Document o f The World Bank

Report No: 25010-BUL

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF EURO3 1.9 MILLION (USD34.15 MILLION EQUIVALENT)

TO THE

REPUBLIC OF BULGARIA

FOR A

REVENUE ADMINISTRATION REFORM PROJECT

May 9,2003

Poverty Reduction and Economic Management Department Europe and Central Asia Region

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APRs CAS C I D A

C M DFID

E C A EMP ERR EU GDP GOB GTD

CURRENCY EQUIVALENTS

(Exchange Rate Effective February 24,2003)

CurrencyUnit = Lev L1.00 = US$0.55 US$1 = L1.81

FISCAL YEAR 2003 -- 2008

ABBREVIATIONS AND ACRONYMS

- Annual Procurement Reviews - Country Assistance Strategy - Canadian Intemational Development

- Contact Management (System) - Brit ish Department for Intemational

- Europe and Central Asia - Environmental Management Plan - Economic Rate o f Retum - European Union - Gross Domestic Product - Govemment o f Bulgaria - General Tax Directorate

Agency

Development

I T ITD MOF

NGOs NHIF

N P V NRA NSSI PAS P C M U PCU PHARE

HRM - Human Resources Management PHRD

IBRD - Intemational Bank for Reconstruction and RARP

I L O - Intemational Labor Organization SA Development

IMF - Intemational Monetary Fund SAPARD

IMFiFAD

I O T A - InterEuropean Organization o f Tax SOGEMA

ISPA - Instrument for Structural Policies for VAT

- Intemational Monetary Fund, Fiscal Affairs SOE Department

Administrations

Pre-Accession

Information Technology Information Technology Department Ministry o f Finance

Non-governmental Organizations National Health Insurance Fund

N e t Present Value National Revenue Agency National Social Security Institute Procurement Accredited Staff Project Change Management Unit Project Coordination and Administration Unit Poland and Hungary Assistance for Restructuring the Economies (EU Program) Policy and Human Resources Development Fund (Japanese) Revenue Administration Reform Project

Special Account Special Accession Program for Agriculture and Rural Development Statements o f Expenditure

SociCtC de Gestion et de Management

Value Added Tax

Vice President: Johannes F. Linn

Sector Manager: Helga W. Muller Loan Country Director:

Task Team Leader:

Andrew N. Vorkink

Carlos D.C. Ferreira

BULGARIA REVENUE ADMINISTRATION REFORM PROJECT

CONTENTS

A. Project Development Objective

1. Project development objective 2. Key performance indicators

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Ma in sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices

C. Project Description Summary

1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project altematives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5. Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

Page

2 3

4 4 6

7 9

10 10

12 13 14 15 15

16 16 17 18 20 20 22

F. Sustainability and Risks

1. Sustainability 2. Crit ical risks 3. Possible controversial aspects

G. M a i n Loan Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex I: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, o r Financial Summary Annex 6: (A) Procurement Arrangements

(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project F i le Annex 9: Statement o f Loans and Credits Annex 10: Country at a Glance Annex 1 1 : Supervision Plan Annex 12: Letter o f Commitment

22 22 24

24 24

24

25

26 35 47 48 56 57 64 68 69 71 72 74 76

IBRD 32131R

BORROWER 27.38 1.47 IBRD 12.29 21.86

28.85 34.15

Total: 39.67 I 23.33 I 63.00

FY 2004 2005 2006 Annual 2.00 7.00 13 .OO

Cumulative 2.00 9.00 22.00

2007 2008 2009 7.00 3.00 2.15

29.00 32.00 34.15

A. Project Development Objective

1. Project development objective: (see Annex 1)

The project development objective i s the implementation o f a sustainable revenue collection system for Bulgaria through the establishment o f an economically efficient public revenue collection system that facilitates private sector development and complies with requirements for EU accession. A complementary objective i s the separation o f central and municipal revenue collection functions as an integral part o f the institutional rationalization and modernization process. The project would achieve i t s developmental objective through a comprehensive program o f reforms focused on maximizing community voluntary compliance, increasing effectiveness and efficiency, establishing a professional workforce, which will help reduce the opportunity and motivation for cormption, and improving equity and fairness in the administration o f the tax and social contribution collection system, while reducing the taxpayer/contributor compliance burden. The project i s intricately connected with the National Revenue Agency (NRA), which was legally created by Parliament in November 2002, and will execute the project. Under the project, the NRA would become the foundation o f the new revenue and social collection system in Bulgaria.

The project would maximize the level of taxpayer voluntary compliance by: (a) further developing the current system o f se l f assessment and introducing risk management as a key element o f operations; (b) simplifying the law and procedures; (c) establishing a comprehensive program o f taxpayer/contributor education and services; (d) reengineering, integrating and automating business processes; (e) instituting a comprehensive compliance strategy and selective audits and investigations; ( f ) enhancing collection activities; and (g) transforming the thinking and behavior o f NIL4 officials and taxpayers to one o f mutual t rust and cooperation in the administration of, and participation in, the tax and social benefit systems.

The project wouldpromote effectiveness and efficiency by: (a) adopting a model for strategic management as the basis to develop the role and capacity o f NRA headquarters; (b) creating a vision, values, and plans for reform and ongoing revenue administration improvements; (c) establishing processes and structures for planning, accountability, and corporate governance; (d) providing mechanisms for external transparency and accountability, and for input from extemal stakeholders; (e) redeveloping functional organizational arrangements, and restructuring and consolidating the national revenue organization; ( f ) providing modem accommodations and environment for staff and taxpayers; (g) perpetuating and continuing to sharpen the special focus on large taxpayers and contributors; (h) separating and enabling a future transfer o f responsibility for the administration o f local taxes and charges to local governments; (i) reengineering business processes to increase efficiency, transparency, and accountability while reducing opportunities for rent-seeking behavior; ('j) introducing modern, integrated, information technology business support; and (k) adopting the Bulstat (nationally assigned number) as the common taxpayer identifier and introducing electronic interfaces with other government agencies (e.g., Customs and State Receivables Agency).

The project would establish aprofessional workforce and approach by: (a) establishing a comprehensive human resource management function and strategy; (b) establishing a modern and relevant code o f conduct and ethics; (c) increasing the professional capacity o f the executive, middle managers and key operational staff; (d) establishing a comprehensive learning, development, and training capacity; and (e) developing the internal control system to monitor integrity and organizational outcomes.

The project would reduce the potential for corruption by: (a) increasing the separation between taxpayers and tax inspectors; (b) reengineering work procedures to reduce discretion and opportunities

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for rent-seeking behavior; (c) simplifying and increasing taxpayer understanding o f tax laws and procedures; (d) carefully directing audit activities to f i r m s and individuals whose tax returns are questionable; (e) increasing community participation through taxpayer associations, and (e) developing an internal control system to monitor integrity and enforce the code o f ethics.

The project would improve equity and fairness in the administration o f the tax and social contribution system by: (a) creating a modern Charter o f Taxpayer and Contributor Rights; (b) promoting community understanding o f the system, laws, administrative procedures, and rights and obligations; (c) promoting the development o f private taxpayer advisory services; (d) adopting uniform approaches and interpretations throughout the country; and (e) ensuring that dispute resolution mechanisms are expedient and impartial.

The project would reduce the taxpayer compliance burden by: (a) harmonizing and simplifying tax and social legislation and their respective codes; (b) developing, simplifying, and integrating to the extent possible, tax and social contributor processes and services; and (c) maximizing electronic interchange with taxpayers and contributors.

The project would indirectly foster economic growth by: (a) enabling a reduction o f tax rates through broadening the tax and social contribution base; (b) enabling a fairer private sector environment by increasing the overall level o f compliance, and providing a more uniform and equitable tax and social contribution system; (c) reducing compliance costs through easier and more efficient declaration and payment o f liabilities; and (d) reducing taxpayer exposure to corruption and administrative abuse.

2. K e y performance indicators: (see Annex 1)

The following general performance indicators have been agreed. Baseline values and project targets have been established. In addition, and as a complement, Annex 1 provides indicators that would be used to validate or measure the achievements o f each project component.

Macro Indicators Total revenue collected Revenue collected by type Share o f the gray economy

Compliance Aggregate compliance rates Number and amount o f PIT declarations filed Number o f tax declarations received on timekotal number o f tax declarations filed Revenues paid on timehevenues assessed

Revenue Predictability Revenue collectedhevenue target by category (annually).

Efficiency and Effectiveness Cost o f collection Number and amount o f audit adjustmentshumber o f audits Average number o f days taken to process a VAT refund request

Enforcement Annual number o f forced VAT registrations/total VAT registrations

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Amount o f arrears at year end compared to amount o f arrears at end o f previous year Arrears recovered during the yeadtotal revenues collected

Integrity Public perception o f tax administration integrity as measured by periodic surveys Staff perception o f integrity as measured by periodic surveys Number o f complaints over an anti-corruption hotline (or ombudsman's office if one i s established).

Taxpayer Services Public perception o f quality o f taxpayer service as measured by periodic surveys Performance against agreed standards for responding to telephone, written and personal inquiries Average number o f days to respond to formal written rulings.

Compliance Costs Percentage o f taxpayers filing electronically.

9. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 23927

An important dimension of the Bank's country assistance strategy has been the emphasis on developing an institutional basis for effective macroeconomic stabilization, and within this framework to concentrate on effective implementation of reform efforts. The project would support this objective by implementing an economically efficient public revenue collection system, the National Revenue Agency (NRA), recently enacted into law (Promulgated, State Gazette No. 1 12/29.11.2002), to facilitate private sector development and comply with the requirements for EU accession. Since 1996 the Bank has been engaged in a project to improve the performance of the National Social Security Institute (NSSI), which included strengthening the collection o f social security contributions. The NRA would incorporate concepts and outcomes of the NSSI project as well as the Customs refom. Both the Bank and the IMF have cooperated closely to provide the necessary technical assistance and leadership, as well as to support the Ministry of Finance in the creation o f the professional and technical competence to achieve a smooth organizational transition to the new NRA. These efforts are fully consistent with the revised CAS (discussed with the Board on May 9,2002) and the IMF programs in Bulgaria. The NRA forms an integral part o f the projected Bank lending program for FY02-04.

Date of latest CAS discussion: May 3 1 , 2002

2. Main sector issues and Government strategy:

In the course o f transition to a market economy, and in reformulating the role o f government, the Republic o f Bulgaria confronted mounting evidence that i t s revenue collection administration needed a major institutional overhaul to enable it to mobilize effectively and efficiently revenues, as well as to accede to the EU.

This perceived need for an overhaul applied in particular to the administration o f direct and indirect taxes. This perception was underscored by a joint LMFBank mission, an EU review based on the EU blueprints carried out by the InterEuropean Organization o f Tax Administrations (IOTA), and diagnostic studies on organization, human resources and taxpayer compliance by the Canadian consultants SOGEMA, financed by CIDA. While recent changes have been introduced into the tax administration, such as the introduction of functional arrangements, a large taxpayer office, and new concepts

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incorporated in a Tax Procedure Code in December 1999, the tax administration continues to be characterized by:

A crisis approach to management, with continuous encroachment by headquarters on the collection activities o f the tax offices, resulting in loss o f focus by management on the development and implementation o f strategic and future planning, direction, and control o f the organization;

The lack o f a credible human resource management function or strategy. As a consequence the tax administration suffers from limited workforce planning, poor recruitment, selection, and compensation arrangements, and an inadequate focus on executive, manager and staff learning, development, and capacity-building;

An operational strategy that, while having some focus on self-assessment, lacks the necessary supporting strategies or processes to service and support taxpayers. Current operations are based on outdated business processes with little in the way o f cohesive information technology support, and no credible compliance or risk assessment strategy or function as support;

A fragmented and dysfunctional national network o f offices, spans o f control and layers o f management, exacerbated by the need to collect both national taxes and local taxes and charges;

Inadequate internal controls, and claims o f taxpayer harassment and internal corruption;

Inadequate information systems and weak information technology management, systems development, and operational capacity; and

W h i l e recent changes have been beneficial, their development and implementation, combined with the pressure o f business as usual, has also placed considerable strain on resources, and the current General Tax Directorate (GTD) executive. As a consequence, today's tax administration generally lacks direction, staff lack the necessary s lu l ls and time to effectively introduce major changes, I T and HRM support are inadequate, and there i s a growing culture o f low community compliance and system participation, particularly among individuals and commercial enterprises in the small business sector o f the economy.

In October 1999, as a major reform initiative, the Government o f Bulgaria decided to establish a Unified Revenue Agency (UR4) for the primary purpose o f modernizing i t s tax administration. An important part of the modernization effort was the integration o f the GTD and the collection function o f the NSSI for the purpose o f simplifying tax and social contribution adrmnistration. In so doing, the government realized that the initiative would be highly challenging and not without some risk.

On June 29,2000, the Council o f Ministries approved a concept paper for a URA and launched the f i rst stage o f an implementation plan. This included: starting joint audit operations, strengthening GTD and NSSI, especially GTD's information technology systems; improving GTD and NSSI coordination; and developing a detailed implementation strategy for the subsequent two stages, including a realistic timetable and cost estimates. The IMF provided a full-time advisor for 12 months, to October 2001, to assist the Government in this effort.

The Government has worked on the implementation plan since then. Whi le a reasonable level o f achievement occurred, lack o f support by some members o f the previous government and the former GTD executive, coupled with a lack o f local experience in major project development and management, slowed progress. Moreover, initial gains from joint activities could not be built on because o f the lack o f a legislative basis for information-sharing between GTD and NSSI.

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The reform strategy, supported by the legal framework o f the NRA, builds on the achievements o f the Bank financed Social Insurance Administration Project (SIAP) and current project plans. With the assistance o f the government, the NRA program o f reforms would be comprehensive, medium to long term, and would address the policy, legal, procedural, infrastructure, human and behavioral aspects o f tax and social contribution administration in an integrated way. This approach, and the World Bank's involvement, would build the capacity o f the institution and staff, and introduce strict project and change management processes to ensure the achievement o f desired outcomes.

Region/ Category EU

EU-Accession Candidate Countries

Other European

3. Sector issues to be addressed by the project and strategic choices:

The project would address the sector issues identified above through an integrated package o f investments in organizational and management strengthening, human capacity building, and operational and systems reengineering and development. Specific focus would be on the revenue side o f the budget, and the set o f activities needed to: implement the NRA organization and management by January 2004; maximize community participation and contribution in the tax and social contribution systems; refine the legal and regulatory framework; establish human resource management on a more professional basis; develop taxpayer outreach services, and implement core business functions, including the integration o f tax and social contribution collection, information technology, and physical infrastructure. Special attention would be given to project and change management both to encourage staff and community participation and to minimize disruption o f current revenue collection flows while the new agency i s being set up.

Countries Denmark, Finland, Ireland, Italy, Netherlands, Sweden, United Kingdom Estonia, Hungary, Lithuania, Latvia, Malta, Slovenia, Romania', Bulgaria' Norway, Albania'

A key strategic choice was how best to time and coordinate the reform and integration o f the tax administration and social contribution collection functions. This decision, while taking into account the urgent need for tax reform and greater equity in the tax system, would also protect the achievements made through the NSSI modernization program, which included collection o f social insurance payments.

Former Soviet Union North and South America Asia and Pacific

Middle East

Russia Argentina, Colombia, Canada, United States Most Asian and Pacific countries do not have separate social insurance contribution schemes. Most Middle East countries do not have separate social insurance contribution schemes.

Source: IMF FAD reports. '' In course o f development

During implementation, the project will aim for early successes to build a sense o f achievement and the confidence o f stakeholders. A basic element of the initial and continuing reform strategy would be the systematic development o f executive, manager, and staff capabilities through training and other

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capacity-building activities targeted at the areas o f most need. Integration i s expected to be enhanced by a personnel compensation reform to attract and retain key personnel.

Important strategic elements already approved by the Council o f Ministers, which inform the strategic choices defining the project, include: (i) structuring the NRA as a national organization on a functional basis, with two reporting linkages, (a) headquarters and (b) a territorial and large taxpayer directorate; (ii) the executive management to consist o f a Director, reporting to a Management Board, including in i t s membership the Governor o f NSSI, and the Director for the Health Insurance Fund, in addition to M O F Minister and Deputies; (iii) preparatory work to transfer the collection o f local taxes eventually to the municipalities, in consultation with the National Association o f Municipalities; (iv) the allocation to NRA of an annual budget and cash flow based on assessed need, with the flexibility, responsibility, and autonomy to make i t s own financial decisions subject to normal government requirements for authorization and accountability; and (v) the development o f national policies developed on an on-going basis for key sensitive technical, strategic, and operational areas o f the revenue agency.

The Government has also created the NRA Commission, under the leadership o f a Deputy Minister o f Finance, as the legal body responsible for the N R A ' s development.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown) :

The project consists o f six components:

Component 1 - Policy Support: This component aims at ensuring that the NRA fully complies with the tax policy framework developed by the Ministry o f Finance and provides usefu l feedback on the administrative arrangements and requirements to implement the Tax Code. The component would finance activities to: (a) build in-house capacity for conducting policy reviews, and compliance and revenue estimation studies; (b) review and analyze policies and laws to provide an efficient and legally effective operating environment for the NRA, and, in particular, ensure the legal alignment necessary for EU accession exists, and propose improvements to NRA's legal framework and jo int taxatiodsocial contribution code; and (c) support N R A ' s strategic and operational planning, with special focus on the integration o f GTD and NSSI collections. Moreover, this component would (d) improve NRA's interaction with the court system to efficiently manage revenue collection cases, and specifically (e) facilitate judicial understanding and interpretation o f salient elements required to adjudicate these cases properly. I t also would (0 help develop fair and impartial administrative procedures for handling appeals, including the possibility o f community participation. This component finances technical assistance to carry out these activities.

Component 2 - Organization and Management Development: This component aims at developing the capacity o f NRA in two major areas: Organizational Development and Human Resources and Training. Organizational Development targets (a) providing an organizational structure for the NRA, and (b) a management system that includes modules governing accountability, internal control, and integrity o f managerial processes. I t would be implemented through a management information system deployed throughout the NRA. The project would provide management and technical training to staff to raise the level o f agency professionalism and integrity. The investment in human resources management would establish a modem HRM function in the NRA. This would include modernizing recruitment, selection, and hiring procedures, compensation policies and practices, performance incentive systems, workforce planning and career development, as well as management development. It also would establish a training center to meet short- and long-term training requirements o f the NRA. Curricula would be developed

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and suitable training infrastructure established. NRA HRM policies and procedural manuals would be developed and standardized, and a Code o f Ethics and Conduct prepared and disseminated to all N R A staff. This component finances technical assistance and goods to carry out these activities.

Component 3 - Increasing Operational Efficiency: This component would support activities required to implement the core business processes o f the NRA by: (a) establishing an Information and Communications Technology Department; (b) strengthening basic areas o f revenue administration, such as audit, enforcement, appeals, and intemal audit; (c) implementing an Integrated Revenue and Registration Management System, with access to third-party information, to increase efficiency and compliance; (d) implementing a Human Resource, Financial Management, and Management Information System, respectively, providing for sharing information through a Data Warehouse. I t would be vital that experienced revenue administration staff within GTD and NSSI be assigned to assist in the execution o f this component to ensure alignment between revenue administration requirements and new technical specifications. This component finances goods in the form o f computer hardware, software, and technical assistance to carry out activities.

Component 4 - Outreach and Participation: This component would develop and implement a Taxpayer, Insurer, and Contributor Charter o f Rights; assuring citizen voice and participation in shaping the NRA, creating mechanisms for transparency and accountability, such as oversight panels, community surveys; participation in improving the appeals procedures to ensure fair community input; creation of a "call center" to provide information and services to taxpayers and contributors; and external and intemal communications plans aimed at the community and NRA staff. This component also would promote the development o f private taxpayer advisory services. This component finances technical assistance to carry out activities.

Component 5 - Office Upgrading: This component would finance civ i l works to establish an adequate working environment for the NRA--staff, taxpayers, and contributors. T h i s would be achieved by the rehabilitation o f buildings currently owned by GTD or newly acquired buildings, where necessary. Appropriate workspaces would be established at HQ and the Regonal Offices, including power, network, physical, telecommunications security, appropriate functional/spatial separation, and other necessary features often adopted by modem tax offices. Modemization o f offices would take into account best practices in EU countries. Priority would be assigned to those Territorial Directorates that account for the highest share o f revenue collected. These are the Directorates o f Sofia, Plovdiv, Vama, Burgas, and the Large Taxpayer Directorate. Together they constitute 85 percent o f budget revenues. (A pilot project aimed at centralizing state taxes at the Territorial Directorate level and separating the administration of local taxes and fees in the Territorial Subdivisions has been launched in Plovdiv as well. Plovdiv i s also the site of the new Tax Training Institute.) The above mentioned Directorates, and at a minimum the Large Taxpayer Directorate, and Directorates in Sofia, Plovdiv, and Vama, would be modemized to reflect EU standards so as to promote the development o f domestic and international investment in the country through better interaction with potential investors. Ideally, a building to accommodate NRA H Q functions would be acquired to create a level playing field for GTD and the NSSI social collections function, which would be merged to form the NRA, and become operational in January 2004.

Component 6 -Project Management: This component would finance a structure for implementing the project, including: a Project Coordination and Administration Unit ( P O ; and a Change Management Unit, which would provide direction and lead the integration o f the Social Security collection area o f the NSSI and GTD into the NRA, as well as take responsibly for managing the incremental changes necessary to effect the implementation o f each component and related activities o f the RARP. The PCU would ensure that the financial management and procurement capacity meets World Bank Guidelines for accountability and transparency. The Change Management subcomponent ensures that all changes promoted by the NRA are based on well-established change management principles that seek to build

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commitment o f a l l staff in the change process to facilitate integration and overall development o f the NRA.

0.90 6.80

13.80 0.60

10.85

1. Policy Support 2. Organization Development 3. Increasing Operational Efficiency 4. Outreach and Participation 5. Office Upgrading

2.6 19.9 40.4

1.8 31.8

1.50 8.05

18.80 1.70

30.80 6. Project Management 1.80

I

Front-end fee I 0.35 I Total Financing Reauired I 63.00

% of Total

2.4 12.8 29.8 2.7

48.9 2.9

99.4 0.6

Note: Estimated costs include VAT and Customs duties. Counterpart funds include provision o f new and refurbished office accommodations.

2. Key policy and institutional reforms supported by the project:

The Government has taken the most important policy decision required to create the necessary conditions for the project; namely, the decision to integrate social and income tax collection into a single agency, and to transfer revenue, including collections for social contributions, directly into the appropriate Treasury accounts within 72 hours o f collection. The project would put in place conditions to ensure a sustainable and stable revenue flow, thus helping the Government to ensure macroeconomic stability, encourage fiscal prudence, and provide a more equitable basis for social and income taxes by the relevant agencies. The project also would substantially support public sector institution-building, and advance the ongoing anti-corruption efforts o f the Government.

At the strategic and operational level, the long-term reform objective i s to transform behaviors, relationships, and linkages between taxpayers and agency officials, to create a transparent, accountable, even-handed, and service-oriented public agency, and, as a consequence, to maximize the community’s participation in the system and promote voluntary compliance with the law.

This objective would be specifically achieved by developing and modernizing the current approaches to self-assessment, under which all taxpayers and contributors become responsible for voluntarily determining and meeting their obligations. True reform can only be achieved in an environment o f community confidence and agency credibility, which would need to be supported by: (a) legislative reform; (b) simplification of laws, regulations, and procedures; (c) a significant focus on, and function for, taxpayer service, related support, and education; (d) the efficient and rapid processing o f documents and follow-up on failures to f i l e or pay; (e) a comprehensive compliance strategy based on assessment of the risk to revenue collection, executed to maximize leverage and gain public confidence; (f) effective and credible dispute resolution processes; and (g) the control and eradication o f taxpayer harassment and internal corruption.

In essence, the reform o f the revenue collection system would require an integrated package. This package consists of a strategic approach to management, the development o f self-assessment, organizational restructuring and consolidation, modernization o f business and work processes, the development o f a supporting integrated information technology system, and the introduction o f modem human resource management practices. I t also includes the modification and simplification o f laws and

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regulations to meet the requirements for the overall reform, harmonization between tax and social contribution laws, and meeting EU requirements for accession.

To support the introduction and sustain the reform results, the project also would need to create a high level of stability and continuity among NRA management and staff. This would be done by focusing on career development at a l l levels, compensation improvements, and related learning and developmental activities. The project would further seek to change the organizational culture toward a merit-based, promotion and reward system supported by modern human resource management policies and regulations.

3. Benefits and target population:

Substantial benefits would accrue to the citizens o f Bulgaria from modernization, simplification, cost reductions, and improvement in compliance levels as a consequence o f the integration o f collection, service, and enforcement functions o f the two integrated agencies within the NRA. Other benefits include: improved collection and increased budgetary capacity; increased social service collections and greater benefit capacity; improved community participation in the tax and social benefits system; improved levels o f service to taxpayers and contributors; a decrease in tax fraud and evasion; and lower Government operating costs.

Taxpayers would benefit from reduced compliance costs and greater opportunities to reduce their tax burden based on increased compliance rates. Taxpayers also would benefit from improved taxpayer services, access to better information from the tax ahnistrat ion, and elimination o f time spent in queues to fi le declarations. Businesses would benefit from a reduction in the number o f business interruptions because of inadequate audits, and reduced level o f competition from gray market operators currently evading or avoiding their responsibilities.

Compliant taxpayers would benefit directly by the revenue administration having more accurate and comprehensive sources o f information, avoiding unnecessary contact with the administration because o f better-targeted auditing activities, and from a more efficient and equitable appeals and conflict resolution environment. Moreover, they would benefit indirectly from increased general compliance and knowing that the system was applied fairly and equitably.

Honest revenue administration inspectors would benefit from overall improvements in internal integrity and career and professional development opportunities fostered by the project.

4. Institutional and implementation arrangements:

Implementing the NRA would require the development o f new policies, work arrangements, procedures and technology, and the integration o f staff, resources, and cultures o f the GTD and the collection functions o f the NSSI. The change process would need to be carefully managed and sequenced so that staff of the two organization can grow and learn together while managing all processes and activities that would go into fully operationalizing the new NRA by January 2004.

The government strategy calls for a two-stage implementation. The f i rs t stage began in July 1, 2000, with the objective o f improving collection through more effective cooperation and better working arrangements between GTD and NSSI, which were aimed at eventual full modernization o f the revenue administration. In fact, in June 2000 the Council o f Ministers set up a Commission and project team, under the leadership o f a Deputy Minister o f Finance, to work on implementation issues. Subsequently, at the request o f the MOF, the International Monetary Fund provided an Expert Consultant on a long-term assignment to assist the Deputy Minister and the Project Team Leader. Working Groups have

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been established and are concentrating on providing better information technology systems, updating the building accommodations and overall work environment, improving business processes, and preparing legislative initiatives to support the comprehensive reforms reflected in the project component areas.

The second stage, which began in September 2001, incorporated the considerable results o f the first stage, and included the drafting o f an overall legal framework for the NRA, which was enacted into law in November 2002.

The current arrangements were sufficient for project preparation; however, they need further development to put in place a project team with the capacity and strength to implement the reform as envisaged. Moreover, the reform would require unequivocal GTD and NSSI executive support. Accordingly, implementation arrangements would be strengthened by:

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0

0

0

0

0

0

0

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Reviewing the structure, role, and composition o f the NRA commission as the project steering body;

Creating an oversight panel o f three to five international andor community leaders to provide an external accountability mechanism for the reform;

Creating fora for ongoing external consultation and input, especially including other agencies and professional and community groups;

Creating comprehensive strategies and processes for staff communication and participation;

Implementing the NRA, establishing at Headquarters a Project Coordination (PCU) and Change Management Unit (CMU) and appropriate dependencies to subsume current project arrangements, so as to manage project implementation, including change management, and internal and external relationships and communications;

Ensuring that the PCU i s staffed by competent and change-oriented personnel, providing appropriate working conditions, remuneration, and learning and developmental opportunities;

Ensuring that the national executive has competent full-time leadership in all key functions, e.g., the large taxpayer/contributor office, including human resources and information systems and technology;

Developing strategic, project, and change management, as well as administrative capacities o f the executive, the PCU staff, and pertinent territorial heads and middle managers;

Creating a Steering Committee for each substantive area under each o f the six project components; and

Ensuring that the PCU i s responsible and accountable for project financial management and procurement, plus providing logistical and coordinating support to undergird project objectives.

Financial Management: The project financial management would be carried out by a newly established PCU within the NRA. Project Financial Management Reports (FMRs) would be used for project monitoring and supervision. Agreed upon formats o f these are included in the Project’s Financial Management Manual. The PCU would produce a full set o f FMRs every three months throughout the life of the project. FMRs would not be used for disbursement purposes but rather Bank-financing would be disbursed under the Bank’s established procedures, including Statements o f Expenditures (SOEs).

Funds Flow: Project funds would f low from: (i) the Bank, either via a single Special Account which would be replenished on the basis o f SOEs or by direct payment on the basis o f direct payment withdrawal applications; or (ii) the Government, via the Single Budget Account o f Treasury at the Ministry o f Finance on the basis o f payment requests sent by NRA.

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D. Project Rationale 1. Project alternatives considered and reasons for rejection:

The project seeks the comprehensive reform and modernization o f revenue collection in Bulgaria and would include reforming the tax administration, and i t s integration with the collection functions o f the NSSI covering social, health, and unemployment contributions, and concomitantly to achieve EU compliance. Reforms o f this nature are challenging and complex, comprising many different components. However, each component i s an integral part o f the whole reform process, and the development and implementation o f each of the components i s obligatory if the reform i s to be effective. Consequently, each o f the six project components and the preliminary steps outlined earlier, are necessary, and there are no technically viable alternatives that could be recommended for a partial reform.

Alternatives to limit the scope o f the reform were considered and rejected because they might give birth to an ineffectual tax administration environment. For example, there i s little value in redesigning tax administration business processes without modem information technology support, as the revenue administration i s basically a transaction processing agency. On the other hand, there i s no value in introducing sophisticated technological infrastructure without business process redesign. The lack o f a thorough review o f the legal and regulatory frameworks might lead to cumbersome business processes. Insufficient taxpayer education and services might lead to an excessive number o f errors in the preparation o f retums and payments and additional processing costs. Organizational development, while essential, might be counterproductive without the complementary introduction o f new HRM processes and policies for staffing, job redesign, staff relocation and learning and development activities. And it i s imperative to move forward comprehensively to meet the requirements for EU accession.

The Government, with advice from the IMF and the Bank, discarded the possibility o f concentrating on a limited set o f reforms within the current tax administration in keeping with i t s highly constrained institutional capacity. While such an approach would be possible, i t s effectiveness would be severely limited because other components would need similar reform to be internally consistent. Moreover, past attempts to modernize tax administrations failed repeatedly in spite o f international support, including a Bank-sponsored Technical Assistance Loan. The purpose o f creating the NRA i s to integrate the administration o f tax and social contributions collections seeking the benefit o f integrated business processes, and simplified access and processes for clients. This would reduce the costs o f collection and compliance, and improve capacity to manage compliance through integrated data bases and joint activities. Integration o f this nature has already been accomplished in several other ECA countries, and i s an emerging trend and strategy to be pursued.

The possibility o f expanding the scope o f the project to include the reform o f Customs was also considered but rejected because: (a) the level o f institutional change sought by the project was already very demanding on existing implementation capacity, so the addition o f Customs could easily create an unmanageable risk and compromise achieving project objectives; (b) another World Bank project i s already pursuing Customs modernization; (c) EU accession requirements were being worked on independently, which will begin to affect deeply the function o f Customs during the l i fe the project, eventually forcing the transfer o f country fiscal collection to the NRA. Even so, the proposed project would seek appropriate legislation to enable exchange o f information between the NRA and Customs and would put in place the infrastructure to promote a better integration and data exchange between the two agencies.

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2. M a j o r related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

The two Bank projects listed below seek to reform the pension system and health insurance systems. The ability of these projects to achieve their development objectives i s greatly dependent on the achievement of high compliance rates in the collection o f social contributions. This collection i s currently successfully being carried out by the National Social Security Institute; however, NSSI's ability to enforce collection i s limited. This h c t i o n would be absorbed by the NRA. The NSSI and the Health Insurance Institute are key stakeholders with a vested interest in the project and both plan to participate on the project steering committee. A third project, a Programmatic Adjustment Loan (PAL), has been agreed with the Government and includes activities related to tax sector reform.

Sector Issue

Ban k-f inanced The need to create a stronger pension system based on a multi-pillar concept instead o f the existing pay-as-you-go approach; and the need to manage pension funds more efficiently.

The need to implement a fundamental reform o f the health sector, to improve access and cost-effectiveness, and to ensure ongoing financial and operational sustainability.

The need to provide the requisite structural and policy framework for the GOB to undertake a comprehensive medium-term reform. 3ther development agencies hternational Monetary Fund

Canadian International Development 4gency (CIDA) and technical issistance from SOGEMA

European Union (ISPA, SAPARD, and PHARE programs) )/DO Ratings: HS (Highly Satisfactory), S

Project

Social Insurance Administration (P008323)

Health Sector Reform (PO55157)

Programmatic Adjustment Loan (PAL).

Extended Facility Financing (EW

Technical Assistance to diagnose the requirements to modemize the tax administration

Financial assistance for EU accession

(Satisfactory), U (Unsatisfactory), HL

Latest Supervision (PSR) Ratings

1Bank-financL Implementation

Progress (IP)

HS

S

iighly Unsatisfa

projects only) Development

Objective (DO)

HS

U

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3. Lessons learned and reflected in the project design:

The project design and i t s implementation would incorporate lessons learned from international best practice and experience in tax reforms, which includes:

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Clear evidence o f sustained political commitment and support for the reform.

The administration and project has competent, committed, and dynamic leadership.

There i s a clear vision o f the organization's future state, supported by government, and there are well-articulated strategies and comprehensive plans to realize this vision.

Arrangements are put in place to develop executive, middle management, and institutional capacities,

There are early successes in the project's implementation to foster political and organizational confidence and support.

Current operations are not unduly placed at risk, and change i s incrementally introduced within local capacity to learn and contribute in manageable "chunks" rather than using a "big-bang" approach.

An appropriate legislative basis has been established to support the reform proposals, or has been modified accordingly to do so.

Investments in technology are based on modern strategies and reengineered business processes with attention to institutional development.

Adequate resources, funding, and cashflow arrangements are in place to ensure the agency can fully implement and sustain the reform.

A high level o f accountability, founded on sound corporate governance, management structures and process, i s enforced.

All elements of the reform are addressed in an integrated way, including participation o f and relationship with external stakeholders, such as other agencies, and professional and community associations.

Good project management and budgeting processes are employed, with external oversight and accountability.

Staff and external stakeholders receive comprehensive and timely information and are fully involved and have adequate voice in the reform process.

There i s cohesion and integration between those developing and implementing project reforms and those performing routine operations.

Technical assistance i s used to achieve general project goals and objectives as well as to meet specific targets.

Local ownership i s in evidence during and after the reform process.

Other major barriers to reform--e.g., corruption, inadequate compensation, and poor working environment--are addressed.

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4. Indications of borrower commitment and ownership:

The Bulgarian Government i s committed to establishing a modern revenue collection agency. Creation o f the agency i s taking place under the aegis o f the Council o f Ministers through a collaborative effort of the Ministries o f Finance and Labor. In January 2000, the World Bank and the IMF, in response to a Government request, launched a joint mission to review the plans for implementing a modem National Revenue Agency (NRA). Subsequently, a final report containing key recommendations for the creation o f a URA (now NRA as enacted into law) was issued March 2000. The IMF, again responding to a request from the Government, fielded a full-time, high-level advisor to assist the Government in the development o f a proposal for implementing the agency. The concept proposal was adopted by the Council o f Ministers in July 2000. In addition, the Canadian International Development Agency (CIDA) financed a full diagnostic/feasibility study (conducted by SOGEMA) o f the tax collection processes, procedures, and capacity of the current tax administration and the NSSI, and has provided the Government with recommendations covering the activities necessary to implement a fully operational NRA. In turn, the Government has requested Bank assistance in implementing the NRA through the proposed project.

In 2000, Parliament enacted new procedural codes for both tax and social contribution administrations and the elements of a modern administration have been implemented; for example, the Bank financed a project to reform the NSSI, and a large taxpayer office has been introduced and a functionally-based organization in the tax administration has been established. The NRA Commission and project team have made significant progress during the first stage o f NRA development, including preparing the draft NRA law for Parliamentary approval, which subsequently was enacted into law in November 2002.

The Minister of Finance, the Deputy Minister o f Finance in charge o f establishing the NRA, the NSSI, and the NRA executive management, in particular, fully support the project development objectives, and have provided a Letter o f Commitment (see Annex 12) attesting to this support with regard to ensuring a level of administrative independence recommended for modern revenue collection authorities.

Significant progress has been made by the current NRA project team. The team will be strengthened and expanded into the Project Coordination Unit when the project enters into effectiveness in September 2003.

5. Value added o f Bank support in this project:

The Bank and the IMF have developed a strong and unique experience in the modernization o f revenue authorities, with the Bank being particularly strong in the ECA region. The project would take advantage of this comparative international experience to assist the Government o f Bulgaria and the Ministry of Finance in the implementation o f the NRA based on transfer o f institutional knowledge o f the development o f successful tax administration projects in transitional economies and other regions of the world, The momentum for reform engendered by the Government and the diagnostic work of several technical assistance agencies should also assist in addressing the overall objective o f meeting EU accession criteria. The close coordination with the IMF and other donor agencies, such as U S Treasury and DFID, plus twining arrangements also should provide a solid foundation for the requisite support and coordination, thus contributing to the significant value added o f the Bank's role in the ongoing reform process.

In particular, the Bank would bring i t s unique and effective focus, coordination, and discipline to the project, and create a level o f commitment that would fully capitalize on earlier and current technical assistance programs, and provide the needed support to underpin the Government's commitment to

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modernize i t s revenue administration.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4): Cost benefit NPV=USS62 million; ERR = 70 % (see Annex 4)

- Cost effectiveness Other (specify)

- h

Economic Imuact

The project i s expected to generate substantial incremental fiscal revenue flows. Their importance in the context o f the specific challenges faced by the economy o f Bulgaria under the Currency Board Arrangement and the drive to EU membership by 2007 are outlined in Annex 4. Revenue gains are vital for sustaining macroeconomic stability and completing the unfinished structural reforms agenda. Nevertheless, these are inter-sectoral transfers, and could not be treated as direct welfare gains for the purpose o f cost-benefit analysis.

The project does target welfare outcomes (identified in Annex 4.8). They stem from:

a) efficiency gains in revenue administration, resulting in lower compliance costs, and higher quality o f services;

b) reduced price distortions coming from non-compliance or reflecting inflationary pressures;

c) additional potential for tax reductions as a result o f higher compliance and collection rates, etc. Not all o f them allow reliable quantification. Nevertheless, the team used the best available data. Annex 4 takes into account only enterprises’ compliance cost. I t shows that projected economic returns in the form of saved accounting cost alone are more than enough to pay back the project’s cost.

This i s an important benefit o f the project, but the project’s major targeted economic outcomes are directly related to improved compliance and enforcement and the establishment o f more transparent and equitable revenue admmistration system. In this context incremental fiscal revenue streams are the single most important measurement o f the project’s impact. They are described below.

2. Financial (see Annex 4 and Annex 5): NPV=US$720 million; FRR = 267 % (see Annex 4)

The project’s financial analysis i s presented in the fiscal impact section below. Annex 4 contains the analytical details.

Fiscal Impact:

Given Bulgaria’s low baseline compliance rates, the project i s expected to produce sizeable revenue

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gains. The projections o f the expected impact i s presented in Table 5 o f Annex 4. They are based on projected end-of-program aggregate improvement in compliance rates by only 5 percentage points as a result o f the project. Even this quite reasonable improvement would yield a NPV o f EUR 672 million, and an IRR o f 267%.

3. Technical:

Several technical issues merit attention:

The NRA has been established and would be managed on a functional basis, with special attention to the activities o f the largest taxpayers and contributors. This would require appropriate technical and organizational preparation o f the GTD and NSSI to make their systems sufficiently compatible to enable integration o f tax contribution collection functions into the new NRA structure.

taxpayer and contributor information. Accordingly, business processes would be redesigned and modem information technology systems and infrastructure developed, maintained, and properly managed. This can be accomplished only if the NRA has i t s own IT Department created with sufficient autonomy to meet the technical and infrastructure requirements on a timely and ongoing basis. Currently, GTD i s highly dependent on the Ministry o f Finance for IT resource decisions and management directives pertaining to i ts infrastructure and operations. Administrative inattention to the needs o f GTD internal priorities, resource restrictions, and inadequate compensation arrangements, make it extremely difficult to attract and retain sufficient IT and other technical specialists, which to date has compromised the ability o f the GTD to perform i t s collection and related functions satisfactorily. The recent passage of the N R A Law by the Bulgaria Parliament, and the formal commitment o f the Ministry o f Finance o f the requisite control over managerial, technical, and operational requirements, would provide the Agency with basic conditions to implement the RARP as designed (see Annex 1).

The NRA, to function as foreseen, would be highly dependent on reliable and timely flows o f

and planning development capacity to provide national direction supported by a uniform and internally consistent approach. Additionally, the NRA would need to manage the logistics o f providing adequate office accommodations, as 82% of i t s buildings are either unsuitable for current use or inadequate to constitute the physical basis for a revenue modernization program based on substantial investments in information technology. Office accommodations also must provide modem, open work areas and facilities for staff as well as comfortable service centers for taxpayers and social contributors. The Government agreed to finance the major part o f the construction requirements with the Bank financing needed renovation and rehabilitation o f the largest Directorates accounting for 85 percent o f total revenues collected.

Another fundamental issue i s the need to establish a strategic, functional, and operational policy

Another critical element for success of the project i s the integration and harmonization o f audit and appeals processes of the NSSI collection and the GTD into the NRA. Audit would be based on risk assessment and strategic selection processes. Joint audits are currently being tested, and are expected to

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be fully developed by project launch.

e appropriate incentive schemes linked to performance aimed at achieving strategic and operational outcomes, would also be a critical technical input to the project and at the forefront o f institutional development issues. The project preparation team sought agreement from the Government that it would provide the NR4 with an appropriate work environment for a modem human resource management department, with a suitable policy and regulatory framework. The newly enacted NRA Law, and specifically the formal commitment o f the Ministry o f Finance, supports the modernization o f human resources, the development o f adequate remuneration schemes, as well as the use o f performance incentive measures and commensurate resources for this purpose.

Human resource management and professional development, with the establishment o f

e An overarching issue i s the change management leadership required to orchestrate the technical, professional, and managerial coordination to carry out the transfer o f tax and social collection activities smoothly into the NRA when it becomes fully operational, in January 2004. The project preparation team received official commitment that sufficient resources would be allocated by the Ministry o f Finance to manage this process (Annex 1).

4. Institutional:

4.1 Executing agencies: The project would be managed by a Project Coordination Unit (PCU), and include project teams covering all component activities. The PCU would report to the NRA Management Committee, chaired by the Minister o f Finance. The Management Committee membership includes the Director General o f the NRA, a Deputy Ministry o f Finance, and the heads o f the NSSI and the NHIF. The PCU would be led by a senior member o f the NRA, and supported by consultants experienced in managing World Bank projects on the financial management and procurement side. Special focus would be on the development of NRA capacities as well as change management capacity-building. NRA functional directors and local executives would manage change activities required to conduct pilots, develop model offices, and implement technical and operational activities into the new functional areas o f the revenue administration. The PCU capacity would be increased through training and technical sk i l ls transfer. The PCU core team would be responsible for project development and implementation o f a l l components, covering, respectively: (i) organization and management, including office accommodations; (ii) tax administration functional operations, including business process redesign; (iii) policy, legal and regulatory framework; (iv) information systems and applications; (v) human resource management and training; (vi) inter-agency exchanges and cooperation; (vii) internal and external communications; and (viii) project planning, administration and staff development.

4.2 Project management:

The project would be a long-term, significant, and challenging task for the Bulgarian authorities. At the highest level, the Ministry o f Finance would assume primary responsibility, supported by the following structure:

o An external panel o f three to five community and/or international leaders would provide oversight in the interest o f public accountability for expected progress, including the change o f taxpayer and contributor behavior by fostering an institutional climate that encourages voluntary compliance.

An external consultative forum would provide the venue for formal community participation and feedback.

o

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o Internal and external communication program and networks would be established for staff participation and input as well as for external publics.

An NRA Management Committee would act as the project steering committee under the chairmanship o f the Minister o f Finance. The Committee would: (i) lead the effort and ensure inter-agency cooperation; (ii) decide on institutional and organizational arrangements and oversee the implementation of the NRA; (iii) allocate and oversee budget allocation and use; and (iv) comment on design and development options, as required, and resolve inter-agency disputes. The Committee would have high-level and balanced representation o f all stakeholders affected by the implementation ofthe NRA, including NSSI and NHIF.

A Project Coordinating Unit would manage the project in operational and technical areas.

I t i s expected that the project also would have continuing input and oversight from other technical assistance providers, in particular the IMF, as well as the current PHARE Twining arrangements, and would continue to include training and development, and be supported as well by US Treasury, DFID, and local project management capacity-building and institutional change efforts.

o

o

o

Changes proposed would be tested and refined in designated test sites within the NRA integrated revenue and social collection administration.

4.3 Procurement issues:

Procurement would be carefully managed and monitored to facilitate project implementation in critical areas, particularly information systems, technical assistance and large-scale building refurbishment and improvement. The GTD in general, and current project staff, in particular, s t i l l have little experience with Bank procurement requirements and guidelines. Consequently, priority would be given to training procurement and administrative staff, and the strict adherence to contractual arrangements to meet Bank requirements. Procurement and financial management advisory services might be contracted during the initial project years until the project management team meets the Bank standard requirements.

4.4 Financial management issues: Financial management, as in the case o f procurement, would be the responsibility o f the project management team. Close supervision and monitoring would be necessary to ensure that Bank financial management guidelines are closely followed, along with the necessary accountability mechanisms needed to safeguard the project's financial integrity.

In February 2003, a World Bank accredited Financial Management Specialist performed a detailed assessment o f the financial management system in accordance with the Bank's OP/BP 10.02 and the WB FM requirements. The result o f the assessment i s that the Project satisfies the minimum WB financial management requirements.

I t i s concluded that the Project has a financial management system which meets the Bank's minimum financial management requirements because:

The PCU implemented an acceptable computerized accounting system; The PCU has written a detailed financial manual describing the accounting policies and procedures, internal controls, delegation of responsibilities and authorities, transaction flows; The PCU has an adequate accountinghance staffing acceptable to the Bank, The PCU will produce quarterly FMRs in an agreed format acceptable to the Bank; The PCU will contract independent external auditors, acceptable to the WB.

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5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The project does entail some minor civil works to adapt buildings to the power and air conditioning requirements to support information technology investments and to create an appropriate environment to receive taxpayers. Any such construction or renovation will be carried out in compliance with Bulgarian environmental standards, including asbestos abatement and hazardous waste disposal. The numerous Directives and Regulations governing these areas, many o f which have been published between 1999 and 2002, have been delineated for the Bank, and are available in the project fi les. To ensure that the provisions o f national regulations, which to a large extent are aligned with the western practices, are complied with, the project team w i l l assure adherence to the national standards governing construction debris transportation and disposal, handling o f asbestos (widely used in the past for wall partitions and roofs), proper fencing of construction sites, noise and dust pollution, and proper landscaping when applicable.

Environmental Category: C (Not Required)

Bidding documents for works w i l l provide for such requirements to prospective contractors and that contractor obtains all environment and construction permits prior to commencement o f the works.

5.2 What are the main features o f the EMP and are they adequate?

Not Applicable. 5.3 For Category A and B projects, timeline and status o f EA:

Date o f receipt o f final draft: Not Applicable.

5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

Not Applicable. 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

Not Applicable.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. A key aspect o f the project involves merging social contribution collections into the new National Revenue Agency (NU). The result i s expected to be a more efficient collection o f taxes and social contributions. This would bring about a higher level o f compliance, and lower compliance costs to the taxpayer. The project would benefit directly the citizens o f Bulgaria by fostering a new taxpayer culture and lead to increased compliance. Indirectly this would provide social benefits to the general population through a more efficient f low o f revenues into the Treasury, leading to improved capacity to manage national budgetary resources, a more equitable spread o f the tax and social contribution burden, and significantly increased compliance. There i s a risk, however, that integration o f the GTD and NSSI into the N U would strain the organizational and managerial capacity o f the existing as well as the new agency during the early stages o f the transition, and potentially disrupt the flow o f funds to support social services. This would require careful planning and decision-making related to timing and sequencing the

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modernization and integration elements o f the reform. I t would also necessitate close monitoring to forestall any possible negative fallout to the most vulnerable segments o f the population in the short term.

Another social issue relates to the planned consolidation o f the existing network o f some 150 GTD offices into 28 operational departments, maintaining service centers in remote locations, and one office for large taxpayers/contributors. This consolidation, in combination with new business processes and automation, might have an impact on the level o f federal government staffing and lead to changes in skill requirements o f the NRA workforce. At the time o f consolidation, responsibility for the collection o f local taxes would be transferred to local governments. I t i s expected that staff not recruited into the NRA would be absorbed by local governments for collection o f local taxes. Retraining and re-skilling o f these workers would be undertaken to facilitate the transition. The Management Committee would have oversight o f this process. The NRA HR Department would develop a strategy and coordinate the transition o f personnel in accordance with NRA requirement for s k i l l mix and retraining requirements, including adherence to civil service regulations and labor codes. Every effort would be made to support the placement o f retrenched staff. The process o f transition i s expected to be incremental. with adequate time given to handle personnel and institutional adjustments in the new NRA operating environment.

6.2 Participatory Approach: How are key stakeholders participating in the project?

Key stakeholders in the reform project are the Bulgarian taxpayers and those who make social contributions. Their interest in achieving agreed project outcomes and transforming the behaviors o f agency officials and the community would be represented by an external oversight panel. The panel would comprise independent and prominent local and international experts who would meet, perhaps quarterly, to hold accountable the NRA Management Committee, the GTD and the NSSI for project performance and outcomes--in particular, that progress i s being made in changing the modus operandi of the revenue officials and the agency, and that these changes are perceived by the community, and that taxpayer and contributor rights are being protected. Periodic surveys also would be conducted by the NRA, under the project, to ensure that all segments o f the taxpaying public receive the required service levels as the new agency i s developed. This would be especially crucial during the institutional transition period, given i t s scale, and the need for adroit change management and leadership--which has been provided for under the project management and implementation arrangements.

External stakeholders, such as other agencies, professional bodies, and community groups, would be encouraged to participate in the reform process and provide input through formal external consultations initiated by the executives o f the GTD and NSSI.

Current staff o f GTD and NSSI would also participate in the project through internal communication and consultative mechanisms that w i l l be established.

Private tax advisory services w i l l be promoted to help the private sector and enterprises fulfilling their tax and social contribution obligations. In introducing advisory services, key segments o f the business and general community as well as professionals and their associations would be consulted.

Finally, outreach services would be established by the N R A to promote citizen voice and encourage participation in shaping the NRA and creating mechanisms for transparency and public accountability.

6.3 How does the project involve consultations or collaboration with NGOs or other c iv i l society organizations? NGOs and/or civil organizations would be encouraged to participate in the external panels and fora

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referred to earlier. 6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

The project does not have direct social outcomes; however, i t does positively and directly affect overall government revenues and thus social expenditures, with the potential to spread the tax and contribution burden to achieve greater equity in the delivery o f social services. The project aims, in particular, to transform the perspective and behavior o f agency officials and the community in such a way as to foster greater integrity, engender public trust and participation, and fully realize the concept o f voluntary compliance. The oversight panel (the Advisory Board) and external consultative groups (including representatives from the private sector) would focus on monitoring progress that should lead to the achievement o f these desired outcomes. 6.5 How will the project monitor performance in terms o f social development outcomes?

No specific, direct social development outcomes are sought by the project. Annual surveys would be used to measure the taxpayer perception o f the quality o f services provided by the NRA and improvements in integrity and reducing corruption.

7. Safeguard Policies:

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The project does entail some minor c iv i l works. Any such construction will be carried out in compliance with Bulgarian environmental standards. The Bank will ensure compliance in i t s supervision of the project.

F. Sustainability and Risks 1. Sustainability:

The Bulgarian Government i s fully committed to implementing a modem revenue collection agency based on international experience in managing compliance and arrears, linked to strong auditing and enforcement built on strengthened institutional arrangements, which balance taxpayer and contributor rights with their obligations under the law.

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

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Risk From Outputs to Objective 1. Generalized progress and taxpayer responsibility regarding the rule o f law i i

not achieved.

2. Economic stability and progress in the general economy (including internationa determinants) are not achieved.

3. The implementation o f the NRA woull not proceed smoothly because o f institutional incompatibilities, but especially lack o f political will.

M

S

M

H 4. The MOF would retain sufficient control over the NRA to impede the required level o f administrative and financial independence needed to implement and sustain the reform.

The Government places a high priority on maintaining the ru le o f law and fighting corruption. It i s taking steps to ensure structures are in place to provide due process to all citizens.

Economic and social stability are key ingredients in the Government's long-term strategy for EU accession and should provide the ballast to avert this possibility.

The process o f implementing the NRA would take into account institutional differences among the affected agencies and take steps to harmonize capacities through a carefully developed change management program that includes al l parties at every institutional level.

The project preparation team has received formal commitment f rom the MOF that sufficient financial and administrative independence will be granted to the NRA to achieve efficient and effective revenue and social collections and agreed targets (Annex 1). As confirmation, the Loan Agreement would incorporate a conditionality necessary to attest sustaining a satisfactory administrative and financial environment for the NRA over the l ife o f the project.

1. Key staff/managers are diverted to non-project tasks by internal crises or revised Government priorities.

S 2. IntemaVexternal "losers" in modernization effort impede progress toward modernization and full functioning o f the NRA.

Potential "losers" are many, including the GTD and administrative/financial units o f the MOF. This potential source o f disruption has been taken into account and efforts would be made to provide assurances to staff at a l l levels o f fair and equitable treatment during implementation o f the NRA through change management leadership provided by line and executive managers, including the implementation o f a strategic internal communications strategy.

I

Risk Rating I Risk Mitigation Measure

M Efforts would be made to ensure that while Project Management i s totally dedicated to the project, the task teams are integrated into the functional areas o f reform, and that any internal issues are resolved by project-related inputs.

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3. The NRA i s unable to attract and retain the highly skilled staff necessary ii a sophisticated revenue collection agency, particularly information jtechnology, auditing and legal staff.

Overall Risk Rating I Risk Rating - H (High Risk), S (Substantial Ris

S

S 1, M (Modest Risk), N

The project team will seek to obtain assurances from the Government that the NRA wi l l be able to compensate key staff at levels reasonably competitive with the market and leading public sector entities. Also, the project w i l l attempt, to the extent possible, to anchor information technology activities on local private sector f i rms that can provide stable service to the NRA.

Jegligible or Low Risk)

3. Possible Controversial Aspects:

N / A

G. Main Loan Conditions 1. Effectiveness Condition

None

2. Other [classify according to covenant types used in the Legal Agreements.]

1. independence for the NRA in the areas o f financial and administrative resources.

Assurance that the Government w i l l maintain for the l ife o f the project the requisite

2. financial statements, SOEs and Special Account, as well as the financial statements and accounts o f the NRA w i l l be audited annually by independent auditors acceptable to the Bank on terms o f reference acceptable to the Bank. The audited financial statements will be provided to the Bank within six months of the end of each fiscal year as well as at the closing o f the project.

The PCU will maintain a financial management system acceptable to the Bank. Project's

H. Readiness for Implementation E 1. a) The engineering design documents for the f i rs t year's activities are complete and ready for the

I 1. b) Not applicable. start o f project implementation.

1

2. The procurement documents for the first year's activities are complete and ready for the start o f project implementation.

quality.

1 I 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory

4. The following items are lacking and are discussed under loan conditions (Section G):

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1. Compliance with Bank Policies

a 2. The following exceptions to Bank policies are recommended for approval. The project complies 1. This project complies with all applicable Bank policies.

with al l other applicable Bank policies.

/

c __-- .--I-” <--I - fl& Cxn* Carlos D. C. Ferreira Helga W. Mul ler Andrew N. Vorkink Team Leader Sector Manager Country Director

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Annex 1: Project Design Summary BULGARIA Revenue Administration Reform Project

Total revenues collected.

Type o f revenue collected

Revenue collected by sector

Hierarchy of Objectives Sector-related CAS Goal:

CAS monitoring activities;

Government economic and sector reports;

An economically efficient public revenue collection system that promotes macro-economic stability, improves the climate for private sector development, and complies with requirements for EU accession.

Key Performance I Data Collection Strategy

Annual NRA report;

IMF supervision activities. Share o f gray economy

Critical Assumptions (from Goal to Bank Mission)

Political stability.

Continued public pressure for improved public sector performance.

NRA given sufficient independence to manage its resources to meet project objectives.

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I Kev Performance Data Collection Strategy

'roject reports: roiect Development I Outcome I Impact Critical Assumptions

(from Objective to Goal) lbiective: nprove the level o f taxpayer oluntary compliance with tax i d social conmbution bligations.

Indicators: Number o f tax declarations

filednumber o f registered

'romote administrative ffectiveness and efficiency.

1 Government financial ,tatistics.

1 IMFReports.

1 Project semiannual reports.

active taxpayers.

Number o f active taxpayerslcontributors (companies, employees, self-employed, etc.)

Number and amount o f tax declarations filednumber o f active taxpayers by type of revenues.

0 Number o f tax declarations received on timekotal number o f tax declarations filed.

Revenues paid on timeltotal revenues assessed.

Number and amount o f P IT declarations filed

Percentage o f disputes on hand in relation to total.

Perception o f taxpayers regarding the quality o f service provided by the revenue administration, measured through periodic surveys.

Revenue collectedrevenue targeted by category (annually)

Revenue collectedrevenue projected (large taxpayers)

Cost o f collection

Percentage o f taxpayers filing electronically.

0 Number o f complaints against the tax administration.

Average number o f days taken to process a tax declaration by type o f revenue.

Average number o f days taken to identify and notify non-filers andlor non-payers.

Continued government commitment to reform o f public institutions and private sector development.

Maintenance of sound 1 Project-financed semiannual) surveys and inalytical work.

macro-economic and fiscal policies.

Ability to adjust to extemal shocks.

Continued political support for the modernization o f the revenue collection system as well as EU accession.

1 Government financial ;tatistics

D IMFReports.

Project semiannual progress 'eports.

D Project-financed :semiannual) surveys and inalytical work.

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'romote a professional vorkforce and approach.

mprove equity and fairness in he administration o f the tax #ystem.

Average number o f days taken to process a VAT refund request.

Number o f taxpayers / number o f revenue administration employees.

Number and amount o f audit adjustments/number o f audits.

0 Performance against agreed standards for responding to telephone, written and personal inquiries.

Average number o f days taken to respond to requests for formal written rulings

Annual number o f idditional forced VAT .egistrations/total VAT .egistrations

Amount o f arrears at year :nd/total revenues assessed

D Amount o f arrears recovered during the yeadtotal revenues collected

Perception o f taxpayers and 3ther stakeholders regarding the level o f professionalism ind integrity o f revenue idministration staff, as measured through periodic surveys.

b Perception o f managers and staff regarding the level o f yrofessional skills in different Functional areas, as measured :hrough periodic surveys.

Number o f complaints over in anti-corruption hotline

b Number o f additional forced VAT registrations during the leadtotal number o f VAT .egiseations at year end.

b Amount o f arrears at the )eginning o f the year (o/w ioncollectible)

Percentage o f disputes

Periodic surveys o f lxpayers and other takeholders

Periodic surveys o f N R A

Project semiannual progress

ianagers and staff.

:ports.

Periodic surveys o f ixpayers and other takeholders

IMF reports.

Project semiannual progress :ports.

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resolved during the period in relation to total.

Percentage o f appeals lost in court, by category o f dispute

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Hierarchy of Objectives 3utput from each 2omponent: I. Policy Support

!. Organization and vianagement Development

Key Performance Indicators

Output indicators:

Appropriate changes in the legal and regulatory framework made to support the reforms introduced by the Project and accession to the EU.

Tax policy unit staffed and made operational with capacity to analyze administrative performance, and economic efficiency and effectiveness o f the NRA.

Improved revenue forecasting models and methodologies implemented.

Revised administrative appeals system filly functional, evaluated, and revised if necessary.

* Capacity to analyze how well the NRA implementation 3 f the Tax Code achieves tax policy objectives.

1 Organizational structure at he headquarters and territorial

Data Collection Strategy

Droject reports:

b Annual Strategic Plans :ASPS).

:AOPs).

b Project Management ieports (PMRs).

b World Bank Supervision ieports.

b Mid-Term Review (MTR).

1 Taxpayer surveys.

1 Consultant Outputs.

Annual Operational Plans

Critical Assumptions (from Outputs to Objective)

Sustained commitment to improvement in revenue administration performance at the political, managerial, professional and technical levels.

Continued involvement o f high level officials o f the MOF, NRA, and local offices in oversight and implementation o f project initiatives.

Project management o f the caliber needed for effective change management to build ownership for the reforms and minimize resistance from managers, staff, taxpayers, and other stakeholders.

Willingness o f N R A management and government to implement modern human resource management policies and practices to establish a meritocratic, professional, performance oriented revenue service.

Government commitment and fiscal ability to provide equitable pay and incentives to NRA staff, thus fostering improved integrity and increased ability to attract and retain requisite skills.

Willingness o f the MOF to give the NRA fill managerial and technical control over its information technology environment.

Willingness o f the legislature to enact legal changes required for implementation o f project activities in a timely manner.

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. Operations Strengthening

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levels rationalized along functional lines, but with a focus on large taxpayers.

Territorial offices consolidated.

Collection o f local taxes transferred to local governments.

Strategic approach to the management o f the agency established.

Improved management systems relating to accountability and authority, monitoring and evaluation, internal control and integrity implemented.

Standardized workflows, in accordance with well re-engineered business processes implemented.

Physical infrastructure of offices covered by the project improved.

Regular consultation with key stakeholders implemented.

0 Responsibility for collection o f taxes and social contributions transferred to the NRA.

New human resources management, staffing and pay policy -including efficient incentive systems- and training plan adopted.

0 Code o f Ethics implemented.

0 Effective internal audit management and procedures implemented.

0 Core business procedures reengineered considering intemational best practice. Business processes streamlined and codified for uniform use throughout the country.

I. Outreach Services

1 I T capacity at the Central md territorial level enhanced, ind computer systems to ;upport business processes mplemented.

1 Communications network mplemented making taxpayer nformation available hroughout the administration.

1 Electronic filing system mplemented.

1 NRA Portals and websites mplemented.

1 Taxpayer advisory services mproved.

1 Taxpayer service standards leveloped and implemented.

1 Taxpayer education :ampaigns implemented on ipecific topics.

1 New audit support systems mplemented, including issistance for desk audits, iudit selection, and third party nformation collection.

1 New arrears management iystem implemented.

Long-term training strategy developed and implemented targeting continuous upgrading o f skills.

Improved policies and systems for recruitment, promotion, rotation, performance evaluation, discipline and professional development implemented.

Legal database o f court decisions implemented and available countrywide.

Community Participation ind Services Department :stablished, staff trained

NRAPerformance Feedback Surveys taken and results used to improve client service.

. Facilities Upgrading

I. Project management

Annual reports prepared and disseminated to Government and stakeholders.

Private taxpayer advisory services actively promoted.

0 Intemet services available for filing tax returns and related intemet-based tax and contributor services established.

Public education campaign mounted.

0 Intemal communications plan developed and implemented.

Plans for rehabilitation of N U offices implemented, with the installation o f networks, computers and completion o f training.

Quality assurance and change management methodologies are implemented.

Good quality Annual Operational Plans prepared in time.

Good quality, semiannual Project Management Reports (PMRs) prepared in advance o f supervision missions.

0 Procurement carried out in a timely manner and in accordance with World Bank Guidelines.

0 Project financial management carried out in accordance with World Bank Guidelines.

Annual project audit conducted in a timely manner by independent auditors.

An implementation completion report reflecting the W s evaluation o f the project prepared before project closing.

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'roject Components / iu b-components: . Policy Support

!. Organization and vianagement Development

1. Operations Strengthening

1. Outreach Services i. Facilities Upgrading i. Project Management

nputs: (budget for each :omponent) JS$1.5 mill ion (total cost)

JS$8.05 mil l ion (total cost)

JS$18.8 mil l ion (total cost)

JS$1.7 mil l ion (total cost) JS$30.8 mil l ion (total cost) JS$1.8 mil l ion (total cost)

'roject reports:

I Semiannual Project Report

1 Management Reports

I Supervision missions.

1 Project audit reports.

PMRS).

'rom Components to lutputs)

Satisfactmy institutional rrangements are found for -ansfer o f revenue functions I the new agency (NRA).

ffort do not disrupt work. "Losers" in modernization

Key staff can be attracted to

K e y staff and managers are

i e new agency.

ot diverted to non-project isks by crises.

Counterpart h d s for the lroject are made available on n on-going basis by the hlgarian Government.

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Annex 2: Detailed Project Description BULGARIA Revenue Administration Reform Project

By Component:

Project Component 1 - US$1.50 million Policv SUDDOI-~ ComDonent

This component would finance technical assistance to build in-house analytical capacity to conduct compliance and economic studies, analyze proposed bills, laws, policies and regulations, review tax laws, improve the legislative and regulatory foundation o f the NRA, and address the policy and legislative aspects o f the tax and social contributions system. The purpose i s to seek a simple, supportive, and well-balanced approach to the collection o f direct and indirect taxes, including rates, thresholds, discretions, and exemptions. This component would also support N R A ’ s strategic and operations planning as well as quality assurance.

This component has three subcomponents:

(1) Policy Analysis and Evaluation

This subcomponent would finance technical assistance and office equipment to build the in-house capacity to evaluate proposed bills and policy changes and recommend program alternatives to policy makers.

(a) Establish a Policy Analysis and Evaluation Department (i) strategic plan, and performance indicators. (ii) (iii) (iv)

Prepare a mission statement, organization, position descriptions, responsibilities,

Identify staff to be transferredhired. Provide training and Technical Assistance in Policy, Legal and Economic Analysis, etc. Acquire office equipment and library.

(b) Carry outpolicy impact analyses 08 (i) (ii) (iii)

The welfare and demographic impacts o f current programs and program changes. The impact o f program changes within the broader context o f the economy. The policy framework for mandatory social insurance.

(c) Carry out compliance studies (i) economic sector, tax, and geographic location - includes surveys and consultations. (ii)

Annual estimate of compliance and evasion by type o f taxpayerlcontributor (tlc), size,

Others such as annual estimate o f VAT refund fraud.

(4 Carry out taxpayer/contributor/retention entity (ddr) distribution studies: (i) of tadcontribution and geographic location, compared to registered tlclr by type, etc. (ii)

Annual estimate o f numbers o f potential tlclr by type o f tlclr, size, economic sector, type

Annual estimate o f potential revenue for different tlc by type, etc.

(e) Analytical modeling (i) above studies.

Complete and fine-tune the compliance analytical model for applying the results o f the

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(2) Legal Framework

The objective of this subcomponent i s to establish a comprehensive legal system to ensure compliance with tax and social contribution legislation taking into account taxpayers/insurers/contributor rights and obligations, and, with respect to the issues related to EC harmonization; to create and strengthen a legal unit to identify legislative gaps and prepare recommendations in the form o f amendments to ensure the operational feasibility o f tax and social contribution legislation.

(a) Establish NRA Legal Function (i) plan, and performance indicators. (ii) (iii) (iv) (v) about changes in legislation.

Prepare mission statement, structure, position descriptions, responsibilities, strategic

Identify staff to be transferredhired. Provide training in tax law, case presentation, specialized EU legal language, etc. Acquire office equipment and library. Develop an information system that w i l l notify agency staff and taxpayers/contributors

(6) Review and propose improvements to NRA 's institutional legal framework (i) of enforcement powers, and citizen appeals and recourse mechanisms (coordinated with Components 3 and 4). (ii) for use by NRA staff.

Review N R A ' s institutional legal framework with a view to simplification, improvement

Review GTD and NSSI internal resolutions and preparation o f a simplified, ordered text

(c) Review and analyze the tax system laws (i) harmonized legislation for public revenues; (ii) compliance and avoidance studies, (iii) administrative change costs.

Prepare proposal for a jo int taxatiodsocial contribution code to provide for covering and

Review Tax Code with a view to simplification and closing loopholes--based on

Analyze proposals for changes in the tax code, and estimate revenue impact and

(d) Review and analyze other applicable laws (i) assistance/creation o f a Fiscal Tribunal, or Tax Courts). (ii) (iii) information-gathering from other institutions; (b) protect taxpayer information; (c) permit access to pertinent information as per law; and (d) access impact on NRA procedures. (iv) Analyze Digital Signature Laws and implications for N U procedures. (v) Analyze Electronic Payments laws and impact on NRA procedures. (vi) Analyze past tax and insurance case verdicts and recommend way to improve procedures and legal capacity.

Analyze judicial processes applied to revenues and recommend improvements (e.g.,

Examine the possibility o f introducing arbitration. Analyze issues dealing with confidentiality o f information to (a) facilitate

(e) Review EUAccession laws and make recommendations related to harmonization with the E l l legal and regulatory system related to taxation.

(3) Strategic Planning and Quality Control

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This subcomponent would finance activities to prepare and annually improve N R A ’ s strategic and operational plan. This plan would define all activities necessary to accomplish the Strategic Planning objectives (specifying duration, sequence, and resources). The activities, in turn, would have clearly defined results and performance indicators for gauging accomplishment, efficiency, and effectiveness, together with explicit goals.

(a) Establish and later strengthen NRA Planning and Quality Control Unit (i) performance indicators, etc. (ii) (iii) Provide targeted training.

Define mission statement, structure, position descriptions, responsibilities, strategic plan,

Identify staff to be transferredhired.

@) Prepare NRA Strategic and Operational Plan, 2004-2008

(c) Plan for the integration of GTD and NSSI collections.

(d) Introduce output quality control policies, procedures, evaluation methodologies, and provide training.

Project Component 2 - US$8.05 million

Orvanization and ManaPement Component

This component would build strategic focus, create the management structure, build executive and managerial capacity, strengthen human resource technical and operational capacity, develop related management information systems, including customization, and strengthen the integrity o f the NRA. An integrated human resource management system would be installed, including modules for payroll, human resource management, and performance evaluation. All activities would be managed by the change management team.

(1) Organizational and Management Development

(a) Advisoty Services (i) (ii) monitoring, internal control, corruption, management, etc.

Develop an adequate organizational design to implement the National Revenue Agency, Design a management system for the N U covering al l levels, including accountability,

@) Management Information System (i) (ii) Implement customized MIS.

Design customized Management Information System (MIS).

(c) Headquarters Office Infrastructure (i) (ii)

Install 80 workstations, including printers, scanners, audiovisual equipment, etc. Equip offices, including copiers, phones, fax, binders, etc.

(d) Territorial Office Infrastructure (i) (ii)

Install 2,000 workstations in territorial offices Equip offices, including copiers, phones, fax, binders, etc.

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(e) Training (i) General management training (ii) Accountability system training (iii) Internal control system training (iv) English language training (v) Related books and professional subscriptions

(2) H u m a n Resources and Training

The Human Resources and Training component provides the basis for modern Human Resource Management (HRM) and training systems. Areas to be strengthened include recruitment, selection, and hiring procedures, compensation policies and practices, performance incentive systems, workforce strategic planning, management development, and support for training centers, curricular development to meet short and long term needs, and training infrastructure for training centers. NRA HRM policies and procedures manuals would be developed and standardized and a Code o f Ethics and Conduct prepared and disseminated to all staff. Employee retention would be strengthened by the development o f career streams to match the needs o f the NRA.

(a) Human Resources Policy and Strategy Development (i) development, and termination. (ii) and anticipated pay reform environment, including analysis o f adequacy o f pay bands in each employment category, i.e., managerial, professional, technical, and support (iii) the new NRA. (iv) professional, and technical needs assessment projected for the short-, medium-, and long-term, including replacement policy guidelines. (v) Develop position descriptions for new NRA workforce requirements in the context o f career streams and structure for each category o f staff. (vi) Prepare and implement an employment rationalization (needs adjustment) program for the NRA based on new staffing requirements in the context o f overall workforce planning. (vii) Prepare and implement a Code o f Ethics and related training program for new employees and as a part o f the career development and performance evaluation program.

Develop policies and planning for recruitment, selection, hiring, promotion, career

Develop wage, benefits, and performance incentives policies for the NRA, within current

Develop and disseminate to al l staff: HR Personnel, Policy, and Regulations Manuals for

Prepare workforce strategic planning framework and methodology, including managerial,

(b) NRA Training Policy and Strategy Development (i) requirements for developing an on-going program o f training to meet current and future needs o f the NRA. (ii) Assess management training needs for the NRA, prepare a training program, and deliver it. (iii) Develop capacity to prepare and disseminate training materials needed for the full implementation o f the NRA, as well as for future training requirements, including the use o f distance learning methods and technologies, and train the trainers. (iv) including packages, study tours, seminars, and courses o f study for the project (see individual components). As per component over l i fe o f project.

Develop training strategy for the NRA, including assessment of existing capability and

Prepare and deliver short-term training to meet the needs o f a l l component areas,

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Project Component 3 - US$18.80 million

Increasinp Operational Efficiencv Component

The Government’s decision to create a new agency to be responsible for both social contributions and tax collections wi l l require the definition o f new combined and streamlined business processes as well as business requirements, the design and implementation o f new information systems to support the core business functions. This includes the integration o f tax and social contribution collection, the acquisition, and installation o f new computer and network equipment, and the creation o f a department for system and technology support.

This component has four subcomponents, as follows:

(1) Business Processes

The objective o f this subcomponent i s to introduce integrated business processes that will support the redesigned business operations o f the NRA. The project would support NRA with technical assistance to:

(a) Establish the Business Development Office to coordinate redesign activities, technical assistance, and training.

(i) and performance indicators. (ii)

Define mission statement, structure, position descriptions, responsibilities, strategic plan,

Identify staff to be transferredhired.

(b) Review and document NSSI’s existing business processes; review, document and update GTD’s business processes.

(c) Define the N R A ’ s uniform business processes based on the previous activities’ results; and develop and implement new business processes countrywide.

(d) Improve specific operational processes, among others. (i) Audit:

i. external information, propose selection methods, and implement) ii. iii. Prepare algorithms for the detection o f noncompliance trends (for large taxpayers and for other taxpayers) iv. Specialization and training o f auditors in specific economic sectors v. Coordination and information exchange with foreign revenue authorities vi. Specific training in dealing with multinational corporations vii. Prepare Annual Audit Plan viii.Define performance indicators, measurement techniques, and quality and control management system ix. Training o f auditors in audit techniques.

(ii) Fiscal presence i. Evaluate the perception o f risk o f noncompliance by potential taxpayer, feedback into the system ii. Prepare measures to improve the fiscal presence

i. Analyze effectiveness and appropriateness o f legal enforcement powers

Case selection for large taxpayers (analyze existing procedures, gather internal and

Case selection for other groups o f taxpayers

(iii) Enforcement:

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ii. Analyze effectiveness o f administration in using i t s enforcement powers iii. Analyze arrears, develop a strategy and policies for prioritization o f collections, and implement plan iv. Analyze post-collection and risk perception v. Train theoretically and on-the-job in investigation techniques vi. Develop enforcement management information system

Administrative and Judicial Appeals processes i. Prepare administrative dispute mechanisms and improvement proposals ii. Analyze information and prepare database on cases in the Administrative Tribunal iii. Analyze information and prepare database on cases in the Courts iv. Develop a system for assigning and monitoring cases given to NRA lawyers v. Prepare process manuals vi. Develop appeals processes management control systems

Anti-corruption strategies and internal investigation i. Develop risk analysis capacity ii. Prepare an anti-corruption plan iii. Design and implement internal audit automated systems iv. Design audit trails, cross-checking, and other control and corruption-detection mechanisms v. Train in internal investigation vi. Establish integrity hotline in internal audit department

(iv)

(v)

(2) Application Software

The objective o f this subcomponent i s to support the businesses processes through the appropriate application systems. In addition to the central operational database, NRA wi l l establish and maintain a data warehouse for studies and decision-making information.

The project will support NRA to:

(a) Carry out inventory of existing ITsupport; and define the information systems and technology (IST) strategy for NRA

(b) IST solution (i) Management System for the collection and processing o f taxes and social contributions, which should have interfaces with other agencies and an e-government module (e-filing, consultations through the Internet, etc.). (ii) Acquire licenses for system software and development tools (iii) Acquire IRMS, customize it to fit N R A ’ s requirements, train I T D s ta f f to participate in the customization of the new system, convert and migrate data from existing systems; conduct a pilot implementation o f the system; prepare and implement a nationwide deployment plan

Develop business requirement and systems architecture for the Integrated Revenue

(c) Data Warehouse (i) warehouse (ii) warehouse system.

Develop business requirements, data architecture and data sources for the data

Acquire required software (data mining, data warehouse etc.) and implement the data

(d) Backup and SecuriQ

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(i) (ii) requirements (iii) (iv)

Define backup policies, processes, and procedures Define data security policies and procedures; define security and access software

Acquire security software and implement nationwide. Prepare disaster recovery and contingency plans

(e) Financial Management Software (i) (ii)

Define NR.4 financial management software requirements, Acquire, customize, and implement the appropriate software package.

@ Provide end-user training for software applications.

(3) Information Technology Infrastructure and Implementation

The project would support the development o f technical specifications, procurement, and installation o f computer and networking equipment, including central and regional equipment, internet gateway servers, and systems software (including business software and development tools), and a number o f portables for audit work, as follows:

(a) Inventory existing computer, network, and telecommunications equipment at HQ and in the regions

@) Prepare technology requirements, including network and telecommunications infrastructure

(c) Prepare a technology procurement and implementation plan

(4 Implement the business software and development environment

(e) Acquire equipment, install and setup nationwide network, including the appropriate security and access controls.

@ Design and implement the e-NRA gateway.

(4) Organization of Information and Communication Technology Department

The project would support the creation o f an Information and Communication Technology Department for systems development and technology support, initially to carry out subcomponents 2 and 3, to support the systems and technology once in place, and to provide end user support in the future. The Department’s initial organization would be as follows

Director (assisted by an Office of ITPlanning, Control and Security), and composed 08 IT Architecture

The fimction o f this unit will be to define the technology, data analysis and modeling, and application and configuration architectures. The number o f people in this unit will decrease as the project advances and the systems mature. Initially the unit would consist o f i t s manager and two technical staff.

This unit would be charged with (a) the business analysis, requirement and testing (including acceptance o f third-party products) - initially three specialists; and (b) user support in the form o f customer service and Help Desk support -two staff.

IT User Interface

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IT Development This unit would be charged with software development and maintenance, and be composed o f developers (sk i l l s in function o f the application system’s languages) and unit testers. Initially this unit would be composed o f eight technicians (including two database administrators), who would work with vendors in customizing selected products.

This unit would be in charge o f the operation o f the equipment, i t s maintenance, user support (for hardware matters), data center support, printing, etc. Initially, the unit would be composed of: four specialists on networking and telecommunications services and two website developers (this number would increase over time); a number o f other staff depending on the systems selected, the number o f users, etc.

IT Operations

The Director will be assisted also by the IT Planning, Control and Security Unit, which would be in charge o f budgetkontrol, prioritizatiodscheduling, risk analysis, security/audit, quality assurance and preparation o f service level agreements. The staff needs will vary according to the project phases. Initially this unit would be composed o f two specialists. The project will support the training o f ITD staff.

Project Component 4 - US$1.70 million

Outreach and Participation Component

The process o f creation o f the National Revenue Agency includes seelung an institutional culture change towards the citizen and noncitizen taxpayers and contributors as stakeholders and clients o f the NRA. The project would finance technical assistance and equipment to improve client participation and education, improve assistance and introduce a service orientation, as well as lower the cost o f compliance through uniform approaches, simplified tadcontribution procedures and payments, and improved appeals mechanisms.

(1) Taxpayer Services

This subcomponent aims to increase the transparency and accountability o f NRA and to provide assistance to taxpayers and contributors to fulfill their legal obligations:

(a) Establish Community Participation and Services Department (i) Definition o f mission statement, organization, position descriptions, determination o f responsibilities, preparation o f strategic plan, definition o f performance indicators. (ii) Identify staff to be transferredhired. (iii) Training in tax procedures, communication ski l ls and other areas

(b) Design and promote Taxpayer and Contributor Charter of Rights

(c) Provision of other services through the Internet, such as: (i) payments and queries (ii) (iii) (iv)

Introduce systems for electronic reception o f tax returns, third-party information,

Design o f alternatives o f access to the Internet for taxpayers without their own access TA and training for the design o f web pages and e-services Web-based FAQ system and chat

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(v) (vi) telephone or internet.

Provide notifications through electronic means Study on security and authenticating modification o f taxpayer information remotely by

(4 Provision of personal and remote assistance (i) Center) (ii)

Provision of telephone and email direct assistance at HQ and territorial offices (Call

Definition o f client service standards and monitoring

(e) Develop a management and quality control system and develop apermanent taxpayer time and cost-monitoring system by type of taxpayer and fiscal obligation

fl Call Center--acquisition and equipment for Call Center to provide information to clients on the telephone

(@ Design and development of an automated complaints and suggestions monitoring system

(h) Definition of client service standards

0) Promotion of the development ofprivate taxpayer advisory services

0) Develop mechanisms for transparency and accountability

(2) Communications and Public Relations

This subcomponent would promote community understanding o f the system, laws, administrative procedures, and r ights and obligations o f the clients through a comprehensive program o f taxpayer/contributor education, as well as an internal communications campaign, including:

(a) Establish and strengthen the Public Relations Department in NRA (i) plan, performance indicators. (ii) (iii)

Definition mission statement, structure, position descriptions, responsibilities, strategic

.Identify staff to be transferredhired Training in communications and related areas

(b) internal communications (i) (ii)

(iii) Create an NRA intranet (iv)

recognition)

Conduct sociological surveys and analysis Preparation and publication o f internal communication materials, information pamphlets

and posters for NRA Offices

Organizing special informational events (meetings, seminars, discussions, employee

(c) External communications (i) performance, compliance, and other areas, such as:

Design and implement periodic surveys to measure community feedback on NRA

1. procedures, 2. information provided, 3. access to NRA,

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4. treatment by NRA personnel, 5. transparency, corruption and equity issues. Training in the development, monitoring, and evaluation o f surveys and other feedback (ii)

mechanisms, contracting, monitoring and quality control o f survey execution

(iii) Communication activities 1. Carry out campaigns targeted at consolidating community perceptions 2. Carry our campaign targeted at legal entities 3. Carry out campaign targeted at physical entities 4. Promote Taxpayer and Contributor/Self-insured individuals Charter o f Rights and Obligations 5. Design and implement a taxpayer information center

(d) Develop mechanisms for transparency and accountability (i) leaders to provide an external accountability mechanism (ii) agencies, taxpayer associations, and professional and community groups; (iii) (iv) (vi) Design NRA performance surveys

Creation o f an oversight or monitoring panel o f three to five international or community

Creation o f fora for ongoing external consultation and feedback, representing other

Analyze existing feedback mechanisms and recommend measures for their improvement Prepare and implement a strategy for feedback using the internet and other means.

1.Conduct periodic surveys to obtain feedback on public perception o f NRA strengths and weaknesses 2. Based on survey results: (a) develop and implement a quality control system; and (b) develop a permanent taxpayer time and cost-monitoring system by target groups o f taxpayer and fiscal obligation

(e) Prepare annual reports for submission to the National Assembly and other Stakeholders

Project Component 5 - US$30.80 million

Office UuPradinP ComDonent

The objective o f this component i s to establish an adequate working environment for the NRA, through the rehabilitation and renovation o f buildings and workspaces at HQ and in the Territorial Directorates in Sofia, Plovdiv, Varna, Burgas, and the Large Taxpayer Directorate. These Directorates together represent 91 percent of revenue collection. Modem facilities would be provided for staff and taxpayers/contributors, with offices would be linked through information networks, to enhance efficiency o f NRA..

The project w i l l support NRA with technical assistance, office refurbishing, and technology to:

(a) Develop architectural designs and technological requirements, based on a diagnostic and evaluation of work to be done

(6) Prepare the rehabilitation and networking plan

(c) Prepare the physical security system specifcations

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(d) Prepare the management and quality control plan

(e) Implement the plans, comprising office rehabilitation, security, installation of networks, acquisition of personal computers, installation and training.

Project Component 6 - US$1.80 million Project Management ComDonent

The Project Coordination Unit includes the project manager and advisors to ensure financial management and procurement integrity to meet World Bank Guidelines and international standards o f accountability and transparency. Project audits are also carried out within th i s sub-component. This PCU office w i l l be provisioned and training, and provided with the critical sk i l ls o f project management, procurement, and disbursement.

(1) Project Coordinating Unit

(a) Advisory Services (i) Procurement and Disbursement Advisor to ensure procurement and disbursements are carried out in a timely manner. (ii) Project Auditing to ensure auditing o f project accounts are conducted in a timely way by independent and qualified auditing firms.

(b) Office Infrastructure (i) Workstations for advisors. (ii) Office equipment for advisors (iii)Vehicle (utility) for conducting business o f the project management unit. (iv) Financial management system.

(c) Training (i) Project Management training to provide the necessary tools and methods to ensure successful management o f project implementation as designed (ii) Procurement and disbursement training in World Bank Guidelines, policies, and procedures.

(4 Office Supplies

(e) Project Management Stajf

(2) Change Management

The Change Management sub-component i s intended to ensure that a l l changes that take place to form the new NRA are based on common understanding o f the purposes o f the changes. Moreover, the changes would be carried out using established change management approaches that seek to build commitment o f all staff in the change process. This will facilitate both the integration o f NSSI staff and collection functions into the NRA, and the overall development o f the agency. Staffing o f the Change Management Unit includes a highly experienced revenue administration expert, a change planning expert who w i l l set up establish the Unit, and a change management specialist who i s experienced in the field. Change management software would be purchased to assist in the management o f change throughout the

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project l i fe cycle, which can be used subsequently by the NRA planning and management team. Training would be provided in principles and practices o f change management, including attendance at conferences and study tours.

(a) Advisory Services (i) the life o f the project on al l operational and technical matters. (ii) guidelines for its operation. (iii)

Revenue Administration Advisor, senior level, who will provide expert guidance over

Change Planning expert, who w i l l establish the change management office and provide

Change Management expert who i s a senior level change management practitioner.

(b) Office Infrastructure (i) Workstations (ii) Office Equipment (iii) change management processes.

Change Management System, Le., software available to assist in the implementation o f

(c) Training (i) management, to include attendance at conferences. (ii) Language training. (iii) management principles in mergers and organizational change. (iv) development, and public sector, especially revenue administration reform.

Training for the change management team in the principles and practices o f change

Study tours to visit both public and private organization that have used change

Books and professional subscriptions dealing with managing change, organizational

(d) Office Supplies

(e) Core Change Management Team

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Annex 3: Estimated Project Costs BULGARIA: Revenue Administration Reform Project

Total Project Costs’ 39.70 Front-end fee

Total Financing Reauired 39.70

Project Cost By Component 1. Policy Support 2. Management and Organizational Development 3. Operations Development 4. Outreach Services 5. Facilities Upgrading 6. Project Management Total Baseline Cost Physical Contingencies Price Contingencies

22.95 62.65 0.35 0.35

23.30 63 .on

Local US $million

0.80 2.00 5.50 1.20

29.10 1.10

39.70

1 Total Project Costs

Front-end fee

Foreign

39.70 22.95 62.65 0.35 0.35

US $miion 0.70 6.05

13.30 0.50 1.70 0.70

22.95

Total US $million

1 S O 8.05

18.80 1.70

30.80 1.80

62.65 0.00 0.00

Goods and Technical Services Civil Works Consulting Services and Training Unallocated Recurrent Costs

1.60 28.70

5.65

3.75

13.75 0.00 9.20

0.00

15.35 28.70 14.85 0.00 3.75

I I I

Total Financing Required I 39.70 I 23.30 I 63.00

Note: The amounts on the tables above include contingencies. Hence contingencies are not shown as a separate line.

1

64.62% o f total project cost net o f taxes. Identifiable taxes and duties are 10.15 (US$m) and the total project cost, net oftaxes, i s 52.85 (USSm). Therefore, the project cost sharing ratio is

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Annex 4: Cost Benefit Analysis Summary BULGARIA Revenue Administration Reform Project

Summary of Benefits and Costs:

Economic Background

1. competitive private sector led growth, strengthening public administration and anti-comption initiatives, and supporting EU accession process. A major part o f CAS structural reform program i s directed towards improving markets’ functioning and efficiency. The implementation o f CAS objectives hinges crucially on the capacity o f the adrmnistration to sustain macroeconomic stability.

The Bank’s latest country assistance strategy for Bulgaria 2002-2005 i s focused on promoting

2. In the context o f CAS strategic objectives, the Revenue Administration Reform Project i s designed to: a) establish the necessary institutional and regulatory base for sound fiscal performance and sustained macroeconomic stability through consolidating the collection functions o f the tax, social and health insurance administrations into one agency (NRA); b) eliminate market malfunctions due to distorted price signals reflecting non-compliance; c) strengthen governance capacity and reduce corruption; d) secure more room for further reductions o f taxes and non-wage labor cost through increasing compliance and collection rates.

3. policy becomes the major instrument for maintaining macroeconomic stability. I t s relative weight and importance stems as well from the high level o f openness o f the economy, which exposes it to strong current account pressures. Despite this high relative weight o f fiscal performance in sustaining internal and external balance, there i s limited room for adjustment both on the expenditure and the revenue side. The structure o f expenditures i s fairly rigid with social outlays accounting for 33 percent o f total spending. Investment and maintenance has been much neglected in the years o f transition, and requires additional public resources. On the revenue side, the Government i s strongly committed to encourage investment and employment creation by reducing direct taxation and applying exemption and depreciation incentives. In this context fiscal balance will depend increasingly on the capacity o f the administration to improve collection and compliance rates.

The fiscal dimension of the project i s o f primary importance. In the context o f CBA, fiscal

4. and to raise collection efficiency i s well demonstrated in such policy moves as the establishment of central tax administration unit for large taxpayers, raising collection efficiency o f customs office with the consultancy assistance o f Crown Agents o f UK, raising the efficiency o f the NSSI with the Social Insurance Administration Project, supported by the WB, etc. (Table 1 provides overview o f Bulgaria’s revenue performance.)

This i s not a new priority. The Government’s commitment to curb tax evasion and corruption,

5. compliance and enforcement, lowering the tax weight, and harmonizing the revenue legislation with that o f the EU. Major components o f the program are the expansion o f the l i s t o f large tax-payers to 480 companies, accounting for about 65% o f tax revenues; the reduction o f the VAT mandatory and voluntary thresholds to BGL50000 and BGL25000; introduction o f mandatory VAT accounts; registration o f all employment contracts; introduction o f minimum insurance threshold by occupation; harmonization o f the excise duty rates with EU, etc. On the other hand, with the aim to encourage

In 2003 the Government launched a comprehensive three-year program aimed at improved

- 4 8 -

investment GOB introduced accelerated depreciation schemes, CIT breaks for high-unemployment areas, VAT exemptions for import o f investment goods over EUR 5 million, etc. PIT rates were revised downwards, whi le CIT rates are to go down to 20% in 2004 and 15% in 2005. (Table 2 shows some of the key mid-term tax policy measures and their expected effect on revenue collection.)

Benefits and Costs

6. capacity o f the administration to raise voluntary compliance and improve law enforcement. Various studies and surveys provide evidence for a sizeable compliance gap. The project seeks to capitalize on this resource, i.e. to reduce this compliance gap as much as possible through supporting the establishment of a modern, accountable, adequately equipped and staffed revenue agency with the necessary capacity to monitor and raise voluntary compliance; to strengthen and better target enforcement measures; to raise staffs professionalism and integrity and reduce the opportunities for corruption; improve equity and fairness, and reduce taxpayer compliance burden.

Against this background, the achievement o f balanced budget by 2005 depends mainly on the

7. These targeted outcomes w i l l be monitored and evaluated through a number o f quantitative and qualitative performance indicators measuring improvements in revenue planning; voluntary compliance; enforcement o f the law; quality o f service; efficiency and integrity o f the administration. (The indicators with the assigned to them mid-term and final targets are shown in Table 3.) They are the base for assessing the economic impact o f the project and for monitoring and evaluating i ts actual performance. Some o f the major outputs o f the project would be a rise in aggregate compliance/collection rates by about 5 percentage points; reducing the cost o f collection under 1 %; reducing the average number o f days taken to process a VAT request to 15 days; reducing the cost o f compliance through faster and better service delivery; improved targeting and efficiency o f audits, etc.

8. an easy task. Increases in tax and social insurance revenues, even though vital in the context o f the macro-policy mix outlined above, cannot be calculated as direct benefits in a cost-benefit analysis. Budget revenues are inter-sectoral transfers. The welfare impact o f a revenue administration reform stems from efficiency and distributional gains and improved business and price environment, rather than from increase in budget revenues. Economic benefits o f the RARP would come through various channels. Some benefits pertain to collection management and services, and are related to:

a.

b. money spent for filing, audits, claims, and inquiries)

c. implementation.

Other benefits go beyond the system o f revenue administration and have more or less direct impact on the market and business environment. These are related to:

a. fair law enforcement)

b.

c.

Measuring the economic impact o f the project’s performance as set by the indicator targets i s not

Efficiency gains in tax administration (in terms o f lower running cost per unit o f revenue)

Lower compliance cost for taxpayers and higher quality o f services (in terms o f time, staff and

Increased awareness and involvement o f the community and stakeholders in revenue policy

Reduced price distortions coming from non-compliance (in result o f more equitable, even and

Reduced price distortions reflecting inflationary pressures (in result o f improved fiscal capacity)

Potential for economic expansion through tax cuts as a result o f improved revenue collection

Quantifying above benefits, however, i s much harder than identifying them. Collection costs and

- 4 9 -

compliance costs, however can be measured and monitored. Table 4 calculates the economic impact o f the business time saved due to efficiency gains. It shows that even if we ignore all other economic benefits listed above, this outcome o f NPV o f EUR 57.9 mill ion (IRR 70%) alone i s enough to justify the project's investment.

Conclusions

9. As already mentioned, apart from the economic benefits there are purely fiscal gains. These are the extra revenue flows generated by the project. Fiscal gains will come through a number o f channels. The tax base will expand with the shrinking o f the shadow economy and the increase in voluntary compliance. On the other hand collection rates w i l l r ise due to rising efficiency o f audits, higher staff integrity, and improved enforcement and collection o f arrears. Projecting the effect o f those improvements throughout the l i fe o f the project, however, i s also a challenging task, especially in view of the need to distinguish them from the effect o f the policy measures non-related to the project (despite the fact that their implementation might also crucially depend on the success o f the NRA). (Table 5 shows the targeted incremental revenues resulting from the project.) The table below plots the present value of these revenues against the present value o f the project's cost. Applying a 10% discount rate, the net present value o f the project i s EUR 672 million. IRR i s 267 %.

Net Present Value o f Project's Gains, 2004-2008

Main Assumptions: See tables below.

Sensitivity analysis / Switching values of critical items: See tables below.

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Table 1. Revenue Perfomance 1999-2002 (BGL thousand) GDP 23790440 GDP 26752833 GDP 29618000 GDP 32607000

Changes in tax legislation Effect on Revenues 2003 2004 2005

I. Corporate Income Tax '

2. Personal Income Tax

3. Value Added Tax

Reduction of the effective tax rate from 23.5% in 2003 to 20% in 2004 and 15% in 2005 0 -132,272 -201,174

Revising the tax brackets while preserving the level of payroll tax rates -67,003 -71,346 -57,671

Increase - . - of the VAT revenues as a result of the excise duty related price increase of some excise goods 15,567 8,758 8,909

1 Revenues

11 Corporate Income Tax'

12 Personal IncomeTaS

13 Value Added Tax

15 PropertyTaxes4'

I 4.1 Fees

Source: MOF; GTD; NSSI: 1 Corporate income taxand taxes on dividents, insurance premiums. 2 Personal Income Taxincludes taxes deducted by employee remuneration wthout filing, taxes filed and paid by self-employed and sole proprietors.

3 lincludes fuel tax,collected by Customs Office 4 Property taxes include real estate tax, legacytaw. vehicle tax, road tax taxon acquiring property 5 Collection of HIC started July 1 1999

and the so called patent (license) taxlevied on certain economic activities wth turnover below BGL75000

4. Excise Duty I I I Increase n excise dJty revenues due 10 tne IransDos tion of E J acq& I 101,8361 72.9801 74,237

Tomi effect I 50,3991 -121,881l -175,699

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Amount of adjustment per audit (EGL) Appealed SIC acts to ail S IC acts Num b e t of enacted penalty acts En fore e m e n t

Additional V A T registrations by N R A acts/ Total V A T registrations Arrears ( E G L million)

T a x % of revenues assessed

o/w non-collectable a s a % of total arrears

Insurance % of revenues assessed Arrears recovered (BGL million and % rev) Arrears older than 1 year to total arrears Integr i ty Taxpayers perceptions about revenue administration's integrity as per surveys Staff's sastisfaction & perceptions on business organization; skills; ethics; H R policies N u m b e r o f anti-corruption hot-line complaints

- 52 -

2003 baseline 2003 baseline 2003 baseline

2003 baseline 0.5' 1/1/2002 1/1/2003 1/1/2005 1/1/2006 1 /I 1200

1.845 3,000 2,626 2391 1,98 32% 24 % 17 '

n.a. 1,509 1,762 1659 1,39 50% 69% 70

n.a. 426.6 12% 650

i f tware-related

Table 3. Indicator baseline and targets

' PIT Employers' Compliance estimates is based on PIT paid by employers ( P r total minus a m n t filed) relative to PIT i n m e projection NSI annual wage bill times AETR of 14.7% (derived from annual average salary) 'Includes Custcms-collected road tax on fuels

Sde proprietors do file PIT i n m e statements, even though they are registered as business entities. 'Collection cost are defined as operation cost per revenue mllected. Tax oftice 2002 cost is BGL M 91. NSSI estimate is derived from total operation cost of BGL M 41 times the share of revenue administration to total staff, i.e. 1644 of 3756.

'Only revenue administartion staff of 1644 out of total NSSI staff of 3756 ' Number of payers is calculated as follows: taxpayers from the sum of CIT (107603) plus PlT(922655) plus patent tax (268372) filers; fw SIC payers is the sum of the insurers and self insured (224528). 2005 and 2008 projections are based on 5% growth in the number of taxpayers and additional 3% SIC payers that are not tax payers.

Does not include all personal i n m taxed, as employers deduct PIT frrm wages, but do not file. Employees file only in case of additional income.

- 53 -

Tax Number of companies # 200000 70000 10000 500 Responsible for accounting # 1 1 2 5

Small non-VATSmall VATMediumLargeTotal days Average

Understanding new laws d 1 2 2 2 385.000 1.4 Filling out tax documents d 5 24 36 60 3,550.000 12.7 Filing declarations d 0.5 9.0 6.0 6.0 865,000 3.1 InformatiorVCertiicats d 2.0 4.0 4.0 4.0 770,000 2.7

Insurance Sm// nm-VAT Small VAT Medium Large Total days Average Number of companies # 200000 70000 1 w w 500 Responsible for accounting # 1 1 2 5 Understanding new laws d 1 1 1 1 292,500 1.c Filling out tax documents d 12 12 24 36 3,810,000 13.6 Filing Warations d 6.0 6.0 3.0 2.0 1,685,000 6.C InformatiorVCertiicats d 2.0 4.0 4.0 4.0 770,000 2.7

d 3 12 12 24 1,740,000 6. I lnswance 8,297,500

Estimated time needed for compliance with NAP

Number of companies # 200000 70000 10000 m Responsible for accounting # 1 1 2 5

Smallnon-VAT Small VAT Medium Lage Total days Average

Understanding new lam d 1 I 2 2 315,000 1.1 Proactive cmmunication and info Filling out tax documents d 12 25 42 67 5,152,000 18.4Simpliication and e-services Filing declarations d 5.2 12.0 7.2 6.4 2,040,000 7.3Better workflow and e-services Infonnation/Certiicats d 2.0 4.0 4.0 4.0 770,000 2.7Better workflow and e-services Audits d 6.0 30.0 30.0 112.0 4,180,000 14.9BetterIT,auditrules,processes Total with project 12,457,000 Accounting time saved 5,310,500 30% Accountant's time average cost per day (BGL) 15 Direct Economic Benef& likely in 2005 (BGL) 79,657,500 /Expected Annual Economic Benefits (EUR) Source: GTD Estimates based on ARCS and other suwerj

- 54 -

40,728,233

- 55 -

Annex 5: Financial Summary BULGARIA Revenue Administration Reform Project

Years Ending 2009

I Year1 I Year2 I Year3 [ Year4 I Year5 I Year6 I Year 7 Total Financing Required

Project Costs Investment Costs 9.2 18.9 17.3 8.0 3.0 1.6 0.0

Recurrent Costs 0.5 0.6 0.7 1 .o 1 .o 0.9 0.0 Total Project Costs 9.7 19.5 18.0 9.0 4.0 2.5 0.0

Front-end fee 0.3 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 10.0 19.5 18.0 9.0 4.0 2.5 0.0

IBRDll DA 2.0 7.0 13.0 7.0 3.0 2.2 0.0 Government 8.0 12.5 5.0 2.0 1 .o 0.3 0.0

Central 8.0 12.5 5.0 2.0 1 .o 0.3 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 10.0 19.5 18.0 9.0 4.0 2.5 0.0

Main assumptions:

Financing

The table reflects project expenditures using the following assumptions have been made regarding financial flow lags in relation to cost accrual: 2 semesters for foreign expenditures, and 1 semester for local expenditures.

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Annex 6(A): Procurement Arrangements BULGARIA Revenue Administration Reform Project

Procurement This section o f the PAD describes the Procurement arrangements for the project. Should there be a discrepancy between the PAD and the Loan Agreement, the information in the Loan Agreement supersedes that o f the PAD.

Procurement under the Bank loan w i l l follow the Bank's Guidelines: Procurement under IBRD Loans and IDA Credits, January 1995, revised January and August 1996, September 1997, January 1999, for Goods and Works, and the Guidelines: Selection and Employment of Consultants by World Bank Borrowers, January 1997, revised September 1997, and January 1999, and May 2002. For procurement under the Loan, the Borrower w i l l use: (i) the Bank's latest standard bidding documents for ICB procurement; (ii) for IT procurement the latest standard trial documents available; and (iii) the Bank's standard request for proposal for selection o f consultants. The procedures outlined in these Guidelines apply to al l contracts financed in whole or in part from the Bank loan. Project activities not financed by the Bank will be procured in accordance with procurement procedures agreed between the respective financing organizations and the Government.

Notification of Business Opportunities

A General Procurement Notice (GPN) would be published in the UN "Development Business" around the period o f Loan Negotiations and would be annually updated. For ICB goods contracts and large-value consultant contracts (more than EUR200,000), Specific Procurement Notice would be advertised in the Development Business and national press, and in the case o f NCB, in a major local newspaper (in the national language).

Procurement Management

The overall responsibility for implementation o f the RARF' rests with NRA. The Project Coordination Unit (PCLJ), which has been established as o f February 1,2003 within NRA, w i l l be responsible for day-to-day coordination, management and monitoring o f the RARP. The procurement arrangements under the project are based primarily on the Bank appraisal o f the existing procurement management capacity o f the PCU was camed out in February 2003. The Capacity Assessment report and action plan are shown in Table B 2 o f this Annex.

Procurement methods (Table A)

The project includes procurement o f goods, works, and consultant services. A detailed procurement plan for these has been prepared and included in the Project Implementation Plan (PIP). During project implementation, the procurement plan wil l be updated every six months.

The Project procurement arrangements are shown in Table A below.

Procurement o f Goods

Goods would be procured according to World Bank Guidelines: Procurement under IBRD Loans and IDA Credits (January 1995, revised January and August 1996, September 1997, and January 1999). The Bank's Standard Biding Documents for Goods, January 1995, revised March 2000, revised January 200 1

- 5 7 -

and March 2002, adapted to the project, would be used for the procurement o f Bank-financed goods, for the Supply and Installation of Information Systems Standard Bidding Documents o f March 2003, adapted for the project, would be used for procurement o f communications equipment, I T equipment, and software packages.

Procurement through ICB. Goods contracts costing more than EUR300,OOO equivalent per contract, would be procured following International Competitive Bidding (ICB) procedures in accordance with World Bank Guidelines. Communications, IT equipment, and other goods, procured through ICB are estimated to account for about 77% (EUR11.1 million) o f the total Bank-financed goods value:

In the comparison o f bids for goods to be procured through ICB, local manufacturers competing under ICB would receive preference in bid evaluation o f 15% o f the CIP price, or the prevailing customs duty applicable to nonexempt importers, whichever i s less, provided they can establish to the satisfaction o f the purchaser and the Bank that: (i) labor, raw material and components from within Bulgaria will account for more than 30% o f the E X W price o f the product offered, and (ii) the production facility in which those goods will be manufactured or assembled has been engaged in the manufacturing/assembling of such goods at least since the time o f bid submission.

Other Methods of Procurement. The remaining 23% o f the project requirements value o f Bank-financed goods would be procured as below

(a) Limited International Bidding (LIB). Computer applications software and software development tools, which the Bank agrees are available only from a limited number o f suppliers, may be procured through LIB;

(b) International Shopping (IS). Contracts for goods estimated to cost less than EUR100,OOO per contract, will be awarded under I S procedures, based on comparing price quotations obtained from at least three suppliers from two eligible countries in accordance with WB Guidelines. Procedures for IS will be used for small amounts o f goods where the cost o f ICB would clearly outweigh possible price advantages. As an exception, the IS method will be used for procurement o f the following three contracts: Security Management Software, Software Development Tools, and Data Warehouse and Mining Software.

(c) National Shopping (PIS). Minor items not exceeding EUR50,OOO per contract, could be purchased on the basis o f local shopping by comparing price quotations obtained from at least three local suppliers, in accordance with Bank Guidelines;

(d) Direct Contracting (DC). D C procedure would be used for procurement o f Financial Management Software under the Increasing Operational Efficiency Component o f the Project.

Selection of Consultant Services

Procurement o f consulting services would be carried out in accordance with the Bank Guidelines: Selection and Employment o f Consultants by World Bank Borrowers (January 1997, revised January and September 1997, January 1999, and May 2002). The Bank's standard Request for Proposal o f January 1995, revised April 1998 and July 1999, adapted to the project, would be used for the award o f Bank-financed Technical Assistance contracts. To keep the evaluation process manageable, no more than six (but at least three) proposals would be invited following a short-listing process acceptable to the Bank. I t i s estimated that WB-financed TA and training would total EURl 1 .O million, including contingencies.

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Quality and Cost Based Selection (QCBS). The majority o f WB-financed TA contracts would be awarded on the basis o f QCBS method.

Selection Based on Consultants' Qualification (CQ). Services estimated to cost less than EURl00,OOO equivalent per contract may be procured under contracts awarded in accordance with the provisions o f paragraphs 3.1 and 3.7 o f the Consultant Guidelines.

Least Cost Selection (LCS). LCS procedure would be used for auditing services for annual audit throughout the l i fe o f the project, public education campaigns, and translation services contracts.

Selection Under a Fixed Budget (SFB). Services for technical supervision o f c iv i l works and community participation and services contracts may be procured under contract awarded in accordance with the provisions o f paragraphs 3.1 and 3.5 o f the Consultant Guidelines.

Individual Consultants (IC). Individual consultants w i l l be contracted in accordance with I C procedures and based on the comparison o f CVs among those expressing interest in the assignment in response to advertisements o f the positions in at least two newspapers with national circulation. I C method will be used for the selection o f consultants for all TA to be provided in the initial stages o f the project to support development o f complete NRA mission statements and position descriptions, procedures and activities, and a comprehensive NRA staff training program (estimated contract value o f EURO. 18 million, including contingencies). The method will be used also for the selection o f individual specialists, mainly for management advice, specialized consulting and quality assurance, when the TA i s needed for a period o f about 1 month or less.

Training. The institutions, for training, conducting seminars, and for study tours, will be selected on the basis o f an analysis o f the most suitable program o f training offered by the institutions, availability o f services, period o f training and reasonableness o f the cost. Individual consultants will be contracted in accordance with I C procedures and based on a comparison o f CVs to deliver the staff training under the project.

Civil Works. The Facilities Upgrading component o f the project involves rehabilitation and renovation o f buildings and workplaces o f the NRA offices in Sofia, Plovdiv, Vama, and Bourgas. It i s anticipated that contracts financed by the Bank would be up to an aggregate amount o f EUR 8.1 million, including contingencies. Civil works would be procured in accordance with the World Bank Guidelines: Procurement under IBRD Loans and IDA Credits (January 1995, revised January and August 1996, September 1997, and January 1999). I t i s envisaged that the WB's SBD for Small Works o f January 1995, revised June 1995, June 1996, September 1996, October 1999, January 2000, and June 2002, adapted for the project, will be used for the procurement o f Bank-financed contracts for c iv i l works under the project.

International Competitive Bidding (ICB). Works contracts estimated to cost more than EUR 3 mill ion equivalent per contract would be procured following I C B procedures in accordance with the World Bank Guidelines.

National Competitive Bidding (NCB). Works contracts estimated to cost less than EUR3 .O mill ion equivalent per contract would be procured following NCB procedures in accordance with the World Bank Guidelines. Bids will be advertised in the national press or official gazette. Government entities would be ineligible to participate in Bank-financed contracts unless they meet the criteria under the Bank Guidelines demonstrating they are legally and financially autonomous.

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N C B would be acceptable subject to the following conditions: a point system o f evaluation w i l l not be used; domestic preference w i l l not be applied; international bidders will not be excluded from bidding; and the draft N C B bidding documents will be prepared and submitted to the Bank for prior review and no-objection before any N C B tender i s issued. N o bids w i l l be rejected at the bid opening. All bids submitted on or before the deadline for submission o f bids will be opened and read out at public bid opening; local bidders shall demonstrate ability to obtain securities and reasonable access to credit; bid evaluation criteria shall be pre-disclosed to bidders; and technical specifications must be clearly written. These conditions shall be discussed at the negotiations and made part o f the Loan Agreement.

The Government o f Bulgaria (GOB) would finance about 10 additional contracts up to an aggregate amount o f EUR3.8 million. including contingencies. The procedures under the local Procurement Law will be used in this case for c iv i l works under the Facilities Upgrading component.

Operating Costs. NRA incremental staff salaries and operating costs (total aggregate o f about EUR3.6 million, including contingencies) would be financed entirely by the GOB.

Bank's Review of Procurement Decisions

i. Scheduling o f Procurement. Procurement of goods and services for the project would be carried out in accordance with the agreed Procurement Plan (Table B), which would be updated annually, included in the progress report, and reviewed by the Bank.

ii. Prior Review. The following are the arrangements for prior review under the project:

0 Goods and Works: Prior review o f bidding documents, including review o f evaluation, recommendation o f award and contract would be conducted for al l ICB, NCB, LIB and all IS above the EUR100,OOO threshold. All steps for the f irst two contracts procured under IS and NS would require prior review.

Consulting Services and Training: Terms o f reference for al l consulting assignments would be subject to prior Bank review. Requests for Proposal (RFP), shortlists, terms o f condition of contracts as well as evaluation reports, recommendation for award, and draft negotiated contracts for selection o f consultants under QCBS, LCS and I C would be subject to prior review by the Bank. All documents and recommendations involving single-source contracting would be subject to Bank's prior review as well.

Contract Amendments: After award o f contracts, should any material modifications or waiver o f terms and conditions o f a contract result in an increase or decrease above 15 percent o f the original amount, the Bank would undertake a prior review o f such modifications (including modifications to contracts for consulting services).

0

0

iii. Post Review. Following the award o f procurement contracts, the Bank reserves the right to conduct Prior Review o f any material modifications or waiver o f terms and conditions o f a contract which would result in a significant change in the scope o f the contract (Terms o f Reference in the case of consultant services) and/or increase or decrease o f more than 15 percent o f the original contract amount. Contracts below the Bank's prior review threshold, are subject to the Bank's post review. Periodic post review by the Bank o f not less than one in five procurement contracts will be undertaken during regular supervision missions.

iv. Customs Duties and Taxes. All Customs duties and taxes for goods specifically imported for the

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project and for all technical assistance would be financed by the Borrower.

Action Plan for strengthening Agency's Capacity to Implement Project Procurement

a.

b.

C.

d.

e.

f.

€5

h.

Borrower should make a formal decision on the responsibilities, authorities and lines o f accountability o f all staff involved in the project, in particular the PCU.

A second Procurement Officer, preferably with knowledge in public procurement and experience in c iv i l works, should be hired before Loan Effectiveness.

The Project Manager, the two Procurement Specialists and the Disbursement Officer should attend a four-week procurement training course offered by L O in Turin, Italy, or a similar course, and participate in procurement workshops conducted by the World Bank.

A part-time Procurement Specialist would be needed, who should be experienced in public procurement and preferably knowledgeable about Bank procurement Guidelines to help implement procurement activities, including planning, scheduling, monitoring and reporting, bidding procedures, contractual issues, among other, during the f irst three years o f the project, and no later than three months before Loan Effectiveness.

A week-long project launch workshop would be held for beneficiarieslend-user staff, who will be involved in the project. I t would include at least a one day training session in procurement, more specifically in the preparation of bidding documents for each type o f procurement method proposed in the loan agreement, bid evaluation, and preparation o f contracts.

To build-in and maintain strong management capacity, it i s recommended that the PCU staff and all staff from the NRA involved in the project attend the procurement workshop to be carried in the country office in FY03.

All staff involved in the project, who lack a working knowledge (good command) o f English should attend English language training courses during the f irst year o f project implementation.

A framework service contract should be signed with a firm for translation and interpretation services required for implementation o f the project.

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Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

Incremental Staffing and

Figures in parentheses are the amounts to be financed by the Bank Loan. All costs include contingencies.

2 j Includes goods to be procured through other methods, consulting services, training, technical assistance services, and incremental operating costs related to managing the project.

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Prior review thresholds (Table B) The thresholds for procurement methods and WB prior review appear in Table B below. Procurement o f goods, consulting services, training and civil works for the project will be carried out in accordance with the agreed Procurement Plan, which w i l l be updated if necessary and included in the APRs for WB review.

Table 6: Thresholds for Procurement Methods and Prior Review'

(EUR thousands) Expenditure Category . Works

Procurement Method

I. Goods

all contracts

(a) 300K and above

(c) below l O O K

(d) below 50K

(a) Firms: l O O K and above

(b) Individual Consultants: 50K and above

3. Services

ICB and N C B

(a) ICB, and LIB (below $2.4 million)

(c) I S (also for specific packages below)

(d) N S

see Table A1

~

Contracts Subject to Prior Review (EUR millions)

Al l steps for each contract

(a) and (b): all steps for each contract

(c) a l l steps for the ones above the EUR100,OOO

threshold; (c) and (d):first two contracts

all steps for each contract.above threshold

and Single Source.

TORS for contracts below threshold

Total value of contracts subject to prior review:

Frequency of procurement supervision missions proposed:

EUR37.0million

One every 6 months (includes special procurement supervision for post-reviewlaudits)

Overall Procurement Risk Assessment: High

Where foreign bidders would be interested in procurement in the EURlOOK-300K range, ICB would be used except for the following packages for which IS was agreed: Security Management, Software Development Tools, and Data Warehouse and Mining.

- ~- .___~ \ ' Thresholds generally differ by country and project. Consult "Assessment o f Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.

- 6 3 -

Annex 6(B): Financial Management and Disbursement Arrangements BULGARIA Revenue Administration Reform Project

Financial ManaPement

1. Summary o f the Financial Management Assessment

Country Issues

A Country Financial Accountability Assessment for Bulgaria will be carried out during February 2003 - May 2003. When finalized, the document will disclose issues on the financial management r isks for the country and the implications for the World Bank operations.

A summary of key country financial management issues in Bulgaria i s given below:

0 The macroeconomic situation has generally improved after the financial crisis o f 1996 - 1997. GDP growth was recorded yearly since 1998. Inflation has been brought down to single digits figures. The currency - Lev i s pegged to the Euro following the introduction o f a Currency Board in 1997.

Occasionally insufficient counterpart funds are secured to finance the Government’s portion o f certain Bank projects in Bulgaria.

All Bank financed project use traditional disbursement methods as preparation o f reliable budgets for P M R based disbursements i s moderately difficult due to the volatility o f Bulgarian business environment.

The accounting standards have been modified to adhere closely to International Accounting Standards (IAS).

0

0

0

Strengths and Weaknesses

The significant strengths that provide a basis o f reliance on the project financial management system include: (i) Project “ring fencing” through the establishment o f a dedicated PCU with a suitable staffing structure; and (ii) the experience o f PCU’s accountant in implementing Bank-financed project.

There are no significant weaknesses o f the project financial management system.

Implementing Ent i9 NRA was established in 2002 through passing the National Revenue Agency Law. I t i s a newly established entity under the Minister o f Finance which will execute all activities related to formulation, administration and collection o f public revenue. A PCU has been established within the NRA, which will coordinate the implementation o f the Project.

Funds Flow

Project hnds w i l l f low from: (i) the Bank, either via a single Special Account which w i l l be replenished on the basis o f SOEs or by direct payment on the basis o f direct payment withdrawal applications; or (ii) the Government, via the Single Budget Account o f Treasury at the Ministry o f Finance on the basis o f payment requests send by NRA.

Staffing

The PCU includes Director, Accountant and Procurement Specialist. The detailed job descriptions, responsibilities and authorities o f each PCU member are included in the Financial Management Manual developed by the PCU and approved by the Bank. The Project Accountant already has practical

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experience with Bank financed project related to reforming the National Social Security Institute.

Audit Report Entity

Project

SOE

Special Account

Supervision Plan

During project implementation, the Bank will supervise the project’s financial management arrangements in two main ways: (i) review the project’s quarterly financial management reports as wel l as the project’s annual audited financial statements and auditor’s management letter; and (ii) during the Bank’s supervision missions, review the project’s financial management and disbursement arrangements (including a review o f a sample o f SOEs and movements on the Special Account) to ensure compliance with the Bank’s minimum requirements. As required, a Bank-accredited Financial Management Specialist will assist in the supervision process.

2. Audit Arrangements

Accounting Policies and Procedures

The accounting books and records w i l l be maintained on a cash basis and project financial statements w i l l be presented in the Loan currency - Euro. The PCU has instituted a set o f appropriate accounting procedures and internal controls including authorization and segregation o f duties and has described those in the Financial Management Manual.

Due Date Within six months o f the end o f each fiscal year and also at the closing o f the project Within six months o f the end o f each fiscal year and also at the closing o f the project Within six months o f the end o f each fiscal year and also at the closing o f the project Within six months o f the end o f each fiscal year and also at the closing o f the Droiect

Internal Audit

NRA will establish an Internal Audit Department, however, an assessment needs to be camed out on the effectiveness o f this department before any reliance i s placed on the results o f its operations.

In addition, the Bulgarian Supreme Audit Institution (Smetna Palata) wi l l perform annual audits o f NRA and the project under i t s implementation. I t was agreed that the NRA would be audited annually by the Bulgarian Supreme Audit Institution, the Smetna Palata, and that the results o f this audit would be shared with the Bank within six months o f the end o f each fiscal year. I t was further agreed that the Smetna Palata w i l l specifically consider the following issues during their audit o f the NRA: (i) the tax assessment and validation process at the NRA; (ii) the reconciliation process between the NRA and Treasury in respect of tax payments received from tax payers in settlement o f their obligations; and (iii) the follow-up and monitoring process at the NRA in respect o f tax payers’ outstanding tax liabilities.

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Reporting and Monitoring

PCU will produce all financial reports and SOEs for the Bank with the project accounting software PAIS, which i s used in a number o f Bank financed projects in Bulgaria. Project management-oriented Financial Monitoring Reports (FMRs) w i l l be used for project monitoring and supervision. The PCU will produce a full set o f FMRs every three months throughout the l i fe o f the project. The FMRs will include: e

e

e Project Balance Sheet

e Physical Progress Reports e Procurement Monitoring Reports

Project Sources and Uses o f Funds Uses o f Funds by Project Activity

0 Special Accounts Statements Plus Local Bank Accounts Statements

Expenditure Category (1) Works (2) Goods and Technical Services

Information Systems

An accounting software package has been installed and tailored to the specific requirements of the project.

3. Disbursement Arrangements

Bank funds will be disbursed under the Bank's traditional procedures including SOEs and direct payments. Supporting documentation for SOEs, including completion reports and certificates, w i l l be retained by the Borrower and made available to the Bank during project supervision. Disbursements for expenditures above the SOE thresholds will be made against presentation o f full documentation relating to those expenditures. At present there i s no plan to move to periodic disbursements.

NRA will open and manage a Special Account specifically for this project, in Bulgarian National Bank. Withdrawal applications for the replenishments o f the SA will be sent to the Bank at least every three months, or when the balance o f the SA i s equal to about hal f o f the init ial deposit or the authorized allocation, whichever comes first.

Allocation of loan proceeds (Table C)

Amount in US$million Financing Percentage 8.97 50% 12.72 100% o f foreign expenditures;

100% o f local expenditures (ex-factory cost); and

80% o f local expenditures for items

Table C: Allocation of Loan Proceeds

(3) Consultant's Services, including Audit procured locally

95% o f foreign expenditures; and 11.63

Total Project Costs with Bank Financing Front-end fee

Services. and Training I I 85% o f local exoenditures I

33.81 0.34

1(5) Unallocated I 0.49 I I

ITotal I 34.15 I I

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Use of statements of expenditures (SOEs):

All disbursements against contracts below the following thresholds will be made against statements o f expenditures:

EUR 0.25 mill ion for goods EUR 0.1 mill ion for consulting f i rms contracts EUR 0.05 mill ion for individual consultants contracts All training expenditures

For these expenditures under SoE, detailed supporting documents evidencing payments to consultants and suppliers wi l l be kept at the NRA PCU. These documents w i l l be made available for the required audits, as well as to the Bank supervision missions upon request.

All other expenditures above the SoE thresholds will be submitted on the basis o f full documentation.

Special account: To facilitate timely project implementation, IBRD loan funds will be channeled through a Special Account. The GOB will establish, maintain and operate, under terms and conditions acceptable to the WB, within the Bulgarian National Bank, a SA denominated in EUROS to be managed by the PCU. The Special Account would be audited annually by independent auditors acceptable to the Bank.

The authorized allocation in the SA will be EURl .O million. However, during the initial stage o f the project, an amount limited to EURO0.5 mi l l ion equivalent w i l l be deposited in the SA. When the aggregate amount o f disbursement reaches EURO2 mi l l ion equivalent, the amount deposited in the SA w i l l be increased to the fully authorized allocation o f EUR1.O million.

The minimum amount o f each application should be 20% o f the authorized allocation. Replenishment applications should be submitted by the PCU on a monthly basis or when about 33% o f the initial deposit has been utilized, whichever comes first. Applications for withdrawal from the IBRD loan will be used to request: (i) direct payment to third party for amount due; (ii) replenishment to the SA; (iii) reimbursement o f payments already made by MOF for eligible expenditures; and (iv) application for Special Commitment.

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Annex 7: Project Processing Schedule BULGARIA Revenue Administration Reform Project

Appraisal mission departure

Negotiations

IFirst Bank mission (identification) I 09/10/2001 I 04/01/2002 I 1011 512002 11/09/2002 03/25/2003 03/10/2003

Planned Date of Effectiveness 0710 112003

Prepared by: National Revenue Agency (NRA) Working Group and the Bank

Name Carlos D.C. Ferreira Wi l l iam V. Mayville Konstantin Pashev Michael Engelschalk Pervaiz Rashid Vladislav Krasikov Antonia Viyachka Rossen Stefanov Papazov

Irina Kichigina Bhagwan Das V m a

Daria Goldstein

Preparation assistance: Jean-Paul Bodin (IMFFAD), Stanford Ross, Ross Humphries, Luis-Jose Meija, and Fatos Qendro

Speciality Task Team Leader (HQ) Organization and Management Specialist (HQ) Senior Economist (Sofia) Tax Policy and Administration Specialist (HQ) Lead Specialist, Operations and Quality (HQ) Procurement Specialist (Sofia) Procurement Analyst (Sofia) Financial Management Specialist (Sofia)

Lawyer (Zagreb) Project Assistant (HQ)

Lawyer (HQ)

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Annex 8: Documents in the Project File* BULGARIA Revenue Administration Reform Project

A. Project Implementation Plan A Japan PHRD grant for US$306,000 (TF 026692) financed consultant services for the following key project preparation activities: (a) preparation o f an information systems technology strategy for the new NRA; and (b) studies of compliance patterns, and organizational and human resource management, including change management.

These activities have been completed and outputs, respectively, by the consultant Deloitte & Touche and SOGEMA, were satisfactory, resulting in a significant transfer o f technical knowledge to the client.

A Project Implementation Plan (Project Operations Manual--POM) was jointly prepared by the Borrower and the Bank, and was finalized during the post-appraisal mission. The P O M contains, for each component, detailed objectives, activities, implementation procedures, performance and outcome indicators, implementation schedules, detailed budgets, and the procurement plan, i t s schedules, procedures and arrangements. The POM also covers other activities, such as financial management and reporting.

B. Bank Staff Assessments Mission Back-to Office Reports, Aide-memoires, and Consultation Reports from Preparation through Negotiations. Procurement and financial assessments were carried out during the post-appraisal mission by FMS and PAS staff.

C. Other

The following key documents, including institutional analyses, have been considered in the preparation o f the PAD and are in the Project Files:

1.

2.

3.

4.

5.

6.

7.

8.

Crotty, Kloeden, and Zarnowieki. Bulgaria: Tax and Customs Administration Reform. International Monetary Fund, Fiscal Affairs Department, August, 1996.

Bodin, Brondolo, Schlotterbeck, and Lortie. Bulgaria: Tax Administration Reforms, Priorities for Next Steps. International Monetary Fund, Fiscal Affairs Department, November 1998.

Lortie. Bulgaria: Status on Tax Administration Computerization. International Monetary Fund, Fiscal Affairs Department, July 1999.

Crotty, Horvath, Benon, and Ross. Bulgaria: Selected Social Contributions and Tax Collection Issues. International Monetary Fund, Fiscal Affairs Department, July 1999.

Crotty, Bodin, Ferreira, Ross, and Roy . Bulgaria: Implementing a Modern Revenue Collection Agency. International Monetary Fund, Fiscal Affairs Department, March 2000.

Feasibility Study Report - The Diagnostic (CIDA Grant). CRC SOGEMA: May 2000.

Feasibility Study Report - Preliminary Recommendations (CIDA Grant). CRC SOGEMA: May 2000.

Bodin, Humphries, and Mulherin. Bulgaria: NRA Project--Progress Achieved and Recommendations for Next Steps. International Monetary Fund, Fiscal Affairs Department,

- 69 -

January 200 1.

Bulgaria: The Dual Challenge of Transition and Accession. World Bank Country Study, May 200 1.

Walsh, Sawyer, Montagnat-Rentier. Bulgaria: Customs Administration Revenue Measures. Intemational Monetary Fund, Fiscal Affairs Department, December 200 1.

Information Systems Strategy (PHRD Grant T F 026692). Deloitte & Touche: January 2002.

Bodin, Humphries, and Meurice. Bulgaria: Revenue Administration Reforms and VAT Administration Issues. Intemational Monetary Fund, Fiscal Affairs Department, April 2002.

Human Resources and Organizational Management Strategy--Final Report (PHRD Grant T F 026692). CRC SOGEMA: June 2002.

Study of Taxpayer Compliance and Law Enforcement--Final Report (PHRD Grant TF 026692). CRC SOGEMA: June 2002.

Self-Assessment of Administrative Barriers to Investment: Results of the Administrative and Regulatory Cost Survey. Foreign Investment Advisory Service (FIAS), November 2002.

9.

10.

1 1.

12.

13.

14.

15.

*Including electronic files

- 70 -

Annex 9: Statement of Loans and Credits BULGARIA: Revenue Administration Reform Project

16-Apr-2003 Difference between expected

and actual disbursements' Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO69532 2003 SlEP 50.00 0.00 0.00 0.00 54.39 2.50 0.00 PO67051 2003 PAL 150.00 0.00 0.00 0.00 163.23 0.00 0.00

0.12 0.00 PO68658 2002 WETLAND REST (GEF) 0.00 0.00 7.50 0.00 7.98

PO64536 2001 CHILD WELFARE REF 8.00 0.00 0.00 0.00 8.88 PO55021 2001 REG AND CADASTRE 30.00 0.00 0.00 0.00 33.13 3.49 0.00 PO55158 2001 EDUC MOD (APL #I) 14.39 0.00 0.00 0.00 14.68 11.52 0.00 PO70086 2000 TRADE 8 TRANS FACIL IN SE EUR 7.40 0.00 0.00 0.00 7.14 6.39 0.00

63.30 0.00 0.00 0.00 47.24 14.95 0.00 PO55157 2000 HEALTH SECT REF PO57927 2000 ENV/PRIV SUPT SAL 50.00 0.00 0.00 0.00 19.66 23.35 0.00

Total: 373.09 0.00 7.50 0.00 356.32 70.64 0.83

8.33 0.83

BULGARIA STATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions U S Dollars J u ~ 30 - 2002

Committed Disbursed IFC IFC

F Y Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1999 BAC Bank 0.00 0.00 4.00 0.00 0.00 0.00 4.00 0.00 2001 1999 1998 2001 2001 1994 2000 1996 200010 1 2002 2001 1997 2001

Bulbank Celhart Devnya Cement Doverie EPIQ Euromerchant FND Florina Interlease Inc. Kronospan Group PFS Restr Procredit Bank Sofia Hilton Sofia Med

0.00 17.47 0.00 0.00 1.83 1.50 0.00 0.00

27.42 0.00 0.00 0.00 3.04 0.00 1.78 0.00 8.93 0.00 0.00 0.00 0.00 4.86 0.00 0.00 4.17 0.00 0.00 0.00 1.79 0.30 0.00 0.00 6.95 0.00 0.00 2.98 0.00 2.01 23.49 0.00 0.00 1.0s 0.00 0.00

11.05 0.00 2.00 8.68 13.40 0.00 0.00 0.00

0.00 1.83

27.42 2.54 4.96 0.00 3.87 0.29 6.95 0.00 0.00

11.05 0.00

17.47 1 S O 0.00 0.00 0.00 4.86 0.00 0.30 0.00 2.01 1 .os 0.00 0.00

0.00 0.00 0.00 1.27 0.00 0.00 0.00 0.00 0.00

17.47 0.00 2.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.98 0.00 0.00 8.68 0.00

Total Portfolio: 78.58 27.19 31.27 11.66 58.91 27.19 24.74 11.66

Auurovals Pending Commitment

FY Approval Company Loan Equity Quasi Partic 2002 BAC Bank I1 0.00 5.00 0.00 0.00 2002 Unionbank SME 5.00 0.00 0.00 0.00

Total Pending Commitment: 5.00 5.00 0.00 0.00

-71 -

Annex 10: Country at a Glance BULGARIA Revenue Administration Reform Project

POVERTY and SOCIAL Bulgaria

2001 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, I99541

Population (%) Labor force (%)

Most recent estimate (latest year available, $99501) Poverty (% ofpopulation below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Illiteracy (% ofpopulation age 15+) Grass primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981

GDP (US$ billions) Gross domestic investmenffGDP Exports of goods and ServicesIGDP Gross domestic savings/GDP Gross national savings/GDP

Current account balance/GDP interest paymentslGDP Total debVGDP Total debt service/exports Present value of debffGDP Present value of debffexports

20.1 35.5 35.6 36.6

0.6 0.2 3.9 0.7

1981-91 199141 (average annual growth) GDP 2.2 -0.7 GDP per capita 2.4 -0.1

8.1 1,630

13.2

-0.6 -0.5

70 72 14

98 2

101 102 99

I991

10.9 22.6 43.5 26.9 17.3

-0.7 0.8

107.3 6.6

2000

5.4 5.9

Europe B Central

Asia

475 1,960

930

0.1 0.6

63 69 20

90 3

1 02 103 101

2000

12.6 18.3 55.7 12.9 12.7

-5.6 4.1

88.9 16.0 76.3

131.3

2001

4.0 4.6

Lower- middle- income

2,164 1,240 2,677

1.0 1.2

46 69 33 11 80 15

107 107 107

2001 13.6 20.4 55.7 12.9 14.3

-6.1 3.8

78.3 19.2

200145

4.6 5.2

1 Development diamond.

~

Life expectancy

~ 1 GNI per capita

Access to improved water source

Bulgaria Lower-middle-income a r o u ~

-

Economic ratios'

Trade

-

Indebtedness

-Bulgaria Lower-middle-income group _ _ -

Exports of goods and services -11.4 7.2 16.6 8.5 10.0 STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

4981 1991 2000 of investment and GDP (#)

166 154 123 51 9 578 258

15 7 31 4 268 61 9 627 2o

487 541 692 71 1 d o 147 190 179 161 345 392 611 632 -GDI '-O-GDP

1981-91 199141 2ooo (average annual growth)

Industry 3 0 -32 10 6 Agriculture -1 9 4 1 -103

Manufacturing Services 4 2 -04 122

Pnvate consumption 1 5 -05 4 4 General government consumption 3 7 -60 117 2 4 -10 -

154 199 --+-Exports -0-Imports Gross domestic investment 1/ -0 1 1 6 Imports of goods and services -129 8 8 186 130

Note 2001 data are preliminary estimates *The diamonds show four key indicators In the country (In bold) compared wth Its income-group average If data are mlssing, the diamond wll be incomplete

- 72 -

PRICES and GOVERNMENT FINANCE

Domestic prices ("A change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Consumer goods Investment goods Manufactures

Total imports (ci9 Food Fuel and energy Capital goods

Export price index (1995-700) Import price index (7995=700) Terms of trade (7995=700)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1981

1981

1981

9,338 9,046

292

-261 90

121

-190 369

1981

773

68

1991

226.6

43.6 -1.2 -4.2

1991

3,737

4,071

1,263

1991

4,137 4,255 -118

-28 69

-77

-4 81

616 0.01

I991

11,742 61 0

276 0 0

19 29 30 56 0

267 58 0

58 0

58

2000

10.4 6.7

38.2 3.2 0.4

2000

4,825 1,439

552 656

6,507 175

1,775 1,592

91 105 87

2000

7,000 7,670 -670

-321 290

-702

975 -273

3,460 2.1

2000

11,202 824

0

1,170 76 0

74 71

107 1,002

5

135 71 27 44 49 -5

2001

7.5 6.5

38.1 4.0 2.1

2001

5,107 1,715

625 675

7,261 198

1,627 1,816

89 103 86

2001

7,532 8,555

-1,023

-304 498

-828

1,272 -444

3,579 2.2

2001

10,616 844

0

1,513 80 0

177 -189 360 694

-9

88 88 32 56 48

8

I Inflation (%) 1500 -

96 97 98 99 00 01

-GDP deflator . I D I C P I

I Export and import levels (US$ mill.)

8,OW -

I 95 96 97 98 99 00 01

=Exports Imports

Bulgaria

Development tconomtcs Y/lY/UZ

Current account balance to GDP ( O h ) 115]

-10 1

Composition of 2001 debt (US$ mill.)

G 1,219 A 844

' A - I B R D E . Bilateral B . IDA D ~ Other multdateral F - Prtvate C - IMF G - Short-term

- 73 -

Additional Annex 11 : Supervision Plan BULGARIA Revenue Administration Reform Project

The RARP i s basically an institutional development project. Because revenue administrations are highly dependent on automation to process revenue collection and to collect information to validate taxpayer assessments o f their tax liabilities, i t includes also a complex investment in automation. I t i s estimated that the RARP w i l l require about 25 staff-weeks o f W B supervision per year on average during implementation, a moderately higher amount o f supervision than normal, as reflected in the supervision plan below:

Timing

FY2004

FY2005

FY2006

FY2007

Staff Weeks Staffing

32 weeks WB resources (32 weeks) o f which: - Task manager (8 weeks) - Revenue Specialist (4 weeks) - Institutional Reform Specialist (4 weeks) - Information Technology Specialist (4 weeks) - Sofia-based Operations Officer (4 weeks) - PAS (4 weeks) - FMS (2 weeks)

30 weeks W B resources (30 weeks) o f which: - Task manager (6 weeks) - Revenue Specialist (4 weeks) - Institutional Reform Specialist (4 weeks) - Information Technology Specialist (4 weeks) - Sofia-based Operations Officer (4 weeks) - PAS (4 weeks) - FMS (2 weeks)

22 weeks W B resources (22 weeks) o f which: - Task manager (6 weeks) - Revenue Specialist (3 weeks) - Institutional Reform Specialist (3 weeks) - Information Technology Specialist (3 weeks) - Sofia-based Operations Officer (4 weeks) - PAS (2 weeks) - FMS (1 weeks)

22 weeks WB resources (22 weeks) o f which: - Task manager (6 weeks) - Revenue Specialist (3 weeks) - Institutional Reform Specialist (3 weeks) - Information Technology Specialist (3 weeks) - Sofia-based Operations Officer (4 weeks) - PAS (2 weeks) - FMS (1 week)

- 74 -

FY2008 20 weeks WE3 resources (20 weeks) o f which: - Task manager (6 weeks) - Revenue Specialist (2 weeks) - Institutional Reform Specialist (2 weeks) - Information Technology Specialist (3 weeks) - Sofia-based Operations Officer (4 weeks) - PAS (2 weeks) - FMS (1 week)

FY2009 18 weeks WB resources (1 8 weeks) o f which: - Task manager (6 weeks) - Revenue Specialist (2 weeks) - Institutional Reform Specialist (2 weeks) - Information Technology Specialist (2 weeks) - Sofia-based Operations Officer (3 weeks) - PAS (2 weeks) - FMS (1 week)

- 75 -

Additional Annex 12: Ministry of Finance, Letter of Commitment BULGARIA Revenue Administration Reform Project

- 76 -

- 77-

- 7 8 -