Maldives: Enhancing Tax Administration Capacity

Transcription

1 Completion Report Project Number: Technical Assistance Number: 8525 August 2018 Maldives: Enhancing Tax Administration Capacity This document is being disclosed to the public in accordance with ADB s Public Communications Policy 2011.

2 In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 TA Number, Country, and Name: Amount Approved: $850,000 TA 8525-MLD: Enhancing Tax Administration Capacity Revised Amount: Not Applicable Executing Agency: Source of Funding: Amount Undisbursed: Amount Utilized: Ministry of Finance and Treasury Japan Fund for $122,200 $727,800 TA Approval Date: 4 December 2013 TA Signing Date: 3 March 2014 Poverty Reduction Fielding of First Consultants: 14 April 2014 TA Completion Date Original: 31 December 2015 Actual: 31 December 2017 Account Closing Date Original: 31 December 2015 Actual: 22 December 2017 Description The Asian Development Bank (ADB) provided a technical assistance (TA) grant of $850,000 to the Government of Maldives (the government), financed by the Japan Fund for Poverty Reduction in December 2013, for strengthening the Maldives Inland Revenue Authority (MIRA). The TA was built on three ADB projects, which helped (i) establish MIRA as a modern tax administration agency in 2010; (ii) introduce the goods and services tax (GST) and business profit tax (BPT) in 2011; and (iii) set up information technology (IT)-based revenue administration management information system (RAMIS). 1 While progress has been made in tax reforms as MIRA accounts for 75% of government revenue, mainly attributable to GST and BPT, due to further fiscal consolidation needs, the government requested additional TA to enhance MIRA s capacity in (i) tax collection and promoting voluntary taxpayer compliance using IT-based initiatives given the challenges of the country s archipelagic geography; (ii) effective tax audits; and (iii) implementation of existing tax policies and new taxes such as personal income tax (PIT) and corporate profit tax (CPT), which were then under advanced deliberation in the Parliament. The TA was aligned with the government s Strategic Action Plan , recognizing the importance of tax reforms. The executing agency (EA) was Ministry of Finance and Treasury (MOFT) and the implementing agency (IA) was MIRA. Expected Impact, Outcome, and Outputs The expected impact was improved fiscal position. The expected outcome was enhanced capacity of MIRA in tax administration. The TA had the following outputs: (i) taxpayer services of MIRA enhanced; (ii) the audit capacity of MIRA strengthened; and (iii) the readiness of MIRA to effectively implement tax policy reforms strengthened. Delivery of Inputs and Conduct of Activities The formulation of the design and monitoring framework (DMF) and consultants terms of references were adequate. The implementation was originally for 25 months, from 4 December 2013 to 31 December 2015, but the completion was delayed to 31 December A consultation mission on December 2012, a fact-finding mission on February 2013, and nine review missions during October 2014 August 2017 were fielded, combined with either Inclusive Micro, Small, and Medium-Sized Enterprise (MSME) Development Project 2 (six missions) or tripartite portfolio review meetings (three missions). Under Output 1, a minor change memo was approved on 24 March 2014 for the recruitment of two additional international individual consultants to strengthen MIRA s capacity for implementing SAP-based IT systems for taxpayer services. The SAP tax and revenue management (TRM) specialist was recruited for two person-months (PMs) intermittently during 14 April June 2014 (later extended to end June 2014). The specialist provided hands-on support to MIRA s IT team to resolve bugs and configure SAP TRM system. The same consultant was recruited as the IT specialist for tax and revenue system support during 5 September March 2015 with a minor change memo on 11 July The specialist was rated as excellent by MIRA and satisfactory by ADB. A specialist for SAP customer relationship management (CRM) system was recruited for two PMs during 13 June August 2014 (later extended to end December 2014). The specialist assisted MIRA to (i) prepare SAP CRM and business intelligence (BI)/business objects (BO) system requirements and request for proposal (RFP) documents along with the bill of material for IT infrastructure tender, which was later changed to meet the requirements, as suggested by the selected IT firm; (ii) evaluate the capacity of the IT firm for implementation of the functional design; and (iii) produce a road map for strengthening taxpayer services. The specialist trained MIRA on SAP CRM and BI/BO design and capabilities on 16 August The specialist was rated generally satisfactory by MIRA. An IT firm was selected competitively based on quality cost ratio of 90:10 for 24 PMs (instead of 15 PMs as originally envisaged), from 19 August 2015 with the original contract completion date of 30 June 2016 to (i) prepare the blueprint, functional and technical specifications for SAP CRM and BI/BO systems; (ii) carry out code development, configuration, 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Loan, Technical Assistance Loan, and Technical Assistance Grant to the Maldives for the Economic Recovery Program. Manila; ADB Technical Assistance to the Maldives for Institutional Strengthening of Economic Management. Manila; ADB Technical Assistance to the Maldives for Developing the Revenue Administration Management System. Manila. The government engaged Systems Applications and Products (SAP) Singapore in 2011 for the operationalization of a customized SAP tax and revenue management system (a.k.a. RAMIS). 2 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant to Republic of the Maldives: Inclusive Micro, Small, and Medium-Sized Enterprise Development Project. Manila.

4 2 testing and go live of these systems; and (iii) provide post-implementation support and training. The team comprised (i) SAP CRM senior consultant/team leader (eight PMs); (ii) SAP CRM investigative case management and analytics senior consultant (eight PMs); and (iii) SAP BI/BO senior consultant (eight PMs). These two systems included (i) contact center and service management for taxpayer interaction via call center and web-based platforms; (ii) tax agent channel management; (iii) investigative case and fraud management for risk profiling and intelligence gathering; (iv) marketing and campaign management for surveys and use of social media; and (v) master data on taxpayers and analytical tools. MIRA carried out the procurement of hardware and software licenses worth $240,000 under the TA. Additionally, IT infrastructure for SAP TRM was upgraded using grant resources from Inclusive MSME Development Project (footnote 2). A total of seven variations were made on the IT firm s contract: The first variation extended the completion date by 6 months until 31 December 2016 due to delays in procurement of hardware and software licenses by MIRA. The firm started system configuration in February 2016 only after this procurement. The second variation replaced the team leader, who resigned and the two other consultants, who discontinued due to health reasons. A third variation funded an additional two-week training and further extended the completion date until end February 2017 to accommodate delays from consultant turnover and finding qualified replacements. Despite further extensions to end April 2017, then to 15 July 2017 and finally to 30 July 2017 with three subsequent contract variations, the software development could only reach the blueprint phase and MIRA raised concerns about the quality of the applications such as (i) slow and inefficient data load design; (ii) errors in SAP CRM data configuration; (iii) unstable call center functionalities; and (iv) inability to view the investigative case management module. The firm could not complete the user acceptance testing and go-live stages, as originally planned for October Frequent changes in qualified software developers and replacements with junior staff negatively affected the quality. Although the firm provided trainings on SAP CRM and BI/BO functionalities, onsite sessions were not fully utilized as MIRA staff was busy with other activities. Despite extension until end July 2017, application issues were not resolved, and MIRA confirmed that both systems were unusable. This resulted in final variation, which partially cancelled the firm s contract and reduced the maximum contract payment by $118,830 from $468,846 to $350,016 ($314,666 for progress payments 1 4 only, cancelling 5 7, and $26,600 for eligible costs under progress payment 8). The firm was rated unsatisfactory by MIRA. Under Output 2, an international tax audit consultant was recruited intermittently for six PMs from April 2014 until end 2015 to support MIRA by preparing (i) a strategy report to strengthen MIRA s audit functions; (ii) standard operating procedures and manual for risk-based audit (modeled after New Zealand s guidelines); (iii) an organizational road map for specialized audit teams; and (iv) recommendations for amendments to existing tax laws. Auditors were also trained on international best practices. The consultant was rated satisfactory by MIRA. Furthermore, two international tax experts and ADB s taxation specialist delivered a workshop on (i) international (OECD) tax laws; (ii) best practices in tax compliance, riskprofiling, investigation, audit quality, and dispute resolution; and (iii) transfer pricing. The experts were rated satisfactory. Under Output 3, an international tax policy specialist was recruited for six PMs intermittently from 3 August 2014 until end The specialist (i) proposed medium-term tax policy and tax administration reforms, based on analysis of revenues and MIRA s institutional capacity; (ii) assisted MIRA in drafting subordinate legislation, regulations, and internal procedures for implementing existing taxes such as BPT, GST, and bank profit tax; and (iii) assisted MIRA in technical procedures to commence international tax negotiations (i.e. bilateral double taxation treaties). The specialist provided capacity building on international taxation, technical and legislative matters, taxpayer education, and the train-the-trainers program for the licensed tax agents (19 February 7 March 2015) as well as advised the staff of the Audit and Investigations Department, Large Taxpayer Unit, and Enforcement and Compliance Department. The specialist was rated excellent by MIRA. ADB s performance was satisfactory, given that ADB effectively coordinated with MIRA, building on earlier institutional support for tax reforms in Maldives. ADB accommodated requested changes in the TA scope successfully and communicated these with the consultants. The performance of EA and IA was satisfactory for most of the TA activities. Evaluation of Outputs and Achievement of Outcome Under Output 1, full operationalization of SAP CRM and BI/BO systems and integration in MIRA s business procedures were not achieved given the IT firm s failure to deliver the upgrades as the firm did not have the requisite technical skills such as SAP certification and qualified staff continuity to develop the software as per the broad design made by the SAP CRM specialist. MIRA s IT staff capacity was also weak to explain the details of the functional requirements and monitor deliverables effectively. These systems were supposed to strengthen collection efficiency through enhanced interaction with taxpayers. Instead, MIRA continued to rely on existing online taxpayer service portals under RAMIS and MIRAconnect. Under Output 2, MIRA strengthened its institutional audit capacity. MIRA shifted its focus from comprehensive audit to compliance-based audit, using risk profiling of taxpayers and established a compliance risk management committee. In 2016, MIRA created three separate audit departments for large business, corporate business, and individual business while investigation and intelligence became a separate division. Trainings were successfully conducted on 4 12 June 2014 and 2 3 November 2014, covering risk-based and evidence-based audit methods, sampling techniques, audit planning, quality assessments, and international standards for internal controls for different tax categories. Another training was conducted on 8 and 22 November 2014 on laws and administrative tools against tax avoidance and transfer pricing under OECD rules.

5 3 The ADB workshop on tax audits and tax treaties was attended by 47 MIRA staff on 8 11 May With the TA s contributions, audits including atoll visits kept pace with the increase (137%) in number of registered businesses and GST taxpayers during These audits brought a cumulative of Rf1.86 billion in additional tax revenues. An IT solution for taxpayer risk analysis is yet to be developed since the SAP BI/BO system was not delivered. However, MIRA integrated its case manager system with audit manuals. MIRA strengthened its organization with (i) industry-based audit teams; (ii) quality reviews for business and compliance departments; and (iii) audit plans. Under Output 3, MIRA strengthened its readiness to implement tax policy reforms. Despite the dynamic political situation, including the parliamentary election in March 2014 and change of the government, creating shifts in support for tax reforms, MIRA proved itself as a reform-minded professional tax agency, insulated from external pressures and dedicated to effective tax administration. Although PIT and CPT Bills were not included in the government s legislative program, MIRA drafted subordinate legislation and regulations for existing tax laws. A green tax was introduced with amendments to the Maldives Tourism Act in 2015, followed by remittance tax in 2016 and airport development fee in Amendments to the BPT Act and measures against non-compliance were shared with the Attorney General for presentation to the Parliament in MIRA negotiated tax treaties with the United Arab Emirates, Malaysia, and Bangladesh. MIRA plans to join OECD s Automatic Exchange of Information portal in The TA supported training of licensed tax agents and establishment of Maldives Tax Academy, accredited by Maldives Qualifications Authority under MIRA s 5-year strategic plan. Overall, MIRA enhanced its tax administration capacity with full achievement of two out of three outcome indicators. Although tax compliance measured by on-time filing of tax returns reached 77% for GST and 51% for BPT in 2017, the targeted 15% increase over the 2013 baseline was not achieved. On a positive note, total tax compliance rose from 79% in 2016 to 83% in The tax revenue collection by MIRA increased from $355 million (Rf5.5 billion) in 2012 to $768 million (Rf11.8 billion) in Number of tax audits increased from 880 in 2012 to 2,092 in The impact of improved fiscal position was achieved as the government revenue to GDP ratio increased from 22.4% in 2012 to 28.9% in 2017, exceeding the target of 21%. The tax revenue to GDP ratio increased from 12.3% in 2012 to 17% in The fiscal deficit to GDP ratio reached -5.4% in 2015, -7.7% in 2016, and -4.4% in 2017, remaining below the -9% target (appendix). Overall Assessment and Rating The TA is less than successful based on its ratings of (i) relevant, (ii) less than effective, (iii) less than efficient, and (iv) likely to be sustainable. The TA was relevant for improving tax collection and compliance given the government s fiscal difficulties, and ease of doing business for MSMEs using IT-based tax administration (footnote 2). The TA was less than effective as the key IT systems under Output 1 were not delivered and the new taxes under Output 3 were not introduced due to lack of political support for PIT and CPT legislations. While MIRA s overall capacity in implementing existing taxes and risk-based tax audit improved, increase in compliance and revenue collection was also attributable to MIRA s taxpayer outreach using existing online systems developed under earlier ADB TAs and favorable economic growth, reaching 8.8% in The implementation was less than efficient with two years delay, resulting from the IT firm s failure to deliver SAP CRM and BI/BO systems. The TA is likely to be sustainable with achievement of outcome and Outputs 2 and 3. To strengthen sustainability of Output 1, ADB recently mobilized new TA resources ($225,000) under Domestic Resource Mobilization Fund in June 2018 to (i) conduct a diagnostic system audit on unfinished SAP CRM and BI/BO applications, and (ii) hire a new SAP-accredited IT firm to complete the SAP BI/BO system by end November Major Lessons The SAP CRM specialist could have been engaged longer with onsite deployment at MIRA to (i) improve communication with the IT firm on the detailed requirements of the software; (ii) support timely procurement of IT infrastructure; (iii) monitor the firm s staff continuity; and (iv) verify quality of the software as a third party. While ADB s frequent review missions were crucial for getting feedback on consultants performance, and developing course correction plans for delayed activities, project monitoring could have been more effective had there been ADB resident mission (RM) in Maldives, especially for IT projects requiring strong physical presence for continuous communication. Project design and implementation could have benefitted from stronger collaboration with ADB s IT department. The political dynamics could have been factored in the pace of tax reforms that are dependent on legislation by the Parliament. The DMF targets could have been set more realistically to reflect implementation risks, considering IA s capacity constraints. Finally, streamlining number of contracts (six contracts and two resource persons), preferably under a firm, would have ensured better coordination among individual consultants even more so in the absence of RM and with a relatively weak IA, and reduced ADB s own transaction costs. Recommendations and Follow-Up Actions MIRA needs to (i) operationalize SAP BI/BO system to strengthen intelligence gathering for risk-based audit, and detection of fraud and tax evasion; (ii) develop IT staff capacity and allocate adequate resources to maintain IT-related infrastructure; (iii) introduce credible tax penalties and close tax loopholes; (iv) develop partnerships with international tax agencies and treaty networks to build capacity and exchange knowledge on international taxation; (v) strengthen voluntary compliance via taxpayer education; and (vi) draft regulations for PIT and CPT while political commitment is pursued for their legislation. Prepared by: Çiğdem Akın Designation: Senior Public Management Economist Kristina Recomono Senior Operations Assistant

6 4 Appendix DESIGN AND MONITORING FRAMEWORK Results Chain Performance Indicators with Targets and Baselines Status of Achievement Data Sources and Reporting Mechanisms Assumptions and Risks Impact Improved fiscal position Tax revenue to GDP ratio increases to 21.0% by 2018 (2012 baseline: 19.7%) Achieved. Tax revenue collected by MIRA to GDP ratio increased from 12.3% in 2012 to 16% in 2015, 16.6% in 2016, and 17% in The increase from the baseline year of 2012 is around five percentage points. Total revenue collected by MIRA to GDP ratio increased from 16.1% in 2012 to 21.2% in 2015, 22.4% in 2016 and 21.9% in The increase from the baseline is 5.8 percentage points. For all indicators: Maldives Department of Statistics data Ministry of Finance data Risk Global economic and financial crises adversely affect GDP growth and revenue collection Total government revenue to GDP ratio increased from 22.4% in 2012 to 24.3% in 2015, 28.2% in 2016 and 28.9% in The increase from the baseline is over six percentage points. The economic growth during was favorable, averaging 6.4%. The GDP growth reached 8.8% in Source: The revenue data is from MIRA Annual Report, 2017, page 33. Current GDP in local currency for is from World Bank, World Development Indicators and for 2017, IMF World Economic Outlook dataset, April GDP growth for is from the World Development Indicators. Fiscal deficit to GDP ratio improves to -9% by 2018 (2012 baseline: -12.6%) Achieved. The fiscal deficit (defined as government revenue minus expenses, minus net investment in nonfinancial assets) to GDP ratio was -5.4% in 2015, -7.7% in 2016, and

7 Appendix 5 Results Chain Performance Indicators with Targets and Baselines Status of Achievement -4.4% in 2017 compared to baseline of -4.6% in The fiscal deficit remained below -9% target. Data Sources and Reporting Mechanisms Assumptions and Risks Source: IMF World Economic Outlook, April Outcome Enhanced capacity of MIRA in tax administration Tax compliance increases by 15% by 2015 (2013 baseline: goods and services tax: 70%; business profit tax: 55%) Not Achieved. In 2016, 79% of total tax returns were filed on time. This figure increased to 83% in On-time filing of GST reached 77% and BPT reached 51% in GST and BPT together comprise 63% of total revenue collection by MIRA in For all indicators: MIRA statistics Assumption Political tensions do not affect MIRA s ability to effectively enhance its revenue collection capacity Despite the overall improvement in tax compliance, the increase fell short of the DMF target of 15% over the baseline. Source: MIRA Annual Report, 2016, page 59 and MIRA Annual Report, 2017, page 68. Risk Parliamentary elections significantly slow down the legislature Tax filing information of GST and BPT was provided by MIRA. Revenue collection increases by 10% by 2015 (2012 baseline: $467 million) Achieved. Tax revenue collected by MIRA increased from $355 million (Rf5.5 billion) in 2012 to $641 million (Rf9.8 billion) in 2015, representing 80% increase. The tax revenues further increased to $700 million (Rf10.8 billion) in 2016 and $768 million (Rf11.8 billion) in Total revenue collected by MIRA increased from $465 million (Rf7.2 billion) in 2012 to $849 million (Rf13.1 billion) in 2015, representing 83% increase. The revenues collected by MIRA further increased to $945 million (Rf14.5 billion) in 2016 and $986 million (Rf15.2 billion) in 2017.

8 6 Appendix Results Chain Performance Indicators with Targets and Baselines Status of Achievement Total government revenue increased from $645 million (Rf9.9 billion) in 2012 to $1.1 billion (Rf16.8 billion) in 2015, representing 70% increase. The government revenues further increased to $1.2 billion (Rf18.3 billion) in 2016 and $1.3 billion (Rf20.1 billion) in Data Sources and Reporting Mechanisms Assumptions and Risks Source: The revenue data is from MIRA Annual Report, 2017, page 33. Current GDP in local currency and in USD for is from World Bank, World Development Indicators and for 2017, IMF World Economic Outlook, April Number of taxpayers subject to tax audit increases by 20% by 2015 (baseline 2012: 4.5%) Achieved. Number of businesses registered as tax filers increased from 13,819 in 2012 to 25,618 in 2015, representing 85% increase. The number further increased to 29,616 in 2016 and 32,727 in The persons registered for GST doubled from 5,213 in 2012 to 10,500 in 2015 and the number further increased to 11,131 in 2016 and 12,419 in In 2012, 880 audits were conducted, resulting in Rf116.7 million in additional tax payable. The tax audits increased to 1,282 in 2015, resulting in additional tax payment of Rf448.3 million. The number of audits further increased to 1,772 in 2016, resulting in Rf326.4 million paid and 2,092 audits in 2017, resulting in Rf631.6 million paid. The average increase in number of audits is 35% per annum and 52% in additional taxes paid during

9 Appendix 7 Results Chain Performance Indicators with Targets and Baselines Status of Achievement Data Sources and Reporting Mechanisms Assumptions and Risks Source: MIRA Annual Reports, Outputs 1. Taxpayer services of MIRA enhanced CRMS is operational and effectively integrated in MIRA s business procedures by December 2015 Not achieved. Development of SAP CRM and BI/BO systems was terminated as the IT firm was unable to develop and deliver the system up to the expectation of MIRA. For all indicators: MIRA statistics and reports Assumption MIRA is able to retain dedicated and competent staff. 2. Audit capacity of MIRA strengthened 40 MIRA audit staff are trained in riskbased audits by December 2015 (2013 baseline: 0) Achieved. Training of MIRA staff was conducted on 4 12 June 2014 and 2 3 November 2014 on risk-based audit and compliance. A training was conducted on 8 November and 22 November on the tax laws, tax avoidance tools, and OECD transfer pricing rules. Workshop on tax audits and tax treaties was conducted for 47 MIRA staff on 8 11 May Readiness of MIRA to effectively implement tax policy reforms strengthened Subordinate regulations and internal procedures to implement the proposed new tax measures are finalized for adoption by April Partially achieved. Subordinate regulations and internal procedures and organizational arrangements to implement the existing taxes such as BPT, GST, bank profit tax have been completed. However, due to government s decision not to include the Personal Income Tax Bill and Corporate Profit Tax Bill in legislative program, the legal and regulatory preparations for these taxes are yet to be completed.

10 8 Appendix Activities with Milestones 1. Taxpayer services capacity of MIRA enhanced 1.1 Select vendor for CRMS (January 2014). An IT firm was contracted in August 2015 to develop CRMS (completed). 1.2 Finalize system requirement specifications (April 2014) (completed) 1.3 Conduct a workshop on ICT-based taxpayer services with Japanese tax officials (May 2014). This training was changed to tax audit and tax treaties training held in May 2017 (not completed). 1.4 Finalize design document (June 2014). Blueprints submitted by the firm were not satisfactory and the firm was not able to deliver the system (not completed). 1.5 Undertake user acceptance test (December 2014) (not completed) 1.6 Pilot test CRMS (January 2015 to June 2015) (not completed) 1.7 Official launch of CRMS (July 2015) (not completed) 1.8 Implement CRMS and train users (July 2015 December 2015) (not completed) 2. Audit capacity of MIRA strengthened (completed) 2.1 Produce road map reports on tax audit (January 2014) 2.2 Conduct a workshop on tax audits with Japanese tax (audit) officials (July 2014) 2.3 Introduce the concept of risk-based audits (December 2014) 2.4 Train staff on risk-based audits (June 2015) 2.5 Conduct regular staff training sessions on enhancing audit capacity (January 2014 December 2015) 3. Readiness of MIRA to effectively implement tax policy reforms strengthened 3.1 Draft subordinate regulations and business operation procedures to implement new income taxes (April 2014) (not completed) 3.2 Organize awareness-raising campaign for introduction of new taxes (September 2014 September 2015) (not completed) 3.3 Conduct a workshop with Japanese tax officials on tax policy implementation and general taxpayer services (September 2014) (not completed) 3.4 Conduct regular staff training sessions on tax policy and legislation (January 2014 December 2015) (completed) Inputs Japan Fund for Poverty Reduction: $850,000 Consultants Equipment Training and workshops 30.0 Administration and support 0.5 Contingencies 1.3 Note: The government will provide support in the form of counterpart staff, office accommodations, and other in-kind contributions. BI/BO = business intelligence/business objects, BPT = business profit tax, CRMS = customer relationship management system, GDP = gross domestic product, GST = goods and services tax, ICT = information and communication technology, IT = information technology, IMF = International Monetary Fund, MIRA = Maldives Inland Revenue Authority, OECD = Organization for Economic Cooperation and Development, Rf = rufiyaa. Source: Asian Development Bank.