Technical Assistance Report Project Number: 46429-001 Capacity Development Technical Assistance (CDTA) April 2013 Republic of the Philippines: Supporting Capacity Development for the Bureau of Internal Revenue (Financed by the Japan Fund for Poverty Reduction) The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.
CURRENCY EQUIVALENTS (as of 5 March 2013) Currency unit peso (P) P1.00 = $0.02456 $1.00 = P40.70 ABBREVIATIONS ADB Asian Development Bank BIR Bureau of Internal Revenue GDP gross domestic product ICT information and communication technology TA technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Type Capacity development technical assistance (CDTA) Targeting classification General intervention Sector (subsector) Public sector management (public expenditure and fiscal management) Theme (subthemes) Governance (public administration), capacity development (institutional development, organizational development) Location (impact) National (high) Partnership Japan Fund for Poverty Reduction NOTE In this report, "$" refers to US dollars unless otherwise stated. Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Country Director N. Jain, Philippines Country Office, SERD Team leader Team members N. Usui, Senior Country Economist, SERD S. Araki, Public Management Specialist (Taxation), Regional and Sustainable Development Department S. Callet, Operations Assistant, SERD T. Mendoza, Economics Officer, SERD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS Page I. INTRODUCTION 1 II. ISSUES 1 III. THE TECHNICAL ASSISTANCE 3 A. Impact and Outcome 3 B. Methodology and Key Activities 3 C. Cost and Financing 4 D. Implementation Arrangements 4 IV. THE RANKING VICE-PRESIDENT'S DECISION 5 APPENDIXES 1. Design and Monitoring Framework 6 2. Cost Estimates and Financing Plan 8 3. Outline Terms of Reference for Consultants 9
I. INTRODUCTION 1. In 2012, the Bureau of Internal Revenue (BIR) asked the Asian Development Bank (ADB) for technical assistance (TA) for capacity development of tax officials as part of ongoing tax administration reforms under the current administration. In response, ADB conducted consultation missions in 2012. During a fact-finding mission in January 2013, the BIR, the government s executing agency, agreed on the proposed impact, outcome and outputs, implementation arrangements, cost, financing arrangements, and terms of reference as laid out in the approved concept paper. The TA is included in the country operations business plan, 2013 2015 for the Philippines. 1 The design and monitoring framework is in Appendix 1. II. ISSUES 2. ADB s growth diagnostics study of the Philippines identifies that weak tax mobilization capacity, and the resultant inadequate provision of infrastructure and underinvestment in human capital, are major constraints on the country s inclusive economic growth. 2 While the 2005 expanded value-added tax reform temporarily improved the fiscal position, its gains were not sustained. Tax revenue fell to 12.2% of gross domestic product (GDP) in 2009 from a peak of 17.0% in 1997 and was the lowest since the 2005 reform. Revenue mobilization has since then become an urgent policy agenda item for the current administration. While the recent tax collection effort has increased tax revenues, the tax GDP ratio remained at 13.1% in the first 9 months of 2012. 3. ADB s fiscal policy assessment in the country partnership strategy, 2011 2016 suggests that weak tax administration remains a key constraint on revenue mobilization. 3 According to ADB estimate, the country could improve the tax GDP ratio by 4.6 percentage points by increasing tax productivity to 70% of the regional average in East Asia and Pacific countries. 4 Low tax productivity in the Philippines points to untapped potential which could be mobilized through improved tax administration. The BIR, which is in charge of assessing and collecting all internal revenue taxes has taken measures to improve tax administration, which include data consolidation to identify nonregistrant taxpayers and suspected tax avoidance, intensified tax payer audit, and the Run after Tax Evaders Program. 5 The government has recently accomplished reforms in excise taxes on tobacco and alcoholic drinks. However, increasing the tax GDP ratio to the government s target of 15.6% by 2016 requires strengthening of tax administration. 4. Capacity and resource constraints within the BIR help explain its short-term orientation (e.g., resorting to advanced collection of next period s tax liabilities from corporations) and 1 The TA first appeared in the business opportunities section of ADB s website on 4 February 2013. ADB. 2012. Country Operations Business Plan: Philippines, 2013 2015. Manila. 2 D. Canlas, M. E. Khan, and J. Zhuang, eds,. 2009. Diagnosing the Philippine Economy: Toward Inclusive Growth, Asian Development Bank and Anthem Press. 3 ADB. 2011. Country Partnership Strategy: Philippines, 2011 2016. Manila. 4 Usui, N., 2011. Tax Reforms toward Fiscal Consolidation: Policy Options for the Philippine Government. Manila. Philippines Country Office, Asian Development Bank. http://www.adb.org/publications/tax-reforms-toward-fiscalconsolidation-policy-options-government-philippines 5 The Bureau of Customs is in charge of collecting customs duties. ADB. 2007. Technical Assistance to the Republic of the Philippines for Enhancing Revenue Collection and Strengthening the Criminal Prosecution of Tax Evasion Cases. Manila. This TA has supported the BIR s revenue mobilization effort by improving the tax policy and strengthening criminal prosecution of tax evasion. Major TA activities include development of an internal database at the National Prosecution Service to consolidate and share internal probable case rulings and decisions on Run after Tax Evaders Program cases and related training, and capacity development of National Prosecution Service and BIR prosecutors.
2 absence of programs to deal with medium-term challenges (e.g., tax arrears and the criminal prosecution of tax offenders). 6 5. Staff training is a central part of effective tax administration, and in many countries initial training and education for new recruits are a critical part of staff training policy; effective tax administration is sustainable only with highly skilled and motivated frontline tax officers. Moreover, staff training and education can serve as a tool for attracting, developing, and retaining talent, which is particularly important for tax administration. At about 4%, the BIR's staff attrition rate, i.e., the number of staff departures compared with the total number of staff, is higher than in other countries in the region (3% in Indonesia and 1% in Malaysia). 7 Therefore, capacity development of newly recruited staff is an urgent issue in the BIR, and indeed the BIR's medium-term strategy recognizes and confirms the importance of highly trained tax officers. For effective administration, the authorities need to strengthen tax officers capacity, both for the frontline operations of assessing and collecting taxes and the back office operations of managing taxpayer accounts and records. In this context, the government decided to establish the Philippine Tax Academy in 2010 for systematic training of tax officers. 8 Although the plan for the Philippine Tax Academy has not yet taken shape, the BIR and also the Department of Finance continue to stress the need to strengthen the BIR's capacity for staff training based on a systematic medium-term staff development strategy. Once the plan for the academy materializes, a staff development strategy and training programs should be developed. 6. ADB has conducted a preliminary review of the BIR s current training regime for new recruits. It has been identified that (i) there is no medium-term training plan for new recruits, which covers systematic training for the first few years; (ii) although the General Course for Revenue Officers is conducted as an introduction course for new recruits, its duration (44 half days) and curriculum do not satisfy the needs of new recruits; (iii) training materials do not adequately address specific skills required for tax officials, e.g., detection of malpractices and tax avoidance; (iv) as the training content is heavily tilted towards the assessment area, collection and other areas are not given enough weight; and (v) there are no full-time lecturers (trainers). 9 Therefore, the current training system is neither well organized nor oriented toward the specific skill upgrading that is needed to increase tax revenue collection by the BIR. 7. In designing a staff development program, it is important to develop a medium-term training scheme with the right mixture of a series of class and on-the-job trainings at tax offices within a 3 5-year time frame. For example, in Japan the National Tax College provides necessary training to all tax officials. The college, which consists of the main campus and 12 regional training centers, trains new recruits graduated from high schools and universities and provides training programs for tax officials so they are fully equipped with necessary knowledge and skills for field activities. The programs cover a wide range of topics such as tax law, bookkeeping, accounting, and business analysis. Trainings at the National Tax College enable officers to develop the capacity for both frontline and back office operations. 8. Tax administration reform has been a focus area of development partner operations in the Philippines. Starting with the World Bank s Tax Computerization Project in the 1990s, the country has received broad support from development partners. The World Bank supports tax 6 ADB. 2008. Country Assistance Program Evaluation for the Philippines. Manila. 7 Organisation for Economic Co-operation and Development. 2010. Tax Administration in OECD and Selected Non- OECD Countries: Comparative Information Series. http://www.oecd.org/dataoecd/2/37/47228941.pdf 8 An Act Establishing the Philippine Tax Academy, Defining its Powers and Functions, 31 July 2010. 9 The General Course for Revenue Officers was developed in 1998 based on a training needs analysis conducted by the Development Academy of the Philippines.
3 compliance, tax enforcement and control, and human resource development and management with the National Program Support for Tax Administration Reform. The United States Agency for International Development has funded a performance management program within the large taxpayer service and at the department director level. The Millennium Challenge Corporation has funded extension of the integrated tax system through acquisition of new equipment, modification of software, and training. The proposed TA will complement other development partners past and ongoing efforts by focusing on capacity development of tax officers. 9. Despite extensive support for capacity building provided by development partners in the past, the BIR s tax administration capacity remains weak. Lack of high-level support and commitment undermined sustained efforts for better tax administration. 10 Frequent turnover of BIR commissioner and key officials exacerbated the problem. Under the current administration, however, tax mobilization has become a top priority in the overall context of governance reform. There has been steady progress in revenue mobilization by the BIR. The proposed TA is designed to support these efforts for strengthening tax administration. III. THE TECHNICAL ASSISTANCE A. Impact and Outcome 10. The impact will be increased tax revenues to help the government fund increase in public spending on infrastructure and social services. The outcome will be improved tax mobilizing capacity of the BIR through adoption of a new staff training system for newly recruited tax officials. The design and monitoring framework is in Appendix 1. B. Methodology and Key Activities 11. The TA will achieve its outcome by introducing a new and systematic approach to staff training to ensure high-quality standards. The current training policy and system will be reviewed under the TA, with a particular focus on new recruits, and their effectiveness for staff development will be assessed. The TA will assist in (i) developing a medium-term training plan for new recruits, i.e., an initial 3 5-year training schedule; and (ii) implementing a more effective training system, consisting of appropriately sequenced classroom courses and on-the-job training. Regional workshops on staff development systems will be organized under the TA to share with BIR international best practice and help it establish institutional links with other tax administration bodies in the region and key international organizations. The regional workshops will help the BIR formulate a suitable staff training system by taking into account advanced staff training systems and the experiences of tax administration reforms in other developing countries in the region. 12. Major outputs of the TA are as follows: (i) International good practices of staff training and tax administration shared among regional partners. Regional workshops will be designed in coordination with the BIR. Suitable regional partners for these workshops will also be selected in consultation with BIR. (ii) A training strategy and medium-term training plan. A training needs assessment will be conducted under the TA to review the current training policy and courses, including the General Course for Revenue Officers for new recruits, 10 R. F. Fabella and K. K. Chua. 2011. BIR Reforms Initiatives: Why is Success so Elusive. In Built in Dreams Grounded in Reality. The Asia Foundation. Manila.
4 (iii) (iv) (v) and recommend ways to improve them. For the review process, internal consultation within the BIR and international practice acquired through the workshops will be taken into account. A staff training policy and strategy will be developed, and a medium-term training plan for new recruits, i.e., a 3 5-year training schedule which will consist of appropriately sequenced classroom courses and on-the-job training, will be designed. Under the TA, proposals for building stronger links between staff training and human resource management, for example through a better profiling of revenue officers competency, will also be made. Revised training materials. Based on review of the current training courses, revised training materials for more practical skill-oriented training will be prepared. The revised materials will include evaluation of training participants achievements and progress. In addition, web-based training materials, which enable distance training for regional revenue officers, will also be prepared. Training of trainers seminars. A series of training programs will be conducted for trainers to improve their teaching skills for more effective implementation of training course. The TA will also look at the possibility of mobilizing local research and training institutes for sustainable staff training for the BIR. A new or revised training course for new recruits. Under the TA, a new training course for new recruits will be launched, based on a medium-term plan for building the capacity and skills of new recruits. 11 C. Cost and Financing 13. The TA is estimated to cost $1,100,000, of which $1,000,000 will be financed on a grant basis by the Japan Fund for Poverty Reduction and administered by ADB. The government will provide counterpart support in the form of office accommodation, staff, and other in-kind contributions. The cost estimates and financing plan are in Appendix 2. D. Implementation Arrangements 14. The BIR will be the executing agency. It will provide office space with furniture and support services for the consultants, and be responsible for day-to-day management and decisions on project implementation. The TA requires four experts (two international consultants with 26 person-months of inputs and two national consultants with 24 person-months of inputs). The consultants will be engaged by ADB on an individual basis in accordance with its Guidelines on the Use of Consultants (2010, as amended from time to time), on a competitive basis following advertisement on the ADB website, evaluation of expressions of interest received, and short listing of qualified experts. All procurement will be done in accordance with ADB s Procurement Guidelines (2010, as amended from time to time). The disbursement under the TA will be done in accordance with the Technical Assistance Disbursement Handbook (2010, as amended from time to time). Eligibility or ineligibility will be guided by Japan Fund for Poverty Reduction Policies and Guidelines for Technical Assistance. The consultants terms of reference are in Appendix 3. 15. Following the signing of the TA agreement between the government and ADB, the TA will be implemented from 1 May 2013 and will be completed on 31 December 2014. 11 There were 77 218 new recruits in the BIR in 2007 2012. The BIR tentatively plans to increase the number of new officials at the annual rate of 5.6% for 2013 2017.
5 IV. THE RANKING VICE-PRESIDENT'S DECISION 16. The Ranking Vice-President, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, and under the authority delegated by the Board, has approved ADB administering technical assistance not exceeding the equivalent of $1,000,000 to the Government of the Philippines to be financed on a grant basis by the Japan Fund for Poverty Reduction for Supporting Capacity Development for the Bureau of Internal Revenue, and hereby reports this action to the Board.
6 Appendix 1 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Increase tax revenues Performance Targets and Indicators with Baselines Tax GDP ratio increased to 15.6% by 2016 (2012 baseline: 12.9%) Data Sources and Reporting Mechanisms Budget data Assumptions and Risks Assumption Effective implementation of the new training program Risk Decreased government commitment to revenue mobilization Outcome BIR has improved capacity to mobilize tax revenues Shift to the new training system in 2014 Establish a medium-term policy for new recruit training in 2014 Increase the number of training days during the first 3 years after recruitment in 2014 Review mission, dialogues Assumption Effective coordination within BIR for shifting to the new program Risk Leadership change in BIR Outputs 1. International best practices on staff training and tax administration shared 2. A training strategy and medium-term training plan Workshops conducted (by December 2013) A training course for new recruits based on a strategy and medium-term plan prepared (by December 2013) Minutes of workshops Recommendation report and training program Assumption BIR s commitment to effective TA implementation Risk Priority change in BIR 3. Revised training materials Training materials for new recruits prepared (by April 2014) Training materials 4. Training for trainers seminars Training for trainers programs conducted and at least 30 trainers are trained (by May 2014) Participation sheets 5. A new training course for new recruits At least 250 tax officials trained in the new course (by August 2014) Video recording, participation sheets Activities with Milestones 1.1 Identify regional partners to hold workshops Inputs
Appendix 1 7 (by June 2013) 1.2 Conduct workshops on staff training (by December 2013) 2.1 Review the current training policy and courses (by August 2013) 2.2 Develop a training strategy and medium-term training plan for new recruits (by December 2013) 3.1 Revise paper-based training materials (by February 2014) 3.2 Develop materials to evaluate participants achievements and progress (by March 2014) 3.3 Develop web-based training materials (by April 2014) 4.1 Plan and develop programs to train trainers (by April 2014) 4.2 Conduct training for trainers seminars (by May 2014) 5.1 Develop and launch a new training course for new recruits (by June 2014) 5.2 Assess the initial outcome of the new training course (by August 2014). ADB $1.0 million from the Japan Fund for Poverty Reduction: The government will provide counterpart support in the form of office accommodation, staff, and other inkind contributions. The value of government contribution is estimated to be equivalent of 9.1% of the total TA cost. ADB = Asian Development Bank, BIR = Bureau of Internal Revenue, GDP = gross domestic product, TA = technical assistance. Source: Asian Development Bank.
8 Appendix 2 COST ESTIMATES AND FINANCING PLAN ($'000) Item Japan Fund for Poverty Reduction a Amount 1. Consultants a. Remuneration and per diem i. International consultants 435.0 ii. National consultants 65.0 b. International and local travel 40.0 c. Reports and communications b 60.0 2. Equipment c 20.0 3. Training, seminars, and conferences 270.0 4. Miscellaneous administration and support costs 10.0 5. Contingencies 100.0 Total 1,000.0 Note: The technical assistance (TA) is estimated to cost $1,100,000, of which contributions from the Japan Fund for Poverty Reduction are presented in the table above. The government will provide counterpart support in the form of office accommodation, staff, and other in-kind contributions. The value of government contribution is estimated to be equivalent of 9.1% of the total TA cost. a Administered by the Asian Development Bank. b Includes inception and concluding workshops. c E-learning and video learning materials, which will be prepared under the TA, will be transferred to the Bureau of Internal Revenue upon TA completion. Source: Asian Development Bank estimates.
Appendix 3 9 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS 1. A total of 26 person-months (intermittent) of international consulting services and 24 person-months (intermittent) of national consulting services will be required to ensure the effective implementation of this technical assistance (TA) project. Consultants will be recruited as individuals according to the Asian Development Bank (ADB) Guidelines on the Use of Consultants (2010, as amended from time to time). 2. Tax administration specialist and team leader (international, 14 person-months, intermittent). The tax administration specialist and team leader, who will have experience in senior management in tax administration including tax audits and human resource management and in technical assistance to developing countries, will undertake the following tasks: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Provide overall management of project implementation. Conduct technical discussion with the Bureau of Internal Revenue (BIR) and analyze the current strategy, practices, and programs with respect to human resource management and staff training. Design and lead international workshops on staff training, which aim to share international practices and strengthen institutional links with other tax administration bodies in the region. Taking into account the outcome of activities (ii) and (iii) above, develop a comprehensive training strategy covering all staff, a medium-term training plan for new recruits which will consist of classroom training and on-the-job coaching, and a revised training course for new recruits. Design and lead seminars to train trainers in charge of training and educating new recruits. Based on the medium-term training plan for new recruits developed in activity (iv) above, assist the BIR to launch the new training course, which will include the provision of lessons through e-learning. Review capacity of local research and training institutes to provide regular training for BIR officials, and prepare a recommendation for institutional coordination. Regularly report the progress of the TA project. 3. Human resource management specialist (international, 12 person-months, intermittent). The human resource management specialist, who will have experience in tax administration and human resource management including staff training and development, will support the tax administration specialist and team leader and undertake the following tasks: (i) Analyze the current strategy, practices, and programs with respect to human resource management and staff training in the BIR. (ii) Organize international workshops on staff training, which aim to share international practice and strengthen institutional links with other tax administration bodies in the region. (iii) Analyze other countries systems and practices shared in the international workshops, and identify practices applicable to the BIR. (iv) Support the development of a comprehensive training strategy covering all staff, and draft a medium-term training plan for new recruits which will consist of classroom training and on-the-job coaching, and a revised training course for new recruits including its curriculum. (v) Revise and develop training materials such as practical case studies to improve the effectiveness of the new course for new recruits.
10 Appendix 3 (vi) (vii) Conduct seminars to train trainers in charge of training and educating new recruits. Based on the medium-term training plan for new recruits developed in activity (iv) above, assist the BIR to launch the new training course, which will include the provision of lessons through e-learning. 4. Public management consultant (national, 14 person-months, intermittent). The public management consultant, who will have experience in public management and governance including tax administration, will work under the tax administration specialist and team leader and undertake the following tasks: (i) Assist the international specialists to conduct research on human resource management and staff training systems. (ii) (iii) (iv) (v) (vi) Logistically support the organization of international workshops. Assist the international specialists to revise and develop a training plan, a training course, and training materials, which include communications with the BIR, information gathering, and document editing. Logistically support the organization of the training-for-trainers seminars and the launch of the new training course for new recruits. Assist the tax administration specialist and team leader to prepare project progress reports on a regular basis. Carry out any other duties that are within his or her specialization as may be assigned by the ADB project team and the international specialists. 5. E-learning consultant (national, 10 person-months, intermittent). The e-learning consultant, who will have experience in information and communication technology (ICT), electronic service, and public management, will work under the tax administration specialist and team leader and undertake the following tasks: (i) Assist the international specialists to conduct research on staff training systems, in particular regarding the application of ICT including e-learning systems. (ii) Assist the international specialists to develop a training plan, a training course, and training materials, in particular regarding e-learning. (iii) Prepare e-learning function and materials which aim to facilitate the training of regional tax officials. (iv) Communicate with relevant BIR departments such as an ICT section for establishment of an e-learning function. (v) Carry out any other duties that are within his or her specialization as may be assigned by the ADB project team and the international specialists.