Philippines - Tax Computerization Project

Documt of The World Bank FOR OMICJAJL USE ONLY Rq1t NOP P-5931-PH MEMORANlDM ND RECOMDMENDATION OF THE .PRESIDENT OF THE INTENTIONAL BANK FOR RECONSTI-MCTEON AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AM)OUNT EQUIVALENT TO US$63 MILLION TO THE REPUBLIC OF THE PHILIPPNES FOR A TAX COMPUTEZATION PROJECT APRIL 13, 1993 t II ; I' .- . ii'-r - This document has a restricted dstribution and may be used by recipients only in the pe-formance of teir official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CUREENCY EQUIVALENTS (as of January 1993, Currency Unit Pesos I w 1 - US$0.038 US$1 -26.0 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank ASEAN Association of South-East Asian Nations BIR Bureau of Internal Revenue BOC Bureau of Customs DOF Department of Finance GDP Gross Domestic Product IMF International Monetary Fund NCC National Computer Committee RDO Revenue District Offics SGS Societe Generale de Surveillance TIN Tax Identification Number VAT Value-Added Tax FISCAL YEAR January 1 to December 31  FOR OMCUIA US ONLY Tax C oec Loam and Proect Summary Borroer: Republic of the Philippines , moznt: US$63 million equivalent Terms: 20 years, including five years of grace, at the Bank's standard variable interest rate FinancingPln Local Foreign Total -US$ million ------ Bureau of Customs 10.3 4.8 15.1 Bureau of Internal Revenue 19.1 9.0 28.1 IBRD JU. 63.0 km. TOTAL 29.4A 1Q. Economic Rate of Return: NA Staff Apnraisal Report: Report No. 11355 du: IBRD No. 24362 | This document has utes.trcted distsbution and msy be used by wipitnts only in the petformance Iof their offcial duties. Its contents may nOt otherwise be disclosed without World Bank authorization.|  MEORANDUM AND RECOMMEDATION OF THE PRESIDENT OF THE IBRD TO TEE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TRE REPUBLIC OF THE PHILIPPINES FOR A TAX COMPUTERIZATION PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of US$63 million to help finance a Tax Computerization Project. The loan would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. 2. Background. Insufficientt govarnment revenues and the inabflity to borrow on commercial markets seriously constrain the construction of infrastructure critical for the country's economic development. Taxes are the main source of government revenue, accounting for 83X cf total revenues in 1991. Tax collection mainly involves the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC), both within the Department of Finance (DOF). 3. Tax Reforms. Iwportant procedural reforms for both BIR and BOC have been carried out since 1986, increasing administrative efficiency and rationalizing tax systems. With LfF technical support, these efforts accelerated during the past two years and have paved the way for computerization. The tax administration, although constrained by its lack of adequate computer facilities, tripled tax collections between 1986-1991, (from 065.6 billion to f183.4 billion), while the tax/GDP ratio incre_sed from 9.8X in 1984 to 12.5X in 1987 and 14.82 in 1991. 4. BIR Tax Reform. BIR reforms include: (a) establishing a unique tax identification number (TIN) for every taxpayer, (b) introducing a new system where taxes can be paid at banks, (c) establishing a final withholding tax on compensation income and (d) developing pilot VAT software. Particularly Important has been the approval of new legislation that: (a) requires about 1,500 large taxpayers to file returns and process all their tax transactions in one revenue district office (RDO); (b) establishes monthly VAT returns for large corporations and (c) increases penalties for tax evasion (including imprisonment). Additional improvements are being implemented by BIR, and have been included in the design and specifications of the new computerized systems or in the project Action Plan (para. 14). 5. BOC Tax Reform. BOC has also made significant reforms. It introduced computer systems to clear manifests, simplified customs forms, strengthened the review systems, introduced internal audit for all taxpayers and implemented the TIN system. Moreover, since early 1992, a comprehensive import supervision scheme contracted with the Societe Generale de Surveillance (SGS) was extended to all countries trading with the Philippines. Satisfactory progress is being achieved in completing other improvements identified by the IMF, including: supervising bonded warehouses, assessing duties and taxes, controlling bank remittances to the Treasury, compiling and exchanging information on importers and exporters. Medium-term measures include the use of the GATT valuation system to replace the home consumption valuation system used now. All these reforms are incorporated in the procedures and systems specified for the new  -2- computer system (NCS). The Action Plan includes target dates for approving legislation, which has been certified by the President and approved in second reading in Congress, simplifying import clearance procedures, increasing penalties for smuggling and consolidating customs tax legislation. 6. The system by which taxes are processed is slow, inefficient and unable to cope even with the present tax volume. Currently, only a fraction of the individual and corporate tax returns are computer-procesjed. There is little cross-checking, even of computGr-processed returns, and collection and compliance verifications are rudimentary. Because most taxes are still handled manually, delays occur in processing tax returns, which affect tax compliance, collection statistics and the management of the tax system. Tax administration is also hindered by obsolete ^omputer software. 7. The Government has recognized that an efficient and equitable tax administration system is the basis of sound economic development and social stability, and has placed very high priority on improving tax revenues and collection management througb a decentralized system. The proposed project would support these reforms by providing an integrated computerized system of tax administration. S. Lessons Learned from Previous Bank foerAtios=. Very few projects have been completed by the Bank in this sector. The proposed project reflects the current experience from a few projects that are under preparation and supervision and the experience of a similar project in Thailand, particularly regarding: (a) separating the tax improvements and computerization from other projects; (b) selecting carefully the team responsible for developing the software; (c) carrying out adequate tax administration reforms prior to the computerization; and (d) specifying the basic information technology accurately, but allowing for creative improvements by the hardware vendors and software application developers. 9. Rationale for Bank Involvement. The Bank provided assistance for project preparation and mobilized technical assistance to support administrative, procedural and legal reforms to improve tax administration and ensure successful computerization. Procurement of the required hardware and software is technically complex and would substantially benefit from Bank experience in similar projects and the use of a transparent evaluation methodology. The proposed project will establish a modern tax administration which, in line with the Bank's lending strategy for the Phillppines, would increase government revenues, support improved fiscal policies and ensure that tax collection is efficient and equitable, by distributing the fiscal burden fairly among Filipinos. Bank involvement in the project will also ensure that adequate priority is given not only to the commissioning of hardware and software, but to the implementation of other institutional and organizational improvements, technology transfer and staff development. 10. Prolect Objectives. The main objective is to support improvements in tax administration by providing technical assistance, staff training, hardware, software, priority equipment and facilities. This will result in m e efficient  -3- and faster processing of revenues and improve access to, and auditability of, tax records. 11. EProegt Dencrigtion. Tha project would establish a computerized and integratted tax administration system to process all taxes, by providing the hardware, tax software, complementary equipment, training, initial operational support and technical assistance to establish a modern tax collection system for BIR and BOC. It includes the following components: (a) Provision of computer hardware and software to establish a tax collection system for BIR, comprising, Inter alla: (a) a mainframe computer integrating BIR's tax information systems; (b) computing facilities, communication and data-entry systems at about 19 BIR regional offices and about 44 BIa district offices; and (c) software for all taxes administered by BIR (income, excise, withholding and VAT); (b) Provision of computer hardware and software to establish a tax collection system for BOC, comprising, Inter alla: (a) two main computers for software development and for integrating all tax data at the Office of the Commissioner of BOC; (b) microcomputer systems for the Manila Port and its Food Terminal Inc., Manila International Container Port, Batangas Port, Cebu Port, Manila International Airport and Cebu International Alrport; (c) microcomputer systems for integrated processing of expori-relate6 taxes; and (d) customs tax software. (C) Priority office equipment and utility vehicles for BIR and BOC and laboratory equipment for BOC to operate and manage the tax systems; (d) Training of BIR and BOC staff; and (e) Technical assistance for project implementation ar- for the required reorganization of BIR and BOC. 12. Prolect ImnIementati n. The proposed project would be carried out by BIR and BOC with the support of consultants. Project costs are estimated at US$92.4 million, with a foreign exchange component of US$63 million equivalent (68X) and taxes and duties estimated at US$5.7 million equivalent. The total financing required, including interest during construction, is US$106.2 million, of which the Bank would finance US$63 million, (592 of the total). Of the US$63 million loan, US$42.7 million would be allocated to BIR and US$20.3 million to BOC. The remaining costs would be financed by budgetary allocations. Government has already included a total allocation of 0127 million for BIR and 9100 million for BOC in the 1993 budget. Retroactive financing of up to US$6 million would be provided for project expenditures incurred after January 31, 1993. The breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, along with the disbursement schedule, are shown in Schedule B. A timetable of key project processing events and the status of Sank Group operations in the Philippines are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 11355-PH, dated March 31, 1993 is being distributed separately.  -4- 13. PxoJect Sustainability. The project is sustainable, employing technologies which are widely and satisfactorily used in the Philippines by other private and public institutions. Operations and management would be supported by turnkey cintractors during the first five years and by pr.rsonnal who will be extensively trained under the project. 14. Agreed Actions. The approval of key legislation has been completed satisfactorily (para. 4). The approval of additional legislation is targeted in the project Action Plan. Also, to ensure that this technically complex project is properly implemented, BIR ar.d BOC wou'.d es_ablish and staff a Project Implementation Unit and appoint consultants to supervise project implementation as conditions for loan effectiveness. Assurances were obtained from Government at negotiations that: (a) a reorganization study for PIR and BOC would be completed by May 31, 1995; (b) adequate local counterpart funds for the project would be Approved annually; and (c) BIR and BOC would implement in a timely manner an Action Plan. The Action Plan sets targets Inter a&la for: (a) completion of legislation; (b) implementation of improved procedures; (c) procurement, awarding and implementation of the turn-key contracts; (d) strengthening the informatics staff; (e) implementing a reorganization study; and (f) bidding and awarding contracts for non-computer equipment. 15. project Bnefts. The project would substantially increase government revenues which are critical for the country's economic development. Increasing tax revenues would be a particularly important factor in reducing the fiscal deficit and debt burden faced by Government. The computerized system would Improve tax administration and collection, thereby increasing efficiency, effectiveness and equity. The project has already been instrumental in improving tax procedures, regulations and legislation through technical assistance provided during project preparation. In the future, it would help to decentralize the processing of tax returns, improve access to tax records, promote auditability at each level, and provide adequate taxpayer records. The new system is expected to considerably increase revenues from taxpayers who currently avoid or underpay the required taxes: estimates suggest that tax evasion could be as high as 30X-50. Even if only 22Z of these taxes are collected after computerization, the tax/GDP ratio will increase to 191, which is comparable to ratios in several ASEAN countries. The project benefits have been demonstrated by the recent but limited coLputerization of the VAT system in two pilot revenue districts, which increased their tax collections by 401. 16. It is impossible to estimate an economic rate of return for the project, since its main result would be the transfer of revenues resulting from improved procedures. However, the project is extremely cost-effective in financial terms and even if the project benefits are assumed to be achieved gradually until the year 2000, the benefit-cost ratio will range from 47 to 61, depending on the discount rate used (for discount rates between 101 and 201). Project expenditures would be recovered in just one year by a less than 11 increase in tax revenues. 17. Iisks. The main risks are associated with the procuremont process. In general, the award of large contracts for computer hardware and software is technically complex, controversial and subject to political pressure. In addition, the project's success would depend on the quality of the software and hardware provided. These risks have been minimized in the proposed project through the design of rigorous selection requirements and a transparent system  -5- for procurement, under a turn-key contract. While little risk is involved with overall project implementation, given the qualifications proposed for the two turn-key contractors, there is still a risk that BIR and BOC may not be Able to retain adequately trained and qualified staff to operate the much-expanded computerized tax system. However, this risk is lessened by the massive training programs included in the project (which provide for expected staff attrition), by the supplier initially operating the system and by the potential to extend this assistance, if needed. 18. Recomendati. I am satisfied that the proposed loan would comply with the Articles of Agreement of Bank and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. April 13, 1993  -6- ShoheWe A Phgifppi Tax Proct Estate Cost and Finaning Plan Estimated Cost Local Foreign Tot&l ---- (US$ million)--- Bureau of Customs 9.9 17.5 27.4 Hardware System 2.0 10.3 12.3 ASYCUDA Software System 0.0 1.9 1.9 Other Project Cost 2.9 2.9 5.8 Technical Assistance 0.1 2.5 2.6 Taxes and Duties 4.8 0.0 4.8 Bureau of Internal Revenue 18.0 37.0 54.9 Hardware System 2.6 32.6 35.2 Other Project Cost 5.2 2.0 7.2 Technical Assistance 0.2 2.5 2.7 Taxes and Duties 9.9 0.0 9.9 Base Cost (January 1993) 2..8 _54.5 82.3 Physical contingencies 0.8 2.9 3.7 Price contingencies 0.8 5.5 6.3 Total Project Cost j/ 29.4 _630 92.4 Interest during construction 0.0 13.8 13.8 Total Financing Reguired / 29.4 _76.8 106.2 FLnscin Plan: World Bank - 63.0 63.0 Bureau of Customs 10.3 4.8 15.1 Bureau of Internal Revenue 19.1 9.0 28.1 TOTAL W/ 29.4 16-8 106.2 Is Including taxes and duties equivalent to US$15 million. Lh Interest is computed on the disbursed amount of the loan allocated to each one of the Bureaus including commitment charges. g,l Due to rounding, the last digit in totals may not add.  -7- Skbadu1 A Page 1 of 2 Philippine Tax Computeizaton Project Summary of Proposed Procunent (US$ Milon) |Procureent Method ICB Oter NB- Total Civil Works 0.0 0.0 4.9 4.9 0.0 0.0 0.0 0.0 BOC Computer System and 14.1 0.0 0.0 14.1 Related Services (14.1) 0.0 0.0 (14.1) ASYCUDA Software 0.0 22 0.0 2.2 0.0 (22) 0.0 (22) Other BOC E3quipment LO 1.0 0.0 2.0 (0.9) (0.5) 0.0 (1.4) BIR Computer System and 39.7 0.0 0.0 39.7 Related SerVices (37.6) 0.0 0.0 (37.6) Other Bri Equipment 1.8 05 0.0 2.3 (L8) (0.5) 0.0 (23) Consultants 0.0 5.4 0.0 5.4 0.0 (5.4) 0.0 (5.4) Miscellaneous (taxes) 0.0 0.0 2L8 218 0.0 0.0 0.0 (0.0) Total S6.6 91 26.7 9_ [T.~~~~~ _ ;