FOR OFFICIAL USE ONLY

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Financial Sector Unit Africa Region Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 8.3 MILLION (US$12 MILLION EQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR A TAX MODERNIZATION PROJECT May 19,2006 Report No: TA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 30,2006 Currency Unit = Tanzania Shillings Tanzania Shillings 1,22 1 = US$ 1 US$ = SDR 1 FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS ASYCUDA Automated System for Customs Declarations AWPB Annual Work Plan and Budget BFDPs Basket-Funding Development Partners CAS Country Assistance Strategy CED Customs and Excise Department. CFAA Country Financial Accountability Assessment CMVRS Central Motor Vehicle Registration System DANIDA Danish International Development Agency DFID Department For International Development DPs Development Partners DRD Domestic Revenue Department FY Fiscal Year GDP Gross Domestic Product GOT Government of Tanzania GTZ German Agency for Technical Assistance IBRD International Bank for Reconstruction and Development IDA International Development Association IMF International Monetary Fund ITA Institute of Tax Administration ITAX Integrated Tax Administration System JSC Joint Steering Committee KJ?I Key Performance Indicators LTD Large Taxpayer Department MDGs Millennium Development Goals MOU Memorandum of Understanding MSC Modernization Steering Committee NCB National Competitive Bidding NSGRP NatiGnal Strategy for Growth and Reduction of Poverty PCU Program Coordinating Unit PEFAR Public Expenditure and Financial Accountability Review PFMRP Pubiic Financial Management Reform Program PP Procurement Plan QCBS Quality and Cost Based Selection

3 SBD TAP TIN TMP TMP-IDA TMPU TRA VAT ZRl3 Standard Bidding Documents Tax Administration Project Taxpayer Identification Number Tax Modernization Program Tax Modernization Project Tax Modernization Program Unit Tanzania Revenue Authority Value Added Tax Zanzibar Revenue Board Vice President: Country Director: Sector Manager: Task Team Leader: Gobind T. Nankani Judy M. O Connor Antony Thompson Ravi Ruparel

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5 A B TANZANIA TAX MODERNIZATION PROJECT TABLE OF CONTENTS Page STRATEGIC CONTEXT AND RATIONALE... 1 Country and sector issues... 1 Rationale for Bank involvement... 2 Higher level objectives to which the project contributes... 2 Eligibility for Repeater Status... 2 PROJECT DESCRIPTION... 3 Lending instrument... 3 Project development objective and key indicators... 4 Project components... 4 Lessons learned and reflected in the project design... 6 Alternatives considered and reasons for rejection... 6 C. IMPLEMENTATION... 7 D. 1. Partnership arrangements Institutional and implementation arrangements Monitoring and evaluation of outcomes/results... 9 * 4... Sustainability Critical risks and possible controversial aspects Loadcredit conditions and covenants APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Social Environment Safeguard policies Policy Exceptions and Readiness... 12

6 Annex 1: Country and Sector or Program Background Annex 2: Major Related Project Financed by the Bank and/or other Agencies Annex 3: Results Framework and Monitoring Annex 3(b): Arrangements for Results Monitoring., Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Arrangements Annex 9: Economic and Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance Annex 15: Maps... 60

7 Date: May 19,2006 Country Director: Judy M. O'Connor Sector Managermirector: Antony Thompson Project ID: P Lending Instrument: Specific Investment Loan TANZANIA TAX MODERNIZATION PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTFS Project Financing Data [ ] Loan [XI Credit [ ] Grant [ 3 Guarantee [ ] Other: Team Leader: Ravi Ruparel Sectors: Central government administration (1 00%) Themes: Tax policy and administration (P);Law reform (S) Environmental screening category: Not Required Source Local Foreign Total BORROWE URECIPIENT INTERNATIONAL DEVELOPMENT ASSOCIATION DENMARK: DANISH INTL. DEV ASSISTANCE (DANIDA) UK: BRITISH DEPARTMENT FOR INTERNATIONAL DEVELOPMENT (DFW Total: Borrower: The United Republic of Tanzania Dar es Salaam Tanzania Responsible Agency: Tanzania Revenue Authority P.O. Box Sokoine Drive Dar essalaam

8 TY hual Zumulative The project development objective is to promote an effective and efficient tax administration that provides high quality customer services with fairness and integrity. Project description Re$ PAD B.3.a, Technical Annex 4 The TMP seeks to build on the activities of TAP and has been designed to reflect the five (5) strategic goals of TRA s corporate plan. The activities related to these goals are summarized below. Strategic Goal 1: Improve revenue collection in a cost effective way: narrow the revenue gap, improve the tax structure, and deepen the modernization of customs arrangements. Strategic Goal 2: Full integration of TRA operations: Integrate processes and procedures, strengthen the Large Taxpayer s Department; provide additional information technology infrastructure, introduce e-filing, roll out the Asycuda++ system for customs; strengthen the Domestic Revenue Department. Strategic Goal 3: Provision of high quality and responsive customer service: develop taxpayer education programs, roll out district one stop centers, promulgate a taxpayer s charter, establish Quality Management System, and establish customs client services unit. Strategic Goal 4: Promote tax compliance through a fair, equitable and transparent application of tax laws: unify taxpayer identification, introduce risk management for auditbased taxes, further strengthen the Tax Investigation Department and improve tax enforcement.

9 Strategic Goal 5: Improve staff competence, motivation, integrity and accountability: strengthen management controls, promulgate a staff charter, strengthen training capacity, and implement the anti-corruption strategy. TMP will also provide support to the Zanzibar Revenue Board (ZRB) for improving efficient collection of taxes; promotion of voluntary compliance; provision of quality service to taxpayers; and improvement of working environment, staff skills, competence and motivation. Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 None Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: None Loadcredit effectiveness: The conditions for effectiveness are the signing o f a Subsidiary Agreement between the Government and Tanzania Revenue Authority and the submission o f a final operations manual, Covenants applicable to project implementation: The only disbursement condition is the signing o f the MOU for basket funding between the Government and IDA.

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11 A. STRATEGIC CONTEXT AND RATIONALE The proposed IDA funded Tax Modernization Project (TMP-IDA) is a repeater of the US$40 m IDA funded Tax Administration Project (TAP) which was approved in March 1999 and which is scheduled to close on 30 June This project was part of the broader multi development partner financed US$70.2 m Tax Administration Project. The TMP-IDA will fund part of the US$33.6 million Tax Modernization Program (TMP) designed to continue the support provided to the Government of Tanzania (GOT) and the Tanzania Revenue Authority (TRA). The TMP supports the implementation of the TRA s second five year corporate plan (FY03 - FY08) through a multi development partner basket funding approach. The TMP is also intended to support the Zanzibar Revenue Board (ZRB). Two development partners, DFID and DANIDA, have already contributed US$19.6 million to the TMP through a basket funding arrangement leaving a financing gap of US$14 million. This will be met by the proposed IDA credit of US$12.0 million and GOT contribution of US$2.0 million. 1. Country and sector issues During the 1990s the Government of Tanzania faced serious fiscal problems arising from the gap between stagnant revenues and public expenditures swollen by large outlays on administration, The fiscal deficit, after grants, which was 5% in FY94 rose to 7.9% in FY95. Tax revenue collection was weak reflecting both the structure of the tax system and deficiencies in tax administration. The GOT, recognizing these challenges, established the Tanzania Revenue Authority in 1996 as a quasi-autonomous executive agency. With the support of TAP, the GOT and TRA began an ambitious program of reforming the tax system and strengthening tax administration. The objective of TAP was to assist the GOT in raising its tax revenues without increasing tax rates by (i) improving the legal framework (ii) broadening the tax base (iii) strengthening the TRA to increase the efficiency and effectiveness of tax administration and (iv) improving the administrative infrastructure. There has been substantial progress on the overall objective and all the components. A major initiative of TRAY supported by TAP, has been the development of the second five year Corporate Plan (200/ /08). This plan has since provided strategic direction for the reforms by adopting a more integrated approach to project design and implementation over a five year period. Implementation of the Corporate Plan has been supported by TAP and the TMP. The last two years of the corporate plan (July 2006 to June 2008) includes a number of key activities in the reform and strengthening process. These include implementation of the customs modernization plan and the information systems strategy, including the development and deployment of an integrated tax administration system. IDA support for the TMP will enable the corporate plan to be adequately financed and implemented. 1

12 The Zanzibar Revenue Board (ZRB) has also developed a Corporate Plan ( /10) which spells out its corporate objectives and outlines the strategic direction to achieve the objectives. The funding under TMP also supports the activities for three years of the ZRB corporate plan. 2. Rationale for Bank involvement The rationale for Bank involvement in TAP included (i) the GOT S desire to benefit from the Bank s international experience in tax administration, (ii) the Bank s role in helping the GOT develop the framework for multi donor financing, and (iii) the Bank s ability to play a catalytic role in initiating and supporting the reform which involved wide-ranging organization changes. This rationale remains valid for TMP-IDA. While other development partners are willing to support TRA and ZRB, the Bank is best placed to continue its coordination and harmonization efforts such as leading the multi development partner implementation support missions. Furthermore the Bank s financial support also provides the GOT with the credibility to leverage other partners resources. 3. Higher level objectives to which the project contributes The Government of Tanzania completed formulating its National Strategy for Growth and Reduction of Poverty (also called MKUKUTA) in June The strategy identifies three clusters of broad outcomes: (i) growth and reduction of income poverty, (ii) improvement of quality of life and social well being, and (iii) good governance. Key activities in the strategy include the scaling up of investments towards the modernization of small, medium and large scale enterprises, improvement of efficiency in service delivery and ensuring effective public administration so that systems of government are managed in a transparent manner. The current Country Assistance Strategy (CAS) for Tanzania was approved by the Bank s Board in June The CAS focuses on facilitating higher growth, reducing poverty, and undertaking institutional reforms to improve governance. The multi development partner Joint Assistance Strategy for Tanzania, currently under preparation, has similar objectives and is expected to be presented to the Board in FY07. The TMP contributes to the objectives of the MKUKUTA and the CAS in a number of ways. Firstly, TMP will help improve revenue performance and increase domestic resources on a sustainable basis to finance public investments, including social sector expenditures. TMP will also help build the needed capacity in areas critical for sound economic management, specifically in TRA and ZRB. And finally, TMP is expected to continue supporting tax policy reforms aimed at eliminating provisions that create distortions in economic decision making. 4. Eligibility for Repeater Status The TMP complies with all the requirements for repeater projects in the Bank guidelines: 2

13 Recipient ownership and interest: There is complete ownership by the TRAY ZRB and the Ministry of Finance in all aspects of the project. The GOT S strong interest in scaling up TAP has been demonstrated by their design of the TMP and the basket funding arrangement. Project status report ratings: The ISR ratings for TAP implementation progress and development objectives have been consistently satisfactory. As at March 2006, TAP had disbursed 82 % of the credit. The GOT has requested an extension of the TAP project until December 2006 to complete the procurements that are in progress. It is expected that the TAP funds will be fully disbursed by December I Impact: The impact of TAP has been fully consistent with the expectations set out in the original PAD. Specific results include: - Tax revenues have increased from Tshs billion in FYOO to Tshs 1,625 billion for FY05 (an increase of 132%) annual data - The legal framework has been substantially improved with the passing of a new Income Tax Act (2004) and the drafting of the Miscellaneous Taxes Amendment Act and the East African Customs Management Act; - The tax base has been broadened from 190,000 in 2002/03 to 277,448 as at March 2006; - TRA has been strengthened through reorganization, creation of new departments (e.g. the Large Taxpayers Department and the Domestic Revenue Department) and the introduction of modem management practices and capacity building; - The administrative infrastructure has been improved with rehabilitation of buildings and procurement of information technology equipment, customs patrol boats, motor vehicles and office equipment. Fiduciary, environment, social and safeguard issues: There are no unresolved fiduciary, environmental, social or safeguard problems. The overall financial management rating of TAP is satisfactory with a number of indicators rated as highly satisfactory. The procurement assessment in June 2005 indicated a need to increase the staffing of TRA s procurement unit and TRA has taken the necessary action by increasing the number of staff from two to six. Funds availability from other agencies: The TRA estimates that to fully fund its investment plan for years 4 and 5 of the corporate plan and ZRJ3 s plan will require funding from the TMP of US$33.6 million. DFID and DANIDA have already contributed US$19.6 m to the TMP through a basket funding arrangement leaving a gap of US$14m. At present the EU has indicated that it cannot provide funding to TMP and no other funding sources have been identified. B. PROJECT DESCRIPTION 1. Lending instrument The lending instrument is a specific investment loan (credit) with a three year focus to finance goods, consultancy services and training to support the implementation of TRA s and Zm s corporate plans. 3

14 2. Project development objective and key indicators The project development objective for TAP was to assist the GOT to increase tax revenues without increasing tax rates. The PDO for TMP is to promote an effective and efficient tax administration that provides high quality customer services with fairness and integrity. The PDO is designed to reflect TRA's mission statement which is "To be an effective and efficient Tax Administration, which promotes voluntary tax compliance by providing high quality customer service with fairness and integrity through competent and motivated staff '. TRA has also defined a set of outcome indicators to reflect the mission statement and the PDO. These are: total tax revenue collected by TRA in relation to its annual revenue target average time taken to clear goods at sea ports, border posts and airports percentage of taxpayers awareness on tax education programs percentage of written enquiries attended within seven days level of perceived corruption index One of the achievements of TAP was assisting TRA to refine the indicators in the PAD to develop TRA's own list of Key Performance Indicators which are used by TRA for its own management purposes. These are intermediate outcome indicators and are detailed in Annex 3. TRA has recently changed its results framework to list indicators by department - LTD, DRD and Customs. This is shown in Annex 3(b). TRA's list of key indicators will be further refined to include perception. indicators (following the perception surveys of the Customs Department and Large Taxpayers Department). 3. Project components TAP currently provides financing for four components. These are (i) improving the legal framework; (ii) broadening the tax base; (iii) strengthening the Tanzania Revenue Authority (TU) to increase the efficiency and effectiveness of tax administration; and (iv) improving the administrative infrastructure. Key activities accomplished under the TAP include the enactment of a new Income Tax Law, creation of the Large Taxpayers Department, and the Domestic Revenue Department, modernization of customs, training of staff, improvement of taxpayer services, and introduction of anti-corruption measures and improvement of infrastructure. The TMP seeks to build on all these activities and has been designed to reflect the five (5) strategic goals of the corporate plan. The activities related to these goals are summarized below and are described in detail in Annex 4. Strategic Goal 1 - Improve revenue collection in a cost effective way - narrow the revenue gap, improve the tax structure, and deepen the modernization of customs arrangements. Strategic Goal 2 - Full integration of TRA operations - Integrate processes and procedures, strengthen the Large Taxpayer's Department; provide additional information technology 4

15 infi-astructure, introduce e-filing, roll out the Asycuda++ system for customs; strengthen the Domestic Revenue Department. Strategic Goal 3 - Provision of high quality and responsive customer service - develop taxpayer education programs, roll out district one stop centers, promulgate a taxpayer s charter, establish a Quality Management System, and establish a customs client services unit. Strategic Goal 4 - Promote tax compliance through a fair, equitable and transparent application of tax laws - unify taxpayer identification, introduce risk management for auditbased taxes, further strengthen the Tax Investigation Department and improve tax enforcement. Strategic Goal 5 - Improve staff competence, motivation, integrity and accountability: strengthen management controls, promulgate a staff charter, strengthen training capacity, and implement the anti-comption strategy. The TMP basket fund will also support the purchase of motor vehicles, motor cycles and office equipment. TMP will also provide support to the Zanzibar Revenue Board (ZRB) for improving efficient collection of taxes; promotion of voluntary compliance; provision of quality service to taxpayers; and improvement of working environment, staff skills, competence and motivation. The expected costs and funding sources of the TMP are indicated in the table below. Because the IDA funding will be provided through the TMP basket fund, the IDA funding will not be allocated by component. The basket fund will support consultancy services, goods, equipment, and training but will exclude civil works. The cost of any remaining civil works under TRA s corporate plan will be funded by the GOT. Indicative Program Costs and Financing DANIDA commitment DFID commitment Proposed IDA Credit Expected GOT Contribution Total

16 4. Lessons learned and reflected in the project design The design of the TMP draws on lessons from TAP and other basket funding arrangements in Africa. The design is also in full accordance with the Paris Declaration on Harmonization. Ownership andframework: There is complete ownership of the TMP within the GOT, TRA and ZRB. The framework for the TMP is the TRA s and ZRB s Corporate Plans which have been developed with the full endorsement of the respective managements and boards and the GOT. Harmonization: Under TAP, the development partners made significant progress in harmonizing their procedures and requirements in line with GOT S overall aims of reducing transaction costs, The final step of the harmonization process was the creation of the basket fund to be used by all development partners financing the TMP. Mainstreaming: During the implementation of TAP, the Bank team strongly encouraged and supported the creation of capacity in order to have project coordination mainstreamed within TU. This was completed and TAP coordination and procurement is being done by TRA staff, This arrangement will continue with TMP. ZRB has also established a Modernization Department to implement its plan. Use of country systems: The Bank team has advocated the use of Tu s own systems and reports for TAP and TMP in order to minimize the burden. Consequently procurement is done using national procedures and the reports provided to development partners are the same reports provided to TRA management. The annual financial reporting requirements have been simplified to have one combined set of financial statements and audit report for TU, TAP and TMP. 5. Alternatives considered and reasons for rejection Three alternatives to the TMP were considered and rejected, before determining that a repeater project was the best approach: In the later half of the 2005 the team considered the alternative of providing support to TMP through a component of the Private Sector Competitiveness Project (PSCP) which was being appraised at the time. It was determined that this would not be a suitable approach as this would increase the size and scope of an already large project and would complicate the implementation arrangements. The team began preparing an extension to TAP with supplemental financing. However after internal IDA consultations it was agreed that this would not be a suitable approach because of the following reasons: (i) the project had already been extended once, (ii) the change in disbursement approach to a basket fund and (iii) the change in the results framework, Consideration was also given to supporting the TMP program through general budget support operations. However as there are some key activities remaining in the implementation of TRA s corporate plan, it was felt that resources for tax modernization could best be protected at this time through basket funding. The TMP basket fund nonetheless complies with the 6

17 criteria of the Joint Assistance Strategy that is being developed. It is being mobilised in support of a country owned and developed programme operating with Government systems and procedures. It consolidates and brings on budget sources of external funding, increases funding predictability and provides for a single forum for dialogue between GOT and DPs. It is expected that future support to TRA after the end of TMP would go through general budget support. C. IMPLEMENTATION 1. Partnership arrangements There are currently seven development partners providing support to TRA with the Corporate Plan forming the basis of harmonized development partner support. The development partners currently providing funding to TMP through the basket fund are DANIDA and DFID. The Basket-Funding Development Partners (BFDPs) and the GOT have signed a Memorandum of Understanding (MOU) which outlines the obligations of GOT and the BFDPs and also the implementation arrangements. It is expected that IDA will also sign the MOU following Board approval. The other development partner providing funding is the EU which continues its hnding under TAP, but which has indicated that it will not join the basket fund. Partners who are providing valuable technical assistance directly to TRA are GTZ, IMF-East Afritac, and IMF-FAD. Details of some of technical assistance provided in the form of studies that are helping to shape the tax reform agenda in Tanzania are provided in Annex 1. All the partners work in a harmonized manner with joint implementation support missions. The harmonized DP support for the TMP is in line with the 2005 Paris Declaration and conforms squarely to the objectives of the Africa Action Plan. 2. Institutional and implementation arrangements The arrangements for TMP are similar to TAP, with some modifications to reflect the basket funding arrangement. The arrangements are defined in the TMP Operations Manual which is a key reference document for the TMP MOU. TMP coordination: In order to ensure effective program implementation as well as effective communication channels a TMP Joint Steering Committee (JSC) has been established. The JSC is chaired by the Commissioner General, TRAY and comprises of other senior staff of TU, representatives of all BFDPs and the Ministry of Finance. The JSC meets twice a year and its responsibilities include the following: (i) review and endorsement of TMP Annual Work Plan and Budget and procurement plans (ii) oversee TMP s progress through review of reports on the key performance indicators for the TMP; and (iii) review of external audit reports to ensure that issues raised by the audits were properly followed up. A Modernization Steering Committee (MSC) chaired by the Commissioner General of TRA and comprising members of TRA s senior management has also been established to meet monthly to 7

18 review TMP implementation progress, clarify policy issues and approve proposals from the Tax Modernization Program Unit (TMPU) which is which is headed by the Modernization Program Manager. The TMPU is responsible for all technical aspects of TMP design, implementation, and monitoring and evaluation. Since the mainstreaming of project coordination the Modernization Program Manager serves as the coordinator of the TMP. The Modernization Department of ZRB will coordinate the implementation of its component with support from the TMPU. Planning and Disbursement: The Corporate Plan provides the basis for planning and resource allocation by linking planning with budgeting. TRA will prepare a detailed Annual Work Plan and Budget (AWPB) and a six-month cash flow forecast for implementation of the TMP. The six-month cash flow forecast for July-December in each year will be provided to the JSC together with the AWPB in May. Upon endorsement of the AWPB by the JSC, the BFDPs will authorize disbursement of funds to the TMP Basket Fund Holding Account. The Accountant General at the MoF will then authorize the release of funds from the TMP Basket Fund Holding Account to the TRA s TMP Basket Fund (Tshs) Account to finance eligible expenditures for the first six months of the financial year. At the November meeting in each year, the BOT will provide the JRM with another six-month cash flow forecast for January-June. After approval of this forecast the BFDPs will authorize disbursement of funds to the TMP Basket Fund Holding Account for the last six months of the financial year. For the IDA disbursement, the first disbursement will be done based on the six month cash flow forecast. Subsequent disbursements will be done after the review of the six month cash flow forecast and a review of the Interim Financial Report (IFR) for the previous six-months. The Government s contributions to the TMP will be specified in the AWPB and will be made available on an annual basis following the endorsement of the AWPB. The Government s contribution will be transferred to the TRA s TMP Basket Fund (Tshs) account in line with the Government s prevailing procedures. Financial Management: The accounts of the TMP are an integral part of TRA s accounts and the Commissioner General has the overall responsibility for financial management. The Government and the BFDPs have agreed to adopt an accountability arrangement that embraces TMP activities within reports generated for TRA as a whole. In this regard reports generated for submission to the JSC, TRA s Board of Directors and for audit purposes cover TRA as a whole. TRA will provide six monthly interim un-audited financial statements to the BFDPs within 45 days of the end of each six month period. Audits: TRA will prepare annual financial statements for TRA and these statements will incorporate the TMP. The National Audit Office (NAO) has responsibility under the law to undertake external financial audits of TRA within six months of the financial year-end. The NAO will undertake the audit in accordance with International Standards on Auditing and will express an opinion on the TRA financial statements. The audit report will be submitted to the BFDPs within six months of the end of the financial year. Procurement: Under the MOU and the TMP Operational Manual all procurement of goods, and consultancy services, which is not done under International Competitive Bidding (ICB) 8

19 procedures will be in accordance with the Public Procurement Act (PPA) No. 21 of 2004 and its associated regulations. The Public Procurement Regulatory Authority (PPRA) is responsible for monitoring all procurement activities, including carrying out of procurement audits, to ensure compliance with regulations. The TRA will be responsible for preparing a detailed Annual Work Plan and budget (AWPB), including a Procurement Plan (PP) and Training Plan, which will be reviewed during the annual meeting of the JSC to be held in May of each year. Procurement will be carried out based on this annual Procurement Plan. The PP will be updated annually or as needed throughout the duration of the project in light of the availability of funds and progress in implementation, and resubmitted to the JRM for approval. At the minimum, the PP would consist of information such as: description of the contract; contract number; cost estimate; procurement and selection method; whether it is a prior or post review contract; start date; completion date; and other milestones deemed necessary. The TRA will implement the PP in the manner in which it has been approved by JSC. Any procurement carried out contrary to the approved PP may be sufficient reason for misprocurement. All non ICB and selection of non international consultants, may be carried out using standard bidding documents already prepared by the PPRA. Otherwise, all ICB contracts and selection of international consultants will be procured using procedures specified in the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004; and Guidelines: Selection and Employment of Consultants by the World Bank Borrowers dated May The BFDPs will determine a threshold amount for prior review contracts and the same threshold will be shown in the approved PP. Initially this threshold will be determined by the World Bank and will be based on the thresholds used in TAP. This threshold will be reviewed by the BFDPs and TRA annually. For procurements requiring a prior review of contracts, the World Bank on behalf of BFDPs, will review the procurement documents before contract award. This responsibility for prior review will also be determined annually. By the lst July of each year, the TRA will appoint an independent firm or individual to undertake a comprehensive post review of contracts which were not subjected to prior review during the preceding financial year. The TRA and the BFDPs will agree on the scope and terms of reference of these post reviews ( procurement audits ). The independent firm or individual will be required to prepare a report for the TRA and BFDPs identifying any areas of concern that require remedial action. The same report will also be shared with the PPRA. 3. Monitoring and evaluation of outcomes/results The TRA has established a comprehensive and robust monitoring and evaluation system. The M&E system tracks a wide range of performance indicators both at the corporate level and at the individual department level. TRA s list of key indicators will be further refined to include perception indicators (following the perception surveys of the Customs Department and Large Taxpayers Department) and new indicators for the Customs Department. 9

20 4. Sustainability By supporting a comprehensive tax set of administration reforms, the TMP will help the GOT to establish sustainably higher and more predictable levels of revenue. The strong emphasis on institution building and capacity enhancement is aimed at ensuring sustainability of the reform efforts. TRA is fully committed to sustaining the improvements and is in the process of applying for IS0 certification. The GOT is also expected to show strong commitment to the TMP by ensuring full funding of TRA s operational budget, thus permitting TRA to hire, motivate and retain qualified staff, which will be crucial for the long term sustainability of the reforms. An Assets Replacement Fund has been set up and the GOT has committed to an annual contribution of Tshs 1 billion to the fund to enable TRA maintain its facilities and systems. Beyond the TMP, funding for TRA and ZRB investment activities will no longer be done through a basket funding arrangement but through the GOT budget. DP funding for the sector will be channeled through the GOT S budgetary process. TRA and ZRB will thus develop their future plans on the basis of budget funding and will initiate discussions very early with the Ministry of Finance for inclusion of all its investment activities within the budget. 5. Critical risks and possible controversial aspects There are no substantial risks to the success of meeting the program development objective. The modest risks are listed below. Risk Risk Rating Risk Mitigation Measures TRA s ability to (i) attract and retain qualified staff, and (ii) manage the change process. Government initiatives that undermine revenue mobilization effort M M TRA has shown its ability to manage the change process. TRA has implemented substantial pay increases following a compensation review. TRA holds regular dialogue with all stakeholder to discuss tax policies and implications GOT unable to fully fund continuing investments after the TMP Overall project risk rating M M GOT has committed to funding an asset replacement fund. Key: H (High Risk); S (Substantial Risk); M (Modest Risk); N (Negligible or Low Risk) 10

21 6. Loadcredit conditions and covenants There are no conditions for Board Approval. The conditions for effectiveness are the signing of a Subsidiary Agreement between the Government and TRA and the submission of a final operations manual. The only disbursement condition is the signing of the MOU for basket funding between the Government and IDA. D. APPRAISAL SUMMARY 1. Economic and financial analyses No quantitative economic and financial analysis has been conducted for this program given the fact that it is a capacity building project. The comprehensive implementation of TRA s Corporate Plan will determine the economic and financial benefits which will be measured by increased domestic revenue and the efficiency with which it is collected. 2. Technical The technical aspects of the TMP have been assessed through regular implementation support missions and the specialized studies done by IMF-FAD and IMF-East Afritac. 3. Fiduciary a) Financial Management: A specific financial management assessment was not carried out during appraisal because this is a repeater project that will be implemented by same institution and personnel in TRA who have successfully implemented the TAP. TRA has maintained highly qualified staff to manage its funds and has integrated project accounts into its normal accounts and has recently adopted International Financial Reporting Standards (IFRS). It has maintained a highly satisfactory Financial Management rating, including clean and unqualified audited accounts during the implementation of the TAP. The financial management risk is rated as low. Further details are provided in Annex 7. b) Procurement: The procurement risk of the project has been rated high. The procurement assessment revealed weaknesses on contract management and administration. Furthermore, the procurement staff lacks the skills to prepare adequate procurement plans. The agreed measures to address these issues during implementation of the project include the training of procurement staff on procurement based on World Bank Guidelines and the Public Procurement Act. In addition, the procurement staff will also be trained on contract management and administration, Further details are provided in Annex Social The project is expected to have a positive social impact through increased domestic revenue to finance the budget of GOT, especially the programs and activities outlined in the MKUKUTA. Though the program seeks to broaden the tax base to include the informal sector, this will not be accompanied by an increase in tax rates, and therefore should have minimum impact on vulnerable groups. 11

22 ~ 5. Environment This is a capacity building project and will not have any direct or indirect environmental impact, The GOT is undertaking civil works such as building of new offices through a separate budget allocation outside the basket-funding arrangements. The environmental category of the project i s [CI. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [I [x 1 Natural Habitats (OP/BP 4.04) [I [x 1 Pest Management (OP 4.09) [I [x 1 Cultural Property (OPN 11.03, being revised as OP 4.11) [I [x 1 Involuntary Resettlement (OP/BP 4.12) [I [x 1 Indigenous Peoples (OPBP 4.10) [I [x 1 Forests (OP/BP 4.36) [I [x 1 Safety of Dams (OP/BP 4.37) [I [x 1 Projects in Disputed Areas (OP/BP 7.60)* [I [x 1 Projects on International Waterways (OP/BP 7.50) [I [x 1 7. Policy Exceptions and Readiness There are no policy exceptions. * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 12

23 Annex 1: Country and Sector or Program Background TANZANIA: Tanzania - Tax Modernization Project 1. TRA Prior to 1995 revenue collection in Tanzania was done by the Tax Department under the Ministry of Finance. This arrangement was fraught with serious weaknesses and problems leading to poor tax administration, inadequate policies and above all poor revenue collection, These deficiencies impacted negatively on the country s macroeconomic performance over several years because of low levels of domestic revenue amidst rising government expenditure. The budget deficit (after grants), for example, rose from 5% of GDP in FY94 to 7.9% in FY96. In order to address these problems the Government of Tanzania launched a radical program of reforms and created an autonomous Tax Revenue Authority (TRA) in The TRA was tasked with the responsibility of assessing, collecting and accounting for domestic revenue on behalf of the GOT. It is also responsible for administering as well as enforcing tax laws, providing advice to the government on fiscal policy, and developing an efficient and fair tax regime. TRA started operations in July 1996 and made an immediate impact on the economy. Considerable progress was made in improving and strengthening efficiency in revenue collection. Actual revenue collected in FY97 was 97% of the estimated target and 26% higher than FY96. Similarly, revenue collected in FY98 was 88% of the target and 12% higher than revenue collected in the previous year. Apart from increased revenue collection, TRA introduced VAT in July 1998 which also led to higher levels of domestic revenue. 2. TAP In recognition of the strong commitment shown by the government in the implementation of the reforms, coupled with the achievements and its impact on macroeconomic performance, the Bank in 1999 agreed to provide a technical assistance credit of US$40.0 million to support the reforms under the Tax Administration Project (TAP). The progress of implementation of the TAP has been satisfactory over the life of the project. This has impacted greatly on the macroeconomic performance of the country. Domestic revenue for instance has increased steadily from 11.3% of GDP in FYOO to 13.6% of GDP in FY05. Other key achievements of the project include the following: - Collected Tax revenue has risen from Tshs 1,088 billion in FY03 to Tshs 1,625 billion in FY05 and is likely to reach the target of Tshs 1,754 in FY06. - Number of registered tax payers has increased from 190,000 in 2003 to 277,448 in March 2006, exceeding the target of 270,000 set for project completion date of June Percentage of customs clearance within 24 hours has increased from 30% in 2003 to 85% in 2005 exceeding the 2006 target of 60%. 13

24 Amount of previous years tax arrears collected as proportion of total amount of taxes in arrears at the beginning of the year has increased from 6% in 2003 to 47% in The key components of the reform under the TAP included the improvement of the legal framework, strengthening of revenue institutions, broadening the tax base and improvement of infrastructure. Progress to date on these components as well as outstanding activities which are outlined in the TRA s Corporate Plan and are to be supported by the TMP are detailed below. (a) Improving the Legal Framework The legal framework of tax administration in Tanzania has been enhanced through a new comprehensive law, the Income Tax Act 2004, developed and promulgated under the TAP, The implementation of the Law is supported with the development and distribution of 11 practice notes. A Miscellaneous Tax Amendment Act that will harmonize all amendments in the existing tax laws has also been prepared and forwarded to the Ministry of Finance and the Attorney General. Recommendations for amendment to the East African Community Customs Management Act have been prepared and are expected to be approved by the Council of Minister and subsequently enacted by the East African Legislative Assembly. This enactment and the approval of the consequential regulations should principally facilitate the electronic processing of customs documentation and facilitate trade within the country and the EAC. (b) Broadening Tax Base Measures adopted to broaden the tax base include the identification of new taxpayers, the reduction of the impact of exemptions, the developments of long term revenue generation strategy and development of a robust revenue forecasting model. The adoption of tax education campaigns, the enforcement of relevant tax laws, the increased coverage of the informal sector, and the use of the TIN register has helped to track more taxpayers in the country. In order to reduce the impact of exemptions, the GOT has introduced new policies whereby administrative exemptions are now controlled through the introduction of the Treasury Voucher Scheme. Introduction of up-front payment of duties and taxes on petroleum products, as well as the installation of 16 flow-meters at Dar es Salaam Kurasini Oil Jetty, have helped reduce tax evasion. Exemptions for mining and some road construction companies are now administered through refunds. Despite the implementation of these measures as part of the TAP, there remain excessive exemptions on customs and VAT. In order to address these issues, TRA plans to hrther revise the arrangements on exemptions, duty drawbacks and refunds. (c) Institutional Strengthening of TRA The success achieved to date under the TAP can largely be attributed to the success and satisfactory implementation of this component. The establishment of a new department - the LTD; the consolidation of the Income Tax and VAT departments into the DRD; as well as the reengineering of Tu s processes and procedures, contributed to these results. 14

25 Large Taxpayer Department: The LTD was established in October 2001 and currently manages a total of 286 taxpayers against a target of 300 by end-june The current number of taxpayers in the portfolio contributes about 68% of the domestic revenue against a target of 70%. The Department has been fully staffed and has been strengthened with qualified auditors with specialized skills such as chemical engineering, mining and geology. The Department is to be strengthened further with personnel with skills to audit the financial sector. The process of IS0 certification of the Department has commenced and is intended to help the Department to operate in an efficient manner. Further, TRA is developing a policy to include all large taxpayers outside Dar es Salaam in the operations of the LTD as part of the planned initiatives. The LTD is also yet to automate its debt management processes and this continues to delay the pace of debt collection. Domestic Revenue Department: The DRD was established July 2005 following the merger of the VAT and Income Tax departments as part of the measures in the Corporate Plan to integrate TRA s operations. This was done in order to streamline the services for of the small and medium taxpayers. The DRD, being a new department is faced with the challenge of implementing a supportive integrated tax administration system, cleaning up the TIN database and training of officers to fit into the new direction. Customs Department: The Customs Department has made significant progress with the implementation of the modernization program. Significantly, there has been the upgrade of ASYCUDA 2.7 to ASYCUDA++ which has been rolled out at the airport, the Customs Service Center and the Port, thereby reducing the customs clearance times. Various administrative and processing arrangements designed to facilitate trade have also been developed and are at various stages of implementation. These include Accreditation and Licensing, Warehouse, Bond, Export Processing Zone and Transit Arrangements. The major initiatives that are outstanding and are to be implemented over the remaining life of the Corporate Plan and under the TMP, include the extension of the ASYCUDA++ to the remaining key ports of entry, a review and development of new arrangements for Securities and Bonds, Exemptions, Duty Drawback and Refund. Tax Investigation: A Tax Investigation Department has been established within TRA. In 2004/5 the Department investigated 259 cases. In order to enhance its operations the Department will develop an investigation and intelligence policy and plan in order to enable consistent and systematic direction, monitoring and evaluation. It will also develop and document its operational policies and procedures to guide its operations. Information and Communication Technology: TRA has developed an ICT policy and strategy. The up-grade and roll out of the ASYCUDA system has enhanced the operations of the Customs Department. TRA is currently considering various systems, including ITAX, to be selected for the implementation of an integrated domestic tax administration system. A decision is expected shortly and the implementation of the system will be completed over the remaining 15

26 life of the current corporate plan. Other planned ICT initiatives to be implemented include: disaster recovery system, electronic help desk and e-filing. Corporate Planning and Performance Indicators: A major initiative supported by TAP has been the development of a Corporate Plan by Tanzania Revenue Authority, 2005/08. This plan has provided strategic direction for the reforms leading to significant achievements in the sector. The mission that supports achievement of the vision is To be an effective and efficient tax administration which promotes voluntary tax compliance by providing high quality customer service with fairness and integrity through competent and motivated staff. TRA is in the third year of implementing the Corporate Plan 2003/ /08. Under the plan, TRA planned to implement a total of seventy-nine (79) major initiatives during the five year period. Up to March 2006, a total of 43 initiatives were completed while an additional 11 are expected to be completed by June 2006 bringing the total to 54, about 68% completion rate, It is expected that the remaining 25 initiatives (32%) will be completed as scheduled during the final two years. Anti Corruption: An Anti-Corruption Strategy designed to reduce corruption in the revenue administration has been developed and is being implemented. Measures accomplished under the strategy include the development and distribution of Code of Conduct policies to all heads of departments and regional offices. A yearly assets declaration policy for all staff and their immediate family has also been instituted. A well publicized rewards system for informers and whistle blowers program is also being implemented. The impact of these measures remains to be measured. An independent External Integrity Monitoring and Transparency Review of the operations of TRA has been initiated. The review will, among other things, assess TRA s achievements in reducing corruption and in promoting transparency and accountability. Taxpayer Service: Significant measures already implemented under the Corporate Plan with support from T N include taxpayer survey, development of communications and monitoring program, establishment of help desk for tax payers and establishment of taxpayers service centre and designing a new taxpayer assistance program. TRA plans to deepen these measures by implementing taxpayer assistance program, Training and Human Resources: Recognizing the importance of training to the well functioning of the organization, TRA has re-organized the Institute of Tax Administration (ITA) into a semiautonomous institution, developed a training plan and syllabus for mandatory and general training and modernized the library infrastructure. Several staff of TRA and its departments have also benefited from external training programs in order to update knowledge on international best practices. A draft Human Resource Development policy has been developed under TAP and is awaiting approval by TRA Board for implementation. A key outstanding activity is the implementation of an automated system for planning and tracking training delivery for each employee. 16

27 As part of the measures to motivate staff TRA has revised and implemented a new compensation package for all staff. Other planned activities to enhance institutional strengthening of TRA include development of a staff charter, the carrying out of job evaluations for all positions, preparation of job descriptions and an organizational manual and further improvement of facilities at the ITA. Financial Reporting: A significant achievement made by TRA under the TAP is the adoption of International Financial Reporting Standards (IFRS). This has led to transparency in its financial management and reporting as these reports conform to international best practices. There are also no separate project accounts - the TAP accounts are integrated into the TRA s accounts and a single audit is undertaken thereby reducing transaction cost to TRA. There is however the need to train more personnel in the accounting functions in order to consolidate the gains. (d) Improving the Administrative Infrastructure There has been significant improvement of the administrative infrastructure for TRA through construction or rehabilitation and refurbishment of office accommodation throughout the country. A total of 18 civil works contracts have been executed so far with funding from TAP, Examples of completed works are rehabilitation of Mapato House, Arusha, Mwanza, Zanzibar and Pemba offices; construction of Segera Transit station and Horohoro Border station. This has improved the working environment for TRA. A significant number of motor vehicles and bicycles have been procured by TRA and distributed to all departments across the country to facilitate revenue collection, inspection and enforcement. Equipment such as computers, photocopiers and electricity generators have been supplied to enhance service delivery. Additional vehicles and equipment are however required for distribution to other departments and tax posts in order to enhance the collective effort of tax collection. 3. RECENT SECTOR WORK a) IMF -FAD Tax Administration Technical Assistance Mission The Fiscal Affairs Department of the IMF, upon TRA s request, conducted a review of progress of TRA s modernization program, in particular, domestic tax administration. The review was completed in November The report concluded that TRA s adoption of a more clearly focused modernization strategy, especially under the TAP, has begun to have a more effective impact reflected in very robust revenue collection results in 2003 and The report however noted that the domestic tax administration integration objective remains incomplete as the existence of two separate tax departments (the LTD and DRD) results in the absence of a single point of tax administration accountability that could lead to divergent operations. The recommended reform measures include the following: - acceleration of efforts to complete the implementation of integrated tax administration procedures, processes, and systems; 17

28 - consolidation of LTD achievements by further building audit staff capacity and strengthening audit case selection criteria, audit procedures, and case management; - assignment of full responsibility for taxpayer registration to the DRD, and focusing the taxpayer registration drive on verifiable business activity through realistic targets that include both quality and quantity factors; - strengthening the use of the TIN as the sole identifier by eliminating the VAT Registration Number by amending the VAT law, and introducing a two-tier proof of identity for registration; - strengthening the effectiveness of DRD headquarters to ensure uniform development, application and monitoring of tax administration operational policies that includes the overseeing of LTD procedures and operational performance by the DRD headquarters as an interim arrangement until a single tax department is established; - developing a comprehensive national audit plan and related operational policies by strengthening the DRD headquarters audit function; - developing a plan to integrate tax administration under one department head reporting to the CG that brings all operational units, including large taxpayers under a single department with a clearly defined headquarters, rationalizing senior executive titles with streamlined reporting lines to the CG; - ensuring that all qualifying large taxpayers in the country are under LTD management by: (1) treating 70 percent of domestic collections and the current number of taxpayers as minimum targets; (2) applying the turnover inclusion criteria consistently for taxpayers everywhere in the country; (3) developing clear LTD entrylexit policies that are objectively administered; and (4) annually reviewing the LTD inclusion criteria; - completing the tax administration system requirements to benchmark ITAX and other integrated system options and finalizing the evaluation of ITAX and other options as soon as possible; - extending and strengthening the taxpayer segmentation approach for medium taxpayers by: (1) clearly defining the medium taxpayer segment to include all entities that are outside the LTD which include corporations, employers or those businesses registered for VAT; and (2) consolidate their management at a few regional offices, but allow filing, payment and taxpayer services at the most convenient office, and create a dedicated medium taxpayer office in Dar es Salaam; - consideration of bi-monthly VAT filing for non-ltd taxpayers, dividing the register so half file in odd and even months respectively; 18

29 - strengthening small taxpayer administration by: (1) harmonizing the VAT and presumptive income tax thresholds at TSh 40 million; (2) realigning the presumptive regime with the personal income tax by implementing a tax free turnover threshold; and (3) leveraging the motor vehicle licensing system to reinforce the management of the presumptive regime for the commercial transportation sector; - streamlining the processing of payments to ensure prompt posting to taxpayer accounts, enforce higher data integrity from the contracted banks, consider using pre-printed payment forms, and eventually extend electronic payment methods once improved; and - applying true self-assessment through new procedures, supporting IT systems, and redesigned tax returns, and restrict the use of default assessments for non-filers. TRA has acknowledged and noted the recommendation of the IMF FAD Tax Administration Technical Assistance Mission. TRA is assessing which recommendations are feasible to implement during the Corporate Plan period. b) IMF - FAD Customs Technical Assistance Mission In response to a request from the Tanzanian authorities, a Fiscal Affairs Department (FAD) technical assistance mission visited Dar es Salaam from March 28 - April 8, The objective of the mission was to review the implementation status of the customs administration reform program and to provide advice on the continuation of modernization. The mission found that progress has been made in many areas of the reform with the most significant measure being the implementation of a destination inspection and scanning scheme. Progress has also been made in preparing for the full implementation of the ASYCUDA ++ system with the pilot project about to commence at the Dar es Salaam international airport. Less progress had been made in the compliance area with the exception of the post-clearance audit program. More attention was required in the coordination and management of the overall reform program by the Customs and Excise Department (CED); and the implementation of trade facilitation proposals and design of the complementary compliance program. The major recommendations of the mission were: - strengthen the project management structure under the new headquarters organization, with a full time manager and stafc - hlly integrating destination inspection and ASYCUDA++ as an urgent and critical measure by reengineering the planned import process so that TISCAN operations and the customs system be combined in a streamlined procedure; - transferring of know-how to customs officers by the destination inspection company; - reviewing the documentary requirements and follow-up on release times (release times being the major complaint from traders); 19

30 accelerating plans to implement ASYCUDA++ transit and bonded warehouses modules; strengthening the control of unloaded cargo and manifests; developing a comprehensive compliance strategy based on the integration of the facilitation initiatives with enforcement/compliance measures, including as a priority an anti-smuggling strategy and action plan; increasing the number of flexible anti-smuggling teams (FAST) teams in light of the risk map prepared by CED; fully staff the risk management and intelligence unit with trained staff so that they can fully support the national and local selectivity committees; increase the number of auditors in the post audit section over the next months and create commodity specialist units to carry out post clearance audits; deploy customs officers to the TISCAN Computerized Risk Management System (CRMS) operation; complete a comprehensive human resource plan for the customs department including the establishment of work loads, matching of staff skills, review of the training programs and implementation-to enable the critical move to more value-adding functions; develop and implement a strong headquarters operational policy function that separates policy from field delivery/operations; implement accountable key performance indicators; and complete the critical amendments required to the EAC customs management act, regulations and documentation and instruments that are required for the smooth implementation and stabilization of the EAC customs union framework. TRA has acknowledged and noted the recommendations of the IMF FAD Customs Technical Assistance Mission. TRA is assessing which recommendations are feasible to implement during the Corporate Plan period. c) Customs Time Release Study The Study was conducted with financial support from the World Bank in April-August 2005 with the following key objectives; To determine the time taken between arrival and release of goods; To determine the average time required for the clearance of goods by Customs clearance points, type of traffic and customs regime; To determine the average time taken for release of goods requiring the intervention of other organs; 20

31 To determine the average time taken for release of exempted goods; To determine the average time taken for release of goods rated for green, yellow (scanning) and red (physical examination); and o To determine problems existing in the clearance procedure and the possible corrective measures and recommendations to rectify the problems. The study observed that time release taken from arrival to removal of goods from customs control is significantly too long. The mean time taken from arrival to release is 11 days, 9 hours and 3 minutes across all seaports, 7 days 19 hours and 13 minutes across all airports, and 2 days 20 hours and 3 minutes across all inland border stations. The study further establishes that there are delays at all stages of clearance processes including TISCAN, Customs operations, cargo handlers operations, intervening operations and Clearing and Forwarding Agent s services. The problems contributing to such delays include the following: Existence of repetitive and unproductive processes in the clearance system. Over control of transactions resulting in checking and rechecking of the same information by several different sections (valuation, assessment etc.). Late submission of manifests to Customs by shipping line agencies for registration as well as late registration by Customs administration. The processes of verification of Import Declaration Forms and other related information particularly of requesting detailed information from suppliers abroad is time consuming and hence prolong time taken for accomplishing DI processes. Poor quality declarations done by importers or agents hence resulting in rejections and queries. Delay payment of duties and taxes and other charges such as port and airport charges. Delayed registration of declarations in ASYCUDA. < Customs Operations are not online. Inadequate equipment required for movement of goods to the examination and offloading areas. The key recommendations of the study included the following measures: Establishment of interface with all key players in the cargo clearance system Strengthening of post clearance audit and risk management & intelligence o Introduction of Accelerated Customs Clearance Procedure (ACCP) Simplification and harmonization of Customs procedures at Dar-Es-Salaam Long room and other stations. o Encouragement of Pre-lodgment of entries o Imposition of Penalty for defaulters to encourage compliance training and certification of agents TRA is in the process of implementing the recommendations from the Time Release Study. 21

32 d) IMF Tax Policy Study The study reviewed the tax policy of Tanzania with a particular focus on the formulation of reform options intended to enhance tax revenue in the short to medium term. The study revealed that despite its modern tax laws and a tax administration that has been improving and already rates high among taxpayers and experts, tax revenue is relatively low. The study estimated the tax capacity of the country, as of 2004, is equal to 17.2 percent of GDP, similar to Uganda s and below those of Kenya and Malawi. The study indicated that despite the relatively low tax capacity, comparison between potential and effective revenues shows a tax gap of 4.8 percent of GDP in The draft recommendations of the study include measures on: a) targeted revenue to GDP ratio, b) investment incentives, c) income tax, d) VAT, e) excises duty, and 0 trade taxes e) FIAS Study on Tax Policy A team from the Foreign Investment Advisory Service (FIAS) conducted a field study of the Tanzania tax system on its impact on growth in January The draft conclusions of the study are that the current tax system is fundamentally sound and well suited to the stage of development of the economy. The study however highlighted the significant weaknesses that stem from: i) excessive exemptions on customs and VAT; ii) unequal and uncertain implementation of existing legislation, especially slow tax rebates; and iii) sub-national taxes which are an administrative and economic burden to taxpayers, and yet raise very little revenue, 22

33 Annex 2: Major Related Project Financed by the Bank and/or other Agencies Tanzania - Tax Modernization Project The Tax Administration Project (TAP) became effective in 2000 and is scheduled to close in June Its objective is to assist the GOT to raise its tax revenues without increasing tax rates. The TMP seeks to build on the reforms initiated under the TAP. The IP and DO ratings from the latest ISR are satisfactory. The Public Sector Reform Project was approved in 1999 and has the objective to enable the public service to deliver efficiently and effectively the Government s economic and social programs on a continuous and sustainable basis. The TMP builds on this project by building the needed capacity in areas critical for sound economic management, specifically in TRA and ZRB. IP and DO ratings from the latest ISR are satisfactory. The Tanzania Private Sector Competitiveness Project was approved in October Its objective is to create sustainable conditions for enterprise creation and growth. Among others the project seeks to strengthen the business environment so as to lower the costs of investing in, establishing, and operating a business in Tanzania. It is estimated that about 98 percent of all businesses in Tanzania operate informally. This project is expected to encourage the formalization of more of such businesses and thereby help broaden the tax base as they get registered in the tax books. This conforms to the strategic goal of the TMP which seeks to broaden the tax base in the country. 23

34 Annex 3: Results Framework and Monitoring Tanzania - Tax Modernization Project The TAP results framework was developed by TRA and is used by its management and Board to monitor the progress of the Corporate Plan. TRA s current results framework is arranged by Revenue Department and is provided in Annex 3 b. TRA is in the process of refining this framework by adding perception indicators and new indicators for Customs. The proposed result framework for TMP has been modified with a new PDO to reflect TRA s mission statement. Project Development Objective To promote an effective and efficient tax administration that provides high quality customer services with fairness and integrity. Project Outcome Indicators Total annual tax revenue collected by TRA in relation to its annual revenue target Average time taken to clear goods at sea ports, border posts and airports Percentage of taxpayers awareness on tax education programs Percentage of written enquiries attended within seven days Level of perceived corruption index Use of Project Outcome Information A lack of progress in achieving results likely indicates a lack of capacity to implement the program. Outcome information will be used to identify progress, obstacles to progress, and reasons for a lack of progress where progress is lacking. Action to improve the likelihood of the project achieving its objectives will be taken. Intermediate Outcomes 1. Improved effectiveness and efficiency of tax administration. Intermediate Outcome Indicators Amount of previous year s arrears collected in relation to total amount of tax arrears at the beginning of the year. Average number of days to identify stop-filers (LTD and D W 0 Number of TIN registered tax Use of Intermediate Outcome Monitoring A lack of progress in achieving results likely indicates a lack of capacity to implement the program. Outcome information will be used to identify progress, obstacles to progress, and reasons for a lack of progress where progress is lacking. Action to improve the likelihood of the project achieving its objectives will be taken. 24

35 2. Improved quality of customer service delivered with fairness and integrity payers Number of VAT registered taxpayers Percentage of VAT refunds made within one month (DW Proportion of customs clearances made within 24 hours (ports and airports) Percentage of duty drawbacks made within one month. A lack of progress in achieving results likely indicates a lack of capacity to implement the program or a lack of government commitment to do so. Outcome information will be used to identify progress, obstacles to progress, and reasons for a lack of progress where progress is lacking. Action to improve the likelihood of the project achieving its objectives will be taken. 25

36 I s z g a 0 d s r- d s c! s z s m W s a j 1:: s 0 a v) Ln 8 s m Ln s 7 h m 0 Ln n

37 s 8 7 g W 0 r g IC I N N jc t g 0 r E a H v, n L

38 Annex 4: Detailed Project Description Tanzania - Tax Modernization Project The TMP seeks to build on the activities of TAP and has been designed to reflect the five (5) strategic goals o f the corporate plan. The activities related to these goals are summarized below. Strategic Goal 1 - Improve revenue collection in a cost effective way narrow the revenue gap, improve the tax structure, and deepen the modernization of customs arrangements. Strategic Goal 2:- Full integration of TRA operations integrate processes and procedures, strengthen the Large Taxpayer s Department; provide additional information technology infrastructure, introduce e-filing, roll out the Asycuda++ system for customs; strengthen the Domestic Revenue Department. Strategic Goal 3 - Provision of high quality and responsive customer service develop taxpayer education programs, roll out district one stop centers, promulgate a taxpayer s charter, establish Quality Management System, and establish customs client services unit. Strategic Goal 4 - Promote tax compliance through a fair, equitable and transparent application of tax laws: unify taxpayer identification, introduce risk management for auditbased taxes, further strengthen the Tax Investigation Department and improve tax enforcement. Strategic Goal 5 - Improve staff competence, motivation, integrity and accountability strengthen management controls, promulgate a staff charter, strengthen training capacity, and implement the anti-corruption strategy. The TMP basket fund will also support the purchase of motor vehicles, motor cycles and office equipment. TMP will also provide support to the Zanzibar Revenue Board (ZRB) for improving efficient collection of taxes; promotion of voluntary compliance; provision of quality service to taxpayers; and improvement of working environment, staff skills, competence and motivation. The matrix below highlights the status of implementation of the TRA corporate plan and includes several of the activities implemented under the TAP. The planned activities for Years 4-5 forms the basis of the TMP to be funded under the basket-funding arrangement and which supported by this credit. 28

39 A. STRATEGIC GOAL 1: INCREASE REVENUE COLLECTION IN A COST EFFECTIVE WAY INITIATIVES Narrow the revenue gap Improve the tax structure Establish to record and monitor the cost of collection Establish policy information management capacity Modernize Customs Administrative arrangements Introduce Petroleum Products Rebate Scheme Establish new Central Motor Vehicle Registration System (CMVRS) Introduce New Driver s License System COMPLETED -YEAR Robust revenue forecasting model developed - Petroleum Products Controls improved - Tax Exemptions reviewed (e.g. introduction of Treasury Voucher System - VAT threshold increased from TShs 20-40m and Stamp Duty on receipts repealed - Long term revenue generation strategy developed - cost centre reports developed - activity based budget introduced - data warehouse in RPPD established - accreditation licensing and facilitated client arrangements developed - warehouse arrangements developed - management arrangements in Bonded and Export Processing Zones developed - transit arrangements developed and implemented - CMVRS introduced PLANNED - YEAR 4-5 carry out a study to assess revenue gap strengthen controls on transit goods carry out a study to evaluate the impact of controls on imports scanner and flow meters review exemptions on mining, manufacturing, construction and other sectors conduct a study on reviewed exemptions review of tax holiday policy - establish centralized cost monitoring system - strengthen policy information management capacity within RPPD implement interim accreditation, licensing and facilitated client arrangements. revise arrangements for Securities, Bonds, Exemptions, Drawbacks and Refunds develop and implement Petroleum Products Rebate Scheme - Strengthen CMVRS - implement Driver s license system at identified centers B. STRATEGIC GOAL 2: INTEGRATE TRA OPERATIONS INITIATIVES Integrate Processes and Procedures Build Modern Reengineered Processes and COMPLETED - YEAR work instruments and systems for integrated operations developed - integration of Income Tax and VAT Departments implemented and establishment of Domestic Revenue Department (DRD) - DRD organizational structures established - Large Taxpayer Department (LTD) established, PLANNED - YEAR conduct workload analysis - review the impact of developed work instruments and systems in the integrated operations - develop Integrated Revenue Administration and Support Systems to enable integrated tax 29

40 NITIATIVES Systems Develop a Custom Modernization Plan Improve the ASYCUDA Customs Processing System Develop and introduce a Computerized Rebate Scheme claims processing system COMPLETED - YEAR a Modernization Plan developed - migrated from ASYCUDA 2.7 to ASYCUDA++ in DSM Customs Service Centre, DSM Port, MJKN International Airport and Tunduma - ICT Policy and Strategy developed - Implementations of ICT Strategv commenced PLANNED - YEAR 4-5 operations - strengthen the use o f TIN system - enhance Integrated Expenditure Accounting System (EPICOR) and Integrated Payroll and - - Human Resources Management System develop internet, intranet and TRA portal and implement an ICT security infrastructure and disaster recovery system establish ICT centre, Electronic Help Desk and introduce e-filing - implement modernization plan - rollout ASYCUDA++ to the remaining centers - establish connectivity between TRA ASYCUDA++ with neighboring countries of Zambia and Malawi - enhance ITAX system to support integrated operations - develop computer specifications for the claims processing system ACTIVITIES COMPLETED - YEAR 1-3 Develop taxpayer - taxpayer survey conducted education capacity - communications and monitoring - program developed taxpayer help desk established in all TRA offices - taxpayer service centers established Improve access to - district One-Stop Centers established services Promulgate Taxpayer s - taxpayer s Charter developed Charter Establish Quality - QMS structure established Management System - Quality Manual for pilot at LTD PLANNED - YEAR4-5 - design taxpayer assistance program - review OSCs workloads - monitor performance according to Charter - prepare Quality Manual for Customs and Excise Department Stakeholder Computerized Systems Streamline overall trade facilitation arrangements interfaced - regular trade facilitation meetings with stakeholders conducted warehouses - review impodexport arrangements involving the CED and other government departments and develop options for improvement - develop and document policies, procedures, guidelines and implementation strategies and implement agreed arrangements 30

41 - review impodexport arrangements involving CED and port operators and develop options for improvements D. STRATEGIC GOAL 4: PROMOTE TAX COMPLIANCE THROUGH A FAIR, EQUITABLE AND TRANSPARENT APPLICATION OF LAWS ACTIVITIES COMPLETED - YEAR 1-3 PLANNED - YEAR 4-5 Develop taxpayer information capacity Introduce risk management tax-based operations - Taxpayer intelligence Unit established - strengthen Taxpayer Intelligence Unit ~~ - extend self assessment to upcountry regions Improve tax sector regulation Improve Tax enforcement Local Authority Support Develop and implement customs organizational arrangements and approaches for client monitoring - conduct a study on harmonization of central and local government taxes, TRA s role, public policy, operating modes and costs, and sources of hnding - establish client monitoring unit and implement interim arrangements E. STRATEGIC GOAL. 5: IMPROVE STAFF COMPETENCE, MOTIVATION, INTEGRITY AND ACCOUNTIBILITY I I ACTIVITIES Introduce in-house Corporate Planning and Control Capacity COMPLETED - YEAR 1-3 PLANNED - YEAR 4-5 I - departmental plans in line with - review Corporate Plan 2003/ Corporate Plan developed - benchmark TRA against World Best practices - steering committee and Tax - develop the third TRA Corporate Plan modernization Unit established - Corporate Plan communicated to Regional Managers - Corporate Plan reviewed and updated 31

42 1 ACTIVITIES Promulgate staff charter Strengthen management control capacity Realign the organization for integrated front line delivery training and development of Tax Administration Review staff compensation and incentives Improve Tu s infrastructure Review anti-corruption strategy an HIViAIDS awareness COMPLETED - YEAR 1-3 annually - Surveillance and security system installed at key sites - Job analysis of all positions completed - Training plan and syllabus for general and mandatory training based on TRA business needs developed - ITA reorganized into a semiautonomous training establishment - ITA library modernized - A remuneration survey for review of current structure conducted and the revised compensation package implemented - Buildings rehabilitated - Vehicles and office equipment procured and installed - new anti-corruption strategy and action plan ( ) developed - strategy developed and implemented PLANNED - YEAR Develop staff charter - evaluate the performance of the installed surveillance and security system - Prepare Job Descriptions and an Organizational Manual Develop manning level standards for classes of sites, including operational, volume and geographical location Develop plan for implementation of organizational realignment Implement an automated system(s) for planning, managing and tracking training delivery for each employee Convert non-self contained hostel rooms to self-contained rooms Develop recreation and sports facilities at ITA - establish a link between compensation package and performance measurement - rehabilitate additional buildings - procure more vehicles and office equipment - implement strategy - evaluate the impact of anti-corruption strategy - carry out an independent, transparent and integrity review - train Managers (District and Regional Managers) on good governance - engage external quality reviewer on transparency and integrity F. Support to ZRB The ZRE3 Corporate Plan was adopted in 2004 following a diagnostic study by Fiscal Affairs Division of the IMF the same year. The ZRB activities will include measures to improve efficient tax collection; promote voluntary compliance; provide quality service to taxpayers; and improve working environment, staff skills, competence and motivation. The details of the Plan that will be supported under TMP are as follows: A. Effective and efficient collection of revenue through the widening of the tax base; strengthening tax audit, investigation and compliance; integration of business processes 32

43 and procedures; full integration of business operations and strengthening of research and development function. B. Promotion of voluntary compliance through simplified tax laws, development of integrated enforcement policy; and improvement of employee ethics and integrity C. Provision of quality service to taxpayers through transformation of ZRB into a customer responsive organization; improve the knowledge of taxpayers by dissemination of general tax information through the media and workshops and seminars; launching of a staff code, and establishment of taxpayer forum. D. Improvement of working environment, staff skills, competence and motivation through construction and renovation of offices, procurement of modem office equipment and vehicles; conduct of work load analysis, capacity building and upgrading of terms and conditions for ZRE3 staff. 33

44 Annex 5: Project Costs Tanzania - Tax Modernization Project TMP Costs Local Foreign Total Program Cost By Activity US$ US$ US$ million million million Strategic Goal Strategic Goal Strategic Goal Strategic Goal Strategic Goal Equipment ZRB Total Program Costs TMP Financing Total Financing Source US$ million DANIDA 8.0 DFID 11.6 IDA 12.0 GOT 2.0 Total Financing

45 Partnership arrangements Annex 6: Implementation Arrangements Tanzania - Tax Modernization Project There are currently seven development partners providing support to TRA with the Corporate Plan forming the basis of harmonized development partner support. The development partners currently providing funding to TMP through the basket fund are DANIDA and DFID. The Basket-Funding Development Partners (BFDPs) and the GOT have signed a Memorandum of Understanding (MOU) which outlines the obligations of GOT and the BFDPs and also the implementation arrangements. It is expected that IDA will also sign the MOU following Board approval. The other development partner providing funding is the EU which continues its funding under TAP, but which has indicated that it will not join the basket fund. Partners who are providing valuable technical assistance directly to TRA are GTZ, IMF-East Afritac, and IMF-FAD. Details of some of technical assistance provided in the form of studies that are helping to shape the tax reform agenda in Tanzania are provided in Annex 1. All the partners work in a harmonized manner with joint implementation support missions. The harmonized DP support for the TMP is in line with the 2005 Paris Declaration and conforms squarely to the objectives of the Africa Action Plan. Institutional and implementation arrangements The arrangements for TMP are similar to TAP, with some modifications to reflect the basket funding arrangement. The arrangements are defined in the TMP Operations Manual which is a key reference document for the TMP MOU. TMP coordination: In order to ensure effective program implementation as well as effective communication channels a TMP Joint Steering Committee (JSC) has been established. The JSC is chaired by the Commissioner General, TRAY and comprises of other senior staff of TRA, representatives of all BFDPs and the Ministry of Finance. The JSC meets twice a year and its responsibilities include the following: (i) review and endorsement of TMP Annual Work Plan and Budget and procurement plans (ii) oversee TMP s progress through review of reports on the key performance indicators for the TMP; and (iii) review of external audit reports to ensure that issues raised by the audits were properly followed up. A Modernization Steering Committee (MSC) chaired by the Commissioner General of TRA and comprising members of TRA s senior management has also been established to meet monthly to review TMP implementation progress, clarify policy issues and approve proposals from the Tax Modernization Program Unit (TMPU) which is which is headed by the Modernization Program Manager. The TMPU is responsible for all technical aspects of TMP design, implementation, and monitoring and evaluation. Since the mainstreaming of project coordination the 35

46 Modernization Program Manager serves as the coordinator of the TMP. The Modernization Department of ZRB will coordinate the implementation of its component with support from the TMPU. Planning and Disbursement: The Corporate Plan provides the basis for planning and resource allocation by linking planning with budgeting. TRA will prepare a detailed Annual Work Plan and Budget (AWPB) and a six-month cash flow forecast for implementation of the TMP. The six-month cash flow forecast for July-December in each year will be provided to the JSC together with the AWPB in May. Upon endorsement of the AWPB by the JSC, the BFDPs will authorize disbursement of funds to the TMP Basket Fund Holding Account. The Accountant General at the MoF will then authorize the release of funds from the TMP Basket Fund Holding Account to the TRA s TMP Basket Fund (T shs) Account to finance eligible expenditures for the first six months of the financial year. At the November meeting in each year, the BOT will provide the JRM with another six-month cash flow forecast for January-June. After approval of this forecast the BFDPs will authorize disbursement of funds to the TMP Basket Fund Holding Account for the last six months of the financial year. For the IDA disbursement, the first disbursement will be done based on the six month cash flow forecast. Subsequent disbursements will be done after the review of the six month cash flow forecast and a review of the Interim Financial Report (IFR) for the previous six-months. The Government s contributions to the TMP will be specified in the AWPB and will be made available on an annual basis following the endorsement of the AWPB. The Government s contribution will be transferred to the TRA s TMP Basket Fund (Tshs) account in line with the Government s prevailing procedures. Financial Management: The accounts of the TMP are an integral part of TRA s accounts and the Commissioner General has the overall responsibility for financial management. The Government and the BFDPs have agreed to adopt an accountability arrangement that embraces TMP activities within reports generated for TRA as a whole. In this regard reports generated for submission to the JSC, TRA s Board of Directors and for audit purposes cover TRA as a whole. TRA will provide six monthly interim un-audited financial statements to the BFDPs within 45 days of the end of each six month period. Audits: TRA will prepare annual financial statements for TRA and these statements will incorporate the TMP. The National Audit Office (NAO) has responsibility under the law to undertake external financial audits of TRA within six months of the financial year-end. The NAO will undertake the audit in accordance with International Standards on Auditing and will express an opinion on the TRA financial statements. The audit report will be submitted to the BFDPs within six months of the end of the financial year. Procurement: Under the M OU and the TMP Operational Manual all procurement of goods, and consultancy services, which is not done under International Competitive Bidding (ICB) procedures will be in accordance with the Public Procurement Act (PPA) No. 21 of 2004 and its associated regulations. The Public Procurement Regulatory Authority (PPRA) is responsible for 36

47 monitoring all procurement activities, including carrying out of procurement audits, to ensure compliance with regulations. The TRA shall be responsible for preparing a detailed Annual Work Plan and Budget (AWPB), including a Procurement Plan (PP) and Training Plan, which will be reviewed during the annual meeting of the JSC to be held in May of each year. Procurement will be carried out based on this annual Procurement Plan. The PP will be updated annually or as needed throughout the duration of the project in light of the availability of funds and progress in implementation, and resubmitted to the JRM for approval. At the minimum, the PP would consist of information such as: description of the contract; contract number; cost estimate; procurement and selection method; whether it is a prior or post review contract; start date; completion date; and other milestones deemed necessary The TRA will implement the PP in the manner in which it has been approved by JSC. Any procurement carried out in contrary to the approved PP, may be a sufficient reason for misprocurement. All non ICB and selection of non international consultants, may be carried out using standard bidding documents already prepared by the PPRA. Otherwise, all ICB contracts and selection of international consultants will be procured using procedures specified in the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004; and Guidelines: Selection and Employment of Consultants by the World Bank Borrowers dated May The BFDPs will determine a threshold amount for prior review contracts and the same threshold will be shown in the approved PP. Initially this threshold will be determined by the World Bank and will be based on the thresholds used in TAP. This threshold will be reviewed by the BFDPs and TRA annually. For procurements requiring a prior review of contracts, the World Bank on behalf of BFDPs, will review the procurement documents before contract award. This responsibility for prior review will also be determined annually. By the 1 July of each year, the TRA will appoint an independent firm or individual to undertake a comprehensive post review of contracts which were not subjected to prior review during the preceding financial year. The TRA and the BFDPs will agree on the scope and terms of reference of these post reviews ( procurement audits ). The independent firm or individual will be required to prepare a report for the TRA and BFDPs identifying any areas of concern that require remedial action. The same report will also be shared with the PPRA. 37

48 Annex 7: Financial Management and Disbursement Arrangements Tanzania - Tax Modernization Project EXECUTIVE SUMMARY OF FINANCIAL MANAGEMENT AND DISBURSEMENT TMP activities are implemented by TRA in collaboration with other development partners through a basket funding arrangement. TMP has been under implementation since Two BFDPs namely DANIDA and DFID have signed the M OU and provided funds to the basket. TMP implementation arrangements are mainstreamed in the existing TRA structures, which include financial arrangement in terms of accounting, planning and budgeting, reporting and auditing. More specifically the Tax Modernization Program Unit (TMPU) which is headed by the Modernization Program Manager is responsible for all technical aspects of TMP design, implementation, and monitoring and evaluation. The accounts of the TMP are an integral part of TRA s accounts and the Commissioner General has overall responsibility for financial management. The Government and the BFDPs have agreed to adopt an accountability arrangement that embraces TMP activities within reports generated for TRA as a whole. In this regard reports generated for submission to the JSC, TRA s Board of Directors and for audit purposes cover TRA as a whole. TRA will provide six monthly interim un-audited financial statements to the BFDPs within 45 days of the end of each six month period. TRA financial management systems and arrangements are capable of producing timely, understandable, relevant, and reliable financial information that would allow the project management and the World Bank monitor compliance with agreed procedures and appraise progress towards its objectives. TRA is adequately staffed with highly qualified accountants who are able to manage and report on the project financial affairs. A specific financial management assessment was not required because of the following factors: (i) TMP is a repeater project that will be implemented and managed by same agency i.e. TRA. (ii) TRA has maintained a highly satisfactory FM rating during the previous IDA project Tax Administration. (iii) Project audits received clean /unqualified opinions. The overall financial project risks are rated low and there are no major financial fiduciary risks. Financial Covenants: Standard financial covenants include the submission to IDA of: Annual audited financial statements within six months after the year-end.(the audit report will be for TRA and will include TMP activities) Agreed interim unaudited Financial Reports (IFRs) within 45 days after each mid year, and shall cover such mid year project progress. Other related information as required by IDA. 38

49 Disbursement Method: Disbursements from the IDA Credit will rollow the agreed pooled fund disbursement modalities as stipulated in the signed MOU. Funds from the IDA Credit will be disbursed to the TMP Basket Fund Holding Account already established at BOT. The determination for the percentage of disbursement into this account will be on the basis of the Annual Work Plan and Budget (AWPB) and on the basis of the contributions indicated by each co-financier for a specific year. For the IDA disbursement, the first disbursement will be done based on the six month cash flow forecast. Subsequent disbursements will be done after the review of the six month cash flow forecast and a review of the Interim Financial Report (IFR) for the previous six-month RISK ANALYSIS Country Risks: The Government of Tanzania has made great steps in improving public financial management and through implementation of Public Financial Management Reform Program (PFMRP). The March 2005 Public Expenditure and Financial Accountability Review (PEFAR) concludes that generally Tanzania now has a sound system of formal rules for financial management and extensive training has taken place on the application of the financial rules and regulations. Most of the recommendations contained in the 2001 Country Financial Accountability Assessment (CFAA) report have been implemented or are already included in the Public Financial Management Reform Programme (PFMRP) under implementation. In terms of appropriate legislation and regulatory frameworks, significant progress has been made to ensure that the risk associated with a lack of clear rules and regulations has been reduced. Also more useful information is now provided in the annual accounts and the audit report is now produced on time. As a result the general level of fiduciary risk has been reduced from high to medium. Although much has been accomplished, risks remain in terms of (i) effective controls, compliance and sanctioning, including enforcement of procurement and payroll rules and procedures; (ii) effectiveness of public reporting of corruption; (iii) predictability of internal and external resources; (iv) lack of adequate qualified internal auditors, external auditors, and accountants; (v) effective independent oversight; and (vi) timeliness and effectiveness of legislative and public scrutiny. (vii) lack of public access to government financial information. With the support of a number of development partner assisted initiatives, such as the Public Financial Management Reform Program, Local Government Reform Program, and Local Government Support Program, the government is seeking to rapidly enhance the financial accountability framework in order to mitigate fiduciary risks in public expenditure management. Project Risks; The table below identifies the key risks that management may face in achieving program objectives and provides a basis for determining how management should address these risks. 39

50 I Inherent Risk Countrv: Funds may not be used in an efficient and economical way and exclusively for the purposes intended. Risk Rating M hcorporated Risk Mitigating Measures Project funds will be subject to both internal and external audit verification. The inherent risk of project funds not being used in an Zfficient, economical way and exclusively for the intended purpose will continue to be addressed through the Public Financial Management Reform Program currently under implementation. Additionally and as currently done, this risk will be reviewed and monitored during the annual Public Expenditure and Financial Accountability Review (PEFAR) and PRSCs. Overall Inherent Risk Funds Flow: Staffilzg: Procedures: Internal Audit : External Audit : Financial Reporting and Monitoring: N N N N N N N N The arrangements for TMP are similar to TAP, with some modifications to reflect the basket funding arrangement. Disbursement will be based on approved Annual Work Plans and budgets and a six months cash forecast. TRA has adequate and qualified staff to manage the project funds TRA accounting policies and procedures comply with International Financial Reporting Standards (IFRS) The TRA Department of Internal Audit is adequately staffed with qualified staff and use modern internal audit techniques to carry out the internal audit functions. The National Audit Office will carry out the annual audit and may subcontract an independent audit firm to carry out the audit on their behalf if the need arises Semi-annual Interim Financial Reports (IFRs) will be prepared and submitted to IDA within 45 days after the end of each six month period.. 40

51 Planning & budgeting: N The Corporate Plan provides the basis for planning and resource allocation by linking planning with budgeting. In form ation Systems N TRA accounts are computerised using Epicor software. Overall Control Risk N Overall Risk Assessment N Risk rating; H (High Risk), S (Substantial Risk), M (Modest Risk) N (Negligible or Low Risk) MAIN STRENGTHS The project financial management is strengthened by the following salient features TRA is a well established government agency with good experience of managing other IDA projects. It has maintained highly satisfactory project FM performance including submission of clean audits. TRA has developed a Procedural Manual for the TMP ( TMP Procedural Manual ). This Manual describes in more detail the procedural framework within which TMP will operate and the associated systems and procedures for planning, budgeting, procurement, financial management and monitoring and evaluation. TRA is in compliance with International Financial Reporting Standards (IFRS) Implementing Entity TRA shall have the overall responsibility for day-to-day implementation and management of TMP funds in terms of (a) procurement, including purchases of goods, works, and consulting services, (b) (c) (d) project monitoring, reporting and evaluation; contractual relationships with IDA and other co-financiers; and Financial management and record keeping, accounts and disbursements. TMP is fully integrated into the TRA existing accounting and financial management system under the Directorate of Finance. This directory will ensure that the disbursements and financial management of the program is carried out efficiently, and in accordance with acceptable international accounting standards. 41

52 . Financial Management System The objectives of the project financial management system are to: 0 ensure that funds are used only for their intended purposes in an efficient and economical way; 0 ensure that funds are properly managed and flow smoothly, adequately, regularly and predictably in order to meet the objectives of the program; 0 enable the preparation of accurate and timely financial reports; 0 enable program management to monitor the efficient implementation of the program; and 0 safeguard the program assets and resources. Financial/Accounting Policies & Procedures The TRA accounting system is based on a computerized system called Epicor maintained on accrual basis. TRA financial statements are in compliance with International Financial Reporting Standards (IFRS). TRA annual accounts will be prepared and an external audit report will be submitted within a period of six months after the end of the financial year. An Operational Manual has been developed to support implementation of the TMP strategies using basket modalities. This Operational Manual describes in detail the procedural framework within which TMP will operate and the associated systems and procedures for planning, budgeting, procurement, financial management and monitoring and evaluation. It also builds on good practices and the lessons learned from the joint pooling arrangements and other implementation procedures adopted for Sector Wide Approaches operating in other sectors. Interim Financial Reports (IFRs) TRA will prepare semi-annual interim financial reports (reflecting sources & uses of funds for TMP). The financial reports will be designed to provide quality and timely information to TRA management, BFDPs, and various stakeholders on the program performance. The semi-annual financial report will be submitted to BFDPs no later than 45 days after the end of each six month period. The report will consist of the following: 0 Financial reports consisting of: (i) sources of funds, uses of funds by project component, (ii) a statement of actual and budget expenditures, (iii) list of payments made during the reporting period for contracts that are subject to the prior reviews, (iv) TMP Basket Fund Tshs Account activity statement, reconciliation and copy of Bank Statement. 0 An Output monitoring report (the current half year report prepared by TRA on the review of the implementation of the corporate plan based on the agreed goals). 0 A Procurement monitoring report. 42

53 Financial Statements TRA financial statements are 'prepared on accrual basis in accordance with International Financial Reporting Standards (IFRS) and are audited as per International Standards on Auditing (ISA). These Financial Statements comprise of: a. b. C. d. e. A Balance Sheet reflecting the assets, liabilities and cyuity showing financial position at balance sheet date. An Income Statement reflecting income, expenses and surplus /deficit recognized in a particular reporting period. A Cash Flow Statement, which reports cash flow during the period, classified by operating investing and financing activities. A Statement of changes in equity reflecting the increase/decrease in net assets during the period. A Note to financial statement presenting information about the accounting basis, policies and other explanatory notes and schedules. ANNUAL PLANNING AND BUDGETING The Corporate Plan provides the basis for planning and resource allocation by linking planning with budgeting. TRA prepares a detailed Annual Work Plan and budget and submits to the JSC for review and approval. A structured process for forecasting and managing cash flows has been established with TRA preparing six monthly cash flow forecasts for implementation of the Annual Work Plan. Upon the endorsement by the JSC of the six-month cash flow forecast, the BFDPs authorize disbursement of funds to the TMP Basket Fund Holding Account. The Accountant General at the MoF authorizes the release of funds from the TMP Basket Fund Holding Account to the TRA-TMP Basket Fund (T Shs) Account. AUDIT ARRANGEMENTS Internal Control and Internal Auditing: The TRA directorate of internal audit is adequately staffed with qualified staff. It uses modern internal audit techniques to carry out the internal audit functions. Quarterly internal audit reports are submitted to the board for discussion and follow UP. External Auditing: The National Audit Office has responsibility under the law to undertake external financial and performance audits of TRA within six months of the financial year-end. The auditor is required to express an opinion on the audited TRA financial statements in compliance with International Standards on Auditing and submit the audit report within six months of the end of the financial year. In addition, a detailed management letter containing the auditor's assessment of the internal controls, accounting system and compliance with financial covenants in the IDA Credit Agreement and agreed MOU. It should be noted that the project financial statements should be all inclusive and cover all sources and uses o f hnds and not only those provided through IDA funding. They thus reflect all project activities, financing, and expenditures, including funds from other donorslparties and contributions in kind such as labor and accommodation, irrespective o f whether the project implementing agency controls the funds for a particular aspect o f the project. 43

54 DISBURSEMENT ARRANGEMENTS Basket Fund Holding Account: MOF will maintain basket fund holding accounts at the BOT denominated in US dollars for the TMP. Disbursements from the IDA Credit will be deposited in this account. The Accountant General at the MoF authorizes the transfer of funds from the TMP Basket Holding Account to TMP Basket Fund Tshs Account to support TMP activities as per approved AWPB, and six months cash forecast. Category Amount of the Financing Allocated (expressed in US$m) Percentage of Expenditures to be Financed Goods and Equipment, 12.0 Consultants Services, Training and Workshops Such percentage of Eligible Expenditures as the Association shall determine for each fiscal year. Total 12.0 Disbursement arrangements: Disbursements from the IDA Credit will be based on the six month cash flow forecast and will follow the agrecd pooled fund disbursement modalities as stipulated in the signed MOU. Funds from the IDA Credit will be disbursed to the TMP Basket Fund Holding Account already established at BOT. IDA will make the first semi-annual disbursement from the proceeds of the Credit to the TMP basket holding account based on the six months cash flow forecast and AWPB approved by the TMP Joint Steering Committee. Subsequent semi-annual fund releases will be based on approved six months cash forecasts and reviews of program progress, including the Interim Financial Reports. The determination for the percentage of disbursement into this account will be on the basis of six months cash flow forecast the Annual Work Plan and Budget (AWPB), and on the basis of the contributions indicated by each co-financier for a specific year. Detailed annual plans for activities, procurement and associated progress and financial reports and budgets will be compiled in the structured formats contained in the Operational Manual. IDA will be expected to fund 100% of program costs in accordance with the approved Country Financing Parameters for Tanzania. 44

55 STAFFING: The Directorate of Finance is well established and has highly qualified accountants who are able to manage the project funds. The same staff managing TAP funds will handle TMP finances. INFORMATION SYSTEM: The accounting system the computerised based accounting and reporting system that uses Epicor software. The staff in Directorate have undergone training in the use of Epicor. More training is planned in the future on the upgrade of the software. PROCUREMENT ARRANGEMENTS: There are no specific procurement arrangements that specifically impact on the FM arrangements. SUPERVISION PLAN The program is subject to joint annual review by both the GOT/TRA and DPs. 45

56 Annex 8: Procurement Arrangements Tanzania - Tax Modernization Project A. General Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as may be required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement of Works: Works are not expected to be procured under this project. Procurement of Goods: Goods procured under this project would include: Motor vehicles, office furniture and equipment (computer hardware and software), surveillance and security equipment, educational and mass media equipment. The procurement will be done using the Bank's SBD and Standard Bid Evaluation Forms for all ICB. Since the Government prepared SBDs for NCB procedures for procurement of goods which have been found acceptable to the Bank, procurement of goods through NCB may be carried using these documents. Goods estimated to cost US$200,000 or more equivalent per contract would be procured through International Competitive Bidding (ICB). Goods estimated to cost less than US$200,000 equivalent per contract would be procured through National Competitive Bidding (NCB), except for goods contracts estimated to cost less than US$50,000 per contract would be procured using Shopping method. Direct contracting may be used when it can be justified that a competitive method is not advantageous and meets the requirements under paragraph 3.6 of the Procurement Guidelines and after consultation with the Bank. The prior review threshold for goods contracts would be US$200,000 equivalent per contract. Procurement of non-consulting services: Non-consulting services will not be financed under this program. Selection of Consultants Main consultant services required under the Project include: Review and consolidation' of tax laws, perception studies for tax payers, review the integrity and transparency scheme, determination of manning and skill levels, Consulting firms for services estimated to cost US$lOO,OOO or more would be selected through Quality and Cost Based Selection (QCBS). Consulting firms for services estimated to cost less than US$lOO,OOO may be selected using the consultants' qualification method. Consulting firms for carrying out standard or routine nature assignments such as audits would be selected through Least Cost (LCS). Individual consultants would be selected on the basis of their qualifications in accordance with Section V of the C,onsultant Guidelines. Single source may be used where it can be justified and 46