Document of The World Bank TECHNICAL ANNEX TO THE CHINA FISCAL TECHNICAL ASSISTANCE PROJECT

Transcription

1 Public Disclosure Authorized Document of The World Bank Public Disclosure Authorized TECHNICAL ANNEX TO THE Report No. T-6552-CHA Public Disclosure Authorized MEMORANDUM OF THE PRESIDENT CHINA FISCAL TECHNICAL ASSISTANCE PROJECT Public Disclosure Authorized Country Operations Division China and Mongolia Department East Asia and Pacific Region APRIL 3, 1995

2 CURRENCY EQUIVALENTS (as of February 1995) Currency Unit = Yuan (Y) $1.00 = Y 8.50 Y 1.00 = $0.12 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADB CS The Decisions EDP EIT GNP IBRD ICB IDA IMF IT LTS MOF NCB NTS PBC PHRD PIT SAT SOE SE SRC SSB TA TIN TOR UNDP VAT - Asian Development Bank - Consultancies - Decisions of the Third Plenary Session of the Fourteenth Central Committee of the Communist Party of China - Electronic Data Processing - Enterprise Income Tax - Gross National Product - International Bank for Reconstruction and Development - International Competitive Bidding - International Development Association - International Monetary Fund - Information Technology - Local Tax Service - Ministry of Finance - National Competitive Bidding - National Tax Service - People's Bank of China - Policy and Human Resource Development - Personal Income Tax - State Administration of Taxation - Statement of Expenses - State-Owned Enterprise - Systems Reform Commission - State Statistical Bureau - Technical Assistance - Taxpayer Identification Number - Terms of Reference - United Nations Development Program - Value Added Tax FISCAL YEAR January 1 - December 31

3 CONTENTS Section A: Detailed Project Description I 1. Background Project Objectives and Description Project Costs and Financing Other Donor Assistance Section B: Project Administration and Implementation Project Implementation Procurement Disbursement Accounting and Audit Arrangements Monitoring and Progress Reporting Supervision Lessons Learned from Previous Bank Group Involvement Rationale for Bank/IDA Involvement Project Benefits Agreements Reached at Negotiations Risks ArrACHmEwS 1 Detailed Project Costs by Subcomponent China: Developments in Government Revenues Changes in Tax Structure in China, Project Activities Tax Administration Component Training Plan Preliminary Mission Supervision Plan TABLEs in TEXT 1. China's Tax Administration Offices and Personnel, a. Project Costs by Objectives b. Project Costs by Cost Categories Project Financing Plan Proposed Procurement Arrangements Projected Disbursement Schedule FIGURE IN TEXT 1. Project Implementation Structure Tax Administration Component

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5 TECHNICAL ANNEX 1/ SECTION A: DETAILED PROJECT DESCRIPTION 1. BACKGROUND 1. Introduction and Overview. China's fiscal system has come under stress over the reform period since The reforms initiated a major shift of the tax base away from the sectors traditionally tapped by the tax system, and government revenues declined from over 34 percent of GNP in 1978 to less than 16 percent in Tax buoyancy was undermined by loose collection and tax exemptions that were induced by intergovernmental fiscal contracts, and facilitated by the decentralized tax administration system. The reduced budgetary resources were handled by a budget system that was still geared toward financing the State Plan, and a proliferation of extra- and off-budget funds increasingly undermined the macro- and microeconomic functions of the budget. 2. Against this backdrop, China's authorities have recently introduced sweeping reforms of their fiscal policies and practices, which the proposed project would support. The reforms were endorsed in the "Decision of the Third Plenary Session of the Fourteenth Central Committee of the Communist Party of China" in November The reforms can be broadly divided into four parts: (a) a major overhaul of the tax system; (b) the creation of separate tax administrations for central and shared taxes (National Tax Service, NTS) and local taxes (the Local Tax Service, LTS); (c) a restructuring of intergovernmental fiscal relations; and (d) the passing of an organic Budget Law. This section presents the reforms and their background in more detail. Key Issues in Fiscal Policy 3. Tax Policy. China's tax structure has become increasingly incapable of raising sufficient revenues. At the beginning of the reform period, the decline in government revenues was mainly caused by increased independence of state-owned enterprises (SEs), which were no longer obliged to submit all their profits to the budget. In 1984, a separation of taxes and profits was established with the introduction of SE income taxes. Increased competition from the nonstate sector rapidly eroded both profits I/ This report is based on the findings of an appraisal mission in January 1995, consisting of Zafer Ecevit (Chief, EA2CO, mission leader), Bert Hofian (Economist, EA2CO; Task Manager), and Ike Ikamuullah (Senior Technology Specialist, IENTI). The appraisal mission cooperated with a parallel IMF mission, consisting of: Carlos Silvani (Advisor, mission leader), John Brondolo (Tax Systems Information Officer), Tony Pellechio (Economist, IMF), and Alan Landsberg (Panel Expert).

6 - 2 - and taxes from SEs. The buoyancy of the tax system was further undermined by the contracting of profits and taxes between government and SEs since 1988, and the practice of debt repayment deduction from taxes. These practices also provided the impetus for strongly procyclical SE behavior, and recurrent excess investment demand. Furthermore, tax contracting distorted competition among SEs, as the terms of their contract depended on the financial strength of their local government. In the early 1990s the practice of tax contracting was increasingly extended to the turnover taxes, eroding further the tax share in GDP. 4. Competition was further distorted by the complexity of the tax system, which, despite a number of reforms, had 33 taxes, a multitude of rates for every tax, and high marginal statutory tax rates on enterprise income, that varied by ownership. The turnover taxes-mainly business tax, value added tax (VAT), and product tax-had a myriad of rates, in part to compensate for the incomplete price reforms, and in part to penalize "undesirable" consumption. The VAT, introduced in 1984, was gradually extended to more products and sectors, and by 1993 had become the main revenue source (Attachment 2). 5. Tax Administration. Until recently, the decentralized tax administration acted on behalf of both central and local governments. In principle, the tax administration was under the "dual leadership" of local governments and the State Administration of Taxation (SAT), the central tax authorities. SAT was established in Before that, the administration was a department under the Ministry of Finance (MOF). The tax administration is large by any international standard, with over 30,000 offices at four levels (Table 1).2/ The district/county-level offices have primary responsibility for the tax collection at larger enterprises, whereas tax collection stations focus on small enterprises. Total personnel is now over 600,000, and is rising fast. The collection of taxes on imported goods is delegated to Customs, and the agricultural taxes are collected by Finance Bureaus. SAT has two training colleges, with about 400 teachers, mostly specialized in basic tax theory. 6. Over the 1980s and early 1990s, tax administration has increasingly become an arm of local government. To attract investment, local government granted legal and illegal tax exemptions, which contributed to the lack of buoyancy in tax revenue, and central revenue in particular. Besides such political pressures, the tax administration has faced a growing number of taxpayers, now amounting to 33 million, with over 1 billion of transactions with taxpayers annually. The administration increasingly failed to manage these numbers, despite the growth in the number of tax administrators. Efficiency has been hampered by the lack of specialization of tax administrators, the concentration on tax assessment and collection, instead of audit, and by the widespread system of "resident' tax administrators in enterprises, which encourages a negotiated approach to paying taxes. Moreover, the tax administration practices differed from locality to locality, distorting competition, and undermining equality. Z/ The tax collection station falls directly under the city/prefectural level, and is considered a branch of that level.

7 - 3 - Table 1: CHNA'S TAX ADMWNSTTION OFmcEs AND PERSONNEL, 1993 No. of Offices Personnel Central (SAT) 1 n.a. Provinces and Provincial Level Cities 36 8,875 City/Prefecture Level ,676 District/County Level 2, ,857 Tax Collection Stations 28, ,503 Training Colleges and Schools n.a 4,032 Total /a /a SAT reported that total personnel exceeded 600,000 by mid China has made tax computerization efforts since 1986, with investments of over $150 million in about 5,000 offices. There are some 4,000 technicians working in the administration, and over 20,000 operators. Most of the computer applications developed have been less than fully effective because they concentrated on computerizing existing procedures instead of first reforming the tax administration procedures to increase overaul efficiency. Moreover, the computerization that took place has not been coordinated centrally, leading to a proliferation of systems and procedures among localities. Computerization of some administrative functions was further hindered by the absence of unique taxpayer's identification numbers (TlNs). 8. Intergovermnental Fscal Relations. China's intergovernmental fiscal relations have changed considerably during the reform period. The most fundamental change occurred in 1980, when the principle of "eating from separate kitchens" was introduced, giving local governments more autonomy over their fiscal affairs by means of what amounted to a contracting system. The fiscal contracts were formalized in The contract system assigned taxes and tax shares to either central or local government. The excess of local revenues over 1987 "base number" expenditures was to be remitted to the central government according to a contracted rate, and a shortfall of revenues over 1987 expenditures was financed by a transfer from the center. The contracted local retention rates were high, and bolstered local revenues in times of high growth and inflation. In addition to the contracted revenues, local governments received a number of earmarked transfers, predominantly for covering losses of SEs and for price subsidies. 9. The intergovernmental fiscal arrangements gave local governments high incentives for promoting growth, but also caused central tax buoyancy to decline. The decline in tax buoyancy-accelerated by legal and illegal tax exemptions-hampered central government's control over total budgetary expenditures, and reduced its role in equalization among provinces. The contract system added to the procyclical tendencies of China's economy, as the budget rules allowed local governments to spend their actual revenues, which were higher in times of boom and lower in times of growth recessions. Revenue

8 - 4 - assignments also introduced distortions in investment behavior by local governments. Local shares in the product taxes encouraged investment in those industries that were meant to be discouraged. 10. Budget System. China's budgetary system has been an efficient resource mobilizer for the Plan, but the system has not kept up with the reforms in the rest of the economy, and is insufficiently equipped for its emerging role as an allocation and macroeconomic stabilization instrument. The budget no longer fully reflects the fiscal responsibility of the government, due to a proliferation of extra- and off-budget funds that remain outside budget controls. The budget classification system is less suited for policy analysis, cost computation, and for internal management. The budget compilation process is largely incremental, projections are less than accurate, and the control over outlays is weak, which contributes to economic cycles and weakens allocation through the budget. The effectiveness of audits is restricted by lack of detail in the budget classification and reporting procedures. 11. The People's Bank of China (PBC) treasury department manages the vault function well, and once in the treasury accounts, money is transferred relatively efficiently. However, cash management has not been fully developed since the treasury had until recently access to funding from PBC for short-term needs. Expenditure control, which should be exercised by the MOF-Budget Department, suffers from lack of a detailed budget and lack of an efficient information system. Capital budgeting techniques are hardly present in the MOF and Finance Bureaus, as the public investment process used to be handled largely by the State Planning Commission (SPC). Planning and budgeting are virtually separated, as most of the public investments are handled by SPC, and recurrent costs of the investments have increasingly been funded from extrabudgetary sources. Recent Reforms 12. The decline in the share of government revenues in GNP and central share in the revenues in particular caused loss of macroeconomic control, because government expenditures were not reduced in line, but were increasingly financed through policy lending of the banking system. This loss of macroeconomic control led to sweeping reforms in financial and fiscal policies and institutions that were announced in November The fiscal reforms are aimed at halting the decline of government revenues through tax and tax administration reforms, and a gradual centralization of the revenues through a rearrangement of intergovernmental fiscal relations. The Budget Law, which passed the National People's Congress (NPC) in March 1994, should lead to better control over expenditures. 13. Tax Policy. The reforms announced at the beginning of 1995 aim for a major restructuring of the tax system, which reduces the number of taxes from over 30 to 18, and greatly improves the overall structure (Attachment 3). The main reforms consist of: (a) a broadening of the VAT to include parts of the Product Tax and Business Tax, a reduction of the rates to two (17 and 13 percent) and a switch to the credit invoice method; (b) a unification of the EIT for all domestic enterprises, with a standard rate of

9 33 percent,3/ and the abolition of tax contracting and debt principal repayment deduction; (c) abolition of the Energy and Transportation Tax and the Budget Adjustment Tax for SEs; and (d) a unification of the PIT. Various minor taxes are or will be merged or abolished, the Resource Tax will be expanded, and a Securities Trading Tax will be introduced. 14. The State Council has assigned MOF principal responsibility for the formulation of tax policy while SAT will concentrate more on tax administration. The provinces have gained a very limited autonomy in setting rates for certain business taxes, and the authorities are considering the possibility of gradually extending this autonomy. 15. Over the first seven months of 1994, revenues from industrial and commercial taxes (including VAT, Consumption Tax and EIT) grew at about 30 percent in nominal terms over the same period in However, overall budgetary revenues grew only by 18 percent, thus still lagging behind nominal GNP growth. The authorities realize that further tax reforms will be necessary to reverse the decline in government's revenue share in GNP. 16. Tax Administration. To implement the tax reforms and the new intergovernmental fiscal relations, China's authorities intend to fundamentally reform the tax administration. The tax administration will be reorganized in NTS and LTS. SAT is the headquarters for NTS, but also has responsibility for guiding LTS. As of July 1, 1994, NTS collects all central taxes and shared taxes, amounting to the bulk of all taxes. The split of NTS and LTS has now been enacted in all 30 provinces. NTS will retain about 350,000 personnel, the rest remaining in the local tax bureaus. 17. With the help of technical assistance (TA) from the International Monetary Fund (IMF), a reform strategy and an implementation plan have been drafted.4/ The strategy for reforms rests on: (a) a gradual move to self-assessment; (b) increased reliance on tax advisors outside the administration; (c) increased computerization; and (d) a strengthening of taxpayer information. SAT has decided to reform its procedures and the internal organization of the offices, in line with the core tax administration functions (registration; collection and accounting; audit and inspection; and taxpayer's information). The district level will be the focus of computerization, but in the long run, SAT plans a national system, with city-level and national-level processing capacity as well. 18. Intergovernmental Fiscal Relations. The reforms in intergovemmental fiscal relations will gradually increase central government's share in budgetary revenues. The new system assigns most taxes to either central government or to local govemment. The VAT and the Securities Trading Tax (to be introduced) are shared between central and 2/ However, the Energy and Transportation Tax, a tax on retained earnings, is abolished for SOEs but not for nonstate enterprises. 4/ SAT (June 1994), 'The (Draft) Programme for the Reform of Tax Administration," and 'Key Points of the Implementation Plan on Experimental Computerization of Tax Collection and Management."

10 - 6 - provincial government, with central shares of 75 and 50 percent, respectively. Offshore resource taxes accrue to central government and other resource taxes to provincial government. Central govemment's revenue share will gradually increase to about 60 percent of revenues, from about 40 percent in However, provinces are guaranteed the 1993 level of revenues, and the new system will be gradually phased in, starting with the increase in shared taxes over the 1993 level. The incremental revenues that will build up at the central-government level is to be distributed to provincial governments by means of a grant system. Until such a system is designed and approved, extra central revenues from the VAT and Consumption Tax are in part returned to the provinces, predominantly on a derivation basis. 19. The State Council has established a Working Group to prepare a conceptual design of a central-provincial grants scheme by June The Group, consisting of MOF, Systems Reform Commission (SRC) and SAT officials, builds on technical assistance by IMF, and is currently exploring a scheme that takes both revenue capacity and expenditure needs into account. A "standard budget approach" used by Australia is currently under study. The Group's efforts are supported by a Japanese Policy and Human Resource Development (PHRD) grant, which finances regular visits of experts for workshops on various aspects of the grants scheme design. After the State Council has approved the conceptual design next year, the Budget Department of MOF is to develop a detailed design, and will be responsible for implementation of the grants scheme. 20. Budget Systems. An organic budget law was passed by the March 1994 NPC, codifying the 1991 budget regulation system. The law specifies a number of principles and practices that may lead to a better allocation of public resources, and better expenditure control. The law sets out the role and responsibilities of the various actors in the budgetary process, codifies the new tax assignment and sharing system, and the separation of central and local budgets, which de facto was already in place. The law only allows borrowing for construction expenditures. Since 1993, the central budget is compiled according to the "dual budget" method, which divides the budget into a 'regular' and "construction" budget. The PBC Law excludes overdrafts from PBC, a practice already in place since the beginning of Local governments are, as before, not allowed to borrow. 21. Both the "dual budget" and the new intergovernmental fiscal relations require fundamental changes in the budget accounting system. The "dual budget" reporting can only be fully implemented if the accounting system corresponds with the "dual budget' structure. The new intergovernmental fiscal relations put additional demands on the information to be contained in the budget. The "standardized expenditure needs" basis of the grants scheme requires adequate information on the costs of government programs, which is at present hard to obtain from the budget. 22. The preclusion from access to PBC financing increases the need for sound and efficient treasury management, in order to minimize short-term debt obligations. Improved treasury management would also be necessary to achieve the goals of expenditure control as stated in the Budget Law. Finally, the new intergovernmental fiscal relations

11 - 7 - have led the State Council to the decision that central and local government treasuries in PBC need to be separated. 2. PROJEcr OBJEcTIvEs AND DESCRIPTION 23. The Government has asked the Bank Group and IMF for assistance in implementing the current fiscal reforms and preparing future reforms. The project would support the fiscal reforms by: (a) developing and implementing a new tax administration; (b) strengthening capacity for tax policy analysis; (c) developing and implementing a central-provincial grants scheme; and (d) improving budgetary processes and practices. The project would contribute to improved management of public resources. Tax Administration 24. The tax administration component would support SAT with the development and implementation of an NTS that is capable of implementing current and future tax reforms. The project would support the development and implementation of new administrative procedures, organizational arrangements, and information systems. SAT's implementation plan, developed with IMF assistance, calls for a phased implementation of the reforms. During Phase I, the new tax administration will be tested on a pilot basis in four cities (Beijing Haidan District, Wuxi, Xiaoshan, Shenyang). After a systems assessment, the reforms will be rolled out to 14 other cities (Phase II). Subsequently, the reforms would be implemented nationally, with over 200 cities planned to be in the NTS network by the year The project will support Phases I and II. During negotiations, assurances were obtained that no roll-out will take place before satisfactory systems assessment, and implementation of agreed improvements. 25. SAT has established a Steering Committee, and has drafted new procedures and organizational arrangements for the tax administration, which were reviewed by the appraisal mission, and are expected to be finalized by August On the basis of this, an information systems design and architecture would be developed, supported by a PHRD grant, and the project. Selection of a consulting firm that would assist SAT in systems design is expected to be finalized by April The information systems would be developed and implemented in one development site, Haidian District in Beijing. China's priorities for computerization are the VAT, the EIT and the PIT. The PIT is a local tax, but SAT plans to use the information system of the NTS to process data for local taxes with high dataprocessing requirements (PIT and EIT for locally owned enterprises). A PHRD grant will finance systems design and specification covering the requirements of a nationwide information system, database structures, dictionaries and overall hardware architecture. SAT plans to first implement functions more closely related to collection (registration, filing, accounting, stopfiler detection, etc.), whereas at a later stage information systems for audit, audit selection, and internal management would be implemented.

12 A preliminary architecture of the system includes data processing capacity at three levels: (a) District. The district level would become the main operational level. Databases and processing capacity for, among others, registration, filing, collection, stopfiler control, accounting, refunds, and appeals would be maintained at this level. (b) City. The city-level databases would maintain summarized taxpayers' records for audit, audit selection, and statistical reporting, and information for internal management purposes. (c) National. The national-level database would contain summarized historical time series and sample individual data for tax policy analysis, and summarized data on the tax administration organization for management and strategy development purposes. 28. In small cities, SAT intends to experiment with data processing capacity centralized at the city level. In this architecture, the districts would retain the taxpayer's files and would access the city-based database with terminals. 29. SAT has decided to opt for an "open systems" concept, portable among hardware platforms, and expandable according to needs. The information system should be able to accommodate likely changes in the tax administration, including changes in tax policy, changes in organizational setup, number of taxpayers, and changes in tax administration policies, procedures and controls. SAT intends to use CASE, Relational Database Management Systems, UNIX, and a Standard Systems Development Methodology. 30. The project would support: (a) CS for tax administration procedures and information systems development; (b) training in administrative and managerial functions and in systems development; and (c) equipment for the information system. 31. Consultancies. The CS will focus on tax administrative functions and on the development and implementation of the computer systems design. The systems design will predominantly be implemented by SAT personnel, with assistance from programmers financed under the project, and under guidance from the technical advisor and the electronic data processing (EDP) advisor. Assistance will also be provided in the procurement and installation of equipment. China's authorities have decided against resident advisors and intend to obtain advice through regular short-term consultations. The main experts expected to be financed under the project are: (a) The Technical Advisors who would advise SAT on all aspects of the development of the new tax administration system. SAT would hire one foreign and two local experts. The advisors would assist SAT in project management, notably in supervision of the systems design consultants, the

13 development of an installation plan for Phase I equipment and software, and a roll-out plan for Phase II; (b) (c) (d) (e) Systems Design Experts who would assist SAT in detailed design of the data processing system; Programmers who would assist SAT in construction of the data processing system; A Procurement Advisor who would assist SAT in the acquisition of hardand software for the new tax administration; A Training Expert who would assist SAT in the development of a national training plan, and on the development of key courses for the new tax administration. 32. Short-term CS will be financed for several management issues faced by SAT, including personnel policy, cooperation with banks and Customs, and investment and efficiency analysis for the tax administration. 33. Training. Training will concentrate on those functions that are emphasized by the new administrative procedures: audit and inspection; management and taxpayer's information. SAT wants to build up local training capacity in those new functions, but deems it necessary that local trainers for those functions be trained abroad. Information technology (it) training will strengthen SAT's in-house capacity for systems development, implementation and maintenance. The project will also finance SAT's large training program for new users of computers. A limited number of study tours would provide comparative experience on some policy issues for the tax administration, including: cooperation with banks and Customs; tax management systems, and city- and national-level information systems; and tax enforcement measures. Several SAT staff will be seconded to foreign tax administrations to obtain in-depth exposure to state-of-the-art-practices, notably in audit, audit selection, and management. 34. Equipment. Equipment and software acquisition will concentrate on the district level, the main operational processing level. City-level and national-level computers would also be financed, as well as a district-level computer for one of SAT's training schools. Tax Policy Analysis 35. China's authorities aim to improve China's tax policy analysis capacity in order to perfect current tax reforms and to prepare future tax reforms. The tax policy component will support this objective by: (a) improvements in the capacity for quantitative tax policy analysis; (b) facilitating the gradual transfer of responsibility for tax policy analysis from SAT to MOF; (c) the creation of tax policy analysis capacity at the provincial level; and (d) the preparation of future tax reforms.

14 The project expands the capacity for quantitative tax policy analysis by improving the MOF enterprise survey and the State Statistical Bureau's (SSB) household survey, making them more suited for tax policy analysis. The project would support training in tax policy analysis for central government officials to enhance their capacity to analyze the revenue impact of policy changes, and to conduct revenue forecasts. The more advanced courses would be held overseas. The project would support the development of an information system for the MOF-Tax Policy Department and the SAT Tax Policy and Legislation Department for the processing of the survey data, and other policy-related data. MOF staff would obtain IT training under the project. 37. The project would support the gradual transfer of the tax policy function from SAT to MOF. Currently, tax policy analysis is principally based within SAT, and MOF comments on and clears SAT proposals on tax policy. The State Council has recently assigned the tax policy formulation function to MOF, while SAT will concentrate more on the administration of taxes. This division of labor is in line with intemational experience. The project furthers this objective by supporting a number of joint studies in tax policy, which would contribute to the transfer of knowledge from SAT to MOF, and by financing training for MOF and SAT officials. 38. Provinces have until now hardly any tax policy analysis capacity, as all authority on tax rates and bases is vested in central govemment. With the emergence of new intergovemmental fiscal arrangements, the authorities anticipate the need for increased participation of subnational-level govemments in tax policy, and therefore for tax policy analysis capacity at provincial level. The project would support this by financing training in tax policy analysis for provincial-level assistance, and by providing personal computers to each provincial-level fiscal authority for analysis, and for data collection for the national survey. The project would finance studies on local taxes and tax assignment. Finance Bureau staff would obtain IT training under the project. 39. The joint MOF/SAT studies would refine the current reforms and prepare for future tax reforms. Current reforms have moved China's tax system considerably in the direction of a system suited for a market economy, but in several respects, the current structure still requires adjustments. Moreover, early figures on 1994 tax collection suggest that the current reforms will not increase the tax share in GNP, and future reforms would seek a broadening of the tax base. The project would finance studies in the areas of: (a) the VAT; (b) the EIT; (c) the PIT; (d) local taxes; (e) social security taxes; and (f) environmental and resource taxes. The studies are part of the work plans of MOF and SAT for the Ninth Five-Year Plan. The studies will be performed predominantly by Chinese officials and researchers, but the project supports CS to provide the methodological framework, assist in drafting outlines for the studies and control the quality of the studies after draft final reports have been prepared. Intergovernmental Fiscal Relations 40. China's authorities aim to develop and implement an efficient and equitable central-provincial grants scheme that would, according to objective criteria, redistribute

15 part of the increase in central government revenue to the provinces. The intergovernmental fiscal component supports this goal. The grants scheme is an essential complemen to the new revenue assignments. The authorities plan to implement the grants scheme on a pilot basis in A date for nationwide implementation has not been decided upon. Currently, the State Council Working Group is working on a conceptual design for a grants scheme, an effort supported under a PHRD grant. Following the State Council's approval of the conceptual design, the MOF Budget Department will assume the responsibility for detailed implementation of the conceptual design. Implementation requires a substantial effort in data gathering and analysis, and the training of people at central- and provincial-level govemments. 41. After the State Council Working Group produces the conceptual design, the project will support detailed studies for the implementation of the grants scheme. This will include the detailed norms and criteria on revenues and expenditures to be used in the grants scheme, and the data and data reporting necessary to operationalize the grants scheme. The project would support the pilot implementation of the grants scheme in several provinces. The pilot would serve the development of administrative processes and computer system to support the grants scheme. The project would support a number of workshops to disseminate the results of the studies, to discuss the design of the pilot, and to evaluate the plans for nationwide implementation. The project has earmarked resources for nationwide implementation, once this has been decided upon by the State Council. The project would finance extension of the computer system to all localities and a number of seminars for the dissemination of the national grants scheme design. 42. The project would support training at central and local level to enhance the understanding of the grants scheme and to build implementation capacity. The project will support a number of secondments of central officials to grants implementing agents in various countries to provide MOF personnel with in-depth exposure to the day-to-day administration of a grants scheme. Budget System 43. The Govemment aims to operationalize the 1994 Budget Law. The budget systems component supports this goal by strengthening MOF's institutional capacity for implementing reforms in the budget system. The component would enhance MOF's understanding of best-practice budget procedures, practices and systems, and support the formulation of a budget systems reform strategy appropriate for China. 44. In a number of diagnostic studies, the budget systems component would identify strengths and weaknesses in: (a) the budget accounting system; (b) treasury management; (c) budget preparation and analysis; and (d) audit and inspection. The studies would be performed primarily by Chinese officials assisted by foreign and local consultants. In-country CS will be primarily provided in short-term consultations, to avoid overburdening the key people within MOF.

16 Study tours, training and international workshops would provide MOF with exposure to best-practice budget systems. The international comparison and the diagnostic studies would provide input for a budget systems reform strategy to be drafted by MOF. The strategy would establish a long-run view for the development of an efficient budget system that can support China's budgetary processes and practices. The strategy would identify priority areas for implementation. Domestic workshops would disseminate and discuss the findings of the studies. 46. The project would also finance an expansion and improvement of the existing treasury network of PBC. This high-priority investment would be done after an assessment of the existing data processing system and implementation of agreed-on improvements in software. Assurances were obtained during negotiations that no procurement of equipment for the treasury network would be initiated before a systems assessment has been implemented, and agreed improvements have been implemented. 3. PROJEcr COSTS AND FINANCaNG 47. Total project base costs are estimated at about $88.2 million. Including contingencies, total costs are estimated at $105.5 milion.5/ The base costs of the various components are: (a) tax administration $76.3 million; (b) tax policy $4.8 million; (c) intergovernmental fiscal relations $2.9 million; and (d) budget systems $4.3 million (Table 2). Of the total base costs, 14.8 percent supports institutional development, 0.9 percent project implementation, 2.5 percent policy support, 45.4 percent automation, and the remaining 36.3 percent consists of (five-year) incremental operating costs. In terms of cost categories, 42.9 percent is devoted to equipment, 36.3 percent to incremental operating costs, 6.2 percent to consultants' services, and 14.2 percent to training, seminars and study tours. Detailed cost estimates can be found in Attachment The Bank Group will finance 92 percent of foreign exchange costs, the balance consisting of counterpart funding of computer equipment. The Bank Group will finance 5.3 percent of local costs consisting of expenditures for CS. The total Bank Group finance share is 47.4 percent. Two thirds of counterpart funding consists of incremental operating costs for the investment in equipment.6/ Table 3 provides an overview of financing arrangements; Attachment 1 provides a detailed financing plan. 4. OTHER DONOR ASSISTANCE 49. In addition to the assistance provided by the project, IMR and UNDP have an ongoing TA program with SAT (about $400,000), under which advice on tax policy and administration reforms is provided in specific areas, such as transfer pricing and VAT S/ The current high domestic inflation in China inflates the domestic price contingencies in dollar terms, as a constant nominal exchange rate is assumed in the calculations. 6/ The costs were estimated at 5 percent of the investment per year for PC-based systems, and 8 percent for mini/medium-size computers. Five years of incremental operating costs were taken into account.

17 Table 2a: PtOJECT COSTS BY OBJECTIES Y Million S Million Local Foreign Total Loal Forcigp Total Tax Adminisftrtio m Institutional Development Project Implementation Support Automation Incremental Operating Costs Tax Policy Institutional Development Policy Support Automation Incremental Operating Costs Intergovermental Fiscal Relations 9i Institutional Development Policy Support Automation Incremental Operating Costs Budeet Systems 16A L Institutional Development Policy Support Automation Incremental Operating Costs Total Base Costs Price Contingencies Physical Contingencies Total Costs Sl. los. Note: Totals may not add due to rounding. The costs do not take import duties and taxes into account, which may apply after January administration. The content of the proposed project has been coordinated with this program such that overlap is avoided. The tax administration reforms as pursued by SAT rely heavily on IMF TA: IMF assisted SAT in developing a strategy and a draft implementation plan. The Bank Group and IMF have closely cooperated in preparation, will cooperate in the supervision of the tax administration component, and will closely coordinate efforts in the other components (Section B5). IMF has provided TA to MOF on grants design, the treasury function, and on budget nomenclature. The Asian Development Bank (ADB) is financing a study on subprovincial finance in PY95.

18 Table 2b: PROJECT COSTS BY COST CATEGORIES Y Million $ Million Local Foreign Total Local Foreign Total Tax Administration Consultancies Training, Study Tours, Seminars Equipment, Materials lncremental Operating Costs Tax Policy Consultancies Training, Study Tours, Seminars Equipment, Materials Incremental Operating Costs Interzovermmental Fiscal Relations Consultancies Training, Study Tours, Seminars Equipment, Materials Incremental Operating Costs Budget Systems Consultancies Training, Study Tours, Seminars Equipment, Materials Incremental Operating Costs Total Base Costs Price Contingencies Physical Contingencies Total Costs 4623U Note: Totals may not add due to rounding. The costs do not take import duties and taxes into account, which may apply after January SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION 1. PROJECr IMPLEMENTATION 50. For overall project coordination, a project coordination team has been set up, consisting of representatives from SAT and MOF. The MOF World Bank Department will coordinate the project implementation team and will advise on Bank Group policies and procedures. The World Bank Department and the International Cooperation

19 Table 3: PRoJEcr FINANclNG PLAN Local Costs Forein Exchange Total $ million % $ million % $ million X Government and Participating Entities Banlc/IDA Total Departments of MOF and SAT will advise the implementation teams on the implementation of study tours and foreign training. Under the project implementation team, three separate implementation teams have been established for: (a) tax administration; (b) tax policy; and (c) intergovernmental fiscal relations and budget systems (Figure 1). Figure 1: PRoJECT IMPLEMENTATION STRuCIURE Project Implementation Team Secretariat: MOF-World Bank Department T ~~~~~A an MFT OFBde Tax Tax Policy Budget Intergovern- Administration Component Systems mental Fiscal Component Component Component Associated Associated Associated Associated Agencies: Agencies: Agencies: Agencies: - Customs - SSB - PBC - SRC - Banks - NEPA - Audit - SAT - HOF - Line Min- Authorities - SSB istries - Line Ministries 51. SAT is responsible for implementation of the tax administration component. SAT has installed a Steering Committee to lead the reform efforts, headed by the Chief Economist. The Steering Committee will clear all major steps in the reform effort, among which are: specification of administrative procedures, systems design and architecture, systems assessment; roll-out plan; training plan; and project completion reports. The SAT has appointed a Tax Administration Reform Office (TARO) responsible for the day-to-day

20 implementation of the tax administration reforms. Under TARO, various working groups will be responsible for the implementation of parts of the project (Figure 2). TARO will be advised by the technical advisors and by a procurement advisor. A training development expert would assist in the drafting of training plans, and training financed under the project. Figure 2: TAx ADMNISTRATION COMPONENT SAT Steering Conmittee Tax Administration Reform Office Technical Advisors Working Working Working Working Working Working Group Group Group Group Group Group Registration Returns Pro- Systems Training Audit Appeals TP Services ceasing/acc. Development 52. The major milestones of the component, including timing, deliverables and responsibilities have been agreed upon. The roll-out of the computer systems is now expected to be completed by the end of 1996 (Attachment 5). Terms of Reference for key activities have been agreed upon. 53. The Tax Policy Department in MOF and the Tax Policy and Legislation Department in SAT have set up a joint tax policy unit to administer the tax policy component. The Unit is led by the Director of the MOF Tax Policy Department and the Deputy Director of the SAT Tax Policy and Legislation Department. Local consultants would assist the tax policy unit in the organization and programming of training, studies, study tours, and seminars. TORs for each project activity have been submitted to the Bank and were discussed during appraisal. 54. The MOF Budget Department is responsible for the intergovernmental fiscal component and the budget systems component. The Department has established a project team to implement the component. The Department will cooperate with the PBC Treasury Department and the State Audit Administration on the relevant subcomponents of the budget systems component, and with SAT, SRC and SSB on relevant parts of the intergovernmental fiscal component. Local consultants would assist in organization and programming of studies, training, study tours, and seminars. Outline TORs for all project activities were discussed during negotiations.

21 The Bank Group has obtained assurances that the Borrower will: (a) maintain the project coordination team and the component implementation teams with the resources necessary for smooth implementation of the project; and (b) adequately maintain the equipment procured under the project. For this purpose, the Borrower would sign maintenance contracts with qualified firms. 56. For a detailed overview of the activities, the responsible agencies and departments, and planned timing of the activities, see Attachment 4. Assurances were obtained at negotiations that the project components will be implemented in accordance with action plans acceptable to the Bank Group. 2. PRocuREmENT 57. Consultant Services. Consultant services required for the project would be procured in accordance with the World Bank guidelines "Use of Consultants by World Bank Borrowers and by the World Bank as an Executing Agency" (August 1981). Contracts with firms of $100,000 and with individuals of $50,000 or more would be subject to Bank Group prior review. 58. Goods. Goods (equipment and materials) contracts above $200,000 will be subject to the Bank Group's international competitive bidding (ICB) procedures as stated in the 'Guidelines for Procurement under IBRD Loans and IDA Credits" (January 1995). Contracts estimated to be $200,000 or less and $800,000 or less in the aggregate will be subject to national competitive bidding (NCB) with procedures acceptable to the Bank Group, and contracts estimated to be $100,000 or less and $600,000 or less in the aggregate would be subject to national shopping rules. For the procurement of equipment and materials, Model Bidding Documents and standard contract documentation would be used. A domestic preference for goods procured under ICB-15 percent of the CIF price, or the actual tariff, whichever is less-will be allowed. All goods contracts over $200,000 would be subject to prior review. 59. The equipment will be procured in phases. First, a development computer and development software will be procured with the proceeds from a CRISSP subproject. This would enable SAT to start developing the district system on the basis of the systems design. Subsequently, an operational database management system would be procured by ICB. This would allow SAT to start construction of the computer system before acquisition of operational hardware. Then, equipment for the four cities would be procured, with the 14 cities' expansion included as an option, leaving flexibility to adjust hardware architecture after the first phase. SAT will be assisted by a procurement advisor in preparing the procurement documents.

22 Table 4: PROPOSED PRocuREmENT ARRANGEMENTs ($ million, including contingencies) Procurement Method ICB NCB Other NBGF Total Cost Consultancies /c (3.7) (3.7) Training, Study Tours, /c Seminars (8.1) (8.1) Goods 40.7/a 0.8/b 0.6/d (36.7) (0.8) (0.6) (38.1) Incremental Operating Costs Total (36.7) (0.8) (12.4) t5.0 NBGF: Not Bank Group-financed. /a According to the procedures in Guidelinesfor Procurement under IBRD lb and Snaller IDA Credits equipment (January needs; 1995). estimated at 4 contracts. /c Consulting Services would be procured in line with the Bank guidelines, World The Bank Use of Borrower Consultants and by by the World Bank as an Executing Agency (August /d Off-the-shelf 1981). items and materials (faxes, copiers, etc.) procured by national shopping; contracts. estimated at 6 Note: Figures in parentheses are the amounts financed by the Bank/IDA. Figures may not add due to rounding. 3. DLSBURsEMENT 60. An approximate disbursement profile is given in Table 5. Disbursements would be made for: (a) goods at 100 percent of foreign expenditures, 100 percent of local expenditures (ex-factory) and 75 percent for other items procured locally; and (b) consultants' services, training seminars, workshops and study tours at 100 percent of expenditures. Disbursement against contracts for goods not exceeding $200,000 equivalent and consultants' services performed by firms not exceeding $100,000 equivalent and for consultant's services performed by individuals not exceeding $50,000 equivalent, training, seminars, and study tours would be made on the basis of Statements of Expenditure (SOEs). Retroactive financing of up to SDR 3.1 million, or about $4.5 million equivalent, would be alowed for more urgent expenditures-among which Phase I equipment-paid after March 1, Projected disbursements depend to a considerable extent on the rollout of the tax administration computer system. This roll-out, planned to be completed by

23 , may be delayed due to unexpected difficulties in design, construction, and piloting of that system. The projected disbursement is therefore somewhat slower than implied by the timetable in Attachments 4 and 5. The closing date of the loan and the credit would be December 31, Table 5: PROJECED DISB ($ million) SEmENT SCHEDULE Bank/IDA FY Annual Cumulative MOF will establish a special account in a bank acceptable to the Bank Group, under conditions satisfactory to the Bank Group. The authorized allocation for the Special Account is $5 million, which is somewhat higher than the usual four months of average expenditures, because disbursements are concentrated in the first two years of the project. Initial deposits amounting to $3 million equivalent will be made. 4. ACCOUNTING AND AUDIT ARRANGEMENT 62. The project accounts and the special account would be maintained by the MOF World Bank Department. The project accounts, special account and the documentation for SOEs would be subject to an annual audit by an independent auditor satisfactory to the Bank Group. The audit reports, and separate opinions on SOEs and the Special Accounts would be furnished to the Bank Group within six months of the end of the Government's fiscal year. 5. MoNrroRiNG AND PROGRESS REPORTING 63. For each project component, semiannual activity plans would be prepared by the implementation team, and furnished to the Bank Group for discussion and concurrence. Each work plan would include: planning on the subcomponents under implementation, and the subcomponents under preparation; detailed description and terms of reference for the components; and budget and expected disbursements for the subcomponents. 64. For the tax administration component, progress reports would be prepared by the implementation team according to the Schedule in Attachment 5 and furnished to the Bank Group. For the project as a whole, semiannual progress reports would be prepared. Assurances to this effect were obtained at negotiations. The complexity of the tax administration component requires a higher frequency of progress reporting. The

24 reports would summarize progress on the subcomponents, including activities undertaken, disbursements, output, and implementation issues. Key indicators for monitoring progress in the activities, as well as the various reports to be produced are summarized in Attachments 4 and Output and Impact Indicators. For tax administration, output indicators would be: (a) the implementation of the new procedures, organizational arrangements and the new information system in the 18 project sites; and (b) the number of people trained. The impact of the tax administration reforms would be measured by improvements in efficiency indicators, among which: (i) number of taxpayer registrations and returns processed per employee; (ii) number of taxpayers' questions answered, and average response time; (iii) speed of assembling daily, monthly and annual reports; and (iv) average tax collection per employee. 66. For the Tax Policy Component, the main output indicators would be: (a) the implementation of the revised enterprise survey; (b) the completion of the studies; and (c) the number of people trained. The final impact indicator would be a broadening of the tax base and an improvement of the tax structure. This impact, however, largely depends on political decisions, which fall outside the control of the implementing agencies. 67. For the Intergovernmental Fiscal Component, output indicators are: (a) completion of the studies for grants design; (b) number of people trained; and (c) discussion seminars completed. The main impact indicator would be the national introduction of an efficient and equalizing grants scheme. This, however, again depends primarily on a political decision to implement the grants scheme developed under the project. 68. For the Budget Systems Component, the main output indicators are: (a) the completion of the diagnostic studies; (b) expansion of an improved treasury network in one or two provinces; and (c) the number of people trained. Impact indicators would be the implementation of the recommendations made in the diagnostic studies. 6. SUPERVISION 69. Supervision of the project would require an estimated 16 staff-weeks per year, excluding IMF staff. In the first year, the supervision of the tax administration component will require more than proportional attention, due to the various critical decisions on hiring and procurement to be made. Supervision missions for the whole project will be fielded three times a year for the first two years, and semiannually afterwards (see Attachment 7 for further detail). 70. The Bank Group and IMF will continue close cooperation in the supervision of the project. The IMF plans to assist the Bank Group in supervising the substantive aspects of tax administration and systems design and implementation. The Bank Group would retain overall supervision responsibility, including procurement and disbursements.

25 LESSONS LEARNED FROM PREVIOus BANK GROUP INVOLVEMENT 71. Bank Group and IMF involvement in tax administration projects suggests three key factors for success: (a) high political commitment; (b) a clear reform strategy; (c) a strong implementation team; and (d) use of pilot project to test new systems and procedures before nationwide implementation. This experience also shows that procedural and organizational change should precede computerization, and that self-assessment combined with effective audit techniques and proper administration-intemal resource allocation provides for the most efficient tax administration. 72. Bank Group experience in budget systems reforms shows that such reforms require a long lead time, and that a clear strategy for a revised budget system should precede implementation of reforms. 73. The Bank Group has no previous project experience in the field of fiscal management in China, but there have been seven technical assistance projects: two Technical Cooperation Projects (Cr CHA, Cr CHA), a Planning Support and Special Studies Project (Cr CHA), a Reform, Institutional Support and Preinvestment Project (Cr CHA), a Financial Sector Technical Assistance Project (Cr CHA), an Environmental Technical Assistance Project (Cr CHA) and an Economic Law Reform Project (Cr CHA). Among the lessons leamed are the need for: (a) political commitment to the goals of the operation; (b) preidentification of sufficient subproject activities; (c) avoidance of excessive financing of hardware and overseas training; and (d) a firm implementation plan, including onlending arrangements between MOF and the beneficiary agencies. 74. The political commitment to fiscal reforms is high, as witnessed by The Decisions of November The hardware acquisition is predominantly in tax administration, and is firmly supported by the overall reform strategy in that area, which aims to revise procedures and organization before new computer systems are developed. SAT's Steering Committee and implementation team, supplemented by advisors, provide a guarantee for implementation of the tax administration component. The budget systems component aims to develop a long-term strategy for budget system and to build the capacity to implement such reforms. The appraisal mission has agreed on design and implementation of overseas training and study tours that ensures their quality and impact. Most project activities had been identified in preparation, and most TORs were discussed at appraisal. The structure of the implementation teams guarantees the necessary coordination among agencies. Assurances were obtained at negotiations that the Borrower will allocate the loan/credit proceeds to the various implementing agencies free of charge. 8. RATIONALE FOR BANK/IDA INVOLVEMENT 75. The implementation of fiscal and tax reforms is a high priority for China's government, and the Minister of Finance has directly asked the Bank Group and IMF to support the proposed project. Fiscal reforms are central to the Bank's Country Assistance Strategy, in which implementation of macroeconomic reforms is one of the primary

26 objectives. Improved fiscal management would serve as a catalyst for reforms in other sectors such as banking and SEs, because with increased and better-managed resources these sectors can be relieved of government functions. A more equitable distribution of fiscal resources would contribute to poverty reduction. In addition, increased fiscal resources in poor provinces would relieve some of the shortage of counterpart funds for Bank Group projects in those provinces. 76. The Government's reform program corresponds closely with the Bank Group's recommendations in economic and sector work, and policy dialogue. The tax administration and intergovernmental fiscal components directly address implementation of the reforms initiated in The budget systems and the tax policy component support preparation of reforms in areas where further improvements could still be made. The tax policy component aims at rationalization and broadening of the tax base, and the budget systems component prepares reforms that would increase the efficiency of government expenditures. 9. PRoJEcT BENEFr 77. The project would: (a) contribute to increased efficiency in revenue generation and government expenditure; (b) enhance the productivity of the tax administration and reduce burdens on the taxpayer; (c) increase the efficiency of the tax structure; (d) improve the equitable distribution of government resources among provinces; and (e) improve allocation of budget resources. Total project costs are less than 0.2 percent of annual tax collection, and about 2 percent of collection in the districts directly financed under the project. Thus, only a marginal improvement in collection efficiency would make the project financially viable. 10. AGREEMENTS OBTAINED AT NEGOTIATIONS 78. During negotiations, the Bank Group obtained agreements with the Borrower on: (a) a proper phasing and a realistic planning in the tax administration reforms (para. 24); (b) systems assessment and improvements before procurement of equipment for the PBC treasury (para. 46); (c) the Borrower will allocate the credit/loan proceeds to the various implementing agencies free of charge (para. 74); (d) the modalities of project management, implementation and monitoring (paras. 55, 56, and 64); and (e) adequate maintenance of equipment procured under the project (para. 55). 11. RISKS 79. The Government is very anxious to reform the tax administration quickly, and SAT may be pressured to rush the implementation of the project. This risk will be addressed by agreements at negotiations with SAT on a realistic timetable, and by agreements on the phased project design, which requires satisfactory implementation of one phase before activities for the next phase are implemented.

27 Poor coordination among participating Chinese agencies may delay implementation. The structure of the implementation teams would serve as a means to resolve potential conflict among these agencies, and minimize the risk. 81. A third risk lies in overburdening key officials in MOF and SAT. This has been reduced by hiring local consultants under the project to supplement the staff of the participating agencies, and by phasing the activities over time. 82. A final risk lies with the possibility that SAT implements the computer system without following up on the associated reforms in tax administration procedures. Policy dialogue during implementation of the project will emphasize the importance of the latter, and thus minimize this risk.

28 - 24 -

29 Attachment 1 ATTACHMENT 1 DETAILED PROJECT COSTS AND FINANCING BY SUBCOMIPONENTS La ($'OOO) Costs Financing Local Foreign Total Bank GOC TAX ADMINISTRATION Consultancies Technical Advisor Software Developers Systems Assessment Systems Design Procurement, Installation Training Curriculum Development Subtotal Consultancies L.232 Training, Study Tours, Seminars Tax Administration Management Registration Taxpayer's Services Tax Collection, Accounting Tax Audit 2, , ,064 Audit Selection Tax Information Management Systems Maintenance, Network Management Software Application Appeals Legal Database Application Teacher's Training Tax Management Secondments Systems Design and Development Training Seminar on Management Issues Study Tour: Tax Management Study Tour: Tax Enforcement Study Tour: Internal Organization Study Tour: City and National System Study Tour: Tax Service-Customs-Banks cooperation Subtotal Training, Study Tours, Seminars

30 Attachment 1 Costs Financing Local Foreign Total Bank GOC Equipment, Materials Hardware National Computer Medium/Minicomputers 0 1,600 1,600 1,600 0 Super Servers 0 6,400 6,400 6,400 0 Microcomputers 0 6,154 6,154 3,154 3,000 Large Screen Monitors Printers, etc 0 6,289 6,289 6,289 0 Software Unix Operating System 0 1,770 1,770 1,770 0 Relational Database Management System 0 2,040 2,040 2,040 0 Volume Licenses DBMS 0 3,450 3,450 3,450 0 Software Development Tools (CASE etc.) Analytical Software Communications 0 1,466 1,466 1,466 0 Miscellaneous Computer Equipment 0 6,111 6,111 6,111 0 Subtotal Equipment, Materials Incremental Operating Costs Hardware 10, , ,570 Software 5, , ,432 Telecommunications 2, , ,631 Miscellaneous Equipment 4, , ,753 Utilities 1, , ,570 Supplies 4, , ,540 Incremental IT staffing 1, , ,965 Subtotal Incremental Costs 31, , Subtotal Tax Administration , TAX POLICY Consultancies Enterprise Survey Household Survey Systems Development VAT Study EIT Study PIT Study Environmental & Resource Tax Study Tax Assignment Study Local Taxes Social Security Taxes Tax Capacity Estimation Studies to be determined Subtotal Consultancies

31 Attachment 1 Costs Financing Local Foreign Total Bank GOC Training, Study Tours, Seminars Quantitative Tax Policy Analysis Senior Tax Policy Seminars Personal Training Overseas 0 1,348 1,348 1,348 0 IT Training Tax Policy Conference Study Tour: VAT Study Tour: EIT/PIT Study Tour: Environment & Resource Taxes Study Tour: Local Taxes/Tax Assignment Study Tour: Social Security Taxes Study Tour: Tax Burden Comparison Study Tour: Tax Capacity Estimates Subtotal Training, Study Tours, Seminars !2 Equipment, Software Q Q 80 Incremental Operating Costs Q 200 Subtotal Tax Policy INTERGOVERNMENTAL FISCAL RELATIONS Consultancies Expenditure Needs Study Revenue Capacity Study Data Collection and Processing Information Systems Design Subtotal Consultancies Training, Study Tours, Seminars Expenditure Needs Workshop Revenue Capacity Workshop Pilot Scheme Workshop National Implementation Workshop Dissemination Workshops (7) Senior Seminar Intermediate Seminar Pilot Training Secondment IT Training Study Tours (4) Subtotal Training, Study Tours, Seminars

32 Attachment 1 Costs Financ' Local Foreign Total Bank GOC Equipment, Materials Research Hardware Pilot Hardware National Implementation Hardwar Subtotal Equipment, Materials fi 2 Incremental Operating Costs 2 Q Q j Subtotal Intergovermmental Fisca l.s m BUDGET SYSTEMS Consultancies Budget Accounting Treasury Management Budget Auditing and Control Budget Analysis Information System Development Dual Budget National Stategy Subtotal Consultancies J Training, Study Tours, Seminars Workshops Budget Accounting Treasury Management Budget Analysis Dual Budget Audit and Inspection National Strategy Dissemination Workshops (9) Secondment Budget Management Senior Level Seminars Domestic Training Study Tour: Budget Accounting/Dual Budget (2) Study Tour Treasury Sysems (2) Budget Method and Analyus Audit and Inspection Subtotal Training, Study Tours, Semin ai.3 2 L

33 Attachment 1 Costs Financing Local Foreign Total Bank GOC Equipment, Matias Trasury Network Subtotal Equipment, Materials 2 80 Soo I Q licrementda Operaing Costs Q 2Q 02 Z Subtotal Budget System 1s T2ota Price Contingencies 10,288 2,523 12,811 2,324 10,487 Physical Contingencies 2,098 2,313 4,412 2,272 2,140 TOTAL PROJEC COSTS S /a Figures may not add due to rounding

34 AITACHMENT 2 CBINA: DEVELOPMENTS IN GOVERNMENT REVENUE (As a percent of GNP) Tax Revenue Taxes on income and profits Profit tax Agricultural tax Other Taxes on goods and services of which Product tax VAT Business tax Real estate tax Taxes on intemational trade Other taxes Nontax revenue of which: Profit remittances Memorandum items: Revenue from enterprises Profit tax Profit remittances Extrabudgetary receipts Total Revenue Note: '..' not applicable. Source: IMF AND MOF.

35 Attachment 3 ATTACIMENT 3 CHANGES IN TAX STRUCTURE IN CHINA, 1994 A. STATUS OF/MODIFICATIONS TO ExmSTING TAXES 1. Adjustment Tax on SEs. Abolished. 2. Agriculture Tax. Remains. 3. Animal Husbandry and Trading Tax. Merged into the VAT structure. 4. Banquet Tax. Remains, but the choice of whether to levy this tax to be given to the provinces. 5. Business Tax. The business tax on the wholesale and retail sectors merged with the VAT; the rest remains. 6. Collective Income Tax. Became part of the new income tax on domestic enterprises. 7. Consolidated Industrial/Commercial Tax. Abolished. 8. Energy and Transportation Tax. Abolished for SEs, but remains for collectives, TVEs.Lg 9. Housing Tax. Remains. 10. Income Tax on Private Firms. Became part of the new income tax on domestic enterprises. 11. Income Tax on Self-Employed Individuals. Become part of the new personal income tax. 12. Income tax on Joint Ventures and Foreign-owned Companies. Remains for now but to be merged eventually with income tax on domestic enterprises. 13. Investment Orientation Adjustment Tax on Fixed Assets. Remains as at present. 14. License Tax for Vehicles and Ships (domestic). Merged with 31 into a general tax on vehicles and ships. 15. Market Trading Tax. Merged into the VAT structure. 16. Personal Income Adjustment Tax. Became part of the new personal income tax. 17. Personal Income Tax on Foreigners. Merged into new personal income tax. 18. Product Tax. Eliminated and merged with the VAT, consumption tax. 19. Resources Tax. This covered mostly crude oil, natural gas and iron ore. Extended to cover a larger range of nonmetal and mineral resources. 20. Salary Adjustment Tax for State-Operated Enterprises. Abolished. 21. Salt Tax. Merged with the resource tax. 22. Slaughter Tax. Remains, but the choice of whether to levy this tax to be given to the provinces. 23. SE Income Tax. Became part of the new income tax on domestic enterprises. 24. Special Tax on Burning Oil. Abolished.

36 Attachment Special Excise Tax. Abolished. 26. Stamp Tax. Remains. 27. Urban Land Use Tax. Remains, but with rates to be fixed by local govemments within a centrally determined range. 28. Urban Real Estate Tax. Remains. 29. Urban Maintenance and Construction Tax. Remains.La 30. VAT. Broadened to absorb a part of the existing business tax and most of the product tax; switch to credit invoice method; reduction to three rates (17, 13 and 0 percent for exports). 31. Vehicle/Ship Tax (domestic). Remains. 32. Wage Bonus Tax. Abolished. B. NEW TAES 1. Consumption Tax. Excise tax introduced on a limited number of goods. 2. Land Value Increment Tax. Introduced as a progressive capital gains tax on land. 3. Inheritance and Gift Tax. To be introduced, but no timetable as yet. La This is a extrabudgetary tax.

37 Attachment 4 ATTACHMENT 4 PROJECT ACTIVITIES Tax Administration Componen j j~ ~~~~~~~ Beneficiar_ ~~~~~~~ S.bcmpo_i Objective Implemeadn Group/ Trning Trainng Modern tax mngement 60 Officialm of tax bureaus, tax 07/95-08/95 (m two models and computerization collectors and information managers in groups), one month 18 pilot cities Regisration 200 Officials in charge of tax 08/95 registration in 18 cities Tsxqsyer ervice 40 Officials responsible for providing 09/95-10/95 Cm two tax guidance, policy consultation, form groups) isuing and invoices to taxpayers (2-3 people from each city will be elected to be training teachers) Tax return maagement, tax 400 People of the 18 cities having 10/95 collection (including tax responsibilities described in the left delinquency control) and column accounting Selection of audit and audit 60 Leading offlcials of tax audit 10/95-11/95 (in two methods departments of 18 cities (3-4 from each groups) wil be training teachers) Tax auditing Tax auditorm of 18 cities /96 (in! ~~~~~~~~~Institution Building groups, 15 days each) Tax information 20 Officials in 18 cities responsible for 08/95 management and analysis computer data usage, management and "anayis Sysem maintenance and 2-3 system and network managers from 07/95-08/95 (in two network mansement each of the 18 cities; 40 people total grups) (oversea) Software application 1,500 systems operators from 18 cities 09/95-12/95 (in groups, 12 days each) Tax appeal and appeal 100 Tax appeal handlers nd relevant 12/95 hendling people in 18 cities law archiving and legal data 20 Responsible people from IS cities 01/96 base application Package training for tining 60 Teachers from 1 SAT university, 2 07/95-08/95 (in two teachers on tax management training centers and 26 tax colleges groups) reform and computerization (overea)

38 Attachment 4 Tax Administration Component c o- dmei l pe Grop/ T Benefidiari Secoadmet 10 SAT officials. The econdments 3-month period. concentrate on audit, taxpayer's information, management. IT Training Automation SAT ofricials; Development Team 2/95-5/95 Consltny Training Plan Development SAT training centers, some pilot units 05/95-06/95 Implementation Support and SAT collages Equipment procurement SAT information center and relevant 06/95 people from 18 cities Systems Design Automation Steering Committee, Information Center 3/95-7/95 Technikal Advisor lmkementation Support Steering Committee, Information Center 03/95-07/96 Software Development Information Center 03/95-07/96 Automation System Asesment Steering Committee Inernationl seminar on SAT Officials, City and District level Management lsues in Tax managers Adminisrtion (personnel Institution Building policy; investment decisions; efficiency) Study Tours Cowparison of tax 8 SAT project director and directors of 09/95 management reform models project components in different countries City and National Level 6 Systems developers 08/95 Systems Tax Enforcement measures 6 SAT officials 06/95 Cooperation Tax Service, Institution Building 6 SAT officials 02/96 Cusoms, and Banks Cooperation National ad Lcal Tax Service PM: UNDP Activity Internal Organization of Tax 6 SAT Officials To be determined Depaments Equipment and Software Equipment and softwae for SAT nd Localities 03/95-012/ sites in 18 cities, of Automation which 4 pilot cities

39 Attachment 4 Tax Polky Component Subcomponest Objecive Implenezizig Tunin Group/ Conautancies 1. Enterprise Surveys Ing MOF and SAT Officials 94/12-95/2 2. SSB Household Surveys MOF, SAT, SSB Officials 95/2-95/5 3. Systems development Automation MOF, SAT and Finance Bureaus /8 Studies 1. VAT MOF/SAT Officials 95/9-96/3 2. Enterprise Income Tax MOF and SAT officials. 95/10-96/3 3. Personal Incone Tax MOF and SAT officials 95/11-96/3 4. Env. & Res. Taxation MOF, SAT, NEPA Officials 96/1-96/5 5. Tax Assignment and MOF, SAT, local tax bureau officials 95/5-96/8 Adminidation Policy Support 6. Local Taxes MOF, SAT, Local Finance Bureau 96/8-96/11 7. Social Security Taxes MOF, SAT, Min. of LAbor 95/10-96/6 S. Tax Capacity Estimation MOF, SAT and Local Tax Bureau To be determined officials 9. Conference (I or 2) MOF, SAT, Min. of Labor, NEPA, 96/5-97/1 Finance Bureaus Study Tours 1. VAT 4 people, 20 days (combined with SAT- 95/8 UNDP sturdy tour) 2. EIT/PIT 8 people, 20 days 95/10 3. Resource Taxes 6 people, 20 days 96/1 4. Local Taxes 6 people, 20 days 96/5 5. Social Security Tax Institution Building 6 people, 20 days To be determined 6. Tax Burden Comnparison 6, people, 20 days To be deternined 7. Tax Capacity Etimation 6 people, 20 days To be determined Trqinin 1. Quantitative Tax Policy 30 MOF, SAT, Finance Bureau officials 95/3-95/8 Analysis 2. Two Senior Semina MOF, SAT, Finance Bureau officials 95 nd 96 Tax Policy Analysis Institution Building (Overseas) 3. Personal Training 100 MOF, SAT, Ftnance Bureau To be determined (Oversas) officials 4. IT training To be determined

40 Attachment 4 Tax Poliky Componen Sabcn.ponmta Objective Implementing Timin Group/ Benefldcari Eqmpmeot provincial-levl MOF, SAT and Local fince burcaus To be determined computers, 2 nationallevel LAN (10 urn); Automation dawb manement sofiwam, anaytcal softwae, printers. modems Budget System Componm_ sube -mp a Objecive S ubobjedhe ts 1 1 iring I. J Beaeficlarts litudie Dual Budget Budget Acousting Implementation of the Dual MOF Budget Depqztmeil, 3/95-3/97 Budget Sysem Fnance Bureaus Develoqment of a new MOF Budget Dept, Fnanc 3/95-3/97 budget accounting system Bureaus, Audit Authoritie PRc Treaury Synn Modeiing treasury MOP Budget Dept., Natonal 5/95-5/98 Policy Sppt _mae t Treauy DepL PBC Budget Prqearo id Anabii Dcvelping analytical MOF Budget Dqpt., Fnace 5/95-8/98 mdod for budget Bureaus ~~piwarato snw analysis _ Auditing and Supevsn Dcveopment of budget MOF Budget Dept., legal 3/97-8/98 awudit ad suprvision Dept.; Audit Authorities PRC Naioal Statey Natonal Strty for MOF Budgeg Dept., Fance I Budget Sytms Burea, PBC treasuy Dept., Modernizo Audit Authorities Co _ c -I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Ind. Trsy oomputer sy AAotisnot and MOFBudgetDept. ad PBC 5/95-10/95 improveut of treury Treawy Dg* conputer qdeen

41 OK ~~~~~~~~~~~~~~ro a~~~~~~~~~~~~~~~~~~~~~~~~z j Z, SI,~~~~~~~~~~~~~~~~~~~~~~~~~~~ P._ AI I.: 1 I~~~~~0 I I N N I.4~ m ~~~~~~~~m - -

42 Attachment 4 Budget System Component s ompotil Objedive Subobjetive ImpIm_mLtioI T Tlmi Study Toun Budget Accounting/Dual Budget Comparion of the Chincec MOF Budget Dept. Audit To be deternnmied system with best practice Authorities examples_ Treaury M me-d Comparison of the Chinese MOF Budget Dept. PBC To be determined system with beat practice treaury management Dept Institution Building examples Budgt Metbods Comparison of the Chinese MOF Budget DepL To be determined system with best practice examples Budget Audit nd Inspection Comparison of the Chinese MOF Budget DepL; Audit To be determined system with beat practice Authorities examples Equipment Tre_ury network Automation Expa oiion f PBC tresawy department After completion of improvcment f existing gydkamcsm treasury network Intergovermental Fiscal Component Subcomnpooent Objedive Subobjective Implementation/ T _ming Studie Studies Beneficiarica Expenditure needs Development nd MOF Budget Dept 5/95-03/9711 Implementation of Expenditure needs assessment Policy Support Revenue Capacity Development and MOF Budget Dept 5/95-03/97 Implementation of Revenue capacity assment Data coliection and processing Design and Implementation MOF Budget Dept To be deternined of a data collection and procesing syqtem Syesssa deign sad Automation Design and Implementation MOF Budget Dept. piot /96 Programming of a computer system to localities administer grants InternAtional Workshops Expenditure need Institution building Discussion and finalization MOF Budget DepL 4/96 of studies on expenditure Revenue Capacity Dinion and finaliaton MOF Budget DepL 6/96 of revenue capacity reports Data oolecto and procesing MOF Budget DepL To be deerine 1/ The timing of the activities under this component depends on the completion of the work of the Leading Group on Grants Design.

43 Attachment 4 I Intergovernmental Fiscal Componeit Sabcomponeut Objedive Subobjedtive Isnp.mpati dirg Beneficire Pilot achcne Discusion nd finulization MOF Budget Dept 04/97 of plan for pilot impl eenttion Naional Imp ion Dicuion of pilot MOF Budget Dept to be determined experience Nd finalization of national impkmentation plan Dometc Workshops Expenditure Need Discussion and MOF Budget Dept 06/96 dissemination of Expenditure neede methodology Revenue Capacity Dicuaion and MOF Budget Dptp 08/96 disaemination of revenue capacity methodology lstiton Building Data Collection an processing Discussion rnd MOF Budget DepL To be detennined dissemination of data collection And processing methodology Pilot Workshop Diacussion nd MOP Budget Dept 03/97 dissemination of the plns for pilot implementation Natonal Implenntsion Evaluation of Pilot MOF Budget Dept To be detemined implementation nd prepartion of national I implementation Trining Over Senior Semnwr Familiarize Senior MOF Budget Dept: 20 daff penonnel of MOF and Finance Bureaus with theory nd practioe of inrgovernenal ficl relations Overes Intermediate Semir Inatitution Building Familiarize intermedistc MOF Budget Dept: 20 staff level MOF nd Finance Bureau personnel direcdly involved in grant design and opertion with theory and practice of intergovernmental fil relations Secondient Acquiring in-depth MOF Budget Dept.: 4 ataff, knowledge of day to day ec half-year opertions of a grant _d_ministating intitution Pilt Traing Familiarize pilt peaonnel MOF Budget Dept Fll 96 with operation of the Coputer Traini Automation Taning finace burou MOF Budget Dept To be detenrmd personnel in dbe computr aystcm developed for grant admiwtion

44 Attachment 4 Intaose nmmaial roada CoanpsmI T I I B s. d"r Study Tours J 4 Study Toun Im"don Builduy Study tie design, opertion MOF Budget Dept.: 6 peopk and administration of on esch tour, 2 weeks gm to schenm6 in model - Objectie Subobjectlve 1 Iplemertatbx/ Th I Equipmens k_nmwh Hardware 1Enbling das ptocering MOF Budget Dept 12/95 for dke detaikd grants design. PUt h edwe Enable computerized MOF Budget Dept and pilot 02/97 Automat istion d localities eporting system for grabn Na_ Im p_plection Extension of the To be detennined computerized granrs administration sysem

45 ATTACHMENT 5 TAX ADMINISTRATION COMPONENT Project milestones, responsibilities, activities and deliverables MIESTONES STEERING C OM rtee TAX ADMINISTRATION REFORM TENTATIVE DATES WORgING GROUP REVIEW & APPROVAL OFFICE REVIEW & APPROVAL START FINISH DELIVERABLES and OUIrPUTS I. L t Steering Committe Tax Adminition Prmcedure igh level) mlyy mm/yy 0 main functions Decision and feature Document of procedures and workflow a general descripuom of die buines pros tax forms review, This specification document of vecords dat con- -end of mu relat tae mm fon md organizadmd tent Phase review conclusions amd arrngemenu. AU data emenas are idenge S nitiate development decionm of Data Dictionay to proceed o the nest and described. Import areatjor opelona/ * pteliminary activity/organization matrix 1*ae chart lnprovnnens ar dentid (relates each m l prcedure or responsibility to its appropriate buines or data processing organizational entity) 0 sele^t preliminary performance indicators It also contains repor, on det Procurement 1. Technical Advior * prepar draft interim contrct erabes and other recommends- (continued in Design Phase) Procurement 2. Database Management System * develop specifications, tender documenu, 4 obtain World Bank 'no objection" nidate procurement process whk. U41 contnue 0 requet bids for respose bito the Design Phase. Procurement 3. System Design Conwlting Firm Project Team Training 0 additional information provided to bidders * provide opportunity for bidder clarification * evaluate proposals; submit summauy evaluation to World Dank; obtain 'no abjection' * negotiate drft contract; obtain World Bank.no objection' * training of busines procedures specialists * training of sytems design specialists Procedure for Management of Revisions * procedures for control and approval of requests for revisions I/ procedures for approving and conitrollng * procedures for informing taff who may be requests for changes to the procedue or the impacted by a change 11 computer system. > DMF/World Bank Review Completion of Preparation Phase End of Phase reponing - Preparation of Design s end of Phase repons by working goupss Phase 06/95 0 technical advisor's report * terms of reference for Design Phase 1/ Some deliverables and outputs are not required to be completed by the finish date of the Phae. A time-bound action plan was agreed at negotiations.

46 MIESTONES STEERING COMMrrTEE TAX ADMINITRAION REFORM TENTATIVE DATES WORKING GROUP REVIEW & APPROVAL OFFICE REVIEW & APPROVAL START FINISH DELIVERABLES and OUTPUTS II. Des. Steering Committee Tax Administration Procedure (detaild) 0 decision on the sucture Decision of the Document TIN * decision Business on Procedums centralization at city leve and detailed specljlcadom of how each basness process Design local termina or event dl" operate, including on4ine, batch, and 0 a decision on Aseament nd Payment Medtmanual creen layots, reporsr,frnns, wbpha ods and deaignated bank; manuals etc., for and busineee a U d s,, and docu- ara procedures, processing center opertione mens required to operate the new applcadon. data ecurity and control, disaser recovery I/ PerfoiMnce targets arc established for each prevl- 0 tax 1his fonna and phase is public carried information, out and intemal ouly selected performne indicator. Decklow in parallel forms required by two to team; wpport the work flows and mst be made on: information the requirements, cputer inchuding systems taxpayer design tsem and the buiucorrspondence requirments 0 optins for fta ienlfcatlon 1/ (03/95) * estabhsh targets tc_ro-d-ri for slected performance d-ign indi- *"cators SEML and measure 0~~~~~~~~~~~SwhethSF or Aot to cterdraue baseline performance )piwcu5imf at the levleans. ~~~~~~~~~~~~~~City leve els (in and the if four so, whether pilot cities) there for Was each be a indic-ator as final activity/organization matrix chart ermsl s hook-sp to we disrct offers (04/95) the design of opertional controls, ledgers, etc. 0 the choke of Assesnseast and Payraexd Method and the I desigatd bank approach- (05195) the design of al system outputs and statiical Procurement 1. Technical Advisors draft final contract (continued from Preparation Phawe) * obtain World Bank 'no objection' 1 IMF Interim Visit 0 progres report Development of the Training Program 0 a training program which outlines the training needs of all staff involved in the program instruction for au personnel involed in either com- 9 requirements and sourcing plan for trining puter or manual operations related to the business facilities and instructors process. 0 participant materials, instructor's guide, and ~prewntation manterials I/ Test Plan Development 0 a description of the objectives of the test stages (unit test, system integration description test, uwer of the applicadonfuncdons orfcatures acceptance test) to be tted, along with the methods of testing and 0 a test script which describes the conditions and sequence of events, and the expected results. events that will be tested in both the procedures and in the application programs, including a prediction for the result of each case to be tested 0 sample tranctions and records for program unit testing; sample input documents of all types and cases to be accounted for in the overall system test End of ubphase Completion of business End of subphase reporting 09/95 0 end of subphase reports by working groups procedures detailed design 0 technical advisor's report I/ Some deliverables and outputs are not required to be completed by the finish date of the Phase.

47 MILESTONES STEERING COMMITTEE TAX ADMINISTRATION REFORM TENTATIVE DATES REVIEW & APPROVAL WORKING GROUP OFFICE REVIEW & APPROVAL START FINSDI VRA S and OUTPUTS 11. Desig Phoe Steering Committee Procurement 4. * develop Decision requirements Document and specifications &{ifica=on of tools and sekcton of programning and * acquisition of tools System Deaign Procurenent 2. (Continued from Preparation * evaluate proposals, negotiate conditional conwbphawe Phase) tract prepare summary evaluation by end of Database Management System com=dkon of procureme * obtain World Bank 'no objection,' finalize contract and Procurement Procurement 5. Selection of the Development * develop requirements nd cifications Platform and the Development Methodology 0 obtain release of funds' (CRSPP) from MOF * ac uisition and installation Application Architecture and Database Design detailed login a dcrionb of user interfaces Zhe applicatons architecture describes the com- * desi of the apprication databases describin* puter applicadons that suppon the business the buriness area requirements for data area sharnng requirements. High evel versions of these data distribution, data security deslns and data maage- should be approved by the Tax Adminis- ment tranon Reform Office secification of the technical arvhiteccnre and prforfmance requirerment for 18 cities Procurement 6. Initiate Computer Equipment * prepation of tender documents Acquisition (continued in Construction and Implementation Phases) (4 pilot cities, option for additional 14 cities) wa,r* stations, servers, networ, equipment, uflitdes, operating systems, peripheral equipment, etc. Service Requirements and Storage Capacities peiformance objectives and capacides of the entre computer and manual procedure operatfng cnvuronment Sample Output Development and Approval simsladons of the way the application program %iq perform, help the desiuwnr check design ideas wuth system users before programs are maximum operational data base sizes *systm adat base availability requiremratu, (hours of operation) * a plan for implementing new versions of the system * respone times for on-line operations, and run times for batch programs * anticipated volumes of all innuts and utouts * scripts describing all important opermting eoanaros * sample screen displays * user recommendations Project Team Training (System Design Team) list of technical skil related to position in the secifrcadons gf au technical s_u a rrgem frtff trairin2 Fnd of subahase Comwletion of System Destin End of subohas ceportig _ IMFlWord BAnk Review Compdleo of Design Phas End of Phase reporting - Preparation for Conbusinenoroceduse and * end of Phas reports by working stnrction groups Phase systm djeignconyletechnical advisor's report 0 terms of reference for the Construction Phas

48 MILESTONES STEERING COMMrI'rEE TAX ADMINISTRATION REFORM TENTATIVE DATES WORKING GROUP REVIEW & APPROVAL OFFICE REVIEW & APPROVAL START FINISH DELVERABLES and OUTPUrS m. Steering Committee Programming * construction of the application software com- Decision Docurnenit ponents appodnent of prowning szqfor counsructdon * construction of the phyl database and its ofprograms and datbas, and owrseeing dite supoting procedues and utilities, including bjtauadon and aeeptance ofdie computng eqssp- conversion from the development DBMS to ment the production DBMS Forms and Manaas * printng and distrnbution of form, instructions, and guides * prim and disution of procedur manuals Procurement 6. Delivery and Acceptance of * evaluate proposal, negotiate conditional con- Compue Equineat tra prepae sumary evalation * obtain World Bank 'no objection, finalize (coimied from Syse Deign Phae) coatrct * oversight of preparation and installation of all (4 pilot cities) physa infrastr (accopr modaiona, air Facilities Management and Equipment In0sllation conionin, power, etc.) * overnight of inslation of all techanolgy cmusbned rcsp ry technical ard bsiness cm"sed of kdudeat mwmwbility and budnm equipment vendor rmady for uae' report * fonnal acceptance te Testing 0status report on unit and systm tedst risults m of acceptance testing (6nluding a test ugualy inwovs both bcuss and technical staff of worklows and related computer procese) * finalization of performance indicators for the pilot operation Implemnet Trainiqg Progrm trainod staff for busina procedures and computer uualy bnvolvs both bsuinsss and technical staff opertions _uter t IMF/Wordd Bank Review Competion of Condruc- End of Phase reportiqg - Preparation for Implemen- 12/95 0 end of Phas report by working groups tion Phase tation Phase * technical advisor's report * terms of reference for the Construction Phase ii

49 MILESTONES STEERING COMM'rrTEE TAX ADMINISTRATION REFORM TENTATIVE DATES WORKING GROUP REVIEW & APPROVAL OFFICE REVIEW & APPROVAL START FINISH DELIVERABLES and OUTPUTS IV. hn w_ Steering Committee Commencement of Operation * problem nd problem resolution reports --nm Decision Document * revisions and necessary improvements to comthe computcr system and procedural operations are puter programs and business procedures (4 Pikot Cities) Jmonitored and adjusted until satisfactory initiate couter sqtems operadiom, rnefsea ta Monitoriqg of Pilot Operation *4 city pilot o0eration dstus reports a lson proce- oecomnoend Oton for proceedig to the evaludures and new organi- a dedsion is made to proceed to evauation phase ation phase zatinal arrangemeats i %en she entire system operates satisfactorily 4 cities. IMF/World Dank Review Completion of Implements- End of Phase reporting - Preparation for the Eval- 06/96 0 end of Phase reports by working groups tion Phase ustion Phase technical advisor's report * terms of reference for the Evaluation Phae V. Evaloation Phase Steering Committee Appraisal of Pilot Operation * analysis of performance indicators against actual Decision Documern experience actual results of manual and computer operations * recommendations for revised procedures and are measured against performance indicators system enhancements * recommendations for revisod ervice levels ecom ndations and a plan of action for n_o xtnsio ne n to next roll to IMF/World Rank Review CoPnetion e of mplemna- End of Phase reporting - Preparation for Expan- 09/96 * end of Phase evaluation report tion Mae sion Phae * technical advisor's report I I I * term s of reference for the Expansion Phase t lleve VI. Expnion P Steering Comnittee Procurement 6. Delivery and Acceptance of Com- 0 oversight of preparation and installation of all Decision Document puter Equipment (continued from System Design physical infrastructure (accommodations. air roll out computer sys- Phase) conditionig, power, etc.) tem, rewsed tax ain 0 oversight of installation of all technology equipisauion procedures, and (exercise option for 14 pilot cities) ment new organizanonal _ * vendor 'rady for use report arrangemems to 14 ctides Commencement of Opertion s expansion of computer processing, revised tax akdministration procedures and organizational the comp yse mr and procedural operations are arrngements to 14 cities monitored and austed ntil satisfactory 0 revisions and necessary improvements to comvuter busines Procedures mrogam and Monitoring of Pilo Opeation * IS city pilot operation status reports * recommendation for proceeding to the finl a deciion is made to proceed to fina evaution evahuaon 1/ _then ent otvm operae sfactoilly atis IMF/World Bank Review Completion of Expanson End of prowect repordn 04/97 * end of proect evaluaion report Phae and Project Coucki- 0 technical advisor' final report I/Sa vb non - o p v. qi [I Same ddietlerblee and rais_ amo x e_sd to be completd by te flids data of the Pas.

50 Attachment 6 A T TACIHMENT 6 TRAINIG PLAN 1. The project includes a comprehensive training component to strengthen the institutional capacity of SAT, NTS in the 18 project locations, MOF, and the provinciallevel Finance and Tax Bureaus. The training program would provide specialized training and training for trainers abroad, and would provide training for operational staff incountry. In addition, a number of secondments would be financed under the project to provide in-depth exposure to best practices in tax administration, budget management and grants administration for key individuals of SAT and MOF. No degree training is planned under the project. 2. Tax Administration. The training under this component emphasizes new functions in the tax administration, such as taxpayers' services, information management, and auditing. In these fields, future trainers would be educated abroad. The trainers would not only be used for the 18 project sites, but also are expected to play a central role in the expansion of the NTS nationwide. In addition, training in computer systems design and implementation would enhance SAT's in-house capacity to further develop and implement the information system, which would enhance sustainability of the new NTS. 3. Domestic training would include the training of all personnel of the project sites. All computer operators would be trained in computer applications; tax administration personnel would be trained in the skills required by the new functional organization of the NTS bureaus (Registration, taxpayers' services, filing, collection and accounting, audit, appeals). 4. SAT would be responsible for the design of the training, assisted by the Bank Group and IMF; the International Cooperation Department would be responsible for organization of the training abroad, and the Training Department would be responsible for domestic training. Domestic training would be delivered at the various training schools and colleges of SAT, by full-time trainers, and by operational tax administrators. Foreign training would be contracted out to specialized organizations, such as OECD's Training Network for Tax Officials; IMF; Tax Consultants, and development institutes at universities. Training in systems design would be contracted out to the consulting firm that supports SAT in systems design; and computer application courses would be provided by the hardware vendor. A timetable for the training activities, including estimates of the number of officials to be trained, is included in Attachment 4. Outline curricula for the training courses were developed by SAT before negotiations, and are available in the project files.

51 Attachment 6 5. Tax Policy. The training under this component aims to strengthen tax policy analysis capacity of MOF, SAT and Finance Bureau officials. Basic tax policy analysis courses, predominantly aimed at provincial-level officials, would be provided domestically. More specialized courses in tax policy analysis, predominantly aimed at central-level officials, would be held abroad. 6. The Tax Policy Unit of SAT and MOF would be responsible for the design of the training courses, assisted by the Bank Group. At negotiations, it was agreed that the Bank Group would provide the Tax Policy Unit with a list of institutions that would be capable of providing the required training. The international cooperation departments of MOF and SAT, and the World Bank Department of MOF would be responsible for implementation of the training abroad. The domestic training would be held at training colleges of MOF and SAT. Most foreign training would be contracted out to specialized institutions such as various development institutes and tax consultant firms. Outline curricula for the courses were developed by TPU before negotiations, and are available in the project files. Approximate timetables for the training courses are included in Attachment Intergovernmental Fiscal Relations. The training for this component aims to strengthen the capacity for grants systems development and implementation. A number of senior-level training courses abroad in intergovernmental fiscal relations would enhance the absorptive capacity of Chinese officials for the studies financed under the project, and the capacity to further develop the designs to Chinese circumstances. A series of domestic seminars would, besides disseminating the grants design developed, increase understanding of intergovernmental fiscal issues at subnational level. Five staff would be seconded to foreign institutions administering a grants scheme, in order to obtain in-depth exposure to best practice operation of a grants scheme. 8. The MOF budget department will be responsible for the design of the training courses, assisted by MOF World Bank Department, and the Bank Group. At negotiations, it was agreed that the Bank Group would provide MOF with a list of suitable institutions for training. The international cooperation and the World Bank Department would be responsible for the implementation of the foreign training. Domestic training would be held at various training facilities of MOF and provincial finance bureaus. Foreign training would be supplied by specialized institutions with extensive experience in teaching in public policy and intergovernmental fiscal issues. Universities and institutes in countries with operating grants schemes, such as Australia, Canada, and Germany would likely be most suited. Outline curricula for the training courses have been submitted by the MOF Budget Department, and are available in the project files. An approximate timetable for the training activities, including the expected number of beneficiaries, is included in Attachment Budget Systems. The training under this component aims to build the institutional capacity necessary to implement reforms in budgetary management. Key individuals at central government level would be trained abroad in a broad area of budgetary management. Subnational-level officials would be trained domestically in the