . Results framework COUNTRY: Moldova Tax Administration Modernization Project Project Development Objectives(s) To improve revenue collection, tax compliance and taxpayer services in the Republic of Moldova Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 To improve revenue collection Overall efficiency of VAT 52.30 54.70 collection (Percentage) Efficiency of VAT collection by STS 11.06 11.34 12.54 (Percentage) Rationale: Action: This indicator Support will be provided by the IMF’s ongoing program. TAMP will have no direct impact to achieve this indicator. This is a new development compared to the has been Marked for time of project preparation. Deletion Draft Law on Changes to the Tax DLI: Increased nominal Specific rates and Code aimed at value of the Specific and minimum rates by The Parliament increasing the Specific rates Increased specific Minimal Excise Rates for types of tobacco approved the Law DLI 1 specific rate and increase came into rates came into all tobacco products products as set up in (DLR1.2) the minimum rate effect. DLR 1.3 effect. under tariff position the Tax Code of for both cigarettes 240220 (Text) Moldova in 2017 with filter and without filters on The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 minimum 15 % each for the year 2021 comparing to the Excise Rates from 2020 submitted to the Parliament (DLR1.1) Rationale: Action: This indicator is DLI1 is aimed to reflect the tax policy reform supported by the RBF component. New Due to the legal gap in provisions which stipulates the Draft Law on process of debt Changes to the Tax The Parliament DLI: Ensured that cancellation, at the Code of Moldova adopted the The adopted supplies of goods by time transfer of (Title 3, art 3, 93 Changes to the Tax changes to the Tax insolvent subjects taxed DLI 2 collected VAT 102, 115) Code and they Code came into with VAT on the reverse insolvent subject submitted to the came into effect. effect. charge principle. (Text) does not have Parliament (DLR (DLR2.2). liquidity and this 2.1) creates budget losses. Rationale: Action: This indicator is This DLI will reflect the tax policy reform supported by the RBF component. New To improve tax compliance The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 Share of active taxpayers (legal entities) filing income declarations in 19.35 21.00 86.00 86.00 87.00 88.00 89.00 90.00 total registered taxpayer (legal entities) (Percentage) Rationale: STS aims to increase the number of submissions by economic agents that are active and are about to file tax returns. The indicator will be measured: Action: This indicator has Ratio of active taxpayers-economic agents (legal entities) filing income taxes to all active taxpayers (legal entities). been Revised The STS has understood since the time of project preparation that this indicator aims to measure legal entities only. Therefore, STS requested to clarify the indicator’s description, as well as to increase annual target levels to reflect recent development. Increase in additional tax assessed per audit 0.00 10.00 10.00 15.00 20.00 25.00 34.00 (Percentage) Rationale: To adjust annual target levels, except the end target level. Action: This indicator has Proposed adjustment is needed considering the delay with the implementation of ITMS and recent legal changes. Also, to clarify that the annual targets are been Revised measured as % increase against the baseline (not year on year increases). There are two Single STS website websites available launched with at Use of STS website New STS website is DLI: Improved the (one for information least the following by taxpayers within used by the usability of the STS DLI 3 only and another new features:- 1 months of its taxpayers website. (Text) one for the Support to launch (DLR 3.2) submission of tax requirements of declarations by people with special The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 taxpayers; there are needs;- single STS some gaps in the web page which functionality of both will allow websites. taxpayers to submit income statements electronically through their personal account created on the site;- STS web site is synchronized with the state web sites through the automated information exchange (open data);-new searching system which will reflect the final version of the legal documents, specifying all amendments and additions;- feed- back mechanism is available through the online (chat) assistance service.(DLR 3.1) The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 Rationale: Action: This indicator is To reflect STS’ efforts to improve compliance under the RBF component. New To improve taxpayer services Time required to comply 186.00 186.00 181.00 180.00 178.00 175.00 173.00 165.00 with taxes (Hours) Rationale: Action: This indicator has To adjust the annual target levels, the end target level is not changed. been Revised Proposed adjustment is needed considering the delay with the implementation of ITMS. The Manual is There is no a Manual on DLI: Strengthened the All eligible staff of implemented and all Manual on Taxpayer taxpayer services is capacity of STS staff to the STS located in eligible staff of STS DLI 4 Services, the staff developed and deliver taxpayer services all offices is trained located in all offices had no specific adopted by (Text) (DLR 4.2) was trained trainings. STS(DLR 4.1) Action: This indicator is New Pilot of the electronic taxpayer Evaluation report survey mechanism on Roll-out results The tool is DLI: Introduced an No tool for is completed and for six months of implemented. Electronic Taxpayer DLI 5 taxpayers’ regular training courses for implementation. Survey Tool (Text) feedback is in place. the designated (DLR5.2) staff to support the roll-out are conducted, and the The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 roll-out is initiated (DLR 5.1) Action: This indicator is New PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Tax policy reform (Action: This Component has been Marked for Deletion) Decrease in tax arrears 8.50 8.50 7.00 (Percentage) Rationale: This indicator was originally planned for Component 1, but since that component will be reorganized to the RBF Component, the indicator is reflected here Action: This indicator has accordingly. been Marked for Deletion It is proposed to adjust target levels to reflect the delay with ITMS implementation and the project’s extension. Institutional development (Action: This Component has been Revised) Baseline survey Legal entities – 83,9% Legal Entities – 91,6% Satisfaction in crease - conducted with data and Individuals – and Individuals – 20% (compared to Legal entities -76,3% disaggregated by 76,1%. Satisfaction 83,0% baseline) and Individuals – gender, results and increase - 10% Satisfaction increase - Taxpayer satisfaction (Text) 69,2%. suggests actions of (compared to 20% (compared to baseline) Final survey conducted the STS to address baseline) Final survey with data weaknesses are Mid-project survey conducted with data disaggregated by published on the STS conducted with data disaggregated by The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 website. disaggregated by gender, results and gender. Results and gender, results and suggests actions of suggested actions of suggests actions of the STS to address the STS to address the STS to address weaknesses are weaknesses are weaknesses are published on the STS published on the STS published on the STS website. website. website. Rationale: Action: This indicator has Considering the extension of originally planed ITMS's implementation's schedule, the timeframe of achievement of this indicator to be adjusted with no changes been Revised to the target levels of the indicator. Seven training Ten training courses Twelve training All identified distance The Training Distance courses to support to support for the courses to support learning courses to The list of training Learning System for the the distance learning distance training the distance training Assessment System is support for the most programs is not most important workflows training programs programs identified programs identified launched. important workflows identified (Text) identified by domains by domains are by domains are are developed and are developed. developed developed updated. Rationale: Change to reflect recent developments. Action: This indicator has The ongoing SIDA’s Institutional Cooperation Project (2018-2021) will fully support the original indicator. However, TAMP supported purchase 45 been Revised videoconferencing equipment to be used for distance learning of the STS employees all over the country. The STS plans to develop the course to support for the most important working processes by 2020. Subsequently, updating will be ensured. Number of hits to the STS web-site (Number 3,570,004.00 3,900,000.00 6,900,000.00 7,000,000.00 7,050,000.00 7,100,000.00 7,150,000.00 (Thousand)) The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Rationale: Action: This indicator has The target level and annual levels of the indicator should be increased based on results achieved in 2018 and due to the project extension. been Revised Operational development (Action: This Component has been Marked for Deletion) Share of large taxpayer audits which includes related parties, when 0.00 10.00 35.00 related parties exist (Percentage) Rationale: Achievement of this indicator will be fully assisted by the IMF Revenue Management Project, implemented for the period 2016-2019. This is a new development Action: This indicator has compared to the time of project preparation. been Marked for Deletion Share of income tax returns filed electronically 39.60 60.00 (Percentage) Rationale: A Subsystem for submission of tax declarations was developed by the STS, is functional, and will be just integrated to the ITMS. Since the project will not add Action: This indicator has value to the indicator, it is proposed to be deleted. been Marked for Deletion RBF: Support in tax policy and tax administration reforms (Action: This Component is New) Decrease in tax arrears 8.50 6.68 6.67 6.50 6.48 6.47 (Percentage) The World Bank Tax Administration Modernization Project (P127734) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Rationale: This indicator was originally planned for Component 1, but since that component will be reorganized to the RBF Component, the indicator will be reflected accordingly. Action: This indicator is It is proposed to adjust target levels to reflect the delay with ITMS implementation and the project’s extension. New IO Table SPACE Disbursement Linked Indicators Matrix DLI IN00681375 ACTION DLI 1 DLI: Increased nominal value of the Specific and Minimal Excise Rates for all tobacco products under tariff position 240220 Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Outcome Yes Text 700,000.00 0.00 Period Value Allocated Amount (USD) Formula Specific rates and minimum rates by types of Baseline tobacco products as set up in the Tax Code of Moldova in 2017 Draft Law on Changes to the Tax Code aimed at increasing the specific rate and the minimum rate for both cigarettes with filter and without filters 50% of DLI1 allocation;1.75% of total December 2019 350,000.00 by a minimum of 15 % each for the year 2021 financing. comparing to the excise rates from 2020 submitted to the Parliament. ( DLR 1.1) The World Bank Tax Administration Modernization Project (P127734) 20% of DLI1 allocation;0.7%of total December 2020 The Parliament approved the Law (DLR1.2) 140,000.00 financing. 30%of DLI1 allocation;1.05% of total December 2021 Specific rates increase came into effect. DLR 1.3 210,000.00 financing. Rationale: Action: This DLI is New To reflect the tax policy reform supported by the RBF component. DLI IN00681411 ACTION DLI 2 DLI: Ensured that supplies of goods by insolvent subjects taxed with VAT on the reverse charge principle. Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Outcome Yes Text 650,000.00 0.00 Period Value Allocated Amount (USD) Formula Due to the legal gap in provisions which stipulates the process of debt cancellation, at the time Baseline transfer of collected VAT insolvent subject does not have liquidity and this creates budget losses. Draft Law on Changes to the Tax Code of Moldova 70% of DLI2 allocation;2.275% of December 2019 (Title 3, art 3, 93 102, 115) (DLR 2.1) submitted to 455,000.00 total financing. the Parliament ( DLR 2.1) The Parliament adopted the Changes to the Tax 30% of DLI2 allocation, 0.975% of December 2020 195,000.00 Code and they came into effect.(DLR2.2). total financing. December 2021 0.00 0% Rationale: Action: This DLI is New To reflect the tax policy reform supported by the RBF component. The World Bank Tax Administration Modernization Project (P127734) DLI IN00681412 ACTION DLI 3 DLI: Improved the usability of the STS website. Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Output Yes Text 600,000.00 0.00 Period Value Allocated Amount (USD) Formula There are two websites available (one for information only and another one for the Baseline submission of tax declarations by taxpayers; there are some gaps in the functionality of both websites. Single STS website launched with at least the following new features: - Support to requirements of people with special needs; - single STS web page which will allow taxpayers to submit income statements electronically through their personal account created on the site; - STS 75%of DLI3 allocation; 2.25% of total December 2019 web site synchronized with the state web sites 450,000.00 financing. through the automated information exchange (open data); -new searching system which will reflect the final version of the legal documents, specifying all amendments and additions; -feed- back mechanism available through the online (chat) assistance service. ( DLR 3.1) Use of STS website by taxpayers within 1 month 25%of DLI3 allocation; 0.75% of total December 2020 150,000.00 of its launch (DLR 3.2) financing. December 2021 0.00 0% Rationale: Action: This DLI is New To reflect STS’ efforts to improve compliance under the RBF component. The World Bank Tax Administration Modernization Project (P127734) DLI IN00681413 ACTION DLI 4 DLI: Strengthened the capacity of STS staff to deliver taxpayer services Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Output Yes Text 300,000.00 0.00 Period Value Allocated Amount (USD) Formula There is no a Manual on Taxpayer Services, the Baseline staff had no specific trainings. Manual on taxpayer services developed and 50%of DLI4 allocation; 0.75% of total December 2019 150,000.00 adopted by STS. (DLR 4.1) financing. All eligible staff of STS, located in all offices, are 50%of DLI4 allocation; 0.75% of total December 2020 150,000.00 trained. (DLR 4.2) financing. December 2021 0.00 0% Rationale: Action: This DLI is New To reflect STS efforts to improve its taxpayer services under the RBF component. DLI IN00681414 ACTION DLI 5 DLI: Introduced an Electronic Taxpayer Survey Tool Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount Output Yes Text 750,000.00 0.00 Period Value Allocated Amount (USD) Formula Baseline No tool for taxpayers’ regular feedback is in place. The World Bank Tax Administration Modernization Project (P127734) Pilot of the electronic taxpayer survey mechanism is completed and training courses for the 80%of DLI5 allocation;3% of total December 2019 600,000.00 designated staff to support the roll-out are financing. conducted, and the roll-out is initiated (DLR 5.1) Evaluation report on Roll-out results for six 20%of DLI5 allocation; 0.75% of total December 2020 150,000.00 months of implementation.(DLR5.2) financing. December 2021 0.00 0% Rationale: Action: This DLI is New To reflect STS efforts to improve its taxpayer services under the RBF component. Verification Protocol Table: Disbursement Linked Indicators DLI_TBL_VERIFICATION DLI 1 DLI: Increased nominal value of the Specific and Minimal Excise Rates for all tobacco products under tariff position 240220 Description The Ministry of Finance of Moldova/ Official Gazette. Data source/ Agency World Bank Verification Entity 1. For DLR1.1, review of evidence that the draft Law has been submitted to and is registered in the Parliament. 2. For DLR1.2, review of evidence that the Parliament adopted the Law and is published in the official gazette. Procedure 3. For DLR 1.3, review of evidence that the mentioned rates came into effect. DLI_TBL_VERIFICATION DLI 2 DLI: Ensured that supplies of goods by insolvent subjects taxed with VAT on the reverse charge principle. Description Data source/ Agency The MoF/ Official Gazette The World Bank Tax Administration Modernization Project (P127734) World Bank Verification Entity For DLR2.1, review of evidence that the draft Law has been submitted to and is registered in the Parliament. For DLR2.2, review of evidence that the Parliament adopted the Law that is published in the official gazette and all Procedure mentioned changes came into effect. DLI_TBL_VERIFICATION DLI 3 DLI: Improved the usability of the STS website. Description STS Data source/ Agency World Bank Verification Entity For DLR3.1, review reports produced by the STS including accessing the website and testing its new features. For DLR3.2, review reports produced by STC on use of the web-site which should include as minimum: number of visits, Procedure number of feedback received, number of tax declarations submitted. DLI_TBL_VERIFICATION DLI 4 DLI: Strengthened the capacity of STS staff to deliver taxpayer services Description STS Data source/ Agency World Bank Verification Entity For DLR4.1., review evidence of STC adoption of the Manual on Taxpayer Services. Procedure For DLR4.2, review reports produced by the STS on staff being trained on the Manual. The World Bank Tax Administration Modernization Project (P127734) DLI_TBL_VERIFICATION DLI 5 DLI: Introduced an Electronic Taxpayer Survey Tool Description STS Data source/ Agency World Bank Verification Entity For DLR5.1, review evidence of the STS’s Order on the conduct of a Pilot of the Electronic Taxpayer Survey Tool and STS ‘s Report on the Pilot to document the feedback mechanism piloted, the analysis of the feedback and adjustments made to improve the STS’s business processes. Procedure For DLR5.2, review of evidence of the STS’s Order on the system’s roll-out and the STS’s report on the six-months implementation experience (including an inventory of adjustments made based on the survey results). The World Bank Tax Administration Modernization Project (P127734) Annex 1 DLIs Related to Tax Policy Reform DLI 1: Increased nominal value of the specific and minimal excise rates for all tobacco products under tariff position 240220 Taxation of tobacco products currently has two important purposes. The first and most important objective is to reduce the consumption of tobacco products in line with the recommendations of the World Health Organization. At the same time, charging for these products creates budget revenue required to cover budget expenditures for social and medical purposes. As a general conclusion, in the last period after gradual increasing the excise rate for tobacco products in 2016, 2017 and 2018, experience showed that this measure brought more revenue, proportionally to the increased excise rates. It is caused by the low elasticity of consumption of those products. In order to show a general view of measurement taken in last period and the effect on the budget, below is a table in which are included rates of excise and budget revenues. SR = specific rate / AVR = ad-valorem rate The World Bank Tax Administration Modernization Project (P127734) DLI 2: Ensured that supplies of goods by insolvent subjects are taxed with VAT on the reverse charge principle Description of actual situation: The company's liquidation process involves a list of activities, including the sale of goods of the insolvent subject. At this time, designated liquidator is obliged to extinguish the debts to the creditors. In the process of sale of goods, subjects collect from buyers VAT which is obliged to pay it to the state budget. Due to the provisions of the Insolvency Law which stipulates the process of debt cancellation, at the time of transfer of collected VAT, insolvent subject does not have liquidity and this creates budget losses. Description of proposed solution: In order to collect VAT not transferred to the budget by insolvent subject, it is proposed to tax these supplies on the reverse charge principle, which implies that sellers do not tax these supplies with VAT and buyers calculate by themselves the VAT and transfer/pay it to the budget. Analysis currently carried out shows that applying this principle will bring to the budget around MDL 30 million. Purpose: Improving revenues collection. Action required to reach the indicator: Amending the Tax Code, Title 3, in particular art. 93, art.94, art.102, art.115. The necessary steps to increase the excise rate: 1. Drafting the amendments to the Tax Code. 2. Government approval. 3. Adoption by the Parliament. DLIs Related to Tax Administration DLI3: Improved the usability of teh STS website Description of actual situation: Currently, the STS has an official web site that facilitates taxpayers' access to real-time information. However, the institution's site does not correspond to the information needs of people with special needs, considering the fact that in Moldova about 5% of the population of the country are disabled. Also, the institution's web page has a cumbersome structure of access to information (according to the established good practices, accessing the desired information should be done within 2 to 4 clicks). Proposed solution: The World Bank Tax Administration Modernization Project (P127734) Improving the functionality and usability of the STS web site, boosting taxpayers' confidence in its informational content, optimizing the information resources and services available to taxpayers, adapting the web site to user- friendly development principles, as well as effectively promoting the image of the institution. Strengthening decision transparency through a well-structured, broad and easily accessible by taxpayers’ placement of information, including administrative one, issued by the State Tax Service, contributing to the increase of taxpayers' confidence, simplified access, efficient dissemination of public information and exclusion of the need for contacting the tax service directions by telephone or visits of the taxpayers to the territorial offices for receiving the additional information. New features: 1. adjusting the STS web page to the necessities of people with special needs by developing the necessary functionalities that will facilitate access to the institution’s information and services for this category of population; 2. creating a single STS web page that will allow taxpayers to submit income statements electronically through their personal account created on the site. At present, 65,1% of the statements are submitted electronically via a separate web page www.servicii.fisc.md (which provides over 45 electronic services); 3. synchronizing the STS web site with the state web sites through the automated exchange of relevant information (open data); 4. the creation of the system designed for searching for laws/systematized methodological documents, issued by the STS, which will provide as a result the final and most updated version of the document, specifying all amendments and additions; 5. creating the feed-back mechanism through the online (chat) assistance service so that the taxpayer receives real-time assistance. Action required to reach the indicator: - Contracting the company for the compilation of the web site. The services provided by the company are planned to be supported under the Project’s new component 1; - The delivery-acceptance act/contract signed on the elaboration of the site; - The existence of the new functionalities on the web page. DLI 4: Strengthened the capacity of STS Staff to deliver taxpayer services Description of actual situation: There are currently a multitude of acts (explanatory letters, guides, instructions) that guide taxpayers' service. There is no single knowledge repository system containing all internal orders, indications, circulars, with the possibility of viewing subsequent changes. At the same time, there are activities within the service process that are regulated not so thoroughly and explicitly, as these are segmented regulatory provisions. Also, if a new tax inspector is employed, it is difficult for him to take note of all the provisions in the field, making the process of integrating the inspector longer and more complicated. Proposed solution The World Bank Tax Administration Modernization Project (P127734) The Operations Manual for Taxpayers’s Service will be an integral and unique methodological support for taxpayers’ service. Its elaboration will facilitate the establishment of an adequate knowledge repository system for all employees engaged in taxpayers’ service. It will allow: 1. Structuring/Organizing normative acts, instructions, guides, methodological letters, etc. by areas of service; 2. Strengthening good practices in taxpayers' service; and 3. Preventing and managing the various current and potential situations that are not foreseen in the law. The overall objective of the Operational Manual is to improve the functionality of the taxpayers' service system by actually implementing the legal framework in the field consistently. The operational manual on taxpayers' service will contribute to:  Creating significant methodological support for any tax inspector;  Saving time to solve difficult situations;  Standardizing taxpayer service activities;  Quick and accurate provision of the legal framework in the field of taxpayers' service;  Managing and harmonizing taxpayer service processes;  Effective evaluation of STS activities on taxpayers' service;  Improving tax administration;  Improving taxpayers' service processes;  Facilitate interaction with taxpayers through modernization of STS activity;  Improving the taxpayer's communication and information system;  Improving the abilities and professional skills of inspectors directly involved in taxpayers’ service. The Manual will be used in electronic format, available online on the www.sfs.md external website and the intern.sfs.md internal portal. This manual is intended for the tax administration, especially for the over 700 tax officers working in 40 territorial offices, responsible for: - serving natural and legal persons; - registration / cancellation of taxpayers as subjects of VAT, excise duties; - receiving reports; - verification of tax obligations; - compliance, etc. In order to achieve that concept, the following steps are planned: 1. Elaboration of the action plan, determining the tasks to be performed; 2. Creating the work team (about 10 STS employees, including the US Treasury expert) responsible for the development of the Manual; 3. Identify the possibility of electronic distribution of the Manual and its online accessibility; 4. Testing the Manual functionality; The World Bank Tax Administration Modernization Project (P127734) 5. Training of 100% tax inspectors involved in the service process by conducting 40 training hours per inspector (both within the State Tax Service Training Center and through Skype for Business) and on average 3 months of individual training at the workplace, coordinated by a mentor (eg. head of subdivision). Actions required to achieve the indicator: - This indicator will be achieved from the resources available to the State Tax Service and with the support of the long-term expert from the US Treasury Department. - STS Order approving the Taxpayer Service Manual; - Evidence of people attending training (confirmed by the signature of each participant); - Confirmation by the mentor (the head of subdivision) of the inspector's training at the workplace. DLI 5: Introduced an electronic taxpayer survey tool Vision Implementing a modern system/mechanism for conducting high-quality surveys aimed at obtaining in-depth information and at evaluating the taxpayers' satisfaction degree and their opinions through the feedback mechanism, contributing to the optimization of the services provided by the STS, to the development of the communication capacity and to the improvement of the decision-making process and eventually improvement in tax services. Although certain aspects of taxpayer service have improved, there is a broad field of action in order to improve the services provided to the taxpayers and to increase tax compliance. The information obtained through taxpayer responses will provide an analysis of the taxpayer route mapping and recommendations for improving the latter in order to reduce the time needed for tax compliance. At the same time, the level of taxpayer satisfaction is an intermediate measure aimed at helping the STS to reduce the burden borne by taxpayers, to improve tax compliance, and to increase public confidence in the professionalism and integrity of STS employees. Objectives - Determining the taxpayers’ opinion on the basis of their responses, which will provide the opportunity to analyze and modify procedures or methodologies within the STS; - The optimization, adjustment of STS processes (tax services), depending on taxpayers’ requirements; - Determining on the basis of the taxpayers' responses on their level of satisfaction, related to the STS activity. Implementing the concept The questionnaires will be adapted according to the pursued objective (the overall performance of the services provided by the State Tax Service, the provision of a particular service, the direct servicing by the tax inspector, the process of completing the declaration, the process of paying the taxes and fees, the content of the web page, etc.). Thus, the content of the questionnaires can be both general and specific in a given field, containing open/closed, large/short/simple questions, depending on the context. In order to achieve this concept, the following steps are generally planned: 1. Developing an action plan that determines the tasks to be performed; 2. Creating the work team for monitoring the implementation of the system; The World Bank Tax Administration Modernization Project (P127734) 3. Identifying and contracting the company in order to jointly develop the survey methodology; 4. Elaborating the system concept; 5. Developing the web page containing the questionnaire and pop-up presentation that will redirect one to the questionnaire page; 6. Acquiring the gadgets; 7. Testing the functionality of the system; 8. External training of the persons who will be responsible for conducting the survey. The informational model of the system The informational system must provide a WEB interface, accessible through a broad-based Internet browser, compatible with: Microsoft Internet Explorer, Mozilla Firefox, Opera, Google Chrome, or Safari. From a functional point of view, a reliable and scalable solution will be developed, both in case of increase of the number of users as well as in case of increase of the information volume managed by the former based on an MVC architecture. In order to ensure an adequate level of informational security, the IT solution must allow for secure connections between the client stations and the application server in order to ensure the security of the sent information. By analyzing the modeled domain (ensuring the functionality of the system) one can delimit all the informational objects to be taken into consideration in the development process of the informational system. The informational system contains 11 categories of objects which are of primary importance to the process of designing and implementing the information system, namely: Informational objects for the solution web portal (modules for creating and managing the questionnaires): 1. Web interface for the inspector – this is an informational object that allows the inspector to view the information on the site; 2. Web interface for the administrator – this is an informational object that will allow the administrator to have full access to the web portal and will be responsible for maintaining the functionality of the site; 3. Questionnaires – these represent the informational object that will allow for the viewing, creation and editing of taxpayers' satisfaction assessment questionnaires. Also, any question can be changed and a new questionnaire can be created; 4. Live Data – this is an informational object that will allow one to view the responses and data received in real time as well as within a certain amount of time. In this compartment, the system administrator will be able to select the device from which he/she wants to view the data stream, as well as the period of questionnaire completion; 5. Reports - This is an informational object that will allow system users to generate reports based on questionnaires and responses received from customers (taxpayers); 6. Alerts – these represent an informational object in which the system administrator will be able to create alerts based on questionnaire responses according to certain criteria; 7. User management - this is an informational object that will allow the system administrator to manage the system users, to create new users, assign system usage rights, etc.; and 8. Mobile devices management (questionnaire running terminals) - this is an informational object that will allow the system administrator to manage the mobile devices on which the created questionnaires will run. Informational objects for the mobile application of the solution (modules for running the questionnaires): The World Bank Tax Administration Modernization Project (P127734) 1. Integration with the web administration portal - this is an informational object that will allow for the integration of the mobile application with the web portal in order to run the created questionnaires; 2. Running the questionnaires - this is an informational object that will allow one to run the questionnaires created on the web portal directly on the mobile application; and 3. Offline Data (offline data storage) - offline data allows for the use of the questionnaire and storage of response data on a particular device without Internet connection. The data will be automatically transmitted to the server when the device is first connected to the Internet. Technical solution 1. Elaboration of web questionnaires, involving: a) the elaboration of the web page containing the questionnaire presentation: o The portal will have a front office and a back office; o The structure of the ”front office” web page (what the taxpayer sees) will include:  The portal’s header with its name;  Selecting the language of the questions;  The grid of questions and answers. o The Structure of the “back office” web page (what the page administrator/programmer sees):  An instrument for adding a new questionnaire;  An instrument for adding questions;  A questionnaire archiving instrument;  An instrument for the generation of statistical analysis on taxpayer responses. b) the development a “pop-up” (tab on the web portals that displays advertising) on the web portal: www.sfs.md with the name “Participate in the poll-your opinion matters”, which will redirect the user to the questionnaire page. 2. Using a „gadget” (tablet or computer) located within the Tax Service Departments. An equipment to be connected to the Internet will be identified: a) a simple computer with internet connection, or b) a tablet with a 10-inch diagonal and wifi equipment. In order to conduct an efficient survey for a high-quality analysis, there will only be one chance of filling in the questionnaire from one IP address available, except for the IP addresses within the Tax Service Departments. Actions required to achieve the indicator: - Contracting a company to develop a methodology for conducting a survey, from the resources available within the STS. - The acquisition of approximately 80 gadgets (tablets) for the actual realization of the survey to be funded under the new Component 1 - External training of tax inspectors who will be responsible for conducting the survey, from the resources available within the STS. - The STS Order for the adoption and implementation of the satisfaction assessment system; - The delivery-acceptance act of gadgets signed by the contracting parties (STS and vendor company); - The signed delivery-acceptance act/contract on the elaboration of the methodology; - The evidence of the persons who participated in the training (confirmed by each participant's signature). The World Bank Tax Administration Modernization Project (P127734) Annex 2 Disbursement Linked Indicators, Disbursement Linked Results, Indicative Timeline for the Achievement of the DLRs under each DLI and Allocated Amounts for Each DLI/DLR Disbursement-Linked Results Results to be Results to be Results to be Disbursement Linked achieved in achieved in achieved in Indicators Baseline Year 1 Year 2 Year 3 (Dec-2019) (Dec-2020) (Dec-2021) Draft Law on Changes to the Tax Code aimed at increasing the specific rate and the minimum rate for both Increased nominal value of Specific rates and cigarettes The the specific and minimal minimum rates by with filter and Specific rates Parliament excise rates for all tobacco types of tobacco without filters increase came approved products under tariff position products as set up by a into effect the Law 240220 in the Tax Code of minimum 15 (DLR1.3) Moldova in 2017. % each for (DLR1.2) (DLI1) 2021 comparing to the excise rates from 2020 submitted to the Parliament. (DLR1.1) Financing amounts: SDR 513,300 (USD 750,000) SDR 256,650 SDR 102,660 SDR 153,990 Due to the legal gap Draft Law on The in provisions which Changes to Parliament stipulates the the Tax Code Ensured that supplies of goods adopted the process of debt of Moldova by insolvent subjects are Changes to cancellation, at the (Title 3, art taxed with VAT on the reverse the Tax Code time transfer of 93, 94, 102, charge principle. (DLI2) and they collected VAT 115) came into insolvent subject submitted to effect does not have Parliament The World Bank Tax Administration Modernization Project (P127734) Disbursement-Linked Results Results to be Results to be Results to be Disbursement Linked achieved in achieved in achieved in Indicators Baseline Year 1 Year 2 Year 3 (Dec-2019) (Dec-2020) (Dec-2021) liquidity and this (DLR 2.1) (DLR2.2) creates budget losses Financing amounts SDR 476,700 (USD 650,000) SDR 333,690 SDR 143,010 Single STS website launched with at least the following new features: - support to requirements of people with special needs; There are two - single STS websites available web page that (one for information will allow Use of STS only and another taxpayers to website by one for the submit taxpayers Improved the usability of the income state- within 1 submission of tax STS website (DL13) ments elec- month of its declarations by taxpayers) there are tronically launch some gaps in the through their (DLR 3.2) functionality of both personal websites. account created on the site. - STS web site synchronized with the state websites through the automated information exchange (open data); The World Bank Tax Administration Modernization Project (P127734) Disbursement-Linked Results Results to be Results to be Results to be Disbursement Linked achieved in achieved in achieved in Indicators Baseline Year 1 Year 2 Year 3 (Dec-2019) (Dec-2020) (Dec-2021) - new searching system which will reflect the final version of the legal documents, specifying all amendments and additions; - feedback mechanism available through the online (chat) assistance service. (DLR 3.1) Financing amounts: SDR 440,000 (USD 600,000) SDR 330,000 SDR 110,000 Manual on All eligible taxpayer There is no a Manual staff of STS Strengthened the capacity of services on taxpayer services; located in all STS staff to deliver taxpayer developed the staff had no offices are services (DLI 4) and adopted specific trainings. trained by STS (DLR 4.2) (DLR 4.1) Financing amounts: SDR 220,000 (USD 300,000) SDR 110,000 SDR 110,000 Pilot of the Evaluation electronic report on No tool for taxpayers’ taxpayer Roll-out Introduced an electronic regular feedback is in survey results for six taxpayer survey tool (DLI5) mechanism is place months of completed implementat and training ion courses for The World Bank Tax Administration Modernization Project (P127734) Disbursement-Linked Results Results to be Results to be Results to be Disbursement Linked achieved in achieved in achieved in Indicators Baseline Year 1 Year 2 Year 3 (Dec-2019) (Dec-2020) (Dec-2021) the (DLR 5.2) designated staff to support the roll-up are conducted, the roll-out is initiated (DLR 5.1) Financing amounts: SDR 550,000 (USD 750,000) SDR 440,000 SDR 110,000 The World Bank Tax Administration Modernization Project (P127734) Annex 3 Current expenditures of the MoF and the STS 2017 2018 2019 Recurrent costs Budget Actuals for 9 classification Actuals (MDL) months (MDL) Planned (MDL) MoF 1 Electricity 222110 1,928,180.02 1,762,606.32 2 Gas 222120 12,228.15 478.83 3 Heating 222130 929,293.84 686,457.33 2,778,000.00 4 Water & sewerage 222140 194,386.62 169,486.04 5 Other utilities 222190 63,527.80 54,963.72 6 Informational services 222210 14,123,493.51 11,674,192.87 20,167,700.00 7 Telecommunication services 222220 417,886.36 215,284.77 8 Rent 222300 3,870,028.66 555,944.07 0 9 Transportation 222400 67,062.99 75,530.00 30,000.00 10 Current repairs 222500 3,381,797.05 2,051,760.00 1,847,800.00 Professional development / 222600 1,551,400.00 11 training 406,711.84 68,906.00 12 In-country travel 222710 31,968.36 5,524.68 1,795,000.00 13 Travel abroad 222720 1,402,676.84 1,067,152.07 14 Medical services 222810 120.00 0.00 0.00 15 Editing services 222910 6,000.00 6,500.00 16 Representation costs 222920 266,916.17 24,557.28 17 Security costs 222940 1,270,875.87 843,767.34 4,892,200.00 18 Banking services 222970 300.00 225.00 19 Post services 222980 174,473.67 31,153.31 20 Other expenditures 222990 2,861,625.48 1,729,997.16 TOTAL 222 31,409,553.23 21,024,486.79 33,062,100.00 STS 1 Electricity 222110 2,444,036.73 2,429,195.32 2,611,400.00 2 Gas 222120 808,861.68 1,009,651.87 1,352,300.00 3 Heating 222130 540,775.65 680,980.96 842,000.00 4 Water & sewerage 222140 271,356.90 306,930.19 362,300.00 The World Bank Tax Administration Modernization Project (P127734) 2017 2018 2019 5 Recurrent costs Other utilities 222190 Budget 65,960.22 64,052.73 81,200.00 6 Informational services 222210 classification 30,743,364.14 39,443,049.73 40,965,300.00 7 Telecommunication services 222220 1,516,268.66 1,605,683.94 2,300,000.00 8 Rent 222300 9,520,616.09 9,280,951.79 11,930,000.00 9 Transportation 222400 284,871.88 259,730.61 290,000.00 10 Current repairs 222500 1,613,577.52 2,568,601.73 4,269,888.10 Professional development / 500,000.00 11 training 222600 413,150.00 439,523.20 12 In-country travel 222710 688,256.22 739,310.23 760,000.00 13 Travel abroad 222720 446,770.79 756,577.29 1,079,700.00 14 Medical services 222810 15 Editing services 222910 2,019,579.60 16 Representation costs 222920 19,056.82 18,291.00 50,000.00 17 Security costs 222940 1,378,465.64 1,333,694.49 1,404,800.00 18 Asset valuation 222960 240.00 19 Banking services 222970 11,717.08 75.00 100.00 20 Post services 222980 624,267.37 1,254,612.28 1,800,000.00 21 Other expenditures 222990 3,977,545.01 4,845,137.47 3,002,500.00 TOTAL 222 57,388,738.00 67,036,049.83 73,601,488.10 The World Bank Tax Administration Modernization Project (P127734) Annex 4 Eligible Expenditure Programs for the DLIs Budget Code of the Code of the Related DLI Title of the Allocation Allocation Allocation code Budget institution budget line for 2019, for 2020, for 2021, classification USD USD USD (actual) (estimated) (estimated) 222 00112 00325- DLI 1: Increased Recurrent 2,130,359.03 2,044,062.3 1,937,914.6 Ministry of nominal value of costs Finance the Specific and Minimal Excise Rates for all tobacco products under tariff position 240220 DLI 2: Ensured that supplies of goods by insolvent subjects are taxed with VAT on the reverse charge principle. 222 00112 15272- DLI 3: Improved Recurrent 4,332,047.5 4,095,797.9 3,976,309.4 State Tax the usability of the costs Service STS website DLI 4: Strengthened the capacity of STS staff to deliver taxpayer services DLI 5: Introduced an electronic taxpayer survey tool The World Bank Tax Administration Modernization Project (P127734) Annex 5 Economic and Financial Analysis Sectoral and Institutional Context Moldova continues to rank above its regional peers when it comes to the time to comply with all tax requirements, but the progress has stalled recently, as the Doing Business report shows. According to the 2019 Doing Business (DB) report, in Moldova for a medium-sized company, it takes 181 hours to prepare, file and pay taxes (about 10 payments per year) compared with, on average, 234.3 hours in the Europe and Central Asia region (17 payments per year) and 175.4 hours in OECD (11.8 payments per year) 7. While the number of tax payments has seen a twofold decrease between DB’20168 and DB’2019, the time to prepare taxes has remained largely unchanged at 181 days over the past 6 years. Table 5.1. Administrative Burden of Tax Compliance in Moldova and ECA, 2006-19. Tax payments, 2006-2019. Time to prepare and pay taxes, 2006-2019. Number oer year Hours per year 60 500 450 441 50 400 350 215 40 300 30 250 21 234 234 200 20 181 150 17 100 181 10 10 50 0 - DB2006 DB2011 DB2015 DB2019 DB2006 DB2011 DB2015 DB2019 MDA ECA MDA ECA After showing some mixed results between 2013 and 2016, total tax revenues have been trending upward, projected to reach 27.7 percent of GDP in 2018. Within the tax revenue envelope, revenues administrated by STS have been steadily growing since 2016. CIT has registered the largest relative increases, growing from MDL 3.4bln 7 One way to measure the tax compliance burden is to look at the time needed to comply with the major taxes (profit taxes, labour taxes and mandatory contributions, and consumption taxes) and the number of tax payments for a medium-sized company. The time indicator reflects the number of hours needed to prepare, file and pay the three major types of taxes: profit tax, consumption taxes, and labour taxes and mandatory social security contributions; while the number of payments typically reflects the frequency with which the company has to file and pay different taxes. 8To some extent a declining trend in compliance costs could be explained by the introduction of the “e-declaration” system, online payment for some taxes, and the reduction in the number of declarations by merging them, among others. The World Bank Tax Administration Modernization Project (P127734) or 2.1 percent of GDP in 2016 to MDL 5.4bln or 2.8 percent of GDP in 2018 (provisional year-end numbers). Within the direct tax revenues, as Table 5.2 shows, profit tax recorded the largest gains – from 1.7 percent of GDP in 2013 to 2.8 percent in 2018. PIT revenue has also been trending upward since 2016, but with fewer gains compared to CIT. Between 2016 and 2018, PIT revenue increased from MDL 3.2bln to MDL 4bln, reaching 2.1 percent of GDP in 2018. Social security contributions have risen by 30 percent between 2016 and 2018, reaching a new high of MDL 13bln or 6.8 percent of GDP in 2018. Within indirect taxes, domestic VAT collections increased from MDL 5.4bln or 3.4 percent of GDP in 2016 to MDL 7.1bln or 3.4 percent of GDP in 2018. Table 5.2. Tax revenue in Moldova in nominal values and as a share of GDP, 2013-18. 2013 2014 2015 2016 2017 2018'E Tax item MDL, % of MDL, % of MDL, % of MDL, % of MDL, % of MDL, % of GDP bn GDP bn GDP bn GDP bn GDP bn GDP bn Tax revenue 31.4 26.7 33.7 25.7 36.9 25.7 40.7 25.6 48.2 27.3 53.0 27.7 Direct taxes 14.3 12.1 16.0 12.2 18.0 12.6 20.2 12.7 23.8 13.5 27.0 14.1 Profit tax 2.1 1.7 2.4 1.9 2.1 1.4 3.4 2.1 4.1 2.3 5.4 2.8 Personal income 2.2 1.9 2.4 1.9 2.7 1.9 3.2 2.0 3.6 2.1 4.0 2.1 tax Social Fund contr. 7.8 6.6 8.4 6.4 9.3 6.5 10.0 6.3 11.9 6.7 13.0 6.8 Health Fund contr. 2.0 1.7 2.4 1.8 2.9 2.0 3.2 2.0 3.6 2.1 4.1 2.1 Other, incl. 0.3 0.3 0.3 0.3 1.9 1.1 0.8 0.3 0.5 0.3 0.6 0.3 property tax Indirect taxes 17.1 14.5 17.7 13.5 18.9 13.1 20.5 12.9 24.4 13.8 26.0 13.5 Excises 3.5 3.0 3.4 2.6 3.8 2.7 4.5 2.8 6.0 3.4 5.7 3.0 collections 3.8 2.4 3.7 2.8 4.1 2.8 4.7 2.9 6.2 3.5 5.9 3.1 refunds -0.3 -0.2 -0.3 -0.2 -0.2 -0.2 -0.2 -0.1 -0.2 -0.1 -0.2 -0.1 VAT 12.2 10.3 12.9 9.8 13.7 9.5 14.5 9.2 16.9 9.5 18.6 9.7 collections 4.0 3.4 4.4 3.3 4.8 3.4 5.4 3.4 6.3 3.6 7.1 3.7 refunds -1.9 -1.6 -2.4 -1.8 -2.1 -1.4 -2.6 -1.6 -2.6 -1.5 -2.9 -1.5 collections at 10.1 8.6 10.9 8.3 11.0 7.6 11.8 7.4 13.2 7.5 14.4 7.5 customs Other 1.4 1.2 1.5 1.1 1.3 0.9 1.5 0.9 1.6 0.9 1.7 0.9 Source: Ministry of Finance, World Economic Outlook. A. Economic Analysis Methodology and Data In a nutshell, cost-benefit analysis (CBA-hereafter) is an analytical exercise, which aims to assess the economic advantages or disadvantages of an investment project on society or the economy as a whole.9 In the context of the Moldovan Tax Administration Modernization Project (TAMP – hereafter), the CBA attempts to quantify the impact of the likely project costs and benefits for both tax payers and the STS. The calculation of the financial and economic costs and benefits is made with the incremental net benefits techniques, which considers the differences in the 9 In this analysis, we adopt the following guiding principles self-contained (results of previous studies should be briefly recalled and illustrated); transparent (a complete set of data and sources of evidence should be made easily available); verifiable (assumptions and methods used to calculate forecast values should be made available so that the analysis can be replicated by the reviewer); and credible (based on well-documented and internationally accepted theoretical approaches and practices). The World Bank Tax Administration Modernization Project (P127734) costs and benefits between compares the scenario with-the-project and the alternative scenario (also known as counterfactual or business as usual scenario). To conduct the cost and benefit analysis various sources of information have been used. They can be summarized as follows:  Cash flow under the project as defined in the revised Project Procurement Plan;  Administrative records concerning the number of active taxpayers by size and tax type were obtained from STS;  The average time to comply with taxes is based on the 2019 Doing Business report. The indicator is reported for a hypothetical medium-sized company, which needs, on average, about 181 hours/year (or approximately 23 days) to comply with major types of taxes and contributions in Moldova. The indicator can be subdivided further into the time needed to comply with the corporate income tax (42 hours or 5 days per year), labor taxes (88 hours or 11 days per year), and consumption taxes (55 hours or 7 days per year);  The average remuneration of an accountant in the country in 2018 is estimated at 22’600 MDL/month ($1350 per month10) for the large companies, 12’500 MDL/month ($750 per month) for the medium-sized firm, about 6’000 MLD/moth ($350 per month) for the small and 4’500 MDL/month ($270 per month) for micro firms.11 We also take into account the fact that a typical large Moldovan company besides the chief accountant employs two assistant accountants ($300 per month), while a medium-sized/small enterprise usually has one assisting accountant ($275/$250 per month). This has been factored in while calculating the average cost of an accountant per day. The TAMP is expected to generate both tangible and intangible benefits and costs for the taxpayers and the STS. While the project costs are typically easy to define and quantify, measuring some benefits, as well as defining causal linkages between some outcomes (such as behavioral responses) is not straight-forward. As such, the CBA aims to quantify only the most realizable and quantifiable benefits brought by the project. Costs and Benefits. For tax payers, the major economic benefits include the reduction in the time to comply with taxes and the time spent on dealing with tax inspections. The latter will be achieved mainly through strengthened compliance risk management mechanism and the fact that tax inspectors would now need to spend less time on gathering and processing information, as well as surveillance (knowledge generation) during field audits and before them.12 Additionally, it is anticipated that the new STS website would contribute to the increase of taxpayers' confidence, simplified access, efficient dissemination of public information and the exclusion of the need for contacting the tax service directions by telephone or visits of the taxpayers’ to the territorial offices for receiving the additional 10 Based on the average exchange rate of 16.76 MDL per 1 USD for 2018 (Source IMF WEO). 11The data were obtained from various official sources (e.g. National Bureau of Statistics in Moldova) and job advertising websites, with some additional adjustments after consultations with local audit companies. 12There is an extensive amount of evidence that emerged during consultations/interviews with various divisions/units within the STS supporting the case that the duration of an inspection might be substantially shortened in the presence of more reliable operational information on taxpayers, in addition to more targeted compliance risk assessment and specialization of tax inspectors. The World Bank Tax Administration Modernization Project (P127734) information. As a result, the mentioned measures should lead to a lesser amount of time for taxpayers to comply with taxes. For the STS, the major economic benefits are associated with the optimized business processes within the inspectorate. Particularly, the project is expected to result in automation and the abolishment of rudimental manual work still practiced by the STS staff; reduced inception costs (in terms of time spent by heads of divisions) for the training of newly hired staff, reduction in wasteful operational expenses such as printing of forms, automation and integration of all business and analytical processes, among others. Most of the benefits generated at the level of the STS will result in enhanced operational efficiency and effectiveness of services provided (“more” and “better” will be done with the same resources), which will be ultimately passed on to the tax payers. Key assumptions:  CBA of this project is presented relative to the current state of the tax administration system in the country, reflecting the anticipated changes in the time to comply with major taxes and the time to deal with tax inspections as reported in 2018;  It is anticipated that the time to comply with major taxes will start gradually declining from 2020 onwards: the time to comply with PIT and VAT will shrink by 25 percent and 20 percent, respectively; the time to comply with CIT is expected to decline by 20 percent starting from the same year. The forecasted targets to be reached by 2025 are 6.4 days for PIT, 3.6 days for CIT and 4.5 days for VAT;  The time to deal with tax inspections (in days) will start declining from 2020 thanks to the project. It is anticipated that the average duration of an inspection would start declining by 20 percent for micro/small firms, 25 percent for the medium-sized enterprises and 30 percent for the large companies from 2020 onwards.  The number of the STI staff will not change significantly over the project horizon and likely be fixed at the 2018 level. In the meantime, the number of active tax payers will remain unchanged over 2019-2020 and will start increasing from 2021 onwards at an annual rate of 5 percent as the economy will enter a phase of more robust growth;  The Social Discount Rate13 equals 14 percent.  Annual renumeration of an accountant has been indexed conservatively by 2.5 percent starting from 2020. Table 5.3. Costs and benefits with- and without- the investment project. Target Type of taxpayer Micro Small Medium Large Days/year *Days/year PIT payers 44,749 309 12 0 10.5 6.4 CIT payers 77,653 6,280 1,362 229 5.3 3.6 VAT payers 21,775 5,677 1,266 232 7 4.5 Individual tax payers 4,339 1 - - 11 7 Total active tax payers 148,516 12,267 2,640 461 Accountant remuneration (per day) 12 16 34 61 Total compliance cost, w/o project (1) 13.2 1.20 0.54 0.17 15.1 Total compliance cost, w/ project (2) 12.2 1.13 0.52 0.16 14.0 13 Average Commission The European duration of guide to CBA w/o inspection, (2014-2020) recommends6 5% 10 12 Countries SDR for Cohesion 25and 3% for other Member States. Such a high SDR rate in the case of Moldova is the reflection of the high-country premium. The World Bank Tax Administration Modernization Project (P127734) project (days) *Average duration of inspection, w/ 4.8 8 9 17.5 project (days) Savings from reduced duration of 1.09 0.20 0.14 0.11 1.57 inspection (3) Estimated annual net economic impact 2.07 0.26 0.16 0.11 2.61 (1) - (2) + (3) Note: The estimates correspond to the reduced number of days spent on tax compliance and dealing with tax inspections. In the case of tax inspections, total savings are calculated by multiplying the time saved on inspections (in days) with the accountant renumeration (USD/per day). We also take into account the probability to be inspected (on average 50 percent). Table 5.4. Economic benefits and costs under the project, 2016-2025 (in USD Millions) Project Schedule\Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total % of realization 1% 4% 19% 46% 21% 10% 1% 100% Procurement plan + RBF 0.1 0.7 3.7 9.1 4.2 2.0 0.2 - - 20.0 Economic benefit (time to - - - 1.1 1.5 2.9 3.5 4.1 4.7 comply) Economic benefit (time for - - - 1.6 3.4 3.5 3.7 3.9 4.1 inspections) Net economic profit -0.1 -0.7 -3.7 -6.4 0.7 4.4 7.0 8.0 8.8 NPV, (USD) 3.59 ERR, % 27% At NPV of USD3.59 million and ERR of 27%, the project appears to be economically feasible and desirable from a society point of view. It is worth noted that the results of the economic analysis of the restructured TAMP are very close to what was originally calculated: NPV of USD 3.6 million and ERR of 23%14. While the state of the Moldovan economy has changed since the initial appraisal (e.g. EX rate, GDP growth, tax payer base, etc.), most of the benefits that would be brought by the restructured TAM remained as relevant as they were 4 years ago. It should also be pointed out that the economic analysis follows a pragmatic approach, which aims to quantify only the most realizable benefits and costs brought by the project. For example, enhanced functionality and usability of the STS website and as a result enhanced user confidence in the information resources and services available to them, increased access of disabled population to the STS website; increased satisfaction of the STS staff with the services provided are just a few examples of project benefits that haven’t been quantified in the economic analysis. The estimate of the economic rate of return represents therefore a lower bound for actual net benefits of the project to the economy. 14IRR of return is sensitive to the timing and magnitude of cash flows. Therefore, for the same project a slight change in disbursement schedule may lead to different IRR results. The World Bank Tax Administration Modernization Project (P127734) B. Financial Analysis From the financial point of view, the project is expected to generate additional budgetary revenues through a greater collection of excise taxes, as it is envisaged by the restructured TAMP, and improved overall compliance (both volunteered and enforced) with major taxes thanks to the project. The former will be achieved by increasing excise rates for tobacco products for the year 2021 by minimum 15 percent compared with the excise rates for 2020. Improved compliance will be enhanced through the establishment of favorable conditions for tax compliance, including the prevention of incidences of non-compliance by notifying the taxpayers in advance, as well as by better compliance targeting of tax payers that are not behaving honestly. It is also anticipated that compliance will be strengthened through lower incidences of bribery as the outcome of improved tax payers’ perception of the country’s tax system coupled with less opportunities for tax inspectors to collect bribes. Additionally, the project is expected to generate a one-off increase in budgetary revenues from the sale of goods by insolvent subjects taxed with VAT on the reverse charge principle15. The analysis carried out show that as a result of this policy measure the budget would benefit from about 30 mln. MDL. The financial analyses of the project are based on the project outflows and greater budgetary revenues (inflows) estimated using the tax elasticity approach16 whereby the growth in revenue for each major tax is interrelated with the growth in the tax base (GDP is used as a proxy for tax base). By estimating tax specific elasticities and then multiplying them by projected growth rate of GDP, we yield the tax revenue forecast. The restructuring of TAMP necessitated to revise the historical tax elasticities17 and their forecasts by taking into account the extended project disbursement period, as well as the most recent macroeconomic developments in the country. The new tax elasticities are calculated for the period of 2014-2018 and are as follows: 1.00 (PIT), 0.90 (SSCs), 1.61 (CIT), and 1.01 (VAT). The tax elasticities have been estimated based on the taxes collected by the STS and therefore VAT collected at customs haven’t been into account. We also notice that the new baseline tax elasticities have significantly improved compared with the original forecast which underestimated the expansion of the tax base between 2014 and 2018. Between 2014 and 2018, year-over-year growth in tax revenues has consistently outperformed the growth rate of GDP resulting in much higher short-team elasticities compared to their original estimates. In particular, the revised short-term elasticities averaged 1.13 (PIT), 1.09 (SSCs), CIT (1.84), and VAT (1.66) over 2013-2018. Noteworthy, all short-term tax elasticities are trending upward compared to their historical averages. 15According to the reverse charge principle, insolvent sellers of goods subject to VAT are supposed to not tax their goods and buyers calculate by the themselves the VAT that has to be paid to the budget. 16 Tax elasticity is the ratio of percentage change in tax revenue to the percentage change in tax base. 17The original draft of the TAMP envisaged the following baseline tax elasticities: PIT (0.89), SSCs (0.98), VAT (1.2) and CIT (0.91) over the period of 2004-2014. It was previously anticipated that the improved tax administration and compliance brought by TAMP would raise the corresponding elasticities above their historical values from the second year of the project (y2017): from the trend values of 0.89 (PIT) and 0.98 (SSCs) to 1.1 in each case, from the trend rate of 0.91 to 1.05 for CIT and from 1.20 to 1.25 in the case of VAT. The World Bank Tax Administration Modernization Project (P127734) The following key assumptions are used:  Thanks to the project, we expect the PIT and SSCs elasticities to trend at 1.15 from 2020 onwards. We are not expecting any significant changes to the CIT elasticity as the project component will help to sustain the recent upward trends in CIT collections;  Improved tax administration and compliance brought by the project won’t affect the VAT elasticity. The rationale for no-change is justified by the fact that the current short-term VAT elasticity (1.66) is trending significantly above its historical average of 1.01.  The counterfactual scenario reflects the anticipated development in the corresponding tax revenues derived from the short-term elasticities for 2013-2018: PIT (1.13), SSCs (1.09), VAT (1.66), and CIT (1.84);  A 15 percent increase in the excise tax rate on tobacco products is expected to generate a permanent increase in the tobacco excise revenue starting from y2021. The tobacco excise cash flows for the years 2018-2020 are based on the tobacco tax increases adopted by Parliament, which are projected to further augment excise tax revenue: MDL 2.45 bln in 2018, 2.87 bln in 2019 and 3.31 bln in 2020. By following the tax elasticity approach, we first forecast the tobacco excise tax revenues without the 15 percent increase in the tax rate in 2021. We then introduce the effect of a 15 percent change in the tax rate by adjusting the 2021 excise tax elasticity. We also assume that the tobacco excise elasticities will average 1.71 over 2022-2026, being consistent with the historical averages.  If the changes to the Tax Code are adopted by Parliament in 2020 and consequently the sales of goods by insolvent subjects on the reverse charge principle become eligible under the amended Tax Code, the budget would benefit from an estimated of MDL 35mln or USD 2.2 mln thanks to the project implementation.  Nominal GDP growth18 is projected at 9.1% for 2019-2025; the nominal exchange rate is expected to average 17.6 USD/MDL for 2019-2022, and 19.5 USD/MDL onwards;  The Financial Discount Rate is 15%. Table 5.5. Additional fiscal revenues with- and without- the investment project. CIT VAT PIT SSCs Total Tax revenue w/o project Historical elasticities, 2004-18 1.61 1.01 1.00 0.90 Short-term elasticities, 2013-18 1.84 1.66 1.13 1.09 Revenue collected, LCU bln 7.3 5.6 4.84 20.71 37.85 Tax revenue w/ project Elasticities, project 1.84 1.66 1.15 (↑) 1.15 (↑) Revenue collected, LCU bln 7.3 5.6 4.84 20.82 38.56 FX, USD/MDL 17.4 17.4 17.4 17.4 Additional fiscal benefits (y2020), USD 0.0 0.0 0.47 5.93 6.5 18 Based on the IMF WEO estimates up to 2023. The World Bank Tax Administration Modernization Project (P127734) Table 5.6. Fiscal benefits under the project, 2016-2025. Project Schedule\Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total % of realization 1% 4% 19% 46% 21% 10% 1% 100% Procurement plan + RBF 0.1 0.7 3.7 9.1 4.2 2.0 0.2 0.0 0.0 20 Benefits from improved compliance 6.5 7.0 7.5 7.8 8.6 9.5 Benefits from increased tobacco excise revenues 27.7 30.9 34.0 39.2 45.3 Benefits from VAT collected on the principle of the reverse charge 2.2 Net financial profit -0.1 -0.7 -3.7 -2.6 32.7 36.4 41.6 47.8 54.8 NPV $74 IRR. % 174% FX, USD/MDL 18.5 16.8 16.4 17.4 17.9 18.6 19.5 19.5 19.5 GDP, billion MDL 176.8 191.7 209.3 228.1 248.8 271.4 296.1 323.0 352.4 At the IRR of 174% and NPV of USD 74 million the project appears to be very profitable and beneficial from an investment point of view. The revised financial project indicators are also significantly higher than it was originally estimated (48% IRR, USD 3 million NPV). There are several key explanations to that: 1. The revised TAMP is expected to generate more fiscal benefits stemming primarily from a permanent increase in the excise tax rate for tobacco products; 2. Overall improved revenue performance over 2014-2018 (e.g. increased tax elasticities); 3. Stronger Moldovan Leu Vis-à-vis United States Dollar leading to higher revenues in USD.