Turkey - Public Financial Management Project (Vol. 2 of 3) : Annex 1: Tax administration

Document of The World Bank Report No. 14656-TU STAFF APPRAISAL REPORT VOLUME 2 OF 3 REPUBLIC OF TURKEY PUBLIC FINANCIAL MANAGEMENT PROJECT ANNEX I: TAX ADMINISTRATION AUGUST 29, 1995 Country Operations Division Country Department I Europe and Central Asia Regional Office CURRENCY EQUIVALENTS Currency Unit - Turkish Lira (TL) AVERAGE EXCHANGE RATES (Turkish Lira per US$) Currency Unit CY1990 CY1991 CY1992 CY1993 CY1994 CY1995 Jan-July US$1.00 = TL 2,609 4,172 6,872 10,985 29,609 42,447 WEIGHTS AND MEASURES FISCAL YEAR Metric System January 1 - December 31 ABBREVIATIONS AND ACRONYMS AB - National Agricultural Bank (Ziraat) CAS - Country Assistance Strategy CBT - Central Bank of Turkey CCC - Customs Cooperation Council CCT - Common Customs Tariff CET - Common External Tariff CIT - Corporate Income Tax Customs - Undersecretariat of Customs EBF - Extra Budgetary Funds EDI - Electronic Data Interchange EDP - Electronic Data Processing EU - European Union FAD - Fiscal Affairs Department FIB - Finance Inspectors Board FLS - Financial Ledger System GATT - General Agreement on Trade and Tariffs GDBFC - General Directorate of Budget & Fiscal Control GDC - General Directorate of Citizens' Affairs GDPA - General Directorate of Public Accounts GDR - General Directorate of Revenues GFMIS - Government Financial Management Information System GFS - Government Financial Statistics GIBOS - Customs Administration Integrated Automated System ICB - International Competitive Bidding IMF - International Monetary Fund IT - Information Technology LFA - Legal Framework Agreement MERNIS - Merkezi Nufus Idaresi Sistemi (Central Citizens Registry System) MOF - Ministry of Finance PFMP - Public Financial Management Project PIAL - Privatization Implementation & Social Safety Net Assistance Loan PIT - Personal Income Tax PMSS - Project Management Support Services PMU - Project Management Unit PSBR - Public Sector Borrowing Requirement PSAL - Public Sector Adjustment Loan RCs - Revenue Controllers SAR - Staff Appraisal Report SBA - Stand-By Arrangement SEE - State Economic Enterprises SOFIX - Systeme d'Ordinateurs de Fret International SPO - State Planning Organization TAB - Tax Accountants Board TCA - Turkish Court of Accounts TIN - Taxpayer Identification Number TIR - International Transport Register Treasury - Undersecretariat of Treasury TL - Turkish Lira UIN - Unique Identity Number VAT - Value Added Tax TABLE OF CONTENTS ANNEX I: TAX ADMINISTRATION COMPONENT Annex la: Implementation Plan ................................... 1 Annex lb: General Directorate of Revenue (GDR) Terms of Reference .......... 43 Annex Ic: Detailed Cost Table ................................... 97 Annex id: Implementation Schedules ............................... 101  Annex la PUBLIC FINANCIAL MANAGEMENT PROJECT Tax Administration Component Implementation Plan  Annex la Tax Administration Component Implementation Plan Table of Contents I. THE TAX ADMINISTRATION COMPONENT...........................1 A. Objectives and Scope. ........................................1 B. The Reform Program. ........................................3 C. Project Description. ..........................................7 D. Project Costs and Financing Plan..................................23 E. Accounting and Audit Plans.. ..................................... 26 1. IMPLEMENTATION ARRANGEMENTS. ............................. 27 A. Responsibilities of the Implementing Agencies ......................... 27 B. Inter-Agency Coordination ..................................... 28 C. Role of World Bank Supervision ................................. 29 III. IMPLEMENTATION ACTIVITIES ................................. 31 A. Implementation Schedules ..................................... 31 B. Procurement Arrangements and Schedules ........................... 32 C. Disbursement Arrangements and Schedules ........................... 35 IV. BENEFITS AND RISKS ....................................... 37 A . B enefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 B. M ain Project Risks ......................................... 37 C. Other Factors Affecting Project's Success ............................ 38 V. MONITORING AND EVALUATION ............................... 39 A. M onitoring and Evaluation ..................................... 39 B . Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 C. Reporting Arrangements ...................................... 41 Tables: 1. Information Sources .................................... 13 2. List of IT Related Courses ................................ 21 3. Number of Classes (Sections) by Subject/Course ................... 22 4. Costs Summary by Expenditure Accounts ....................... 25 5. Tax Administration Component: Financing Plan ................... 26 6. Proposed Procurement Arrangements .. ........................ 33 7. Procurement Implementation Plan ............................ 34 8. Estimated Bank Disbursements ... ............................ 36 w I. THE TAX ADMINISTRATION COMPONENT A. OBJECTIVES AND SCOPE 1. The primary goal of the Tax Administration Component is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at strengthening the compliance enforcement capability of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The envisaged institutional changes will follow up on recent tax policy reforms that included the closure of a number of corporate ."loopholes" and other measures aimed at expanding the tax base and improving compliance. The tax administration component also will seek to ensure the sustainability and predictability of the expected revenue increases through the modernization of organizational arrangements, procedures and computer based systems. Activities will also be directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. 2. A program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing and policy formulation. The proposed changes would seek to: (a) restructure central, regional and local tax agencies in order to achieve a more functional and strategic orientation in the GDR; (b) improve coverage of the individual tax payer base and provide for better system integration of a number of major tax sources; (c) develop and implement modern automated systems for core tax administration functions and management; (d) develop and implement a more aggressive and complete compliance enhancement strategy, notably through the establishment of a third party tax intelligence system for auditing and collections; (e) strengthen tax policy formulation through the establishment of a Policy Analysis Unit and the development of a suite of tax policy models; (f) improve taxpayer service; and (g) strengthen GDR human resources through training and study tours to accomplish and sustain these objectives. 3. The authorities' plan is reach these objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the -2- process of administrative reform in the GDR and lay a solid foundation for a restructuring of the organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. 4. Activities during the first phase (1995-97) will be aimed at introducing a redefinition of the tax administration system in Turkey, with changes envisaged in organization and procedures, the legal and regulatory frameworks, and human resources. Resources are required for: (a) in-house advisory services to help refine further the medium-term modernization and reform program for tax administration business processes and management, and to help manage Phase I activities; (b) an organizational study to establish the overall framework for restructuring the GDR to improve its effectiveness and efficiency; (c) design studies and pilot activities to establish the detailed requirements and choices for hardware, systems software, communications design and applications development tools for the restructured GDR; (d) recruitment and training of IT staff to enhance the in-house capability of the GDR to develop and sustain its information technology investments; (e) an assessment of the policy-making process and the information flows on which policy decisions are based, with a view to designing a tax Policy Analysis Unit within the GDR, and development of analytical and operational tax models, with appropriate training of GDR staff; (f) study tours abroad for key GDR staff; and (g) project management support services. 5. Phase 11 (1996-2001) would see an expansion of the advisory services program, notably in the areas of audit, collections, returns processing and many aspects of the supporting IT infrastructure, as well as modern tax administration business management. The envisaged Policy Analysis Unit would also be made operational during this phase, and would use the proposed models to conduct a detailed analysis of the current tax system, and to perform an evaluation of various policy options. Consultants may be needed in Phase 11 to provide guidance to the PAU, however, the objective is to develop an operational unit within the GDR that is sufficiently trained in the construction and use of analytical tools and models to perform an on-going tax policy analysis function. 6. Other Phase II activities in the IT area would cover the upgrading of existing central and regional IT assets of the GDR, acquisition and installation of IT products at a number of new regional offices, development and delivery of a broad-based training program for GDR staff and computers and ancillary equipment for a restructured and rationalized local tax office network. The main remaining cost elements for Phase II would be: (a) site preparation; (b) a management -3- consultancy to assist the GDR in its reorganization and the rationalizing of the network of local offices; and (c) enhanced project management support services. The World Bank has been requested to provide financial support for the Phase II activities through a follow-up public financial management loan. The next section outlines in more detail the medium-term program of the tax authorities. Section C presents a description of the specific project activities planned for Phase I, and proposed to be supported by the PFMP loan. B. THE REFORM PROGRAM 7. Restructuring and Modernization of the General Directorate of Revenues. The three basic goals of the GDR are: (a) to restructure its management and administrative organization so as to reduce fragmentation of managerial authority and achieve a more functional and strategic orientation in the directorate; (b) to introduce modern automated systems for core tax administration and management functions, to allow for an expansion of business and more effective and efficient operations; and (c) to enhance substantially the policy-making capability of the GDR, including through the establishment of a permanent Policy Analysis Unit to replace the currently diffused and somewhat ad hoc process. 8. A three tier model is envisioned with a solidly developed managerial infrastructure at each level, oversight responsibilities invested in each higher level, with ultimate command at the central level of GDR. The restructuring is based on establishing new regional offices under the supervision of the General Director of Revenues. These centers will provide a regional focus for a substantially enhanced audit function, as well as providing managerial oversight, training and IT support for a restructured and automated local office network. 9. An extensive review of the GDR will be conducted at the start of Phase I in order to confirm the benefits of the proposed three-tier model and to determine required changes in organization, legislation and human resources. The review would cover current staffing levels and skills mix, workload distribution and managerial span of control for the new middle tier and the specific adjustments that will be necessary to implement the three-tier structure that has been projected. The study will also address the position and performance responsibilities in each organizational component at all levels, and identify required changes in legislation to establish a clearer authority link between the local offices, regional centers and GDR headquarters. 10. A parallel activity will establish the linkage between the business needs of the organization and the application of IT. Using well established systems engineering methodologies, it will determine the appropriate level of IT activity within the new regional offices and the technical interfaces needed to support the re-design of processes--systems and procedures--affecting functional operations. This study will identify the various informational needs at all levels, as well as define the major processes that draw upon that information. A third study will integrate the results from these first two studies (with existing information and reports from other Phase I activities) to develop a framework and requirements for the acquisition and deployment of computer hardware, system software and the necessary communications products. This will represent the "blueprint" for the construction of the new tax administration's IT infrastructure. -4- 11. It is anticipated that the major processing of tax returns will be done at regional processing centers located in Ankara, Istanbul, and Izmir. IT capabilities will be significantly improved at all three sites. During a transitional period of 2-3 years, taxpayers will still file tax returns at local offices, and the local office will continue to have the primary responsibility for interface with the taxpayer. By the end of this period, it is envisaged that the assessment receipt requirement will have been eliminated--removing the main rationale for taxpayers to visit local tax offices--and the role of the banking sector in payment collections increased considerably. The GDR would also like to introduce direct mailing of returns to processing centers as well. The removal of major returns processing responsibilities from the local offices, as well as an enhanced IT capability, will provide the framework for improved taxpayer service. 12. The main IT system, located at the Dikmen site in Ankara, will continue as the central hub and be responsible for the tax masterfile and related support activities. The capacity of this center will be increased to allow for enhanced operational and management activities. The expanded masterfile, and all its associated processing modules, will be developed and implemented in Phase II, following appropriate sectorial and IT studies in Phase I. In addition to the two major studies/analyses mentioned above, a number of smaller, specific-focus studies will be conducted in Phase I. A banking study will determine how to improve the transfer of collected taxes and other public monies from banks to the central bank. It will also examine the requirements for increasing the role of private commercial banks in the collection of taxes, thereby improving efficiency in collections and increasing convenience for taxpayers. A withholding study will analyze the operational procedures for consolidation of all withholding collection and processing by the GDR. It will assess the impact on other agencies currently involved in withholding functions and determine the information and process requirements. This study will also address VAT collection and withholding, including procedures related to monitoring and field inspections. If determined practical, the GDR will develop systems and procedures for withholding all taxes, plus social security, health insurance premiums and unemployment insurance. The results of both studies will be merged into other analysis activities being undertaken during the Phase I. 13. The authorities understand that broadening of the tax base has an important analytical or policy dimension. Specifically, there is a need to ensure that the tax structure itself does not erode the tax base through excessive deductions, exemptions or other preferences. Attention also needs to be given to the fairness or equity aspect of the system, which currently places a heavy burden on wage and salary earners and lower income groups. External consultants will assist the GDR to design a Policy Analysis Unit to be established in the GDR, and to deliver appropriate initial training to staff selected to serve in the Unit. 14. In addition, a family of analytical models and databases will be developed suitable for the design of tax policy changes and for revenue forecasting for the budget. Currently, projections of revenue are carried out using aggregate data from tax returns. None of the secondary economic effects of tax policy changes nor the incidence of taxes is captured. These issues are important. For instance, the ongoing debate over the replacement of EBF levies by less distortionary budget taxes is complicated by the lack of information about the likely incidence and other effects of the proposed replacement taxes. It is also not possible to simulate the effects of changes in the macroeconomic environment on tax revenues. The envisaged models (covering all -5- the main tax instruments) would be capable of generating alternative policy simulations as well as an ongoing monitoring capability for current tax effort. A core team of GDR staff would be trained in the manipulation and maintenance of the models. 15. Develop Enhancements for Compliance Enforcement Capability. The main goal in this area is to develop and implement a third party tax information system that will progressively permit the broadening of the tax base and the growth of revenues through improved audit and other compliance checks. This effort will be coordinated with the ongoing citizens' registry computerization project (MERNIS) of the General Directorate of Citizens' Affairs (GDC) that is intended to result in the assignment of unique identity numbers (UINs) to all citizens.J/ The third party information system will feature prominently in the GDR's efforts to improve compliance, and will eventually be a driving force for the proposed tax intelligence centers, as well as provide information-based resources for all audit boards and local offices engaged in collections and other functions. In addition to the benefits to tax administration and policy to be derived from the MERNIS, the UIN will allow for the introduction of other reforms related to social security and health financing contributions and entitlements. A UIN would also reduce substantially the current burden on citizens who are required to visit the Citizens' Affairs office in their father's place of birth to obtain certifications for a range of transactions and documents. 16. Due to its importance to future public financial information systems, Bank support is already being provided to the MERNIS under the FY94 Privatization Implementation and Social Safety Net Assistance Loan (PIAL). This is being used by the GDC for required additional preparatory work, as well as pilot development, temporary incremental personnel and professional project management support. Additional support for completing the MERNIS project is planned to be provided under the second PFMP loan. However, in light of its urgency, more funds would be reallocated under the PIAL if needed to maintain the momentum of MERNIS activities until financing from the second PFMP loan is available. The overall MERNIS effort, including issuance of the new identification numbers and matching of files with the GDR, is expected to take about 3 years to complete. 17. In the interim, the GDR will conduct a study to review the background and status of current third party information processing, to compile potential sources of third party information, identify relationships to other information such as current and future taxpayer identification numbers and analyze all vehicles for smooth implementation, including required legislation. Although a strategic plan for the third party information system will be prepared in the study, it is expected that one of the plan's elements will be specific guidance for a phased approach. Scenarios for piloting the use of third party information will also be a part of the Phase I study and pilot operations will be developed in the laboratory center that is also to be established during Phase I (see below). 18. The GDR has almost completed a major cleansing of its taxpayer database and has begun to assign taxpayer identification numbers (TIN) to existing taxpayers. Some expenditures for 1/ The current identity number is tied to local GDC offices and is not practical for national financial management purposes. -6- local office equipment have already been made using budgetary resources in order that this key task not be delayed. TINs will be assigned first to business taxpayers, and later to individual taxpayers. It is expected that the GDR will take affirmative steps to begin a manual cross checking of available sources of information for under-reported income. One such information source could be custom ledgers associated with import/export activity that could be used to match value added tax (VAT) records to other GDR records. 19. Since authority to collect and analyze third party information has already been granted to the Ministry of Finance, it is anticipated that legislation will be issued in the coming year requiring citizens to obtain a TIN to conduct specified transactions. The GDR will process all newly issued TIN's through the tax intelligence centers when they become available. In the near term, the GDR will conduct manual analyses to match specific groups or business sectors. One group can be derived from new vehicle purchases. The names of the purchasers can be cross-checked against the current taxpayer name file for tax return filing, and appropriate enquiries generated where there is evidence of non-filing. Other examples include real estate purchases or sales and rental property ownership. To the extent that the required information is available or known, the Phase I study will address the method of eventually cross-referencing TINs to UINs. 20. Most computerized audit enhancements are planned for Phase II, since much of the improvements in the audit function are dependent on the modernization and re-structuring needed to establish tax intelligence centers and related computer based information and procedures. Building on an ongoing effort to introduce computer-assisted audit techniques, which is being supported by the German Government, selected auditors from each of the audit boards will be trained in computer auditing techniques. They will then train a selected group from their respective boards. After training, this group of auditors will make up a cadre of computer audit specialists. This unit will be engaged in specialized audits employing a market segmentation approach, and targeting business sectors and individuals who fit an identified profile. 21. At the start of Phase II, a coordinated audit development plan for the four audit groups in the MOF will be formulated under the direction of the DGR and approved by the Minister of Finance. This plan is expected to outline audit strategies and goals designed to increase efficiency and subsequent yield. Guidelines for an audit management information system will also be developed during this formulation to determine the criteria for computerized audit selection, to be implemented in Phase II. It is anticipated that while computerized audit systems are being developed, all audit boards will aggressively pursue manual audit leads such as land use, real estate and other pertinent information that is available through existing manual and automated government and other public data bases. Increases in audit volume will be monitored throughout the project. 22. Improve Taxpayer Service. The purpose of this initiative is to increase voluntary compliance with tax regulations by increasing the role of private banks and the postal service in routine tax procedures, eliminating steps in filing and payment procedures, simplifying forms and staggering present monthly deadlines. Working groups will be established within the GDR during Phase II to implement the tasks that are defined in the Phase I studies. Their responsibilities will include the proposal of legislation for the changes necessary to extend the tax -7- return filing period. An extended filing season would ease the burden on taxpayers and spread the workload in local offices over a longer period of time. One of the working groups will redesign all tax returns and related forms to conform with the restructuring effort, and will continue to monitor the need for changes in forms on an annual basis during the second phase. 23. Strengthen Human Resources in the GDR. The purpose of this effort is to undertake the training and other human resource investments needed to implement and sustain the initiatives discussed above, including the redesign of career paths and re-deployment of staff in the GDR. In Phase I, priority will be given to training GDR IT staff, who will be responsible for much of the development work in Phase II. 24. On completion of the analyses for workload distribution and re-deployment of resources in local and regional offices discussed above, the GDR's central training division will develop training packages for the re-training of staff, as will be necessary because of new IT, process re- engineering and/or staff redeployment. This will include the selection and training of a basic instructor cadre, course design and instruction. In addition, training packages for management will be developed for entry, middle and executive level managers. Key managers will be encouraged to visit overseas tax administrations for study tours. C. PROJECT DESCRIPFION 25. The Tax Administration component is a wide-ranging system restructuring effort which, over the duration of the project, will address many of the most important known deficiencies in tax administration in the Republic of Turkey. The term restructuring is used to imply that this project involves a re-examination of the fundamental processes that make up tax administration. Much of the re-examination work has already been conducted, under the auspices of a grant from the Government of Japan. Other studies are required, which will add to the accumulated information base. Based on the work that has already been carried out and the information now available, priority in Phase I is to be given to tasks that accomplish the following: (a) Implement improved organizational structures and practices within the tax administration affecting most functional processes and provide flexibility of design for the tax administration to evolve smoothly in the future. An example of the latter point is provided by the current debate over whether the scope of tax collection functions should be extended to include collections of social security contributions, and health and unemployment insurance premiums. This should represent a logical extension of the tax administration's activities in the area of payroll withholdings, and should not add an insupportable burden to the work program of the GDR. In short, the future operational systems will be designed to accommodate reasonable changes in functionality and workload expansion. (b) Improve the content of the taxpayer masterfile, both individual and business, which is known to possess major gaps in coverage as well as deficiencies in the quality of taxpayer locator information. This masterfile will include: -8- * Sub-systems containing tax return and assessment data to assist in returns processing. * A taxpayer account module that will track an account from the pre- payment stage to final payment, identifying transactions such as appeals, status of the account, payments and corrections/adjustments. * The capability to issue payment commands, which will be accessed by local offices through their respective regional computing centers. * A taxpayer delinquency database to identify non-filers or stop-filers. * A MIS to provide statistical information which will assist management in ascertaining baseline measurements to monitor employee performance and resource requirements, and to conduct trend analysis. (c) Provide for better integration of the various tax information sources, which are currently processed as separate entities. This includes withholding, third party information, banking and other financial information relative to other entity information (e.g., name, address) and appropriate cross referencing. (d) Introduce new mechanisms to the requirements of tax administration designed to increase voluntary compliance and detect non-compliance--the former will be supported by enhanced service to tax clients, the latter by the development of new intelligent systems support for the audit and collection functions. (e) Develop an enhanced capacity for tax policy analysis and modelling to allow for the design of new taxes to replace the distortionary extrabudgetary funds levies and to strengthen the revenue side of budget preparation more generally, including through the design of a Policy Analysis Unit and appropriate training. (f) Expand considerably the interface with the private banking system. The past reliance on state banks has been identified as a source of significant time delay (and a source of lost revenue) in the existing collection process, and of difficulties for taxpayers due to the failure to remit payment receipts and monies to the GDR in a timely fashion. A study will be conducted in Phase I of the project to evaluate alternative methods for processing payments made through banks. The results of this study will also cover part of the requirements of the Expenditure and Personnel Management component of the PFMP as regards the flow of public monies through the banking system. 26. The specific activities proposed to further these ends during Phase I are described below: -9- 27. In-House Technical Advisory Services (base cost: US$900,000). As noted above, a number of studies have already been completed, providing recommendations for multi-year programs of enhancements for the main business processes and management of the GDR. The studies and pilot activities proposed for the PFMP constitute a second stage effort that will integrate these process/management recommendations with each other, and with new organizational and system requirements. Most of the contracted services defined below for the other activities of this component involve non-tax specialists. The GDR requires the services of a residential advisory team with detailed technical and operational tax administration experience to assist the PMU in the planning, coordination and implementation of the activities proposed to be carried out under the Tax Administration Component. The required services are to be provided by a team of experts from the Internal Revenue Service (IRS) of the United States. The Government's decision to assign this task to the IRS is based on its desire to adopt certain aspects of the organization and business process models of the IRS, and to continue a technical assistance collaboration that began in 1992 and was continued during the preparation of the PFMP. The team will be comprised of one permanent adviser and a number of experts who will carry out short term assignments. 28. The specific responsibilities of the in-house advisory team will include: (a) preparing an integrated planning document for the modernization of the core tax administration business processes (audit, collections and returns processing), systems and management over the next five years--to be completed within six months and based on the functional reviews that have already been carried out under the auspices of the Japan Grant and the preliminary results of the activities proposed to be funded under this loan; (b) identifying upfront tasks and training programs (including study tours abroad) that can be carried out to prepare for and initiate the business process reforms; (c) assisting the PMU to coordinate and otherwise manage the various activities and consultancies proposed to be carried out under this Component, including preparation of procurement packages, and ensuring consistency in the timing and recommendations of various efforts and their technical quality; (d) providing technical guidance to GDR staff in the design and implementation of change, including draft legislation, procedures and forms; (e) assisting the PMU to prepare detailed work plans for the Working Groups in charge of specific tasks and to monitor their implementation; and (f) assisting the PMU to prepare interim working papers and reports as needed or requested by the Director General, and quarterly progress reports for the Bank. 29. This assignment is expected to require roughly 36 consultant months during the period November 1995 to June 1997, to be delivered by a team comprising one permanent adviser (the lead consultant), who is highly qualified and experienced in tax administration management, and - 10 - experts in various areas of tax administration business processes, e.g., audit, collections and returns processing, who would carry out short term assignments. The Advisory team will report to the Director General of Revenues through the Head of the PMU, and the lead consultant will be an ex officio member of the PMU. The PMU will ensure that the team is provided with translation, administrative assistance and counterpart personnel as required. It is expected that the consultancy contract would be renewed for three additional years under a second PFMP loan from the World Bank. The Advisory team will commence activities in Ankara about one-two months before most of the other technical assistance begins, in order to allow adequate time for familiarization and more detailed planning. 30. Studies for the Re-organization of the GDR (base costs: US$1.24 million). Even though legislation is pending that defines and enables the creation of new regional centers, detailed analyses and developmental work will be necessary to determine and establish the optimal linkages between these regional centers and the rest of the existing organization. Organizational unit responsibilities will have to be defined and realigned, consistent with these changes. The restructuring and other process modifications that are being considered will have significant effects on the work tasks and positions within the organization. New positions will likely be required and existing position definitions will probably be changed and both will impose new knowledge and skill requirements on the incumbents. Position ladders (career paths) may, likewise, be affected. Substantial reassignment of personnel is expected to accompany the restructuring to accommodate the shifts and balancing of work loads, requiring detailed planning and re-orientation of the personnel affected. Four studies are proposed to be carried out by GDR working groups with assistance from external consultants. These would cover, variously, overall organization, third party information systems, banking system arrangements and withholding arrangements. The studies are each described briefly below. 31. Organization Study (base cost: US$740,000). A comprehensive study will be conducted by GDR to determine the most effective organizational structure, authority delegations, and management controls, to define the necessary organization and personnel administration manual changes that will be necessary, to determine the training requirements, and to develop specific, detailed plans for the restructuring. It will include: (a) Review of the current organization and authority structure, workload distribution, and personnel administration structures; (b) Definition of alternative structures and analyses of the impact of changes on the existing organization; (c) Elaboration of the responsibilities and authorities needed for the structure to be implemented; (d) Identification and modification of organization authority and other related manuals; (e) Determination of the effect of changes in responsibility on the types of work to be done and the formal positions that will be affected; - 11 - (f) Estimation of the workload on the affected organizational entities by functional area and determination of the organization unit structures, including numbers of position by category and level; (g) Development of operating concepts and scenarios for the organizational entities to be modified; (h) Identification of the organization and personnel administration changes that may be required to implement the restructuring and the modification of related administrative manuals; (i) Identification of training required to effect changes in operations and jobs; and (j) Preparation of strategies and plans for carrying out the restructuring. 32. Because of the critical importance of re-structuring decisions, the first three of the above items are designated as the first stage of this study, which will focus on developing the information that is essential to management decisions regarding the re-structuring for new regional centers. Completing this stage and reaching these decisions will constitute a key milestone in Phase I. As the decisions become solidified, the second stage effort will shift to completing the work needed to effect formally the re-structuring and to incorporating the changes resulting from process restructuring activities, discussed below. For this latter stage, a dynamic interchange of information will be required between this and the other analysis activities in Phase I in order to maintain consistency in the end results of all Phase I activities. 33. The study will be carried out by a GDR Organization/Administration Working Group over a period of about one year with assistance of technical advisors experienced in organization analysis and design. The first stage is expected to last 3-4 months, with a further 12 months required for stage 2. A total of 24 months of technical assistance will be required. 34. Third-Party Information Study (base cost: US$183,000). It is a feature of most modern tax administrations that third-party information is obtained and used as the foundation for what are commonly called "tax intelligence services". This third-party information is typically derived from public sources such as the administrative data of banks, corporations, unions and professional associations. It is subsequently used to compare tax returns or other taxpayer related information with identified sources of income, and validate tax actions that seek to attach significant asset holdings--which may have escaped identification for tax purposes. This information can also be used to drive tax-payer profiling activities in support of intelligent audit programs, and in support of analytical/longitudinal studies of the tax-payer population. The objective of this study is twofold. First, it seeks to develop an approach and plan for an expanded third party information system within the GDR. This system will enhance the efforts to improve tax administration. Second, it seeks to identify the principal information requirements and processing procedures for such information, and to provide that information to the parallel modeling activities of Phase 1. - 12 - 35. This study, which can draw extensively from previous work, will include the following: (a) A review of the background and status of previous and on-going third-party information processing, including the existing tax intelligence files belonging to the VIM system--e.g., their content and current capacity. (b) A compilation and cataloging of the best potential sources of third-party information--indicating their data contents, usability, methods of collection or access, relationship to other information including taxpayer identification numbers, and the legal, policy, privacy, security and/or technical requirements for effecting their use. (c) A review of existing third-party information sources within the GDR in order to determine past usage, intended future use, and to assess the need to collect new information--or the same information from more expanded sources. (d) The preparation of alternative proposals for satisfying unmet needs, including data collection options, enabling conditions for collection or access of data, recommended analytical methods, technical requirements for implementation, suggested methods for evaluation, modeling, or pilot testing, and recommended actions. (e) For high priority or selected sources and analyses, preparation of specific plans for evaluation in a pilot test environment (see the prototyping laboratory activity below), including all aspects of data base development, data conversion, remote access or transfer, formatting or structuring, matching and collating with other sources or files, access security, analysis and summarization, and preparation of electronic and/or printed outputs for the intended end users or other automated processes. (f) Development of scenarios for pilot use in automated processes or computer aided tasks by end users, as are envisioned in intelligence support operations for tax audit and collection functions. Scenarios should include automated processes and computer aided tasks, such as taxpayer notifications, operating procedures or dialogues for end users, procedures for analysis and interpretation of output, output formats and types, and model cases that could be used in training exercises. 36. Table 1 contains a representative set of information sources and categories to be analyzed as sources for inclusion in the third-party component of the tax administration base: 37. Measures will be taken to ensure that all legislative requirements are addressed early since time frames, directives for third party usage, public relations formulation, and fundamental approaches for implementation are anticipated issues for inclusion in the parameters of future legislative guidelines. - 13 - Table 1. Information Sources Banking Industry Production and Construction and Employment Manufacturing Securities Land Use Professional and Trade Associations Professional and Other Imports and Exports Retail Trade Non-wage Income Real Estate Inheritance Official Statistics Motor Vehicle and Driver Lotteries and Gaming Credit Bureaus Registration 38. In preparing implementation plans, consideration should be given to the burden placed on reporting groups or agencies. It is important that the tax administration remain sensitive to the inherent ease or difficulty of providing administrative information. In some cases, enabling legislation may be required. 39. The study is to be performed by a GDR Third Party Information Working Group with assistance from a technical advisor experienced in the analysis outlined above. The results must feed easily into the information/process model being prepared within another sub-component of the tax administration component. The effort is expected to require about 6 consultant months. 40. Banking Study (base cost: US$183,000). This study will ascertain how best to strengthen the role of banking companies in tax collection and other routine tax administration processes, and the capability of these institutions to adapt to the envisaged increase of the tax base. The study will assure that all necessary bank related issues are addressed so as to obtain a system that will meet the needs of tax administration, while at the same time fall within the parameters of existing or future legislative guidelines. 41. To this end, the study will: (a) evaluate alternate methods for processing government monies in the banking system, in order to improve cash flows and reduce the costs; and (b) review and restructure the government banking and account arrangements, and to ensure that the arrangements are consistent with the proposed expenditure management reforms. Additionally it will investigate the legal and procedural process necessary to establish special depositories for the collection of taxes so as to increase tax collection by banks, and improve the efficiency in collection. The study will analyze new possible approaches, establish the data and processing requirements, outline the possible structure of special depositories and/or other means of collection, identify possible locations for depositories, and estimate the workload. Costs will - 14 - be outlined, recommendations made, and impacts on either the banks or tax offices noted. Among the issues to be studied are: * The causes for delay in the transfer of funds and receipts from banks and post offices * The cost to the Government attributable to the 7 day grace period, as well as additional delays * Suitable banking procedures, account requirements and preferred arrangements for cash management * The options available for more timely transfer of funds to tax accounts, including electronic funds transfers and/or electronic payments status information * Establishing time frames for fund transfer, including possible fee mechanisms for alternative processing methods by banks, and penalties for non-compliance * The need to establish audit trails * The financial impacts of alternative proposals on banks and post offices. 42. The study will be timed to begin about two months after the launching of Phase I activities, and it must be completed in 6 months. It is anticipated that, working together with the Collections Working Group, a senior banking sector specialist and a specialist in electronic funds transfer can accomplish this task with approximately 6 months of total effort. Preliminary results which impact on the information/process modeling activities of a parallel sub-component activity must be made available to the appropriate consultants in a timely fashion. The results from this activity will be shared with the Treasury and Budget and Accounting directorates of the MOF. 43. Withholdings Study (base cost: US$136,000). The General Directorate for Revenue is charged with the responsibility for enforcing current income tax withholding requirements. Approximately 75 percent of all revenues are collected through the withholding system. However the precise extent of income tax collection through withholding is unknown. Currently, two types of withholding are done by: (a) private and public institutions for wage income taxes; and (b) financial institutions for interest and dividend income. The withholding of social security premiums for social security, and health insurance is effected by the Social Security Administration (SSK) for enterprises in the formal sector, the Civil Service Pension Fund (Emekli Sandigi), and Bagkur, which collects for (non-agricultural) small businesses and self employed individuals. It is anticipated that upon approval of pending legislation, unemployment insurance will be collected by the Social Security Administration. Some government officials have expressed a desire to have one organization collect withholding funds related to income tax, and premiums for social security, health insurance and unemployment insurance. The GDR is the organization most officials consider as the logical agency for consolidated collections. - 15 - However, withholding returns and the information retained are substantially different in the GDR from that obtained and retained by the other collection agencies. 44. The purpose of this study is to analyze the information and processes required to accomplish all withholding by the GDR. In addition the processes associated with the withholding for VAT and VAT monitoring procedures will be analyzed. A detailed plan for the implementation of all withholding will be prepared, as well as a report on the findings of the study relative to VAT, including recommendations for possible improvements to be accomplished in the next phase of the project. 45. The analysis for regular withholding will cover operational procedures in the other agencies currently performing withholding functions, and will determine the impact on both the GDR and the other organizations. The analysis for VAT will cover operational procedures, field inspections, and sampling techniques for the matching of information with that of other agencies. 46. Using the information collected during the analysis, a new operational concept will be formulated that addresses all aspects of the withholding and monitoring process by all involved organizational entities. The operational and IT requirements will be outlined including reporting requirements, manual and computer aided procedures, data flows, data base maintenance, confirmation and other reporting, privacy and security, and financial control and audit. The analysis will also propose operating guidelines related to withholding procedures, funds deposit or transfer, distribution of collected funds, and information sharing among involved organizations. 47. This study is expected to require about 4 person-months by a senior technical advisor with experience in withholding associated with tax administration. The consultant would work with the Collections Working Group. The results of the study will be merged into the results of other activities being undertaken during the first phase of this component. 48. Modernization of IT Infrastructure (base cost: US$6.03 million). The objective of this initiative is to assure that system development and investment activities in Phase II are based on a solid foundation in terms of a full understanding of the information requirements and how they relate to the major processes in the tax administration system. To that end, and building on the recent thematic studies, a rigorous examination of the current and proposed tax administration system will be conducted, in close consultation with sector experts and IT management from the General Directorate of Revenues (GDR). The following describes the program of activities in more detail. 49. Information/Process Model (base cost: US$2.5 million). The purpose of this exercise is to ensure that system development activities in Phase II are based on a solid foundation in terms of a full understanding of the information requirements and how they relate to the major processes in the tax administration system. To that end, a rigorous examination of the current and proposed tax administration system will be conducted. 50. A formal information/processing model will be prepared, using an industry standard methodology, and covering the major processes in the full tax administration system--audit, collections and returns processing. This model will be adjusted continually as the results from - 16 - the four studies proposed for Phase I are made available. For example, the study of the Withholding process will provide new information requirements concerning the integration of new processes in support of Social Security collections, possibly to be introduced in Phase II. 51. To enable the analysis of information flows, certain high-level assumptions can be made regarding the organization and distribution of tax administration processing in the Republic of Turkey. Information will flow within a three-tier model consisting of the following logical elements: (a) A local tier represents the tax administration's primary operating interface with the tax payer. There are roughly 1000 of these offices, and they are quite dispersed, with a significant number servicing only a few hundred clients. The GDR operates some 400 such offices as "pure" tax offices, of which approximately 90 are already automated. The remainder of the tax offices are combined with the offices of the General Directorate of Accounting. It is anticipated that the pure tax offices will be the focus for automation activity in Phase II. For planning purposes, it is assumed that the technology of the local offices will be PC based; that appropriate linkages to the other tiers will exist; and that the physical/official tax administration database will not be distributed to this level. A decision on the suitability of LAN technology for larger offices is not required for Phase I, and can be determined in the IT framework activities, discussed below. (b) A regional tier provides two primary functions: (a) a management (over-seeing) role for the local offices in any region, and (b) Tax Intelligence services intended to support audit and collections activities. The current complement of three Regional Processing Centers will be expanded, without substantially changing the role of the processing centers. The precise number, functions and staffing of these offices is not available at this time. Currently, two large regional centers in Istanbul and Ankara perform a high volume data entry service for the local offices. A third office in Izmir will shortly acquire this capability. It is then planned to gradually subsume data entry operations from the local offices into these three (and only these three) regional office processing centers. (c) A central tier is the single custodian of the logical tax administration database. This does not preclude the physical distribution of the database at some future time; thus, the model should be sufficiently flexible to accommodate future adjustments of this type. In particular, the central tier is responsible for those portions of the database which are not closely linked to current operations: e.g., accumulated longitudinal data on tax administration. These elements of the database would support an enhanced research and development function (not yet defined) which would study the operation of the tax system to provide a policy support service to the GDR. Clearly, this is also a potential source of information for the Tax Intelligence service described for the regional centers. - 17 - 52. It can be further assumed that the transactions which will flow across the future network will move only between adjacent tier-boundaries; i.e., local offices will not access directly the center, and the center will not directly access the local tier. They always 'speak' through the intermediary of the Regional tier. This requirement can be illustrated by considering the case of the future Tax Intelligence Center. The information which supports this service is expected to reside within the central tier. This is because it is likely that longitudinal data will be required in support of this function, and this type of information is not expected to be kept at the more operational Regional sites, where only immediately relevant information is stored. During day- to-day operations, specific case information may be requested to be made available to the regional Tax Intelligence support sites, and this will be serviced routinely by a direct central- regional link. In turn, this process may result in specific data being transacted to a local site for field follow-up, and this will be accomplished via a direct regional-local link. Of course, these links can work in the reverse direction, and the logic of this example can be extended to other operational situations. 53. The resulting model(s) will be suitable to support downstream database design activities and to serve as a metadata repository for system development. Consequently, it is anticipated that the use of IBM DB2 data dictionary/directory facilities will constitute a useful physical recording medium for the results of this activity. The GDR has a sizable investment in IBM DB2 technology and it is expected to be a building block of the ultimate technology framework. 54. Laboratory for Modeling, Piloting and Training (base cost: US$3.06 million). The primary objective of this activity is to establish a laboratory facility which will feature representative samples of all the major technological elements of the future tax administration system. These elements include: (a) major hardware types in addition to the mainframe--principally mid-range RISC computers of different scale, and several scales of PC's and more advanced work stations; (b) operating system components in various configurations; (c) foundation software--principally data management software, and productivity tools for the system development and maintenance stages of the project; and (d) communications gear and software, for testing configuration capacities, performance and reliability. 55. In addition to supporting the highly technical aspects of system construction, the laboratory will provide an excellent test bed for the modeling of various tax administration network situations--i.e., interactions among the three tiers of the future system. During Phase I, such tests will provide the capability to perform "proof of concept", to immediately validate elements of the IT Framework. During Phase II, GDR staff will make use of the laboratory to prototype, evaluate and pilot test elements of the tax applications --e.g., third-party processing. - 18 - 56. A third objective of the laboratory is to provide a vehicle for training the IT staff in the specific types of technology that will be used in the development of software for Phase II, and beyond. As operational prototypes are refined, the facility will also be used to develop, evaluate, and pilot test training materials and end-user training in the redesigned operating processes and procedures. In this mode, the laboratory approximates a demonstration center. 57. Specific capabilities will include the modeling of configurations featuring up to 25 concurrent users. The stations will be interconnected by a local area network, and linked to a mid-range computer that can sustain both developmental work related to user/computer interfaces, and simulate combined operations with large data bases. The PC stations will be housed in an area that can simulate a model office. As the system evolves to an end-user training facility, additional stations may be added. A rich suite of software will be provided to enable the evaluation of developmental options in this component of the IT framework, including system development tools, and to support operational modeling and simulation activities and technology related training. A similar configuration will be installed as a part of the laboratory to collect, analyze, develop analytical models, and pilot test the use of third party information for the tax intelligence services. 58. During Phase I, prototyping and modeling activities will be based on preliminary information and process requirements from other component activities and additional detailed analyses related to the specific operational areas to be modeled. These analyses will lead to optional designs which will then be prototyped for demonstration and evaluation. When options are narrowed or selected for specific tasks, the results will be incorporated into an increasingly sophisticated model related to an area of operations. Operational demonstrations will be conducted to facilitate end-user and management review. More specific operational simulation and testing will be conducted to evaluate design options. Testing of specific tasks and operations will include adequate samples to facilitate estimation of processor and network work loads. 59. During Phase II, in areas where operations are fully designed or expected to become operational, the procedures will be documented and, where appropriate, converted to both document and subsequent on-line style operational aids (on-line Help). Design specifications will be prepared. Areas that are suitable for development of related training materials will be identified and, where appropriate, computer and/or media based materials will be specified and/or developed in prototype for evaluation and pilot testing. Such materials will be both demonstrated and tested, as may be appropriate. 60. Training related to the laboratory or development technology included in the laboratory will be provided to the IT staff and to the training development/trainer staff in GDR, assigned to work on this activity with the technical advisors, to enable them to use the facility both during this and the subsequent phase of development and to assume full responsibility for continuing preparation and training activities. 61. About US$1.6 million has been allocated for the capital requirements of the IT Laboratory--covering the cost of acquisition of accommodation elements, hardware (two mid-range computers, 32 PCs, LAN wiring, communications gear to link to remote mainframes and to the local tier), software (e.g., data management software, LAN, office automation - 19 - elements, tools for the support of system development), and a rich blend of aids for training and demonstration, including multi-media development tools. The component implementation plan also provides for the participation of 10 GDR technical trainees for a duration of 9 months. 62. Development of Information Technology Framework (base cost: US$470,000). This activity will integrate the results of the other studies conducted in this component -- particularly the adjusted Information/process model, and the assumptions on which it is based -- and develop a comprehensive information technology framework (ITF) for tax administration. This ITF will have two components: (a) ITF Part 1 --produces a strategic plan for IT at the GDR. (b) ITF Part 2 -- specifies a technical environment for all tax administration processing which encompasses hardware, commercial software, and communications. It shows clearly those components of the existing environment which can be retained, and identifies those new components which are to be added, to the level of detail required to estimate and plan for overall procurement activity. Additionally, where it is clear that certain processing requirements will addressed serially, it also indicates the gross logical staging of acquisitions. 63. A key feature of the ITF Part 1 is its choice of a set of enabling technologies which is coherent and based on internationally accepted de jure and defacto standards. Specific product selections will be a secondary consideration. For example, the ITF's major commitment for a data management technology will in all likelihood be SQL; a secondary consideration might be a commitment to IBM's implementation of standard SQL through its relational database product DB2. This logic will be extended to other areas of choice within the ITF Part 1. 64. The ITF Parts 1 and 2 will consider the local market conditions in choosing technologies and products--i.e., availability and serviceability considerations. 65. The ITF Part 1 will assume a 5-year view of technology. This will assure that older technologies which are nearing the end of their useful lives, and immature technologies--which might pose unacceptable risks for a tax administration system where the consequence of error is relatively great--can be avoided. 66. The ITF Part 1 will have a role to play beyond the relatively immediate challenge of providing a technology baseline for the development of the ITF Part 2 and for support of the funding decisions in Phase II of this project. In addition, the ITF will be of a form suitable for use as a strategic planning document for the management of IT in the future. It is expected that the use of IT services will evolve as time goes by. Thus, the plan will be adjusted annually by the GDR, and used to plan and manage future IT acquisitions and technology replacement. 67. The strategic framework developed for the ITF Part I will be applied in guiding the development of the specific IT environment proposed in the ITF Part 2 for Phase II of the Tax Administration project. - 20 - 68. Timing and Level of Effort. The information/process modeling activities will be timed to begin with the general launching of Phase I activities. The model must be completed in 9 months. The construction of the ITF will follow immediately the completion of the information/process modeling activities. It must be completed 12 months after the general launch of this component: i.e., it must be completed within a 3 month period. The IT Laboratory portion of this consultancy will be active during 16 of the 18 months allocated for Phase I, with emphasis on the second half of Phase I, as more elements of the technology plan become defined. 69. It is anticipated that some overlapping of the activities referenced in the preceding paragraph may be possible. For instance, it is anticipated that the construction of the IT Laboratory can draw on some of the same key individuals who are working on the information/process models, and who may wish to use the facilities of the Laboratory to test and validate their solutions. That is one important rationale for combining these two items in the same terms of reference. It is also anticipated that there will be a carryover of key technical personnel from the laboratory construction activity to the definition of the ITF. Clearly, this would accelerate the learning curve for the involved GDR staff and consultants. Given the importance that attaches to the timely execution of proposed activities, and the regional and local office dimensions, provision has been made for a total effort of 150 months for this consultancy. The exact amount of effort required will depend on the precise skills mix of the consultant team and the amount of overlap that can be built into the team's work program and, in practice, should be somewhat less. 70. Strengthening GDR System Development Capability (base cost: US$700,700). The project (Phase I and Phase II) will introduce substantial changes in tax administration during the next several years, most of which entail modification of existing computer based systems and entirely new systems. Computer systems will be expanded and added to the IT resource pool. A new IT framework will be established during the first phase of the project that will form the foundation for significant IT developments that will largely occur during the second phase. The IT framework will build on currently installed computer and software technology but will introduce new development tools and techniques that will be specified during this phase. The bulk of the system development work in the second phase will be performed by the IT staff in GDR. For the GDR to reach the objectives set for this project, it is critical that the staff be adequately trained in the technology and methods that will be used. To avoid a delay between the phases of the component schedule, it is important to train the staff during the first phase so that they will be prepared at the outset of the second phase. 71. The purpose of this activity is to accomplish that training for the 105 computer programmers, systems analysts, and systems programmers located in Ankara, Istanbul, and Izmir. Table 2 shows the list of courses or subject areas that are planned to be covered and indicating the estimated duration of the courses. 72. The entire IT staff will receive training in all subjects above with the exceptions of course #3, Database Administration and #10, Windows NT 3.5. For these courses, four of the most highly skilled IT employees will be selected to receive this training. Two of these employees will be trained to becoming database administrators (course # 3) and two for providing communications support (course #10). Class size should, generally, be limited to 15 students, as - 21 - Table 2. List of IT-related Courses (subject to confirmation with the future ITF) 1 IBM DB2 Structured Query Language (SQL) 4 weeks 2 Structured Database Design 3 weeks 3 Database Dictionary 2 weeks 4 Database Administration 3 weeks 5 C++ 3 weeks 6 Structured Analysis and Design Techniques/CASE' 3 weeks 7 Microsoft Disk O/S (MS DOS) 6.2 2 weeks 8 Microsoft Windows for Workgroups I week 9 Microsoft Word 6.0 (Turkish Version) I week 10 Windows NT 3.5 1 week 11 Microsoft Excel 5.0 (Turkish Version) 2 weeks 12 Client/Server Application Development Tools 3 weeks Computer Assisted Software Engineering. a maximum, because of the "exercise-intensive" nature of the instruction. With this assumption, the minimum number of classes per course are as indicated in Table 3. 73. All training should be provided in a classroom/laboratory environment containing the necessary computer hardware and software so that each student has their own workstation, as described in an earlier activity. Each student should be provided with a complete set of training material and necessary technical manuals. 74. Enhancement of Tax Policy Capability (base cost: US$500,000). Activity in this area will seek to: (a) design and establish a Policy Analysis Unit within the GDR, including through a detailed training program; (b) carry out a thorough analysis of the current tax system with a view to providing recommendations for legislative change that would broaden the tax base and enhance the fairness and efficiency of the tax system, including through the rationalization of deductions, exemptions and other preferences; and (c) develop a suite of tax policy simulation models suitable for the design of tax policy changes and for revenue forecasting for the budget. More precisely, the GDR Policy Working Group, assisted by external consultants, would: (a) Undertake a complete assessment of the policy-making process within the GDR and make recommendations for restructuring the organization of the policy-making function and the information flows on which policy decisions are based. The design of the proposed Policy Analysis Unit (PAU) will be determined, including - 22 - Table 3. Number of Classes (Sections) by Subject/Course 1 IBM DB2 Structured Query Language (SQL) 7 2 Structured Database Design 7 3 Database Dictionary 7 4 Database Administration 1 5 C++ 7 6 Structured Analysis and Design Techniques/CASE 7 7 Microsoft Disk O/S (MS DOS) 6.2 7 8 Microsoft Windows for Workgroups 7 9 Microsoft Word 6.0 (Turkish Version) 7 10 Windows NT 3.5 > 7 11 Microsoft Excel 5.0 (Turkish Version) 1 12 Client Server Application Tools on Modem GUI' 7 Graphical User Interface (under Windows) its place within the new organizational structure, the posts and functions of the PAU and a detailed training program for the staff of the PAU. (b) Construct analytical models for tax policy to identify potential opportunities for broadening the tax base while maintaining an equitable tax structure and develop specialized databases for use in these models, as well as for independent analysis within the GDR. Separate basic models will be constructed for each indirect tax (valued-added taxes, customs duties and excise taxes) and income tax (company profit taxes, individual income taxes and payroll taxes). Also an integrated model will be developed for examining several of these taxes in combination. A third (revenue receipt tracking) module should offer the capability to map the simulation results generated by different basic revenue estimation models into a receipt projections/monitoring model. Key outputs in this area will include user's and technical manuals (in English and Turkish), and completed training for a small group of GDR staff in the use and maintenance of the system. It is possible that some of the required development material can be purchased off-the-shelf. - 23 - (c) Undertake a preliminary analysis of the current tax system with the above models. Phase II will see the application of the models to carry out a more detailed analysis of current tax law and an evaluation of alternative policy options to be considered by policy-makers. (d) Design a detailed training program for the staff of the PAU. Such training would likely include courses in macro- and micro-economics, tax policy analysis, the use of computers in quantitative analysis and the construction and use of tax policy models. Workshops and on-the-job training would be part of the overall training program. The type of training needed, especially during the early stages of the activity, will also depend on the skills and background of the staff selected to participate in the Tax Policy Working Group, who will form the core of the proposed PAU. 75. The foregoing activities require expert assistance in the amount of approximately 18 consultant months of effort, beginning in November 1995. Assuming that all data is collected and processed by the end of December, the construction of the revenue simulation system will begin in January 1996 and will be completed in February-June 1996, in time for the Fiscal Year 1997 budget preparation process. GDR staff would be expected to participate actively in the modelling work, and after a few initial sessions to introduce the concepts and modelling software, most training would be expected to be of the hands-on variety. 76. Project Management Support Services (base cost: US$514,000). The GDR has decided that it would benefit from the services of a professional project management support services (PMSS) consultant for the implementation of defined activities of the Tax Administration Component of the PFMP under the following categories: (a) national and international consultants; (b) subcontracts; (c) local training activities; (d) overseas study tours; and (e) operational support services. The responsibilities of the PMSS contractor in relation to the five categories of activity are described in the terms of reference detailed in Annex lb. Approximately half of the cost of this activity will be for miscellaneous project support expenditures such as translation services and office equipment. 77. The PMSS assignment is expected to start around the beginning of November 1995 and last until May 1997 in the first instance. It is expected that the assignment will be extended for a further 3-4 years in the context of the second PFMP loan from the World Bank. D. PROJECT COSTS AND FINANCING PLAN 78. flaU. The total cost of the tax administration component is estimated at about US$14.8 million equivalent, including contingencies. The total baseline cost is estimated at US$14.2 million. Project costs include goods and equipment, advisory services, civil works, training services and materials, project management support services and a refund of that part of the US$2 million advance from the Bank's Project Preparation Facility allocated to this component. Price and physical contingencies are estimated at 5 percent of total baseline costs of equipment, software, other materials and civil works. Foreign currency costs, including contingencies, are estimated at US$12.75 million or 86 percent of total cost. Local costs are estimated at US$2.06 - 24 - million equivalent, and are mostly for training, project support costs, taxes and duties, and staff salaries. Cost estimates assume an average local inflation rate of 51 percent in 1995-96, and 15 percent thereafter. Price increases for foreign costs (estimated in US dollars) are assumed at 1.6 percent in 1995-96 and 2.6 percent in 1997. Cost calculations assume an average exchange rate of 61,300 Turkish Lira to US$1.00 for the 1995-97 component execution period. A summary breakdown of costs by expenditure category is shown in Table 4. A more detailed presentation is contained in Annex Ic. 79. Financing. The proposed Bank loan would finance about 60 percent of total component costs (see Table 5). It also would meet 70 percent of foreign exchange requirements. The Government's contribution of US$5.9 million includes equipment purchases of US$3.45 million for the central and local office network in connection with the taxpayer identification initiative, and a variety of local costs, notably training for IT staff and project support costs. 80. Preparatory activities for the PFMP as a whole have benefitted from a Japanese PHRD grant in the amount of Yen 128 million (approximately US$1.3 million). The French Government also provided a grant of about US$132,000 specifically for preparatory studies for the Expenditure and Personnel Management component. The Government has obtained an advance in the amount of US$2 million from the Bank's Project Preparation Facility. These monies have allowed the timely initiation of the most time-sensitive preparatory activities. Table 4. Costs Summary BR Expenditure Accounts ('IL billion) (US $ 000) Of Which Of Which % Foreign Duties & % Foreign % Total Duties & E&change % Total local Foreign Total Tax Ezchange Base Costs Local Foreign Total Tax Base Costs Civil Works 2 0 2 0 0 0 43 0 43 0 0 0 Equipment 15 230 245 15 94 36 315 4,763 5,078 320 94 36 Training Local 67 0 67 0 0 10 1,396 0 1.396 0 0 10 International 0 18 18 0 100 3 0 375 375 0 100 3 Subtotal 67 18 85 0 21 12 1,396 375 1,771 0 21 12 Technical Assistance International 0 323 323 0 100 47 0 6,700 6,700 0 100 47 Project Support 10 19 29 0 66 4 200 384 584 0 66 4 BASE COSTS 94 590 684 15 86 100 1,954 12,222 14,176 320 86 100 Physical Contingencies 3 13 16 1 82 2 59 263 322 9 82 2 Price Contingencies 85 471 556 15 85 81 44 266 310 8 86 2 TOTAL COSIS 182 1,074 1,256 31 86 184 2,057 12,751 14,806 337 86 104 - 26 - Table 5. Tax Administration Component: Financing Plan (US$ million equivalent) Local Foreign Total % of Total IBRD 0.1 8.9 9.0 60.8 Government 1.9 3.9 5.8 39.2 Total Financing 2.0 12.6 14.8 100 .0 E. ACCOUNTING AND AUDIT PLANS 81. A project account and special account will be established for each of the three implementing agencies. Each PMU would prepare quarterly statements of expenditures, consolidate component accounts, and prepare and submit disbursement withdrawal applications for project expenditures (beginning from the date of Loan Effectiveness). The project accounts and special accounts would be audited annually by independent auditors acceptable to the Bank. The audit reports will contain a separate opinion on the use of Statements of Expenditure. During negotiations, the Government confirmed that an annual audit of all project and special accounts would be undertaken by an independent auditor in accordance with the Bank's Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank. (March 1982). Audit reports in English will be submitted to the Bank not later than six months after the end of each Government fiscal year (December 31). Details of the project reporting and annual review schedule are presented in Table 4.7 of the Main Report. II. IMPLEMENTATION ARRANGEMENTS A. RESPONSIBILITIES OF THE IMPLEMENTING AGENCIES 82. The borrower is the Republic of Turkey which is represented by the Undersecretariat of Treasury (Treasury). The Undersecretary in the Ministry of Finance (MOF) has overall responsibility for the supervision of the Tax Administration and the Expenditure and Personnel Management components of the project. 83. The Director General of Revenues is responsible for the management of the Tax Administration component of the PFMP. Specifically, the Director General will oversee, guide and approve the requirements, specifications, operational and organization proposals and other changes that result from the study, analysis and design activities conducted as a part of the Tax Administration Component. The Director General will establish such review committees as he deems appropriate, or may be recommended by the Minister and Undersecretary of Finance, to review and evaluate the results of work done in component activities. This process should help ensure that the activities conducted under this component remain consistent with the objectives that have been established and with Government intentions. 84. Responsibility for day-to-day coordination and monitoring of the project component will rest with the Project Management Unit (PMU), headed by a Deputy Director General, who has already been assigned this responsibility. The PMU will include the heads of the five Working Groups being formed to implement component activities. These individuals, who are Department Heads in the GDR, have also been selected. The Working Groups are expected to form the nuclei of the teams within the GDR that will assume responsibility for follow-through activities, after the first phase of this component. The PMU will include the lead consultant from the In-House Advisory team and the PMSS contractor. Other GDR staff and consultants with skills necessary to support component activities, including project management, procurement and contract monitoring, translation and administrative support, will be assigned or contracted, as necessary, to assist the PMU on a short term basis. The specific responsibilities of the PMU are summarized as follows: (a) ensuring the training, assignment, and placement of GDR staff and consultants as required by activity work plans; (b) providing liaison with the Bank and involved Government units for project administration and supervision; (c) assisting Working Groups in the preparation of procurement strategies, plans and documents, and ensuring compliance with Bank procurement guidelines in the acquisition of products and services; (d) preparing and distributing period reports to the Director General (monthly), the Bank (quarterly), and other Governmental units covering the progress, problems encountered and corrective actions needed, and activity and financial status of the activities; - 28 - (e) ensuring the movement of official documents and contracts through approval processes and undertaking measures to expedite their release; (f) supporting component activities by providing necessary translation and administrative support; (g) monitoring the availability of funds and project costs and expenditures, processing loan disbursement applications and tracking disbursements of the Bank loan and Government funds; and (h) preparing a Component Completion Report within six months of the completion of the component, which will be incorporated eventually into the Project Completion Report. 85. As noted above, the General Director of Revenues will establish five Working GrouD--Automation, Collections, Organization, Tax Policy Models and Third Party Systems--which will be responsible for carrying out component activities with the assistance of contracted technical advisors. Additional short-term teams may be formed from time to time to assist with the preparation of tender documents and with the evaluation of proposals. The specific task responsibilities of the five main Working Groups are as follows: * Automation (IT) Working Group: Information/Process Model; Information Technology Laboratory; Information Technology Framework; and Strengthening In-House Information Technology Capability. * Collections Working Group: Banking Study; and Withholdings Study. * Organization Working Group: Organization Study. * Tax Policy Working Group: Enhancing Tax Policy Capability. * Third Party Working Group: Third Party Information Study. B. INTER-AGENCY COORDINATION 86. Over the medium term, strengthening public financial management in Turkey will depend importantly on the efficient and timely exchange of data between the different agencies charged with this responsibility. However, at this stage, components are essentially independent of each other and will proceed according to separate component implementation plans. The implementation of the first phase of the Tax Administration Component will be undertaken solely by the General Directorate of Revenues in the Ministry of Finance. Consequently, there are no substantial requirements for coordination with the agencies implementing the other two components. Any necessary coordination among the organizations will be effected at the ministry level by the Undersecretaries of Customs and Finance. Looking ahead to Phase II, however, the future tax administration system will benefit greatly from the availability of the citizen identification numbering system being implemented under the MERNIS project. At some stage, - 29 - a close collaboration will be required between the GDR and the General Directorate of Citizen's Affairs as the tax administration migrates from its internal taxpayer numbering system to one that relies on the national citizens registry. C. ROLE OF WORLD BANK SUPERVISION 87. Bank supervision of project implementation will concentrate on the consistency of component activities with agreements reached during negotiations, performance of the implementing groups and assessment of emerging needs for adjustments to project parameters. The day-to-day implementation and monitoring will be carried out by the PMUs. The basis for Bank monitoring will be quarterly progress reports prepared by the PMUs. The reports will describe the status, deviation, if any, from the implementation plans, reasons for deviations as well as corrective actions being taken. The quarterly reports will be supplemented by substantive discussions with the Working Groups implementing the various subcomponents and discussions with higher echelon officials. Annual work and procurement programs will be required to be agreed with the Bank each year, and will include quarterly benchmarks for monitoring and evaluating progress in implementation. 88. Implementation of the proposed project, and the extent to which it is achieving its stated objectives, would be reviewed and evaluated annually and upon its completion. In addition, there will be three formal joint Bank-Government reviews. The first of these would be conducted early in 1996, about four months into the project, to provide a basis for proceeding with preappraisal of the proposed follow-up investment operation, and for making any early adjustments as may be necessary in project parameters. The second (in early 1997) would cover the formal assessment of the pilot implementation of the new Customs system, and the third (early 1998) the assessment of the pilot Government Financial Management Information System (GFMIS) for the Expenditure and Personnel Management Component. A proposed schedule of supervision and review missions is provided in Table 4.7 of the SAR. During Loan negotiations, the Government also agreed to a joint-Bank review of project implementation in October- November of each year for assessing progress toward achievement of agreed policy, institutional, financial and physical targets and for determining and agreeing on needed budget resources (both local funds and Loan proceeds) to be requested for the next fiscal year.  III. IMPLEMENTATION ACTIVITIES A. IMPLEMENTATION SCHEDULES 89. The three components of the PFMP are essentially independent of each other and would proceed according to separate Component Implementation Plans--see Annex 2a for Expenditure and Personnel Management and Annex 3a for Customs Modernization. There are no substantial requirements for coordinating the components at the implementation level. Any necessary coordination among the organizations will be effected at the ministry level by the Undersecretaries of Finance and Customs, with the assistance of the Treasury. 90. The Tax Administration Component will be implemented over a period of roughly eighteen months, according to the schedule shown in Annex 1d. The schedule takes into account the work that has been carried out during project preparation. In particular, draft terms of reference (TOR) for major technical assistance assignments have already been prepared and agreed with the Government. Annex Id also lists the major activities to be undertaken in this component, showing the tasks related to each subcomponent. 91. Most of the proposed activities are inter-related both logically and across time. The results from most will be supported or be integrated into the final strategic plan and information technology framework. The first critical activity is procurement of the In-House Advisory team, which must lead other activities by about 2 months in order to allow for effective planning and coordination of Phase I activities and timely development of the program for Phase II. The Organization study is divided into two distinct stages. The first stage will provide the basis for key decisions regarding the re-structuring of the GDR, which is a critical milestone affecting the remaining activities. The second stage will produce results that will directly support the re- structuring activities and influence the remaining Phase I activities. It is important that the first stage be completed early in the phase. The completion of the first stage of the Organization study and the adoption of an action plan by the MOF based on its recommendations is a basic prerequisite for the fuller definition of Phase II. The rest of the organization development activity will continue through the remainder of Phase I. The Information/Process Model is on the critical path for definition of Phase II as well, and will be launched concurrently with the Organization study. It is expected to last about 15 months. As it progresses, the modelers will integrate into their model the information from the first stage of the Organization study and the three smaller, related studies--Third-Party, Banking, and Withholding. It is expected that these latter studies will also be launched early in Phase I, and be completed in approximately 6 months, allowing time for their results to be fully considered in the construction of the information/process model. The Laboratory prototypes and pilots of certain future operations, such as the new regional intelligence centers, and the Training activities will continue throughout Phase I. 92. Implementation of some activities will be constrained by others. For example, modelling of the envisaged new regional offices is dependent on GDR restructuring and training, and cannot be developed at the outset for some of the technologies which will only be selected in months 14 through 17 of Phase I. However, many of the activities are not similarly constrained and preliminary results from prototype and operational modeling activities will be integrated into the information/process model and IT framework, as they become solidified. The IT Framework - 32 - activity is conducted entirely during the last semester of Phase I, because it needs for the model to be relatively complete (and static) while it is being developed. 93. Together, these activities will establish the foundation for the second phase and provide necessary technical detail to proceed with its procurement and development activities. This includes the training activity (Strengthening the In-House System Development Capability), which is directed to preparing the information technology staff in GDR for second phase design and development work. B. PROCUREMENT ARRANGEMENTS AND SCHEDULES 94. Procurement arrangements and schedules have been prepared independently for each component. The executing agencies' capabilities and purchasing regulations and procedures were reviewed during Appraisal. It was determined that the General Directorate of Revenues would benefit from the services of a professional procurement specialist. These services are to be provided by the PMSS contractor. 95. All procurement of goods and material to be financed from the Bank loan proceeds would be carried out in accordance with the Bank's Guidelines: Procurement Under IBRD Loans and IDA Credits (January 1995) and procurement of services, including the selection of consultants for technical assistance and training, would be in accordance with the Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August 1981). Project procurement would be limited to the purchase of goods, material and services, including training. The former consists mainly of the hardware and software for the information technology subcomponents (including substations, personal computers and peripherals). 96. Contracts for goods and material with a value of more than US$300,000 equivalent per contract will be arranged in accordance with the Bank's procedures for international competitive bidding (ICB). Approximately US$1.7 million worth of equipment is proposed to be procured by the ICB method. Goods manufactured in Turkey and procured through ICB may be granted a margin of preference of 15 percent in accordance with paras. 2.54 and 2.55 of the Bank's Guidelines and paras. 1-6 in Appendix 2 of the Bank's Guidelines. The Bank's Standard Bidding Documents will be used for all procurement under ICB. In the event that the equipment procurement is unbundled, contracts with a value below US$300,000 equivalent per contract will be procured under the Bank's procedures for international shopping. Direct contracting for proprietary software may also be followed to ensure compatibility with development tools already in use in the GDR, but is not expected to exceed US$30,000 in this component. 97. Contracts for equipment and material estimated to cost US$300,000 equivalent or more and all direct procurement contracts would be subject to the Bank's prior review of procurement documentation and approval of contract award. This would result in the prior review of 99 percent of Bank financed contracts. Other contracts would be subject to ex post review after contract award. 98. Procurement of services, including the selection of consultants, would be based on a shortlisting of firms. The exceptions to this procedure are the contract with the IRS and study - 33 - tours which will be sole sourced. The total value of consultant services to be procured from firms and individuals is estimated to be US$7.65 million. Prior review of consultant contracts would not apply to contracts estimated to cost less than US$100,000 equivalent per contract for firms and US$50,000 for individuals. However, the terms of reference for all contracts will be pre-reviewed by the Bank. 99. The GDR will furnish the Bank quarterly procurement reports indicating: (a) changes in individual contracts' cost estimates, including best estimates for physical and price contingencies; (b) revised timing of procurement actions, including advertising, bidding, contract award and completion time of individual contracts; and (c) compliance with aggregate limits on specified methods of procurement. Further, the annual project operating plans would include any revisions in the agreed implementation schedule regarding employment of consultants. A summary of the procurement arrangements for the Tax Administration Component is shown below in Table 6 and the Procurement Implementation Plan showing the details of procurement packages and the relative timing of different procurement actions is presented in Table 7. Table 6. Proposed Procurement Arrangements (US$million equivalent) International Competitive Item Bidding Other ' N.B.F." Total Cost I.Civil Works 0.04 0.04 __________________ __________(0.00) (0.00) 2.Equipment/Goods 1.59 0.13 3.45 5.17 (1.28) (0.02) (0.00) (1.30) 3.Training 0.53 1.34 1.87 (0.53) (0.00) (0.53) 4.Technical 6.42 6.42 Assistance/Advisory (6.42) (6.42) Services 5.Project Management 0.62 0.62 Support Services (0.00) (0.00) 6. PPF 0.80 0.30 (0.80) (0.80) Total 1.59 7.88 5.45 14.92 (1,28) (7.77) (0.00) (9.05) a/ Other includes shortlisting of consultant firms (US$6.49 million), sole sourcing (US$1.16 million), international shopping (US$0.1 million) and direct contracting for proprietary software (US$0.03 million). b/ Not Bank Financed Note: Numbers in parenthesis are the respective amounts financed by the Bank loan. Differences due to rounding. - 34 - Table 7: Procurement Implementation Plan (US$ million) TOTAL Prepare (Including Procurement Tender Bid Award Contract Contingencies) Method Documents Invitation Contract Completion A. Eaniument la 1. Information/Process Model, Lab & ITF 1.59 ICB 2/96 3/96 4/96 4/97 a) Systems Hardware and Software b) PCs c) Development Application Tools \b d) Printers and Computer Peripherals 2. Office Automation Equipment 0.10 IS 9/95 10/95 11/95 3/96 3. Tax Policy Model Software 0.03 DP 11/95 11/95 12/95 1/96 TOTAL Prepare Letter (Including Procurement Terms of of Award Contract Contingencies) Method Reference Invitation Contract Completion B. Trainine 1. Study Tours 0.21 SS TBD TBD TBD TBD 2. Policy Analysis 0.19 SL 8/95 9/95 10/95 10/96 3. Training of Laboratory Staff 0.13 SL 1/96 2/96 4/96 11/96 C. Technical Assistance 1. In-House Advisor 0.95 SS 8/95 9/95 10/95 5/97 a) Tax Administration Advisor b) Short Term Advisors 2. Studies 1.32 SL 8/95 10/95 1/96 1/97 a) Organization Study b) Third Party Study c) Banking Study d) Witholding Study 3. Information/Process Model, Lab &ITF 4.53 SL 8/95 10/95 12/95 1/97 4. Tax Policy Analysis 0.32 SL 8/95 10/95 11/95 1/97 Total 9.37 \a Includes duties and taxes estimated at US$0.12 million, which are to be financed by the Government \b Direct Procurement of proprietory software may be necessary to ensure compatability with development tools currently available in the MOP. NOTES: ICB - International Competitive Bidding SL - Short listing of firms SS - Sole Sourced TBD - To be Determined DP - Direct Procurement - 35 - 100. There are several procurement actions in the Tax Administration Component that must be effected by the GDR, all for technical assistance services. The first procurement--for In-House Advisory Services--is the most critical, since it must lead all other procurement by at least two months. This procurement is already quite advanced. A joint GDR-IRS decision is expected before the end of September 1995 concerning the individual who will act as lead advisory consultant. Given their obvious inter-relations, the four study efforts are proposed to be procured together. The procurement will be through shortlisting of firms. A separate shortlist is envisaged for the tax policy consultancy. 101. The Information/Processing Modelling, the Laboratory Modelling and Prototyping, and Technology Framework activities are closely related and have been combined to be procured from one source that will be responsible for all three. The terms of reference for this work bundle has been prepared on the assumption of a single procurement, under shortlisting guidelines, and contract. This procurement is also critically important, since it provides the lead and critical path activities for the completion of Phase I. The technical re-engineering activities of Phase I begin, in reality, when this contract is awarded. 102. The Laboratory Modelling and Prototyping activity is dependent on establishing a laboratory facility and acquiring mid-range computers, PC's, LAN's, software and multi-media equipment production equipment. These items fall within the guidelines for ICB (or international shopping if unbundled) and will be acquired by the TA contractor for that activity following those Bank guidelines. These acquisitions will be scheduled and conducted in accord with detailed work plans prepared by the contractor at the outset of the activity. 103. The final procurement for IT training will involve multiple, small value service contracts with several service providers. This is also amenable to shortlisting and can be carried out using already available background material and the summary information contained in this document. The TORs for all the foregoing activities are contained in Annex lb. C. DISBURSEMENT ARRANGEMENTS AND SCHEDULES 104. The Loan would be disbursed separately for each component. Table 8 shows the disbursement forecast for the Tax Administration Component by semester. Disbursements for this component are expected to be completed by June 30, 1998, approximately four months after the end of component execution. Loan Closing will be June 30, 2000, allowing ample time for the processing of final withdrawal applications. 105. In order to facilitate disbursements, the Bank's share of project expenditures for the Tax Administration Component would be disbursed through a Special Account which would be opened in the Central Bank, and managed by the PMU. The authorized allocation for the Special Account would be US$1.2 million, equivalent to an estimated four months of component expenditures under the Bank loan. However, initially this level of allocation would not be allowed until the project has disbursed an aggregate amount of US$1 million. Until such level of disbursements is reached, the Special Account deposit would be limited to US$600,000. - 36 - Table 8. Estimated Bank Disbursements (US$million equivalent) IBRD FY96 FY97 FY98 Fiscal Year I II I II I II Annual - 0.8 1.3 1.3 3.0 2.6 Cumulative - 0.8 2.1 3.4 6.4 9.0 106. To ensure that critical initial project activities are not delayed, provision has also been made for retroactive financing of up to US$6.2 million for all eligible project expenditures for the PFMP as a whole between September 29, 1994 and the expected date of loan signing. Disbursements are expected to commence immediately at Loan Effectiveness with the initial deposits into the Special Accounts along with the refinancing of the PPF advance. All disbursements would be fully documented, except for expenditures on contracts for equipment and material of less than US$300,000 and contracts for less than US$100,000/50,000 with firms/individual consultants. In these cases, disbursements will be made against statements of expenditures, whose documentation will be retained by the PMU until at least one year after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account or payment out of the Special Account is made. 107. During negotiations the Government agreed to the following specific conditions for the Tax Administration Component (see also Main Report, paras. 6.4 a. and 6.5 a.): Condition of Disbursement * The General Directorate of Revenues shall have appointed the In-House Technical Adviser and the Project Management Support contractor, with TORs agreed with the Bank. Dated Covenants * By December 31, 1996, the Ministry of Finance shall present the Bank with a satisfactory plan for the reorganization of the General Directorate of Revenues (headquarters, regional and local offices) prepared on the basis of appropriate legislation and regulations, and the proposed new automated systems. * By December 31, 1996, the Government of Turkey shall have communicated to the Bank its decision concerning the collection of social security, health and unemployment contributions by the General Directorate of Revenues. IV. BENEFITS AND RISKS A. BENEFITS 108. It is known that existing loopholes and deficiencies in the tax system's coverage account for very significant losses in tax revenue. The precise amount going unrecovered is not known, but it has been estimated at upwards of 25 percent. Clearly, amounts of this magnitude are important for the general revenues of the government, as well as for establishing tax rates. The activities proposed under this project would help expand the tax base by enhancing substantially the compliance enforcement and policy making capability of the GDR. 109. A restructured and more "client-friendly" tax administration system can also contribute strongly to the real and perceived fairness of the system. This, in turn, can pay benefits in terms of voluntary compliance on the part of tax payers. 110. From the purely technical, information technology view, re-engineering makes good sense. The existing system is not robust in either an operational or technical sense. Large investments have been made in mainframe capacity with little benefit to operations or management. Under the current situation, it would be very difficult to make major changes to functionality without introducing serious risks. Consequently, re-engineering can be viewed as a future cost-avoidance (and risk avoidance) investment. B. MAIN PROJECT RISKS 111. The foundation studies and modeling activities scheduled for Phase I are crucial to the success of the project. Previous reports have dealt primarily with an examination of the tax administration's problems in a vertical fashion. A second stage effort is required to define solutions that are of an integrative nature, looking across the entire system, and that lead to changes in organization, procedures and human resources as well as IT. Therefore, a major risk is that, if the Phase I activities are severely underachieved, downstream IT investments may yield only modest benefits to the system. 112. A second important risk for the Government's medium term tax administration reform program is the heavy dependence on GDR staff for successful implementation. In particular, GDR staff, assisted by a team of contracted consultants, will assume responsibility for the bulk of the downstream system development activities in Phase II. This requires a timely and successful investment in IT staff during Phase I. This may not occur due to any number of systemic reasons, or there may be losses of trained personnel to the private sector. Against this risk must be set the fact that this developmental strategy should assure a high level of involvement by the client early in the project and provide for enhanced sustainability after the logical end of Phase II. The chances of success can be increased significantly by concentrating on acquiring the very best possible technical assistance for Phase I. A good job done with the crucial tasks identified for the coming year will reap large dividends in the future, even if the authorities eventually choose to go forward with the activities envisaged for Phase II in a manner and timeframe different from those discussed thus far with the Bank. - 38 - C. OTHER FACTORS AFFECTiNG PROJECT'S SUCCESS 113. Downstream,. the use of the unified identification number to be provided by the MERNIS project is crucial to the envisaged compliance enforcement strategy. It is important that MERNIS be brought to a successful conclusion in the next two to three years. V. MONITORING AND EVALUATION A. MONITORING AND EVALUATION 114. The proposed project is marked by an ambitious scope, substantial institutional complexity, several interrelated aspects, numerous detailed contracts and training events, and demanding time schedules for individual elements. Therefore, project supervision will entail the allocation of substantial resources, especially in the initial stages of implementation. The supervision inputs detailed above represent atypical resource allocations to help facilitate successful project implementation. 115. Implementation of the Tax Administration component of the PFMP, and the extent to which it is achieving its stated objectives, will be reviewed and evaluated annually and upon its completion. The PMU will be required to submit quarterly progress reports to the Bank. In addition, there will be regular supervision missions and a number of annual and formal joint Bank-Government reviews of overall project implementation. Specifically, there will be three formal project reviews focusing respectively on the preappraisal of PFMP II, the evaluation of the customs pilot and the evaluation of the GFMIS/PPMIS pilots, in March 1996, March 1997 and March 1998. In addition, the Government agreed to a joint-Bank review of project implementation in October/November of each year of project execution for assessing progress toward achievement of agreed policy, institutional, financial and physical targets and for determining and agreeing on needed budget resources (both local funds and Loan proceeds) to be requested for the next fiscal year. The criteria for monitoring and evaluating the Tax Administration component are outlined below. B. INDICATORS 116. The tax administration component has been divided into two phases because several issues cannot be resolved at this point in time. Consequently, it is important to develop performance indicators which can be used not only to help gauge progress toward achieving Phase I objectives, but lay the foundation for Phase II. Monitoring and evaluation will focus on readily recognizable events that indicate progress and assure that the significant infrastructure investments being planned for Phase II will be achieved. There are three natural time points for reviewing performance indicators: (a) at project launch time; (b) at the six-month point; and (c) at the twelve-month point--at which time many of the key activities of Phase I converge. 117. At project launch, a number of important teams must be constituted: * The in-house advisory team, which will assist the PMU with the day-to-day monitoring and coordination of the project, must be successfully launched, as must the project management support services contractor. * The five Working Groups that will implement the component activities must be successfully launched as well. * The Working Groups will require technical assistance and, in order for this to occur, these Groups must develop and implement an aggressive procurement plan, drawing any support that may be required from the PMU, in-house advisor and PMSS - 40 - contractor. Unless the up-front procurement actions are initiated and completed promptly, according to Bank guidelines, Phase I cannot start and end as planned, with consequent slippage in the long term, Phase II work. 118. The Working Group responsible for the two activities that are of a quasi-ongoing nature--strengthening the in-house system development capability, and constructing the IT laboratory--will establish and publish its own schedule and indicators for measuring progress in these activities. These indicators or milestones will be reviewed by the Bank to determine their suitability as performance indicators. Some suggestions might include: numbers of students trained, completion of prototypes, rate of acquisition and installation of the Laboratory components. These two major activities are planned to consume considerable amounts of resources during Phase I. The performance of these activities--against goals that are to be established--will be reviewed at the 6 month stage and again at the 12 month stage, so that any necessary corrective action can be taken. 119. At the six month point, the key organization study must have completed its first stage work. A performance indicator here will key on the study's success in providing concrete solutions for a small number of important issues that persisted at pre-launch. For instance, the study must provide detailed recommendations that will allow for a formal resolution of the precise role of the regional offices, as well as their exact number and location. 120. At the twelve-month point, the key integrative information/process modeling activity must be successfully completed. For this to happen, the results of the organization study, and the three focused studies must have been factored into the analysis--and in a timely fashion. In addition, much existing material must have been successfully analyzed and assimilated into the model. For instance, by this time, there must have been achieved a formal resolution to the issue of the collection of social security and other contribution payments, and the protocols which must exist among the participating agencies would have been identified. A further definition of success is that the model must reside in an electronic repository, so that it can be applied optimally to the Phase II system development activities. 121. This is the point of intersection of most of the major activities of Phase I. Successful completion to this point is pre-requisite to the development of the Information Technology Framework (ITF) during the last few months of Phase I. It is the ITF that will specify the "blueprint" for the significant infrastructure investments planned for Phase II. Consequently, it is not feasible to plan for Phase II without passing successfully through this control point. 122. An advantage of the 12-month point is that it provides sufficient planning time so that additional funds can be made available, and the project (if it is successful to this point) can pass relatively seamlessly into Phase II. - 41 - C. REPORTING ARRANGEMENTS 123. The PMU will be responsible for (i) tracking inputs and outputs related to the project; and (ii) overseeing studies from consultants and working groups. The PMU will prepare a quarterly progress report which, upon clearance by the GDR, will be submitted to the World Bank. The reporting schedule is described in Table 4.7 of the Main Report.  Annex lb PUBLIC FINANCIAL MANAGEMENT PROJECT Tax Administration Component General Directorate of Revenues (GDR) Terms of Reference  Annex lb Tax Administration Component General Directorate of Revenues (GDR) Terms of Reference Table of Contents Consultancy 1: In-House Tax Administration Advisor .................... 47 Consultancy 2: Organization Study ................................ 53 Third Party Information Study Banking Sector Study Withholdings Study Consultancy 3: Information/Process Model ........................... 65 Information Technology Laboratory Information Technology Framework Consultancy 4: Strengthening GDR Information Technology Capability.. . . . . .. 75 Consultancy 5: Tax Policy Analysis . ............................... 83 Consultancy 6: Project Management Support Services.......... . . . . . . . .. 89  Republic of Turkey Ministry of Finance General Directorate of Revenues (GDR) Public Financial Management Project (PFMP) Tax Administration Component Terms of Reference CONSULTANCY 1: PROVISION OF CONSULTANCY SERVICES FOR AN IN-HOUSE TAX ADMINISTRATION ADVISOR INTRODUCTION 1. The Government of Turkey (GOT) is embarking upon a program that will revitalize substantially its Tax Administration system. This process is fairly advanced, and a number of seminal studies, conducted under the auspices of a grant from the Government of Japan, have made extensive recommendations for modernization and reform. Implementation is to be funded by the GOT as one component of an omnibus project--the Public Financial Management Project (PFMP)--which is to be financed in part by two successive loans from the World Bank. The PFMP consists of the following major components: * Tax Administration * Expenditure and Personnel Management * Customs Administration. 2. Overall responsibility for the supervision of the Tax Administration Component is vested in the Undersecretary in the Ministry of Finance (MOF). The Director General of the General Directorate of Revenues (GDR) is responsible for the management of the component. A Project Management Unit (PMU), headed by a Deputy Director General, is responsible for coordination of component activities. Specific tasks are to be carried out by Working Groups comprised of Ministry of Finance staff, assisted by external consultants. The heads of the Working Groups are members of the PMU. The services of a residential advisory team with detailed technical and operational experience in tax administration are required to assist the PMU in the planning, coordination and implementation of activities proposed to be carried out under the Tax Administration Component. These terms of reference provide a description of the required advisory services. BACKGROUND TO THE TAX ADMINISTRATION COMPONENT 3. The primary goal of the Tax Administration Component is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at strengthening the compliance enforcement capability of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The envisaged institutional changes will follow up on recent tax policy reforms that included the closure of a number of corporate "loopholes" and other measures aimed at expanding the tax base and - 48 - improving compliance. The tax administration component also will seek to ensure the sustainability and predictability of the expected revenue increases through the modernization of organizational arrangements, procedures and computer based systems. Activities will also be directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. 4. A program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing and policy formulation. The proposed changes would seek to: (a) restructure central, regional and local tax agencies in order to achieve a more functional and strategic orientation in the GDR; (b) improve coverage of the individual tax payer base and provide for better system integration of a number of major tax sources; (c) develop and implement modern automated systems for core tax administration functions and management; (d) develop and implement a more aggressive and complete compliance enhancement strategy, notably through the establishment of a third party tax intelligence system for auditing and collections; (e) strengthen tax policy formulation through the establishment of a Policy Analysis Unit and the development of a suite of tax policy models; (f) improve taxpayer service; and (g) strengthen GDR human resources through training and study tours to accomplish and sustain these objectives. 5. The authorities' plan is reach these objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the process of administrative reform in the GDR and lay a solid foundation for a restructuring of the organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. 6. Activities during the first phase (1995-97) will be aimed at introducing a redefinition of the tax administration system in Turkey, with changes envisaged in organization and procedures, the legal and regulatory frameworks, and human resources. Resources are required for: - 49 - (a) in-house advisory services to help refine further the medium-term modernization and reform program for tax administration business processes and management, and to help manage Phase I activities; (b) an organizational study to establish the overall framework for restructuring the GDR to improve its effectiveness and efficiency; (c) design studies and pilot activities to establish the detailed requirements and choices for hardware, systems software, communications design and applications development tools for the restructured GDR; (d) recruitment and training of IT staff to enhance the in-house capability of the GDR to develop and sustain its information technology investments; (e) an assessment of the policy-making process and the information flows on which policy decisions are based, with a view to designing a tax Policy Analysis Unit within the GDR, and development of analytical and operational tax models, with appropriate training of GDR staff; (f) study tours abroad for key GDR staff; and (g) project management support services. 7. Phase 11 (1996-2001) would see an expansion of the advisory services program, notably in the areas of audit, collections, returns processing and many aspects of the supporting IT infrastructure, as well as modern tax administration business management. The envisaged Policy Analysis Unit would also be made operational during this phase, and would use the proposed models to conduct a detailed analysis of the current tax system, and to perform an evaluation of various policy options. Consultants may be needed in Phase II to provide guidance to the PAU, however, the objective is to develop an operational unit within the GDR that is sufficiently trained in the construction and use of analytical tools and models to perform an on-going tax policy analysis function. 8. Other Phase 11 activities in the IT area would cover the upgrading of existing central and regional IT assets of the GDR, acquisition and installation of IT products at a number of new regional offices, development and delivery of a broad-based training program for GDR staff and computers and ancillary equipment for a restructured and rationalized local tax office network. The main remaining cost elements for Phase II would be: (a) site preparation; (b) a management consultancy to assist the GDR in its reorganization and the rationalizing of the network of local offices; and (c) enhanced project management support services. The World Bank is expected to provide financial support for the Phase II activities through a second PFMP loan. - 50 - DESCRIPTION OF PHASE I ACTIVITIES 9. Based on the work that has already been carried out and the information now available, priority in Phase I is to be given to tasks that accomplish the following: (a) Implement improved organizational structures and practices within the tax administration affecting most functional processes and provide flexibility of design for the tax administration to evolve smoothly in the future. An example of the latter point is provided by the current debate over whether the scope of tax collection functions should be extended to include collections of social security contributions, and health and unemployment insurance premiums. This should represent a logical extension of the tax administration's activities in the area of payroll withholdings, and should not add an insupportable burden to the work program of the GDR. In short, the future operational systems will be designed to accommodate reasonable changes in functionality and workload expansion. (b) Improve the content of the taxpayer masterfile, both individual and business, which is known to possess major gaps in coverage as well as deficiencies in the quality of taxpayer locator information. This masterfile will include: * Sub-systems containing tax return and assessment data to assist in returns processing * A taxpayer account module that will track an account from the pre- payment stage to final payment, identifying transactions such as appeals, status of the account, payments and corrections/adjustments * The capability to issue payment commands, which will be accessed by local offices through their respective regional computing centers * A taxpayer delinquency database to identify non-filers or stop-filers * A MIS to provide statistical information which will assist management in ascertaining baseline measurements to monitor employee performance and resource requirements, and to conduct trend analysis. (c) Provide for better integration of the various tax information sources, which are currently processed as separate entities. This includes withholding, third party information, banking and other financial information relative to other entity information (e.g., name, address) and appropriate cross referencing. (d) Introduce new mechanisms to the requirements of tax administration designed to increase voluntary compliance and detect non-compliance--the former will be supported by enhanced service to tax clients, the latter by the development of new intelligent systems support for the audit and collection functions. - 51 - (e) Develop an enhanced capacity for tax policy analysis and modelling to allow for the design of new taxes to replace the distortionary extrabudgetary funds levies and to strengthen the revenue side of budget preparation more generally, including through the design of a Policy Analysis Unit and appropriate training. (f) Expand considerably the interface with the private banking system. The past reliance on state banks has been identified as a source of significant time delay (and a source of lost revenue) in the existing collection process, and of difficulties for taxpayers due to the failure to remit payment receipts and monies to the GDR in a timely fashion. A study will be conducted in Phase I of the project to evaluate alternative methods for processing payments made through banks. The results of this study will also cover part of the requirements of the Expenditure and Personnel Management component of the PFMP as regards the flow of public monies through the banking system. 10. The foregoing administrative reform activities are inter-related both logically and across time. The first critical activity is the Organization study, which will support management decisions regarding the restructuring of the GDR--decisions that will affect most of the other activities in Phase I. It is critically important that this stage be completed early in the phase. The completion of the first stage of the Organization study and the adoption of an action plan by the MOF based on its recommendations is a basic prerequisite for the fuller definition of Phase II. The rest of the organization development activity will continue through the remainder of Phase I. The Information/Process Model is on the critical path for definition of Phase II as well, and will be launched concurrently with the Organization study. It is expected to last about one year. As it progresses, the modelers will integrate into their model the information from the first stage of the Organization study and the three smaller, related studies--Third-Party, Banking, and Withholding. It is expected that these latter studies will also be launched at the beginning of the general launch of Phase I and be completed in approximately 6 months, allowing time for their results to be fully considered in the construction of the information/process model. The Laboratory prototypes and pilots of certain future operations, such as the new regional intelligence centers, and the Training activities will continue throughout Phase I. Some of their activities will be constrained by the other activities. For example, regional modelling is dependent on GDR restructuring and training, and cannot be developed at the outset for some of the technologies which will only be selected in months 14 through 17 of Phase 1. However, many of the activities are not similarly constrained and preliminary results from prototype and operational modeling activities will be integrated into the information/process model and IT framework, as they become solidified. The IT Framework activity is conducted entirely during the last semester of Phase 1, because it needs for the model to be relatively complete (and static) while it is being developed. - 52 - SCOPE OF WORK & DELIVERABLES 11. The responsibilities of the residential advisor will include: (a) preparation of an integrated planning document for the modernization of the core tax administration business processes (audit, collections and returns processing) and management over the next five years--to be completed within six months; (b) identifying upfront tasks and training programs (including study tours abroad) that can be carried out to prepare for and initiate the business process reforms; (c) assisting the PMU to coordinate and otherwise manage the various activities and consultancies proposed to be carried out under this Component, including preparation of procurement packages, and ensuring consistency in the timing and recommendations of various efforts and their technical quality; (d) providing technical guidance to GDR staff in the design and implementation of change, including draft legislation, procedures and forms; (e) assisting the PMU to prepare detailed work plans for the Working Groups in charge of specific tasks and to monitor their implementation; and (f) assisting the PMU to prepare interim working papers and reports as needed or requested by the Director General, and quarterly progress reports for the Bank. COMMUNICATIONS AND REPORTING 12. This consultancy will be conducted in the capital city of Ankara, in the Republic of Turkey. The consultants will report to the Director General of Revenues through the Head of the PMU. The consultants will need to maintain an intensive collaboration with the PMU, as well as close liaison with consultants assisting with other activities. The lead consultant will be an ex officio member of the Project Management Unit. The PMU will ensure that the team is provided with translation, administrative assistance and counterpart personnel as required. LEVEL OF EFFORT AND TIMING 13. This assignment is expected to require roughly 36 consultant months during the period November 1995 to June 1997, to be delivered by a team from the United States Internal Revenue Service (IRS). The Government's decision to assign this task to the IRS is based on its desire to adopt certain aspects of the organization and business process models of the IRS. The team will comprise one permanent adviser (the lead consultant), who is highly qualified and experienced in tax administration management, and a number of experts in various areas of tax administration business processes, e.g., audit, collections and returns processing, who will carry out short term assignments. The Advisory team will commence activities in Ankara about one-two months before most of the other technical assistance begins, in order to allow adequate time for familiarization and more detailed planning. Republic of Turkey Ministry of Finance General Directorate of Revenues (GDR) Public Financial Management Project (PFMP) Tax Administration Component Terms of Reference CONSULTANCY 2: PROVISION OF CONSULTANCY SERVICES FOR STUDIES FOR THE REORGANIZATION OF THE GENERAL DIRECTORATE OF REVENUES: (a) ORGANIZATION STUDY (b) THIRD PARTY INFORMATION STUDY (c) BANKING SECTOR STUDY (d) WITHHOLDINGS STUDY INTRODUC'MON 1. The Government of Turkey (GOT) is embarking upon a program that will revitalize substantially its Tax Administration system. This process is fairly advanced, and a number of seminal studies, conducted under the auspices of a grant from the Government of Japan, have made extensive recommendations for modernization and reform. Implementation is to be funded by the GOT as one component of an omnibus project--the Public Financial Management Project (PFMP)--which is to be financed in part by two successive loans from the World Bank. The PFMP consists of the following major components: * Tax Administration * Expenditure and Personnel Management * Customs Administration. 2. Overall responsibility for the supervision of the Tax Administration Component is vested in the Undersecretary in the Ministry of Finance (MOF). The Director General of the General Directorate of Revenues (GDR) is responsible for the management of the component. A Project Management Unit (PMU), headed by a Deputy Director General, is responsible for coordination of component activities. Specific tasks are to be carried out by Working Groups comprised of Ministry of Finance staff, assisted by external consultants. The heads of the Working Groups are members of the PMU. 3. These terms of reference describe the technical assistance required for the conduct of four studies of the GDR organization that will provide analyses and recommendations regarding the restructuring of the Directorate and assistance in planning and effecting the restructuring. In Phase I, the results of the studies will provide input for management decisions regarding the restructuring and to the process re-engineering activities being undertaken under another terms of reference. In Phase II, input from the process re-engineering activities will be factored into organizational planning at a more detailed level, to assist in the implementation of required changes. - 54 - BACKGROUND TO THE TAx ADM[NISTRATION COMPONENT 4. The primary goal of the Tax Administration Component is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at strengthening the compliance enforcement capability of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The envisaged institutional changes will follow up on recent tax policy reforms that included the closure of a number of corporate "loopholes" and other measures aimed at expanding the tax base and improving compliance. The tax administration component also will seek to ensure the sustainability and predictability of the expected revenue increases through the modernization of organizational arrangements, procedures and computer based systems. Activities will also be directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. 5. A program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing and policy formulation. The proposed changes would seek to: (a) Restructure central, regional and local tax agencies in order to achieve a more functional and strategic orientation in the GDR (b) Improve coverage of the individual tax payer base and provide for better system integration of a number of major tax sources (c) Develop and implement modern automated systems for core tax administration functions and management (d) Develop and implement a more aggressive and complete compliance enhancement strategy, notably through the establishment of a third party tax intelligence system for auditing and collections (e) Strengthen tax policy formulation through the establishment of a Policy Analysis Unit and the development of a suite of tax policy models (f) Improve taxpayer service (g) Strengthen GDR human resources through training and study tours to accomplish and sustain these objectives. 6. The authorities' plan is reach these objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the process of administrative reform in the GDR and lay a solid foundation for a restructuring of the - 55 - organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. 7. Activities during the first phase (1995-97) will be aimed at introducing a redefinition of the tax administration system in Turkey, with changes envisaged in organization and procedures, the legal and regulatory frameworks, and human resources. Resources are required for: (a) In-house advisory services to help refine further the medium-term modernization and reform program for tax administration business processes and management, and to help manage Phase I activities (b) An organizational study to establish the overall framework for restructuring the GDR to improve its effectiveness and efficiency (c) Design studies and pilot activities to establish the detailed requirements and choices for hardware, systems software, communications design and applications development tools for the restructured GDR (d) Recruitment and training of IT staff to enhance the in-house capability of the GDR to develop and sustain its information technology investments (e) An assessment of the policy-making process and the information flows on which policy decisions are based, with a view to designing a tax Policy Analysis Unit within the GDR, and development of analytical and operational tax models, with appropriate training of GDR staff (f) Study tours abroad for key GDR staff (g) Project management support services. 8. Phase 11 (1996-2001) would see an expansion of the advisory services program, notably in the areas of audit, collections, returns processing and many aspects of the supporting IT infrastructure, as well as modern tax administration business management. The envisaged Policy Analysis Unit would also be made operational during this phase, and would use the proposed models to conduct a detailed analysis of the current tax system, and to perform an evaluation of various policy options. Consultants may be needed in Phase II to provide guidance to the PAU, however, the objective is to develop an operational unit within the GDR that is sufficiently trained in the construction and use of analytical tools and models to perform an on-going tax policy analysis function. 9. Other Phase II activities in the IT area would cover the upgrading of existing central and regional IT assets of the GDR, acquisition and installation of IT products at a number of new regional offices, development and delivery of a broad-based training program for GDR staff and computers and ancillary equipment for a restructured and rationalized local tax office network. The main remaining cost elements for Phase II would be: (a) site preparation; (b) a management consultancy to assist the GDR in its reorganization and the rationalizing of the network of local - 56 - offices; and (c) enhanced project management support services. The World Bank is expected to provide financial support for the Phase II activities through a second PFMP loan. DESCRIPTION OF PHASE I AcTIvrrES 10. Based on the work that has already been carried out and the information now available, priority in Phase I is to be given to tasks that accomplish the following: (a) Implement improved organizational structures and practices within the tax administration affecting most functional processes and provide flexibility of design for the tax administration to evolve smoothly in the future. An example of the latter point is provided by the current debate over whether the scope of tax collection functions should be extended to include collections of social security contributions, and health and unemployment insurance premiums. This should represent a logical extension of the tax administration's activities in the area of payroll withholdings, and should not add an insupportable burden to the work program of the GDR. In short, the future operational systems will be designed to accommodate reasonable changes in functionality and workload expansion. (b) Improve the content of the taxpayer masterfile, both individual and business, which is known to possess major gaps in coverage as well as deficiencies in the quality of taxpayer locator information. This masterfile will include: * Sub-systems containing tax return and assessment data to assist in returns processing * A taxpayer account module that will track an account from the pre- payment stage to final payment, identifying transactions such as appeals, status of the account, payments and corrections/adjustments * The capability to issue payment commands, which will be accessed by local offices through their respective regional computing centers * A taxpayer delinquency database to identify non-filers or stop-filers * A MIS to provide statistical information which will assist management in ascertaining baseline measurements to monitor employee performance and resource requirements, and to conduct trend analysis. (c) Provide for better integration of the various tax information sources, which are currently processed as separate entities. This includes withholding, third party information, banking and other financial information relative to other entity information (e.g., name, address) and appropriate cross referencing. - 57 - (d) Introduce new mechanisms to the requirements of tax administration designed to increase voluntary compliance and detect non-compliance--the former will be supported by enhanced service to tax clients, the latter by the development of new intelligent systems support for the audit and collection functions. (e) Develop an enhanced capacity for tax policy analysis and modelling to allow for the design of new taxes to replace the distortionary extrabudgetary funds levies and to strengthen the revenue side of budget preparation more generally, including through the design of a Policy Analysis Unit and appropriate training. (f) Expand considerably the interface with the private banking system. The past reliance on state banks has been identified as a source of significant time delay (and a source of lost revenue) in the existing collection process, and of difficulties for taxpayers due to the failure to remit payment receipts and monies to the GDR in a timely fashion. A study will be conducted in Phase I of the project to evaluate alternative methods for processing payments made through banks. The results of this study will also cover part of the requirements of the Expenditure and Personnel Management component of the PFMP as regards the flow of public monies through the banking system. SCOPE OF WORK 11. The GDR goal is to restructure its management and administrative organization so as to reduce fragmentation of managerial authority and achieve a more functional and strategic orientation in the directorate. A three tier model is currently proposed with a solidly developed managerial infrastructure at each level, oversight responsibilities invested in each higher level, with ultimate command at the central level of the GDR. The restructuring will establish a number of new regional directorates under the supervision of the Director General, as defined in Decree Law 516, Supplementary Articles 8 and 9, August 20, 1993. A top level regional management structure is specified in the new legislation, but the directorate functions and work structures remain general. It is envisaged that the new directorates will provide a regional focus for "tax intelligence" and related audit and collections functions, as well as provide managerial oversight, training and IT support for a restructured and fully automated local office network. 12. The Organization Study will provide assistance in restructuring of the GDR and in developing revised legislation, regulations and manuals defining the organization and its personnel administration in areas affected by restructuring and process re-engineering, described below. It will cover authority structures, unit responsibilities and, in some areas, position definitions, career paths and new skill/training requirements. The study is to be done in two stages. The first stage, to be completed in the first three to four months of activity will provide results to support management decisions regarding organization design and human resource re-alignment plans that are critical to the other project activities being conducted concurrently in this phase of the project. The second stage will provide support for effecting the restructuring. Results from both stages, together with organization decisions, will be incorporated into the information process model, IT framework, and related modelling activities discussed below. - 58 - 13. Results from the Organization Study are expected to confirm the benefits of the proposed three-tier model and to determine required changes in the organization, legislation, and human resources. The review will cover current staffing levels and skill mixes, workload distribution, and managerial span of control for the new middle tier and the specific adjustments that will be necessary, in all areas, to implement the structure that has been projected. The study will also address the position and performance responsibilities in each organizational component at all levels. 14. Three smaller, specific-topic studies will be conducted in parallel with the Organization Study, the results of which will be reflected in the second stage of the main study. These supplementary studies will fill information gaps in several key areas: (a) the role of the Banking System in tax administration; (b) the potential for obtaining Third-Party Information for supporting an evolving "tax intelligence" function in the proposed new regional directorates; and (c) the requirements for consolidating all public financial Withholding Mechanisms within the GDR--specifically, health insurance premiums, social security contributions and unemployment insurance premiums. The additional information from these studies is expected to be incorporated into the organization study, as they become available over the first six months of Phase I of the Tax Administration Component plan. For instance, a decision to include revenue collections on behalf of the Social Security Administration in the operations of the GDR would represent a logical extension of the tax administration's activities in the collection of personal income tax withholdings. It would also represent a significant change in the workload and operational (manual and technical) interface with other government organizations that may affect the restructuring objective. 15. Other independent parallel project activities will establish the linkage between the business needs of the organization and the application of IT. Using well established systems engineering methodologies, they will determine the appropriate level of IT activity within the new regional directorates and the technical interfaces needed to support the re-design of processes--systems and procedures--affecting functional operations. They will identify the various information needs at all levels, as well as define the major processes that draw upon that information. In a second stage, it will integrate the results from the first stage and the Organization Study, as well as provide input to the second stage of the Organization Study. These activities also will develop prototypes and models of new operational entities that, together with other information, contribute to developing a framework and requirements for the acquisition and deployment of computer hardware, system software and the necessary communications products. The end result will represent the "blueprint" for the construction of the new tax administration's IT infrastructure. Deliverable #1 - Organization Study 16. The purpose of this study is to perform the analyses required by GDR to determine the most effective organizational structure, authority delegations, and management controls, to define the necessary organization and personnel administration manual changes that will be necessary, to determine any training requirements, and to develop specific, detailed plans for effecting the restructuring. It will include the following: - 59 - (a) review of the current organization and authority structure, workload distribution, and personnel administration structures; (b) definition of alternative structures and analyses of the impact of changes on the existing organization; (c) elaboration of the responsibilities and authorities needed for the structure to be implemented; (d) identification and modification of organization authority and other related manuals; (e) determination of the effect of changes in responsibility on the types of work to be done and the formal positions that will be affected; (f) estimation of the workload on the affected organizational entities by functional area and determination of the organization unit structures, including authority and other related manuals; (g) development of operating concepts and scenarios for the organizational entities to be modified; (h) identification of the organization and personnel administration changes that may be required to implement the restructuring and the modification of related administrative manuals; (i) identification of training required to effect changes in operations and jobs; and (j) preparation of strategies and plans for carrying out the restructuring. 17. Because of its critical importance to the overall restructuring effort, the first stage of this study will focus on developing the information essential to management decisions regarding the establishment of the new regional directorates. Completing this stage and reaching these decisions will constitute a key milestone in the Tax Administration Component. As the decisions become solidified, the second stage effort will shift to completing the work needed to effect formally the restructuring and to incorporating the changes resulting from process restructuring, already discussed. For this latter stage, a dynamic interchange of information will be required between this study and the other activities being conducted in Phase I of the project component in order to maintain consistency in the end results. - 60 - 18. The major tasks to be performed in conducting the Organization Study are as follows: Stage 1. (1) Review the existing organization and proposed plans for restructuring; (2) Define alternatives that may be considered and analyze the impacts on existing and proposed organizational structures, organizational entities, and operations; (3) Prepare issue papers, draft enabling legislation and orders and recommendations for GDR management; Stage 2. (1) Develop necessary enabling administrative documentation, such as organization and personnel manual changes, covering authorities, and supporting implementation proposals covering staffing, phasing, and staff orientation and training related to proposed changes; (2) Incorporate any modifications in the organization and operating units that result from process re-engineering activities; (3) Prepare analysis and advisory reports, as may be appropriate, throughout the duration of the study; (4) Prepare periodic study status and progress reports as may be required by the General Director or the Head of the PMU; and (5) Prepare final Stage 2 reports. Deliverable #2 - Third Party Information Study 19. This consultancy will prepare a study identifying information that can be obtained from organizations and individuals outside tax administration (third party sources), and used for the purpose of identifying potential non-compliance with tax legislation. This study will assure that all necessary issues are addressed so as to obtain a system that will meet the needs of tax administration, while at the same time fall within the parameters of existing or future legislative guidelines. To this end, there will be a comprehensive review of the availability of information from third party sources conducted in close consultation with audit and collections experts, and GDR IT management. 20. The primary deliverable is a report that provides a framework and implementation plan for the introduction of a third party information system. The report will provide a detailed analysis and recommendations in the following areas: - 61 - (a) Identification of the principal reporting institutions which have the potential to contribute to third party tax information--e.g., mortgage companies, professional associations, unions and retailers of luxury goods; (b) Determination of the types of 3rd party information which are most likely to yield significant downstream results in terms of audit and collections; (c) Determination of the legislative implications and requirements of the various scenarios for accessing 3rd party information; (d) Determination of reporting timeframes and instructions for information providers, coupled with an evaluation of the likely impact of compliance on information-supplying organizations and firms; (e) Recommendations regarding public information approaches which might be contemplated for the introduction of 3rd party mechanisms; and (f) Recommendations concerning the phasing in and launching of a 3rd party information program--in terms of which sources should be exploited early, how the information might be made operational, etc. 21. In addition, the consultant would be required to assist with operational details such as design of legislation, documents and notices to taxpayers, evaluation of pilot activities and preparation of prototype scenarios and study cases. Deliverable #3 - Banking Sector Study 22. This study will ascertain how best to strengthen the role of banking companies in tax collection and other routine tax administration processes, and the capability of these institutions to adapt to the envisaged increase of the tax base. The study will assure that all necessary bank related issues are addressed so as to obtain a system that will meet the needs of tax administration, while at the same time fall within the parameters of existing or future legislative guidelines. To this end, the study will be conducted in close consultation with sector experts and IT management from the GDR. 23. The major deliverable from this assignment is a report that addresses the following areas and issues: (a) A complete review of the existing operational interfaces between the Banking system and the tax administration; (b) A determination of the extent of (and rationale for) delays in the deposit of transfers to the tax authorities; (c) A determination of the extent of government loss of income due to deposit delays; - 62 - (d) The development of recommendations regarding the standardization of arrangements for the transfer of funds; (e) The establishment of time frames for the treatment/processing of tax deposits; (f) The development of recommendations regarding the establishment of inter- agency audit trails for tax payments; (g) The determination of the likely impact upon financial organizations of the rationalization and extension of this method of payment; (h) The development of recommendations concerning a future mode of transfer of payments to the tax administration (e.g., electronic transfer); and (i) The identification of any issues relevant to the planned Phase II activities of the PFMP, and its anticipated timeframe for development. Deliverable #4 - Withholdings Study 24. The purpose of this consultancy is to prepare a study that analyzes the information and processes required to accomplish all withholding by the GDR, and to prepare a detailed plan for implementation in Phase II of the PFMP. The study will assure that all necessary issues are addressed so as to obtain a system that will meet the needs of tax administration, while at the same time fall within the parameters of existing or future legislative guidelines. To this end, a comprehensive analysis will address operational procedures in the other agencies currently performing withholding functions, and will determine the impact on both the GDR and the other organizations. In addition the processes associated with the withholding for VAT and VAT monitoring procedures will be analyzed. The analysis for regular withholding will cover operational procedures in the other agencies currently performing withholding functions, and will determine the impact on both the GDR and the other organizations. The analysis for VAT will cover operational procedures, field inspections, and sampling techniques for the matching of information with that of other agencies. 25. Using the information collected during the analysis, a new operational concept will be formulated that addresses all aspects of the withholding and monitoring process by all involved organizational entities. The operational and IT requirements will be outlined, including reporting requirements, manual and computer aided procedures, data flows, data base maintenance, confirmation and other reporting, privacy and security, financial control and audit. The analysis will also propose operating guidelines related to withholding procedures, funds deposit or transfer, distribution of collected funds and information sharing among involved organizations. 26. The report will achieve the following specific objectives: (a) review and documentation of current withholding methods, including the classes of agents and number of employees subject to withholding, practices in - 63 - use regarding deposits, transfers, distribution of collected funds and information sharing among involved organizations; (b) evaluation of withholding and deposit procedures, with special reference to deposit time frames, GDR monitoring procedures and development of audit trail for corporate withholding and deposit; (c) determination of scenarios for the development of an operational audit trail for financial institution withholdings; and (d) recommendations for improvement of the current tax withholding function by GDR, notably of the VAT and including recommendations for possible improvements to be accomplished in the next phase of the project, and for expansion to include social, health and unemployment insurance payments, with clear statements of how this expansion would impact the GDR workload and plans for revitalizing the tax administration system in Phase II of the PFMP, including inter-agency connectivity and procedures for distribution of funds. TIMINGS AND LEVEL OF EFFORT 27. This consultancy will be conducted in the capital city of Ankara, in the Republic of Turkey. The lead consultant must maintain a strong local presence during the assignment in order to provide the direction that may be required for the teams working on the different studies, and for the involved GDR Working Groups. The overall program of work is expected to be done over a 15 month period, and require a total of about 40 consultant months of effort. The main Organization Study is expected to be developed over a period of 15 months with a total effort of 24 months. Importantly, the first stage of this study is to be completed within four months of the general launching of the component in February 1996. The Third Party Study should be completed within 6 months with a total of six months of consultant effort. The Banking Study needs to be completed within four months of the general launch of the component, and is estimated to require 6 person-months. The Withholding Study is expected to require about 4 person-months by a senior technical advisor with experience in withholding associated with tax administration. COMMUNICATIONS AND REPORTING 28. The consultants will report to the Head of the Project Management Unit (PMU), and be assisted in performing the work by GDR Working Groups established to design and implement the administrative reforms. The consultants working on the Organization Study will work with an Organizational Reform Working Group. The Third Party Study consultant will work with the Third Party Intelligence Working Group. The Banking Study and Withholdings Study consultants will work with the Collections Working Group. The Heads of the various working groups will provide translation, administrative assistance and counterpart personnel to the consultant teams as required. - 64 - QUALIFICATIONS 29. To be considered, firms will be required to submit qualification profiles for the individual consultants who will conduct the studies. The consultants responsible for the main Organization Study,will be highly qualified and experienced in organization analysis and design, including education and experience in management analysis, organization development, human resource administration and training needs analysis. Prior experience in tax administration reform is highly desirable. Turkish language proficiency is not a requirement, however, fluency in English is indispensable. The consultant for the Third Party study should possess considerable skills and experience in the design and implementation of tax intelligence systems, including legislative aspects. Similarly, the consultants proposed for the Banking Study assignment are expected to possess a broad background and conceptual knowledge of manual and computerized work processes associated with the banking industry as well as the technical skills required to design and implement strategies for electronic funds transfer capabilities within an automated processing system. The withholding consultant would be expected to possess a broad background and conceptual knowledge of manual and computerized work processes associated with tax withholding, the technical skills required to design and implement strategies for withholding from wages and other financial sources, and the managerial and technical knowledge required for planning, developing and training related to a modern automated tax withholding system. The major deliverables are described above. Interested firms will be required to elaborate the definition of these reports in their proposals, which should also contain a detailed work program. The consultants' profiles and technical proposal will be the primary criteria for selection. Emphasis will be placed on proof of having achieved demonstrable results on studies of similar scope and complexity. Republic of Turkey Ministry of Finance General Directorate of Revenues (GDR) Public Financial Management Project (PFMP) Tax Administration Component Terms of Reference CONSULTANCY 3: PROVISION OF CONSULTANCY SERVICES FOR DEVELOPMENT OF: (a) AN INFORMATION/PROCESS MODEL FOR THE REVITALIZED TAX ADMINISTRATION SYSTEM OF THE REPUBLIC OF TURKEY; (b) AN INFORMATION TECHNOLOGY FRAMEWORK FOR THE COMPUTING ENVIRONMENT WHICH WILL SUPPORT IT; AND (c) AN INFORMATION TECHNOLOGY LABORATORY TO SUPPORT PILOTING, TESTING, AND TRAINING ACTIVITIES. INTRODUCTION 1. The Government of Turkey (GOT) is embarking upon a program that will revitalize substantially its Tax Administration system. This process is fairly advanced, and a number of seminal studies, conducted under the auspices of a grant from the Government of Japan, have made extensive recommendations for modernization and reform. Implementation is to be funded by the GOT as one component of an omnibus project--the Public Financial Management Project (PFMP)--which is to be financed in part by two successive loans from the World Bank. The PFMP consists of the following major components: * Tax Administration * Expenditure and Personnel Management * Customs Administration. 2. Overall responsibility for the supervision of the Tax Administration Component is vested in the Undersecretary in the Ministry of Finance (MOF). The Director General of the General Directorate of Revenues (GDR) is responsible for the management of the component. A Project Management Unit (PMU), headed by a Deputy Director General, is responsible for coordination of component activities. Specific tasks are to be carried out by Working Groups comprised of Ministry of Finance staff, assisted by external consultants. The heads of the Working Groups are members of the PMU. These terms of reference provide a description of the technical assistance required by the GOT to implement key infrastructure components of the information technology (IT) environment that will support the restructured Tax Administration system. - 66 - BACKGROUND TO THE TAX ADMINISTRATION COMPONENT 3. The primary goal of the Tax Administration Component is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at strengthening the compliance enforcement capability of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The envisaged institutional changes will follow up on recent tax policy reforms that included the closure of a number of corporate "loopholes" and other measures aimed at expanding the tax base and improving compliance. The tax administration component also will seek to ensure the sustainability and predictability of the expected revenue increases through the modernization of organizational arrangements, procedures and computer based systems. Activities will also be directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. 4. A program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing and policy formulation. The proposed changes would seek to: (a) restructure central, regional and local tax agencies in order to achieve a more functional and strategic orientation in the GDR; (b) improve coverage of the individual tax payer base and provide for better system integration of a number of major tax sources; (c) develop and implement modern automated systems for core tax administration functions and management; (d) develop and implement a more aggressive and complete compliance enhancement strategy, notably through the establishment of a third party tax intelligence system for auditing and collections; (e) strengthen tax policy formulation through the establishment of a Policy Analysis Unit and the development of a suite of tax policy models; (f) improve taxpayer service; and (g) strengthen GDR human resources through training and study tours to accomplish and sustain these objectives. 5. The authorities' plan is reach these objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the process of administrative reform in the GDR and lay a solid foundation for a restructuring of the - 67 - organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. 6. Activities during the first phase (1995-97) will be aimed at introducing a redefinition of the tax administration system in Turkey, with changes envisaged in organization and procedures, the legal and regulatory frameworks, and human resources. Resources are required for: (a) in-house advisory services to help refine further the medium-term modernization and reform program for tax administration business processes and management, and to help manage Phase I activities; (b) an organizational study to establish the overall framework for restructuring the GDR to improve its effectiveness and efficiency; (c) design studies and pilot activities to establish the detailed requirements and choices for hardware, systems software, communications design and applications development tools for the restructured GDR; (d) recruitment and training of IT staff to enhance the in-house capability of the GDR to develop and sustain its information technology investments; (e) an assessment of the policy-making process and the information flows on which policy decisions are based, with a view to designing a tax Policy Analysis Unit within the GDR, and development of analytical and operational tax models, with appropriate training of GDR staff; (f) study tours abroad for key GDR staff; and (g) project management support services. 7. Phase 11 (1996-2001) would see an expansion of the advisory services program, notably in the areas of audit, collections, returns processing and many aspects of the supporting IT infrastructure, as well as modern tax administration business management. The envisaged Policy Analysis Unit would also be made operational during this phase, and would use the proposed models to conduct a detailed analysis of the current tax system, and to perform an evaluation of various policy options. Consultants may be needed in Phase II to provide guidance to the PAU, however, the objective is to develop an operational unit within the GDR that is sufficiently trained in the construction and use of analytical tools and models to perform an on-going tax policy analysis function. 8. Other Phase 11 activities in the IT area would cover the upgrading of existing central and regional IT assets of the GDR, acquisition and installation of IT products at a number of new regional offices, development and delivery of a broad-based training program for GDR staff and computers and ancillary equipment for a restructured and rationalized local tax office network. The main remaining cost elements for Phase II would be: (a) site preparation; (b) a management consultancy to assist the GDR in its reorganization and the rationalizing of the network of local - 68 - offices; and (c) enhanced project management support services. The World Bank is expected to provide financial support for the Phase II activities through a second PFMP loan. DESCRIPTION OF PHASE I ACTIVITIES 9. Based on the work that has already been carried out and the information now available, priority in Phase I is to be given to tasks that accomplish the following: (i) Implement improved organizational structures and practices within the tax administration affecting most functional processes and provide flexibility of design for the tax administration to evolve smoothly in the future. An example of the latter point is provided by the current debate over whether the scope of tax collection functions should be extended to include collections of social security contributions, and health and unemployment insurance premiums. This should represent a logical extension of the tax administration's activities in the area of payroll withholdings, and should not add an insupportable burden to the work program of the GDR. In short, the future operational systems will be designed to accommodate reasonable changes in functionality and workload expansion. (ii) Improve the content of the taxpayer masterfile, both individual and business, which is known to possess major gaps in coverage as well as deficiencies in the quality of taxpayer locator information. This masterfile will include: * Sub-systems containing tax return and assessment data to assist in returns processing * A taxpayer account module that will track an account from the pre- payment stage to final payment, identifying transactions such as appeals, status of the account, payments and corrections/adjustments * The capability to issue payment commands, which will be accessed by local offices through their respective regional computing centers * A taxpayer delinquency database to identify non-filers or stop-filers * A MIS to provide statistical information which will assist management in ascertaining baseline measurements to monitor employee performance and resource requirements, and to conduct trend analysis. (iii) Provide for better integration of the various tax information sources, which are currently processed as separate entities. This includes withholding, third party information, banking and other financial information relative to other entity information (e.g., name, address) and appropriate cross referencing. - 69 - (iv) Introduce new mechanisms to the requirements of tax administration designed to increase voluntary compliance and detect non-compliance--the former will be supported by enhanced service to tax clients, the latter by the development of new intelligent systems support for the audit and collection functions. (v) Develop an enhanced capacity for tax policy analysis and modelling to allow for the design of new taxes to replace the distortionary extrabudgetary funds levies and to strengthen the revenue side of budget preparation more generally, including through the design of a Policy Analysis Unit and appropriate training. (vi) Expand considerably the interface with the private banking system. The past reliance on state banks has been identified as a source of significant time delay (and a source of lost revenue) in the existing collection process, and of difficulties for taxpayers due to the failure to remit payment receipts and monies to the GDR in a timely fashion. A study will be conducted in Phase I of the project to evaluate alternative methods for processing payments made through banks. The results of this study will also cover part of the requirements of the Expenditure and Personnel Management component of the PFMP as regards the flow of public monies through the banking system. SCOPE OF WORK & DELVERABLES 10. The purpose of this activity is to assure that system development activities in Phase II are based on a solid foundation in terms of a full understanding of the information requirements and how they relate to the major processes in the tax administration system. To that end, and building on the recent thematic studies, a rigorous examination of the current and proposed tax administration system will be conducted, in close consultation with sector experts and IT management from the General Directorate of Revenues (GDR). Deliverable #1: The Information/Process Model 11. A formal information/process model will be prepared, using an industry standard methodology, and covering the major processes in the full Tax Administration system. This model will be adjusted continually as the results from the four Phase I studies (organization, third party, banking and withholding) described in Consultancy #2 are made available. For example, the study of the Withholding process will provide new information requirements concerning the integration of new processes in support of social insurance and health contributions collections planned for introduction. These requirements will be integrated into the model as they become available. 12. To enable the analysis of information flows (and to permit bidders to gauge more precisely the magnitude of the task at hand), certain high-level assumptions can be made regarding the organization and distribution of future tax administration processing in the Republic of Turkey. Information will flow within a three-tier model consisting of the following logical elements: - 70 - (a) A local tier represents the tax administration's primary operating interface with the tax payer. There are roughly 1000 of these offices, and they are quite dispersed, with a significant number servicing only a few hundred clients. The GDR operates some 400 such offices as "pure" tax offices, of which approximately 90 are already automated. The remainder of the tax offices are combined with the offices of the General Directorate of Accounting. It is anticipated that the pure tax offices will be the focus for automation activity in Phase II. For planning purposes, it is assumed that the technology of the local offices will be PC based; that appropriate linkages to the other tiers will exist; and that the physical/official tax administration database will not be distributed to this level. A decision on the suitability of LAN technology for larger offices is not required for Phase I, and can be determined in the IT framework activities, discussed below. (b) A regional tier provides two primary functions: (a) a management (over- seeing) role for the local offices in any region, and (b) Tax Intelligence services intended to support audit and collections activities. The current complement of three Regional Processing Centers will be expanded, without substantially changing the role of the processing centers. The precise number, functions and staffing of these offices is not available at this time. Currently, two large regional centers in Istanbul and Ankara perform a high volume data entry service for the local offices. A third office in Izmir will shortly acquire this capability. It is then planned to gradually subsume data entry operations from the local offices into these three (and only these three) regional office processing centers. (c) A central tier is the single custodian of the logical tax administration database. This does not preclude the physical distribution of the database at some future time; thus, the model should be sufficiently flexible to accommodate future adjustments of this type. In particular, the central tier is responsible for those portions of the database which are not closely linked to current operations: accumulated longitudinal data on tax administration, etc. These elements of the database would support an enhanced research and development function (not yet defined) which would study the operation of the tax system to provide a policy support service to the GDR. Clearly, this is also a potential source of information for the Tax Intelligence service described for the regional centers. 13. The resulting model(s) will be suitable to support downstream database design activities, and to serve as a metadata repository for application development. This could constitute a useful physical recording medium for the results of this activity. It is anticipated that the use of IBM DB2 data dictionary/directory facilities may be mandated by the GDR since the GDR currently has a sizable investment in IBM DB2 technology. - 71 - Deliverable #2: The Information Technology Framework 14. A formal Information Technology Framework (ITF) will be prepared which will integrate the results of the studies conducted in Phase I of this component -- particularly the adjusted information/process model, and the assumptions on which it is based. The document will define broadly the IT framework which addresses the business needs of the project. It will have two components: (a) ITF Part 1 -- will approximate an IT strategic plan for the support of tax administration by the GDR. The involvement and 'buy in' of senior IT management at the GDR will be required. (b) ITF Part 2 -- specifies the technical environment for all tax administration processing which encompasses hardware, commercial software, communications, and security considerations. It shows clearly those IT components of the existing environment which can be retained, and identifies those new IT components which are to be replaced or added. It will be designed to the level of detail required to estimate and to plan overall procurement activities for Phase II. Additionally, where it is clear that certain processing requirements will be addressed serially (as full functionality of the revitalized tax administration system is achieved over time), the ITF Part 2 document will indicate the possibilities for staging the required acquisitions. 15. A key feature of the ITF Part I is its choice of a set of enabling technologies which is coherent and based on internationally accepted dejure and defacto standards. Specific product selections will be a secondary consideration. For example, the ITF's major commitment for a data management technology will in all likelihood be SQL; a secondary consideration might be a commitment to IBM's implementation of standard SQL through its relational database product DB2, or under client server technology and with modern tools/RDBMS products. This logic will be extended to other areas of choice within the ITF Part 1. 16. The ITF Parts I and 2 will consider the local market conditions in choosing technologies and products--i.e., local content plus availability and serviceability considerations. 17. The ITF Part 1 will assume a 5-year view of technology. This will assure that older technologies which are nearing the end of their useful lives, as well as immature technologies--which might pose unacceptable risks for a tax administration system wherein the consequence of error is relatively great--can be avoided. 18. The ITF Part I will have a role to play beyond the relatively immediate challenge of providing a technology baseline for the development of the ITF Part 2, and for support of the funding decisions in Phase II of this project. In addition, the ITF will be of a form suitable for use as a strategic planning document for the management of IT in the future. Thus, the plan will be adjusted annually by the GDR, and used to plan and manage future IT acquisitions and technology replacement. - 72 - 19. The strategic framework developed for the ITF Part I will be applied in guiding the development of the specific IT environment proposed (in the ITF Part 2) for Phase II of the Tax Administration project. Deliverable #3: The IT Laboratory to Support Prototyping, Testing, and Training Activities. 20. An IT Laboratory facility will be established which will feature representative samples of the major technological elements of the future tax administration system. It is expected to use this facility for a number of tax administration purposes. (a) The IT Laboratory will provide a test-bed for 'proof of concept' studies required in Phase I and Phase II of the project. This may be applied to the testing of technologies in combination, to the piloting of important user interfaces, and to the development of performance measures. (b) The IT Laboratory will be of sufficient size to be used as a model office which can simulate the 3-tier-network for application testing. (c) The IT Laboratory will support the development and presentation of Training--both for the GDR technical staff, and for representative end-users of the new system components. (d) The IT Laboratory will function additionally as a demonstration center, where the elements of the new tax administration system can be show-cased to a variety of audiences--for management review, etc.. 21. Because the IT Laboratory will be constructed from representative technologies of the new tax administration system, its construction is reliant on the (partial) results of the two other activities in this Terms of Reference. Consequently, it is expected that it can be constructed over the duration of Phase 1, as the key technologies are identified. In addition, it is envisaged that the evolving Laboratory will be used to validate technology choices being made in other activities under this Terms of Reference. 22. About US$1.6 million has been allocated for the capital requirements of the IT Laboratory--covering the cost of acquisition of accommodation elements, hardware (two mid-range computers, 32 Pcs, LAN wiring, communications gear to link to remote mainframes and to the local tier), software (data management software, LAN, office automation elements, tools for the support of system development, etc.), and a rich blend of aids for training and demonstration, including multi-media development tools. The component implementation plan also provides for the participation of 10 GDR technical trainees for a duration of 9 months. TIMING AND LEVEL OF EFFORT 23. The information/process modeling activities will be timed to begin with the general launching of Phase I activities. The model must be completed in 9 months. The construction of the ITF will follow immediately the completion of the information/process modeling activities. It - 73 - must be completed 12 months after the general launch of this component: i.e., it must be completed within a 3 month period. The IT Laboratory portion of this consultancy will be active during 16 of the 18 months allocated for Phase I, with emphasis on the second half of Phase I, as more elements of the technology plan become defined. 24. It is anticipated that some overlapping of the activities referenced in the preceding paragraph may be possible. For instance, it is anticipated that the construction of the IT Laboratory can draw on some of the same key individuals who are working on the information/process models, and who may wish to use the facilities of the Laboratory to test and validate their solutions. That is one important rationale for combining these two items in the same terms of reference. It is also anticipated that there will be a carryover of key technical personnel from the laboratory construction activity to the definition of the ITF. Clearly, this would accelerate the learning curve for the involved GDR staff and consultants. Given the importance that attaches to the timely execution of proposed activities, and the regional and local office dimensions, provision has been made for a total effort of 150 months for this consultancy. The exact amount of effort required will depend on the precise skills mix of the consultant team and the amount of overlap that can be built into the team's work program and, in practice, should be somewhat less. COMMUNICATIONS AND REPORTING 25. This consultancy will be conducted in the capital city of Ankara, in the Republic of Turkey. It may be possible for the leader of this consultancy to draw some of the required expertise from remote sources, or to bring experts in and out of the local environment on an as- needed basis. That is acceptable. However, the consulting team must maintain a strong local presence at all times. 26. Modeling activities will require liaison with sector experts, and with other consultants conducting related studies mentioned earlier in this terms of reference document. Additionally, liaison with IT management of the GDR will be required during the development of the ITF Part I. In contrast, the development of the ITF Part II is viewed as a relatively independent and highly technical activity. 27. Each of the three component tasks of this Terms of Reference will report to the Head of the PMU, and be assisted in performing the work by an Automation Working Group established to design and implement IT changes, investments and training. The Head of this Working Group will provide translation, administrative assistance and counterpart personnel to the consultant team as required. QUALIFICATIONS 28. Bidders will be required to submit qualification profiles for consultants who will form the team. These qualifications will form an important part of the bid evaluation. Emphasis will be placed on proof of having achieved demonstrable results on projects of similar scope and technical complexity in the past. Proposals will be required to include a framework for the modelling exercise as well as a workplan. The lead consultant must have the ability to draw - 74 - upon required specialties dynamically as the need presents itself, and a record of successful delivery of similar projects in an international environment. The team as a whole will be assessed on the suitability of the proposed skills/experience mix. 29. Fluency in English is essential. Knowledge of the Turkish language is also highly desirable, and would be important for the successful execution of Deliverables #2 and #3. Republic of Turkey Ministry of Finance General Directorate of Revenues (GDR) Public Financial Management Project (PFMP) Tax Administration Component Terms of Reference CONSULTANCY 4: PROVISION OF CONSULTANCY SERVICES TO STRENGTHEN IN-HOUSE INFORMATION TECHNOLOGY CAPABILITIES INTRODUCTION 1. The Government of Turkey (GOT) is embarking upon a program that will revitalize substantially its Tax Administration system. This process is fairly advanced, and a number of seminal studies, conducted under the auspices of a grant from the Government of Japan, have made extensive recommendations for modernization and reform. Implementation is to be funded by the GOT as one component of an omnibus project--the Public Financial Management Project (PFMP)--which is to be financed in part by two successive loans from the World Bank. The PFMP consists of the following major components: * Tax Administration * Expenditure and Personnel Management * Customs Administration. 2. Overall responsibility for the supervision of the Tax Administration Component is vested in the Undersecretary in the Ministry of Finance (MOF). The Director General of the General Directorate of Revenues (GDR) is responsible for the management of the component. A Project Management Unit (PMU), headed by a Deputy Director General, is responsible for coordination of component activities. Specific tasks are to be carried out by Working Groups comprised of Ministry of Finance staff, assisted by external consultants. The heads of the Working Groups are members of the PMU. These terms of reference describe an initial training program to be delivered to GDR information technology (IT) staff in order to enable them to carry a major share of downstream IT development work. BACKGROUND TO THE TAx ADMINISTRATION COMPONENT 3. The primary goal of the Tax Administration Component is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at strengthening the compliance enforcement capability of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The envisaged institutional changes will follow up on recent tax policy reforms that included the closure of a number of corporate "loopholes" and other measures aimed at expanding the tax base and improving compliance. The tax administration component also will seek to ensure the sustainability and predictability of the expected revenue increases through the modernization of - 76 - organizational arrangements, procedures and computer based systems. Activities will also be directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. 4. A program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing and policy formulation. The proposed changes would seek to: (a) restructure central, regional and local tax agencies in order to achieve a more functional and strategic orientation in the GDR; (b) improve coverage of the individual tax payer base and provide for better system integration of a number of major tax sources; (c) develop and implement modern automated systems for core tax administration functions and management; (d) develop and implement a more aggressive and complete compliance enhancement strategy, notably through the establishment of a third party tax intelligence system for auditing and collections; (e) strengthen tax policy formulation through the establishment of a Policy Analysis Unit and the development of a suite of tax policy models; (f) improve taxpayer service; and (g) strengthen GDR human resources through training and study tours to accomplish and sustain these objectives. 5. The authorities' plan is reach these objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the process of administrative reform in the GDR and lay a solid foundation for a restructuring of the organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. 6. Activities during the first phase (1995-97) will be aimed at introducing a redefinition of the tax administration system in Turkey, with changes envisaged in organization and procedures, the legal and regulatory frameworks, and human resources. Resources are required for: (a) In-house advisory services to help refine further the medium-term modernization and reform program for tax administration business processes and management, and to help manage Phase I activities - 77 - (b) An organizational study to establish the overall framework for restructuring the GDR to improve its effectiveness and efficiency (c) Design studies and pilot activities to establish the detailed requirements and choices for hardware, systems software, communications design and applications development tools for the restructured GDR (d) Recruitment and training of IT staff to enhance the in-house capability of the GDR to develop and sustain its information technology investments (e) An assessment of the policy-making process and the information flows on which policy decisions are based, with a view to designing a tax Policy Analysis Unit within the GDR, and development of analytical and operational tax models, with appropriate training of GDR staff (f) Study tours abroad for key GDR staff (g) Project management support services. 7. Phase 11 (1996-2001) would see an expansion of the advisory services program, notably in the areas of audit, collections, returns processing and many aspects of the supporting IT infrastructure, as well as modern tax administration business management. The envisaged Policy Analysis Unit would also be made operational during this phase, and would use the proposed models to conduct a detailed analysis of the current tax system, and to perform an evaluation of various policy options. Consultants may be needed in Phase II to provide guidance to the PAU, however, the objective is to develop an operational unit within the GDR that is sufficiently trained in the construction and use of analytical tools and models to perform an on-going tax policy analysis function. 8. Other Phase II activities in the IT area would cover the upgrading of existing central and regional IT assets of the GDR, acquisition and installation of IT products at a number of new regional offices, development and delivery of a broad-based training program for GDR staff and computers and ancillary equipment for a restructured and rationalized local tax office network. The main remaining cost elements for Phase II would be: (a) site preparation; (b) a management consultancy to assist the GDR in its reorganization and the rationalizing of the network of local offices; and (c) enhanced project management support services. The World Bank is expected to provide financial support for the Phase II activities through a second PFMP loan. DESCRIPTION OF PHASE I AcTIviTEs 9. Based on the work that has already been carried out and the information now available, priority in Phase I is to be given to tasks that accomplish the following: (a) Implement improved organizational structures and practices within the tax administration affecting most functional processes and provide flexibility of design for the tax administration to evolve smoothly in the future. An - 78 - example of the latter point is provided by the current debate over whether the scope of tax collection functions should be extended to include collections of social security contributions, and health and unemployment insurance premiums. This should represent a logical extension of the tax administration's activities in the area of payroll withholdings, and should not add an insupportable burden to the work program of the GDR. In short, the future operational systems will be designed to accommodate reasonable changes in functionality and workload expansion. (b) Improve the content of the taxpayer masterfile, both individual and business, which is known to possess major gaps in coverage as well as deficiencies in the quality of taxpayer locator information. This masterfile will include: * Sub-systems containing tax return and assessment data to assist in returns processing * A taxpayer account module that will track an account from the pre- payment stage to final payment, identifying transactions such as appeals, status of the account, payments and corrections/adjustments * The capability to issue payment commands, which will be accessed by local offices through their respective regional computing centers * A taxpayer delinquency database to identify non-filers or stop-filers * A MIS to provide statistical information which will assist management in ascertaining baseline measurements to monitor employee performance and resource requirements, and to conduct trend analysis. (c) Provide for better integration of the various tax information sources, which are currently processed as separate entities. This includes withholding, third party information, banking and other financial information relative to other entity information (e.g., name, address) and appropriate cross referencing. (d) Introduce new mechanisms to the requirements of tax administration designed to increase voluntary compliance and detect non-compliance--the former will be supported by enhanced service to tax clients, the latter by the development of new intelligent systems support for the audit and collection functions. (e) Develop an enhanced capacity for tax policy analysis and modelling to allow for the design of new taxes to replace the distortionary extrabudgetary funds levies and to strengthen the revenue side of budget preparation more generally, including through the design of a Policy Analysis Unit and appropriate training. - 79 - (f) Expand considerably the interface with the private banking system. The past reliance on state banks has been identified as a source of significant time delay (and a source of lost revenue) in the existing collection process, and of difficulties for taxpayers due to the failure to remit payment receipts and monies to the GDR in a timely fashion. A study will be conducted in Phase I of the project to evaluate alternative methods for processing payments made through banks. The results of this study will also cover part of the requirements of the Expenditure and Personnel Management component of the PFMP as regards the flow of public monies through the banking system. SCOPE OF WORK & DELIVERABLES 10. The purpose of this activity is to assure that the skill level of the IT staff of the GDR is raised sufficiently to assure that they can participate fully in the application development process planned for Phase II of the project, and to adequately support the major technologies which will underlie those applications. The IT training consultants will work closely with the GDR's IT management team. It is expected that the consultants will develop and provide detailed classroom training on the above technical subjects and other computer applications or techniques as defined in the plan. The consultant firm is expected to prepare summary progress reports at the end of each course. These reports will indicate each students progress and attendance in the training. 11. Parallel to the work of this consultancy, there will be a major activity which seeks to develop a comprehensive IT framework for the GDR. This framework will choose the major technologies to be employed in constructing the future revitalized tax administration system. Some existing technologies will be confirmed; some existing technologies will be targeted for abandonment; new technologies will be identified for exploitation. Consequently, the work outlined for this consultancy must remain flexible to the GDR's technology directions as they are identified in the evolving framework document. For example, in the early stages of the consultancy, it would be wise to schedule training in core-skills areas which are relatively well insulated from possible technology changes; and, it would be unwise to proceed with early instruction in (for example) Novel networking skills. Deliverable #1 12. This consultancy will prepare a skills inventory of the IT staff of the GDR. This inventory will form the basis of consultations with IT management of the GDR, to prepare a needs assessment, and to develop a syllabus of training. Deliverable #2 13. Working closely with the IT management of the GDR, the consultants will develop courseware for classroom and/or hands-on training on technical subjects which address the objectives above. This courseware will become the property of the GDR upon completion of the consultancy, and will be used by their staff (or staff contracted to them) to deliver training. - 80 - Deliverable #3 14. The consultants will deliver classroom and hands-on training to the IT staff of the GDR. Sample topics -- to be confirmed in light of the Deliverables above may include: * Techniques and Practices: * Management of Application Development Projects * Systems Engineering Methodology * Testing Strategies * Tools in Support of Systems Development * System Administration (i.e., source, test suites, documentation) * Data Management: * Database Design * Metadata Concepts * Specific Data Management Products (DB2, RDBMS) * Proeramming: * 3GL Programming Practices and Techniques (C-language, C/S Technology and modern GUI (windows-based) * SQL * Support Services: * Operating System Concepts -- for O/S in use at GDR * Communications Concepts -- specific to the technologies chosen for the GDR * Local Area Network Support -- specific to the GDR's technology choices * Wide Area Network Support -- specific to the technology choices of the GDR. * RDBMS and CASE and GUI TIMING AND LEVEL OF EFFORT 15. The training consultant is expected to work closely with DGR Information Technology and Training Department management to develop a detailed IT training program that will result in a significant strengthening of the computer development capabilities of the DGR staff. The assignment is estimated to require approximately 45 consultant months of effort. It is estimated that the training will take place over a 15 month period. The contract is expected to be extended for further IT training activities under a second PFMP loan from the World Bank. - 81 - COMMUNICATIONS AND REPORTING 16. This consultancy will be conducted in the capital city of Ankara, in the Republic of Turkey. It may be possible for the leader of this consultancy to draw some of the required expertise from remote sources, or to bring experts in and out of Ankara on an as-needed basis. That is acceptable. However, the consulting team must maintain a strong local presence at all times. 17. The consultants will report to the Head of the Automation Working Group, who will ensure that the team is provided with administrative assistance and counterpart personnel as required. The lead consultant will be expected to work closely with the management of the GDR both in the IT, and sector areas for their input, and clarifications as are appropriate. The assignment will require liaison with other consultants conducting related studies in the IT area, as well as GDR staff in the Training Department. 18. The consultant team will be required to prepare a detailed training plan indicating the specific training activities, modalities, length of training, number of training days and number of participants in each training activity. The consulting firm will be required to prepare summary progress reports at the end of each course. These reports will indicate each students progress and attendance in the training. QUALIFICATIONS 19. The information technology consultants to be selected for providing the computer training assistance are expected to have a broad technical background in the design and development of information systems related to various computer platforms, computer environments and relational databases. The following are minimum qualifications: (a) Comprehensive technical knowledge in all aspects of information systems, computer hardware and operating system, application software development, developing technical training courses and providing classroom training. The lead consultant must have a minimum of 10 years experience working and operating in both public and private information environment, particularly in the areas of applications development, database dictionaries and administration, structured analysis and programming techniques, data network and telecommunications. (b) A sound technical knowledge of various types of application software with emphasis on IBM DB2 Structured Query Language (SQL), Microsoft Disk Operating System (MS-DOS) Version 6.2, Microsoft Windows for Workgroups, Microsoft Word 6.0 (Turkish Version), Microsoft Excel 5.0 (Turkish Version) and Novel Netware 3.12. (c) Demonstrated relevant experience in organizing training of personnel, and knowledge of X.25 PSDN and other data communication facilities. - 82 - (d) The consultants should be fluent in Turkish. Fluency in the English language is considered an advantage. 20. Firms will be required to submit qualification profiles for consultants who will form the team. These profiles will form an important part of the bid evaluation. Considerable weight will also be placed on proof of having achieved demonstrable results on assignments of similar scope and complexity in the past. Republic of Turkey Ministry of Finance General Directorate of Revenues (GDR) Public Financial Management Project (PFMP) Tax Administration Component Terms of Reference CONSULTANCY 5: PROVISION OF CONSULTANCY SERVICES TO STRENGTHEN TAX POLICY ANALYSIS CAPABILITY INTRODUCTION 1. The Government of Turkey (GOT) is embarking upon a program that will revitalize substantially its Tax Administration system. This process is fairly advanced, and a number of seminal studies, conducted under the auspices of a grant from the Government of Japan, have made extensive recommendations for modernization and reform. Implementation is to be funded by the GOT as one component of an omnibus project--the Public Financial Management Project (PFMP)--which is to be financed in part by two successive loans from the World Bank. The PFMP consists of the following major components: * Tax Administration * Expenditure and Personnel Management * Customs Administration. 2. Overall responsibility for the supervision of the Tax Administration Component is vested in the Undersecretary in the Ministry of Finance (MOF). The Director General of the General Directorate of Revenues (GDR) is responsible for the management of the component. A Project Management Unit (PMU), headed by a Deputy Director General, is responsible for coordination of component activities. Specific tasks are to be carried out by Working Groups comprised of Ministry of Finance staff, assisted by external consultants. The heads of the Working Groups are members of the PMU. These terms of reference describe an assignment to assist with the strengthening of the tax policy analysis capability of the GDR. BACKGROUND TO THE TAX ADMINISTRATION COMPONENT 3. The primary goal of the Tax Administration Component is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at strengthening the compliance enforcement capability of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The envisaged institutional changes will follow up on recent tax policy reforms that included the closure of a number of corporate "loopholes" and other measures aimed at expanding the tax base and improving compliance. The tax administration component also will seek to ensure the sustainability and predictability of the expected revenue increases through the modernization of organizational arrangements, procedures and computer based systems. Activities will also be - 84 - directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. 4. A program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing and policy formulation. The proposed changes would seek to: (a) restructure central, regional and local tax agencies in order to achieve a more functional and strategic orientation in the GDR; (b) improve coverage of the individual tax payer base and provide for better system integration of a number of major tax sources; (c) develop and implement modern automated,systems for core tax administration functions and management; (d) develop and implement a more aggressive and complete compliance enhancement strategy, notably through the establishment of a third party tax intelligence system for auditing and collections; (e) strengthen tax policy formulation through the establishment of a Policy Analysis Unit and the development of a suite of tax policy models; (f) improve taxpayer service; and (g) strengthen GDR human resources through training and study tours to accomplish and sustain these objectives. 5. The authorities' plan is reach these objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the process of administrative reform in the GDR and lay a solid foundation for a restructuring of the organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. 6. Activities during the first phase (1995-97) will be aimed at introducing a redefinition of the tax administration system in Turkey, with changes envisaged in organization and procedures, the legal and regulatory frameworks, and human resources. Resources are required for: (a) in-house advisory services to help refine further the medium-term modernization and reform program for tax administration business processes and management, and to help manage Phase I activities; - 85 - (b) an organizational study to establish the overall framework for restructuring the GDR to improve its effectiveness and efficiency; (c) design studies and pilot activities to establish the detailed requirements and choices for hardware, systems software, communications design and applications development tools for the restructured GDR; (d) recruitment and training of IT staff to enhance the in-house capability of the GDR to develop and sustain its information technology investments; (e) an assessment of the policy-making process and the information flows on which policy decisions are based, with a view to designing a tax Policy Analysis Unit within the GDR, and development of analytical and operational tax models, with appropriate training of GDR staff; (f) study tours abroad for key GDR staff; and (g) project management support services. 7. Phase 11 (1996-2001) would see an expansion of the advisory services program, notably in the areas of audit, collections, returns processing and many aspects of the supporting IT infrastructure, as well as modern tax administration business management. The envisaged Policy Analysis Unit would also be made operational during this phase, and would use the proposed models to conduct a detailed analysis of the current tax system, and to perform an evaluation of various policy options. Consultants may be needed in Phase II to provide guidance to the PAU, however, the objective is to develop an operational unit within the GDR that is sufficiently trained in the construction and use of analytical tools and models to perform an on-going tax policy analysis function. 8. Other Phase II activities in the IT area would cover the upgrading of existing central and regional IT assets of the GDR, acquisition and installation of IT products at a number of new regional offices, development and delivery of a broad-based training program for GDR staff and computers and ancillary equipment for a restructured and rationalized local tax office network. The main remaining cost elements for Phase II would be: (a) site preparation; (b) a management consultancy to assist the GDR in its reorganization and the rationalizing of the network of local offices; and (c) enhanced project management support services. The World Bank is expected to provide financial support for the Phase 11 activities through a second PFMP loan. DESCRIMTION OF PHASE I AcTIVITIEs 9. Based on the work that has already been carried out and the information now available, priority in Phase I is to be given to tasks that accomplish the following: (a) Implement improved organizational structures and practices within the tax administration affecting most functional processes and provide flexibility of design for the tax administration to evolve smoothly in the future. An - 86 - example of the latter point is provided by the current debate over whether the scope of tax collection functions should be extended to include collections of social security contributions, and health and unemployment insurance premiums. This should represent a logical extension of the tax administration's activities in the area of payroll withholdings, and should not add an insupportable burden to the work program of the GDR. In short, the future operational systems will be designed to accommodate reasonable changes in functionality and workload expansion. (b) Improve the content of the taxpayer masterfile, both individual and business, which is known to possess major gaps in coverage as well as deficiencies in the quality of taxpayer locator information. This masterfile will include: * Sub-systems containing tax return and assessment data to assist in returns processing * A taxpayer account module that will track an account from the pre- payment stage to final payment, identifying transactions such as appeals, status of the account, payments and corrections/adjustments * The capability to issue payment commands, which will be accessed by local offices through their respective regional computing centers * A taxpayer delinquency database to identify non-filers or stop-filers * A MIS to provide statistical information which will assist management in ascertaining baseline measurements to monitor employee performance and resource requirements, and to conduct trend analysis. (c) Provide for better integration of the various tax information sources, which are currently processed as separate entities. This includes withholding, third party information, banking and other financial information relative to other entity information (e.g., name, address) and appropriate cross referencing. (d) Introduce new mechanisms to the requirements of tax administration designed to increase voluntary compliance and detect non-compliance--the former will be supported by enhanced service to tax clients, the latter by the development of new intelligent systems support for the audit and collection functions. (e) Develop an enhanced capacity for tax policy analysis and modelling to allow for the design of new taxes to replace the distortionary extrabudgetary funds levies and to strengthen the revenue side of budget preparation more generally, including through the design of a Policy Analysis Unit and appropriate training. - 87 - (f) Expand considerably the interface with the private banking system. The past reliance on state banks has been identified as a source of significant time delay (and a source of lost revenue) in the existing collection process, and of difficulties for taxpayers due to the failure to remit payment receipts and monies to the GDR in a timely fashion. A study will be conducted in Phase I of the project to evaluate alternative methods for processing payments made through banks. The results of this study will also cover part of the requirements of the Expenditure and Personnel Management component of the PFMP as regards the flow of public monies through the banking system. SCOPE OF WORK & DELiVERABLES 10. The objectives of this consultancy are to: (a) design and help establish a Policy Analysis Unit within the GDR, including through a detailed training program; (b) conduct a thorough analysis of the current tax system with a view to providing recommendations for legislative change that would broaden the tax base and enhance the fairness and efficiency of the tax system, including through the rationalization of deductions, exemptions and other preferences; and (c) develop a suite of tax policy simulation models suitable for the design of tax policy changes and for revenue forecasting for the budget. More precisely, the consultant(s) would: (a) Undertake a complete assessment of the policy-making process within the GDR and make recommendations for restructuring the organization of the policy-making function and the information flows on which policy decisions are based. Specifically, the consultant(s) will help design a Policy Analysis Unit, will determine its place within the new organizational structure (jointly with Consultancy #2), will determine the posts and functions of the PAU and detail a training program for the staff of the PAU. (b) Construct analytical models for tax policy to identify potential opportunities for broadening the tax base while maintaining an equitable tax structure and develop specialized databases for use in these models, as well as for independent analysis within the GDR. Separate basic models will be constructed for each indirect tax (valued-added taxes, customs duties and excise taxes) and income tax (company profit taxes, individual income taxes and payroll taxes). Also an integrated model will be developed for examining several of these taxes in combination. A third (revenue receipt tracking) module should offer the capability to map the simulation results generated by different basic revenue estimation models into a receipt projections/monitoring model. The entire system should be driven by user-friendly menus (in both English and Turkish) that facilitate the specification of scenarios and allow for the automatic generation of the necessary reports. The deliverables in this area will also include user's and technical manuals (in English and Turkish), and training for a small group of GDR staff in the use and maintenance of the system. - 88 - (c) Undertake a preliminary analysis of the current tax system with the above models. Phase II will see the application of the models to carry out a more detailed analysis of current tax law and an evaluation of alternative policy options to be considered by policy-makers. (d) Design a detailed training program for the staff of the PAU. Such training should include courses in macro- and micro-economics, tax policy analysis, the use of computers in quantitative analysis and the construction and use of tax policy models. Workshops and oi-the-job training should be part of the overall training program. The type of training needed, especially during the early stages of the activity, will also depend on the skills and background of the staff selected to participate in the Tax Policy Working Group, who will form the core of the proposed PAU. TIMING AND LEVEL OF EFFORT 11. The assignment is estimated to require approximately 18 consultant months of effort, to be delivered in about one year beginning in November 1995. At least six months of this effort should be dedicated to training. Assuming that all data is collected and processed by the end of December, the construction of the revenue simulation system will begin in January 1996 and will be completed in February-June 1996, in time for the Fiscal Year 1997 budget preparation process. GDR staff would be expected to participate actively in the modelling work, and after a few initial sessions to introduce the concepts and modelling software, most training would be expected to be of the hands-on variety. COMMUNICATIONS AND REPORTING 12. This consultancy will be conducted in the capital city of Ankara, in the Republic of Turkey. The consultants would be expected to maintain a strong local presence at all times. The consultants will report to the Head of the Tax Policy Working Group, who will ensure the availability of administrative assistance and counterpart personnel as required. QUALIFICATIONS 13. The selected consultant(s) would have an excellent technical background and at least ten (10) years experience in the design, development and delivery of models and training programs for tax policy analysis. The consultant(s) should be fluent in English. Fluency in Turkish would be considered an advantage. Bidders will be required to submit qualification profiles for the consultant(s) who will carry out this assignment. The profile(s) will form an important part of the bid evaluation. Considerable weight will be placed on proof of having achieved demonstrable results on similar assignments in the past. Republic of Turkey Ministry of Finance General Directorate of Revenues (GDR) Public Financial Management Project (PFMP) Tax Administration Component Terms of Reference CONSULTANCY 6: PROVISION OF CONSULTANCY SERVICES FOR PROJECT MANAGEMENT SUPPORT INTRODUCTION 1. The Government of Turkey (GOT) is embarking upon a program that will revitalize substantially its Tax Administration system. This process is fairly advanced, and a number of seminal studies, conducted under the auspices of a grant from the Government of Japan, have made extensive recommendations for modernization and reform. Implementation is to be funded by the GOT as one component of an omnibus project--the Public Financial Management Project (PFMP)--which is to be financed in part by two successive loans from the World Bank. The PFMP consists of the following major components: * Tax Administration * Expenditure and Personnel Management * Customs Administration. 2. Overall responsibility for the supervision of the Tax Administration Component is vested in the Undersecretary in the Ministry of Finance (MOF). The Director General of the General Directorate of Revenues (GDR) is responsible for the management of the component. A Project Management Unit (PMU), headed by a Deputy Director General, is responsible for coordination of component activities. Specific tasks are to be carried out by Working Groups comprised of Ministry of Finance staff, assisted by external consultants. The heads of the Working Groups are members of the PMU. These Terms of Reference (TOR) are for management support only, and do not substitute for, or contain, the TOR for technical assistance. It is in these TOR to negotiate and determine contractual arrangements, provide payment and give other administrative support to the full range of consultants employed under the Tax Administration Component of the PFMP. BACKGROUND TO iE TAX ADMINISTRATION COMPONENT 3. The primary goal of the Tax Administration Component is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at strengthening the compliance enforcement capability of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The envisaged institutional changes will follow up on recent tax policy reforms that included the closure of a number of corporate "loopholes" and other measures aimed at expanding the tax base and - 90 - improving compliance. The tax administration component also will seek to ensure the sustainability and predictability of the expected revenue increases through the modernization of organizational arrangements, procedures and computer based systems. Activities will also be directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. 4. A program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing and policy formulation. The proposed changes would seek to: (a) Restructure central, regional and local tax agencies in order to achieve a more functional and strategic orientation in the GDR (b) Improve coverage of the individual tax payer base and provide for better system integration of a number of major tax sources (c) Develop and implement modern automated systems for core tax administration functions and management (d) Develop and implement a more aggressive and complete compliance enhancement strategy, notably through the establishment of a third party tax intelligence system for auditing and collections (e) Strengthen tax policy formulation through the establishment of a Policy Analysis Unit and the development of a suite of tax policy models (f) Improve taxpayer service (g) Strengthen GDR human resources through training and study tours to accomplish and sustain these objectives. 5. The authorities' plan is reach these objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the process of administrative reform in the GDR and lay a solid foundation for a restructuring of the organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. 6. Activities during the first phase (1995-97) will be aimed at introducing a redefinition of the tax administration system in Turkey, with changes envisaged in organization and procedures, the legal and regulatory frameworks, and human resources. Resources are required for: - 91 - (a) in-house advisory services to help refine further the medium-term modernization and reform program for tax administration business processes and management, and to help manage Phase I activities; (b) an organizational study to establish the overall framework for restructuring the GDR to improve its effectiveness and efficiency; (c) design studies and pilot activities to establish the detailed requirements and choices for hardware, systems software, communications design and applications development tools for the restructured GDR; (d) recruitment and training of IT staff to enhance the in-house capability of the GDR to develop and sustain its information technology investments; (e) an assessment of the policy-making process and the information flows on which policy decisions are based, with a view to designing a tax Policy Analysis Unit within the GDR, and development of analytical and operational tax models, with appropriate training of GDR staff; (f) study tours abroad for key GDR staff; and (g) project management support services. 7. Phase 11 (1996-2001) would see an expansion of the advisory services program, notably in the areas of audit, collections, returns processing and many aspects of the supporting IT infrastructure, as well as modern tax administration business management. The envisaged Policy Analysis Unit would also be made operational during this phase, and would use the proposed models to conduct a detailed analysis of the current tax system, and to perform an evaluation of various policy options. Consultants may be needed in Phase II to provide guidance to the PAU, however, the objective is to develop an operational unit within the GDR that is sufficiently trained in the construction and use of analytical tools and models to perform an on-going tax policy analysis function. 8. Other Phase 11 activities in the IT area would cover the upgrading of existing central and regional IT assets of the GDR, acquisition and installation of IT products at a number of new regional offices, development and delivery of a broad-based training program for GDR staff and computers and ancillary equipment for a restructured and rationalized local tax office network. The main remaining cost elements for Phase II would be: (a) site preparation; (b) a management consultancy to assist the GDR in its reorganization and the rationalizing of the network of local offices; and (c) enhanced project management support services. The World Bank is expected to provide financial support for the Phase 11 activities through a second PFMP loan. - 92 - DESCRIPTIoN OF PHASE I AcTIvITIEs 9. Based on the work that has already been carried out and the information now available, priority in Phase I is to be given to tasks that accomplish the following: (a) Implement improved organizational structures and practices within the tax administration affecting most functional processes and provide flexibility of design for the tax administration to evolve smoothly in the future. An example of the latter point is provided by the current debate over whether the scope of tax collection functions should be extended to include collections of social security contributions, and health and unemployment insurance premiums. This should represent a logical extension of the tax administration's activities in the area of payroll withholdings, and should not add an insupportable burden to the work program of the GDR. In short, the future operational systems will be designed to accommodate reasonable changes in functionality and workload expansion. (b) Improve the content of the taxpayer masterfile, both individual and business, which is known to possess major gaps in coverage as well as deficiencies in the quality of taxpayer locator information. This masterfile will include: * Sub-systems containing tax return and assessment data to assist in returns processing * A taxpayer account module that will track an account from the pre- payment stage to final payment, identifying transactions such as appeals, status of the account, payments and corrections/adjustments * The capability to issue payment commands, which will be accessed by local offices through their respective regional computing centers * A taxpayer delinquency database to identify non-filers or stop-filers * A MIS to provide statistical information which will assist management in ascertaining baseline measurements to monitor employee performance and resource requirements, and to conduct trend analysis. (c) Provide for better integration of the various tax information sources, which are currently processed as separate entities. This includes withholding, third party information, banking and other financial information relative to other entity information (e.g., name, address) and appropriate cross referencing. (d) Introduce new mechanisms to the requirements of tax administration designed to increase voluntary compliance and detect non-compliance--the former will be supported by enhanced service to tax clients, the latter by the development of new intelligent systems support for the audit and collection functions. - 93 - (e) Develop an enhanced capacity for tax policy analysis and modelling to allow for the design of new taxes to replace the distortionary extrabudgetary funds levies and to strengthen the revenue side of budget preparation more generally, including through the design of a Policy Analysis Unit and appropriate training. (f) Expand considerably the interface with the private banking system. The past reliance on state banks has been identified as a source of significant time delay (and a source of lost revenue) in the existing collection process, and of difficulties for taxpayers due to the failure to remit payment receipts and monies to the GDR in a timely fashion. A study will be conducted in Phase I of the project to evaluate alternative methods for processing payments made through banks. The results of this study will also cover part of the requirements of the Expenditure and Personnel Management component of the PFMP as regards the flow of public monies through the banking system. SCOPE OF WORK & DELIVERABLES 10. Support services are required for the implementation of defined activities of the Tax Administration Component of the PFMP under the following categories: (a) national and international consultants; (b) subcontracts; (c) local training activities; (d) overseas study tours; and (e) operational support services. The responsibilities of the PMSS contractor in relation to the five categories of activity are described below. 11. National and International Consultants. This category covers the recruitment and remuneration of national and international consultants and project support staff. Specifically, the PMSS contractor will be responsible for undertaking the following activities, all in consultation with the Head of the PMU. (a) Negotiating and determining contractual arrangements with international and national consultants approved by the Director General. The terms of reference for each consultancy will be prepared by the PMU and approved by the World Bank (b) Undertaking all kinds of administrative tasks such as regular payment to the consultants, insurance and relevant taxes (c) Undertaking all kinds of administrative tasks for the staff of the PMU, both GDR officials and consultants, such as travel arrangements, payments and per diems; in relation to project related field trips and attendance to national and international meetings, seminars, etc; (d) Keeping financial and accounting records and regular reporting to the Head of the PMU and Director General. - 94 - 12. Subcontracts. This category covers the management of the contracts implied by the foregoing five TOR. It includes planned studies and researches to support the changed procedures, new technology introduction, and institutional development of the GDR's modernization program; supervision of training programs, including management training; development and production of public information materials and other project services as may be required. Specifically, the contractor will be responsible for undertaking the following activities, all in consultation with the Head of the PMU. (a) Issue of Requests for Proposals (RFPs) to the selected firms according to the Terms of Reference (TORs) and the shortlist of firms proposed by the GDR and approved by the World Bank (b) Undertaking necessary activities related to the evaluation of bid proposals, amendments in TORs as requested by the GDR upon the approval of the World Bank; and negotiating and contracting with the successful bidder upon the final approval of the General Director (c) Undertaking all kinds of administrative tasks such as payments to the subcontractor(s) based on the payment plan agreed in their contract and upon the final confirmation of the General Director (d) Keeping financial and accounting records and reporting to the PMU regularly. 13. Local Training Activities. This category covers the management support services for the implementation of all training programs to be organized for GDR and other MOF personnel under this component. Specifically, the contractor will be responsible for undertaking the following activities, all in consultation with the Head of the PMU. (a) Undertaking all kinds of administrative tasks such as advance payments, reconciliation of advance payments and final payments to the regional and local staff and also to the PMU, as the case may be, based on the global training program to be prepared by the GDR and approved by the World bank (b) Keeping financial and accounting records and reporting to the GDR regularly. 14. Overseas Study Tours. This category covers the management support services to the implementation of overseas study tours, which will be provided for management and technical personnel. (a) Undertaking all kinds of administrative tasks such as travel arrangements and payments for each of the fellow and the host institution(s) selected by the GDR and approved by the World Bank (b) Keeping financial and accounting records and reporting to the GDR regularly. - 95 - 15. Operational Support Services. This activity covers the procurement of translation services, office equipment, furniture, and supplies for the PMU to facilitate project activities. (a) Undertaking procurement procedures for translation services, office equipment, furniture and supplies according to the technical specifications and itemized list of requirements prepared by the PMU and approved by the World Bank, and contracting with the successful bidder upon the final approval of the General Director (b) Undertaking necessary activities related to the evaluation of bid proposals, amendments in technical specifications as requested by the GDR upon the approval of the World bank, and negotiating and contracting with the successful bidder upon the final approval of the General Director (c) Undertaking all kinds of administrative tasks such as payments to the subcontractor(s) based on the payment plan agreed in their contracts and upon the confirmation of the General Director (d) Keeping financial and accounting records and reporting to the PMU regularly. INPUTS FROM GENERAL DIRECTORATE OF REVENUES 16. The Project Management Unit (PMU) of the General Directorate of Revenues as the implementation agency is charged with the responsibility to carry out necessary administrative and support activities including the preparation of Terms of Reference, short lists, obtaining no- objections from the World Bank, and any other official clearances as required, approval of contracts, technical review of consultant's performance, and outputs as per the relevant rules and regulations established by the World Bank. 17. The GDR will provide adequate funds in a timely manner from the proceeds of the IBRD loan and its own budget to meet component costs, including the PMSS contractor's administration fee. CONTRACTOR'S ADMINISTRATION FEE 18. The contractor shall indicate, in its proposal, the fee for services such as accounting, payroll, financial reporting, computer time, secretarial and other assistance to be provided. The "administration fee" must be justified by the staffing plan. Any increase or decrease in the amount of administrative costs resulting from increases or decreases in the amount of the services to be provided will be mutually agreed by the GDR and the contractor. - 96 - REVISIONS 19. The following types of revisions may be made to these TOR upon the mutual agreement of both the GDR and the contractor:(a) revisions which do not involve significant changes in the immediate objectives, outputs or activities of a project, but are caused by the rearrangement of inputs already agreed to or by cost increases due to inflation; and (b) mandatory annual revisions which alter the delivery of agreed project inputs or increased expert or other costs due to inflation. 20. In the event of any other changes made in the Loan Agreement that cause any significant decrease or increase in the type and amount of services to be provided by the contractor, the administrative fee may be rearranged upon the mutual agreement of the GDR and the PMSS Contractor. REPORTING, REVIEW, AND EVALUATION 21. The consultant will report to the Head of the PMU, and serve as an ex officio member of the PMU. The assignment will also require close liaison with the In-House Advisory team. The consultant will be required to assist the PMU to prepare period reports covering procurement, disbursement and audit issues to be submitted to the World Bank. TIMING AND LEVEL OF EFFORT 22. This consultancy will be conducted in the capital city of Ankara, in the Republic of Turkey. A professional project management specialist, equipped with the knowledge and skills to ensure the timely provision of support services for the successful implementation of project activities, is required to assist the GDR throughout the period of component execution. Short term consultants would be added on an as needed basis, e.g., translation services. 23. The assignment is expected to start around the beginning of November 1995 and will last until May 1997 in the first instance. It is expected that the assignment will be extended for a further 4-5 years in the context of a second PFMP loan from the World Bank. QUALIFICATIONS 24. Bidders will be required to submit qualification profiles for the consultant who will carry out the assignment. The profile will form an important part of the bid evaluation. The consultant must be fluent in both the English and Turkish languages. Prior experience with World Bank projects is an advantage. The selected consultant would be able to demonstrate superior professional and technical capacity, as well as experience in: (a) Managing and coordinating complex projects of similar magnitude, preferably in the financial complex of large organizations (b) Undertaking large volumes of financial transactions with several different entities within a limited time period. Annex Ic PUBLIC FINANCIAL MANAGEMENT PROJECT Tax Administration Component Detailed Cost Table  H - 闕 & !; 〕！; 手呈籌 l實 鄴哥 它 紛 曇 ,1萬→甲 一66一  Annex ld PUBLIC FINANCIAL MANAGEMENT PROJECT Tax Administration Component Implementation Schedules  4 #4 - a . - - l CD 0> <Di M C.4 (D N > O j < -i0 w - -. C -n - -n <5 ° . 8 81 3 <5 -o - -W5- - .e - 0g cl,cn m e æ 0 Z e-c co - 0 <5 C~"CW :Z M ch cc . . . . . . . ... .. . . . . . . .... . .. .. . - EOT ......................... .....-.... .. . ENN JO >2 ..... .s .. . . . . . . . . . .. .. . . . . . . . . . .  「‘―晋！ 一g0T一  !‘以’& 一乙01一  Public Financial Management Project Tax Administration Implementation Plan 1995 1996 1997 ID Task Narne Duration Start Finish 02 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 03 Q4 Q1 58 Tax Policy Analysis 51.6w 11/1/95 10126/96 59 Policy & Data Assessment & Analysis 16.6w 11/1/95 2/23/96 60 Model Development and Implementation 21.8w 1 /8/96 6/6/96 61 Preparation of Phase 2 Report 8w 5/6/96 6/28/96 62 Training 26w 4/29/96 10/25/96 Task Summary V Rolled Up Progress Progress Rolled Up Task Milestone Rolled Up Milestone