Public Disclosure Authorized EUROPE AND CENTRAL ASIA Armenia Governance Global Practice IBRD/IDA Specific Investment Loan FY 2013 Seq No: 6 ARCHIVED on 16-Nov-2015 ISR21089 Implementing Agencies: Public Disclosure Authorized Key Dates Key Project Dates Bank Approval Date:03-Jul-2012 Planned Mid Term Review Date:18-Feb-2015 Original Closing Date:30-Apr-2016 Project Development Objectives Effectiveness Date:28-Dec-2012 Actual Mid-Term Review Date:18-Feb-2015 Revised Closing Date:30-Apr-2016 Public Disclosure Authorized Project Development Objective (from Project Appraisal Document) The Project development objective (PDO) is to modernize Armenia s tax administration to (i) increase voluntary tax compliance, (ii)reduce tax evasion, (iii) reduce compliance costs; and (iv) increase administrative efficiency. This objective will be achieved by: introducing modern, integrated information technology to support SRC operations; improving data exchange between the SRC and other agencies to enhance better risk management and targeting of compliance activities ( third party information ); reengineeringand automation of business processes to improve efficiency and effectiveness; and expanding egovernment, including e-filing and e-payments to lower the compliance burden for the private sector. Has the Project Development Objective been changed since Board Approval of the Project Objective? No PHRPDODEL Public Disclosure Authorized Components Name Institutional Development:(Cost $2.20 M) Process Modernization and Compliance Management:(Cost $1.00 M) Infrastructure and System Modernization:(Cost $11.00 M) Project Management:(Cost $0.90 M) Overall Ratings Name Previous Rating Current Rating Progress towards achievement of PDO Satisfactory Satisfactory 11/16/2015 Page 1 of 12
Overall Implementation Progress (IP) Moderately Satisfactory Moderately Satisfactory Overall Risk Rating -- Moderate Implementation Status and Key Decisions The Tax Administration Modernization Project (TAMP) became effective on January 04, 2013 after parliamentary ratification of the financing agreement. The original project implementation period remained relatively short - nearly 3.5 years - compared to most other World Bank supported tax projects with a closing date of April 30, 2016. On October 14, 2015 the Ministry of Finance of the Republic of Armenia sent a letter of request with a detailed justification to the World Bank to extend the project closing date till December 31, 2017. The Bank team prepared a Level 2 Restructuring package for the World Bank (WB) Management s review and approval. On November 4, 2015, Bank Management approved the request to extend the project closing date till December 31, 2017. Prior to October, 2015 Implementation Support Mission, the Bank team completed a Mid-Term Review (MTR) mission on February 12-20, 2015. The project is implemented in partnership with the USAID established under a Memorandum of Understanding (MoU) between the World Bank and the USAID on July 13, 2012. At present, the implementation progress remains moderately satisfactory. The next implementation support mission is tentatively scheduled to take place in April 2016. 11/16/2015 Page 2 of 12
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Risks Systematic Operations Risk-rating Tool Risk Category Rating at Approval Previous Rating Current Rating Political and Governance -- -- Moderate Macroeconomic -- -- Substantial Sector Strategies and Policies -- -- Moderate Technical Design of Project or Program -- -- Moderate Institutional Capacity for Implementation and Sustainability -- -- Moderate Fiduciary -- -- Low 11/16/2015 Page 4 of 12
Environment and Social -- -- Low Stakeholders -- -- Low Other -- -- -- Overall -- -- Moderate Results Project Development Objective Indicators PHINDPDOTBL Average Adjustment result from audits (Amount(USD), Custom) Value 10.10 10.80 10.80 12.10 Date -- 20-Feb-2015 16-Oct-2015 31-Dec-2017 The reduction of the figure for 2014 is due to the change in the compliance management approach, which is increasingly focused on raising taxpayers awareness, organizing training courses for taxpayers by the tax body, establishing a taxpayer self-assessment system and conducting on-going efficient supervision by tax authorities before an audit action is initiated. In parallel with the operation of the self-assessment regime a comparative and a sectoral analysis of taxpayer information is performed and studies and reviews are conducted for taxpayers considered as risky. In case of any inconsistencies or doubts found, taxpayers are given the opportunity to adjust their filed tax returns without applying any additional responsibility or penalties. Such errors in the returns are identified by periodically improving electronic system which figures out the errors in taxpayers returns and declarations. After making appropriate changes/revisions, they are removed from the audit risk list. This process leads to a gradual reduction of the number of audits. With taxpayers themselves making the necessary adjustments in their returns pre-audit tax collection figures are increasing. As a result while the average adjustments results from audits gradually decrease, the tax revenues collected by the MoF increase. The reduction of the figure is also related to the circumstance that the large companies in Armenia are not listed among the risky taxpayers every year because audits of these companies are time consuming and voluminous. Therefore tax audits are not conducted annually with these taxpayers. In these companies significantly large amounts are recorded as a result of audits which have an impact on annual average indicators. Consequently the reduction of the indicators in the Year 2014 against the indicators of the Year 2013 is influenced by this factor. Meanwhile, it is undeniable that in order to obtain maximum results, the risk based system needs to be improved periodically by monitoring audit results and other analysis, developing new approaches, and raising risk effectiveness on which the MoF specialists have been working all these years. Several initiatives were taken to develop new algorithms for risk assessment in line with the changes in legislation and reporting forms. PHINDPDOTBL Number of active VAT taxpayers (Number, Custom) Value 11800.00 10270.00 10270.00 12400.00 Date 01-Jan-2011 20-Feb-2015 16-Oct-2015 31-Dec-2017 11/16/2015 Page 5 of 12
In 2014 the reduction of VAT payers in comparison to previous year is attributed to the following two factors: Legislative changes and reduced economic activity. 1. Legislative changes: A. The Law of the Republic of Armenia on Turnover Tax has come into effect since 1 January 2013, which allowed the economic entities to: - perform tax registration by a simplified method; - have a low level of tax burden as compared to the entities registered for VAT; and - reduce taxpayers' expenses significantly for tax registration. The possibility to apply the simple turnover tax system has caused a number of businesses previously registered voluntarily for VAT to migrate into the turnover tax regime. This trend continued in 2014, when the turnover tax rate was reduced substantially from 3.5% to 1%, increasing the incentives for small businesses to apply this regime. Another possible reason for reduction of the number of VAT payers may be the reduced economic activity in different branches of the economy. Although the economic activity for 2013 increased by 3.5 percent as compared to the previous year, the economic activity was reduced in some areas of the economy. Specifically, in textile and mining industries, and in other branches of open-pits, production of chemicals, rubber & plastic product types, and in tourism, economic activity was reduced by 28.7, 7.6, 6.3, 7.5 and 16.5 percents respectively, (source: www.armstat.am). For those entities operating in these areas of economy, sales turnover is below 58,35million Armenian Drams, based on the results in 2012. During a period of economic growth they could have passed the VAT threshold and could have been considered VAT payers in 2013. However, since the economic activity was reduced in the above-mentioned areas despite the overall growth in 2013, the sales turnover for these entities did not exceed the VAT threshold in 2013. Consequently, these entities were not considered as VAT payers. From 58916 turnover taxpayers 1351 previously were voluntary VAT payers in 2013. Adding this number to the VAT payers, gives a number close to the target. PHINDPDOTBL Number of active CIT taxpayers (Number, Custom) Value 28939.00 -- 13118.00 30400.00 Date 01-Jan-2012 20-Feb-2015 16-Oct-2015 29-Dec-2017 For 2012, from 28791 active CIT taxpayers, 18427 taxpayers were Simplified CIT report filers. Since the Law of the Republic of Armenia on Turnover Tax came into effect from 1 January 2013, the majority of Simplified CIT payers became Turnover Taxpayers, which leads to the decrease of the figure for Year 2013 and 2014. The number of active CIT taxpayers was decreased, as 3358 CIT payers (from 15,547) have changed their taxation regime and have become Turnover taxpayers and Patent Fee payers starting from 2014. PHINDPDOTBL CIT productivity (Percentage, Custom) Value 0.10 -- 0.11 0.14 Date 13-Feb-2012 20-Feb-2014 16-Oct-2015 29-Dec-2017 On calculating the CIT productivity, following two factors were taken into account: (i) the RA Law on Making Amendments and Supplements to the Law of the RA on Profit Tax has abolished the minimum profit tax payments for companies since January 1, 2014 11/16/2015 Page 6 of 12
and as a result, the actual profit tax revenues were reduced from 124,6 billion AMD to 103,6 billion AMD. For comparison purposes, it is worth stating that the minimum CIT inputs by the results of 2012 and 2013 were 17.7 and 16.5 billion AMD, respectively; and (ii) the number of CIT payers has decreased due to a move of some CIT payers into the turnover tax regime and a reduction of economic activities. PHINDPDOTBL Ratio of Revenue collected to SRC operating costs (Number, Custom) Value 74.00 110.70 110.70 83.00 This is 858,091.9 mln. AMD/7,752.3 mln.amd {Collected revenue divided by SRC s operating costs} PHINDPDOTBL Perception of taxpayers regarding level of professionalism and honesty in tax administration as measured by biannualsurveys (differentiated by gender) (Percentage, Custom) Value 0.00 23.70 23.70 0.00 The survey was conducted by USAID in 2013 and the Indicator the level of trust towards the tax service in the survey is considered to be the closest and therefore the most relevant one for this PDO indicator. Another survey will be conducted closer to the project ending in 2017 which will most likely be funded from project savings or with cost sharing with another donor agency which is working in PFM/Tax reform area in Armenia. It is important to point out that in 2014 SRC (State Revenue Committe) was merged as part of MoF and hence 2017 survey will not include SRC as a separate entity. Overall Please see Annex 2 of the Aide Memoire (attached) of October 2015 mission for a detailed explanation on all of the PDO indicators. Intermediate Results Indicators 11/16/2015 Page 7 of 12
PHINDIRITBL PHINDIRITBL PHINDIRITBL Number of tax inspectors trained (differentiated by gender). (Days, Custom) Value 0.00 29648.00 29648.00 13800.00 1. Total number of tax inspectors trained include 10,564 (women) and 19,084 (male). 2. The Training Center of the SRC of the RoA has commenced the performance of its major activities since the 2nd quarter of 2012. In 2012 the training center organized its courses mainly for tax officials. Long-term language courses, as well as three-day training sessions for groups with 50 participants in each were conducted and all these training courses were finalized with testing of participants. Starting from 2013, the Training Center significantly increased the share of training courses conducted for customs officers as compared to the same results recorded in 2012. In 2013, the indicator of trainings organized by the Training Center increased by more than 1600 staff/hour as compared to the same result in 2012. Staff *Hour Conducted Trainings Year 2012 Year 2013 Year 201 Total 41,448 43,087 42191 Number of tax inspectorates (Number, Custom) Value 39.00 22.00 22.00 29.00 The target has already been achieved. SRC adopted modernized organizational structure, based on workflow analysis (Text, Custom) Value Current SRC structure is based territorial structure, based on face-face interactions with clients SRC is merged with Ministry of Finance SRC is merged with Ministry of Finance Segmented, functional organization adopted. 11/16/2015 Page 8 of 12
PHINDIRITBL PHINDIRITBL PHINDIRITBL Provision and Installation of Equipment and Furniture for Training Institute (Text, Custom) Value Outdated equipment and furniture deployed in training institute Training Center in Dijijan is still under construction and should be open by September/December 2015 Training Center in Dijijan is still under construction is scheduled to be operational by April 2016. New equipment and furniture deployed Date 13-Feb-2012 20-Feb-2015 16-Oct-2015 30-Apr-2016 According to most recent Procurement Plan (PP), contract to provide IT equipment for Yerevan Training Center, Dijijan Training Center, Service Center and Tax Inspectorates (LAN), will be completed in November 2016. Service centers established (Yes/No, Custom) Value N Y Y Y Date 13-Feb-2012 20-Feb-2014 16-Oct-2015 29-Dec-2017 Percentage of total tax returns filed electronically (Percentage, Custom) Value 20.00 90.50 90.50 60.00 For 2014 among total tax returns electronic returns are 90.5 %, 9.5% include the following: State duty return; Presumptive fee declarations; Return on Environmental Fees; VAT return on Individual s Activity; Simplified Return on Individuals Annual Revenues; and others. 11/16/2015 Page 9 of 12
PHINDIRITBL PHINDIRITBL PHINDIRITBL Time to prepare and pay taxes (Hours, Custom) Value 500.00 321.00 321.00 400.00 Comment: The figure for 2015 is based on "Doing Business Survey". Disaster Recovery Center Operational (Yes/No, Custom) Value N N N Y All IT equipment for Disaster Recovery Center, Data processing Center, and equipment for Local Network Capability (Procurement Line 1.4) have been completed. Disaster Rec. Center, which is located in Dilijan Training Center, could only become operational when Dilijan Center is completed. Expensive and sophisticated servers and other equipment in the Dis. Recovery Center require a construction/dust free environment to operate. Modern Core IT System Established and Operational (monitored by sub-indicators:(a):data Processing Center Operational(b):Data Warehouse Operational(c): IRMIS Operational(d): IT Security and Access Man (Number, Custom) Value 0.00 1.00 1.00 4.00 11/16/2015 Page 10 of 12
PHINDIRITBL Network Capacity and IP Telephony operational (Yes/No, Custom) Value N N N Y Partially operational. During April 2016 mission, further improvement is expected. Overall Data on Financial Performance Disbursements (by loan) Project Loan/Credit/TF Status Currency Original Revised Cancelled Disbursed Undisbursed Disbursed P111942 IDA-51140 Effective XDR 7.80 7.80 0.00 3.96 3.84 51% Key Dates (by loan) Project Loan/Credit/TF Status Approval Date Signing Date Effectiveness Date Orig. Closing Date Rev. Closing Date P111942 IDA-51140 Effective 03-Jul-2012 09-Jul-2012 28-Dec-2012 30-Apr-2016 30-Apr-2016 Cumulative Disbursements 11/16/2015 Page 11 of 12
Restructuring History Level 2 Approved on 10-Mar-2014,Level 2 Approved on 04-Nov-2015 Related Project(s) There are no related projects. 11/16/2015 Page 12 of 12