Argentina - Second Tax Administration Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 19535 IMPLEMENTATION COMPLETION REPORT ARGENTINA SECOND TAX ADMINISTRATION PROJECT (LOAN. 3460-AR) June 25, 1999 Poverty Reduction and Economic Management Argentina, Chile and Uruguay Country Management Unit Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso Arg. $1 = US$1 WEIGHTS AND MEASURES Metric System FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS AFIP Federal Public Revenue Administration (successor to DGI) AUDINT Automated administrative system BNA Government's Commercial Bank DGI General Tax Directorate (replaced by AFIP) DOSMIL Automated collection system for large taxpayers DOSMIL REMOTO Extension of DOSMIL to encompass large taxpayers residing far from DGI offices ECLAC UN Economic Commission for Latin America and the Caribbean GDP Gross Domestic Product ICR Implementation Completion Report IDB Inter-American Development Bank IMF International Monetary Fund METFIS Planned system for improved credit procedures PSRL Public Sector Reform Loan PSRTAL Public Sector Reform Technical Assistance Loan SICOFI Automated collection system for small and medium-sized taxpayers UTE DGI's new telecommunications network VAT Value Added tax WAN Wide Area Network LAN Local Area Network PC Personal Computer | Vice President: Shahid Javed Burki Country Director: Myrna L. Alexander Sector Director: Guillermo Perry Task Team Leader: Luis-Jose Mejia  FOR OFFICIAL USE ONLY Argentina Second Tax Administration Project (Loan 3460-AR) Implementation Completion Report CONTENTS Preface Evaluation Summary ................................................... ii Part I. Project Implementation Assessment A. Introduction .................................................... 1 B. Project Objectives ....................................................3 C. Implementation Experience ....................................................3 D. Results ...................................................4 E. Project Sustainability and Future Operations ....................................................7 F. Bank Performance ...................................................7 G. Borrower Performance ...................................................8 H. Assessment of Outcome ...................................................8 I. Lessons ...................................................9 Part II. Statistical Tables Table 1: Summary of Assessment ................................................... 12 Table 2: Related Bank Loans/Credits ................................................... 14 Table 3: Project Timetable ................................................... 15 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual ......................................... 16 Table 5: Matrix of Project Activities ................................................... 17 Table 6: Bank Resources: Staff Inputs ................................................... 23 Table 7: Studies Included in Project ................................................... 24 Table 8: Project Costs and Financing ................................................... 25 Table 9: Status of Legal Covenants ................................................... 26 Appendix A. Mission's Aide Memoire B. Borrower's Contribution to ICR C. Sales and VAT Tax Collections as Percentages of GDP (1935-97) D. Collections from Social Security and Customs Taxes as percentages of GDP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Argentina Second Tax Administration Project (Loan 3460-AR) Implementation Completion Report Preface This is the Implementation Completion Report (ICR) for the Second Tax Administration Project in Argentina, for which Loan 3460-AR in the amount of US$20 million equivalent was approved on April 14, 1992, and became effective on February 11, 1993. Final disbursement took place on February 12, 1999. The ICR was prepared by H. J. Nissenbaum, under the supervision of Luis-Jose Mejia, Task Manager (LCSPR), with the assistance of Messrs./Mmes Leichtle, Rojas and Schuitz (consultants experienced with the Chilean tax agency), and reviewed by Luca Barbone (AFTM3). The ICR is based on information in the project files and discussions with officers and staff of the Federal Public Revenue Administration. The Borrower contributed its own evaluation of the project's experience and provided background material and support.  - ii - Argentina Second Tax Administration Project (Loan 3460-AR) Implementation Completion Report EVALUATION SUMMARY A. Introduction and Project Objectives 1. By the end of the 1980s, Argentines had virtually stopped paying taxes. The General Tax Directorate (DGI) had lost its capacity to administer the tax system effectively, which numerous assessments identified as among the major reasons for serious Government revenue shortfalls. One Bank study found that there had been an about 75% reduction in revenue variations that could not be explained by changes in the potential tax base owing to fluctuations in the economic environment, tax rates or in the "Olivera-Tanzi" effect during 1987-89. 2. To remedy the situation, the authorities first resorted to charges on exports, bank checks, energy sales, etc. for readily accessible revenues. Unfortunately, these generated system distortions and their yields fell when taxpayers found ways to avoid these charges. Simultaneously, tax rolls were not updated, collected revenue per audit fell from $126 to $34 in 1986-89 and less than 16 percent of DGI's audit conclusions were being collected. 3. The authorities therefore took more basic measures. They broadened the VAT base at a uniform rate, instituted a gross asset tax as a minimum income tax, redefined inflationary adjustments to partly eliminate the "Olivera-Tanzi effect", and trimmed industrial tax breaks. The relatively loose evasion penalties were tightened, existing sanctions were reactivated and new enforcement powers were obtained. DGI was authorized to close temporarily businesses involved in VAT violations without having first to obtain court approval. Closures rose from zero in 1989 to 32,000 in 1992, which figured in VAT collections' rise to 6 percent of GDP by 1991. Prominent citizens were indicted on evasion charges; tax inspectors found corrupt were dismissed; and industrial promotion beneficiaries were audited. 4. In parallel the Government chartered the First Tax Administration Project (Ln. 3015) which helped to rapidly increase revenues. A major factor was the development of a computerized large taxpayer current account system ("DOSMIL"), which substantially reduced collection and return verification, errors in returns, and late submissions and payments. The Project also succeeded in increasing the accuracy and reliability of information for auditing taxpayers. It helped DGI expand its audit staff by almost 300 percent and multiply audits fivefold in 1989-92. 5. The Government decided it also needed to improve DGI. IMF and other experts had long judged it to be too bureaucratic, with unduly rigid procedures and tax forms, and lacking proper planning and coordination. Its staff's tasks were ill defined and their roles  - 111 - confusing. Competent professionals were difficult to attract and retain, their morale was low, and they usually held second jobs to augment low wages. In addition, DGI's management was often unable to plan or carry out reforms adequately, partly because of union restrictions. And a review of DGI's first 54 years showed that over half of its Director Generals stayed for less than one year, and 93 percent less than three years. The authorities accordingly recognized the need for a broad gauged strategy for improving DGI's overall structure, operations and management. They launched a comprehensive reform program and requested Bank aid for segments of it, including the extension and deepening of some of the First Project's initiatives. 6. The Second Tax Administration Project's objectives were to increase tax revenues without increasing rates, ensure the continuity and sustainability of these increases, and facilitate voluntary compliance. It provided support to: (a) review and codify tax laws and rules in order to simplify existing legislation and make it more coherent, develop a legislative data base, and train DGI legal staff; (b) expand the automated accounting and administrative systems recently developed to all DGI agencies, acquire microcomputers and train staff in their use; (c) install "DOSMIL" in all DGI agencies; (d) gather data related to collections, develop methodologies and tools for fraud detection, and train auditors; and (e) survey taxpayers and train staff in improving their services. B. Implementation Experience and Results 7. Project implementation began so well that the Government increased its financing for the operation and expanded its activities in the first year. But beginning soon afterwards, three new Director Generals were successively appointed along with numerous project component coordinators. The ensuing instability was later complicated by delays stemming mainly from DGI's inheriting the responsibility for social security contributions and later customs duties in its evolution into the Federal Public Revenue Administration (AFIP). The 1994-95 "Tequila crisis" also was disruptive. These arrested much of project progress in midstream and there was no attempt for almost a year to continue, followed by some unsuccessful efforts to re-invigorate the Project. Further, AFIP decided in 1997 to begin a new, larger tax administration project with IDB support. This tended to relegate the Bank's operation to a lesser --though still useful-- role. 8. The Project substantially contributed to Argentina's improved fiscal performance, particularly during the first part of the project period. A 1998 Bank report associated the 2.8% of GDP increase in current revenues in 1990-94 with better tax collection capabilities, complemented by less inflation and renewed growth. Bank figures indicated that tax revenues rose on average from some 11.4 percent of GDP in 1988-90 to 16.5 percent in 1990-96. In this connection, the "DOSMIL" system which the Project helped institutionalize established solid on-line control of each regional DGI agency's largest 2,000 taxpayers throughout the network. "DOSMIL" related VAT payments multiplied tenfold during the project period from 2.7 million pesos in 1991 (16 percent of total collections) to 27.2 million in 1997 (72 percent of the total). Related social security receipts rose from 7.9 million pesos in 1993 to 13.2 million in 1997. These gains,  - iv - incidentally, sparked initiatives at provincial and municipal levels to emulate "DOSMIL", which the Bank also supported. 9. The Project also enabled DGI to better incorporate small and medium taxpayers through a simpler control and payment system. This added almost 300,000 taxpayers to the rolls through 1995, when it was replaced by a comparable system linked to more advanced telecommunications facilities ("UTE"). Meanwhile, a "DOSMIL" subsidiary expanded the collection network to encompass taxpayers residing far from DGI offices. The system's high costs led to its closure in 1997 when "UTE" assumed its functions. Another activity helped create the telecommunications network which linked 127 DGI and 57 BNA branches on "DOSMIL" activities and provided timely information on tax obligations and receipts throughout the tax agency. 10. The accounting and budgeting system's manual processing was replaced in 1993 by a computerized operation, and assistance in DGI's treasury area improved its direction. These have strengthened controls and management. But the improvements largely reflected relatively rudimentary upgrading, and the accounting and budgeting system still fails to provide program, product and management cost data units. 11. Similarly, DGI's ability to select suitable audit cases improved through the development of cross-checking information models and consolidation of other agencies' data. These and 43 sector studies helped build a useful database. DGI also adapted a Project-aided information system for improving auditing procedures but some elements of these changes were stopped for failure of the consultants' work to be properly integrated with line operations. Thus, the application of these advances for the desired better audit performance and its management control is incomplete. DGI's auditing operations' planning and execution, methods and uses of information systems appear to be improving only slowly. 12. In the legal framework component, experts completed a systematic compilation of the disorganized body of laws and regulations, which was to provide the foundation for an electronic database. The latter was actually installed but has never been used; nor the planned related training executed due to staff-consultant disputes. The activity has since been transferred to the Justice Ministry. There was greater success in the effort to install a computerized legal administration and files management system in all units concerned with contentious bad debt cases. These helped install centralized registration and control over all judgments, cut processing time and increase judgments paid. 13. A significant shortfall occurred in the case of the planned institutional restructuring. Initially, this was delayed to await the organizational and personnel changes related to the new union work agreement being concluded at the Project's beginning. Subsequently, the several changes in the incumbents of the Director General's post and their differing interests in pursuing this objective obstructed its undertaking. The Project did help transform DGI though into a much more decentralized institution.  -v 14. Not all the actions planned to encourage greater voluntary taxpayer compliance through stimulation of positive cultural changes were implemented either. However, the Project helped lessen compliance costs for taxpayers. "DOSMIL" permitted the substitution of magnetic media for tax returns for the previous complicated paper presentations. Over 96% of declarations now come in via the software DGI distributes. Conversely though, "DOSMIL" contributed to tightening taxpayers' fulfillment of their obligations by publicizing DGI's expanded knowledge base, and a new billing system is helping deter documentation falsification. Taxpayer ranks almost tripled from 1991 to 1997, helping improve Argentina's poor record in curbing taxpayer evasion. IMF estimates indicate that VAT compliance levels increased from 33.9% in 1989 to 64.4% in 1992---but that it also declined in 1993-94. AFIP itself estimates that the evasion rate declined to 42 percent in 1995 and 37 percent in 1997. These suggest commendable progress but there remains scope for betterment, in part depending on AFIP's ability to gain fuller legal authority to pursue tax delinquencies. 15. The sustainability of the Project's achievements is rated "Likely". "DOSMIL" and the many other new, now proven changes are in place and AFIP's commitment to maintaining them shows promising signs of durability. In addition, the follow-on project launched in 1997 should help expand several of the activities supported by Loan 3460. It calls for further advancing the legal framework governing tax administration and strengthening AFIP's legal procedures on collections and audits; simplifying and monitoring taxpayer compliance; augmenting information technology services; bolstering organizational development and personnel management; and improving audit activities. However, the long-term sustainability of the Project will depend fundamentally on AFIP's effecting and maintaining the changes needed to achieve a more adequate institutional base. The problem is complicated by AFIP's challenges of fully integrating the management of income and related taxes, social security contributions and customs obligations. 16. The Project's future operations require the further strengthening of the organization in several key areas so as to achieve better overall performance. They also hinge on the fate of the aforementioned follow-on activity. Its plans fortunately appear to comprise appropriate arrangements for continuation of several important project components. These include provisions for timely inputs and the systematic evaluation of project results based on comprehensive performance indicators. C. Bank and Borrower Performance 17. Bank performance was "Satisfactory". Project preparation was very detailed with activity and performance measures set out for every component. Project documentation was exemplary in its inclusion of definitions of new functions, procedures and systems in all major DGI areas. AFIP staff commended the Project for seeing through and effectively supporting the intended changes. The institution's officers expressed special appreciation for the relatively high order of planning and project execution, which they credited to the Bank's participation. Moreover, they praised the Bank's work as creating a solid basis for the further reforms they are pursuing.  - vi - 18. However, the Bank demonstrated relatively little capacity to alter the progressively deteriorating record of project execution. To be sure, the small amount of the Loan (US$20m) relative to the task, DGI's size and scale of activity reduced the Bank's scope for influence, as did the launching of the follow-on project. In addition, it would have been virtually impossible to safeguard the operation against the political instability and changes in leadership that hurt it. Under these circumstances, the Bank should have sought to bring the Project to an earlier than scheduled conclusion. 19. The Government undertook the reform program with a firm strategy, competent and motivated managers, pronounced improvements in the enabling environment, and provisions for suitable assistance, abetted for some time with considerable top level backing. DGI constructively engaged its line officers in project operations and its central coordinating unit's work was commendable. However, the heavy turnover in the agency's management, the progressive loss of interest in the operation by the later .Director Generals and the neglect of some key reform areas were injurious. And more should have been done to expand DGI's readiness for substantial change, as evidenced by some units' resistance to several Project targets. Firmer managerial action was needed to solve these problems. D. Assessment of Outcome 20. The outcome measured against the conditions of the Project's formulation and its defined goals presents a positive picture. To be sure, significant policy goals, especially concerning DGI's institutional development and to a lesser degree, the legal framework were set aside in favor of priorities on technical changes. Thus the latter directed organizational reforms instead of the more preferable opposite approach. Plans to engage project-affected groups in participatory activity were also de-emphasized. And Borrower interest in and ownership of all the elements of the Project waned throughout most of its implementation. 21. However, the major project objectives were more than adequately fulfilled, especially as it directly served to strengthen tax revenue collections and reduce tax evasion. The 1997 income tax returns attained the highest percentages of GDP in the previous 35 years. Sales tax VAT collections in 1992-97 exceeded 6% of GDP, the highest in 1935-97. And the 1994-97 social security contributions approximated the peaks reached for these payments over the same 1935-97 period, which occurred 40 years previously. 22. In the process too, tax collection has become more efficient and effective. Unit administrative costs fell by about a fourth from 1991 to 1993-97 while returns on each peso spent on administration increased 16 percent. Also, the Project helped DGI become a more modernizing, change-oriented institution. Many inefficient, unproductive practices were shed and some relatively sophisticated ones implanted. Tax collection and other information systems, communications infrastructure, management controls particularly are now quite advanced in certain respects. Thus taking into account also the  - vii - importance of the Project's accomplishments for Argentina's strong economic performance during the 1990s, the Project is considered to have responded adequately to its challenge and achieved satisfactory development results. E. Lessons 23. The project experience illustrates the potential benefits of the Bank's new adaptable lending instruments. In undertaking the requirement in this case for achieving substantial institutional reform, it would have been far better to have employed an APL - type approach (had this been available then). This might have produced superior results in maintaining strong high level Borrower commitment, affording possibilities of providing greater Bank funding, and coping with the changing economic/political tides over an extended period. 24. Another lesson has been drawn from DGI's historic experience. The Argentine authorities have underscored the importance of safeguarding tax bureaus to the extent possible from disruptive political forces because of their importance for fiscal governance and efficient state operations. The officials sought to inject greater stability in the management of the tax program by guaranteeing its chief administrator a multi-year term of office and strengthening the institution's political independence.  1 Argentina Second Tax Administration Project (Loan 3460-AR) Implementation Completion Report PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Introduction 1. The magnitude of Argentina's fiscal adjustment during the 1990s has been a key factor in its relatively strong economic perfornance. This constituted a major change from the previous decade when large deficits of the central government and non-financial public sector fueled extreme inflation and external imbalances. 2. The previous fiscal disequilibrium was partly owing to erosion of Argentina's revenue mobilization capacity. There had long been a relatively large gap between the taxes which should have been paid and actual collections, which a recent IMF report estimated at 20-40 percent. The ratio of tax receipts to GDP was only 12.7-18.7 percent in the 1980s. Granted, real economic growth then was only 0.78 percent with inflation volatility of over 1 percent. There were also numerous fiscal exemptions and incentives, and almost biannual tax amnesties. But these factors alone did not adequately explain the persistently poor tax revenues. 3. By the end of the 1980s, Argentines virtually stopped paying taxes. The General Tax Directorate (DGI) had lost its capacity to administer the tax system effectively, which an IBRD 1991-92 macroeconomic assessment concluded was among the major reasons for the revenue shortfalls. The Bank's subsequent "Effects of Tax Reform on Argentina's Revenues" study found that there had been an about 75% reduction in "tax effort" (i.e., revenue variations that could not be explained by changes in the potential tax base owing to fluctuations in the economic environment, tax rates or in the "Olivera- Tanzi" effect) during 1987-89. The study attributed the subsequent improvement in this "effort" to better tax administration and taxpayer compliance. 4. To remedy the poor situation in the late '80s, the authorities first resorted to charges on exports, bank checks, energy sales, etc. for readily accessible revenues. Unfortunately, these generated system distortions and their yields fell when taxpayers found ways to avoid them. Then as well, DGI inspectors were reported to be regularly working on the side to help large taxpayers with their bills. Tax rolls were not updated; some actually vanished. And collected revenue per audit fell from $126 to $34 in 1986- 89 while less than 16 percent of DGI's audit conclusions netted revenues. 5. The authorities therefore took more basic measures. They broadened the VAT base at a uniform rate, instituted a gross asset tax as a minimum income tax, redefined inflationary adjustments to partly eliminate the "Olivera-Tanzi effect", and trimmed industrial tax breaks. They tightened the relatively loose evasion penalties, reactivated  2 existing sanctions and gained new enforcement powers. In the process, they clarified the murky legal framework that had made claims on taxpayers hard to prosecute. DGI was authorized to close VAT-violating businesses without having first to obtain court approval. Closures rose from zero in 1989 to 32,000 in 1992, which figured in VAT collections' rise to 6 percent of GDP by 1991 (on a par with Chile). Prominent citizens were indicted on evasion charges; tax inspectors found corrupt dismissed; industrial promotion beneficiaries audited and VAT taxpayers enumerated. 6. In parallel with these efforts, the Government first enlisted the help of the Bank in this sector in 1986 under the Public Sector Management TA Project (Ln. 2712). It mainly produced a unified taxpayer number. In 1989, the authorities chartered the First Tax Administration Project (Ln. 3015), aimed mostly at rapidly increasing revenues by improving DGI's efficiency. In the event, better tax administration and legislation did contribute significantly to revenue growth. A major factor was the development of a computerized large taxpayer current account system ("DOSMIL"), which was installed in DGI's 37 largest branches. This substantially reduced collection and return verification, errors in returns, and late submissions and payments. It was quite novel since, as late as 1990, DGI had no system for controlling even the largest taxpayers, who provided the bulk of revenues. The First Project also succeeded in increasing the accuracy and reliability of information for auditing taxpayers. It helped DGI expand its personnel working on auditing by almost 300 percent and multiply monthly audits fivefold in 1989- 92. In addition, it introduced automated control systems in budgeting, legal and human resource areas. Subsequently, the Public Sector Reform Project (Ln. 3394) helped enhance the policy framework for revenue mobilization with emphases on rebuilding the tax rolls, further auditing upgrading and modernizing legal procedures. 7. The Government decided it also needed to improve DGI. IMF and other experts had long judged it to be too bureaucratic, with unduly rigid procedures and tax forms, and lacking proper planning and coordination. Its staff's tasks were ill defined and roles confusing. Competent professionals were difficult to attract and retain and their morale was low. DGI's management was often unable to plan or carry out reforms adequately, partly because of union restrictions. And a review of the organization's first 54 years showed that over half of its Director Generals stayed for less than one year, and 93 percent less than three years. A Fund report said that they only focused on short-term matters, often made inappropriate resource allocations, and were inattentive to management and systems development and taxpayer incentives. 8. The authorities thus recognized the need for a broad gauged strategy for improving DGI's overall structure, operations and management. They also appreciated that the First Project's advances had to be extended and deepened. Buoyed by the reform spirit of its 1991 reorganization, DGI launched a comprehensive improvement program and requested Bank aid for segments of it.  3 B. Project Objectives: 9. The Second Tax Administration Project addressed four major causes of the inefficiency of the system: the inadequate legal framework; weak, excessively centralized administration; poor service to the public; and inferior collection and taxpayer auditing. Its objectives were to: (a) increase tax revenues without increasing tax rates; (b) ensure the continuity and sustainability of these increases; and (c) facilitate voluntary compliance through increasing popular perception of fairness and equitable distribution of the tax burden. The Project financed services, equipment and other support to: * review and codify tax laws and rules in order to simplify and make more coherent existing legislation, develop a legislative data base, and train DGI legal staff; * expand automated accounting and administrative systems developed in the First Project to all DGI agencies, acquire microcomputers and train staff in their use; * install "DOSMIL" in all DGI agencies; * collect data related to collections, develop methodologies and automated tools for fraud detection, and train auditors in their use; and - carry out taxpayer surveys and train staff in improving their services. C. Implementation Experience 10. Project implementation began and was sustained well at first. This led the Government to increase its fumding for the operation and to expand its activities in the first year. It also then appeared that the operation would be successfully completed far ahead of schedule. But beginning early on, three new Director Generals were successively appointed along with numerous project component coordinators after several political changes. The ensuing managerial instability was exacerbated by delays stemming mainly from DGI's absorption of the responsibilities for social security system contributions and later customs duties in its evolution into the Federal Public Revenue Administration (AFIP) in 1996. In addition, the 1994-95 "Tequila Crisis" caused DGI'to focus almost exclusively on raising tax revenues, with other activities slipping to secondary attention. These factors arrested much of project progress in midstream, and there was no attempt for almost a year to continue the reforms. There were some efforts later to re-invigorate activity but these were aborted. Further, AFIP decided in 1997 to launch a new activity to strengthen tax administration, for which the IDB approved a US$96 million loan. This tended to relegate the Bank's project to a somewhat secondary -- although still useful -- role. 11. Fortunately, the delays and other events did not affect "DOSMIL" and other collection-related activities much. There were also some compensating factors. A few of the unfulfilled Project goals were offset by some unplanned accomplishments. Some of these were elements of the comprehensive reform program that DGI originally planned to implement entirely on its own, but for which they eventually obtained Loan support (to good ends). In addition, global information and telecommunications advances opened  4 investment opportunities in administrative areas, for which Bank assistance proved valuable. D. Results (Ref. Table 5) 12. The Bank's 1998 "Fiscal Dimensions of the Convertibility Plan" report associated the 2.8% of GDP increase in current revenues in 1990-94 with better tax collection capabilities, complemented by less inflation and renewed growth. Bank figures indicated that tax revenues rose on average from some 11.4 percent of GDP in 1988-90 to 16.5 percent in 1990-96. VAT collections grew fastest, approaching 6% of GDP, more than twice the average of the '80s. AFIP calculates that income tax revenues rose from 9.23 % of GDP in 1991 to 11.7 % in 1997 while social security receipts increased from 3.5 % of GDP to 5.4 % in 1992/97. 13. The Project helped institutionalize the "DOSMIL" system, which established solid on-line control of each regional DGI agency's largest taxpayers throughout the network (now 141 units). As of 1997, it encompassed 238,000 taxpayers, reportedly expanded later to 242,356, through the system's replication, and now constitutes the heart of tax collections. "DOSMIL"-related VAT payments multiplied tenfold during the project period, increasing from 2.7 million pesos in 1991 (16 percent of total collections) to 27.2 million in 1997 (72 percent of the total). Related social security receipts linked to it rose from 7.9 million pesos in 1993 to 13.2 million in 1997. 14. The Project also enabled DGI to better incorporate small and medium taxpayers through a simpler control and payment system (SICOFI), installed in 63 important branches. SICOFI added almost 300,000 taxpayers to the rolls through 1995, when it was replaced by a comparable system linked to more advanced telecommunications facilities ("UTE"). Meanwhile, a "DOSMIL" subsidiary expanded the collection network to encompass taxpayers residing far from DGI offices. "DOSMIL REMOTO" operated in 150 branches of the national commercial bank (BNA) and grew to involve 55,000 taxpayers. High costs led to this activity's closure in 1997, when tax return and payment functions under "DOSMIL" controls were transferred to "UTE." 15. The Project helped create a telecommunications network which linked 127 DGI and 57 BNA branches on "DOSMIL" activities that provided useful data for headquarters departments. It also formed the basis for the organization's first electronic mail system and later links with "WAN" and "LAN" systems. "DOSMIL" and these facilities provided valuable resources for more effective tax administration. They enabled data on tax obligations and receipts to be captured and rapidly disseminated, providing more useful and reliable guidance for auditing activity than the former manual methods. A new system permnits the consolidation of "DOSMIL" data, facilitating extensive examination of IVA collections by different economic and geographic areas, and development of tax payment projections. Similarly, integrated "DOSMIL" data tracked payments and measurements of taxpayer compliance, in turn enabling DGI to upgrade its indicators for evaluating its own entities' performance.  5 16. The Project also helped install practices designed to increase the efficiency of other DGI functions. The accounting and budgeting system's manual processing was replaced in 1993 with the installation of a computerized operation (AUDINT). DGI then also established links with the Government's new financial management information system and readily exceeded its requirements. Project support in DGI's treasury area improved its direction. All these have strengthened DGI's controls and management but the improvements largely reflected relatively rudimentary upgrading. The accounting and budgeting system still fails to provide cost data by program, product and management units. 17. DGI's ability to select suitable audit cases improved through the development of cross-checking information models and consolidation of other agencies' data. Some 43 studies on different economic sectors helped build a database. DGI expanded the Project- aided METFIS system established for improving taxpayer auditing procedures to set better controls over the use of IVA invoices for fiscal credits. Other elements of METFIS were stopped in 1996 for failure of the consultants' work to be properly integrated into line operations. In addition, the AUDINT system was first suspended and later revived. Therefore, the application of these advances for the desired better audit performance and its management control is incomplete. In their wake, DGI's auditing operations progressed but still show weaknesses, notably in the quantity and quality of taxpayer data. Planning and execution of inspections, auditing methods, management controls and uses of information systems appear to be improving slowly. 18. The Project helped DGI learn US Internal Revenue Service methods to protect the security and integrity of tax information, and better control against fraud and inappropriate entry. The results were used in the definition of specifications for higher level telecommunication facilities, especially for encapsulating messages and encryption. They also facilitated the use of the Internet for controlling IVA evasion. 19. Tax collection has become more efficient and effective. Its unit costs have fallen with the progressive advances in information technology and involving banks in receipts. Collection administrative costs fell from 2.5 percent of returns in 1991 to 1.9 percent in 1993-97. Collection returns increased from 44 pesos for each peso spent on administration to almost 51 pesos in 1996-97. 20. There was partial success in applying technological changes under the. legal framework component. Experts completed a systematic compilation of the disorganized body of laws and regulations, which was to provide the foundation for an electronic database. The latter was actually installed but DGI staff opposition impeded its use. And the planned related personnel training was not executed due to staff-consultant disputes. (The agency's officials, in this connection, have underscored internal resistance to changes, particularly those involving the introduction of information technology). The database activity has since been transferred to the Justice Ministry. There was greater success in the scheme to install a computerized legal administration and files management system in all units concerned with contentious bad debt cases. New  6 software and other helped cut processing time, increase the number of judgments finally paid, and install centralized registration and control over all judgments. All these have been fruitful: in 1997-98, AFIP reported having satisfactorily settled 30,300 cases (with an adjustment of over $6 billion); gained another $700 million by effective collection of bad debts; initiated 24,000 new investigations; and closed 12,000 delinquent businesses. Unfortunately though, the independent Fiscal Tribunal which examines payment issues still processes these slowly and continues to limit the tax agency's receipts. 21. The planned institutional restructuring was initially delayed to await the organizational and personnel changes related to the new union work agreement that was being concluded at the Project's beginning. Subsequently, the several changes in the incumbents of the Director General's post and their differing interests in pursuing this objective obstructed its undertaking. Fortunately though, the present AFIP Administrator revived these intentions on assuming office in 1996, albeit with a different emphasis: fully integrating Customs and the ex-DGI functions. Also, the training aspects of the envisaged organizational improvements took root following greater management interest in staff upgrading. From 1991 to 1997, the number of training courses given rose from 1,075 to 4,188, with a more than fourfold increase in the number of participants' hours. The Project also contributed to restructuring and expanding the institution's training unit and introducing more industrial-type instruction. 22. The Project advanced DGI's transformation into a much more decentralized institution whose field units now have far greater operating autonomy. "DOSMIL" helped with the agency's decision to decentralize collections. Other Project elements also contributed by propelling DGI's substantial turn from dependence on a central mainframe data system. It was originally intended to rationalize the latter but computer science advances identified more efficient methods. Consequently, the central mainframe now performs a comparatively marginal role. Further, measures which DGI initiated outside of the project brought about significant organizational changes through the installation of advanced telecommunications networks. Ultimately, Loan 3460 supported the latter's design and infrastructure. 23. The planned actions to encourage greater voluntary taxpayer compliance through stimulation of positive cultural changes were only partly implemented. But the Project helped lessen compliance costs. "DOSMIL" permitted the substitution of magnetic media for tax returns for the previous complicated paper presentations. Taxpayers have used diskettes for tax forms and, more recently, forms designed for optical character recognition reading. Over 96% of sworn declarations now come in via the software AFIP distributes. The agency has also facilitated electronic payment transfers and conducted studies regarding similar tax return submissions, introduced direct debit payment service, simplified low income payers' obligations, and permitted relatively low interest rate installment payments. 24. At the same time, "DOSMIL" contributed to tightening incentives for taxpayers' fulfillment of their obligations by expanding the tax agency's information base. And a new billing system strengthened control of payment transactions by deterring falsification  7 of documentation. With these and other new tools, the number of taxpayers almost tripled from 1991 to 1997, helping improve Argentina's poor record in curbing tax evasion. IMF estimates indicate that VAT compliance levels increased from 33.9% in 1989 to 64.4% in 1992 (but that it also decreased to 59.5% in 1993 and 55.1% in 1994). AFIP estimates that the evasion rate declined to 42 percent in 1995 and 37 percent in 1997. Overall, these suggest commendable progress (although rigorously reliable statistics in this areas are hard to determine). But there remains scope for betterment: VAT compliance in Uruguay was 72% and 82% in Chile in 1994. E. Project Sustainability and Future Operations 25. The sustainability of the Project's achievements is rated "Likely". "DOSMIL" and many other new, now proven techniques put in place are entrenched and AFIP's commitment to maintaining these changes shows promising signs of durability. In addition, the follow-on project launched in 1997 should help expand several of the activities supported by Loan 3460. Its components call for further advancing the legal framework governing tax administration and strengthening AFIP's legal procedures on collections and audits; simplifying and monitoring taxpayer compliance; augmenting information technology services; bolstering organizational development and personnel management; and improving audit activities. These bode well. However, the long-term sustainability of the Project will depend fundamentally on AFIP's effecting and maintaining the changes needed to achieve a more adequate institutional base. The problem is complicated by the daunting challenges of fully integrating the management of income and related taxes, social security contributions and customs obligations. (A recent ECLAC review of Latin American tax trends judged this combination to be the most advanced multi-sector organizational model in the region.) 26. The project's future operations require the further strengthening of the organization in several key areas so as to achieve better overall performance. They also hinge on the fate of the aforementioned follow-on activity. Its plans appear to comprise appropriate arrangements for continuation of several important project components. These include provisions for timely inputs and the systematic evaluation of project results based on comprehensive performance indicators. In view of the IDB's role, the Bank has not maintained monitoring of the operations supported under Loan 3460. F. Bank Performance 27. The Bank's performance was satisfactory. The Project design followed the recommendations for further support of Argentine tax improvements set out in OED's review of the First Project, as well as recommendations for tax administration reform activities in OED's 1996 "Fiscal Management in Adjustment Lending" report. Project preparation was very detailed with activity and performance measures set out for every component. Project documentation was exemplary in its inclusion of definitions of new functions, procedures and systems in all major areas. To be sure, the Project was very  8 demanding but this was necessitated by the fiscal difficulties at the time, on whose account the Government and the Bank fully agreed that it was imperative to squarely tackle the main issues. The objectives were clear, realistic, not complex; almost none of the components were particularly original for DGI (or typical public sector management operations). Moreover, the project yardsticks set out in the appraisal report and Loan Agreement proved useful for keeping the operation well directed. 28. AFIP staff commended the Project generally for sparking, seeing through and effectively supporting the intended changes. They expressed special appreciation for the relatively high order of planning and implementation during project execution, which they credited to the Bank's participation. They judged the task manager's command of information technology especially helpful as DGI initially found the procurement of the required hardware and software complex. And they saw the Bank's work creating a solid basis for the further reforms they are pursuing. 29. However, the Bank demonstrated relatively little capacity to reverse the progressively deteriorating pattern of project execution. To be sure, the US$20 million Loan was too small relative to the task (and even more so in comparison with DGI's size and scale of activity), and it reduced the Bank's scope for influence. In addition, as a practical matter, it would have been virtually impossible to safeguard the operation against the political instability and changes in leadership that badly hurt it. Under these circumstances and the initiation of the IDB-backed project, the Bank should have opened a dialogue with the Borrower to bring the Project to an earlier than scheduled conclusion. G. Borrower Performance 30. The Government undertook its tax administration reform program with a firm strategy, competent and motivated managers, pronounced improvements in the enabling environment, and provisions for suitable assistance. DGI usefully involved line managers in efforts to carry out the investments. Its central project unit's coordination and reporting were of high quality, and it helped avert significant deviations from Bank policies during project implementation. A check during the final supervision mission of sample purchases of goods and consultant contracting found satisfactory compliance with IBRD norms and the Loan conditions. 31. However, the heavy turnover in DGI's management, the recurrent slippage in its attention to non-collection components, and the progressive disinterest in the operation by the later Director Generals were very costly. Also, more should have been done at the outset and subsequently to create greater institutional readiness for substantial change. Definitive managerial action in addition should have been taken to overcome the staff resistance (reflecting partly inadequate motivation) and other problems that obstructed the fulfillment of some of the agreed targets. Because of the weight of these factors, the Borrower's performance in project implementation and operation is judged to have been less than satisfactory.  9 H. Assessment of outcome 32. The project outcome measured against the perspective of the conditions prevailing when it was undertaken and its set objectives presents a positive picture. The main goals- --increasing revenues through more efficient tax administration, combined with ensuring their sustainability---were in fact adequately fulfilled. The figures indicate that the Project directly served to strengthen DGI's performance in tax revenue collections and reduced tax evasion. The resulting marks moreover set near national records. Income tax revenues in 1997 attained the highest percentages of GDP in the previous 35 years. Sales tax and VAT collections in 1992-97 exceeded 6% of GDP, the highest throughout 1935- 97 (ref. Appendix C). And the 1994-97 social security contributions as GDP percentages also approximated the peaks reached 40 years earlier over the same more than half- century (ref. Appendix D). Also, IMF figures show that Argentina's 16.5 percent tax ratio in 1990-95 was higher than the average for all LAC countries then, compared to only two thirds of that mean in 1986-90. 33. However, tax administration activities are not appropriately judged solely by the level of incremental revenues. It bears noting therefore that the Project together with DGI's simultaneous independent actions helped implant significant changes in Argentina's tax administration capability and practices. In some respects, the agency has become a modernizing, change-oriented institution. It shed many inefficient, unproductive practices, and integrated relatively sophisticated ones. These have made tax collection, management controls and communications infrastructure quite advanced in several ways. And these have enabled the institution to grow in Argentines' views in professionalism and credibility as an effective public sector agency. These strides have had a more substantial institutional development impact than the First Project's. 34. To be sure, the Borrower neglected the planned improvements in the significant institutional development framework which the appraisal had underscored, as well as the legal setting. Its priorities throughout the program period were instead concentrated on technological changes. These governed the shape and pace of the tax administration program actions rather than more basic organizational and managerial reforms (which should have guided technology instead of vice versa). The Borrower also de-emphasized the activities designed to engage the large project-affected population in a beneficial participatory manner for boosting voluntary tax compliance. Further, Borrower interest in and ownership of all elements of the Project (save for those concerned with collection increases) waned over time with the attendant generally declining project performance. 35. But the overall balance indicates that the Project adequately fulfilled the Government's/Bank's desires for realizing important changes, even under difficult circumstances. Taking all these accomplishments into account, and their continuing importance for the major fiscal adjustment which significantly improved Argentina's economy over the 1 990s, the Project achieved satisfactory development results.  10 I. Lessons 36. The project experience illustrates the potential benefits of the Bank's new adaptable lending instruments. In undertaking the requirement in this case for achieving substantial institutional reform, it would have been far better to have employed an APL- type approach (had this been available then). This might have produced superior results in maintaining strong high level Borrower commitment, affording possibilities of providing greater Bank funding, and coping with the changing economic/political tides over an extended period. 37. Another lesson has been drawn from DGI's historic experience. The Argentine authorities have underscored the importance of safeguarding tax bureaus to the extent possible from disruptive political forces because of their importance for fiscal governance and efficient state operations. The officials sought to inject greater stability in the management of the tax program by guaranteeing its chief administrator a multi-year term of office and strengthening the institution's political independence. 38. In uncertain climates, special provisions should be made to take account of conditions in which project leadership changes cause an extended hiatus while new authorities familiarize themselves with the institutions, the project and the status of operations. Perhaps project coordinators should be granted extra authority for the duration of such interregnums.  11 Statistical Tables Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project timetable Table 4: Loan/Credit Disbursement: Cumulative Estimated and Actual Table 5: Matrix of Project Activities Table 6: Bank Resources: Staff Inputs/i Table 7: Studies Included in Project Table 8: Project Costs and Financing Table 9: Status of Legal Covenants  12 Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable (O) (O) (O) (Ol) Macro Policies Sector Policies / IZ Financial Objectives L / Institutional Development E l L LI Physical Objectives LI LI I Poverty Reduction [ [ / Gender Issues ] II I Other Social Objectives LI / Environmental Objectives LI [ aI Public Sector Management e[ [ II] Private Sector Development CI L I Other (specify) ] LI C C B. Project Sustainability Likely Unlikely Uncertain (n) ([o) (U) C. Bank Performance satisfactory Satisfactoryt Deficient (U) (U) (0) Identification / I] Preparation Assistance [' LI Appraisal i V L Supervision / LI  13 Higl D. Borrower Performance satisfactory Satisfactory Deficient (O) (O) (0) Preparation I Implementation I," Covenant Compliance i i E Operation (if applicable) 1' Hily Hiy E. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatisfactory (O) (O) (O) (E) O] Jf F O  14 Table 2 Related Bank Loans/Credits Loan Purpose Amount Year of Status (US$ M) Approval Loan 2712-AR Public Sector Management 18.5 1986 Disbursed Loan 3015-AR Tax Administration Technical 6.5 1989 Disbursed Assistance Loan 3362-AR Public Sector Reform 23.0 1991 Disbursed Technical Assistance Loan 3394-AR Public Sector Reform 325.0 1991 Disbursed  15 Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/ Latest Estimate Identification (Executive Project Summary) May 1991 May 1991 Preparation Seven Months Seven Months Appraisal December 1991 December 1991 Board Presentation April 1992 April 1992 Signing June 1992 June 1992 Effectiveness August 1992 August 1992 Loan Closing February 1997 February 1999  16 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 Appraisal Estimate 1.5 9.0 15.1 18.4 20.0 0 Actual 0 7.8 14.1 15.8 17.2 17.9 18.2 20.0 Actual as % of Estimate 0 86 93 86 86 N/A N/A N/A Date of Final Disbursement: February 12, 1999  17 Table 5: Matrix of Project Activities OBJECTIVE ACTIVITIES OUTCOMES A. Improvements in Legal Framework 1. Rationalize procedural Examination of tax regulations in Rationalization of laws re: IVA, fuel regulations, laws decrees, resolutions effect in 1989-94 for simplification and fiscal tax procedures. Proposed and judicial documentation; create a of DGI procedures changes in gross profits tax law still DGI database under legislative review. Recommendations helped in codification of tax regulations and development of methodology for their elaboration. Creation of electronic database for Consultants prepared plan for systematic maintenance of tax laws database which DGI installed. It has and facilitating their orderly not been used however, nor was DGI updating when needed; and for staff trained for this purpose. The assisting DGI staff in preparation of objective of providing speedy access new regulations, interventions in to tax law documentation was review procedures and replies to therefore unfulfilled. The database public queries task was transferred in 1997 to the Ministry of Justice. 2. Improve the operating capabilities Creation of computerized data New system ("GELTEX") installed of DGI legal units system governing legal has helped cut case processing times, administration and files management increase collections, (e.g., US$700 in units concerned with contentious million in 1977-98); and impose debt cases centralized registration and control over all cases. However, continued delays in Fiscal Tribunal (independent of DGI) review of cases still slow the process. B. Improvements in DGI Administration Revision of DGI Structure and Implementation of measures to Organization study, survey of Functions advance the 1991 DGI personnel policies, and execution of reorganization through further their results were initially delayed structural changes, changes, and never fully carried out. modification of functions, However, a comparable activity has redistribution of human resources been undertaken under a follow-up project, which is focused on DGI's integration with the former Customs agency into AFIP.  18 OBJECTIVE ACTIVITIES OUTCOMES Loan 3460 did help restructure DGI's training functions and expand its program (about 17,000 participants). In 1991-97, courses and participants quadrupled. Much greater training was devoted to information technology than before, as well as responding to DGI's absorption of first social security and later customs. Establishment of Federal Public Decrees and new procedures code Revenue Administration (AFIP) adopted for effecting the organizational changes. Improved efficiency of Replication of automated Installation of new systems throughout administrative procedures administrative system (AUDINT) DGI field offices, with particular initiatives of the First Project, and success in accounting, treasury and development of further internal personnel sectors. These have audit improvements strengthened DGI's management and _ _ _ ____________________________ control. The accounting and budgeting operation replaced its manual methods with computerized systems. These changes enabled DGI to readily meet the new Government requirements for integrated financial management data and methods. Installation of electronic mail New system improved headquarters/field and internal communications, e.g., reducing time needed for replying to requests, providing data. In mid-1998, there were 1,020 users in central offices with expected 20% increase before year end. Strengthening DGI library Activity dropped for lack of interest Strengthening supervision of DGI Activity dropped because of proceedings at Fiscal Tribunal implementation difficulties. Implementation of management DGI top and middle-level managers information systems for internal now have greater, more rapid access to decision making more reliable data. Strengthening internal auditing with Implementation plan carried out. automated systems  19 OBJECTIVE ACTIVITIES OUTCOMES C. Improvement of Tax Collection Installation of more advanced, Replication of Large Taxpayer "DOSMIL" installed in 141 local technologically supported collection Collection System ("DOSMIL") offices. It helped increase the base of systems throughout DGI network large taxpayers registered and controlled to 238,000 in 1997. "DOSMIL" has become the central tax collection instrument. It helped multiply VAT payments from 2.7 million pesos in 1991 to 27.2 million in 1997. Adaptation of "DOSMIL" techniques Creation and installation of New system installed in 63 field to encompass small and medium '"SICOFI" offices enabled DGI to add almost taxpayers 300,000 small and medium taxpayers to its rolls through 1995. Like "DOSMIL", it brought on-line control over this group, in the process easing the identification of taxpayers failing to present tax data. Telecommunications advances led DGI to replace "SICOFI" with more ___________________________ __________sophisticated instrument after 1995. Design and installation of Telecommunication links now connect telecommunications network 127 AFIP entities along with 57 branches of Banco Nacion (which receive tax payments). Higher speed facilities and ties with "LAN" and "WAN" systems have since been added, along with related improvements in AFIP buildings. Design and development of system System implemented has enabled AFIP of assembling field office data on units on control of administration and collections, and integrating it into inspections, as well as to build up a consolidated data base capacities not previously in existence. Examinations of different economic and geographic sectors' IVA payments, development of tax payment projections.  20 OBJECTIVE ACTIVITIES OUTCOMES Electronic capture of tax return data Examination of optical character Prototype system developed for reading methods and other electronic capture and presentation possibilities of reducing errors in whose development is scheduled to be the capture and recording of tax done under follow-up project. This returns, as well as subsequent would further extend AFIP's transfer for internal uses accomplishments in transmitting information electronically, e.g., over 96% of 1996/97 tax declarations were received via such means (45% in magnetic form, 51% readable by OCR). Support of new computer system Creation of new DGI Logistics Department established for organizational unit to meet supply this purpose has been performing maintenance requirements of the satisfactorily. expanded stock of computer and related systems Incorporating collection from large Initiation of a "DOSMIL" System installed in 150 branches of Taxpayers in remote areas subsidiary to expand the collection Banco Nacion, eventually network so as to include taxpayers encompassed 55,000 taxpayers. The residing more than 80km from system was eliminated in 1997 because DGI offices of high costs. It has been replaced by tax reporting performed under AFIP's new telecommunications facilities ("UTE"). Integrity of systems Program developed to protect Advice from US Internal Revenue AFIP's on-line systems and Service led to plan for increasing Internet connections from fraud, security and integrity of information inappropriate entry, other misuses systems. Produced specifications for higher quality security provision of new telecommunications improvements, scheduled to be accomplished under follow-up project. Technology transfer to municipalities Adaptation of "DOSMIL" Installed revised system in Puerto collection system to meet Madryn Municipality, where it is municipal tax collection needs reported to be working well. D. Improvements in Taxpayer Auditing Collection of information from external Arrangements initiated with Arrangements with other sources not sources and cross-checking DGI data for Central Bank, insurance offices on found productive because of detection of tax evasion trends possible audit subjects information problems and the other agencies' reluctance to furnish data. Five study teams now examine economic and financial trends in varied sectors. Their 43 studies are reflected in auditors' guidance manuals, as are information on tax noncompliance from independent sources.  21 OBJECTIVE ACTIVITIES OUTCOMES AFIP's capacity to detect evasion and better select audit cases is reportedly improved. The selection function has been decentralized to regional offices, who also now perform quality control over audit performance and monitor processing of audit cases. Development of new system for Equipment installed to tighten control of printing of procedures governing authorization of authorizations used in processing fiscal credit, limiting evasion of VAT VAT information for fiscal credits payments. New system was expanded in 1997 to introduce controls engaging Internet. Creation of central database from Initiated information system to collections system information, together reactivate past methods of tracking with exogenous data taxpayers, and to correct tax records considered only 50% accurate. This and the elaboration of the database have combined with changes in auditing methodology and the organizational structure for this function to upgrade AFIP's activities in the sector. Some 2,850 micro PCs were provided to field inspectors for accessing regional database.  22 Development of new system for control Equipment installed to tighten of printing of authorizations used in procedures governing authorization processing VAT information for fiscal of fiscal credit, limiting evasion of credits VAT payments. Improvement of Field Auditing Design of system for use by tax Pilot system experimented; Methods inspectors and training in its uses inspectors trained. DGI experimented with elaborating better management controls over auditing functions. These and other aspects of the Auditing component were curtailed in 1995-96 for contractor problems, limited staff support for some proposed reforms, changes in AFIP management priorities, etc. Some however were reactivated and their results are being applied in the development of proposed new systems for the same purposes. Overall, the planning and execution of inspections, auditing methods and management controls are being modernized and made more agile but at a slow pace. E. Improved Taxpayer Services Measures to facilitate compliance, e.g, enabling taxpayer returns via magnetic forms, in which over 96 percent of 1996/97 returns were presented (ref. Note above). Internet submissions should be feasible shortly. Taxpayers permitted to use direct debit methods for meeting tax obligation. Better AFIP facilities AFIP installed central telephone system for answering taxpayers' questions and multimedia information services. Tax formns have been revised and simplified.  23 Table 6: Bank Resources Staff Inputs' Stage of Actual Project Cycle Weeks US$ Through appraisal 36.7 96.1 Appraisal-Board 1.1 2.8 Board-effectiveness 8.0 24.0 Supervision 114.3 337.0 Total 160.1 459.9 Includes Bank-financed and Trust Fund Consultants. Dollars are direct costs only.  24 Table 7: Studies Included in Project Study Purpose Status Impact Study of DGI's Analysis of the Tax Bureau's The study was not begun by Organizational changes organization structure, personnel policies the targeted date and deferred made without benefit of and procedures indefinitely thereafter. A overall institutional similar study has been assessment. One involved undertaken under the new AFIP's establishment (see IDB-supported project. note below). Review of procedural tax Simplification and This component was somewhat Contributed to the laws rationalization of tax law aborted by the lack of rationalization of laws re: documentation implementation of the IVA, fuel and fiscal tax database developed from this procedures, plus review. The database was recommendations for similar subsequently transferred to the improvements on gross Justice Ministry. profits tax law. It also led to better codification of tax regulations. Examination of the Determination of the quality US Internal Revenue Service IRS recommendations security and integrity of of the Bureau's safeguards recommended improvement applied in defnition of the Tax Bureau's on-line against fraudulent or other measures. specifications for systems illicit entry into its collections telecommunication and other systems improvements. Diagnosis of National Tax Remediation of the long Study was dropped for DGI's None Court administration Court delays in its inability to obtain needed administrative reviews of tax collaboration appeal cases Surveys of representative Identification of DGI service Study was dropped as part of The proposed study was groups' perceptions of areas needing improvement in the only partial implementation unproductive. But DGI and DGI order to improve voluntary of the overall Taxpayer other Government entities compliance Services component. took other measures to try to improve taxpayers' views and tax compliance. Study on expansion of Examination of the Study was added to the scope AFIP's creation was assisted DGI's functions institutional impact of the of the Second Project. Decrees in the process, which the Government's decision to for the establishment of AFIP follow-up project is merge social security tax were prepared and new advancing further. payments and customs tax procedures elaborated for the collections with the prior DGI organizational changes. functions  25 Table 8: Project Costs and Financing Appraisal Estimate (US$'000) Actual (US$'000)' Project component DGI IBRD Total DGI IBRD Total Legal Framework 44 600 644 222 1,124 1,346 DGI-Administration 387 5,170 5,557 1,507 5,289 6,796 Collection and Taxpayer 8,874 11,960 20,834 5,442 6,229 11,671 Services Tax payer Auditing 145 1,120 1,265 3,909 4,614 8,523 Project Implementation 550 1,150 1,700 814 2,744 3,558 Total 10,000 20,000 30,000 11,894 20,000 31,894 "Actual" figures reflect DGI's project accounts and IBRD estimates of Loan 3460 disbursements allocated per project component  26 Table 9: Status of Legal Covenants Argentina Second Tax Administration Project (Loan 3460-AR) Section Covenant Description of covenant Comments type 3.01c 5 Maintain a Project Implementation Unit with the General Coordinator and appropriate staff for the duration of the C Project 3.01d 5 Carry out the project in accordance with the Project C Implementation Plan 3.02 5 Enter into contractual arrangements with an agent/s for handling contracting of consultants, procurement of C goods and arranging project training 3.03 5 Carry out all studies and activities cited in the Loan Agreement; provide the Bank an opportunity to comment CP on their findings, recommendations and action plans; and prepare programs to carry out their recommendations, ___ _________ taking the Bank's comments into account. 3.05 10 Implement a staff training plan, select its prospective CP beneficiaries, exchange views annually on it and inform the Bank on its results and benefits 3.06 12 Before installing the large Taxpayer Collection system in any DGI agency, enter into contractual arrangements C with a bank to set up counters in the agency 3.07 12 Carry out an organizational study of DGI and a review of personnel policies and procedures by May 30, 1994 and NC by three months later, implement the resulting reorganization plan 3.08 5 Maintain adequate numbers of qualified staff in DGI as counterparts of loan-financed consultants, and exclude C DGI staff from receiving loan financing for consulting services 3.10 9 Exchange views with the Bank on the project by June 30, 1994 C 9 Maintain records and accounts, and have them audited 4.01b every year by acceptable independent auditors C Covenant types: I. = Accounts/audits 8. = Indigenous peqple 2. = Financial performance/revenue generation from 9. = Monitoring, review, and reporting beneficiaries 10. = Project implementation not covered by categories 1-9 3. = Flow and utilization of project funds 11. = Sectoral or cross-sectoral budgetary or other resource 4. = Counterpart funding allocation 5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy/ agency regulatory/institutional action 6.= Environmentalcovenants 13. = Other 7. = Involuntary resettlement Present Status: C = covenant complied with CD = complied with after delay CP = complied with partially NC = not complied with  Appendix A REPUBLIC OF ARGENTINA Second Tax Administration Project (Loan 3460-AR) AIDE MEMOIRE World Bank supervision mission August 23rd- September 9th 1998 1) Summary of the findings and agreements between Ing. Jose Mauro Brusa, General Coordinator of the project, managers and staff of the AFIP' and a World Bank supervision mission led Herman Nissenbaum (mission leader), Benjamin Schutz (Subdirector of Informatics, S112), Juan Alberto Rojas (senior counsel, SII), Maly Leichtle (consultant), and Ludovico Tassoni (consultant), under the overall supervision of the project's Task Team Leader, Luis Jose Mejia (LCSPR). The mission would like to especially thank Dr. Carlos Silvani, AFIP Administrator, and his management and staff, as we are aware of the enormous efforts they are making to continue and expand the reform of the AFIP and in consequence the value of the time they gave the mission. Objectives of the Mission 2) The mission's objectives were to review progress on the subject Project, to agree on the arrangements for its completion, and carry out preliminary work for the preparation at headquarters of the Implementation Completion Report (ICR) for this project. Conclusions 3) The general conclusions of the mission were that the Project had served a timely and useful purpose during its lifetime, particularly in assisting the Government's campaign of fiscal adjustment in the early 1990s. Of all the Project's components, special commendation was given to the design and implementation of "DOSMIL" (which as it happens the present AFIP Administrator had recommended to a predecessor of his) and its extensions, the related decentralization of certain AFIP activities, improvements in its management control methods, the modernization of AFIP's information technology equipment and procedures. Due, among others, to the turnover in AFIP management during the project period, and the disruption related to the former DGI's requirement to absorb first Social Security functions, and then Customs responsibilities among other factors, other planned activities of the Project were less successfully implemented. Nevertheless, it was felt that most of the important aims of the project were successfully met, and that most efforts, including some of the less successful ones, had provided the basis for the continuing reform program which an IDB loan approved in 1997 is now supporting. AFIP: Administracion Federal de Ingresos Puiblicos - Tax and Customs Administration Agency 2 S1I: Sistema de Inpuestos Internos - Clhilean Internal Revenue Service  General Observations and Agreements 4) During discussions on the Project's final execution, AFIP requested and the Task Manager concurred in the use of US$1.09 million of the remaining Loan proceeds for the conclusion of the planned office refurbishing works. Consequently, it was agreed to extend the Project's Closing Date until December 31, 1998 and to reallocate the Loan's funds to cover costs involved. Specifications for the refurbishing and the formal request for the extension would be sent to the Bank before the September 15, 1998. 5) The mission, with, as alluded to above, the full cooperation of the Project Coordination Unit, managers and staff of the AFIP, collected sufficient data, in its judgment, to fulfill ICR requirements. This included interviewing numerous present and past AFIP officers conversant with the Project, and visits to AFIP offices in La Plata and Chascomuis in order to observe the functioning of Project-supported systems and other activities. Next Steps 6) The schedule for the next steps is as follows: a) September 12, 1998: i) Formal extension request letter and specifications for cableing are sent to the Bank ii) the consultant's reports are provided to the General Coordinator for comments. b) September 18, 1998: i) Extension is formalized; no objection for 6ffice refurbishing is sent to AFIP ii) AFIP's portion of the ICR report is sent to the Bank. iii) The General Coordinator's comments on the consultant's reports are sent to the Bank. c) October 30, 1998: i) A draft of the Implementation Completion Report is sent to the General Coordinator for his review. d) November 15,1998: (i) Final draft of the Implementation Completion Report is sent for review in the Bank as appropriate. Jose Mauro Brusa Luis'Jose Meiial General Coordinator Task T e Second Tax Administration Project The World Bank  ARQGNTINA Appendix B TAX ADMINISTRATION TECIINICAL ASSISTANCE IOAN LOAN 3468-AR PARTE II: ANALTSIS DESDE LA PERSPECrIVA DEI. PRESTATARIO 1. Introducciou El pr6stamo 3460-AR contratado cn 1993 es la, continuaci6n dcl programa 3015-AR (contratado en marzo de 1989 y culminado en marzo de 1994). El objcrivo as apoyar las politicas del gobierno de mejoratmiento y modernizaci6n do la Adininistraci6n Tributaria. Ambos programas han estado orientados a contribuir a la estrategia de la DGI de recuperar niveics aceepaties de presion ributaria, la cual habia caldo en i989 a Lan solo 12.7 % del PBI, parza lo cual se llev6 a cabo una agresiva estrategia de mnodernizaci6n de las herramnientas informiticas aplicadas al proccso dc rccaudaci6n. Durante el desarrullo del provccto. la DCI cnfircnt6 dos cambios importantcs cO Su quehacer, Ia incorporaci6n de la recaudacion de la seguridad social a parLir de abril de 1993 y la fiLsi6n con Aduanas y creacion dc la Administraci6n Federal dc Ingresos Pfublicos (AFTP) a fines de 1996. Ambas circustancias impactan en divcrsa mcdida cl desarrollo del programa, debicndo haccrsc cambios en las prioridadcs y rnodifIcacidn dc a]gunas componentes. El proycoto continua cl mijorarnicnto y consolidaci6n dc los sistemas informaticos y especial cnfasis en el desarrollo instiiucional. Ademnas, se apoya el dise?io y concreci6n de un nuevo programa para la instinucionalizaci6n dc la AFrP de continuidad dc! csfucrzo modernizador iniciado en 1989, lo cual culniina con Cr6ddto DID 1034 OC-AR. 2. Resultados Los principales resultados del proyecto son los siguientes: * La incorporaci6n de tecnologia par. la autornatizaci6n de las labores adrninistrativas, y la institucionalizaci6n de los nuevos procedimientos de recaudacidn permitcn clevar sustativamcnlc la recaudacion, teniendo como consecuencia el aunmento de la presi6n fiscal a un 18.0 % en 1997. * La dcscontralizaci6n dc las labores de recaudaci6n y cl fortalecimiento de las Agencias ha elevado el control de los contibuyentes, elevando los indices dc cumplimiento tributario, un 95% de las declaraciones juradas sC rccibci Cn tiempo y sin crrores. * El contar con un sistvma funcionando en fobrna efectiva en at imbito de la recaudaci6n tributaria permiWi6 asumir la rccaudaci6n dc la prcvisi6n. Esra sc rcaliz6 mediante una tercerizaci6n, sin paruicipaci6n del prayccto. Sin cmbargo, sc agrcgaron las nuevas tareas a los procedimicntos y sistcmas informaticos dcI Dosmil. Ademis, ambas informiticas se vinculan en forma cicctr6nica y compartcn informaci6n.  a En cl area de fiscalizaci6n sc construy6 una Base de Datos con abundante y variada informaci6n de los contribuyentes, la cual csti aun en proceso dc ordcnamiento, y se actualiza perrnanentemente. Mojora la capacidad de selocci6n de los contribuyentes a fiscalizar a trav6s de cfectuar cruces de informaci6n y gencrar indicadorcs de incumplimiento tributario. 0 Sc confcccionaron 43 Tnanuales de fiscalizaci6n, a partir de estudios scctorialcs realizados, los cuales contienen un amplio conocimiento de distintos swcorcs econ6micos, como asimismo de las modalidades y formas que adopta la cvasi6n en cada scctor. Su uso ha mezjorado la identificaci6n de las areas dc cvasi6n lograndose buenos resultados en tdrminos de contribuci6n. * En el arca lceal, sc apoya la creaci6n de la Direcci6n dc Control, bajo dcpcndencia directa del Administrador Gcncral, realiza ei control de tdos los proccsos contenciosos promovidos par la administraci6n. * En lo institucional, se apoya la pucsta en fincionamiento de la AFTP, dictdndose todas las normas neccsarias para la correcta y completa integraci6n de ambos Servicios, desde el punto de vista funcional. Solo so exceptuan las arcas lcgal y la de operaciones debido a su alto nivel de especializaci6n. a Se efectuia la elaboraci6n de los textos sistematizados de la Ley dc IVA; de la 5cy sobre impuestos especificos a los combustibics; y del Cbdigo de Procdimientos Fiscaics; todos los cualcs se encuentran en vigencia. Solo falta la ley sobre el impucsto a las ganancias, por cuanto se Ic csthn incorporando cambios sustantivos en un proyecto quc se encuentra en tramitc legislativo. v Se clabora el Plan estrat6gico de la DGI para el periodo 1996 - 2000, formulado a nivcl dc objctivos y cstratcgias. * Se desarrolla la conccptualizaci6n do la cstratcgia informitica y la politica de Tecnologia dc Informaci6n. Esto incluyc cl programa dc rccupcraci6n, cn un plazo dc tres aftos la indcpcadcncia cstrat6gica en el discho, dcsarrollo, opcraci6n y !mantonimicnto de los sistemas automatizados de informaci6n. * Se implementa el correo electr6nico, abarcando a 1250 usuarios, de la sedc central y de todas las localizaciones distribuidas. * Se habilita un backbone de datus y el6ctrico de ultima generaci6n para el edificio central de la AFIP con capacidad para atender a 4000 usuarios. Se espera su puesta en fincionamicnto cl primer trinestre de 1999. * Se elaboran los pliegos de licitaci6n para la nueva Red de Tclecomunicaciones y su equipamiento complemcntario, lo cual permite la vinculaci6n con el proyecto del BlIT) reci6n iniciado. Como dificit se menciona lo siguicntc: * En el Imbito dc la fiscalizacd6n no sc lograron plonamcnte los resultados esperados, particularmenee el sistema AUDTNT para esta area, el cual ftic dcsarrollado pcro no fue posible de implementar debido a sus problemas de fuincionamiento. Tampoco se cuenta con una aplicaci6n orientada a extracr informaci6n dcl computador central y depositarla en un notebook, para mejorar la calidad de la fiscalizaci6n dc campo, dobido principalmcnte a deficiencias de seguidad y dificultad de uso. No obstante, los equipos computacionaics adquiridos para su  implementaci6n, han pernitido modernizar y agilizar las tareas de la funci6n fiscalizadora . i En lo referido al mcjoramiento del Area legal, el proycoto de banco de datos clcctr6nico no se complct6 exitosamcntc. Dicha base de datos no se utiliza dado que no se complet6 su proccso de implemcntaci6n. * En el arca de capacitacifn, el proyecto en terminos gcncralcs rcaliz6 estas tareas en forma deficiente. No se pfioriz.6 adecuadamcntc cstc tcma, y esto ha traido deficicncias en cl uso dc las nuevas herramientas por parte de los funcionarios. 3. Conclusi6a El proyecto ha cumplido sus objctivos dc fortalccimicnto de la DGI, Se ha logrado mejorar los procediinicntos y sistcmas informiticos, aumentar la recaudaci6n y mejorar la productividad con la incorporaci6n de tccaologias mas modcrnas. I-as innovaciones principales eslan adecuadamenta institucionlalizadas y garantizada su sustentabilidad futura, particularmente la desc.entralizaci6n de la gesti6n operativa y la scgmcntacicn de los contribuyentes. Se debe valorar adecuadamente la capacidad mostrada por la DGI para asumir la dc la prcvisifn, si que sus sistemas colapsaran. Esto se realiz6 bajo los mismos criterios de segmentaci6n de la tributaci6n, depositando en los sistemas desarrollados por el provecto del Banco Mundial la recaudaci6n de los grandes contribuyentes de este nuevo item. Si bien la recaudaci6n se realiza vfa un tercerizaci6n sin la participaci6n dcl proyccto, ambos sistemas de recaudaci6n son coiherentes y se integraii adecuadamonte. Este proyecto apoya en orrna fiundamental el fobtalecimiento) de la organica dc la instituci6n. En particular, bajo el proyecto se realizan los programnas de planificaci&n de la recuperacifn de la independencia estratdgica de la informitica, deteriorada por el la tercerIzaci6n de la previsi6n. En este mismo orden de materias, se realizan las tareas para consolidar la fiusi6n de la DGI y la Administraci6n Nacional dc Aduanas para constituir la AFIP. El proyecto contribuye a la formalizaci6n de los planes de acci6n para el futuro de la instituci6n, elaborandose el Plan Estrat4gico de la instituci6n, el cual es elevado a la consideracion del Poder Ejecutivo. En las arcas legal y dc fiscalizaci6n oI proyccto muestra resultados parciales, esto se explica principalmcnto por la cultura de la inslitucihn, que ha privilegiado desde hace muchos alios la recaudaci6n y en deticiencias objetivas en la gesti6n del proyecto en estas componcntes. Finalmente, se debe destacar las tareas del proyecto, realizadas cl uiltino tiempo, destinadas a preparar la utilizaci6n de los recursos dcl nucvo proyecto 1034 CC-AR, con lo cual se produce una neccsaria vinculacion con estc programa y se manticnc la direcci6n trazada.  Appendix C ,Sales and VAT Tax Collection as Percentages of GDP (1935-797) 2 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 2~ ~ ~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~.......... ....... ... .. .......... .  Appendix D Collections from Social Security and Customs Taxes as percentages of GDP 10 to~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~W * lmpu.ntos R*ct*'$O de ts w9fW soco f Rcunaws adu.tmms  IBRD 293 20000d SSS00.tA\ 70