Argentina - Tax Administration Technical Assistance Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16091 PROJECT COMPLETION REPORT ARGENTINA TAX ADMINISTRATION TECHNICAL ASSISTANCE LOAN (3015-AR) November 1, 1996 Public Sector Management and Private Sector Development Division Country Department I Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS December 1, 1989: Currency Unit= Argentine Austral (A) Austral 1.00= 7.8 cents at the official commercial rate January 1, 1992: Currency Unit = Argentine Peso (P) = 10,000 A Peso 1 00 = 0.991 US$ June 1, 1994: Peso 1.00 = 1.00 US$ GLOSSARY OF ACRONYMS AUD[NT Performance Monitoring Component CAPPER Training Component DGI General Tax Directorate ('Direcci6n General Impositiva") DNPF Directorate for Taxpayer Audit Programming ("Direcci6n de Normas y Planes de Fiscalizaci6n") DOSMIL Large Taxpayer Collection System Component EQUIPA Equipment Component GOA Government of Argentina GDP Gross Domestic Product IT Information Technology METFIS Taxpayer Auditing Methodology Component ("Metodologias de Fiscalizaci6n") MOP Memorandum of the President of IBRD to the Executive Directors of the Bank PCR Project Completion Report PIU Project Implementation Unit PPF Project Preparation Facility PSMTAL Public Sector Management Teclnical Assistance Loan PSRL Public Sector Refonm l.oan SAR Staff Appraisal Report SELPER Personnel Recruitment Component SICOFI Sistema de Control de Fiscalizacion SITER Information System on Economically Relevant Transactions SSFP Undersecretariat of Public Fianaces ("Subsecretanra de Finanzas Publicas") STAP Second Tax Adminstration Project TATAL Tax Administration Technical Assistance Loan UNDP UJnited Nations Development Program VAT Value Added Tax (" Impuesto al Valor Agregado") FISCAL, YEAR January I December 31 Vice President: Mr. Shahid Javed Burki Director: Mr. Gobind T. Nankani Division Chief: Mr. Paul Meo Staff Member: Mr. Luis Jose Mejia  FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S A. ROBERT PICCIOTTO Office of the Director-General November 1, 1996 Operations Evaluation MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT Subject: Project Completion Report on Argentina Tax Administration Technical Assistance Loan (Loan 3015-AR) Attached is the Project Completion Report (PCR) for the Argentina Tax Administration Technical Assistance project (Loan 3015-AR, US$6.5 million, approved in FY89 and closed 2.5 years behind schedule in March 1994) prepared by the Latin America and the Caribbean Regional Office, with Part II of the report contributed by the Borrower. The objective of the loan was to increase the efficiency of the General Tax Directorate (DGI) by improving control of tax compliance of large taxpayers, recruiting additional tax inspectors, improving training, tax controls and tax inspection techniques and providing additional computer equipment. These efforts at improving tax administration were considered key to the Government's objective of reducing the fiscal deficit. The loan became effective 11 months behind schedule, (after a new government had taken office and initiated a new economic reform program) and was amended twice, in September 1991 and September 1993. Other loans with similar or complementary objectives include a Public Sector Reform Technical Assistance Loan, (US$23 million, FY9 1), a Public Sector Reform Loan (US$325 million, FY92) and a second Tax Administration Technical Assistance Loan (US$20 million, FY92). The PCR concludes that lack of Government commitment during a period of political transition delayed the start of most project components until late 1991. At this time, the Government and the Bank reformulated the project in a way that produced significant improvements in tax collections. The most important project component, which developed a system to monitor tax compliance of large taxpayers, was highly satisfactory. The objectives of other components of the project were partially achieved. These components aimed at developing internal auditing and tax inspection techniques; and to provide training for new recruits. A component which sought to recruit tax inspectors and technical personnel was achieved only at a considerable cost. The PCR also finds that the Government's commitment to improving tax administration continues to be demonstrated by a nationwide expansion of such activities and by a perceived improvement in DGI's image as a credible enforcement agency. Based on the above, OED rates the project outcome as satisfactory, sustainability as likely and institutional development impact as substantial. OED also rates Bank performance as satisfactory because project restructuring and intensified supervision corrected initial weaknesses in design. Lessons from this project include that: (a) political stability is particularly important for implementation of technical assistance operations; and (b) improved civil service incentives, including adequate pay and career development are a must to achieve improved tax administration. The PCR is of satisfactory quality. It provides a good description of the project, the changes in its design and the achievement of objectives. No audit is planned. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT ARGENTINA TAX ADMINISTRATION TECHNICAL ASSISTANCE LOAN (LOAN 3015-AR) TABLE OF CONTENTS Page No. Preface ............................................................i Evaluation Summary ........................................................... iii PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .........1... Project Identity ...........................................................1l Background ............................................................1 Project Design ............................................................2 Project Objectives and Description .......................... .................................. 2 Project Implementation ............................................................3 Second Phase of Project Implementation ............................................................5 Results ............................................................6 Project Impact ............................................................8 Sustainability ............................................................8 Bank Performance ........................................................... 10 Borrower Performance ........................................................... 10 Project Relationships ........................................................... 10 Consulting Services ........................................................... 10 Project Documentation and Data ..................... ...................................... 10 PART II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ............... ................. 11 PART IIH. STATISTICAL INFORMATION ....................................................... 16 Table 1: Related Bank Loans ........................................................... 16 Table 2: Project Timetable ........................................................... 17 Table 3: Loan Disbursements ........................................................... 18 Table 4: Projects Cost and Financing ........................................................... 20 Table 5: Project Results ........................................................... 22 Table 6: Use of Bank Resources ........................................................... 23 Table 7: Status of Covenants ........................................................... 24 This document has a restricted distribution and may be used by recipients only in the performance of their l official duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.  I  PROJECT COMPLETION REPORT ARGENTINA TAX ADMINISTRATION TECHNICAL ASISTANCE LOAN (LOAN 3015-AR) PREFACE (i) This is the Project Completion Report (PCR) for the Tax Administration Technical Assistance Project in Argentina, for which Loan 3015-AR in the amount of US$6.5 million was approved on January 24, 1989. The Loan was closed on March 31, 1994 (the original loan closing date was September 30, 1991). The Loan was fully disbursed on November 19, 1994. (ii) Parts I and III of this PCR were prepared by the Public Sector Management and Private Sector Development Division of Country Department I, Latin America and the Caribbean Region. This report is based upon examination of the Memorandum of the President, Loan Agreement, Supervision Reports, Project Correspondence, Final Statements and Audit Reports, as well as interviews and materials collected during two supervision missions and one completion mission. Part II of the PCR was prepared by the Borrower, the Government of Argentina, which also commented on Parts I and III.   - iii- PROJECT COMPLETION REPORT ARGENTINA TAX ADMINISTRATION TECHNICAL ASSISTANCE LOAN (LOAN 3015-AR) EVALUATION SUMMARY Objectives 1. The US$6.5 million TATAL Loan to the Government of Argentina, approved on January 24, 1989, was designed as an important component of the effort to stabilize the Argentine economy. TATAL financed improvements in tax administration to increase revenues as a part of the strategy to eliminate the persistent fiscal deficit without recourse to inflationary domestic credit creation. This increase would be obtained through the following components: (i) control of large taxpayer compliance (DOSMIL); (ii) improvement of internal control (AUDINT); (iii) improvement of tax inspection techniques (METFIS); (iv) training of staff (CAPPER); (v) additional personnel to carry out tax inspections (SELPER); and (vi) provision of additional computer equipment (EQUIPA). Implementation 2. Continuing changes in senior management delayed project execution, and resulted in two clearly demarcated implementation phases. Very little progress was achieved during the first phase, which covered the period from November 1988 to November 1990. During the second phase, which lasted from November 1990 until the end of the project in March 1994, implementation proceeded swiftly under the direction of the new and committed DGI management team and project implementation unit. The DOSMIL and AUDINT components were revised at this time, and DOSMIL converted from a monitoring system to a comprehensive collection system. In January 1991 DGI introduced their first Large Taxpayer Collection System, controlling the 920 largest taxpayers, nationwide. The system was very successful, and was immediately replicated in 36 more agencies throughout the country. Eventually it was installed in all 130 DGI agencies nationwide (financed by the follow-on loan Second Tax Administration Project, STAP 3460-AR), controlling the approximately 300,000 largest taxpayers. 3. The emphasis placed on DOSMIL required a reallocation of funds to this component and consequently curtailed the scope and execution of AUDINT and METFIS. Out of the six areas identified for the operation of AUDINT only four were begun, and two finished. The remaining four were finished under STAP. Studies were carried out under METFFIS to evaluate evasion trends in specific economic sectors. CAPPER, the training component, was completed, and is being expanded to non-Metropolitan Area staff through STAP. New personnel was recruited as planned through SELPER, although this component was delayed due to a hiring freeze of government employees. Equipment needed to operate the DOSMIL system was acquired under the EQUIPA component.  - iv - Results 4. The new collection system (DOSMIL), that began operating in January 1991, increased VAT revenues from US$6.8 billion in 1991 to US$13.2 billion in 1992 (94%). The use of this system substantially reduced collection and return verification, errors in returns (43% in 1990 to 4% by January 1992), late submissions (51% to 3%), and late payments (40% to 10%). During 1993 errors and delays were negligible. In addition, with the new automated system, a typical DGI branch in Buenos Aires, with 12 staff, can service four times as many taxpayers as before. 5. The AUDINT component was partially achieved, in that the analysis and development of control systems for four areas were begun. Results cannot be formally assessed at the present time, as the 1 systems (including systems finished under the follow-on loan) are just becoming operational. Nevertheless, the new systems are expected to make operations more efficient and provide information for decision-making in the effective allocation of internal resources. In one case these systems have already proved their worth, detecting a considerable fraud carried out by certain DGI employees. 6. The METFIS component was partially achieved. The sectoral studies financed by this component were not used (although taken up later under the follow-on loan). The most important contribution of METFIS were studies to reduce industnral promotion exceptions and loopholes. 7. The objectives of SELPER were achieved but in a relatively costly manner for the agency. The targeted number of 600 tax inspectors and 50 technical personnel (35 programmers and 15 analysts) was fulfilled. An important number of recruited personnel still remain employed. 8. The objectives for CAPPER were achieved; all recruits were trained. A similar course of action is being followed to train staff outside the Metropolitan Area through the follow-on loan; moreover, closer ties between DGI and universities have resulted in more efficiently designed courses. Through the SELPER and CAPPER components, the total personnel working on taxpayer auditing tasks increased by almost 300% between 1989 and 1992 and the audits per month increased from 360 in 1989 to 1,800 in 1992, 9. In conclusion, in spite of delays and modifications, we may consider this project to be a resounding success. In addition to the quantifiable results mentioned above, it is important to mention that during this time there was a marked improvement in DGI credibility and taxpayer mentality due to perception of strict enforcement which DGI created during this period. Sustainability 10. Control of the large taxpayers has continued under the follow-on loan; the DOSMIL system now controls 300,000 large taxpayers. Further increases in collections will now depend on the success of the taxpayer auditing component under the follow-on loan. However, the long-term sustainability of the project will depend on giving more emphasis to human resources, particularly Systems: General Accounting (Budget Progranmning and Execution, Financial Accounting, Accounts Payable and Receivable); Personnel Administration (Recruitment, Benefits, Transfers, Control); Target Selection and Control; Taxpayer External Auditing; Taxpayer Internal Auditing, Judicial; Revision and Appeals; Acquisitions and supplies; Treasury; Tax Accounting; and Assets Management. The last two were installed under Loan 3460-AR.  V to the introduction of an adequate incentive system tied to performance and supported by training. This is being at present considered by DGI. Lessons Learned 11. Lessons drawn from Bank experience applicable to this project fall into three categories: (i) those conceming difficulties in the implementation of tax administration projects; (ii) those conceming critical issues for sustainability; and (iii) best practices in tax administration. (i) Implementation Difficulties 12. In the first category, the two most important lessons are: (a) the need for political commitment by the Government to the reforms and its active support for their implementation and (b) the presence of a politically stable environment to ensure continuity and consistency of tax policies. The Minister of Finance needs to support the Tax Administration in withstanding powerful vested interests accompanied by a vigorous enforcement of tax laws. The Secretary of Public Revenue needs to support the organizational and personnel reforms which are an intrinsic part of tax reform. Support from the Congress is crucial for enacting necessary changes in the legal framework and in tax structure. 13 The Project Implementation Unit (PIU) staff should be carefully selected, with an experienced project coordinator hired and PIU staff trained in project administration before implementation stars. Finally, detailed project preparation is required. (ii) Sustainability 14. The most important lesson (noted in several similar cases) is that inadequate conditions of pay and career development cause severe damage to the sustainability of institutional efforts. Attracting and retaining qualified staff depend on a compensation system that is competitive with the private sector (without necessarily entailing total parity), particularly by offering an attractive carrer path tied to training and objective performance measurement. Efficiency in the public sector requires that the compensation policy include both rewards for good perforrnance and sanctions for non- or poor performance. 15. Because revenue collection is the most visible function of tax administration, there is a tendency to over-emphasize computerization vis-a-vis other important areas like organization and management, human resources, training, and taxpayer auditing. Lasting improvements in tax administration performance will only be possible if all critical institutional weaknesses are addressed. 16. Similarly, the encouragement of voluntary compliance has not received sufficient importance. Only a small amount of the collection can be directly controlled, and the remainder depends upon the taxpayer's perception of the fairness and equity of the tax system, as well as of the costs of non-compliance. It is therefore necessary to improve the quality of services provided by the tax administration to the taxpayers, and introduce grievance redress and appellate mechanisms that enhance the transparency and accountability of tax administration.  -vi- (iii) Best Practices 17. In the third category, a number of best practices have been identified. These include: (i) introduction of a unique taxpayer registration number for effective monitoring of taxpayer activity and compliance; (ii) organization of tax administration based on functions, instead of individual tax laws; (iii) delegation of responsibility and authority to middle management, accompanied by training and better management systems; (iv) prioritization of assessment, investigation and collection activities; (v) development of a single current account for each taxpayer for efficient collection of tax dues; (vi) strengthening of the legal framework to facilitate enforcement of tax laws and streamlining of procedures; and (vii) carrying out of an effective public relations campaign to educate taxpayers regarding their legal obligations.  ARGENTINA TAX ADMISTRATION TECHNICAL ASSISTANCE LOAN (LOAN 3015-AR) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. Project Identity Project Name: Tax Administration Technical Assistance Loan Loan Number: 3015-AR Regional Unit: Latin America and the Caribbean Region Country: Argentine Republic Sector: Public Sector Management 2. Background 2.1 In the last half of the 1980s Argentina suffered from a long period of stagnation, mainly due to chronic public sector deficits and endemic inflation. After the return to constitutional democracy in 1983, public demands for the control of inflation were addressed by four successive stabilization programs each of which failed to redress rapidly and permanently the structural deficit of the public sector. The public sector deficit averaged 14 percent of GDP in the 1980-84 period and 8.9 percent in 1985-89. These endemic deficits had their origin in an erosion of revenue capacity and an inability to contain expenditures. 2.2 Poor performance of the tax administration during Total Revenues 1980-1989 these years was central to the (As Percent of GDP) erosion of tax revenues and 20 gave rise to rampant evasion. On the other hand, the 16 excessive fragmentation of the 12 tax system, inconsistency in legislation, and the complex, 8 -* and at times contradictory laws 4 U Social Security and regulations, produced a ' U. Tax Revenue legal framework difficult to o *.' enforce. The tax burden, which