Philippines - Tax Computerization Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11355-PH STAFF APPRAISAL REPORT PHILIPPINES TAx COMPUTERIZATION PROJECT MARCH 31. 1993 Industry and Energy Operations Division Country Department I East Asia 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 World Bank authorization.  CURRENCY EQUIVALENTS (as of January 1993) Currency Unit = Peso P P 1 US$0.038 US$1 = P26.0 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank ASEAN Association of South-East Asian Nations ASYCUDA Automated System for Customs Data Management BIR Bureau of Internal Revenue BOC Bureau of Customs CISS Comprehensive Import Supervision Scheme CISS Computer Information System Services DOF Department of Finance GB Gigabytes GDP Gross Domestic Product GSIS Government Services Insurance System ICC Investment Coordinating Committee IFB Invitation for Bid IFRR Internal Financial Rate of Return IMF International Monetary Fund ISSP Information System Strategic Plan IT Intelligent Terminal MB Megabytes MICP Manila International Container Port MIS Management Information System NCC National Computer Committee NCS New Computer System NAIA Ninoy Aquino International Airport NO National Office PIU Project Implementation Unit RISSI Revenue Information System Services PSRME Public Sector Resource, Mobilization and Expenditure RDO Revenue District Office RO Revenue Office SGS Societe General du Surveillance TIN Tax Identification Number UNCTAD United Nations Conference on Trade and Development VAT Value-Added Tax FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY Philippines Tax Computerization Project Loan and Project Summary Bormwerw Republic of the Philippines Amount: US$63 million equivalent. Terms: 20 years, including 5 years of grace, at the Bank's standard variable interest rate. Er>ks Description: The project would establish a computerized integrated tax administration system to process all taxes, by providing the hardware, tax software, related data-entry processing equipment, complementary equipment, training, initial operational support and technical assistance to establish a modem tax collection system for the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC). BeRfitS and Rislks: The project will substantially increase government revenues, which are critical for the country's development. The computerized system will improve tax administration and collection, increasing its efficiency, effectiveness and equity. The project has already been instrumental in improving tax procedures, regulations and legislation through technical assistance during project preparation. In the future, it would help decentralize the processing of tax returns, improve access to tax records, promote auditability at each level, and provide adequate taxpayer records. The proposed systems would allow the two Bureaus to cross-check data from other data bases, carry out on-line inquiries, accelerate the processing of taxes and returns and improve BIR's and BOC's management information system. The new system is expected to considerably increase revenues from taxpayers who are avoiding or underpaying their taxes. The main risk is associated with the procurement process. In general, the award of large contracts for computer hardware and software is technically complex, controversial and subject to political pressure. This risk has been minimized in the proposed project through the design of a transparent system for procurement, under a turn-key contract. While little risk is involved with overall project implementation, given the rigorous 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. 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.  - ii - Project Cost: 1/ Local Foreign Total Million Million Million US$ USs USs Bureau of Customs 9.9 17.5 27.4 a) Hardware System 2.0 10.3 12.3 b) ASYCUDASoftware System 0.0 1.9 1.9 c) Other Project Cost 2.9 2.9 5.8 d) Technical Assist. & Admin. 0.1 2.5 2.6 e) Taxes And Duties 4.8 0.0 4.8 Bureau of Internal Revenue 18.0 37.0 54.9 a) Hardware & Software 2.6 32.6 35.2 b) Other Project Cost 5.2 2.0 7.2 c) Technical Assist. & Admin. 0.2 2.5 2.7 d) Taxes And Duties 9.9 0.0 9.9 Total Base Cost 27.8 54.5 82.3 Physical Contingencies 0.8 2.9 3.7 Price Contingencies 0.8 5.5 6.3 Total Cost with Contingencies 29.4 63.0 92.4 Interest During Construction 0.0 13.8 13.8 Totl Fincing Required 29.4 76.8 106.2 To be Fmance by: Bureau of Customs 10.3 4.8 15.1 Bureau of Internal Revenue 19.1 9.0 28.1 World Bank 0.0 63.0 63.0 Total Fimnaced 29.4 76.8 106.2 1/ Due to rounding the last digit in totals may not add. Includes VATand custom taxes equivalent to US$15 million. Bank Fiscal Year EY24 EY95 EY29 EX92 EX2 - ---- (US$ million) ------ Annual 8.9 13.8 17.6 16.4 6.3 Cumulative 8.9 22.7 40.3 56.7 63.0 Economic Rate of Reor: N.A. ME: IBRD No. 24362  - iii - Philippines Tax Computerization Project Table of Contents Page No. Loan and Project Summary .................................. i I. TAX SYSTEMAND REVENUES ................................... 1 Background .................................. 1 The 1986 Tax Reform Package ................................... 1 The 1991-92 Tax Reform .................................. 2 Tax System .................................. 3 Tax Evaluation .................................. 5 Tax Revenue Trends .................................. 5 Present Computerization .................................. S H. THE BENEFICIARIES ................................ 7 The Bureau of Internal Revenue . ................................ 7 Personnel ................................ 7 BIR Organization ................................ 7 BIR Staff Training and Development ................................ 8 Performance Indicators ................................ 9 The Bureau of Customs ................................ 9 BOC Personnel ................................... 10 BOC Organization ................................ 10 Staff Training and Development ................................ 10 BOC Performance Indicators ................................ 11 Comprehensive Import Supervision Scheme ............................... 11 Further Tax Reforms ................................ 11 IH. THE PROJECT .................................. 15 Project Origin .................................. 15 Rationale for Bank Involvement .................................. 15 Project Objectives .................................. 15 Project Description .................................. 15 The new Computer System (NCS) .................................. 16 Staffing and Training .................................. 17 Organization Study .................................. 19 Project Cost .................................. 19 Financing Plan .................................. 19 Implementation .................................. 19 Procurement ...................................20 Disbursements .................................. 22 Operation and Maintenance .................................. 23 Status of Project Preparation .................................. 23 Environmental Impact ................................... 23 Project Monitoring and Supervision .................................. 23 This report is based on the findings of an appraisal mission consisting of Claudio Fernanesa (Principal Financial Analyst) and Antoun Moussa (Senior Information Technology Specialist) who visited Philippines in November 1992. The Peer Reviewers were Jaime Vazquez-Caro (LATPS) and John Crotty (ME). The Project was cleared by Callisto Madavo, Director (EAlDR) and Vineet Nayyar, Chief (EAIIE).  - iv - IV. PROJECT BENEFITS ................................................ 25 Introduction 2.................................................... 2 Least-cost Solution .................................................. 25 Tax Potential and Evasion . ........................................... 26 Main Project Benefits ............................................... 27 Other Benefits .................................................... 28 Financial Rate of Return ............................................ 28 Risks .................................................... 29 V. AGREEMENTS REACHEDANDRECOMMiENDATION ........................ 30 ANNEES 1. Comparative Tax Structure ........................................ 31 2. Overview of Taxes in Philippines .................................... 33 3. Tax Colection Statistics and Indicators . .............................. 38 4. Tax Reforms BIR and BOC ......................................... 43 5. Action Plan ................................................ 46 6. Project Description: New Computer System ............................ 49 7. Project Cost ................................................ 60 8. Non-Computer Equipment and Services ............................... 63 9. Staffing Computer and Information System ............................ 71 10. Training Programs ............................................... 73 11. Estimated Schedule of Loan Disbursements ............................. 80 12. Financial Rate of Return........................................... 81 13. Project Implementation and Supervision - Terms of Reference ................ 84 14. Organization Study - Terms of Reference .............................. 87 15. Project Implementation Schedule .................................... 90 16. Documents Available in the Project File ............................... 94 CHARTS 1. Organization of the Bureau of Internal Revenue 95 2. Organization of the Bureau of Customs ............................... 96 MAE IBRD No. 24362  - 1 - L. Tax System and Revenues 1.1 B* _gzuwd. Lack of government effort (e.g. total taxes divided by GDP) of 14.8%. revenues and commercial borrowing are constraining Tax staistics and indicators referenced in PSRMEare the consucon of ifasruue which is critcal to presewtod in Annex 3. Although the share of income the country's economic development. While 55% of taxes to total taxes has increased gradually, from the population of 64.3 million in 1991 were poor, 22% in 1980 to 33% in 1990 (Frigure 1.1), as in the population growth is still high and will add other developing countres, the problems in another 26 million (40% increase) within the next collecting them are so severe that the Government 20 years. Thus, th Government will need additional relies heavily on indirect taxes. revenues to provide services to the expanded population, correct existig deficiencies and create 1.3 Tax revenues have been increasing jobs. The Bank's Country Economic Report, "Public rapidly due to the country's economic development Sector Resourco Mobilization and Expenditure and improvements in the tax administration system. Management" (PSRME,February 20, 1992) reviewed Various taxes are colleced by the Bureau of Internal the isues of public resource mobilization and public Revenue (BIR) and the Bureau of Customs (BOC) expeaditure. Its conclusions are reflected in this (see Chapter E), both under the Departunent of chapter and in the comparison between the tax FPance (DOF). structure and the Bank's Reference structure (Annex 1). The tax system is described in Annex 2, and is analyzed below. The 1986 Tax Reform Package 1.4 The tax reform of 1986 aimed at X OF TOTAL TAXES COLLECTED establishing a comprehensive and progressive tax system, characteized by efficiency, equity and l