Argentina - Second Tax Administration Project

Document of Tlhe World Bank FOR OFCIL USE ONLY MICROFICHE COPY Report No. P- 5700-AR Type: (PM) MEJIA, L / X37783 / I 4163/ LATPS ReportNo. P-5700-AR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN . : ' IN THE AMOUNT EQUIVALENT TO US$20 MILLION TO THE REPUBLIC OF ARGENTINA FOR A SECOND TAX ADMINISTRATION PROJECT MARCH 10, 1992 This document has a restricted distribution and msay be used by recipients onlY in the perfformance Of tir -official 4uties. Its.contents may not ottherwise be disclosedwihtWolBakahriti.  CURRENCY EQUIVALENTS Currency Unit: Peso ($) US$ 1 $ 1 (January 1, 1992) WEIGHTS AND MEASURES Metric System 1 meter (m.) = 3.28 feet (ft.) 1 kilometer (km.) - 0.62 mile (mi.) 1 square kilometer n2 = 0.386 square mile (sq. mi.) 1 metric ton (m. ton) = 1. I US short ton (sh. ton) 1 liter 0.) = 0.264178 US gallon (gal.) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CUIIT - Unique Taxpayer Identification Number DGI - General Tax Directorate PIU - Project Implementation Unit PSRL - Public Sector Reform Loan PSRTAL - Public Sector Reform Technical Assistance Loan AEDGI - Asociaci6n de Empleados de la Direcci6n General Impositiva  FOR OMCIL USE ONLY h4FXDM TAX hDlSlllOMN ICTM LQM ANI)D PROECT Sa RY Bonmwew: Republic of Argentina B fXiarv: General Tax Directorate (DGI), Ministry of Economy Anttmi: US$20 million equivalent T-en: Seventeen years including a five-year grace period with loan amortization based on level repayments of principal, at the Bank's standard variable interest rate. nSwo Mm EN Fogn Tobl - (US$ '000)- Government 9,050 950 10,000 IRD 7:7Q 12.21Q 20.000 Total 16,840 13,160 30,000 Eoomie of Retun: N/A SSfr A Wsa1 Report: Report No. 1020b-AR This document has a restricted distributi( n and may be used by OipiOts only in the performance of their official duties. Its contents may not othe wise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXUVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ARGENTINA FOR A SECOND TAX ADMINISTRATION PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of Argentina for the equivalent of US$20 million to help finance a project for the strengthening of tax administration. The loan would be at the Bank's standard variable interest rate, with a maturity of 17 years, including S years of grace. 2. Backgrnd. In the last few decades, economic conditions in Argentina deteriorated and economic growth became erratic; in the 1980s, real economic growth averaged a negative 0.78 percent. At the same time, increased government spending and continued expansion of the public sector led to burgeoning fiscal deficits, which together with rigid price, credit and interest rate controls, further depressed and distorted economic development. The tax system was unable to provide an increase in revenues corresponding to the increase in expenditures, in part because of inflation and in part because of the deterioration of the tax administration. Erosion of revenues generally continued until 1989. 3. Since the 1980s, the Government has made numerous attempts to control the fiscal deficit and to reduce inflation, which averaged 710 percent annually during the last decade. These programs - based on various combinations of tight fiscal and monetary policies - went only part way in altering the fundamental distortions in the economy and were not sustainable. The latest program, initiated in early 1991 after the most recent outbreak of high inflation, has so far succeeded in reducing inflation to less than one percent per month. This program goes to the heart of the economic problems facing Argentina and includes measures to reduce the size of the state, deregulate the economy and restore incentives. Nevertheless, public finances remain weak and measures to raise revenues have heretofore been transitory. 4. An essential part of the Government's present economic reform program is to increase tax collections and to eliminate distortions in the tax system. Tax evasion and fraud had become rampant in Argentina as the general public lost confidence in the ability of authorities to use funds effectively, and the public sector lost its capacity to administer the tax system equitably. Much had already been done under previous programs to simplify the system, and to broaden the value-added tax base; inflationary adjustments were redefined to eliminate in large part the Tanzi effect and measures were taken to avoid using the tax system to provide promotional incentives to industry. Under the Public Sector Management Technical Assistance Loan (PSMTAL, 2712-AR), a unified taxpayer identification number was introduced, and a new structure and organization for the General Tax Directorate ("Direcci6n General Impositiva', DGI) was defined. In June 1991 the Presidential Decree necessary for the change in structure was given, and the new organization is being implemented. Under the first Tax Administration Loan (TATAL, 3015-AR) 600 taxpayer auditors were hired, DGI personnel received training, and a new computerized collection system for large taxpayers was developed and is being introduced in the 37 largest DGI agencies (it is operational in 17 to date); also, administrative and monitoring systems are being developed for use at headquarters. Based on the success of these efforts, DGI has prepared a strategy of decentralization and overall improvement of tax administration, which includes strengthening some 150 agencies nationwide and linking them to headquarters through a telecommunications network, simplifying the legal framework for taxes, providing more assistance to the taxpayer, and continuing to improve its collection and taxpayer auditing systems. A mid-project review of the organization and  -2 - functions of DOI will be carried out to take into account the introduction of new systems and technology during the first two years of project implementation. 5. The Goverrnent is now embarked on a series of far-reaching structural reforms, in part to extend and deepen what had been done previously, and in part to break new ground. Bank support for this program is being provided through the Public Sector Reform Loan (PSRL, 3394-AR) which lays out the policy framework for revenue mobilization and expenditure rationalization and the accompanying TA loan (PSRTAL, 3362-AR) which strengthens the Government's capacity to implement the planned reforms. Particular support is being provided under 3362-AR for improvements to customs administration which accounts for 13 percent of collected revenues. The proposed loan addresses the strengthening of tax administration, building on the measures already provided for under Loan 3015-AR. These two loans together deal comprehensively with the needs of the DGI. 6. Prject QbiectiveT. 'Meproposed project aims to: (a) increase tax revenues without increasing tax rates by enhancing the efficiency of the tax administration system; (b) ensure the continuity and sustainability of the revenue increases; and (c) facilitate voluntary compliance through increasing popular perception of fairness and equitable distribution of the tax burden in the population. The project would address four major issues contributing to the inefficiency of the present tax administration system: (a) the multiplicity and frequent contradiction of procedural laws and regulations on tax administration; (b) weakness and excessive centralization of existing administrative systems and procedures; (c) poor service to the public; and (d) inefficiency in collection and taxpayer auditing. 7. EWj