C/2 C; yDoc=nt of

The World Bank

FOR OMCLAL USE ONLY

Rept No. P-6241-ALB

EORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A PROPOSED CREDIT

IN AN AMOUNT EQUIVALENT TO SDR 2.83 MILLION

TO

THE REPUBLIC OF ALBANIA

FOR A

TAX ADMINISTRATION MODERNIZATION PROJECT

JULY 6, 1994

MICROGRAPHICS

Report No: P- 6241 ALBType: PR

This document has a restricted distribution and may be used by recipies only in the performace oftheir official duties. Its contens may not otherwise be diseosd withoot World Bank authorization.

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CURRENCY AND EQUIVALENT UNr

Currency Unit = Lek(Average Commercial Rates)

June Dec March1991 1922 1993 I199 194

US$1.00= 15.0 98.9 101.0 98.0 101.2

WEIGTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRONYMS

CIp - Cost, isurance and freightDT - Directorate of TaxesESAF - Enhanced Strucural Adjustment FacilityEU - European UnionCDP - Gross Domestc ProductICB - liternational Competitive BiddingIDA - International Development AssociationIMB - nternational Monetary FundMoF - Ministry of FinancePHARE - Poland/Hungary Assistance for Reformig EconomiesPIU - Project Implementation UnitPPF - Project Preparation FacilitySuI - Social Insurance InstituteTAA - Technical Assistance AgreementVAT - Value Added Tax

REPUBIC OF ALBANIAFISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

REPUBIIC OF ALBANIA

TAX AlDMINISTRATION MODERNIZATION PROJECr

Credit and Project Summary

Borrower: Republic of Albania

BenefIciarIes: Ministry of Finance (Tax and Customs Directorates)

Credit: SDR 2.83 million (US$4 million equivalent)

Termt: Standard IDA terms

Financing Plan: Local Foreign Total-(US$m milions)

Government 0.22 0.22IDA - 4.00 4.00EU - 202

Total 0.22 4.20 4.42

Econic Rateof Retum: not applicable

Povery Category: not applicable

Staff AppraisalReport: not applicable

TI poWt was prepared by Mr. Hiu Hent (Financial Analyst, EC2CO), wih ontibutons fmm Ms. DoniqweDwFrcaut (Economis, EC2CO), Me. Rochele Hiton (Openso Officer, EC2CO) and Mr. Jean-Paol Bodin (TaxSpeciWst-IMP). Mr. Luis-Jose Maji (LATPS) was the peea rovwer. The Task ManagW of the projct is Mr. Hium

(iC2CO). The Division Chief is Mr. Michel Nod5 (EC2CO) and the Depamnt Director is Mr. Kemal Denvig(EC2DR).

This docment has a restricted distbution and may be used by recipients only iD the performa of theiroficial duties. Its contents may not othierwise be disclosed without World Bank authorization

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THIE EXECUTIVE DIRECTORSON A PROPOSED CREDIT IN AN AMOUNT OF SDR 2.83 MILUON EQUIVALENT

TO THE REPUBLIC OF ALBANIAFOR A TAX ADMINISTRATION MODERNIZATION PROJECT

1. I submit for your approval the following memorandum and recommdation on a proposedtechnical assistance Credit to the Republic of Albania of SDR 2.83 million equivalent to help finance aTax Admion Modernization Project. The Credit would be on standard IDA terms with a 40 yearmaturity. Technical cooperation will also be provided by the European Union.

2. Country/Sector Background. Albania has moved rapidly to participate in the economic andpolitical transformation sweeping Eastern Europe. The demise of communism over 1990-92 wasaccompanied by economic and political chaos: output decline in Albania has been more extreme thananywhere else in Eastern Europe. This resulted in a fiscal crisis of unprecedented dimensions in EasternEurope and monthly in•lation climbed to 10-15 percent. Despite these extremely difficult startingconditions, the new Albanian Government embarked in mid-1992 on a successful stabilization program.In 1993, macroeconomic stability was established and the first signs of a new, dynamic private sector-based growth are emerging. GDP growth for 1993 is estimated at about 10.5 percent, mainly due to thegrowth in agriculture.

3. Until about two years ago, tax and customs laws, and their respective administrations were gearedto handle a centrally planned economy. As in all other centrally planned economies, the state enterprisesector was the main source of tax revenues. In the mid-eighties, tax revenues amounted to 45-50 percentof GDP. Tax revenues for 1993 amounted to about 20 percent of GDP, a drop of nearly 25 percentagepoints from the mid-1980s levels. The major revenue earners have become the turnover tax (22 percentof total), excise tax (19 percent of total), wage taxes (14 percent of total) and customs duties (16 percentof totl). The high level of profit tax revenues (24 percent of total) is misleading as one third of this isaccounted for by the tax on Central Bank profits. This profit is in fact more than compensated by interestpayments from the budget to the Central Bank.

4. The bulk in the decline of tax revenues between the mid-1980s and 1992 is accounted for by adecline in the profit tax and in the turnover tax revenues. While the decline in the profit tax revenuesrelative to GDP is explained by the low profitability of the state enterprises, the decline iii turnover taxrevenues relative to GDP reflects a structural transformation, namely the declining share of stateenterprise output in GDP. Because this decline cannot be expected to be reversed, a new tax base hasto be found, and a market-oriented tax system established. A move towards this began about two yearsago,with assistance from the IMF, the EU and other agencies. Progress, however, has been slow andmuch remains to be done.

5. Finding a new tax base is constrained by two considerations. First, short-term revenues cannotbe sacrificed to the long-term development of a sustainable tax base, in light of Albania's current difficultfiscal situation. Second, the institutional capacity of the tax administration is very limited, affectingcollection performance, introduction of reforms and adoption of new taxes. In view of the urgency ofthe budgetary crisis, the loss in income that is sometimes associated with the initial steps of tax reform

2

must be miniized. To the contrary, tax revenues need to be increased In the short term in order tomake up for the expected decline In revenues from the sale of food aid (from 25 percent of total reveduesin 1993 to less than 1 percent in 1996).

6. The tax administion currently is composed of the Directorate of Taxes (DT), the CustomsDirectorate and the Financial Police. All three agencies report to the Ministry of Finance. Their currentstaffing Is approximately 400 in the DT, 320 in Customs, and 1,200 in the Financial Police. While theDT and Customs respectively have Jay-to-day responsibilities for tax and customs collections, theFinancial Police have a broader mandate to ensure compliance with all fiscal regulations. The FinancialPolice enjoy wide discretionary powers, apparently with limited accountability and judicial review of theiractions. The Financial Police not only undertake controls of taxpayers and importers separate from theDT and Customs, resulting in duplication of work, but they also monitor the work of the staff of thesetwo other agencies.

7. Neither the Tax nor Customs Directorate uses its resources effectively. Furthermore, both needto develop modern procedures and improve allocation of staff to priority areas. The DT needs to improvecompliance by significantly improving basic collection procedures as well as the detection and control ofnon-filers and non-payers. Audit priorities are inappropriate, with excessive staff allocated to the smallbusiness sector and inadequate staff allocated to turnover tax and excise audit work. In the CustomsDirectorate, control over goods entering the country is inadequate, transit procedures are deficient, entryprocessing needs significant improvement, and greater control over refunds is urgendy required. Theseweaknesses point to a need for actions to improve compliance with existing procedures, as well as theintroduction of new procedures.

8. Although the Albanians have received technical support from a variety of sources, the authoritieshave been unable to coordinate this effectively to focus on proper administrative reforms in bothtax/customs policy and administration. As mentioned in para 4, progress has been made in setting upbasic tax and customs systems that are suited to a market economy but much work remains to be done.For Albania to move forward and develop modern tax and customs systems, critical decisions on theorganizational, policy and administrative issues must be made soon. Furthermore, given the limitedadministrative capacity available in Albania, implementation of selected strategies will need to be phasedand implemented based on a clear set of priorities.

9. In order to alleviate the problems mentioned above, the Government has developed, with theassistance of the BMF and the Bank, a strategy with the short-term objective of implementing a limitedmb*er of priority measures to support the reform programs in both tax and customs directorates. Thisstrategy requires: decisions on the reorganization of both directorates; elimination of the currentoverlapping responsibilities with the Financial Police; measures to secure tax and customs collections,strengthen audit procedures, simplify the turnover tax procedures and improve customs entry processing;the design of a Value Added Tax (VAT) to replace the current turnover tax; and the introduction of aland tax at the local level. Implementation of these measures has been agreed with the IMF as part ofthe Enhanced Structural Adjustment Facility (ESAF).' Agreement was obtained during negotiations thatan action plan to clarify the relationship of the tax and customs directorates with the financial police willbe prepared and that satisfactory progress in its implementation will be achieved by January 1995.

1 Approved in July 1993. TMe mid-term rview of the First Annual Armgemet bas bee atisftorilyconcluded and discussions for the Seond Annual Arrangement are underway.

3

10. The Government has decided to introduce a VAT in Albania in 1995. Under the proposedproject, the VAT wil be used as a model for the introduction of modern methods of taxpayer registration,filing, payment and control. Two pilot units will be established to implement a computer-based systemfor monitoring compliance with basic tax obligations. Given the concentration of large firms in Tirana,one unit will be established there. The second unit will be in a smaller city. In establishing these units,the first system application to be developed will be the VAT. The system will then be extended to thepayment of excise, withholding tax on wages and social security contributions, as well as to the profttax for the largest taxpayers (e.g., taxpayers with an annual turnover above the VAT registrationthreshold). Development of the VAT will also include a taxpayer education program. Extension of thissystem to cover oiber major centers will be decided after evaluating the results achieved under the pilotunits.

11. Country Assistance Strtegy and Rationale for IDA Involvement. A Country AssistanceStrategy (CAS) for Albania was discussed by the Board on September 14, 1993, in the context of theTechnical Assistance Project for Social Safety Net Development. The proposed project fits in with theobjectives of the CAS by improving public sector administration and contributing to fiscal restucturing,wihout which the reform process would not be sustainable. The Albanian Govemment has already begunto strengthen its tax and customs administrations with the support of the IM and the EU. While the IMPhas the expertise to promote long-term fiscal reforms, it cannot provide the financal resources neededto back them up. In addition, there ic a clear need for coordination of donor efforts, which in the pasthave sometimes been inconsistent. The proposed project would strengthen tax and customs administrationand help sustain revenue collection that is crucial in view of the fiscal situation (see para 5). Finnciresources needed to implement measures evisaged under the proposed project extend well beyond therources now avlable through the intational donor community (EU-PHARE). Support from IDAwould fill this gap.

12. Project Objectives. The project's objecive is to assist the authorities to sustain and enhancerevenue collection in the short-term and to improve tax and customs administration in the long-term. Thisobjective is to be achieved by institutional and technological strengthening of administrve units incharge of national taxes. The strategy includes defining the roles of the various entities (Tax, Customsand Financial Police), the collection and taxpayer auditing areas, the improvement of taxpayer servicesfor the current tax structure, preparation for the implementation of the VAT, as well as measures toimprove the efficiency of the Customs Directorate.

13. Project Description. The project will have five major components: (i) technical cooperation toimplement the proposed short/medium-term measures as agreed under the ESAF (see para 9), to sustainrevenue collection, and to reorganize the tax and customs administrations; (i) technical cooperation forthe development and implementation of a VAT that would replace the current turnover tax In 1995; (iii)technical cooperation for the setting up of two pilot units to implement a compute-based sysm formonitring compliance with basic tax obligations; (iv) tiing for both tax and customs officers; and (v)purchase of vehicles, equipment and materials and any necessary refiurbishing of buildings toaccommodate the equipment for both tax and customs directorates. Given the limited aiminbuisivecapacity in Albania and the limited financial resources under the project, slpport for the overallcomputerization of tax and customs procedures and implementation of the land tax at a local level willbe organized under a possible follow up operation. A detailed description of the project is provided inthe Technical Annex to this Memorandum. Attachment 1 to the Technical Annex provides a trainingprogram.

4

14. Project Cost and mInandng. TMe project cost is estimated at US$4.42 million equivalent, ofwhich US$4.2 million is the foreign exchange cost. The proposed IDA Credit would finance 90 percentof the total estimated project cost and 95 percent of the foreign exchange cost. The balance five percentof the foreign exchange cost is expected te come from the EU-PHARE, which will provide training forthe Customs Directorate under the umbrella of the project. The EU has already allocated these funds fortaining customs officials in 1994, through their Regional Cooperation Program, of which Albania is abeneficiary. IDA has taken into consideration all external assistance related to the tax and customsadministraions in the design of the proposed project. A breakdown of costs, and the financing plan arecontained in Schedule A. Attachment 2 to the Technical Annex gives a more detailed cost summary.Amounts and methods of procurement and of disbursement, and the disbursement schedule are shown inSchedule B. A timetable of key project processing events and the status of Bank Group operations inAlbania are given in Schedules C and D respectively.

15. Project Implementation. The project will be implemented over a two and one-half year periodand the Credit will close on June 30, 1997. A Project Preparation Facility (PPF) advance of US$500,000has been approved to finance long-term consultants to help implement measures to enhance the efficiencyof revenue collection and start preparation for the implementation of the VAT. The project has beenprepared by IDA with the assistance of the IMF. There is a need for strong coordination andmanagemem of the technical cooperation components, with special reference to the management andsupervision of consultants, the introduction of the VAT and creation of two pilots units, and training forboth tax and customs officials. The authorities have decided to engage the IMF to help them implementthe four technical cooperation components, given its long-standing relationship with both tax and customsadministrations and its special expertise in these areas. A Technical Assistance Agreement (TAA)between the Albanian authorities and the IMF was signed on June 9, 1994, formalizing this arrangement.The Technical Annex provides the proposed implementation schedule and the procurement plan for majorpackages in Attachments 3 and 4 respectively.

16. The first four project components would be implemented in accordauce with the TAA betweenthe IMF and the Albanian authorities. Under the terms of this agreement, the IMP will appoint the long-term consultants with the approval of the authorities and the Association, and will be responsible for theirperformance. One-long term consultant (tax expert) will work closely with the Head of the Directorateof Taxes and one long-term consultant (customs expert) will work with the Head of Customs.Appointment of these consuitants will be a condition of Credit effectiveness. The Heads of the twoDirectorates report to the Vice Minister of Finance (MoF), who will be the project coordinator. The 1BEwill supervise the two long-term consultants and any other consultants appointed under the TAA, andsubmit periodic reports on project implementation and progress to the Vice Minister and IDA. The VATUnit has been set up in the DT to prepare the introduction of the VAT.

17. Monitoring and disbursements for the technical cooperation components to be provided by theIMP will be handled by the Association, in line with similar arrangements established under a tax projectin Sri Lanka (IDA Credit 2128-CE). Financial control and routine implementation activities for theequipment component, including providing assistance to the two Directorates in procurement anddisbursements would be managed by the Project Implementation Unit (PIU) established in the MoF forthe first IDA-fnanced project in Albania (Critical Imports Project).

18. Lessons Learned from Previous Bank Involvement. Lessons from similar projects indicate theneed for a clear focus and limited scope in the project; commitment at all levels (political, managerialand technical); and a sense of ownership of the project by executing agency staff. These factors have

all been taken into account in the design of this project. The project was conceived, based on a longestablished collaboration between the Fiscal Affairs Department (FAD) of the IMP and the authorities.The TAA (see para 16) between the IMP and the authorities will allow the IMP to closely monitor andsupervise project implementation. The specific tax reform measures (see para 9) to be implemented havebeen agreed with the authorities, and two pilot units will be established to implement a computer-basedsystem. The Ministry of Finance has also indicated strong support for early implementation of theproject.

19. Environmental Aspects. In accordance with the Bank's Operational Directive on EnvironmentalAssessment (0D4.01 Annex E), the proposed project has been placed in Category 'C" and does notrequire an environmental assessment.

20. Benefits. The project will enhance the Government's ability to sustain and improve the collectionof revenues, and strengthen the Tax and Customs Directorates through the provision of expert advice,strengthened institutions, training and provision of equipment. It will also improve the administrative

infrastructure which is necessary for more effective and efficient client services. Early education of thetaxpayer (see para 10) and measures to prevent evasion and improve compliance (see para 7) will providemajor benefits in terms of size and sustainability of tax collection. It will also offer donors such as theEU a mechanism to channel their assistance in coordination with IDA, without overloading thecpabilities of the Government.

21. Risks. The project's major risks include: (i) the possibility of change in government strategy,especily with regard to the future role of the Financial Police; (ii) weakness of institutional capacity toimplement the specific tax measures; and (iii) technical risks in computerizing basic tax obligations. Therisk of tax reform derailing is minimal because the Government has a strong interest in improving theefficiency of the tax system in order to increase revenues. The proposed strategy (see para 9) with regardto the Financial Police would clearly define the roles of the various entities and enable them to work witha minimum of overlap. Extensive technical cooperation will be provided by the project to strengthenmlanagementi capacity in the institutions involved, assist in the detailed design of strategic systems, andehance project implementaton. Technical risks of the project (e.g., computerization of basic taxobligations) would be decreased by developing new initiatives on a pilot basis and replicating them uponsuccess.

22. Agreed Actions. During negotiations agreement was reached with the Government that byJamnary 31, 1995, it will have made satisfactory progress in implementing an action plan satisfactory tothe Association, to clarify the relationship of the tax and customs directorates with the financial police.The appointment of the long-term tax and customs experts will be a condition of Credit effectiveness.

6

23. R madon. I am satsfied that the proposed Credit would comply with the Artcles ofAgreemnt of the Assoiation and recommend that the Executive Directors approve it.

Lewis T. PrestonPresident

Washingt D.C.July 6, 1994

7

Schedule A

REPIUBIC OF ALBANIATax Adminisation Modernaton Project

Summary of Project Costs

Locl Foreip Totl |

(US$Mmon)

Proec Componet

Consultat Services 0.02 1.22 1.24

Trang 0.00 0.97 0.97

Computes 0.02 0.15 0.17

Office/Special C.06 0.27 0.33

Refui~ishmt 0.01 0.10 0.11

hnmental Loca Staff 0.01 0.00 0.01

vehicles 0.08 0.80 0.88

Cotncies Q. 0.69 0.&I

Total Prqjec Cost MA-

Loca Foreg Tota

(US$illion)

Financing Plan

IDA 4.00 4.00

BU PHARE - 0.20 0.20

Govrnnt f.. -

TOTAL ,4,2

RlEPUBLIC OF ALBANIATax Administration Modernization Project

Procreent Method and Disburuement

Prcl ment Arrangements'

Project Eleinenls ICB Othes NBP Toial(US$inillion)

Technical Cooperation 1.77 1.77(Consultants) (1.61) (1.61)Training & Study Tours 0.84 0.20 1.04

(0.84) (0.84)Goods 1.01 0.59 1.60

(1.00) (0.55) (1.55)Local Staff 0.01 0.01

(0.00)

TOf'AL 1.01 3.20 0.21 4.42(1.00) (3.00) (4.00)

F igures in parentheses are the amounts financed by IDA. These include total contigencies of 15%.2 Includes Bank financed conislting services and training to be procured in accordancs with Bank

guidelines (UIS$2.45 million); intetnational shopplng (USSS00,000); local shopping (US$50,000).NBF - Non Bankl Financed (EU-PHARE and local costs). Costs exclude customs duties and taxes,

Disbursments

Allocation of ID)A CreditCategories Amount % to be financed

(US$million)Goods 1.27 100% of foreign expedtures,

100% of local expenditures (ex-facotory cost) and 85% of localexpenditures for other itemsprocured locally.

Consultants' services and Training 1.83 100%ERefinancing of PPF 0.50Unalloated0TOTAL 4.00

Estimated Il)A DisburseentsII)A FY FY95 FY96 FY97

(US $ mi llion)

Annual 1.75 1.45 0.80Cumulative 1.75 3.20 4.00I

9

Scbeule C

REPUBLJC OF ALBANIATax Administration Modernization Project

Timetable of Key Project Processing Steps

(a) Time taken to prepare: 4 months

(b) Project prepared by: Government with IDA/IMP assistance

(c) First IDA mission: July 1993

(d) Appraisal mission departure: November 15, 1993

(e) Negotiations: June 9, 1994

(f) Scheduled Board date: July 26, 1994

(g) Planned date of effectiveness: October 1994

(h) Relevant PCRs and PPARs: None

10

Schedule D

REPUBLIC OF ALBANIATax Administration Modernization Project

Status of Bank Group Operatlons In Albania

A. Statenent of IDA Credits'

(As of June 27, 1994)

USS MillionCredit Fiscal (Less Cancellations)No. Yen Borrower Proiect Cleoi Uneisbued

2404 1992 Republio of Albania Critical Imports Project 41.1 6.52461 1993 Republic of Albania Rural Poverty Alleviation 2.4 0.32492 1993 Republic of Albania Technical Assistance for Economic Reforn 4.0 3.62499 1993 Republic of Albania Transport/Infrastructure 18.0 16.92524 1993 Republic of Albania Agriculture Sector Adjustment 20.0 14.52534 1994 Repubtic of Albania Housing 15.0 12.42543 1994 Republic of Albania Social Safety Net 5.5 4.82544 1994 Republic of Albania Labor Market Development 5.4 4.826102 1994 Republic of Albania Dunes Water Supply IlA 11.

Total 123.0Of which: Repaid

Total now held by IDA 123.0

Total Amount Sold 0.0Of which: Repaid 0.0

Total Undisbursed 7S.8

B. STATEMENT OP IFC INVESTMENTS

(As of June 27, 1994)

There are no IFC operations in Mbania

'The status of these projects is desoribed in a separate report on atl Bank/IDA financed projects in execution, which isupdated twice yearly and circulated to the Executive Directors on April 30 and October 31.

2 Not yet effective.

11

tEPUIBUC OF ALBANIATax Adninistration Modernization Project

Technical Annex'

I. Project Background

1. Since 1992, progress has been made in setting up basic tax and customs systems in Albania thatare suited to a market economy, with the help of considerable technical cooperation. However, the taxand customs administration are still very weak. Neither administration uses its resources effectively andboth need to develop modern procedures and better allocate staff to priority work. The tax offices needto improve significantly basic collection procedures and the detection and control of non-filers and non-payers. In addition, audit priorities are inappropriate, with excessive staff allocated to the small businesssector and inadequate staff allocated to turnover tax and excise audit work. The customs administrationsuffers from inadequate control over goods entering the country and poor transit procedures.Furthermore, entry processing needs significant improvement, and greater control over refunds is urgentlyrequired.

Organiaton of F1scal Adndnistration

2. The Directorate of Taxes (DT), Customs and Financial Police are separate agencies, each ofwhich reports to the Ministry of Finance. The current staffing of these agencies is approximately 400in the DT, 320 in Customs and 1,200 in the Financial Police. While the DT and Customs respectivelyhave day-to-day responsibilities for tax and customs collections, the Financial Police have a broadermandate to ensure compliance with all fiscal laws and related requirements in Albania, particularly in theinformal economy. The Financial Police enjoy wide discretionary powers, apparently with limitedaccountability and judicial review of their actions. The Financial Police not only undertake controls oftaxpayers and importers separate from the DT and Customs, but also monitor the work of the staff ofthese two other agencies.

3. As regards tax work, there is already a major duplication of effort by the DT and the FinancialPolice, particularly in the small business sector. In many tax offices, up to 50 percent of inspectors areassigned to the collection of tax from small businesses, checking licenses and ensuring that basicaccounting records are maintained and invoices issued. The Financial Police perform the same tasks andalso ensure that social insurance taxes are paid.

1 This annex draws substantially on two documets that detail the backgromund situation of the Tax andCustoms Directorates and the proposed program of assstane - A September 1993 report by the IMP'sFiscal Affairs Department, *Albania Strategies and Prionties for Tax and Customs AdminaonReforms," which was prepared by a June 1993 Fund (FAD) technical assistance mission, and a September1993, Bank document, 'Albania: Building a New Economy, Proposals for Transition Policies". Bothdocuments are in the project file.

12 Tehnica AnnexPage 2 of 13

4. Customs has primary responsibility for the clearance of goods crossing the land and sea bordersand for the collection of applicable duties, turnover tax and excise on those imported goods. However,because of collection shortfalls and perceived weaknesses in customs clearance, assessment and collectionprocedures, the Financial Police are re-checking trucks that cross at all border posts (after Customs) andcan be present at warehouses when Customs officers physically inspect goods for clearance purposes.They also perform some post-clearance investigations in their role as an anti-smuggling agency. At themoment, Customs officers do not do this work. The increased role of the Financial Police in customswork has strong support at the political level, particularly from the Ministry of Finance. The FinancialPolice also have been provided substantial assistance (training and equipment) under a bilateral assistanceprogram with the Italian Government. Continuing financial, material and training support is expectedunder that program.

5. At present, there are coordination and communication problems, as well as overlapping andduplicated responsibilities, particularly between the Financial Police and Customs but also between theFinancial Police and the DT. Accountability and responsibility for revenue collection is dispersed amongthese three agencies. Staff resources for tax and customs administration work in Albania are not beingused effectively, and with a third agency involved, the total cost of collecting taxes and duties increasessignificantly.

6. With a complement of 1,200 officers, the Financial Police is much larger than the combinedresources of the DT and the Customs service. Because of the scale of the Financial Police's operationsand the wide powers assigned to its officers, there is a serious risk that foreign investors (and perhapsthe Albanian public as well) may see the paramilitary operations of the Financial Police as inconsistentwith the development of a market economy in the country. Also, the more the Financial Police carry outthe work of tax and customs agencies, the greater is the likelihood that the authority of those agenciesand their officers will be undermined. A delicate balance must be found between the measures requiredto combat corruption and tax evasion, and the maintenance of public and foreign investor confidence inthe government agencies that enforce these measures.

7. The Government needs to take actions to improve the current relations and ineffective workingarrangements between the Financial Police and Customs. With the Financial Police now checking alltrucks at border posts and attending at warehouses for the unloading of goods, virtually the only Customswork that they are not duplicating is the processing of entries (although information is taken from thoseentries).

8. As regards the work of the Financial Police in tax matters, the role and responsibilities of theFinancial Police should be clearly defined to minimize duplication of work with the tax offices. TheFinancial Police have an important role to play in ensuring that people comply with basic economicregulations and in controlling black market activities; their work should be concentrated in these areas.In order to overcome the overlapping tax responsibility with the tax office, the work to be performed byFinancial Police should be clearly defined into four categories: (i) checking to ensure that small businessesare properly licensed; (ii) checking to ensure that those small businesses maintain proper accounts andissue invoices for sales; (iii) controlling the transport of goods (imports, goods in transit and domesticproducts) in Albania; and (iv) following a written request from tax or social insurance officers, assistingin the collection of arrears for tax and social insurance contributions. Under the project, assistance isbeing provided (through a PPF advance) to help define this role. At the Government's request, the IMF

13 Technical AnnePage 3 of 13

(see para 21) will visit Albania in mid-1994 for this purpose, and to prepare an action plan satisfactoryto the Association to implement the program agreed to clarify the respective roles of the Tax and CustomsDirectorates and their relationship with the financial police. Agreement has been reached with theGovernment that by January 31, 1995, it will achieve satisfactory progress in implementing this actionplan, in accordance with the agreed timing and target dates.

Tax Adminstration

9. The DT includes approximately 400 employees. Relative to the size of the country this is a smallnumber to administer the current manual system,2 but it would need to be reorganized and its staffthoroughly trained if it were to absorb significant numbers of new recruits. However, an increase in staffis not envisaged at this time since the directorate may be adequate to administer a computerized systemin the future. Simplifying and strengthening tax administration procedures in the very short term willrequire more efficient collection through a lower frequency of tax payments, better tax return forms, andsystematic record keeping. In the medium term, measures will focus on improving audit and registrationprocedures.

10. Collection procedures are unnecessarily complicated for both tax payers and collectors. All taxesbut the turnover tax are paid monthly through the banking system or the post office; the turnover tax ispaid every five days. Payment of the turnover tax every 15 days would greatly simplify the work of theDT without any serious impact on revenue flows to the Government. Tax return forms have recentlybeen designed for all the major taxes but have many deficiencies. In particular, they are not based onself assessment principles. In the case of the turnover tax, for instance, an unreasonable volume ofinformation is required: description of goods, quantity, volumes, etc. In the case of the profit tax andthe small business tax, taxpayers must visit their tax office every three months to discuss their taxliabilities on the basis of their balance sheets and their books of accounts. A large amount of DT capacityis devoted to the assessment of the returns filed by these tax payers. New tax forms based on selfassessment must be designed. They should include basic data to allow a selection of taxpayers likely tohave understated their income and to determine who should be audited. Such a system based onvoluntary compliance and ex-post control would release valuable resources.

11. The current manual registers maintained by the tax offices hinder the control of stop-filers. Asimple system of ledger cards should be set up where a single card would contain a taxpayer's basic taxinformation. Because of the urgent need for such a system, and taking into account existing officetechnology and staff expertise, initially the system would be manual and would be used to create acomputerized database as soon as technology and appropriate skills are available. In the meantime, twopilot units will be established under the project to implement a computer-based system for monitoringcompliance with basic filing and payment obligations for all taxes payable by those taxpayers liable topay the VAT. One unit will be established in Tirana and the second will be set up in a secondary city

2 The capacity of the tax administation actually depends on the technology it uses, currently a manual one.Once the tax admninistration is computerized, it may be large enough for Albania.

14 Technical AnnaPage 4 of 13

to be selected.3 In establishing these units, the first system application to be developed would be theVAT. In a relatively short period, the unit could be extended to payments of excises, withholding tax onwages and profit tax (and in the longer term, social security contributions). As the next step, thecomputer-based system would be extended to other important regional centers.

12. The improvement in revenue collection to be expected from the above measures is very muchconstrained by the absence of an effective Tax Identification Number (IMN) system. Local tax officeshave started to issue taxpayer numbers. However, these numbers are not suitable for computerprocessing, there is no central registry, and taxpayers have not been advised of their numbers, which aretherefore not used in their declarations. At the same time, the newly set up Social Insurance Institute(SI1) is in the process of establishing an automated social registration file and issuing social securitynumbers to all of its payers and clients. In order to avoid duplication of work and to facilitate theexchange of information between the social insurance and tax administration, the DT (see Box 1.2) isexpected to work with the SII in designing its numbering system and will require taxpayers to use the SUnumbers on payment advices and returns filed at the tax office. Use of the SII identification numbers fortax purposes Is expected to be introduced as part of the proposed project.

Preparing for the Introduction of the VAT

13. Currently, the largest tax yielded, at 22 percent of total tax revenues, is the turnover tax. Thegeneral rate is 15 percent and applies to most non-food items at the wholesale level. The importance ofthis tax requires that caution be used in dealing with its shortcomings, which are nonetheless substantial.The tax contains a complex system of exemptions and differentiated rates and has no minimum threshold.Applying the tax at the wholesale level results in a substantial element of cascading, as goods aresubjected to the turnover tax both when they are imported or manufactured and when they are sold bya wholesaler. Moving to a Value Added Tax (see Box 1.1) would resolve the cascading problem of theturnover tax. A program for the introduction of the VAT-now scheduled for 1995-is a majorcomponent under the project. This program will also include the design and implementation of a taxpayer education program to help prepare for the introduction of the new tax. A VAT Unit has been setup in the DT to handle the VAT program.

hnplementing a Land Tax at the Local Level

14. The authorities are also considering the introduction of a land tax to be administered at the locallevel. According to a study conducted by a United States Treasury consultant, the tax would beadministered on about 1,600,000 properties both in rural and urban areas, with the expected revenue notlikely to exceed 0.3 percent of GDP within a five year period after introduction. However, despite itslack of productivity, as a local tax, the land tax could provide a new source of revenue for the fiscallyindependent district councils that are envisaged. Given the limited administrative capacity of theauthorities and the limited financial resources under the project, technical cooperation for theimplementation of a land tax at a local level would be deferred to a possible follow-up project.

3 In Albania, 80 perent of the private companies are concentrated in two towns: Tirana (65 percent) andShkcoder (15 percent).

1S Technica ePage 5 of 13

Customs Adminstration

15. Customs offices are presently organized in headquarters located in Tirana and in 16 outfieldcustoms houses at land borders, sea ports, and inland locations. The staff at field customs houses are notspecialized, with each officer performing, in turn, acceptance of customs declarations, their review, andthe physical examination of goods-though large field offices have specialized sections dealing withstatistics, special clearance schedules, and finance. Under the proposed project, a standard organizationwill be set up at all customs houses, whereby a chief would be responsible and accountable forsupervising authorizations and waivers up to a certain level. Higher value cases would be referred toheadouarters. Deputies would be in charge of supervising day-to-day work. The staff should be dividedin thi. e distinct sections-acceptance, reviewing, and goods examination-reporting directy to the Chief.

Box 1.1: A VAT for Albania

* The introduction of the VAT would provide a sohaion to Om cascading caused by &*W twrver tax. Itwould tax only the fnal oonsumer since at each stage of the production distribution chain, it is ooUectd only onthe difference between sales price and costs, i.e., wages plus profits. Each enterprinse subject to the VAT deductsthe VAT it paid on its inputs from the VAT it owes on its final product. In this way, only valu added is taxed.

* A VAT adapted to Albania's circumstances would have to be uspk to administer with only one rate andno exemptions - investments would be taxed, but the VAT paid on investments would of course be deductible fromthe VAT owed. In fact, the VAT should avoid multiple rates and exenptions even in countries with a sophisticatedtax administion. New Zealand for instance has recently adopted a fonn of VAT very similar to thatrecommended for Albania. Furthermore, in most ACCEDE counties tax reform has moved towards simplifyingthe VAT, with a reduction in the number of rates and exemptions. In order not to overwhelm the taxadministration, the VAT would initially be applied only to enterprises with a turnover above a threshold set in sucha way as to capture the main tax payers at the wholesale and retail level.

* The VAT would also provide a basis on whih to bui a modern ta colkecton system. Once the VATis introduced, the entire tax colloction system should be overhauled and streamlined. New and more formalarwangements will have to be made between the tax administration and the banks for the collection of tax revenues.

* It is often argued that the VAT is a regressive ta. Even if this is the case, a complex system ofmultiple rates and exemptions would not be the best way to make the tax system more progressive. First, the lossin revenues stemming from exemptions may be much higher than the income transfer that would be necessary tocompensate the poor for a loss in purchasing power resuling from the VAT. Second, multiple rtes andexemptions are not only difficult to administer but also lead to tax evasions and create distortions. Mostimportantly, what matters is not the regressivity of one tax instrument but that of the entire system of Governmentrevenues and expenditures.

16. With 320 employees, the customs administration seems adequately staffed relative to the numberof customs entries processed at major locations. However, many officers are in need of training andincentives. Furthermore, customs offices lack basic equipment, including detection equipment, and nodocumentation is available to facilitate the work of customs officers apart from Instruction manualsdesigned by an expatriate expert and recently translated into Albanian. There is no career plan designedfor officers of all ranks, nor the possibility to gain promotion through internal examinations. Theorganization lacks a code of conduct warning officers of disciplinary action, possibly leading to dismissaland/or criminal prosecution when serious breaches are detected.

16 Technical AnnexPage 6 of 13

17. Computerization of customs operations is not a short-term priority. It is important, at this stage,to ensure that the new procedures are working properly and that customs officers have achieved a goodcommand of their responsibilities. However, the procedures will be designed to ensure that they arecompatible with computerization which will be introduced at a later date.

18. A monthly reporting system from field offices to headquarters was recently introduced but is notfunctioning, despite commendable efforts by headquarters staff. Furthermore, the internal audit divisionconsists of only three officials, and therefore cannot conduct frequent and unannounced visits of fieldoffices. As a result, little or no control is exercised on the work of the officers and, when irregularitiesare spotted, no serious action is taken against the offenders. Internal auditing should be expanded overthe next few months, partly through the transfers of Financial Police officers to the Customsadministration (see Box 1.2). Emphasis should be put on audits of the work of customs houses and thereview of samples of entry forms. The internal audit division should report directly to the DirectorGeneral of Customs.

Stategy

19. In order to alleviate the problems mentioned above, the Albanian authorities have developed astrategy (see Box 1.2) with the assistance of the IMF and the Bank. For the short term, the objective isto establish a limited number of priority measures that will ensure that the reform programs in both taxand customs administrations will be set on a clear path. This requires decisions on the reorganizationof both administrations, elimination of the current overlapping responsibilities with the Financial Police,measures to secure tax and customs collections, and the design of a VAT to replace the current turnovertax. Under the proposed project, the VAT will be used as a model for the introduction of modernmethods of taxpayer registration, filing, payment and control. Two pilot units will be established toimplement a computer-based system for monitoring compliance with basic tax obligations. Inestablishing these units, the first system application to be developed will be the VAT. The system willthen be extended to cover other taxes and its expansion to other major centers will subsequently beconsidered (see para 24). Given the limited infrastructure in Albania and the limited financial resourcesunder the project, technical cooperation for overall computerization of tax and customs procedures andimplementation of a land tax at a local level will be deferred to a possible follow up project.

I. Project Description

20. The proposed project is designed to address the above constraints and improve tax and customsadministration. It will include technical cooperation to develop and implement procedures in critical areassuch as the collection system, detection and control of non-filers and non-payers, improvement in auditingprocedures, development of the VAT, customs control, transit and entry procedures. Specifically, theproject will finance: (a) technical cooperation for implementation of agreed reform measures for both thetax and customs administrations; (b) technical cooperation for the development and implementation of theVAT; (c) setting up of two pilot units, one in Tirana and another at a selected location, to implement acomputer-based system for monitoring compliance with basic tax obligations; (d) training for tax andcustoms officials; and (e) purchase of vehicles, equipment and supplies.

21. In order to assist the Albanians to implement the first four components (a, b, c and d), the MoFhas decided to hire the IMF under the terms and conditions of a Technical Assistance Agreement which

17 Technical AnnexPage 7 of 13

has been concluded. The Association had no objection to this proposal and direct contracting for thispurpose has been approved. Under this agreement the IMF will hire consultants in line with Bankprocurement guidelines, with the approval of the MoF. These consultants will work closely with theMoF, but report to the IMP. The IMP, in turn will be responsible for their performance and report tothe MoP.

Box 1.2: Strategy

Tax Adm tion* Define role and organization of DT with respect to the Financial Police.* Use the social insurance identification number to be issued by the Social Insurance Institute for tax identification

purpoSes.* Sitnplify tumover tax payment obligadons to require only two payments per month from taxpayers except the

largest ones.* Improve the ledger card system which is the basis for accounting for tumover, withholding and profits tax and

excise revenues received from state enterprises and legal entites, and implement stop-filer and delinquentaccount action in tax offices.

* Develop an audit plan to provide, on an annual basis, detailed audits of most excise taxpayers and 30 percentof both turnover and withholding tax returns and allocate additional saff to undertake this work.

* Proceed with plans for the introduction of a VAT by January 1995.

customs* Develop and implement a strategy to clearly define the roles of the Financial Police and customs authorities.-* Introduce procedures to ensure that all goods taken into the country are reported to Customs and that they are

not allowed to be renoved or disposed of until a proper entry has been lodged, verified and cleared, and dutypaid or secured.

* Improve Customs entry processing by ensuring that cnties are completed only by the importers, that the fulleight digit nomenclature is used and that once accepted and logged, entries are not retuned to importers forcorrections or cancellation. Apply penalties for misdeclarations.

* Introduce a guarantee system to ensure the later payment of duty when goods have not yet been cleared.Closely monitor refunds, which should be approved by headquarters above a certain level. Exercise tightcontrol over exemption claims.

* Expand and improve internal audit with transfer of officers from the Financial Police.

Technical Cooperation

22. Technical cooperation will be provided to the tax and customs administrations to help implementthe strategy described in Box 1.2. Specifically in the area of tax administration, it would assist in: (i)refining the role and organization of tax administration; (ii) designing and implementing a system to usesocial security numbers for tax identification purposes; (iii) simplifying the payment of the tunover tax;(iv) improving the manual ledger card system; (v) developing an audit plan; (vi) proceeding with plansfor the introduction of the VAT; and (vii) establishing two pilot units to implement a computer-basedsystem for monitoring compliance with basic tax obligations. For Customs, it would assist in; (i) definingthe roles and responsibilities of the Customs Directorate and the Financial Police; (ii) introducingreporting procedures for cargo; (iii) improving customs entry processing; (iv) introducing a guarantee

18 Technical AnnexPage 8 of 13

system for goods moving in transit; (v) expanding and Improving internal audit; and (vi) preparing forthe computerization of customs procedures. This component would include the financing of two long-term consultants, one of whom would be a tax expert and the other a customs expert. Appointment ofthese consultants would be a condition of effectiveness.

Development and hnplementation of the VAT

23. The tax expert would lead the VAT Umt and be responsible for the development andimplementation of the VAT. This unit which has already been established and its head appointed, willconsist of a VAT expert, a systems expert and about five local staff (assigned from the DI) working fulltime on policy coordination and control, drafting laws and regulations, and operating systems andprocedures. The major tasks of this unit wil be:

(a) preparation of the legislation to be submitted to parliament; the law will include adefinition of the tax base (as broad as possible), the exemptions (as limited as possible),the threshold for registration, the rate structure limited to a single rate plus a zero ratefor exports, payment and return obligations, invoicing and bookkeeping obligations, andpenalties for non compliance;

(b) consultation with the private sector to test the design of the VAT, and ensure bettercompliance;

(c) administrative preparations for the VAT-such as designing of forms, developingregistration, reurn and payment procedures and systems, developing the VAT auditsystem, drafting the VAT guide and mamnals, designing the VAT organization andstaffing, and training for the VAT staff; and

(d) preparation and implementation of a taxpayer education program, and taxpayerinformation to prepare taxpayers for introduction of the VAT.

Pilot Units

24. Two pilot units will be established to implement a computer-based system for mciitoringcompliance with basic tax obligations. One unit will be established in Tirana, given the concentrationof large firms there; the second will be set up in a smaller city to be selected in consultation with the taxexpert (see para 19). In establishing these units, the first system application to be developed will be theVAT. The system will then be extended to the payment of excise, withholding tax on wages and socialsecurity contributions, as well as the profit tax for the largest taxpayers (e.g., the taxpayers with anannual turnover above the VAT registration threshold). Extension of this system to cover other majorcenters will be decided, after reviewing and evaluating the results achieved in the pilot units. The pilotunits will be established under the guidance of the tax expert, who will be assisted by a computer systemsdesigner and local counterparts. The tax expert will closely coordinate the work of the VAT team andthe pilot units.

19 Technical AnnPage 9 of 13

Training

25. Training requirements for both tax and customs administration are shown in Attachment 1. Thisprogram will be further refined by the long-term experts in consultation with the authorities and will beclosely reviewed during project implementation to adapt it as necessary to best respond to the emergingneeds of both administrations. Provision is made for a limited amount of overseas training particularlyto allow tax and customs officials the opportunity to visit and learn from other such administrations inthe region, who have more experience in adopting modern tax systems. The customs training componentwould complement the training to be provided under the EU-PHARE's 'Eurocustomsw program.

Equipment and Supplies

26. This component, for both the tax and customs administrations would consist of: (i) approximatelythirty vehicles for transportation of tax and customs officials; (ii) approximately twenty computers foradministrtive and budgeting purposes, a computer for the pilot unit, a number of copying machines, faxmachines, tax forms and miscellaneous items; (iii) detection/x-ray equipment for customs; and (iv)refirbishing of both tax and customs offices to accommodate computers and fax machines. Theequipment list will be further clarified with the assistance of the long-term consultants to be appointed.

M. Project Adndnistration and Implementation

Project Implementation

27. The project would be implemented over a two and one-half year period, in accordance with theatached implementation schedule (see Attachment 3). The Borrower, through the Ministry of Finance,would channel funds to the beneficiary agencies for the respective components. The Ministry, inconsultation with IDA, would also handle any future changes in the distribution of funds. The ViceMinister of Finance has been designated to manage and coordinate all activities, to resolve anyimplementation problems and to supervise the channeling of the funds.

28. A PPF advance of US$500,000 has been approved to hire consultant to help implement the short-term program and start the preparation for the implementation of the VAT. The MoF has appointed theIMP to help them implement the first four project components (Technical AssistancC), as mentioned inpara 21. The obligations of the IMP in this regard are summarized in Box 1.3.

29. The directors of the Directorate of Taxes and Customs Directorate would be responsible forimplementing those activities within their own jurisdiction and would report to the Vice Minister of theMoW. In order to assist these directors, a long-term consultant for tax administration and a long-termconsultant for customs will be appointed. Terms of Reference for these experts have been agreed andthe tax expert has been selected. A suitable candidate for the Customs Directorate has been identified.The VAT has been set up and the pilot units to be established will be under the tax expert, who wouldbe supported by short-term experts as needed, as well as by a dedicated Albanian team. The IMF willbe responsible for the performance of the consultants and for the submission of periodic progress reports.

30. Financial control and routine project administration activities, including providing assistance tothe two Directorates in procurement, disbursement and reporting activities will be managed by the Project

20 ITcnical AnnexPage 10 of 13

Implementation Unit (PIU) established in the MoF for the first IDA-financed project in Albania (CriticalImports Project). To facilitaite record keeping for this project, some limited office refurbishing will beprovided under the project.

Box 1.3: Oblpgations of the IMF as Consultants

Design term of reference and work plans for expertsSelect the expertsPrepae briefing for expertsProvide backstopping (close supervision) and eventual debriefing of expertsUndetake inspection visitsCoordinate with respective area departments in both the IMP and the BankSubmit periodic progress reports to the MoP and the BankPrepare relevant portions of the Implementation Completion Report

Project Cost, Flnancing, Disbursement, and Reporting and Auditing

31. Project Cost. The total project cost (shown in Schedule A) is estimated at about US$4.42 millionequivalent, excluding taxes and customs duties from which the project is exempt. All costs have beensubjected to contingencies of 15 percent to cover price contingencies, in line with the Bank's present priceprojections. The estimates for consulting assignments and training are based on typical current costs forsuch assigments. A more detailed breakdown of project costs is given in Attachment 2.

32. Flnaning. A summary of the project financing plan is shown in Schedule A. The foreignexchange cost requirements are estimated at US$4.2 million. The local currency requirements (US$0.22million) wIll be met by the Borrower from its own resources and from available grant funding. The IDACredit would finance 95 percent and the EU would finance five percent of the foreign exchange cost ofthe project. If additional financing (particularly grant financing) becomes available for specific activitiesor components, such resources could substitute for IDA financing. In this event, the proposed IDACredit would either be reduced by a corresponding amount or be used to increase support where neededfor other project-related activities.

33. Disbursements. Disbursements of funds under the IMF-managed components will be handled byIDA as per the Technical Assistance Agreement between the Albanian authorities and the IMF.Disbursements for equipment and supplies will be administered by the PIU. The proceeds of the IDACredit will finance 100 percent of eligible direct foreign exchange expenditure, 100 percent of localexpenditure for ex-factory cost and 85 percent of local expenditure for other items procured locally forequipment. Technical cooperation, consultants, training and study tours will be financed at 100 percentof total expenditures. Withdrawal applications will be fully documented, except for expenditures against

21 Technical AnnexPage I11 of 13

contracts valued at less than US$50,000 equivalent which will be made on the basis of certified statementsof expenditure detailing the individual transactions. The documentation to support these expenditures willbe retained by the PIU for at least one year after receipt by IDA of the audit report for the year in whichthe last disbursement was made. This documentation will be made available for review by the auditorsand IDA upon request.

34. The estimated disbursement schedule for the proposed Credit is shown in Schedule B. Theuroject is expected to be completed by December 1996, and the Closing Date will be June 30, 1997. APPF advance of up to US$0.5 million has been provided to cover expenditures, primarily for theappointment of advisors, to facilitate the early start up of the project.

35. Speckal Account. To facilitate project implementation, the Borrower will establish a specialaccount in US dollars at a bank acceptable to IDA to cover IDA's share of eligible expenditures. Theauthorized allocation of this account will be US$0.5 million equivalent. At the request of the Borrowerand based on project needs, IDA will make an initial deposit or deposits into the special account, up tothe amount of the authorized allocation. Applications for replenishment of the special account will besubmitted quarterly, or when one third of the amount deposited has been withdrawn, whichever occursearlier. Documentation requirements for replenishment applications will follow the same procedure asdescribed in para 33. In addition, bank statements of the special account which have been reconciled bythe Borrower should accompany all replenishment requests.

36. Reporing and Auditing. Assurances have been obtained from the authorities that the specialaccount, all project accounts, and statements of expenditure will be audited at the end of each fiscal yearby independent auditors acceptable to IDA. Such audits will be carried out in accordance withinternational standards undertaken by auditors qualified for this task. Audit reports for the precedingfiscal year will be made available to IDA no later than by the end of June of each year.

37. The PW will furnish IDA with a series of reports on a regular basis. These reports will include:(i) audited financial statements within six months after the close of each fiscal year; and (ii) records,financial statements, other progress reports or other types of information that IDA may request from timeto time. Progress reports on project implementation for the technical cooperation components will beprovided periodically by the IMP. Based on information provided by the various beneficiary agencies,the IMF will prepare its contribution to the Implementation Completion Report, within six months of theClosing Date, covering all related activities during project implementation.

Procurement

38. Procurement will be the responsibility of the PIU in consultation with the beneficiary agencies.See Attachment 4 for the Procurement Plan and Schedule for major packages. The procurementarrangements will be as follows:

(a) Consultants'services: The IMF has signed an agreement with the Government to providetechnical cooperation for the first four components of the project. Appointment of theIMP in this regard has been carried out in accordance with Bank guidelines. Consultantsfor technical cooperation and training to be financed from the proceeds of the Credit willbe recruited by the IMP from its panel of fiscal experts. The selection of the consultants

22 Technical AnPage 12 of 13

under the technical cooperation agreement will be the responsibility of the IMF as thelead consultants, and will also be consistent with Bank procedures and guidelines.

Procurenent Arrangements I

hQct E limen" ICB Odthe NBF Total_ 0(USsmillion)

Tedinifcooperatio1.77 1.77(Consultants) (1.61) (1.61)TaininW & Study Tours 0.84 0.20 1.04

(0.84) (0.84)G1oods 1.01 0.59 1.60

(1.00) (0.55) (1.55)LOa Staff 0.01 0.01

(0.00)

TOTAL 1.01 3.20 0.21 4.42(1.00) (3.00) (4.00)

1 Figures in paehes a the amouts financed by IDA. 'Men include total contingencies of 15%.2 Includes Bank financed consulting services and training to be procured in accordance with Bank

guidelines (US$2.45 million); interational shopping (US$500,000); local shopping (US$50,000).3 NBF - Non Bank Financed (BU-PHARE and local costs). Costs exclude customs dutes and taxes

fom which the project is exempt.

(b) E:pmen Vehicles for tax and custms administations will be grouped into twopackages totalling about US$1.0 million to be procured through intenational competitivebidding (ICB), using the Bank's Stanc!ard Bidding Documents for goods. Detectionequipment, office equipment (including PCs), supplies and training materials estimatedto cost less than US$200,000 per contract (up to an aggregate cost of US$500,000), willbe procured through international shopping, based on comparison of price quotationsfrom a minimum of three vendors from three different countries. Remaining small valueitems estimated to cost less than US$25,000 per contract (up to an aggregate cost ofUS$50,000), may be procured locally on the basis of comparison of price quotationsobtained from at least three local suppliers. Albanian manufacturers competing for bidsunder ICB will be allowed a preferential margin of 15 percent or the existing customsduty applicable to non-exempt importers, whichever is lower, over the CIF prices ofcompeting importers, provided they can demonstrate that the value added to the productin Albania exceeds 20 percent of ex-factry bid price. Procurement documentation forcontracts with an estimated cost of US$200,000 and above, will be subject to prior IDAreview. Contracts below US$200,000 will be subject to selective post-award review byIDA.

39. Supervision. Although the project will require close supervision, this effort will be greadyfacilitated by the involvement of the IMF, formalized in the context of its Technical AssistanceAgreement with the Government. In addition, we estimate the total staffweeks for project supervision

23 Technical AnnexPage 13 of 13

as follows: FY95, 15 staffweeks; FY96, 15 staffweeks; FY97, 12 staffweeks. About 4 staffweeks areexpected to be provided by a procurement specialist and 4 staffweeks by the resident mission. About 12staffweeks will be provided by an Information Technology specialist and the balance (22 staffweeks) willbe provided by the task manager. The first mission will be planned to coincide with anticipated Crediteffectiveness.

24 Attchment LPage 1 of 3

REPUBIUC OF ALBANIATax Administration Modernization Project

Training Program for Tax and Customs Staff (1994-199

Schedule Number of Staff DuratJon

1. Training program forTax A tration

a. Basic training:

- manual processing of returns and payments 100 2 weeks(edger card system, Oct-Nov 94collection procedures, action against stop-filers)

- general audit training (selecton of returns, 40 1 weekaudit methods, turnover tax and excise Oct-Nov 94a;udits)

b. VAT training:

- VAT basic training (with the VAT guide: 200 1 weekfinctioning of the VAT, registration for Sept-Dec 94VAT, liaison with other taxes)

- VAT information training (taxpayer 90 1 weekservices, registration and information Oct-Nov 94campaigns, advisory visits, seminars withaccountants)

- VAT administration training (with the VAT 40 3 weeksadministration manual: registration Sept-Dec 94operations, VAT forms, VAT return andpayment processing)

- VAT audit training (with the VAT audit 40 3 weeksmamnal: VAT auditor objectives, selection Sept-Dec 94of VAT returns, VAT audit methods, liaisonwith customs and profit tax, and VAT auditreporting)

25 Attachmnt IPage 2 of 3

Schedule Number of Staff Duration

c. Computer training:

- Pilot unit training (phase I: computerized 20 2 weeksprocessing of VAT returns and payments) Sept-Dec 94

- Pilot unit training (phase II: extension to other 20 1 weektaxes) Sept-Dec 94

- basic computer training week (office systems) 40 1 week1995/96

- extension of the pilot unit systems to other 80 2 weeksmajor centers (additional phases) 1996

2. Training program for Customs Administration

a. Orientation 200 1 weekOct 1994

overview of the mandate of customsincluding revenue collection;protection of the economy; and tradefacilitation

roles and responsibilities of theFinancial Police

b. Customs procedures

cargo control; transit warehousing; 120 2 weekstemporary importation; import Oct-Nov 94declaration processing; exportdeclaration processing; andaccounting/cashier function

c. Tariff and valuation 40 2 weeksOct-Nov 94

- Structure and application of the tariff;

- valuation control

26 Atacbment 1Page 3 of 3

Sdhedule Number of Staff Duration

d. Exemptions and refunds

- control of the granting and administration of 30 2 weeksexemptions and refunds Sept-Oct 94

e. Internal Audit

- roles, responsibilities and method of 10 2 weeksoperations Oct. 94

f. Computerization of external trade statisics

- data capture of import and export 10 2 weeksdeclarations Oct. 94

3. Training program for Finanal Police

a. Orientation

- roles and responsibilities of Financial 900 1 weekPolice, Customs and the Tax Directorates Aug. 94

b. Basic training to support Tax Directorate 50 1 weekSept-Dec 94

c. Basic training to support the Customs 300 I weekDirectorate Sept-Dec 94

- enforcement activities including techniquesof physical inspection; surveillance andescorting; and, intelligence and investigation

- offenses and penalties

4. TInnilSemlnars abroad

a. Tax/Customs 60 man months1994-96

27 Attachmen 2Page 1 of 3

REPUBLIC OF ALBANIATax Admnistration Modernization Project

Detailed Cost Etimate

Part A: Directorate of Taxes

:__________ ___ _ Total 1994 1995 1996

Item $'000 '000 $'000 $'000

Foreign Cost

Tax Admin. Advisor 460 100 180 180

VAT Specialist 190 100 90

System Designer 325 55 180 90

Traning 370 90 140 140

Field visits 40 20 10 10

Sub-total 1385 365 60 420

Computers/Pilot S0 2S 25Units

Sub-total 1435 390 625 420

Contingencies 5 100 165 100

Sub-total Foreign Cost 1800 490 790 520

Local Cost

Tax Admin Advisor 9 3 3 3

VAT Specialist 6 3 3

System Designer 4 1 2 1

Local Staff 6 2 2 2

Equipment 3 2 -

Sub-total 30 12 12 6

Contingencies 6 _ 2 2

Sub-total Local Cost 36 14 14 8

TOTAL (A) 1836 504 804 528

'See Part C for the cost of equipment, other than VAT computers.

28 Attachment 2Page 2 of 3

REPUBLIC OF ALBANIATax Administration Modernization Project

Part B: Customs Directorate

Total 1994 1995 | 1996

Item $'°000 $'°° $'000 $'°O°

Foreign Cost 195 105 90

Technical Advisor.

Training2 600 230 370

Field visits 10 5 5

Sub-total 805 340 465

Contingencies 95 95

Sub-total Foreign Cost 900 435 465

Local Cost 4 2 2

Technical Advisor

Local Staff 2 1 I

Sub-total 6 3 3

Contingencies 2 1 1

Sub-total Local Cost 8 4 4

TOTAL (B) 908 439 469

2 Includes $200,000 to be provided by EU-PHARE.

29 Attachment 2Page 3 of 3

REPUBLIC OF ALBANIATax Adm aon Modernization Project

Part C: Equipment

Total I| 1995 | 1996

item $'000 $9000 $'000 $'000

Foreign Cost

Computers 100 50 30 20

Office Equipment 120 20 70 30

Special Equipment 150 80 70

Refurbishment 100 30 40 30

Vehicles 800 200 400 200

Sub-total 1270 380 610 280

Contingencies 230 85 95 50

Subtotal Foreign Cost 1500 465 705 330

Loca Cost

Equipment 70 35 30 5

Refurbishment 10 5 5

Vehicles 85 50 25 10

Sub-total 165 90 60 15

Contingencies 15 A 6 1

Sub-total Local Cost 180 98 66 16

TOTAL (C) 1680 563 771 346

TOTAL (A+B+C)3 4424 1506 2044 874

3The financing plan would be as follows:

TOTAL LOCAL FOREIGN

IDA $4.000.000 $4,000,000

EU $ 200,000 $ 200,000

GOVERNMENT $ 224,000 $224,000 $ 224,000

TOTAL S224.000

Costs exclude customs duties and taxes, from which the project wilH be exempt.

30 Attachment 3

_ - Page 1 of 4

.-g

)-l __ _ _ __ _ _ji eq _-_ _ _ _ _ _ _ T_l_l_l_w ~~I I ___

-4__,__ 15

31 Attachment 3Page 2 of 4

0_

VIIii,~~~~~~~~~~i

N I

_I_ - ___ _ _

0' _ _ _ _ _ __ _ _ _ _ _ _ _ _ _

REPUBLIC OF ALBANIATax Administraion Modernization Project

Project Implementation Schediue

Activity 1996 1997Tax Directorate - 2 3 4 5 6 7 8 9 10 I- 12 1 2 3 4 5 6 7 8 9 10 11 12

PHASE THREEDevelo2ment and ImPlementation (TA/TD)(Sept 9-Se 97)

Evaluate systems for additional tunctionsExpand computer systems for other taxes(Data entry, masterfile, filing,accounring, non-filer and delinquentdetecdon systems)Design output notices, bills and reportsHardware acquisitionDevelop/test softwareComputer staff trainingExpand conmterization in _

- -_other centrs

'ti rt

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4>1 W

REPUBLIC OF ALBANIATax Administration Modernization Project

Project Implementation ScheduleActivity 1994 1995

Customs Directorate 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12PHASE ONEOranization(July-Sept 94)

Create Project Steering Committee (MoF)Recruit interational expert (IMF/MoF)

Fnancial Police Issue(Oct 94-Jan 95)

Develop a plan to clarify and delineatethe tasks of the Financial Policeand Customs (prepare law & regulations)(RAIMP/oE)Draft law and regulations concerning FinancialPolice (MoP)Pass law and regulations

Customs Internal Control (CA/CD)(Oct. 94 -Jan 95)

Prepare a system of internal controlImplement the system

Measutes concermina customs collection andS2Ml (CA/CD)(Dec 94-Feb 95)

Cargo reporting and control procedurcsCustoms impont declaration processingSystem to secure payment (transit)Monitoring exemptions and refunds

Preoataion for the computerization of customsurocedures in coordination with EC (CA/CD)(Mar-Aug 95)

Assesstnent of the needsDevelopment of an implementation planPrepaation of a pilot project

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REPUBLIC OF ALBANIATAX ADMINISTRATION MODERNIZATION PROJECT

PROCUREMENT PLAN AND SCHEDULEFor MaJor Packages

Total Cost Major Activities Schedule (Dates)Nature of Package Estimated Method of

Ptourement Issue of Submission Contract CompletionDocument of Bids/Prop Award/Sign of Package

GOODS

Vehicles (1) 500,000 ICB 12/94 2/95 3/95 8/95

Vehicles (2) 500,000 ICB 3/95 5195 6/95 11195

CONSULTANTSERVICES

Project Management* 2,450,000 Sole Source 11/93 11/93 6/94 12/96

~~~~~~~~~(IM)

4 A Technical Assistance Agreement was concluded between the Govemment and the IMP in June 1994. Under tisAgreement, other consltant (including two long-tem advisors) will be appointed by the IMP, in accordance withBank guidelines.