Document of The World Bank Report No: 24118-ME PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$ 52 MILLION TO THE UNITED MEXICAN STATES IN SUPPORT OF A TAX ADMINISTRATION INSTITUTIONAL DEVELOPMENT PROJECT May 24h, 2002 Poverty Reduction and Economic Management Colombia, Mexico, Venezuela Country Management Unit Latin America and the Caribbean Region FISCAL YEAR January - December 31 CURRENCY EOUIVALENTS (as of April 9'h,2002) Currency Unit = Peso 9.04 Pesos = US$1 WEIGHTS AND MEASURES Metric Systems ABBREVIATIONS, ACRONYMS AND GLOSSARY BANOBRAS National Bank of Public Services (Banco Nacional de Obras y Servicios Publicos) CAS Country Assistance Strategy CIAT Interamerican Center for Tax Administration Centro Interamericano de Administracion Tributaria CIDE Center of Economics, Research and Education (Centro de Investigacidn y Docencia Econ6mica) COMPRANET Government Electronic Procurement System (Sistema Electronico de Contrataciones Gubernamentales) CPAR Country Procurement Assessment Report CQ Selection Based on Consultant Qualifications DBR Development Business Review FMA Financial Management Assessment FMR Financial Monitoring Report G.A. General Administration GDP Gross Domestic Product GOM Government of Mexico IBRD Intemational Bank for Reconstruction and Development ICB International Competitive Bidding ICT Information and Communications Technology IMF International Monetary Fund INTERNET Inter-networking protocol for transmission of data through packets. INTRANET An Internet service restricted to a private group. LCS Least Cost Selection MIS Management Information System NAFIN National Financing Agent (Nacional Financiera) NBF Not Bank Financed NCB National Competitive Bidding PAD Project Appraisal Document PCD Project Concept Document PIU Project Implementation Unit QCBS Quality and Cost Based Selection SAT Tax Administration Service (Servicio de Administraci6n Tributaria) SBD Standard Bidding Document SECODEM Ministry of Comptrollership and Administrative (Secretarfa de Contraloria y Desarrollo Administrativo) SFB Selection Based on Fixed Budget SHCP Finance and Public Credit Secretariat (Secretaria de Hacienda y Credito Publico) SOE Statement of Expenses ssi Revenue Undersecretariat (Subsecretaria de Ingresos) TRAL Tax Reform Adjustment Loan WBG World Bank Group Vice President: David de Ferranti Chief Economist Guillermo Perry Country Director Olivier Lafourcade Sector Director Emesto May Task Team Leader Steven Webb -i- Tax Administration Institutional Development Project CONTENTS A. Project Development Objective ....................................................... 2 1. Project development objective ..................... .................................. 2 2. Key performance indica.tors ................ ....................................... 2 B. Strategic Context ....................................................... 2 1. Sector-related CAS goal supported by the project ............................................... 2 2. Main sector issues and Government strategy ..................................................... 3 3. Sector issues to be addre,ssed by the project and strategic choices ........... ................. 6 C. Project Description Summary ....................................................... 6 1. Project components ....................................................... 6 2. Policy and institutional reforms supported by the project ................. ..................... 9 3. Benefits and target population ...................... ................................. 9 4. Institutional and implementation arrangements ................................................. 9 D. Project Rationale ........................ 10 1. Project alternatives consi(dered and reasons for rejection .................................... 10 2. Major related projects ......................................... 10 3. Lessons learned and reflected in.the project design ......................................... 10 4. Indicators of Borrower commitment/ownership ......................................... 10 5. Value added of Bank support in this project .................. ....................... 10 E. Summary Project Analyses ................................................ 11 1. Economic ..................1 , 2. Financial .................. 11 3. Technical .................. 11 4. Institutional .................. 12 4.1 Executing agencies .................. 12 4.2 Project management .................. 12 4.3 Procurement .................. 12 4.4 Financial management .................... 12 5. Environmental .................... 13 6. Social .................... 13 7. Safeguard Policies....... .......... 14 F. Sustainability and Risks .................... 14 1. Sustainability .................... 14 2. Critical Risks .................... 15 3. Possible controversial aspects ............................ 15 G. Main Loan Conditions ... ......................... 16 1. Effectiveness Conditions H. Readiness for Implementation ............................ 16 I. Compliance with Bank Policies ........................ 16 Annexes Annex 1. Key Project Performance Indicators ........................................17 Annex 2. Project Description ....................................................25 Annex 3. Estimated Project Costs .................................................40 Annex 4. Lessons learned .......................................................50 Annex 5. Financial Summary....................................................51 Annex 6 A. Procurement and Disbursement Arrangements...............................52 Annex 6 B Financial Management and Disbursement Arrangements.......................56 Annex 7. Project Processing Budget and Schedule ...................................59 Annex 8. Documents in the Project File............................................60 Annex 9. Statement of Loans and Credits ..........................................61 Annex 10. Country at a Glance....................................................64 Annex 11. ILetter of Development Policy ...........................................67 The project was prepared under the general guidance of Marcelo Giugale (Lead Economist and Sector Leader) and Ronald Myers (Sector Manager). The project preparation team comprised Kathefine Bain, Lea Braslavsky, Enrique Fanta, Pilar Gonzalez, Francisco Leiva, Luis Jose Mejia (co-task manager), Herman Nissenbaum, Victor Ordofiez, Judith Davidson Palmer, Reynaldo Pastor, Mariangeles Sabella, Harjit Singh, and Steven Webb (task manager). Patricia Chacon Holt and Elizabeth Toxtle supported the team. Peer reviewers were Michael Engelschalk and Jit Gill. Mexico Tax Administration Institutional Development Project Projlect Appraisal Doc ument Latin America and the Caribbean Regional Office Country Management Unit Date: May 24, 2002 Task Team Leader: Steven Benjamin Webb Country Director: Olivier Lafourcade Sector Manager: Ernesto May Project ID: P077602 Sector: BF - Public Financial Management Lending Instrument: Technical Assistance Loan Theme: Public Sector Program of Targeted Intervention: No 7PrTiiisrarminraf3c__ _ WK_ [XI Loan [] Credit } Grrant [I Guarantee [] Other For Loans/Credits/Others: Loan Currency: United States Dollar Amount (US$m): 52 million. Borrower Rationale for Choice of Loan Terms Available on File Proposed Terms (IBRD): Fixed-spread Loan (FSL) Grace Period (years): 5 Years to Maturity: 15 Commitment Fee: 0.85% per amnum from the 60 days after the loan agreement and 0.75% after the 4th anniversary of this date. Front end fee (FEF) on Bank loan: 1.00% Initial Choice of Interest-rate basis: LIBOR plus Fixed spread Type of Repayment Schedule: Fixed at Commitment, with the following repayment method (choose one): Level repayments of principal of 5% per semester over 10 years. Forre in Local To t l - - _ - | ~~~~~~~~~~1D0 29DO .. _ 20.71 61 3] S2J.0 Borrower: United Mexican States Responsible agency: Servicio de Administraci6n Tributaria (SAT) Ardes: Hidalgo 77 Module I, ler piso, Col Guerrero 06300 Mexico D.F. Contact Person: Lic. Adriana Cuevas Argumedo. Tel: 52.55.5229-4406 Email: acuevasashcp.ssi.gob.mx Annmual SJ02 2!;35 - 7pl 63 A0 Cunulae 5 .02 26371 4421 5063601 12no Program implementation period: July 2002 - December 2006 Expected effectiveness date: 07/01/2002 Expected closing date: 12/30/2006 -2 - A. Project Development Objective 1. Project Development Objective (see Annex 1) The project objective is to improve tax compliance and reduce evasion of internal national taxes to increase government revenues by increasing the efficiency and effectiveness of the Mexican Government's Tax Administration Service (SAT). The ultimate object of strengthening the tax system is to assure macroeconomic stability and that public resources are available to meet the country's growing needs for human resource development, both of which have proven essential in Mexico for the continued reduction of poverty. 2. Key performance indicators (see Annex 1) Effectiveness: Increase in revenues due to tax administration improvement Increase in taxpayer coverage Increase in taxpayer perception of evasion risk Increase in taxpayer perception of SAT effectiveness Internal Efficiency: Decrease in the cost to the Service per peso collected. Decrease in SAT's average collection time per peso External Efficiency: Decrease in the taxpayer's cost of compliance Decrease in taxpayer's time for compliance B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1). Document number: 19289 Date of latest CAS discussion: May 1999, May 2002 (CAS Update May 2001). This project supports a goal of the 1999 CAS, subsequently reiterated in the 2000 CAS Update and the 2002 CAS, to provide continuing assistance for the Government's fiscal reform program in the interests of assuring macroeconomic stability. The Bank has carried out economic analyses and discussions with the Government on fiscal policy, in close collaboration with the IMF. As a result, a number of tax reforms have been carried out, the latest being the package of legislative change proposals sent to the Congress late last year. A Tax Reform Adjustment Loan (TRAL) is being presented at the same time. This loan targets reforms affecting several taxes and goals related to fiscal balances and sustaining key programs for investment and poverty reduction. The Government has begun several worthwhile initiatives to improve Federal tax administration, and has requested technical assistance to accelerate planned improvements. This would support Mexico's efforts to reduce poverty and enhance social sustainability by increasing the public sector resources, particularly for expansion of social sector services and infrastructure investment. Recent ESW reports linked that requirement to traditionally low level domestic revenue collection, which is the prime target of this project. -3 - 2. Main sector issues and IG,overnment strategy Mexico needs to invest more in human resource development and public economic infrastructure to modernize its economy, reduce poverty, and facilitate overall growth. This requirement for increasing revenues entails mobilizing resources in a manner which is sustainable in the long term. Despite efforts in the early 1990s which temporarily pushed up Federal revenues as a share of GDP, the overall share of tax revenues in Mexico has changed little over the last two decades. By international and middle-incorne Latin American standards, tax collections in Mexico are comparatively low. Federal tax revenues (excluding social security and oil sector revenues) are only about 11.4 percent of GDP, putting Mexico at the bottom of the OECD ranking of tax revenues to GDP at that time. Moreover, the gap between Mexico's tax to GDP ratio and those of most Latin American countries with similar per capita GDPs is growing. Revenue by Type of Tax Government Revenuei, % of GOP ow nod f rr E,ds e tines 6.12% tJ __ GenernlTaxes VAT . 1Ine.Trx 13 04% 20~~~3% I'50% Others 3.56% These deficiencies exist even though Mexico had frequent (and some quite major) tax policy changes in 1978-80, 1983, 1985-86, 1988, 1990-91, 1993-95, and 1997-98. The most recent, which took effect in 2002 (discussed in the Tax Reform Adjustment Loan documentation), were not as extensive as the Government had originally hoped but nonetheless made important progress. The Government intends to complete other parts of its comprehensive fiscal reformn agenda in the next few years. Meanwhile, the tax system continues to rely heavily on the petroleum sector, which accounts for 15 to 25 percent of total revenues. This makes budget revenues very sensitive to changes in international oil prices. In addition, the gross revenue from oil seems likely to stay roughly constant in real terms, which means that the growth in GDP and public services will necessitate an increase of non-oil revenues as a share of GDP. The value-added tax (VAT) of ¶15 percent, currently the second largest revenue source after income taxes, holds the greatest potential for increasing revenues, as it now suffers from a high level of evasion, which a 1996 study estimated at about 60 percent. Revenues from personal income tax actually declined as a share of GDP over the past two decades (this should change with the recently enacted reforms). SAT recognizes that deficiencies in its operations contribute to the low levels of compliance and revenue. Taxpayer coverage is insufficient. A national survey carried out toward the end of 2001 reported that global coverage ieached 83 percent, of which 81 percent are individuals and 95.2 -4 - percent are firms. Nevertheless, the Taxpayer Registry today does not contain all potential taxpayers. Based on the Twelfth General Population and Housing Census, the work force is calculated at 32.1 million people. Of these, 17.5 million are employees, 4.4 million are exempt agricultural workers, and 1.5 million are domestic employees, of which the latter would be difficult to register. Therefore, it can be reasonably calculated that in addition to the 7,148,800 taxpayers registered in December 2001, there are approximately 1.9 million unregistered potential taxpayers. Of the registered taxpayers, 5.8 million must present tax returns, and of these only 3.95 million present them on time, thus producing a second gap. The taxpayer auditing process needs to be improved, as a relatively low percentage of the unpaid amounts identified through audits are actually collected. Of the court cases filed against taxpayers who fail to fulfill their obligations, many of those submitted for administrative adjudication fail because of procedural errors, faulty notifications, and inadequate case preparation; there is a similar pattern for judicial cases. SAT has recently introduced strategic planning concepts at the senior management level and defined initial organizational performance indicators. It is now refining SAT's planning to orient it to outcomes rather than activities. It also needs to fturther refine its performance indicators, take them farther down the management structure, calculate baseline values, and define individual performance indicators. SAT requires careful management and coordination to create synergies among the various units and allow the timely sharing of information and multidisciplinary teamwork. With respect to the sharing of information, SAT is has the basic technology it requires, although it is somewhat old and requires upgrading and expansion to better support administrative work. The system development and maintenance services lack adequate prioritization and coordination, which has led to dissatisfaction with the services provided and the creation of independent informatics units in the organization. Application systems are redundant and uncoordinated and do not communicate efficiently with each other. SAT needs to improve its information systems and technology strategy, and to introduce internal service policies and strategies to better assign these resources. In the past year, SAT has made significant efforts to improve its staffing and personnel management. The number of staff has been reduced to 37,000, although staff improvement and not reduction is a goal of SAT. Many of the incumbents, particularly in administrative positions, lack proper qualifications and/or do not perform adequately, according to recent personnel evaluations. Of the 37,000 staff, about 16,000 work full time, while the service provided by the remainder ends at 3 p.m. The present staff mix is not appropriate for SAT's goals to provide consistent, effective public service, nor the essential internal institutional functions, and from this point of view, SAT may actually be understaffed. SAT has begun to survey skill levels and determine staff requirements, has improved management selection and salaries, which are competitive with the market. SAT -5 - recognizes however the need for further improvement in its human resource management policies and procedures fox selecting, training, evaluating, disciplining, etc. its employees. SAT has also begun, with Bank help (see below), to introduce mechanisms to prevent, detect, arrest, or punish corrupt practices in key positions. It has rotated or fired about 2000 staff (especially in Customs) in an effort to reduce corruption. Government Strategy As alluded to above, Government has already taken steps to improve tax administration. The most important of these were the creation of SAT as an autonomous entity with potentially considerable internal flexibility and competitive salaries; absorption of the National Training Institute; introduction of strategic planning; initial rationalization and training of staff; introduction of more transparent personnel selection methods; initiation of programs for improving taxpayer services and physical infrastructure; simplified tax return and payment processes; and mechanisms to identify non-filing registered taxpayers. Furthermore, Government is embarking on a government-wide anti- corruption campaign. The issues addressed are critical and have created a momentum for reform within SAT. This momentum needs to be encouraged and assisted, to transform SAT into an institution operationally more aligned with its strategic ol'bjectives and capable of continuous and sustainable improvement. Some important changes in Mexico make it more likely that tax administration reform will have deeper and longer lasting effects now, compared with those in the past. During much of the last two decades the Secretariat of Finance and Public Credit (SHCP) has followed the implicit practice that any increase in revenues would be "spent" in the form of rate reductions or tax expenditures (special exemptions), rather than on the expenditure side of the budget. Keeping tax effort constant largely resulted from negotiating tax burdens with representatives of the private sector. The political economy of taxation in Mexico has involved periodic discussions and agreements between a group of compliant large taxpayers (sometimes including the state petroleum monopoly, PEMEX) and the government authorities agreeing to an overall level of tax effort. Improvements in the level of enforcement or effort by the tax administration tended to come through concentrated tax enforcement crusades (only) when government revenues were dramatically down due to economic crises and business cycle downturns. The efforts suffered from the lack of commitment at the top political levels for administrative reform per se, rather than just for the sake of raising more revenue. Also, the time frame of the reforms was too short, and the reforms were piecemeal, not part of an integrated plan. In contrast to the past, the current reforms to tax administration and policy are priorities of the President and of the Secretary of Finance. The Secretary's public reputation came primarily from the strong tax administration improvement efforts that he led as Subsecretary of Revenue in the early 1 990s. As the current effort starts with the beginning of a new administration, it should, unlike his previous efforts, allow sufficient time to institutionalize the reforms. -6 - 3. Sector Issues to be addressed by the project and strategic choices Sector Issues The project will address the tax administration issues mentioned above through a comprehensive reform of the Tax Administration Service. This reform would encompass organizational and management strengthening in conjunction with operational capacity building. It would introduce the concept of taxpayer life cycle process, to integrate all phases of SAT's relationship with the taxpayer in a service-oriented manner. It would expand the taxpayer base and the control of fiscal obligations, and improve taxpayer access to improved SAT services. The project aims to achieve its objectives by strengthening accountability within SAT, mostly through the introduction of measurable organizational and individual performance indicators, relative to newly determined baselines. It would strengthen its external service vision, introduce an internal service approach, change its focus from the functional approach to a business processes vision, and upgrade management to provide better integration and synergies among the functional units. Strategic Choices The Government and the Bank agreed on three strategic choices for the project. The first choice was to limit the scope of the project to domestic taxation. Therefore, the coordination of information with Customs is included in the project, but substantial changes to Customs administration are not, because Customs had recent reforms in the context of NAFTA. Nevertheless, a diagnostic and plan for future strengthening of Customs could be included in this project. The second strategic choice was to exclude anti-corruption issues, which are being integrally addressed at a government-wide level in a separate project. Activities such as the creation of the post of Technology Security Officer, the modification of key systems to include provisions for audit trails and redundant processes for checks and balances, the inclusion of specific modules in the various management and control systems to provide information for anti-corruption analyses, as well as investigation, technical assistance from already identified friendly tax administrations, and training, will be considered for inclusion in the government-wide project (in preparation with Bank assistance). The third choice was to focus the project on what could be reasonably achieved during the current administration, through the end of 2006. For this reason, the project is a TA loan, rather than an Adaptable Program Loan. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Component 1- eSAT and Taxpayer Services This component aims at strengthening SAT's on-going efforts to provide better taxpayer service and increase the transparency of SAT. The project will further simplify taxpayers' filing of returns by employing more advanced electronic means. It will upgrade the surveys of taxpayers and other stakeholders, and will create permanent focus groups. In addition, studies will be carried out on all of SAT's contact points with taxpayers, for more focused examination of the need for improvement -7 - in its procedures, information services, public access, etc. Service standards will be established, particularly to increase SAT's transparency, and the National Service Center's present limited information capabilities will be strengthened. This component includes all web- based activities under SAT's e-business strategy (eSAT). !: eSAT/Tazayer Senrices Inst. Dev. 538 6.6% 3.71 7.1% 12: Human, Finacial andPhysical MNanaement Inst. Dev. 1812 22.9% 1133 21.8% 3: Infrmation Hub Inst. Dev. 1056 12.9% 791 15.2% 14: Technology Senrices Inst. Dev. 17.12 2099% 1212 24.7% i5: Compliance Process Inst.Dev. 17.16 209% 559 10A% 6: Control & nE:nement Process Inst. Dev. 895 109% 7.51 14A% 7: Pl and Qlality Conl hist. Dev. 3.51 43% 2.60 5.0% Front End Fee 052 0.6% 052 1.0% ITotal Project Costs ____ 82100 1000%, 5210I 10001% Component 2 - Management: ]Human, Financial and Physical This component will help SAT establish a better framework for planning and managing its manpower, financial and physicad resources. Assistance will be provided for assessing SAT's staff, documenting the results in a ]Human Resource Management System, upgrading training, and introducing performance management policies and systems. Better human resource policies and monitoring will be sought, emphasizing greater performance-based and incentive-oriented management. Similar efforts will be undertaken to improve SAT's budgeting and accounting operations, and the whole will be brought together to form SAT's Integrated Resource Management System. Component 3 - Information Hub This component aims to improve the communication, sharing and management of information within SAT. Initially, SAT would appoint a Chief Information Officer in charge of policy, coordination, quality assurance and security of information, and will implement a series of databases that will be optimized for access and security and will automatically receive data from the operational databases in the various areas. Seven major groups of information are essential to the business processes of the organization, and they must be accessible for use in a timely manner by those processes: (i) Taxpayer basic information; (ii) Information on taxpayer's tax compliance and transaction registry; (iii) External commerce information; (iv) Resource Management information; (v) General information database for the provision of information and services to the taxpayer and other organizations; (vi) Information for decision-making. The information hub therefore consists of a collection of databases used for information access ("read only"), configured for multiple queries and retrievals of information, with sophisticated security measures and firewalls, thus leaving the operational databases isolated and optimized for updating rather than access. -8 - Component 4 - Technology services The component would finance consulting assistance to develop an ICT strategy aligned with SAT's business strategy and goals, technical assistance for the development and implementation of an Internal Service Policy for ICT services, develop strategies for information security and integrity, a plan for hardware consolidation and upgrading, functional requirements and test bed for system integration testing, centralization of systems and data migration, development and implementation of a Disaster Recovery Plan (including actions for the resumption of service after a disaster, alternative sites, etc.) and a Contingency Plan (for minor faults which affect the business processes). In addition, equipment will be upgraded to improve performance; more efficient automated administrative systems would be introduced in offices nation-wide; and archived documents would be scanned to permit sharing them electronically throughout SAT's offices. Component 5 - Compliance Process The component would focus on the complete Compliance Process, financing activities to improve SAT's collections, Large Taxpayers, and elements of its Legal and Customs functions. These would be collectively treated within the redesign of the organization's application systems, the development of new databases and control systems. In addition, a management information system would be defined and developed, performance indicators defined and baseline measured, and the Standard Notification System defined (with performance indicators and a control system). In particular, this component would finance the increase in Taxpayer Registry coverage and the creation of the single taxpayer account. Component 6 - Compliance control and enforcement The project would finance activities to integrate elements of SAT's enforcement, auditing, legal and other functions directed at problems of evasion, non-payment etc. into a "Compliance Control and Enforcement" process. These activities would include, among others: (i) design of methods to identify evasion and the development of evasion review guidelines and control system; (ii) developrment of a case selection system based on agreed priorities and policies, which limits discretionary selection; (iii) continuous and systematic evasion studies, in particular on VAT, oriented towards evasion by economic sector and type of taxpayer; (iv) development of a management & control system; (v) establishment of units or appointment of individuals specialized by economic sector or type of taxpayer, theoretical and on-the-job training; (vi) the establishment of a quality and integrity assurance unit and its corresponding systems; (vii) review of the notification system and its legal context; (viii) analyses of notification information provided by the enforcement MIS to provide feedback to the various processes and guidelines; (ix) analysis of compulsory collection measures and their legal context, recommendations for improvement, and integration with the MIS; (x) redesign of the administrative dispute process within SAT; (xi) development of an integrated system for jurisprudence and internal regulations and update of the jurisprudence and internal regulations system with information from SAT's cases in the Fiscal Administrative Tribunal and with information from SAT's cases in the Judicial Tribunals; (xii) development of a system for the assigning cases to lawyers; and (xiii) analysis of portfolio to develop criteria for the prioritization and planning of arrears collection. Although institutional change is a long-term activity, some activities will provide short-term successes essential to enhancing the credibility of the reform and providing political support to the head of SAT, who is the Champion of the project. Two activities have been identified with the requisite characteristics: Audit of VAT refimds; and case selection for Large Taxpayers. Eventually, these efforts will be subsumed in the main thrust of the project. -9 - Component 7: Planning an,l Quality Control SAT senior management last year carried out their first Strategic Planning Exercise (for 2001). As is usual in such activities, an iterative, incremental effort is required to improve the plans yearly. The present Strategic Plan combines elements of strategy and operations. The next iteration should result in separate strategic and operational plans. The operational plan would define all the activities necessary to accomplish the Strategic Plan objectives (detailing their duration, sequence and resources). The activities in turn should have clearly defined results and performance indicators for gauging accomplishment, efficiency and effectiveness, together with proposed goals. Training, seminars and technical assistance on planning and performance indicators would be provided to senior and middle managers. The existing advisory group to SAT's President will assume the function of Results Management, charged with assisting the various areas with strategic and operational planning, change management, conflict management, the definition and measurement techniques for performance indicators, and the monitoring of all project activities. One task would be to contract out a diagnosis of the relationship between Customs and Tax Administration, to be the basis for designing an action plan to strengthen the relationship. Performance indicators would be gathered into a Management Information System, which, as business processes are revised, would be fed with information automatically generated. In addition, quality control will be introduced organization-wide, through policies, procedures, evaluation methodologies and training. 2. Key Policy and institutional reforms supported by the project By contributing to more sustainable revenue flows, the project would help the Government meet its needs for fiscal stability and poverty reduction. The project is part of the Government's overall effort for fiscal reform, public sector rationalization and improved transparency. Key results would be improved accountability by mamagement and staff, management coordination, a business-process approach, and a stronger internal and external service-oriented culture. 3. Benefits and target population Taxpayers should benefit in several ways. Better targeted taxpayer auditing would improve popular perceptions of the tax system's fairness and equity--and thus enhance tax compliance. So too should better appeals and complaints procedures. More efficient SAT operational methods, resulting in faster turnaround of tax returns anid refunds and a faster registration process, would ease the burden of compliance. Improved information to taxpayers could decrease compliance costs. Indirectly and ultimately, the project shoAld benefit all citizens by increasing government revenues, generating greater assistance to the economy and to key development sectors. 4. Institutional and implementation arrangements The proposed project will be implemented by the Sistema de Administracion Tributaria - SAT. The project implementation unit will be located within the SAT, which will be in charge of the overall administration of the project funds and will be responsible for financial management and compliance with Bank requirements. The core SAT project team has been chosen based on project/Bank requirements and will receive support including training from Nacional Financiera, the Undersecretariat of Public Credit., and the Bank. -10 - D. Project Rationale 1. Project alternatives considered and reasons for rejection A hardware technology-driven project design was discarded because it was deemed more critical to focus on basic institutional issues and postpone any major improvements of the physical information technology infrastructure until the information itself and its organization were first improved. 2. Major related projects No project in implementation relates to the proposed project, although it is closely linked with the Tax Reform AL and is complemented by the Anti-Corruption project and the State of Mexico Technical Assistance project, both in preparation. In addition, the Bank is coordinating closely with the IMF on issues pertaining to tax administration as well as policy. 3. Lessons learned and reflected in the project design The project incorporates lessons learned from Bank Tax Administration Projects considered to be examples of their kind', as well as related projects; OED's Lessons and Practices - Technical Assistance, Report Number 7 (May 1996); and "Reforming Tax Systems: The World Bank Record in the 1990s", a report prepared by Tax Policy and Administration Thematic Group. The issues raised are summarized in Annex 4. 4. Indicators of borrower commitment/ownership The strength of the Government's commitment to improved tax policies and administration is shown by its hard fight in 2001 to pass the fiscal reform package, of which Congress accepted important income tax reforms but deferred VAT policy changes to a more politically favorable circumstance. On the administrative side, the Government merged customs and tax administration and is pursuing an aggressive prosecution of problems of corruption within Customs. President Fox's administration has also demonstrated support for a Government-wide anti-corruption campaign, and for the federal decentralization strategy. The Government has also moved on other areas of public sector modernization. Tax administration improvement has been repeatedly discussed with the Bank and the IMF by the highest government officials, and there is a consensus for immediate reform. 5. Value added of Bank support in this project Bank support would help Mexico set a more comprehensive course to tax administration reform based on worldwide experience in the field and key modern concepts and practices. The Bank would help ensure SAT's sustained progress on its major institutional effort by providing systematic technical as well as financial assistance during the implementation of the Service's reform measures. The Bank's dialogue and close supervision of these activities should help SAT see that they are well coordinated and internally consistent. The Bank's coordination with the IMF on tax policy and administration should provide a solid foundation of support and cooperation, bolstering the Government's ability to implement their advice. ' Latvia State Revenue Modernization Project; (October 1998); Guatemala Tax Administration Technical Assistance Loan (August 1997); Turkey Public Financial Management Project (August 1995); in addition, lessons stated in the Russian Federation Second Tax Modernization Project (in preparation, January 2002) have been used. E. Summary Project Analysis 1. Economic Assessment: Since this is a technical assistance project focused on institutional improvements, it is not amenable to the calculation of an econoinic rate of return. However, the modernization of tax and customs administration would produce economic benefits. These include increases in the effectiveness of revenue administration, as manifested in improved cost effectiveness of revenue collection, as well as increases in its efficiency by lowering administrative expenses; widening the tax base and reducing taxpayer compliance costs. Other, less quantifiable benefits associated with the project include: (a) more equitable distribution of the tax burden; (b) tax revenues from the "underground" economy; and (c) increases in economic growth. The revenue effects from improved administration are harder to predict than the effects of policy changes, holding enforcement constant. Historical and international comparisons provide some basis for estimation. The revenues from stronger enforcement of the VAT in 1992-94 with a 10 percent rate, compared with revenues with a 15 percent rate in 1998-99, suggest that improved enforcement could raise VAT revenues by 25 percent. This is conservative compared with the CIDE estimate of 60 percent evasion (reducing evasion to 40 percent would raise revenues by 50 percent) and with the international comparison of revenue shares. For the income taxes, revenues in the early 1990s peaked at aboul: 20 percent higher than in recent years, and CIDE estimates of the potential for increasing income tax revenues suggest about a 25 percent increase due to better enforcement. An estimate of 15 percent increase in revenues due to better income tax administration could be made. Since the 2001 tax revenues were about US$23 billion from the VAT and about US$30 billion from the income tax, it would only take about 0.16 percent increase of revenue from these taxes in a single year to pay for the entire cost of the project. 2. Financial uAtkual 1.45; 12.11 9.33 4.72 2.401 1.451 13.56 22.891 27.60 30.00 The project requires yearly counterpart funding of at most, less than 1 percent of SAT's annual budget. In addition, successful iraplementation of the project should have a favorable fiscal impact, without negatively affecting the level and quality of the provision of necessary public goods and services. The budget for 2002 was defined and enacted into law earlier this year, and it is therefore too late to insert the project the budget for this calendar year. However, SAT can use its own funds by postponing some non-project expenditures until the next calendar year, and be reimbursed with project funds after it is included in next year's budget. SHCP and SAT are confident that the project will be inserted into the budget for calendar 2003 (still in the Bank's FY03) and subsequent years. 3. Technical: There are no critical technical issues. -12 - 4. Institutional: 4.1 Executing agencies SAT has a highly qualified and experienced senior staff, and its salary structure enables it to attract qualified experts for its management and technical positions. Project management assistance would be provided for implementation - the introduction of a project management culture is one of the features of this project. 4.2 Project management The project will be managed and implemented by SAT's own management and staff. A project management committee, composed of the participating General Administrators, will be presided by the Undersecretary for Revenues and President of SAT. He would be assisted by a strengthened Results Management Group in charge of project planning, monitoring, evaluation and reporting, and by the Committee's Secretary, in charge of overall coordination. A Technical Group, composed of representatives of each area, would be responsible for carrying out the decisions of the Committee. The Committee will prepare and implement Annual Action Plans that will be agreed with the Bank every year and revised every six months during supervision missions. Semi-annual progress reports will measure project performance compared with the baselines to be defined before initiation of each key activity. 4.3 Procurement issues SAT's procurement department operates under the Acquisition Law of January 4th, 2000, and its Regulations of August 20th, 2001. This law and regulation provide for measures very similar to the Bank procurement guidelines for consultant selection. They provide for short-lists and an evaluation committee composed of members of the user, legal, budget and procurement areas of SAT, plus a representative from the Comptroller General's Office (SECODAM). The preparation of terms of reference and evaluation criteria will be the responsibility of the user areas, assisted and monitored by the Results Management Unit; the coordinator would be responsible for their clearance and the Bank's review. Standard contracts will be agreed with the procurement department before effectiveness. Government uses its official gazette, the Diario Oficial de la Federaci6n, for invitations to bid and for expressions of interest. In addition, SAT was authorized in June 2001 by SECODAM to participate in COMPRANET, the Federal Government's e-procurement system. All Bank-financed procurement will utilize COMPRANET, which permits open access through the Internet to the bidding documents, minutes of bidders' meeting and awards. Personnel from SAT's procurement department will attend training in the Bank's procurement procedures as appropriate. By negotiations, the first project year's procurement plan and timetable was agreed and will be published in the Development Business Review by effectiveness; after this, semi-annual procurement announcements in the DBR will alert potential foreign consulting firms to opportunities under this project. 4.4 Financial management issues The proposed project will be implemented by the Sistema de Administraci6n Tributaria - SAT, assisted by a financial agency, NAFIN, which will be in charge of the overall administration of the -13 - project funds and will be responsible for financial management and compliance with Bank requirements. NAFIN has many years of experience in working with Bank projects. Financial Management. In order to comply with Bank requirements of OP/BP 10.02, a certified Financial Management Specialist (FMS) carried out a Financial Management Assessment of SAT's institutional capacity. The assessment was based on applicable Bank guidelines and covered project arrangements on budgeting, accounting, internal control, flow of funds, auditing, reporting and staffing. Based on his review and on the information of the ISO certification, the FMS concluded that Sistema de Administraci6n Tributaria -(SAT), the implementing unit, is prepared to implement the project; it is currently ful]ly staffed and operational, and has in operation a sound financial management system that meets minimum Bank financial management requirements. The existing financial management systems in SAT are acceptable but not yet fully satisfactory to the Bank, as they must be adjusted for project management, Bank reporting and project disbursing. One of the activities of the project aims to strengthen further these systems. Overall Risk AssessmentL Moderate. The project will be audited on annual basis by auditors acceptable to the Bank and in line with Bank requirements on the subject. Annex 6 provides additional information on financial management. As a condition of negotiations, SAT and the Bank agreed on the format for Financial Monitoring Reports and the use of an accounting system, satisfactory to the Bank, to record funds expended under the retroactive financing condition. As a condition of effectiveness, a project operations manual satisfactory to the Bank would be prepared, specifying procedures for project management, accounting, intemal controls, planning, budgeting, auditing and disbursing. 5. Environment assessment: Environment Category []A [ ] B [XI C The proposed project is expected to have no environmental impact. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Mexico's income distribution is highly inequitable. The TA Project would help lessen that by advancing changes designed to obtain greater tax revenues from higher income taxpayers, as well as broadening the tax base. These would help reduce the relative tax burden on the poor, and by providing funding for highly progressive social programs, would bring about greater progressivity in the overall fiscal system. The Project would thus support poverty reduction aims mainly from the expenditure side. The successful implementation of the tax policy reforms and the changes within SAT under the Project to better administer the systern will raise more resources for human resource and economic infrastructure programs and in this way enhance the fiscal sustainability of key social services for all Mexican residents. 6.2 Participatory Approach During project preparation, consultations were carried out with NGOs and accounting firms in Mexico City, as well as selected large taxpayers, on their experiences with SAT services. The Taxpayer Assistance Administration, charged with out-reach responsibilities, through the project -14 - will introduce and support arrangements for providing greater public access to information about the tax system, as well as educational campaigns regarding citizens' rights and obligations. Surveys of taxpayers will be carried out periodically throughout the project., An Advisory Committee of interested stakeholders (Chamber of Commerce, professional associations and others) provides on-going feedback on SAT's services and plans. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? It is expected that the greater transparency and information access provided by the project will stimulate NGOs and civil society organizations to monitor and participate in providing feedback to govermment on SAT and its performance. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Not applicable. 6.5 How will the project monitor performance in terms of social development outcomes? Not applicable 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) o Yes * No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) o Yes * No Forestry (OP 4.36, GP 4.36) o Yes * No Pest Management (OP 4.09) o Yes * No Cultural Property (OPN 11.03) o Yes * No Indigenous Peoples (OD 4.20) o Yes * No Involuntary Resettlement (OP/BP 4.12) o Yes * No Safety of Dams (OP 4.37, BP 4.37) o Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) o Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* o Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Not applicable. F. Sustainability and Risks 1. Sustainability: The sustainability of the benefits of the project will depend on the degree to which the Government: -15 - 1. Ensures that SAT's strategic objectives are aligned with the Government's. 2. Provides SAT with the authority and autonomy necessary to comply with these objectives 3. Requires periodic effectiveness and efficiency evaluations of SAT's performance and accountability. And SAT: 1. Ensures that its functions, processes, projects, organization, personnel and incentive system are aligned with its strategic objectives and its values 2. Maintains a corps of professional staff and management working in coordination to achieve these objectives 3. Strives for measurable continuous improvement in effectiveness and efficiency. As noted, there are indications of favorable Government commitment to the objectives of the Project. Moreover, there are reasonable prospects that the Government and SAT will provide and maintain the aforementioned six essential elements for sustainability. In the final analysis though, the successful perpetuation of the Project's outcomes will depend on continuing high level political support for SAT's institutional improvements, which has not been sufficiently steady in past decades. 2. Critical Risks (reflecting the fourth column of Annex 1): Risk Risk Risk Mitigation Measure Rating Annex 1, "From Outputs to Objective New borrower with a record of mixed success in H Continued high-level political past modernization attempts may not be able to commitment; project management carry out the project successfully expertise made available. Annex 1, "from Components to Outputs" SAT does not have access to infornnation on M High-level political support taxpayers from other public agencies Resistance to performance measurement M Change management training; internal communication plan; staff participation Delays due to day-to-day work pressure M Management training (time-management, leadership, planning & delegation) Unions may resist the change M Timely communications and negotiation Internal data is not fully obtainable H Reconstruction of data may be necessary Probability of lost or damaged documents H Reconstruction of data may be necessary Single taxpayer account information not M Encryption accessible because of security constraints Overall Risk Rating S 3. Possible Controversial Aspects Strengthening SAT's fiscal presence (taxpayer's perception of SAT's ubiquity, enhanced amongst others by increased number of audits) might generate allegations or perceptions of administrative excesses or abuses. Steps will be taken to mitigate these through the introduction of more transparent appeals and complaints process and by keeping the public informed through the Internet. Individual's access to their account may generate fears of public disclosure-a concern that improved information management procedures will seelc to address. -16- 1. Effectiveness Conditions (i) Agreement on an operations manual which specifies, inter alia, procedures and requirements on project accounting system and intemal controls; planning, budgeting, management and financial reporting, including format and contents of the accounting reports to be submitted on quarterly basis; auditing and disbursing; .the first year's detailed work program H. Readiness for Implementation [ I The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] Not applicable. 1. Compliance with Bank Policies [ ] This project complies with all applicable Bank policies. [ ] The following exceptions to Bank policies are recommended for approval: (see procurement annex 4). The project complies with all other applicable Bank policies. Olivier e esto May Country Director Sector Dlrector Steven B. Webb Task Team Leader -17 - Annex 1 Key Project Performance Indicators Hierarchy of Key Performance Indicators Data Collection Critical Objectives Strategy Assumptions CAS Objective Contribute to improved fiscal Political stability capacity Promote macro- Improved transparency and Continued public economic stability and integrity of the system pressure for improved social sustainability More equitable distribution of tax public sector burden performance Project Development Objective To improve tax Effectiveness: compliance and Increase in revenues due to tax Annual report prepared by Continued political reduce evasion of administration improvement the Analysis and Studies commitment to the intemal national taxes Unit (baseline: 01.03) reforml to increase govenmment revenues Increase in taxpayer coverage: Annual report prepared by New borrower with a by increasing the (umber of active taxpayers) the Results Management record of mixed success efficiency and Unit (baseline: 01.03) in past modernization effectiveness of the attempts will be able to Mexican Increase in taxpayer perception of Annual reports prepared by carry out the project Government's Tax evasion risk. the Results Management successfully Administration Unit based on external Service (SAT) Increase in -axpayer perception of perception surveys Project management of SAT efficiency (baseline: 01.03) the required caliber needed for effective Internal Eiriciency: change management to Decrease in the cost to the Agency Information prepared by the build ownership for the per monetary unit collected General Administration of reforms and minimize Innovation and Quality resistance from (baseline: 01.03) managers, staff, taxpayers and other Decrease in SAT's average Annual report prepared by stakeholders collection time per monetary unit the Results Management Unit (baseline: 01.03) SAT may fail to obtain access to information on External Efficiency: taxpayers from other Decrease in the taxpayer's cost of Annual reports prepared by public agencies compliance the Results Management Group based on studies of Government Decrease in taxpayer's time for taxpayer costs by type of commitment to compliance taxpayer and by introduce a taxpayer representative performance-based compliance by type of incentive system taxpayer activities (baseline: 01.04) Ability of management to overcome to day-to- day work pressure -18 - Annex 1 Key Project Performance Indicators Hierarchy of Key Performance Indicators Data Collection Critical Objectives Strategy JAssumptions Project Outputs eSAT/Taxpayer Services Simplified processes Reduction in the cost and time of External surveys, data for easier compliance compliance gathering and studies Improvement in the quality of tax MIS on service quality return presentations: # tax returns with errors/total received # Internet tax returns/total tax returns Assistance to taxpayer Improved client satisfaction External surveys, data gathering and studies Office services: MIS; Annual reports # people who go to the office this year/# people last year. Telephone and Internet services: MIS; Annual reports # unsuccessful calls & attempts/total number of calls & attempts Decrease in the number of disputes MIS; Annual reports and increase in the number of complaints resolved Perception of taxpayers and other External surveys, data stakeholders regarding the level of gathering and studies professionalism, service and integrity of revenue administration staff All business processes Annual decrease in paper processes; Annual Reports for each have a web-based annual increase in the number of business process compared window to the public operations the taxpayer carries out to the Organization's e- electronically strategy Management: Human, Financial, Physical and Organizational HR requirements in Job positions, staff profiles & the new organization workload mapped are flexibly and 50% profiles by 07.2003 rapidly addressed 100% by 12.2003 HR Policy prepared by 6.03 Procedure Guidelines produced Training provided as a Training Policy by 06.03 Procedure Guidelines service in response to produced new organizational requirements -19 - Annex 1 Key Project Performance Indicators | Hierarchy of Key Performance Indicators Data Collection Critical Objectives Strategy Assumptions Transition Training Plan by 06.03 Transition training plan implemented by 12.05 Permanent Training Plan by 12.05 Permanent Training Plan in implementation by 06.06 Perception of managers and staff Internal surveys, data regarding the level of professional gathering and studies skills in different areas Incentive system Policy defined by 12.03 aligned with performance for all Individual performance indicators Yearly staff surveys show staff and managemelit defned by 65.03; improved yearly improved perception of transparency System in fill operation by 12.2005 Staff informed on CommunicEtions policies and plan Yearly staff surveys show organization values, prepared by 6.2003 improved motivation progress and plans Implemented yearly Planning and All staff in ]-RMIS by 12.2004 Annual HR Management management of Reports human resources carried out based on full staff information Service culture Internal Service Policy established Procedural Guidelines introduced by July 2001 Service Standards defined by 12.03 Internal staff survey Performance against standards MIS; Annual reports measured by 06.04 Procurement carried out in a timely Supervision Missions manner and in accordance to Bank Guidelines Project financial management carried out in accordance with Bank Guidelines Annual project audit conducted in a timely manner by independent auditors Cost accounting and New Policy on Budgeting and Procedure Guidelines -20 - Annex 1 Key Project Performance Indicators Hierarchy of I Key Performance Indicators Data Collection Critical ObjIctives j Strategy Assumptions budgeting as a Accounting defined by 06.03. planning tool for the organization All budgeting & accounting Annual Financial activities done through the FRMIS Management Reports by 12.2005 Automated inventory New Policy on materials Procedure Guidelines and management of management defined by 06.03. procurement of goods Goods managed by PRMIS by Annual Physical 12.2006 Management Reports 1. Information Hub Information is CIO appointed by 01.03 managed as a resource Information Policy 6.03 Procedure Guidelines Information Coordination Policy Procedure Guidelines 6.04 Information Quality Policy 6.04 Procedure Guidelines Information Security Policy 6.03 Procedure Guidelines Taxpayer Registry Use and Security Policy 07.03 Information is Database management system available for acquired and in operation 12.03 consultation # of Registry records available = 90% of Operational Registry records (yearly) Taxpayer Information Use and Security Policy 07.03 is available for # of records available = 90% of consultation Operational Single Taxpayer Account Database records (yearly) External Commerce Use and Security Policy 07.03 Information is # of records available = 90% of available for Operational External Commerce consultation databases records (yearly) Information on Use and Security Policy for HRMIS human, financial and 07.03 physical resources For FRMIS 07.04 available for For PRMIS 07.05 consultation # of records available = 90% of Operational databases records -21 - Annex 1 Key Project Performance Indicators [Hierarchy of Key Performrance Indicators Data Collection Critical Objectives Strategy Assumptions (yearly) Information necessary Use and Secwity Policy 12.03 Annual evaluation of system for staff available Jurisprudence, regulations, performance centrally through the procedures, guidelines available by Intranet 12.06 Information necessary Public access through Internet to Annual evaluation of system for taxpayers information on taxpayer rights and performance available centrally responsibilities, procedures, through the Internet individual's fiscal status, by 12.06 Information for Use and Secuwity Policy 12.03 Decision-making Information produced automatically available for available for consultation consultation Integral High- level MIS operational by 12.07 2. Technology Services IT offered as an IT Strategy aligned with SAT Annual IT Performance internal service business processes by 6.03 Report IT Plan in operation by 12.03 Core systems and All data is migrated to central databases are systems by li'.05 centralized Risk of business Disaster & Contingency Plans discontinuity due to defined by 06.03 disaster or accident averted Critical documents Document prioritized scanning plan Implementation Plan Probability of lost or and all new prepared by 6.03 damaged documents documents are available centrally on- All new documents scanned by Quality assessment report line 12.04 Priority docunents scanned by Quality assessment report 12.07 3. Compliance Process All potential 7m active taxpayers by 6.03 Quality assessment report Cross-check data from taxpayers are in the 15m active taxpayers by 6.04 Quality assessment report external sources is not Registry 25m active taxpayers by 6.06 Quality assessment report forthcoming Tax obligation and 7m active taxpayers by 12.03 Quality assessment report Internal data is not fully payment information 15m active taxpayers by 12.04 Quality assessment report obtainable -for all taxpayers 25m active taxpayers by 12.06 Quality assessment report accessible in central -22 - Annex 1 Key Project Performance Indicators Hierarchy of | Key Performance Indicators | Data Collection Critical Objectives Strategy Assumptions Single Taxpayer 7m active taxpayers by 6.03 Quality assessment report Internal data is not fully Account database 15m active taxpayers by 6.04 Quality assessment report obtainable 25m active taxpayers by 6.06 Quality assessment report Information on the Baseline by 01.03 Annual Reports effectiveness and Indicators tied in to General MIS by efficiency of the 01.05 process Indicators tied to individual performance by 01.06 Increase effectiveness Increase in the number of tax Annual Reports of the process returns filed/number of registered active taxpayers Increase in the number of tax returns received on time/expected number of tax returns Increase in the tax revenues paid on time/total tax revenues assessed Reduction of time to process a refund request Reduction in process time & cost to SAT in absolute terms and compared to other OECD countries Ratio SAT stafflnumber of taxpayers compared with other OECD countries Reduction in process time & cost to the taxpayer in absolute termns and compared to other OECD countries Increase in the number of taxpayers filing electronically Decrease in the time and cost of identifying and notifying a taxpayer who fails to file tax returns or pay taxes Increase in the number of notifications with positive revenue results Decrease in registration time for individuals and firms Decrease in the number of disputes Improvement in System in operation 12.04 notifications Baseline values 07.03 Increase in correct notifications Surveys offered as a Policy and procedures 07.03 service All surveys carried out under this unit's responsibility 12.05 Confirmation of user satisfaction (yearly) I 1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I -23 - Annex 1 Key Project Performance Indicators Hierarchy of Key Perfiormance Indicators Data Collection Critical Obiectives Strategy Assumptions 4. Compliance Control and Enforcement Process Information on the Baseline by January 2003 Annual Reports for the effectiveness and Indicators tied in to General MIS by business process efficiency of the January 2005 processes Indicators tied to individual performance by January 2006 Areas of evasion Two major economic sectors every Reports prepared by area. identified and year startinp 06.03 tendencies One major taxpayer type every year starting 06.06 Prioritized audits Annual audit plan Annual Reports for the according to Procedure (iuidelines by 06.03 business process transparent criteria Percentage of planned audits implemented Increased Increase in percentage variation of effectiveness of the revenues from audit process Total value of audits for an office/# audit # audits of individuals/total # audits of firms/total by type of finms Additional tlx assessed in audits/# audits Decrease in the average weighted cost of each audit Increase in the number of individuals correctly identified as evaders/# individuals in registry Increase in the number of firms correctly identified as evaders/# in registry Increase in thle number of successful penalty cases/number of audits realized Decrease in Ihe debt ageing Amount of arrears recovered during the period /amount at the beginning of the period Reduction in process time & cost for both SAI and the taxpayer Increased "fiscal Estimated share of the gray Studies presence" of SAT economy in the total economy Improved Large Increase in the number of firms Annual Reports Taxpayer audits correctly identified as evaders/# in registry Increase in the number of n~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I -24 - Annex 1 Key Project Performance Indicators Hierarchy of Key Performance Indicators Data Collection Critical Objectives J Strategy I Assumptions successful penalty cases/number of audits realized Improved VAT refund Increase in the number of firms Annual Reports audits correctly identified as evaders/# in registry Increase in the number of successful penalty cases/number of audits realized 5. Planning and Quality Control Quality focus on Quality assurance and change processes management methodologies implemented by 01.03 Strategic & Measurable outcome and output Strategic and operational There won't be Operational Plans indicators at all levels of the documents excessive resistance to organization (baseline values in the measurement of 10.02, produced every January from organizational 2003). performance Results Management Organizational performance Annual SAT Results Report Group in operation indicators defined by 12.02 and improved annually Baseline values and indicators calculated by 12.02 and refined yearly Project Components 1 aSATrTaxpayerSvices 5 38 (total cost) 2: Human, Financial and Physcal 18.82 (total cost) Management Project Reports: 3:InformationHub 1056 (total cost) 4: Technology Services 17.12 (total cost Semi-annual project reports 5: Compliance Process 17.16 (total cost) 6: Control& EnforcementProcess 895 (total cost) Supervision missions 7:PlarningandQuealyControl 351 (totalcost) Base Costs 81.48 (total cost Project audit reports Front-EndFee 0-52 (total cost) TOTAL 82X0 (total cost) Annual SAT reports - 25 - Annex 2 Project Description The Tax Administration Service (SAT) was created in 19952, along with giving the Undersecretariat of Revenues more managerial, budgetary3 and technical autonomy. It is still, however, embedded in the organizational structure of the Secretaria de Hacienda y Credito Puiblico and is therefore constrained by public administration rules. Current Situation Various IMF and WB missions have noted improvements in tax administration since the creation of the SAT. The collection systemn is better, Large Taxpayer Units have been created, the use of information technology has improved, and there is a better tax statistics system. In spite of these though, revenues are lower than they ought to be. This is due to a numnber of factors: *VAT is not given sufficient emphasis, and a large number of sector exemptions complicates its adiministration. *Taxpayer auditing is not very effective - only about 30% 'of audits result in observations, comipared to about 75% in other countries. Field visits are carried out for 0.2% of taxpayers, in spite of this technique being the most effective in their tool arsenal. * Penalties are wealdy applied, the full extent of the law not being applied. * Complexity in user requirements * Insufficient assistince to taxpayers * Emphasis on foririal controls to the detriment of effectiveness * Lack of appropriate personnel policies 2 Tax Administration Service Law, of EDecember 15, 1995. 3Saing on January 1998 - 26 - * Lack of budgetary flexibility * Perceived widespread corruption * Excessive complexity of the legal framework. * Insufficient flow of information for management and operations To address these and other issues, the project will finance assistance to support activities under these components: - v ~ ~ .-,~-n',r.-.4--- ~ 7: Planning nd ,~~~. .~~~, ~ ~ i~uaty coflr 1: eSATrraxpay.r C ont .+ 0iFs fr4ittJS; l Qunlb~~6 ControlA 8erv 1: eSAT/Tapayer Services 538 Enfo nt Management 1852 11% uranjnanla 2: Human, Financial and Physical a nwnt 18.Pro8es 3: Infrmation Hb ; 10.56 Management 4: Technology Services 17.12 Co lien :5: Compliance Process 17.16 ProIe= 6: Control & Enircerment Process 895 !7:PLa s anid Qualiy Control 351 -aln nb saw comtv - SIAS ~~~~~~~~~~~~~13% Front-Edid Fee 052 4 T*Ohnogy TOTAL 82D0 21% Divided into:' World Bank 52.00 Gbownment of Axico 30.00 Component 1 - eSAT/Taxpayer Services The taxpayer as a customer is an organization-wide vision of SAT, which initially has taken form with the creation of a Taxpayer Services General Administration early in 2001. This Administration has an overarching objective to improve the perception of the taxpayer towards the organization in terrns of its efficiency, transparency, quality and equity in service. To this effect, they have identified a number of general activities which they are addressing: * Enhance and improve SAT's presence and services using the Internet * Improve assistance to the taxpayer * Improve taxpayer feedback mechanisms * Improve the process for client complaints. * Improve the client service orientation With respect to the first area, SAT has implemented a tax return e-filing system, which 10,000 (mostly large) taxpayers are using already4. In May 2002, 2.8 million cards will be delivered to all taxpayers whose tax base exceeds 1 m$ (approximately $100,000); henceforth, these taxpayers will present tax returns and pay electronically in banks or through the Internet. The card is a plastic credit-card type with the taxpayer's name and taxpayer number, which will eliminate a large source of error. This system is available but not compulsory for the rest of taxpayers. SAT has also implemented a Fast Registry scheme for firms, where SAT delegates to public notaries the authorization for registration of firms. 'By law, all taxpayers who use electronic accounting must file electronically also. - 27 - The General Administration of Taxpayer Assistance provides assistance to the taxpayer to reduce the cost of compliance, through the telephone, internet and electronic mail. At present, there is one group in the capital, the National Telephone Assistance Center. Their efficiency, however, is not very high because of several factors. The most important one, is that they lack the information needed to provide good custoniized service. This should to a large extent be remedied by the Information Hub component, which would give access (with due regard for security) to taxpayer account and transaction information, to the legal database and to the electronic filing system, to mention only three important sources of information. They need to evaluate client demand to better organize themselves to respond, and in addition, their efficiency could improve if they introduced a telephone menu system to better direct calls and provide FAQ ("frequently asked questions") automatic service, which requires specialized telephonic equipment. FAQ can also be put on the web. Taxpayer Assistance intends to replicate the National Service Center to up to 66 local offices, which the project would help in. Finally, they need to carry out a feasibility study of altemnatives of the provision of services to taxpayers with access difficulties. Another study to be carried out is the evaluation of service queues, diagnostic of problems, identification of information requirements, training and performance measurement. Taxpayer Assistance is also responsible of the provision of information through radio, newspaper and television media, through presentations to professional organizations and through the web. They need to obtain and present more information, including eventually portions of SAT's annual action plans, goals, achievements of the last year, and effectiveness and efficiency indicators. The project would assist with technical assistance on the design of communication, including improved web design, and the design of periodic surveys to obtain feedback on the effectiveness of the various communication efforts. There are many areas of SAT wbich directly or indirectly impact the client. A mapping exercise will be carried out to identify the points of contact between SAT and the client, using participatory diagnosis, to obtain taxpayer feedback on their perceptions of SAT's strengths and weaknesses in areas such as (i) procedures, (ii) information provided, (iii) access to SAT, (iv) treatment by SAT personnel (v) use of revenues ccillected,(vi) transparency and corruption and (vii) equity issues. In addition, a system to measure the cost of taxpayer compliance in money and time would be developed. The improvement of the service culture requires the definition of service standards and the definition of quality standards, based on benchmarking against other tax administrations. It would also require the development of a client service management system to measure the quality of services and provide feedback to the redesign of the services offered, and the design of an incentive system directed at taxpayer services. Feedback mechanisms could include score cards, or similar method, to be used across SAT to gauge annual, user feedback on different aspects of service provision, to be published and create incentive between departments to offer better quality service, Client surveys are already being carried out, as well as other efforts such as focus groups in order to obtain client feedback; improvement in survey design techniques is required, as well as more flexible mechanisms to obtain feedback from the permanent focus group of important stakeholders (various non-governmental associations including the Chamber of Commerce, Industry, etc.) - 28 - Finally, a formal monitoring system for complaints would be introduced. Similarly, SAT's administrative appeals procedures would be reviewed and upgraded. Component 2: Management: Human, Financial, Physical and Organizational Human Resource Management SAT has elements of a good Human Resource Policy. With respect to the Staff Life Cycle, they have a merit-based selection process for management, which should be expanded to all staff, and an induction process which needs to be formalized and expanded. The evaluation and incentive systems need improvement, particularly in reference to individual and collective performance indicators, and their link to salaries. Training is quite comprehensive, and needs to be better linked to SAT's strategic objectives and the incentive system. Out-placement is difficult because of the legal environmental conditions. A new Human Resource Policy needs to be developed, with the following characteristics: * it should be fair and transparent, * assured by comprehensive internal communications; * encourage a good organizational climate; * be flexible, to permit the recruitment of new skills and deployment of staff where needed, * have a pervasive client orientation (evaluation and promotion systems must be responsive to the needs of the clients and not just internally driven); * be results oriented (a reward system that recognizes and values "results on the ground"); * encourage collaborative decision-making, consensus, teamwork and the sharing of information and knowledge). The salary and incentive structures should be reviewed annually to encourage continuity, motivation and the retention of critical staff. Incentive programs should be designed to encourage and reward achievements tied to the organization's business plans and budgets, a specific reward programs designed, to reward special achievements and contributions of staff beyond normal ongoing job responsibilities or other achievements which are important for the organization as a whole (innovation, cost reduction, quality improvements). With respect to the evaluation system, performance management should be business driven, and managers themselves evaluated for their leadership performance, including their own performance management practices. SAT's strategic agenda should drive the selection, development and assessment of existing and future managers. A strong recruitment, out-placement, comprehensive program of professional development and a coherent strategy for leadership selection and development would be required to counteract the depletion of technical and managerial skills over the years and reach the professional levels of skills and competence required by SAT. As mentioned above, a new, differentiated compensation scheme tied to performance is required. With respect to the tools needed for HR Management, a initial survey of staff profiles has been carried out and needs expansion; a survey of existing capabilities is needed, as well as a mapping of skills requirements with the needs of the organization - this would go together with the proposed reorganization. A human resource management system is required to implement these policies, and - 29 - the audit capability of the Human Resource area needs to be strengthened to enable it to carry periodic progress reviews. SAT is embarked in a process of skills improvement. In 2001, SAT reported 37,011 staff compared with 38,446 staff in 2000. 1,337 of these positions were vacated through voluntary retirement leaving 696 for other reasons. The largest increase in positions (N=1912) was in the area Assistance to Taxpayers. The largest areas of decrease were Fiscal Audit and Collections. It is noted that Audit and Collections are the two largest components of the organization. Staffing strength requirements are reviewed annually. There is an overall goal to reduce the budget by 30% in five years. Further, there is an expressed intention to remove incumbents in administrative positions who do not meet more professional qualifications or who were not perforning adequately. Many of these are identified as union members, which will delay the process. The purpose of this staffing adjustment is not associated with the overall proposed reduction in budget but rather with the objective of replacing these personnel with more qualified incumbents. There is, however, no detailed plan on how the 30% budget reduction is to be achieved, and which areas might experience growth. Clarification of humart resources needs in very specific qualitative and quantitative terms (as related to functional areas anid specific requirements) is essential. There is a stated concern witht respect to the competencies and qualifications of relatively large numbers of SAT staff in regard to the requirements of the positions that they hold. While some individual employee information is retained in individual files, there is no overall assessment and profile of the competencies of staff relative to the needs of the organization. It is important (as noted above) that both the needs of the organization in regard to staff complement and competencies, or lack thereof, of existing staff be identified. The acknowledged deficiency in cdmpetencies of staff also raises the question of the approach of the organization in dealing with this fact. In what balance does the organization train or buy the needed competencies? The issue of training will be dealt with in more detail later. With respect to complement ancl competencies, therefore: (i) the defined HR needs of the organization (as per strategic and business plans) must be articulated in (letail and reflected in the number and competencies of staff; (ii) the areas of grow,th and planned reduction in staff need to be clearly articulated and action plans formulated to achieve same; and, (iii) the necessary information must be available to permit appropriate HR planning and action SAT has its own human resource information system which provides information for payroll purposes. Individual employee information is also retained in separate files. The system as indicated above can generate overall stock employee data as well as similar data by functional area. In addition, information is retained and can be generated on numbers of hires and promotions. Detailed analyses for HR purposes are more difficult and in some cases, impossible, to obtain; e.g., profiles of length of service overall and by functional area, profiles of competencies by area and training requirements. In addition to providing corporate and functional rationalization for positions, the HR information system should generate regular reports (e.g. ongoing staffing strength relative to positions/budget, hires relative to separations) and provide access to managers to non-confidential fields for their planning, decision-making and management purposes. All systems as noted in the SAT Strategic Plan should be integrated. - 30 - A comprehensive, efficient, integrated HRIS is essential for good HR planning, development and rnanagement. A significant enhancement in this area is necessary to the efficient, effective, and equitable functioning of SAT. Training is one of SAT's Strategic Objectives - with particular emphasis on the new culture, service orientation and quality. In light of concerns with respect to: (i) Competencies of staff; (ii) Employee culture and performnance (including corruption), (iii) Issues related to planning, and (iv) Culture change, training assumes an important role in the re-vitalization and renewal of SAT. Other stated objectives also rely heavily on training e.g. developing organizational pride, providing improved customer service, managing the change and evolution of the organization. A specific, targeted Transition Training Plan would assist managers in moving the organization forward in the desired directions. The initial focus of the Transition Training Plan would be on what are in essence baseline areas such as: internal organizational culture change and change management, more effective strategic and business planning (establishing appropriate indicators and timeframes and integrating these with HR requirements), providing leadership and direction (in terms of realizing mission and vision through targeted activities), performance management (process implementation and management), and interviewing and reference checks (especially in light of current problems with respect to competency and corruption). A new approach to reference checks was put in place on March Is - it is important that this be consistently applied, job-related, and monitored in terms of its effectiveness. Another significant area is training in the development and management of effective union negotiation and interaction strategies. While SAT is in significant respects governed by federal government negotiations, it also has some latitude in negotiating working conditions. These can have bottom-line impacts on expenditures and employee relations specifically motivation and satisfaction. It is also apparent that skill training will continue to be required to deal with areas such as new computer applications, investigations, anti-corruption activities, customer service, and implications of the new law. The Transition Training Plan of the organization is something that will require ongoing assessment with respect to business needs, recognizing that the SAT organization will continue to evolve and change. It should be an important element in all three phases. The development and maintenance of high quality management and staff will be achieved over time. In order to not over-burden SAT staff and to ensure the latest in training approaches, the training itself should be out-sourced. An integral and complimentary program to the Transition Training Plan is the Performance Management System. Such a system would allow managers to identify not only deficits in individual employee performance which may be addressed by training interventions or other actions, but also gaps in organizational competencies and corporate training needs. Performance management needs to be supported with appropriate incentives and disincentives. Policies and - 31 - practices related to the system must be developed with fill awareness of legal requirements, union agreements, and corporate culture. An important tool in achieving the above is an internal and external Communication Plan. This plan will have among its internal objectives the desired cultural change, enhancement of motivation and performance, increase in pride and reduction in corruption. Externally, the plan will focus on raising public awareness of the principles and positive image of the organization. The structure of the Human Resources function is centralized in terms of policies and decentralized as far as day to day service delivery such as staffing. Directors of HR are found in functional areas along with staffing personnel etc:. The latter are also present in large field offices. This places an important emphasis on both the development of sufficiently detailed corporate policies and monitoring of their implementation. It is not known to what degree practices deviate from policies or to what extent there are any gaps in the current policy framework. Policies with respect to staffing, promotion, classification and compensation, performance management, training access and funding, discipline and working conditions need to be developed and managed in light of corporate objectives, clearly articulated anel consistently and fairly applied. It is important that SAT review and revise as necessary its HR policies and practices in light of its organizational enhancement objectives and ensure that it has in place a process for monitoring their application. Such a monitoring process should be ongoing and should flag ancd address any deviations or deficiencies. It is also important that the monitoring process includes the capacity to track the actions of the executing authority at various slages so that levels of efficiency can be monitored. E.g. Staffing actions from advertisement, to interview, to reference check, to offer, to incumbent in place. This will permit SAT to enhance its systems precisely at the point where adjustmnent is required thereby improving the efficiency, cost effectiveness and outcome of the process. It will also provide information with which to compare the human resource functioning of different parts of the organization on specific organizational performance criteria which will have to be established. A Human Resource Planning and Development Framework should be developed first. This would consist of a definition of SAT's human and financial resources needs in line with its strategic and business plans, supplemented by the qualifications and sources of required personnel. To this effect, a determination of existing resources would be carried out and a modem Hurnan Resource Information Database created. The Database will permit HR analyses and information for managerial decision-making and the rationalization of positions. In addition, an initial survey of existing competencies and strengths as well as unit workloads will be carried out, leading to the development of a Transition Training Plan (including management training, customer service, planning, interviewing, performance management, etc.). One important aspect of the Transition Training Plan would be culture change and change management. The Framework would be revised every year according to the previous year's performance and next year's organizational requiremenits as proposed in the updated Strategy and as affected by the reengineering processes. One important aspect of the Transition Training Plan is aimed at assisting senior and middle management with issues of leadership and direction, including issues of union negotiation strategies. The Transition Plan would later be transformed into an on-going Training Plan, aligned with the organization's corporate objectives, and aimed at maintaining the skill level - 32 - of staff and management in the long-term. Consideration would be given to out-sourcing the training. This component would also include provisions for enhancing SAT's HR Policies and Monitoring Structures, as well as introducing a performance management system (including software) complemented by motivational incentives and improvement of the work environment. There would in addition be a review of policies and practices related to incentives, selection, hiring, discipline and separation processes. A number of laws would be reviewed and proposals drafted for their modification directed at ensuring their transparency, consistency and internalization by the staff. Along with the introduction of a performance-based incentive system, assistance would be provide to help SAT achieve a culture change within its staff through a Communication Plan. This would be aimed at ensuring that the new principles and image of the organization are well known and understood. Financial Management SAT uses a budget-oriented accounting system which aggregates costs by line item, although a project-oriented budget and accounting system was designed but not applied during the 1990s. It is SAT's intention to re-introduce and enhance the latter system to permit the use of budgeting as a planning tool, with cost accounting by activity, project, and process. This will permit better alignment of operations with the Strategic Plan, efficiency performance measurement and improved managerial decision-making. Physical Resources Management SAT needs to be able to manage their own physical resources as well as third-party physical resources temporarily under SAT's responsibility, as a result of SAT's control and enforcement activities. It would therefore require an automated system, to be eventually integrated with the Human and Financial Resource Systems, as well as initial inventories, nationwide. SAT's reform will be based on a business process and service orientation. In particular, SAT's service orientation would require the definition of an Internal Service Policy. This need is particularly clear for such services as information technology, surveys carried out under Taxpayer Assistance direction in which other areas participate, and training. This activity would also consider prospects of installing a system of internal chargebacks, as well as outsourcing services to the private sector. Component 3 - Information Hub There is a lack of information necessary for SAT's business process; in addition, there is insufficient sharing of existing information. Seven major groups of information are essential to the business processes of the organization, and they must be accessible for use in a timely manner by those processes: taxpayer basic information, information on taxpayer's tax compliance and transaction registry, external commerce information, Resource Management information, documentation, a general information database for the provision of information and services to the taxpayer and other organizations, information for decision-making. The information hub consists of a collection of databases used for information access ("read only"). The operational databases can thus be better protected form unauthorized access, and optimized for update through the appropriate software, whereas the information databases can be configured for multiple queries and retrievals of information, with sophisticated security measures. -33 - The project would provide the technical and consulting assistance to permit SAT to: a) Designate a high level staff as Chief Information Officer in charge of policy, coordination, qualily assurance and security of information. This is necessary for the institutionalization of data sharing and control. b) Acquire a database management system c) Define access and security policies d) Define data to be extracted from operational databases and develop the extraction processes and systems. e) Develop quality control and management information systems. Component 4 - Technology services SAT's use of technology suffers from a lack of prioritization and coordination of efforts, which has led to the creation of independent system development units, redundancy of efforts and a loss of a coherent approach to information and application systems throughout the organization. In addition, it is lacking a number of fundamental policies and strategies, such as security, back-up and information integrity. Note that as an operational concept, all information processed through SAT's computer and telecommunications equipmeni belongs to the organization as a whole under the responsibility of the appropriate user areas. This concept is reflected in the separation of components 3 and 4 and the creation of the function of Chief Information Officer described in Component 3. The second operational concept to be introduced is that the Information Technology G.A. is a provider of infrastructure services. The project would finance consulting assistance to develop an IT strategy aligned with SAT's business strategy and goals, technical assistance for the development of business intelligence for IT, the development and implementation of an Internal Service Policy for IT services, the development of SAT's e-business strategy (eSAT), develop strategies for information security and integrity, a plan for hardware consolidation and upgrade, and develop and implement a Disaster Recovery Plan (including actions for the resumption of service after a disaster, alternative sites, etc.) and a Contingency Plan (for minor faults which affect the business processes). At present, SAT's system testing facilities are too small for full integration testing of new systems; the project would finance equipment upgrade as well as technical assistance to include testing for data integrity and anti-corruption measures. The present client-server approach used by SAT is obsolete in view of today's technologies and the need for increased security and integrity of data. SAT is therefore centralizing databases and systems, and migrating data from the old systems, which the project would support with technical assistance, upgrade of equipment and the acquisition of appropriate package software. - 34 - The project will support SAT's efforts to increase administrative efficiency by financing studies of office workflows, introduction of automated processes and equipment. SAT has millions of documents stored around the country. Some of these files are essential for legal processes and for taxpayer auditing, but their geographic dispersion makes them at best difficult to retrieve and use; at worst, storage difficulties has resulted in deteriorated or missing files. Access to the information contained therein is necessary for accountability. Electronic document management consists of the digitalization of paper files, storage and management, and permits users to operate on exact images of the original, which may even be stored in their own local computers. This enables multiple and simultaneous uses from a single original. The technology creates great opportunities for collaboration and for editing, but also for controlling corruption. It also creates great challenges for records management and for archiving. A feasibility study to determine viable document management options is being carried out. This is in keeping with the growing international tendency to consider electronic documentation to be legal (under certain conditions of quality control and security), and SAT's own move towards electronic taxpayer return and payment processing. Component 5 - Compliance Process The main operational areas (Collections, Large Tax Payers, Taxpayer Auditing, Legal, Customs) each address a different aspect of the tax compliance, with insufficient information transfer and formal coordination among them. This impacts the cost of taxpayer compliance and makes more difficult a complete view of the taxpayer, both to the institution and to the taxpayer, and results in a diversity of application systems which do not effectively communicate with each other (in an extreme case, Customs uses a different main transaction identifier than the rest of the organization). This is aggravated by the complexity of regulations and relationships with other institutions which participate in the taxpayer identification process, the information technology structure in use (client- server) and the geographic dispersion of the taxpayer. The Compliance process is composed of several essential steps, beginning with the incorporation and registration of all potential taxpayers, the reception of tax returns (either by the employee or self-prepared) and payments, the verification by SAT of its consistency (arithmetic, procedural, documentary), request for further payment (or refund) by SAT, possible dispute resolution via administrative means, or collection through the judicial process. The last step in the cycle is transfer of the taxpayer records to permanent inactive status. A similar compliance cycle can be described for legal entities. The project would finance a study of the Compliance Process to identify needs for shared information and responsibilities, with a global focus crossing all areas to facilitate the de- compartmentalization of SAT's existing functions. The project would finance activities to improve the quality of the taxpayer registry by (a) cleaning up the existing information; (b) acquiring software; and (b) developing a permanent updating system, using, among other methods, the information provided by the taxpayer in his/her tax return; conducting a number of field exercises to determine the quality of the date, crosschecking with social security and other databases. It would also extend the Registry from the present 7 million to an amount to be calculated through an early study. In addition, a management information system would be defined and developed, performance indicators defined and baseline values measured. - 35 - If the Tax Registry represents the first step in the Compliance Process, the single taxpayer account is the essence of the process. It should contain taxpayer's fiscal compliance information, payment and refund information, and a record of all tax return and payment transactions with the taxpayer. This database contains the information necessary for enforcement of taxpayer compliance. The design of this database and the control of its integrity should take into account the bill on electronic document and signature being discussed in Congress. This database is required to carry out evasion studies, and to properly prepare cases, among others. At present, the account is being designed; no feasibility study has yet been done, but it is known that the task of creating the Single Taxpayer Account will entail the prioritized review and verification of millions of paper files and hundreds of databases. The project would finance technical assistance and equipment upgrade to create the single taxpayer account database, with information on taxpayers' tax profiles and payment history beginning with the highest revenue producing taxes/taxpayers by (a) gathering and verifying information from existing databases and files; (b) acquiring software; (c) consolidating the existing database (over 260) into one. The population of this database would parallel the Registry's. In addition, a management infornation system would be defined and developed, performance indicators defined and baseline values measured. One of the most important causeis of errors and loss of revenue is the present Notification System whereby SAT legally' transacts business with taxpayers on the results of audits, requests for payments and fines, and arrears. An analysis of the existing system would be carried out, and a new process and system, including a control system, developed. Finally, for historic reasons, the General Administration for Collections has the most experienced survey design and management staff in SAT. The project would finance technical assistance to create an internal survey service, including policies, procedures and training, to offer survey design and monitoring services to other areas which require information gathered through such means. The policy on this service would consider internal contract, chargeback and quality control issues. The project would also finance pilot surveys to internalize the service approach to surveys. Component 6 -Control and Eniforcement Process Compliance control is recognized as a key function in SAT's Strategic Plan, and its present weakness represents a large loss of revenues for Government. Only in VAT, currently the second largest revenue source after income taxes, a 1996 study estimated evasion to be about 60 percent. Other studies put it at 45%, still comparatively high with respect to other countries in the region. The two areas which address direct taxpayer auditing (General Administration for Federeal Fiscal Auditing and the G.A. for Large Taxpayers) have annual auditing plans with some, but not complete, performance indicators. One difficulty is that these indicators are oriented to the efficiency and effectiveness of the auditing activities carried out by the two areas, whereas evasion control is a an auditing process which involves many other areas of SAT, and whose indicator of performance should be actual collections due to all auditing activities. Also, the selection of taxpayers to be audited is not a systematic process, being a collegial effort on the part of auditors in both Large and Other taxpayer areas. Evasion studies are limited, and further work is necessary to know the parameters of evasion by sector and economic activity, by taxpayer size and geographic location. Similarly, an effort must be made to evaluate evasion methods by type of taxpayer and tax, to develop appropriately targeted auditing strategies and to modify them dynamically according to results obtained. To do this, a better performance indicator and auditing - 36 - methods must be designed, accompanied by training. Based on this, a "Risk Administration" strategy can be devised, to select cases and determine the auditing effort for each based on objective parameters. SAT is also increasing its fiscal presence through site visits, which has resulted in a strong increase in business suspensions and closures, especially in the restaurant sector. This is very important to maintain, even if its immediate effects are difficult to measure, as international experience indicates that this type of activity has an important effect on compliance. The weakness in control and enforcement is basically due to the same causes mentioned above, in particular, the lack of coordination, organizational performance indicators, and inadequate information, and the fact that control and enforcement are not being addressed as a process, and each area concentrates on its own bailiwick. Control is the process which begins with the identification of possible evasion (through automated systems, guidelines based on evasion studies, desk checking, site visits, and informers); selection of eases to investigate based on agreed priorities; investigation; preparation of the action file. A number of activities to improve control would be supported by the proposed project: 1. Redesign of the control process, through a review of the workflows, organization, information systems and management of the Federal Fiscal Auditing G.A. and auditing within the Large Taxpayer G.A. 2. Design of methods for the identification of evasion tendencies, which includes the development of evasion trends detection algorithms, systems and guidelines (based on evasion studies included in component 1); guidelines for desk checking, site visits and informers; identification and development of risk indicators for types of taxpayers and progressively for individual taxpayers. 3. Evasion review guidelines and control system, to record auditors' preliminary analysis of cases. 4. Based on the above, development of a case selection system based on agreed priorities and policies, which limits discretionary selection, to assist in the planning control activities for Large and Other taxpayers. The system would initially consist of cross-checking available information sources, eventually growing into intelligent and dynamic risk analysis systems for the different types of taxpayers. 5. Continuous and systematic evasion studies, in particular on VAT, oriented towards evasion by economic sector and type of taxpayer, to provide feedback for the update of the selection system, which improves as the institution learns and also to take into account the evader learning process (see component 1 - Analysis and Studies Unit) 6. Management & control system for the control process, which permits measuring the effectiveness of individual audits as well as control plans, and permits their modification through feedback. 7. Establishment of units or appointment of individuals specialized by economic sector or type of taxpayer, to systematically study each sector to discover evasion methods. 8. Theoretical and on-the-job training, to be carried out in coordination with component 2. - 37 - 9. Quality and integrity assurance unit and systems, to control corruption, increase effectiveness and provide feedback to the process systems and guidelines. The enforcement process begins with an identified evader, and based on the case prepared by the control process (action file), assessing the appropriate amounts and fines; notifying the evader; carrying out compulsory collection measures; possible administrative dispute process; and possibly then judicial disputes (to obtain assessed amounts or in some cases to prove felony). A number of activities to improve enforcement would be supported by the proposed project: 1. Redesign of the enforcement process, through a review of the workflows, organization, information systems and management of the Federal Fiscal Auditing G.A. and auditing within the Large Taxpayer G.A., Legal A.G., and Collections A.G. 2. Design of methods and guidelines for the non-discretionary assessment of owed amounts and fines. 3. Assessment control system, to record assessment activities. 4. Review of the notification system and its legal context, with a view to improving its efficiency and effectiveness, including outsourcing alternatives. 5. Development of a management and control system enforcement to measure the effectiveness of enforcement activities and to identify areas of process failure (e.g., non-located individual, erroneous notifications, lost cases, etc.). This system would include both "normal" collections and arrears. 6. Analyses of notification information provided by the enforcement MIS to provide feedback to the various processes and guidelines. 7. Analysis of compulsory collection measures and their legal context, recommendations for improvement, integration with the enforcement MIS. 8. Redesign the administrative dispute process within SAT; develop an integrated system for jurisprudence and internal regulations; develop guidelines and in coordination with component 2, provide training, integration with the MIS. 9. Update of the jurisprucdence and internal regulations system with information from SAT's cases in the Fiscal Administrative Tribunal; analyses of successes and failures. 10. Update of the jurisprudlence and internal regulations system with information from SAT's cases in the Judicial Tribunals; analyses of successes and failures. 11. Development of a system for the assigning cases to lawyers and integration with the Enforcement MIS. 12. Analysis of portfolio to develop criteria for the prioritization and planning of arrears collection; 13. Integration with the Enforcement MIS. Two activities have been identified with the requisite characteristics: Audit of export VAT refund; and case selection for Large Taxpayers. The first activity would consist of the design of a specialized audit method, analysis of methods of tax returns and payments, collection of internal information, cross-checking the information with major partners customs, analysis and assessment of amounts owed and penalties. The second activities would consist of an analysis of existing - 38 - procedures, the collection of internal and external information, and a proposal for selection methods. Component 7 - Planning and Quality Control SAT senior management last year carried out their first Strategic Planning Exercise (for 2001). As is usual in such activities, an iterative, incremental effort is required to improve the plans yearly. The present Strategic Plan combines elements of strategy and operations. The next iteration should result in separate strategic and operational plans. The operational plan would define all the activities necessary to accomplish the Strategic Plan objectives (detailing their duration, sequence and resources). The activities in turn should have clearly defined results and performance indicators for gauging accomplishment, efficiency and effectiveness, together with proposed goals. SAT's administrative units have been working relatively independently, with non-formalized means of coordination. For an organization with processes cutting across different functions and geographic areas, this has produced a lack of synergy and caused duplication of activities and efforts. This is harmful in an institution with very considerable inter-dependence. SAT's lack of adequate performance monitoring precludes result-oriented management and weakens accountability and transparency. The lack of coordination induces "stove-piping" of information which handicaps units which depend on derived data. This affects SAT's attempts to transform the existing culture into one of service-orientation. The present SAT organizational structure combines vertical functional areas with horizontal support elements. This functional approach splits essential business processes into discrete areas, which creates breaks in the workflow and loss of information. These breaks, as well as the lack of systematic managerial coordination, has impeded the horizontal support areas from fully assuming their organization-wide support role, which in cases has resulted in duplication of functions. Training, seminars and technical assistance on planning and performance indicators would be provided to senior and middle managers, with a view to achieving a Strategic Plan which: a. Integrates and reflects the organization as a whole rather than a bottom-up consolidation of individual efforts. A greater "top-down" approach would facilitate the alignment of each unit's objectives with the mission and values of SAT. b. Is multi-annual, to be revised every year based on the accomplishments of the previous year and the political, economic and technological environment and context of the coming year. c. Has objectives, from the very top down, that are oriented towards clearly defined and measurable results, with agreed annual goals. As some initial SAT baseline figures are lacking, the project would finance the identification of performance indicators, baseline measurement and forecasting studies. As a step towards transparency and accountability, the Strategic Plan would be eventually published in SAT's website, together with other important pertinent information such as each year's projected achievements measured against the organization's indicators, achievements for the last year, financial and other resource uses. - 39 - The existing advisory group to SAT's President will assume the function of Results Management, charged with assisting the various areas with strategic and operational planning, change management, conflict management, the definition and measurement techniques for performance indicators, and the monitoring of all project activities. One task would be to contract out a diagnosis the relationship between Customs and Tax Administration to prepare the basis for design of an action plan to strengthen the relationship. Performance indicators would be gathered into a Management Information System, which, as management processes are revised, would be fed with information automatically generated. In addition, quality control will be introduced organization-wide, through policies, procedures, evaluation methodologies and training. -40 - Annex 3 Estimated Project Costs Total Baselin Cost 5694 1925 76.19 Pbysical Contienes 0.00 0.00 0.00 Price Cordnencies 4.38 091 5 59 Frunt end Fee 0.00 0.52 052 | Total Project Costs 6133 20.67 82OO Total Finaunig Required 32.29 19.71 5280 Works ~~~~~~~~~~0.70 ODlO 0.70 |Goods 32<8 6.62 9.90 Consllty Services 52A7 1338 65Bg Tr?ig Exenitrs I DlO 0.16 1.16 lcounterpart Staff 3B7 ODO0 3fB7 Front end fee 0.00O 052 052; Total Proec Cos1s 61.33 201i7 82.0 Total Fbtaucing ReqWred 32.29 19.71 52DO -41 - Componente 1: ESAT/SERVICIOS AL CONTRIBUYENTE 1. 1 Obligaciones Fiscales Electronicas (Internet) 1.1. 1 Desarrollo de le estrategia e-SAT 80,000 1.1. 2 Declaraciones, :formacion de terceros, dictamenes y pagos 220,000 electronicos con sus respectivas consuttas, lo que incluye el rediseofo de procesos y sistemas: fase I 1.1. 3 Declaraciones, :formacion de terceros, dictamenes y pagos 600,000 electronicos con sus respectivas consuttas, lo que incluye el rediseflo de procesos y sistemas: fase 2 1. 1. 4 Preparacion y acceso de borradores de declaraciones para casos 120,000 1.1. 5 Diseofa de acceso a Intemnet para contsibuyentes sin acceso propio 80,000 1.1. 6 Apoyo y capacitacion para el diseola y servicios de paginas web 90,000 1.1. 7 Sistema de consultas en web (FAtQ) y chat 160,000 1.1. 8 Perfeccionamieinto de la pagina web de metas y planes SAT 100,000 1.1. 9 Notificacionesp?ormedio electronico 60,000 1.1. 10 Estudio sobre aspectos de seguridad y certificacion de la 10O,000 modificacion remota de informacion personal por telefono e internet 1.1. 11 Estudio de impacto de nuevas leyes yreglamentos sobre 60,000 Propiedad. Acceso v Proteccion de la Informacion del ciudadano. 1. 2 Asistencia por medics presenciales y no presenciales 1.2. 1 Diagnostico yinedidas de inicio, definicion de indicadores 80,000 1.2. 2 Comunicacion externa: preparacion e implementacion del plan 800,000 1.2. 3 Diseofo y desarrollo del sistema de control de gestion y de calidad 100,000 1.2. 4 Sistema autometizado de respuestas a consultas telefonicas 80,000 1.2. 5 Estudio de factibilidad sobre metodos altemativos de provision de 15O,000 servicios a contribuyentes con dificultades de acceso 12. 6 Estrategia de caeacion de puntos de asistencia directa 150,000 1.2. 7 Evaluacion de inecanismos de atencion personal, costo para el SAT 400,000 y el contribuyente, y propuesta de rediseoei de procesos, donde sea apropiado, hacia la asistencia por medios no presenciales 1. 3 PerftccionamdentD doe la Retro-alimentacion 13. 1 Anaiisis de los mecanismos existentes de retro-alimentacion y 100,000 recomendaciones para su mejora (sondeos, encuestas, otros) 13. 2 Capacitacion en desarrolo, monitoreo ymedida de calidad de 100,000 encuestas; preparacion de temiinos de referencia y contrataciones 13. 3 Desarrolo de un sistema automatizado de seguirniento de reclamos 5 100,000 13. 4 Perfeccionamie-nto del sistema de opiniones a traves de sindicos 100,000 13. 5 Desarrallo de mietodologias para medir el costo y tiempo de 70,000 cumpliniento por parte del contribuyente por tipo de obligacion y contribuyente 13. 6 Desarrolto del sistema de monitoreo permanente de costos y 70,000 tiempos de cuntplinuiento por pate del contuibuyente por tipo de obligacion y contribuyente -42 - 1. 4 MNedios de Defensa Admilstnaivs 1A. 1 Pesfeccionamiento de los medios de defensa 100,000 1A. 2 Desarrollo del control de gestion 100,000 1. 5 Perfeccionamiexto de la Cultura de Servicio al Ciuudadno 1.5. 1 Levantamiento de todos los puntos de contacto SAT-ciudadano 70,000 15. 2 Obtencion de informacion sobre la percepcion de la calidad de 400,000 servicio al ciudadano 15. 3 Definicion de estandares de servicio al ciudadano y sistema de 70,000 incentivos 15. 4 Desatrollo del sistema de control de gestion, desarrollo de 55,000 indicadores 15. 5 Extension a nivel nacional de la mentalidad de servicio 255,000 15. 6 Gastos de capacitation 56,000 Costns de Base six contingencias 4,065,000 -43 - Componente 2: PROFESIONAAIZACION DEL SAT 2.1 Desricion de cuaps y cuagas doe trbajo 2.1.1 Marco de planificacionymejoramieinto de recursos humanos 160,000 2.1. 2 Continuacicin del levantamiento de petfies, incluyendo 770,000 requernmentos y cargas de trabajo presentes y futuras; inventauio del personal 2.1. 3 Disefio y des anollo de la base de datos de perfiles 270,000 2.1. 4 Reasignacion de personal 7301000 2.1. 5 Marco de direccionypoliticas de getenciamiento, delegaciony 200p00 de centralizacion 2. 2 Marco Legal de RRHH 2.2. 1 Revision de leyes, politicas yreglamentos ypropuestas de mejora 30,000 2.2. 2 ApoyojuticSco enmaterialaboral 430,000 2.3 Capacitaclon 23. 1 Identificacicin de necesidades, preparacion del Plan de Transicion 800,000 de Capacitacion y ejecucion 23. 2 Profesoradc, 220,000 23. 3 Gastos do cipacitation 200,0Q0 23. 4 Desarollo del sistema do control de gestion de capacitacion, 270,00O incluyendo indicadores y evaluazion del aumento de capacidades 23. 5 Identificacicn de necesidades, preparacion del Plan Permanente de 850,000 Capacitaciony ejecucion 23. 6 Gastos de capacitation 135,000 23. 7 Serminanios y capacitacion en planificacion estrategica 180,000 23. 8 Gastos de cipacitation 120,000 23. 9 Capacitacio:a en abilidados de direccionQiderazgo, control del 80,000 tiempo, trabajo en equipo, etc) 23. 10 Gastos de cspacitation 130,000 23. 10 Desarollo de la carrera de directivo pubhico, incluyendo 175,000 identificacic-n do candidatos, perfeccionamiento medianto capacitacion y practica 2. 4 Sistma de incentivos 2A. I Anahsis do las pohticas etstentesy propuesta de 250,000 perftccionmiento del sistema de incentivos (monetarios y no monetarios) atado al cumplimiento 2A. 2 Definicion del sistema de evaluacion de desempeho individual 2W,000 2A. 3 Definicion dtl sistoma de evaluacion de dosempe,fo gerencial S10100 2A. 4 Analisis deas politicas eistentes ypropuestado 150,000 perfeccionoiniento del sistema de seleccion, contrataciony despido de funcionaios 2A. 5 Gastos de calpacitation 60,000 2A. 6 Analisis del sistema de reclamos y quejas intemas ypropuesta part 170,000 su peleccionamiento 2.5 Coimulcaclones :blaeDs 25. 1 Preparacion del Plan do Comunicaciones Intemas y ejecucion 600m0O 25. 2 Desarollo del sistema de control de gestion de comaunicaciones 100,000 25. 3 Definicion de la encuesta intrne; piloto 50,000 25.4 Encuestainlerna 750,000 25.5 Plany desarrollo del sisatent de induccion 20,1000 25. 6 Politicasyprocedimientos de serviciointerno do comunicaciones 90,000 2. 6 Sisuema de Gesodn 2.6. 1 Definicion de requerinmientos y adquisicion del software integrado 2,700,000 con modulo; RRHH, Financieros y Matenales 2.6. 2 Gastos de capacitation 300JDQO 2f6. 3 Definicion de informacion para usoas reservados 100,000 2f6.4 Alimentacion, adaptacionypuesta enmarcha del sistema 750,00 incluyendo el subsi6tema de control de gestion -44 - 2.7 Optimdzacion del gasto del SAT 2.7. 1 Analisis de los sistemas existentes de contabilidadypresupuesto, 100,000 y definicion de requirimientos pare utilizacion de contabilidad de costos y presupuesto como util de planificacion y control de gasto 2.7. 2 Alimentacion, adaptacion y puesta en marcha del sistema 700,000 incluyendo el sub sistema de control de gestion 2.8 Sistema de Gestion de Recursos Materiales 2.. 1 Analisis de los procesos de gestion de recursos materiales y 100,000 definicion de requerinmientos 21. 2 Adaptacion y puesta en marcha del sistema incluyendo el 700,000 subsistema de control de gestion 21. 3 Ejecucion de inventario 800,000 21. 4 Desarrollo del modulo de control de mercancias embargadas y 250,009 remate s 21. Ejocucion delinventario de mercancias... 1,000,000 21. 6 Implementacion del sistema 600,000 2. 9 Organizacion de Los Servicies Internos del SAT 29. 1 Definicion de politicas y procedimientos, incluyendo el concepto 150,000 de precios y pagos de srevicios 29. 2 Preparacion de la estrategia de implantacion, incluyendo inventario 150,000 de servicios y priorizacion de areas 29. 3 Definicion de medidas de calidad do servicios y metodologias de 150,000 "contratacion" y monitoreo; capacitacion 29. 4 Ejocucion de la estrategia 200,000 Costos de Base sin ctln&ecwias 17,400,000 -45 - Componente 3: NUCLEO DE INFORMACION 3. 1 Gestion dea hdblrmacion 31. 1 Establecitniento de la tncion de CIO 510,000 3.1. 2 Apoyo 60,000 3.1. 3 DBMS optimizado pxat el acceso y la seguridad 800,000 3.1. 4 Politicas de acceso y seguridad; procedimientos 240,000 3.1. 5 Sistemas de seguridacl perimetral (ntemos y externos) 4,200,000 31. 6 Gastos de capacitacion 35,000 3.1. 7 Medicion de colidad d.e la informacion e indicadores 240,000 3. 2 Registre Unico de Contribuyestes (Base de consulta) 3.2. 1 Definicion de politica ymecanismos de transferencia 30,000 32. 2 Desarrollo del mecatnit:mo de transferencia 140,000 3. 3 Cuexta Unica Integral del Conlribuyente (Base de consults) 33. 1 Definicion de informacion a set transferida a la base y sus fuentes 30,000 33. 2 Estrategia de integraci.on (secuencia y prioridades) 60,000 33. 3 Definicion de politica ymecanismos de transferencia 30,000 33. 4 Desarrollo de los mectmirsmos de transferencia 240,000 3. 4 hdtrmacion de Comercio Exterinr (Base de consulta) 3A. 1 Definicion de infonnacion a set transferida 30,000 3A. 2 Estrategia de intograci.on (secuencia y prioidades) 60,000 3A. 3 Definicion de politica :y meocanismos de transferencia 30,000 3A. 4 Desarrollo de los mecanismos de transferencia 240,000 3. 5 Inbrinacion de recursos ILumanos, fnancieros y fisicos (base de consul 3.S. I Defoincion de politica :y mecanismos de transferencia 30,000 35. 2 Desarrollo delmecanismo de tansferencia 350,000 3. 6 Warehouse de Documentos Digitalizados (base de consult) 3.6. 1 Definicion de politica :mecanismos de transferencia 30,000 3.6. 2 Desarrollo del mecanii:mo de transferencia 150,000 3. 7 Infrmacion de apoyo pan la olperacion interna (base de consulta) 3.7. 1 Analisis de requerinientos S0,000 3.7. 2 Estrategia de integracion (secuencia y prioridades) 60,000 3.7. 3 Definicion de politica-;mecanismos de transferencia 50,000 3.7. 4 Desarrollo de los mectnismos de transferencia 200,000 3.7. 5 Obtencion de la inforniacion 300,000 3. 8 Ibnradcionpan la torna.e decisiones (base do consulh) 3.. 1 Definicion de politicay mecanismos de transferencia 30,000 3.8. 2 Desorrollo del mecanizmo de transferencia 250p00 3. 9 Sistemade dInSrues especralizados 3.9. 1 Desawrolo de sistemas' e informes 250,000 3.10 Inhhntacionprwenielet de hents exsernas (base de consul1t) 310. 1 Analisis de requeuiniieitos 200,000 310. 2 Estrategia de integracion (secuencia y priouidades) 180,000 3.10. 3 Definicion de politicayrmecanismos de transferencia 200,000 310. 4 Desarrollo de los mecmnismos de transferencia 400,000 3.10. 5 Medidades de seguridad SO OO 3.10. 6 Segregacion de inforruacionpara grupos especiolizados 100,000 Costos do Base sin contingenciLs 9,855,000 -46 - Componente 4: SERVICIOS DE TECNOLOGIA 4. 1 Estudies yEstrategias 41. 1 Desarnollo de planinformatico de apoyo alPlanEstrategico: 70,000 servicios y tecnologia 41. 2 Desarrollo de lapolitica de servicios intemos de tecnologia, 70,000 procedinmientos y guias; comtite de prionzacion, trabajo en equipo 4.1. 3 Desarrollar estrategia. politicas y procedimientos para aseguar la 80,000 calidad e integridad de los datos 41. 4 Desarrollo e implementacion de un Plan de Respaldos 70,000 4.1. 5 Actualizacion de equipo de respaldo 220,000 4.1. 6 Actualizacion de equipo de respaldo (2) 320,000 4.1. 7 Desarrollo e implementacion de un Plan de Contingencias 250,000 4.1. 8 Desarrollo e implementacion de un Plan de Recuperacion de 550,000 Desastres 4. 2 Anqliacien del Laboratuino de Pruebas de Sistemna 4.2. 1 Desarrollo de requeritientos 95,000 4.2. 2 Adquisicion de equipos 583,000 4.2. 3 Asistencia tecnica y capacitacion para mejorar el grado do anti- 200,000 corruptibilidad de los sistemas 4. 3 Centralizacion de sistemas distribuidos 4.3. 1 Desarrollo de estrategia de centralizacion 80,000 43.2 Modificacionypruebade sistemas 570,000 4. 4 Migracion de dates a nuevos sistemas 4A. 1 Analisis, evaluacion, priorizacion y plan de migracion 44,000 4A. 2 Defiticion de aphicativos de ingracion y adquisicion 150,000 4A. 3 Migracion 670,000 4A. 4 Definicion de metodologia de control de calidady aplicacion 168,000 4. 5 Renplaze a actualizacion de equipos 45. 1 Analisis, evaluacion, priorizacion y plan de remplazo o actualizacion 50,000 4.5. 2 Preparacion de especificaciones 50,000 4.5. 3 Adquisicion de equipos 1,000,000 45.4 Adquisicion de equipos (2 1,000,000 4.5. 5 Adquisicion de equipos ( 4,400,000 4.5. 6 Rehabilitacion de oficinas part la instalacion de equipos 475,000 465. 7 Rehabilitacion de oficinas para la instalacion de equipos 2 198,000 4. 6 Sistemas de apoyo pan precesos adminisatitos 4.6. 1 Inventario y evaluacion de tecnologia de oficina 250,000 4.6. 2 Analisis de flujos de trabajo administrativo 250,000 4.6. 3 Introduccion de nuevos procesos administrativos automatizados y 700,000 capacitacion 4.6. 4 Adquisicion de equipos 1,200,000 4.7 Digitaflzacion de dicumentos 4.7. 1 Estudio de factibilidad de digitalizacion y identificacion de 50,000 requenimientos 4.7. 2 Desarrollo de estrategia y plan de digitalizacion, incluyendo 70,000 priorizacion de documentos por tip o y us o de documento 4.7. 3 fiemas 70,000 4.7. 4 Adquisicion de software aplicativo 450,000 4.7. 5 Escaneo de documentos 1,800,000 4.7. 6 Definicion de metodologia de control de calidad y aplicacion 40,000 Costes de Base sin condngencias 16,243,000 -47 - Componente 5: RECAUDACICON 5. 1 AyHablan y deudcion del Rfgifst Federal de Contrhbuyentes 51. 1 AmpliEacion del estudio de estimcion del umiverso de 70?p00 contdibuyentes fuere delpadron 51. 2 Continuacion del desarroilo de li estrategia de depwacion, 70pO0 metodologias y plan para el aseguramiento de la cahdad, vaEdacion 5.1. 3 Continuacion del descnoto de li estrategia de amphtcio. 100,000 metodologias y plan para el aseguramiento de la caldad, vaEhdacion de las metodologias 51. 4 Disefio de la base de datos, actualiztcion de sigtemas apEcativos y 300,000 de control (incluyendo pists do tauditona y otros) 51. 5 Definicion de especificaciones de equipo y ephcativos de bese 50,000 51. 6 Adquisicion de aplictivos de base 300,000 51. 7 Actualizadon de equipos 300,000 51. 8 E4ecucion de la depuracion 750,000 51. 9 Ejecucion de la ampEacion (barndos, chuces, etc.) 7p,00,O 51. 10 Diroccion de la ampiacion, contraparte 340,000 5.1. 11 Sistema de control de gestiony aseguramiento de caidad 11OpOO 5. 2 Cuewta Unica del Contrihwente @asica) 5.2. 1 Definicion del ciclo de vida del ctlrplimiento del contribuyente y 80,000 detenminacion de responsebiEdades; propuesta de perfeccionamiento 52. 2 Desesrollo de la estrate_ia de depuracion, metodologies y plan part 70OO0 el aseurmaniento de la cadad. viEdacion de las metodoloeias 52. 3 Desarrollo de laetstrategia de amohacion,metodologiasyplanpart 1OOpOO el aseguramiento de la caldad, vasdacion de las metodolo,ias 52. 4 Diseiio delabase de datos, actuaktcionde sistemas aphcativosy 50,000 de control (incluyendo pistas de auditonia y otros) 5.2. 5 Definicion de especificaciones dt equipo y apEcativos de base 50,000 52. 6 Adquisicion de aphcativos de besa 300,000 52. 7 Actualiacion de equipos 362,000 52. 8 Ejecucion de la depuracion 590,000 52. 9 Ejecucion de la ampliEcion 1,270,(00 52. 10 Sistema de control de gestiony eseguremiento de calidad 130IS,O 5. 3 DurIa de rocaudacion 53.1 Base do datoa de declaraciones y pagos SO OO 53. 2 Base de datos de contabllidad 50,000 53. 3 Base de datos de retenedores 50,000 53. 4 Otras bases datos SO5O0 53. 5 Doserrollo de sistemas 100,000 S. 4 Sistema Geo-refirencado SA. I Marco Geo-fiscal 50,000 5A. 2 Sistema de informacion geografico-fiscel SW0,0A0 SA. 3 Chupo especial de localizacion de contribuyentes 400,000 SA. 4 Sisteme de control de gestiony aseguramiento de caddad 100,000 S. 5 Stlsta de Notificaciones del SAT 55. 1 Anhisis del sistema actu y evuluacion de dlteniativas de ISO1,O0 tkrcefizciot 55. 2 PoEticas yprocedimientos de ser,icio intemo de notificaciones SOpOO 55. 3 Desarrollo de sistemas de enlace de informacion de notificacion al ISO1O0 area oustantiva 55. 3 Sistoma de control de gestiony asegurac±iento de codtad 110,000 S. 6 Servicio de eneuestas 5.6. 1 Anahsis del sistema actualy evaluacion de altemativas de 230,00 terceizacion. 5.62 Sistema de control de gestion y ;eguratmiento de caddatd 11000 5. 3 Capacitacion en el diseho, validaion, contretacionymonitoreo de 130pO0 encuestes 5.6. 4 Encuestas especificas enapoyo a diferentes areas 1,220,0 C dstos de Base si centencias 15,92pO0 -48 - Componente 6: PROCESO DE CONTROL Y FISCALIZACION 6. 1 Seleclon de cas par sesslon en Grades Contlbuyeutes (soedn do cnrts phi.) 6 1 1 Analises de procedimienrtos actuales 100l00 6.1 2 Recaolccionde infornacionintemay extema 100000 61 3 Propuesta de metodos de selecciaon 8000 61 4 Ejecucion 2m2, 6. 2 Audisorla do Devolhrbion do IYA (accion do corst plno) 62 1 Disefio de metodos de suditouia especiales 80 00 6.2 2 Anslisis de metodos de devolucionypago 60pO 62 3 Recolec cion de informacionintema y eterma 800 624 Crucesdeo formacionyanaeisis especielizadosportipode 120,000 devolucion 6.2 5 Calculo de ontos a devolver/pagar y multas 150IO 6. 3 Pnrceso Integral de Contml y Seguiteno 63 1 Definicion del ciclo de ectividades de controly seguimiento, 100000 doteeminacion de responesbiidades; retro-alimentacion ertre las areas; identifLcacion de informacion requesrida po: las divereas 63 2 Sistema de coftrol de gestion ntegral y aseguremierdo de calidad 16000 63 3 Evaluacion de la percepcion de ziesgo por parte de los 53000 contribuyentes yplmn de mejora 6 3 4 Implementacion del plan y useguranieroto de calidad 750 O 6. 4 Deteccion de tendencas de evanon y clusint 6.4 1 Preparacon de algouitmos de deteccion de tendencies de evasion SW00A0 en bas a estudios de evasion e informacionintemr o esterna 6 4 2 Creacion de una base de dato: de apoyo alaplatificacion de la 160090 fiscelizacion 643 Estudios de motodos de evesion y eluion 160 000 6. 5 Doteccion de tndeocuas do e wson (Grandes CotdbVnyotes) 6.5 1 Preparacion de elgoritmos de deteccion de tendencies de evasion SWnM en base a estudios de evasion e infornacion mterna o externa 65 2 Creacion de unabase de dato: de apoyo a laplanficacion de la fisce 160pO0 65 3 Estudios de metodos de evasion y elusion 320,000 6. 5 Control y Flscsllzcion 6.5. 1 Eveluacion delproceso de auditorie del contribuyente ypropuesta 100000 de pelfeccionamento 65. 2 Disefio de metodos de identificacion de fuentes de evasion 240,000 65. 3 C3uias sectouiales prarel control de evasion 240000 65 4 Desarrollo de un sistemia automatizado de seleccion de casos y 150IO sistems de control 65. 5 Sistema de control de gestiony ooeguremiento de calidad 120,00 65 6 Especiahzacion de profesiondlesxnidades para sectores 200A00 econonicos relevantes 6.5. 7 Capacitacion eAcademica y de terreno 635 8 Coordinadon con Autoridades Fiscdes del extrarnero 100000 6.6 Seg.iXtm ,,pre-juditdalyjuincln Evalueaiondelproceso de seguimieanoypropuestade 70000 6.6. 1 perfeccionwmento 6.6 2 Diseofo de estrategias legales pmar detemmar monto: a 120000 devolverlpageo multas y sanciones penales 6.6. 3 Sistems de control de gestiony aseguramiento de calidad 100 000 6.6. 4 Analisis de lainformnacionrelacionadus conlos contLibuyentes con 100 000 orientacion hacia los aespecto: penales 6.6. 5 Analisis de medidas comtpulsivas de recaudaciony cobro 100000 6.6. 6 Evxadcion delproceso de dispute adminiistrotivey propuesta de 100000 perfeccionainierdo 66. 7 Sistemaintegrado dejuispcudenciaynornatividad 400009 6.6. 8 Macnuales deprocedimientosycapadtacion 210000 6 6. 9 Andlisis de informacion de cos oen el Tribunal Adminisstativo ISOOOO 6.6. 10 Analisis de nfonmacion de cuos en elTrbunal Judiciales ISO150 66. 11 Sistema de asignacion de cuos a abogado: y seguimiento 14SIO0 6.6. 12 Analisis de la cater de morosos, preparacion de estratega y 210A00 polticas de psiomacion y plan operacional de cobro 6.6. 13 Analisis de conductas post-cobrana y percepcion de riesgo 210J00 6.6. 14 Capacitacionacademicsydeterreno enlnvestigacion 300,00 Costs do Base ds sonthgrnwds 4,465,80 -49 - Componente 7: PLANIFICACION Y CONTROL DE CALIDAD 7. 1 P1a,dficnron 7.1. 1 Definicion de indicadores estrategicos y de gestion 180,000 7.1. 2 Catculo de valores iniciales de indicadores 520,000 7.1. 3 Diagnostico y planificacion del fortalecimiento de la relacion entre Aduanas y 300,000 la admiinistracion tsibutaria 7.1. 4 Disen±o y desarrollo del Sistema de Control de Gestion de la Alta Direccion 187,000 7.1. 5 Asistencia Tecnice - intercambio de experiencias y apoyo 750,000 7.1. 6 Fortaleciniento del. Ofupo de PlanificacionyGestion de Resultados 180,000 7.1. 7 Gastos de capacitacion 20,000 7.1. 8 Perfeccionamiento de la gestion matricial y de proyecto en el SAT 130,000 7.1. 9 Coordinacion del proyecto 390,000 7.1. 10 Fortalecimiento del Grupo de Seguitiiento del Proyecto 240,000 7. 2 Control de Calidaul 7.2. 1 Definicion del marco de calidad del SAT, introduccion del concepto de calidad 100,000 72. 2 Definicion de politicas yprocedinientos do evaluacion 50,000 7.2. 3 Desarrollo de metodos de evaluacionyformacion 210,000 CostDs de Base sin contiuencias 3,257,000 -50 - Annex 4 Lessons Learned Need for a Leader: The Undersecretary of Revenues, who is in charge of both tax policy and administration, is strongly committed to the reform of the tax administration. He is supported by the President and by the Secretary of Finance and Public Credit, and at this early stage of a new administration, has the opportunity to make his reform mandate effective. Inadequate change/closure of nonperforming components: Performance indicators will assist in identifying slow performing components; a decision on their continuation will be formally made during supervision missions. Inadequate monitoring and evaluation, and accountability: The improvement of accountability and performance monitoring throughout the institution is explicitly addressed by the project. Baselines will be calculated during the first year of project execution. Institutional modernization as an iterative process: The project action plan will be revised semi-annually during supervision missions, to provide flexibility to introduce changes, gather knowledge, credibility and consensus for reforrn. Need for immediate gains to gain project credibility: Although institutional change is a long-term activity, short-term successes are essential to enhance the credibility of the reform and facilitate political support. Short-term results from activities will be made known; one component specifically addresses short-term activities not in line with the principles of the reform. Address institutional constraints and not only systems and technology: A correct approach to strengthening an organization would be to address its strategy and corporate objectives first, complemented by a comprehensive review of its management, organization and personnel needs. Processes are then adjusted or created to support the corporate objectives, and finally technology brought in where appropriate. This is the approach explicitly taken in the project. Result-orientation is sought: Objectives and performance indicators for staff, management and processes are required for management decision-making throughout the organization. This project would assist the organization in implementing them, through baseline calculations, measuring, and modification of systems to provide indicators and training. Decentralization sought: Given existing technology and communications, centralization of data is the correct approach sought for a tax administration. However, this must be accompanied by a decentralization of authority and tasks for improved efficiency. The project contemplates horizontal management coordination combined with a substantial broadening of regional and local office management within an integrated management framework. Change management is needed: The extensive organizational redesign and culture change sought requires careful attention to change and conflict management to lessen resistance to change. The first component of the project aims to assure that these critical aspects of change are addressed. -51 - Annex 5 Financial Summary 4P.MV1=wJM.I.V : OFft"l'$3 Total Financing Required Pmject Costs 6.48 33.46 27.23 11.04 3.80 Investment Costs 6.48 33.46 27.23 11.04 3.80 Recurrent Costs 0.00 0.00 0.00 0.00 0.00 Total Prject Costs 6.48 33.46 2723 11.04 3.80 Total Financing 5.02 21.35 17.91 632 1.40 Financing IBRDJIDA 5.02 21.35 17.91 6.32 1.40 Government 1.45 12.11 9.33 4.72 2.40 Centrl 0 .00 0.00 0.00 0.00 0 .00 Provincial 0.00 0.00 0.10 0 .00 0 .00 Co-financiers 0.00 0.00 0.00 0.00 0 .00 User-feesibeneficiaries 0.00 0.00 0 .00 0 .00 0 .00 Other 0.00 0.00 00.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Pmject Finning 6.48 33.46 27.23 1104 380 IN WN Y 1: eSATJTaxpayer Services 1.01 2.12 139 0.73 0.12 5.38 2: Hma, Finacial and Physical M agement 131 5.94 7.35 3.34 0.87 18.82 3: Information Hub 0.11 2.67 635 0.85 058 10.56 4: TecbnlorSennces 0.54 10.77 4.12 1.64 °0 ° 1ii 5: Complince Pmcess 0.64 7.90 4.62 2.45 155 17.16 6: Control & Enforvement Pmcess 1.83 3.28 2.49 1.18 018 895 7: Planning and Quahty Control 0.51 0.77 091 0.84 0.47 3.51 Base Costs 5.96 33.46 27.23 11.04 3.80 81.48 Front-End Fee 0.52 TO TAL d648 33.46 27.23 11.04 3.80 82.00 TDhided into: World Bank 5.02 21.35 17391 6.32 1.40 52.00 Government of Mexico 1.45 12.11 pi.33 4.72 2.40 30.00 -52 - Annex 6(A) : Procurement and Disbursement Arrangements Procurement of Goods Procurement of goods financed by the World Bank under the project would be carried out in accordance with World Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995, revised in January and August 1996, September 1997 and January 1999) and the following provisions of Section I of this Annex. The executing agency for the project will be the Sistema de Administraci6n Tributaria (SAT). Grouping of contracts. To the extend practicable contracts for goods shall be grouped in bid packages estimated to cost US$500,000 equivalent or more each. Notification and advertising. The General Procurement Notice to be published in the Development Business, shall be updated annually for outstanding procurement. All invitation to bid shall be published in the "Diario Oficial de la Federaci6n" and in COMPRANET. In addition, invitation to bid for each contract estimated to cost US$10,000,000 equivalent or more shall be advertised in the Development Business in accordance with the procedures applicable to large contracts under paragraph 2.8 of the Guidelines. To obtain expressions of interest for large consultant assignments (contracts expected to cost more than US$200,000 equivalent) a specific procurement notice shall be also published in Development Business. Section I-Procurement Methods The methods to be used for the procurement describe below, and the estimated amounts for each method, are summarized in Table A. The threshold contract values for the use of each method are fixed in Table B. Procurement of Works Minor works to prepare offices for the installation of equipment, cabling, etc., up to an aggregate of US$700,000 may be procured using National shopping procedures based on a request for quotations acceptable to the Bank. Procurement of Goods Goods procured under this project will include information technology equipment totaling US$9.90 million equivalent. Major contracts for these goods will be procured following International Competitive Bidding procedures (ICB), using Bank Standard Bidding Documents (SBDs). Contracts estimated to cost less than US$500,000 equivalent per contract, up to an aggregated amount of US$3.00 million equivalent, may be procured using National Competitive Bidding procedures (NCB) and agreed Standard Bidding Documents. Contracts for goods that cannot be grouped into large bidding packages and estimated to cost less than US$100,000 equivalent per contract, up to an aggregated amount of US$1.00 million equivalent, may be procured using shopping (National or International) procedures based on a request for quotations acceptable to the Bank. -53 - Section II-Employment of Consultants Consultant services shall be procured in accordance with Guidelines for the use of Consultants by the World Bank Borrowers and the Bank as Executing Agency (January 1997, revised in September 1997, January 1999 and May 2002) and the following provisions of Section II of this Annex. Consultant services will be contracted under this project in the following areas of expertise training and institutional development. These services are estimated to cost US$67.74 million equivalent and would be procured using World Bank Standard Request of Proposals. Firms. All contracts for firns would be procured using QCBS procedures except for small contracts for assignments of standard or routing nature and estimated to cost less than US$100,000 equivalent that would be procured using LCS, up to an aggregate amount of US$1.5 million equivalent. Single-Source Selection only will be acceptable, previous Bank No-objection, to assignments when only one firm is qualified or has experience of exceptional worth. Training expenditures will be procured using national shopping for rental of equipment and locales. Individuals. Specialized advisory services would be provided by individuals consultants selected by comparison of qualifications of at least three candidates and hired in accordance with the provisions of paragraph 5.1 to 5.3 of the Consultant Guidelines, up to an aggregated amount of US$5.0 million equivalent. The following provisions shall apply to consultants' services to be procured under contracts awarded in accordance with the provisions of the preceding paragraphs. The short list of consultants, estimated to cost less than $200,000 equivalent per contract, may comprise entirely national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Prior review: The prior review arrangements are presented in Table B. Procurement plan. By Negotiations, the Borrower presented to the Bank for comments a procurement plan for project implementation which provided the basis of the aggregate amounts for the procurement methods. Each year, the Borrower would update the procurement schedule for the following year, including the ICB procedures, the smaller procurement and the consultancy and training services to be financed under the proposed loan following the model procurement plan. Section rn-Procurement Responsibilities and Capacity A procurement capacity assessment for the project was carried out by Ms. Lea Braslavsky, Country Procurement Specialist, LCOPR, and approved by RPA on May 1, 2002. The National Development Bank (Nacional Financiera-NAFIN), one of the three financial intermediary institutions of the Mexican Government will be responsible through its Special Financing Unit for: (i) reviewing all procurement procedures and bid evaluation reports submitted by SAT, (ii) give the no-objection for the award of contracts below the agreed threshold for Bank prior review; and (iii) maintaining all the corresponding records. NAFIN's performance under previous Bank financing projects was satisfactory. The IBank's Implementation Unit in Mexico will provide procurement advice to SAT and NAFIN as required and carried out the Bank's fiduciary functions delegated to it. To ensure SAT's staff knowledge of World Bank procurement Guidelines and procedures, a special procurement seminar was given by the Mexico Resident Mission to SAT's staff. -54 - During project preparation, NAFIN and SAT have confirmed their will for ethical behavior and have expressed their commitment to adhere to competitive selection and transparency in all activities. The Operational Manual will include a chapter call "Code of Ethic" Based on the above procurement risk for the project is rated as "average". Section IV: Procurement Monitoring SAT will prepare annually a Procurement Plan satisfactory to the World Bank and establish procedures for monitoring project execution and impact, procurement implementation, including monitoring of contracts. SAT as well as Nafin will maintain detailed records of procurement activities. Review by the Bank. The proposed thresholds for prior review by the World Bank are based on the procurement assessment of the project executing agency and are summarized in Table B. In addition to this review of individual procurement actions, the annual procurement plan will be reviewed and approved by the Bank, as well as procurement audits to be carried out during the life of the project. Frequency of Procurement Supervision. Based on the overall risk assessment (average) the post- review mission for the project shall be completed every 12 months and shall cover not less than 1 in 20 contracts signed. TABLE A: Project Costs by Procurement Arrangements (US$ million equivalent) _ _ _ _ _ _ _ __I_ _ _ _ _ _ _ _ _ _ __w w o~;U 0.70 - 0.70 1. Worh (050) - (050) 2. 5.26 3.48 1.16 - 990 (452) (3 00) (1.00) - (8.52) !U3. Cousulting Services at - 65.85 - 65.85 3. Co ____su_ ___g Se_ _____s_a- - (41.46) - (41.46) 4. Tn bf . 1.16 - 1.16 _ _ _ _ _ - l (1.00) (1.00) S. CouzteLpart Staff 3.87 3.87 6. Front end Fee -0.52 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - _ _ _ _ _ (0 .5 2 ) Total 5.26 3.49 6939 3.87 82.00 ___________________________________________ (452) (3.00) (44.48) - (52.00) Figures in parenthesis are amount to be financed by the Loan ICB= International Competitive Bidding NCB=National Competitive Bidding Others=Local and International Shopping; hiring consultant services according Bank Guidelines; and training using LCS. -55 - TABLE Al: Consultant Selection Arrangements *__._ (in US$ million equivalent) .4 W_~ ~ ~ ~ ~ ~ ~ I -.. _ __ ' 77- c6st E ~~~~~~~~Ct~i.. ;Vg~ ~ (nicl.,..S, QCBS OBS SFB LCS CQ Other A. Firns 43.65 0.00 0.00 16.72 0.00 0.00 60.37 (29.U0) - - (6.38) _ - (36.18) B. Iiduals 0.00 0.00 0.00 0.00 0.00 5.48 5.48 (5.28) (5.28) 43.65 0.00 0.00 16.72 U00 5.48 65.85 (29.80) - (6.38) (5.28) (41.46) Note: Figures in parenthesis are amount to be financed by the Loan QCBS = Quality- and Cost-Based Selection LCS = Least Cost Selection Other = Selection of individual consultants (per Section V of Consultants Guidelines), Service Delivery, etc. TABLE B Thresholdls for Procurement Methods and Prior Review (US$ 1,000 equivalent) - .~ 4'.~7 't vaubarrocurvithenta I.ntacSbbu jeci Goods >500,000 ICB All <500,000 NCB First two contracts <100,000 Shopping at None least 3 suppliers Services Consulting Services: Firms >200,000 QCBS-Short All List International >1(0,000 QCBS All <1(0,000 QCBS TORs Individual >50,000 Consultant All Qualifications < 50,000 Consultant TORs Qualifications Training services National First two contracts ____________ Shopping ICB = International Competitive Bidding NCB= National Competitive Bidding QCBS= Quality and Cost Based Selection LCS= Least Cost Selection -56 - ANNEX 6(B): Financial Management and Disbursement Arrangements Financial Management 1. Summary of the Financial Management Assessment (FMA) Financial Management Assessment. A financial management assessment was carried out based on applicable Bank guidelines and procedures. It concluded that Sistema de Administraci6n Tributaria - SAT, the implementing unit, is currently prepared to implement the project. Based on the FMA review and on the information of the ISO certification, it was concluded that SAT is currently fully staffed and operational, and that it is operating a sound financial management system which meets minimum Bank financial management requirements. The FMA recognizes that that one of the activities of the project aims at the further strengthening of the systems concerned, which will enable them to meet all Bank requirements. Overall Risk Assessment. Moderate, based on that inherent risk (country, entity and project) and control risk (entity, flow of funds, staffing, accounting policies and procedures, internal audit, external audit, reporting & monitoring and MIS) are overall moderate. Frequency of financial management supervision missions proposed. As required but at least once a year. Financial Agency. SAT will be responsible for all project activities with the support of the designated financial agency, Nacional Financiera. Staffing. There is a good financial management team, skilled and well trained. The project manual will reflect all related information for this project i.e. organizational chart, job descriptions, specific responsibilities for this project. FMR Reporting. The project will produce FMR on semi-annual basis starting after project effectiveness. The format and contents of the FMR were agreed before negotiations. Management Information System. Existing SAT's systems are acceptable to the Bank as they satisfy minimum Bank requirements on financial management, however, those systems will be adjusted to be fully satisfactory to the Bank based on project needs. Budgeting. Financing for the proposed project would be included under standard SAT budget and, therefore, it would be fully pre-financed by the federal government. Flow of funds will be separately identified in all records, reports and files i.e. authorized budget, modified, committed, reserved, spent and reimbursed. Project budget will be in line with PAD projections, which will be up-dated as needed. 2. Audit Arrangements Accounting and auditing. SAT will maintain separate project records which will reflect, in accordance with sound accounting practices, the operations, resources and expenditures of all -57 - project activities. Independent annual audits will be carried out in line with standards compatible with the International Standards on Auditing (ISA), applicable Bank guidelines, legal documents and the technical memorandum of understanding on auditing dated June 2001. These audits will be carried out by auditors acceptable to the Bank and corresponding reports will be submitted to the Bank within the six months after the end of each fiscal year. The audit review will include all project operations and its Special Account. 3. Disbursement Arrangemenits Traditional documentation requirements apply for direct payments, special commitments and statements of expenditures. Full documentation is required for contracts that are above the prior review limit. If project is converted to FMR-based disbursement methodology, all procedures should be satisfactory to the Bank. For prompt disbursements, the SAT will prepare necessary documentation. Retroactive Financing. The project is considering retroactive financing from preparation activities prior to loan signing. Retroactive financing of up to US$ 5.0 million would be permitted for eligible expenditures made after February 10, 2002 (beginning of Project Identification). Project Manual. The manual will include a financial management section satisfactory to the Bank; this will be a project effectiveness condition. Use of statements of expenditures (SOEs): Disbursemnents will be made against Statements of Expenditures. Detailed supporting documents showing evidence of payments to contractors and suppliers will be kept in SAT files and will be made available to Bank supervision missions and the annual audits Based on thresholds recommencded, full supporting documentation will be required for all contracts for goods higher than US$ 500,000.00, consultant firm contracts above US$ 100,000.00, individual consultant contracts above US$ 50,000.00. All expenditures for training, except those which relates to contracts with firms and training institutions will be disbursed by SOE. Special account: A Special Account in US dollars will be established at the Banco de Mexico, Nacional Financiera (NAFIN), or in a commercial bank on terms and conditions satisfactory to the Bank The authorized allocation is US$ 4 million and the initial deposit is $2 million. The SAT might opt to request up to US$2 million out of the pre-authorized revolving fund above mentioned . When the aggregate disbursements under the loan have reached US$ 8 million, this allocation may be increased up to the total allocation. Replenishment applications should be submitted on a monthly basis or when one-third of the amount deposited has been utilized. The replenishment application would be supported by the necessary documentation, the Special Account bank statement, and a reconciliation of this bank statement. -58 - Table C: Allocation of Loan Proceeds (US$ million equivalent) :Workes 1,I Goods i 8.s2l i % jloca , 10i0% reign {Cansu1tmServices 4.45 83.I0 Ibr Ieal sitants * Il 1loEt03% frfonignconsultaaX Fwnt End Fee 0.52 | l _ _ _ _ _ _ _ _ _ _ __T A I i I :I TOTAL -2 -59 - Annex 7 Project Processing Budget and Schedule A. Project Budget (US$00() Planned Actual (At final PCD stage) 85,000 144,000 B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project 2 (months) First Bank mission (identification) 02/10/2002 02/10/2002 Appraisal mission departure 03/012/2002 03/12/2002 Negotiations 05/08/2002 05/16/2002 Planned Date of Effectiveness 7/1/2002 Prepared by: SAT Preparation assistance: Bank team who worked on the project included: Name Specialty Steven Webb Task Team Leader Luis-Jose Mejia Public Sector and Project Management (cons) Enrique Fanta Tax Administration (consultant) Herman Nissenbaum Editor; Loan processing (consultant) Harjit Singh Information Technology (consultant) Judith Davidson-Palmer Human Resources (consultant) Katherine Bain Civil Society & Participation Francisco Leiva Project Administration (consultant) Patricia Holt Administrative Assistant Victor Ord6fiez Conde Financial Management Specialist Joseph P. Formoso Disbursement Officer Mariangeles Sabella Lawyer Pilar GonzAlez Lawyer Reynaldo Pastor Lawyer Elizabeth Toxtle Task Assistant Lea Braslavsky Procurement Specialist -60 - Annex 8 Documents in the Project File* A. Project Implementation Plan Preliminary Plan - see Annex 2. B. Bank Staff Assessments Country Assistance Strategy of June 8, 1999. Country Assistance Strategy Progress Report, May 21, 2001 BTO of December 2001 Identification Mission. Identification Mission, Steve Webb Reformnin Tax Systems: The World Bank Record in the 1990s, by Luca Barbone, Arindam Das-Gupta, Luc de Wulf and Anna Hansson. Tax Policy and Administration Thematic Group. Country Economic Memorandum: Challenges and Prospects for Tax Reform" 2001 Mexico: Tax Reform Adjustment Loan C. Other Mexico: Fortalecimiento de la Administraci6n Tributaria Federal. Casanegra, dos Santos, Escolano & Castro, IMF Report, February 1997. Performance Indicators for Tax Structure and Administration, a Preliminary Proposal, by Arindam Das-Gupta, PRMPS, The World Bank, May 1999. *Including electronic files. - 61 - Annex 9: Statement of Loans and Credits MEXICCI: Tax Admin Institutional Development 02-May-2002 Difference between expected and actual Orilgnn Amount In USS Millions disbursements Projeot ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd P057531 2002 MX Basic Ed Dev Phase II 300.00 0.00 0.00 0.00 30000 0 00 0 00 P060577 2002 MX Someast Ri Deveopnment Ut 5.00 0.00 0.00 0.00 5 00 0.08 0 00 P065988 2002 GEF MX-Consolldatian of Proed Ja 0.00 0.00 16.10 0 00 0 01 000 0 00 P064887 2001 DISASTER MANAGEMENT (ERL) 404.05 0.00 0.00 0.00 395.74 58 36 0 00 P063463 2001 METHANE CAPTURE & USE AT A LANDFIUL 0.00 0.00 6.27 0 00 6 35 1 94 0.29 P060908 2001 GEF MX-MESO AMERICAN CORRIDOR 0.00 0.00 14.84 0.00 13 85 3 07 0 00 P065779 2001 FEDERAL HIGHWAY MAINTENANCE PROJECT 218.00 0.00 0.00 0.00 20393 -1407 000 P068321 2001 MX: III BASIC HEALTH CARE PROJIECT 350.00 0.00 0.00 0.00 350 00 000 000 P066674 2001 GEF MX-Indigenous&Conwiomnity Bo3ersaty 0.00 0.00 7.50 0.00 6 84 2 22 0 Go P071323 2001 Bank Reasructurlng Facllty 505.06 0.00 0.00 0.00 350 01 0 01 0 00 P057530 2000 RURAL DEV.MARG.ARII CARl 55.00 0.00 0.00 0 00 38.92 3 25 0 00 P060718 2000 ALTERNATIVEENERGY 0.00 0.00 8.S0 000 698 692 000 P066938 2000 MX GENDER (UL) 3.07 0.00 0.00 0.00 3 07 163 0 00 P048505 1999 AGRICULTURAL PRODUCT 444.45 0.00 0.00 0 00 139 94 50 19 -27 05 P007610 1999 FOVI RESTRUCTURING 505.50 0.00 0.00 0.00 312.00 31200 000 P007711 1998 MXRURALDEV.MARG.AREA(APLI 47.00 000 0.00 000 2907 2275 000 POmo720 1998 MX HEALTH SYSTEM REFORM - 'AL 700.00 0.00 0.00 0.00 15000 15000 5000 P044531 1998 KNOWLEDGE,INNOV 300.00 0.00 000 000 19537 7871 000 P0550 1 1998 MX: HEALTH SYSTEM REFORM TA 25.00 0.00 0.00 000 1 31 1.31 0 00 P049895 1998 MX HIGHER ED. FINANCING 180.20 0.00 0.00 000 140.19 75.92 000 P007700 1997 COMMUNITY FORESTRY 15.00 0.00 0.00 0 00 6 07 5 59 0 00 P007713 1996 WATER RESOURCES MANA 186.50 000 0.00 0.00 11729 101 96 44 17 P007689 1996 MX: BASIC HEALTH II 310.00 0.00 0.00 0.00 23 83 2383 23 83 P034490 1995 MX TECHNICAL EDUC/TRAINING 265.00 0.00 0.00 69.69 4807 11775 8772 P007710 1994 N. BORDER I ENVIRONM 368.00 0.00 000 313.36 2203 335.40 6200 P007648 1993 MX MEDIUM CITIES TRANSP 200.00 000 0.00 65.50 40 93 106 43 83 43 Total: 5386.83 0.00 53.61 448 55 2906 81 1445 28 324 39 - 62 - MEXICO STATEMENT OF IFCs Held and Disbursed Portfolio Jan - 2002 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1988/91/92/93/95 Apasco 10.80 0.00 0.00 43.20 10.80 0.00 0.00 43.20 1998 Ayvi 8.57 0.00 0.00 0.00 8.57 0.00 0.00 0.00 1990/92/96 BANAMEX 75.71 0.00 0.00 5.49 75.71 0.00 0.00 5.49 0 BBVA-Bancomer 86.47 0.00 0.00 0.00 86.47 0.00 0.00 0.00 1995/99 Baring MexFnd 0.00 2.73 0.00 0.00 0.00 1.90 0.00 0.00 1998 CIMA Mexico 0.00 4.80 0.00 0.00 0.00 4.80 0.00 0.00 1998 CIMA Puebla 7.00 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1994 CTAPV 2.88 0.00 1.69 0.00 2.88 0.00 1.69 0.00 0 Chiapas-Propalma 0.00 0.82 0.00 0.00 0.00 0.82 0.00 0.00 1997 Comercializadora 2.41 0.00 1.72 4.38 2.41 0.00 1.72 4.38 2001 Compartamos 1.00 0.66 0.00 0.00 1.00 0.66 0.00 0.00 1999 Corsa 11.14 3.00 0.00 0.00 11.14 3.00 0.00 0.00 2001 Ecomex 5.00 0.00 1.50 0.00 3.00 0.00 1.50 0.00 2000 Educacion 6.50 0.00 0.00 0.00 4.90 0.00 0.00 0.00 1997 Fondo Chiapas 0.00 4.18 0.00 0.00 0.00 0.54 0.00 0.00 1998 Forja Monterrey 12.07 3.00 0.00 12.07 12.07 3.00 0.00 12.07 1991/96 GIBSA 18.93 0.00 10.00 63.67 18.93 0.00 10.00 63.67 1993 GIDESA 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00 1996/00 GIRSA 45.00 0.00 0.00 60.00 45.00 0.00 0.00 60.00 1993 GOTM 0.49 0.00 0.00 0.00 0.49 0.00 0.00 0.00 1997/98 Gen. Hipotecaria 0.00 1.20 0.00 0.00 0.00 1.20 0.00 0.00 0 Grupo BBVA 0.00 2.67 0.00 0.00 0.00 2.67 0.00 0.00 1998 Grupo Calidra 10.00 6.00 0.00 7.50 10.00 6.00 0.00 7.50 Grupo FEMSA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1989 Grupo Minsa 12.00 10.00 0.00 18.00 12.00 10.00 0.00 18.00 1997 Grupo Posadas 25.00 0.00 10.00 0.00 25.00 0.00 10.00 0.00 1992/93/95/96/99 Grupo Sanfandila 8.09 0.00 0.00 3.61 6.76 0.00 0.00 2.95 1998 Heller Financial 0.00 0.32 0.00 0.00 0.00 0.32 0.00 0.00 1994/96/98/00 Hospital ABC 30.00 0.00 0.00 14.00 1.76 0.00 0.00 1.24 2000 ITR 14.00 0.00 0.00 4.00 14.00 0.00 0.00 4.00 2000 Innopack 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 2000 Interceramic 5.00 0.00 4.00 0.00 5.00 0.00 4.00 0.00 1994 InverCap 0.00 0.07 0.00 0.00 0.00 0.06 0.00 0.00 2000/01 Merida HI 29.59 0.00 0.00 72.15 29.59 0.00 0.00 72.15 1998 Mexplus Puertos 0.00 1.41 0.00 0.00 0.00 1.41 0.00 0.00 1995/99 NEMAK 0.00 0.00 1.51 0.00 0.00 0.00 1.51 0.00 1996/99/00/01 Pan American 0.00 9.00 0.00 0.00 0.00 9.00 0.00 0.00 2000 Rio Bravo 50.00 0.00 0.00 59.50 50.00 0.00 0.00 59.50 2000 Saltillo S.A. 35.00 0.00 0.00 43.00 35.00 0.00 0.00 43.00 2000 Servicios 10.50 1.90 0.00 10.00 10.50 1.90 0.00 10.00 2000 Su Casita 0.00 10.62 0.00 0.00 0.00 10.62 0.00 0.00 2001 Sudarnerica 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1999 TMA 2.58 0.00 2.60 8.95 2.58 0.00 2.60 8.95 1997 Toluca Toll Road 4.83 0.00 0.00 0.00 4.83 0.00 0.00 0.00 1992 Total Portfolio: 533.06 117.68 33.02 429.52 496.39 102.67 33.02 416.10 - 63 - Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 1999 BANAMEX LRF I 50.00 0.00 0.00 0.00 2001 BBVA-Bancomer CL 100.00 0.00 0.00 0.00 1998 CimaHermosillo 7.00 0.00 0.00 0.00 2002 Coppel 30.00 0.00 0.00 0.00 2001 Ecomex 3.50 0.00 0.00 0.00 2000 Educacion 3.20 0.00 0.00 0.00 2001 GFNorte-CL 50.00 0.00 0.00 100.00 2001 Greenmanor 7.00 0.00 0.00 0.00 2001 La Colorada 4.30 6.00 0.00 18.30 2001 PanAme-La Colora 0.00 0.00 1.20 0.00 2002 Puertas Finas 13.00 0.00 0.00 0.00 2001 Su Casita 0.00 2.40 0.00 0.00 Total Pending Commitment: 268.00 8.40 1.20 118.30 - 64 - Annex 10: Country at a Glance MEXICO: Tax Admin Institutional Development Latin Upper- POVERTY and SOCIAL America middle- Mexico & Carib. Income Development dlamond' 2000 Population, mid-year (millilons) 98.0 516 647 Life expectancy GNI Per capita (Atlas method. USS) 5.070 3.680 4,620 GNI (Atlas method. USS billions) 497.0 1,895 2,986 Average annual growth, 1994-00 Population (9%) 1.5 1.6 1.3 GNI Labor force () 2.5 2.3 2.0 GNI Gross Most recent estimate (latest year available, 1994-00) per i enprimary Poverty (9 of population below national povertv line) Urban population (X of total population) 74 75 76 Life expectancv at birth (years) 72 70 69 Infant mortalltv (per 1,000 live births) 29 30 28 Child malnutrition (X of children under 5) 8 9 .. Access to improved water source Access to an Improved water source (X ofpopulation) 86 85 87 Illiteracy (9 of population age 15+) 9 12 10 Gross primary enrollment ( ofschool-aoe vopulatlon) 114 113 107 Moxico Male 116 . 106 Upper-middle-income group Female 113 .. 105 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 19B0 1990 1999 2000 Economic ratios' GOP (US$ billions) 223.5 262.7 479.4 574.5 Gross domestic Investment/GDP 27.2 23.1 23.5 23.3 Trd Exvorts of aoods and services/GDP 10.7 18.6 30.9 31.4 rade Gross domesatc savings/GDP 24.9 22.0 21.9 21.5 Gross national savinas/GDP 22.4 20.3 20.5 20.1 Current account balancelGDP -4.7 -2.8 -3.0 13.1 D I Interest pavmentalGOP 2.0 2.2 2 1 2.0 Domaticnngstsn Total debtUGDP 25.7 39.8 35.0 26.9 avinga Total debt servicelexports 45.4 20.9 25.1 32.7 Present value of debt/GDP .. .. 33.9 26.1 PresentvalueofdebtUexports .. .. 102.6 77.8 Indebtedness 1980-90 1990-00 1999 2000 2000-04 (average annual growth) GDP 1.1 3.1 3.8 6.9 4.3 Mexico GDP percapita -1.0 1.4 2.3 5.4 2.3 Upper-middle-income group Exports of goods and services 7.0 14.6 12.4 16.0 8.5 STRUCTURE of the ECONOMY 1980 1990 1999 2000 Growth of Investment and GDP (%) (9 of GDP) Agriculture 9.0 7.8 4.7 4.4 Industrv 33.6 28.4 28.8 28 4 20 ManufacturinA 22.3 20.8 21.1 20.7 t Services 57.4 63.7 66.5 67.3 -20 96 97 98 so 00 Private consumpUon 65.1 69.6 67.1 67.5 -40 General govemment consumption 10.0 8.4 10.9 11.0 0GDI - a GDP Imports of goods and services 13.0 19.7 32.4 33.2 (average annual growth) 1980-90 1990-00 1999 2000 Growth of exports and Imports (%) Agriculture 0.8 1.8 2.0 2.1 4s Industry 1.1 3.8 4.2 6.6 30 Manufacturing 1.5 44 4.2 7.1 158 Services 1.4 2.9 3.7 7.4 o-{' f ' III Private consumption 1.4 2.4 4.3 9.5 - t 96 97 88 88 oo General government consumption 2.4 1.8 3.9 3.5 ..30 Gross domestic Investment -3.3 4.6 4.1 8.8 -Exports --e-Imports Imports of ooods and services 1.0 12.3 13 8 21.4 Note: 2000 data are preliminary esUmates. The diamonds show tour kev Indicators In the countrv (in bold) comDared with its Income-group averaoe. If data are missing. the diamond will be incomplete. - 65 - Mexico PRICES and GOVERNMENT FINANCE Domestic prices 1980 1990 1999 2000 Inflation (%) (% change) 40 Consumer prices .. 26.7 16.6 9.5 30 Implicit GDP deflator 33.4 28.1 14.9 10.9 20. Government flnance 10 (X of GDP, incdudes current grants) 0o Current revenue 27.4 25.3 20.9 21.8 95 s6 97 S8 99 Current budget balance 4.1 0.9 1.5 2.0 - GDP deflator - -CPI Overall surplus/deficit -3.6 -2.6 -1.1 -1.1 TRADE (US$ millions) 1990 1999 2000 Export and Import levels (USS mill.) Total exports (fob) 16,284 40.711 136,391 166,455 200,000 Oil 10,441 10,104 9,928 16,383 Agriculture 1,528 2,162 3,926 4,217 150,000 Manufactures 3,802 27,828 1226085 145, 334 _ Total imports (cif) 19,342 41.593 141,975 174458 13 Consumerpgoods 2,448 5,099 12175 16,691 _ _ _ _ _ _ Intermediate goods 11,720 299705 109.270 133637 Capital goods 5,174 6,790 20.530 24,130 o_ Export price index (1995=100) 134 99 98 106 94 95 86 97 9a a9 00 Import price index (1995=100) 67 90 99 102 aExports *Imports Terms of trade (1995=100) 201 110 99 103 BALANCE of PAYMENTS 1980 1990 1999 2000 (US$ milions) and2 Current account balance to GDP (%) Exports of goods and services 22,600 48,732 148,083 180,167 0o Imports of goods and services 27,430 51,535 155,465 190,494 Resource balance -4,830 -2,803 -7,382 -10,326 -2 * Net income -6,438 -8,626 -13.306 -14,747 Net current transfers 833 3,978 6,313 6,994 4- Current account balance -10,434 -7,451 -14,375 -18.079 - Financing items (net) 11,453 10,999 14,969 20,901 Changes in net reserves -1,019 -3,548 -594 -2,822 -4 Memo: Reserves including gold (US$ millions) 3,052 9,909 31,829 33,595 Conversion rate (DEC, locallUSS) 2.OOE-2 2.8 9.6 9.5 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ millions) Composition of 2000 debt (USS mill.) Total debt outstanding and disbursed 57,378 104,442 167,626 154,687 IBRD 2,063 11,030 11,027 11,444 A: 11.444 IDA 0 0 0 0 G. 22,744 D: 4,803 Total debt service 10,958 11,311 39,760 63,038 E: 4,494 IBRD 255 1,552 2,155 2,220 IDA 0 0 0 0 Composition of net resource flows Offidal grants 14 54 .. .. ,,.,y * - Official creditors 795 4,168 -1,708 -525 .,. Pnvate creditors -524 -582 13,181 -5,059 . ' Foreign direct investment 2,156 2,549 11,915 13,286 Portfolio eiuity 0 563 3,901 478 F:111,142 Wodd Bank program Commitments 625 2,562 1,671 1,130 A - IBRD E - Bilateral Disbursements 422 3,326 844 1,647 -IDA D- Other multilateral F -Private Principal repaYments 89 801 1,323 1,330 C - IMF G - Short-term Net flows 333 2,525 -479 318 Interest payments 166 751 832 890 Net transfers 167 1,774 -1,311 -573 Development Economics 9/10/2001 - 66 - *&1DOS SUBSECRETARIA DE HACIENDA Y CREDITO PUBLICO 102-B- 131 SECrETAiAI DE HAcIOA Y cRW4TO PIU%o Mexico, D. F., 14 de mayo de 2002. SR. JAMES D. WOLFENSOHN Presidente Banco Mundial Washington DC, 20433 USA Estimado Sr. Wolfensohn: Por medio de la presente, me dirijo a usted para hacer de su conocimiento la intenci6n de la presente Administracion de avanzar en el programa de fortalecimiento del sistema tributario nacional. En tal virtud, el Gobiemo de Mexico solicita apoyo del Banco Mundial a traves de los prestamos Tax Reforrm Adjustment Loan y Tax Administration Institutional Development Project, con el objeto de poder solventar los programas puestos en marcha recientemente en nuestro pais. Para resaltar la importancia que representa para Mexico continuar con la agenda en materia tributaria, a continuaci6n se presenta un breve resumen de lo mas destacado de la evoluci6n de la economia mexicana; lo mas relevante de las reformas tributarias aprobadas recientemente por el H. Congreso de la Uni6n, y los temas principales en materia tributaria en los que el Gobiemo de Mexico planea enfocar sus esfuerzos en el mediano plazo. I. Evoluci6n macroecon6mica En los Oltimos anios, la economia mexicana se ha recuperado favorablemente de la crisis enfrentada a mediados de la decada pasada, y avanza con paso firme hacia la integraci6n con sus principales socios comerciales y la economia mundial. Mexico ha recuperado la estabilidad de precios gracias a ia disciplina fiscal adoptada por las autoridades y al prudente manejo de la politica monetaria por parte del Banco Central. A pesar de los vaivenes del ciclo econ6mico, las cuentas intemas y extemas se han mantenido en orden en todo momento, fortaleciendo asi la confianza de los agentes econ6micos dentro y fuera del pais. Esto ha permitido crear un entomo de estabilidad que ha favorecido la inversi6n, tanto nacional como extranjera. - 67 - t,;IDOS SUBSECRETARIA DE HACIENDA Y CREDITO PUBLICO 102-B- 131 SECRETARIA DE HACIENDA Y CREDITO PU3LICO -2- La evoluci6n de las variables macroecon6micas refleja el fortalecimiento de las bases de la economia nacional. En el periodo 1996-2000, el PIB registr6 una tasa de crecimiento real anual promedio de 5.6 por ciento, proceso que se interrumpi6 temporalmente en 2001 en sintonia con la desacelerac;i6n de la economia mundial. La prudencia en el mariejo de la politica monetaria y la disciplina fiscal han coadyuvado a disminuir considerablemente la inflaci6n. Durante 2001, por ejemplo, el indice Nacional de Precios al Consumidor (INPC) alcanz6 la menor tasa de crecimiento desde su creaci6n en 1968, registrando un aumento de 4.4 por ciento anual, menor incluso que la meta oficial de 6.5 por ciento. Las tasas de interes nacionales tambien han registrado una clara tendencia a la baja, alcanzando niveles minimos hist6ricos en abril de 2002. Ademas, el tipo de cambio muestra fortaleza y estabilidad. Las cuentas con el exterior han evolucionado de manera ordenada. El deficit de la cuenta corriente de la balanza de pagos se ha mantenido en niveles congruentes con la disponibilidad de ahorro externo de largo plazo. Lo anterior ha sido posible gracias a la disciplina en el manejo de la politica fiscal. Las autoridades han reaccionado oportunamente ante los vaivenes del ciclo econ6mico y los cambios abruptos en el precio intemacional del petr6leo, manejo que ha permitido alcanzar las metas fiscales anunciadas en los ultimos affos. En este proceso, el deficit poblico ha disminuido de 1.3 por ciento del PIB en 1998 a 0.7 por ciento en 2001. En materia de deuda publica el gobiemo ha instrumentado una politica proactiva que le ha permitido aprovechar distintas oportunidades para prepagar algunas emisiones, hecho que se ha traducido en ahcrros a futuro y mejoras en el perfil de vencimientos. Los retos que la econcmia mexicana tendra que enfrentar en el corto y mediano plazos son mantener la disciplina en el manejo de la politica econ6mica para garantizar una recuperaci6n ordenada y sostenible, asi como avanzar en la agenda de reformas estructurales que permitan modemizar el marco regulatoro y mejorar la productividad y competitividad del aparato productivo. - 68 - SUBSECRETARIA DE HACIENDA Y CREDITO PUBLICO 102-B- 131 SECRETAR CE HPOE?DAY CREDITO PUJCO -3- I. Reforma Fiscal Desde su inicio en diciembre de 2000, la actual Administraci6n ha considerado la refomma fiscal como una alta prioridad. La creciente necesidad de recursos para cubrir satisfactoriamente las responsabilidades del Estado, requiere de un aumento en las fuentes permanentes de ingresos publicos, por lo que ha sido necesario implementar acciones en las siguientes tres areas: * Politica Tributaria.- Reducir distorsiones y aumentar las fuentes permanentes de recaudaci6n, avanzar en un esquema tributario mas equitativo, simplificar y mejorar el cumplimiento fiscal, hacer el esquema fiscal mas competitivo y cerrar los espacios para la evasi6n y elusi6n fiscales. * Administraci6n Tributaria.- Disenar e implementar programas para aumentar la eficiencia en la recaudaci6n y el cumplimiento fiscal, disminuir la corrupci6n y facilitar el cumplimiento de las obligaciones con el fisco, ampliar los mecanismos y la cobertura de la asistencia fiscal al contribuyente y fortalecer las facultades de la administraci6n tributana para combatir la evasi6n fiscal. * Federalismo Fiscal.- Aumentar las potestades tributarias de los gobiemos estatales y municipales en forma congruente con la Federaci6n. Gracias al esfuerzo conjunto del Ejecutivo y del H. Congreso por trabajar constructivamente y buscar consensos entre sus representantes, el 31 de diciembre de 2001 se aprobaron importantes cambios en materia de legislaci6n tibutaria. A continuaci6n se presentan algunos de los avances logrados. Politica Tributaria. Uno de los objetivos de la reforma es aumentar la recaudaci6n sin introducir distorsiones. En este sentido, la reforma busca incrementar la captaci6n trbutada, expandiendo la base gravable a traves de la eliminaci6n de exenciones y regimenes especiales. La reforma fiscal aprobada contiene avances significativos, especialmente en materia del impuesto sobre la renta. Esta reforma elimina el regimen especial a los sectores agricola, de autotransporte y editorial; unifica la tasa de gravamen para las utilidades de las empresas, independientemente de si se reparten o no; reduce gradualmente las tasas de gravamen, tanto para las empresas como para personas fisicas, durante los siguientes 3 afios; reduce el numero de rangos de tasas para personas fisicas; propone la acumulaci6n total de ingresos gravables para personas fisicas, incluyendo los intereses de bonos gubemamentales o - 69 - uiDOs 44 SUBSECRETARIA DE HACIENDA Y CREDITO PUBLICO 102-B- 131 SECRETARIA DE HAONDA Y CREO4TO PU8UCO -4- corporativos, dividendos y utilidadias bursatiles; elimina el costo del credito al salario hasta en 3% de la n6mina de las empresas; y simplifica el calculo del ajuste inflacionaro y el cumplimiento fiscal de pequehlas y medianas empresas. Asimismo, la reforma incluye cambios a las tasas de los impuestos especiales al tabaco y a las bebidas alcoh6licas, e introduce nuevos gravamenes a los refrescos endulzados con fructuosa y a las telecomunicaciones. El impacto de estas reformas en los ingresos publicos comenz6 desde su entrada en vigor en enero de 2002, y se espera que crezca en el mediano plazo conforme los contribuyentes asimilen por completo las mejoras regulatorias. En relaci6n con la agenda de politica tributaria, en el mediano plazo se pretende continuar con el impulso de dar mas peso a los impuestos indirectos sobre los directos, a efecto de seguir expandiendo lai base gravable, minimizar las distorsiones y reducir la evasion y elusi6n fiscales, asi como seguir fortaleciendo las finanzas de los gobiernos estatales y municipales. Administracion Tributaria. La mejora de la administraci6n tributaria tambien forma parte de los objetivos de la reforma fiscal. En este sentido, se han instrumentado una serie de medidas para mejorar la eficacia y eficiencia de la administraci6n tributaria, que a la fecha, han arrojado resultados favorables. Entre otras medidas, destacan las siguientes: mejorar la coordinaci6n entre las unidades administrativas del Servicio de Administraci6n Tributaria (SAT); mejorar los proceso de auditoria; reducir la corrupci6n; mejorar la captura, calidad y seguridad de la informaci6n dentro de la organizaci6n; intensificar la capacitaci6n del personal; mejorar la atenci6n y el servicio al contrbuyente, y modemizar los programas y el equipo informatico. El Gobiemo de Mexico planea continuar con esas tendencias de mejoras en el mediano plazo. El antes mencionado Tax Administration Institutional bevelopment Project sera una contribuci6n importante en ese esfuerzo. Federalismo Fiscal. En materia de federalismo, la reforma aprobada reconoce la necesidad de incrementar las potestades tributarias de los estados y municipios, toda vez que son 6stos quienes, en buena medida, ejercen el gasto publico. En este sentido, la reforma otorga a los estados nuevas potestades, para que previa autorizaci6n de sus respectivos Congresos Estatales, fortalezcan sus ingresos propios. En particular, la Ley de Ingresos 2002 faculta a los estados para establecer una tasa adicional maxima a las ventas finales de bienes y servicios y para gravar en base neta a las personas fisicas con actividades empresarales y profesionales con ingresos de hasta 4 mdp, con una tasa de hasta 5%, y de 2% sobre base bruta cuando los ingresos por actividades empresariales no rebasen los 1.5 mdp. Se debe mencionar que los ingresos adicionales que recauden los - 70 - SUBSECRETARIA DE HACIENDA Y CREDITO PUBLICO 102-B- 131 SECRETARIA DE WaaENDA Y CRED(TO PUuJCO -5 - estados por estos conceptos no se comparten con el Gobierno Federal. En adelante, el Gobiemo Federal continuara con el esfuerzo para mejorar la coordinacion fiscal entre los gobiemos locales y la Federaci6n (SAT) y mantendra el apoyo para que los gobiernos locales fortalezcan sus fuentes de ingresos propias, y asi consoliden la estabilidad en sus finanzas locales. Ill. Otras Medidas Una de las priordades de la presente Administraci6n es fortalecer las finanzas publicas. En este sentido, el gobiemo ha instrumentado una sene de medidas, adicionales a la reforma tributaria aprobada recientemente por el H. Congreso, orientadas a garantizar la sostenibilidad de la postura fiscal. Entre otras, destacan las siguientes: ^ Disciplina y Transparencia Fiscal.- Con el objeto de preservar la estabilidad y certidumbre en el entomo macroecon6mico, el gobiemo ha mantenido la disciplina fiscal. En este sentido, y para garantizar el cumplimiento de las metas fiscales aprobadas por el H. Congreso, se han incluido en el Presupuesto de Egresos de la Federaci6n una serie de ajustadores automaticos. En particular, el Presupuesto de Egresos para 2002 dispone que en caso de que los ingresos sean menores de lo estimado es necesano ajustar el gasto presupuestario. Por el contrario, si los ingresos obtenidos son mayores de lo previsto, los recursos adicionales deben destinarse, en iguales proporciones, al Fondo de Estabilizaci6n de los Ingresos Petroleros (FEIP), a mejorar el balance del sector publico y al impulso de programas de infraestructura. Asimismo, el gobiemo contin(ua con el esfuerzo de mejorar la transparencia fiscal, publicando peri6dicamente los principales resultados fiscales y de deuda publica, asi como indicadores fiscales ampliados que revelan fehacientemente las necesidades de financiamiento del sector publico (RFSP). Gracias al cumplimiento de metas fiscales y a la transparencia fiscal, entre otros logros, es que Mexico ha obtenido recientemente el grado de inversi6n por las principales corredurias intemacionales. - 71 - SUBSECRETARIA DE HACIENDA Y CREDITO PUBLICO 102-B- 131 SECRErAtA DE HACENDA Y CREDITO PUSUCO -6 - * Reforma Presupuestaria.- Como parte de la iniciativa de reforma para la Nueva Hacienda Publica enviada al H. Congreso en 2001, el Ejecutivo envi6 una propuesta de reforma presupuesl:aria, que tiene por objeto reducir la incertidumbre de los procesos de discusi6n y aprobaci6n del presupuesto, asi como facilitar la ejecuci6n de proyectos de inversi6n rnultianuales. * Politica de Gasto Publico.- Es un compromiso del Gobierno de Mexico continuar con el esfuerzo por atender las necesidades de salud, educaci6n, seguridad social e infraestructura basica de todos los grupos de la poblaci6n, y en especial, de los mas necesitados. Para ello, se han instrumentado una serie de programas sociales incluyendo Contigo y Oportunidades que tienen por objeto combatir la pobreza, especialmente en zonas urbanas. Sin embargo, debido a las crecientes necesidades en materia social, es imperativo continuar impulsando medidas que permitan fortalecer los ingresos permanentes del Estado y asi poder asignar mayores recursos al combate a la pobreza. * Politica de Precios Energeticos.- Reconociendo la importancia del sector energetico en las finanzas publicas, y con el objeto de promover la conservaci6n, en febrero de 2002 el gobiemo anunci6 la reducci6n del subsidio a las tarifas electricas residenciales. Esta politica se tradujo en un incremento en las tarifas para aquellos hogares con consumos; mayores al minimo, a efecto de proteger el ingreso de las familias con menores recursos. IV. Apoyo del Banco Mundial Si bien la reforma fiscal aiprobada representa avances importantes en todas las areas tributarias, se reconoce que auin queda mucho por hacer, especialmente en materia de administraci6n tributaria. Pama ello, el Gobiemo de Mexico solicita al Banco Mundial de su apoyo a traves del Tax Reformr Adjustment Loan. De la misma manera, se pretende continuar con las mejoras en materia de administraci6n tributaria, proceso para el cual Mexico solicita apoyo tecnico y financiero del Banco Mundial a traves del Tax Administration Institutional Development Project. - 72 - IStUDOS SUBSECRETARIA DE HACIENDA Y CREDITO PUBLICO 102-B- 131 SECFErARI DE 4A*E0DCA Y CREDTO PUBMCO -7 - Consciente de la importancia de mantener una postura fiscal sana y sostenible, el Banco Mundial ha mostrado un especial interes en el tema de Reforma Fiscal. En virtud de lo anterior, el Gobiemo de Mexico solicita al Banco Mundial de su apoyo tecnico y financiero para la consolidaci6n de los programas antes mencionados, considerados por las autoridades nacionales de suma importancia para continuar con el Programa de Reforma Fiscal durante los pr6ximos cuatro aiios. A t e n t a m e n t e. SUFRAGIO EFECTIVO, NO REELECCION. El Subsecretaro, DR. AGUSTIN GILLERMO NS CARSTENS C.c.p. Direcci6n General de Cr6dito Publico. Presente. - 73 - SECRETARIAT OF FINAN4CE AND PUBLIC CREDIT Mexico City Mr. James D. Wolfensohn President World Bank Washington DC, 20433 USA Dear Mr. Wolfensohn, I would like to bring to your attention the intention of the present administration to move ahead with the program of strengthening the national system of taxation. For the sake of this, the Government of Mexico requests the support of the World Bank by means of the Tax Reform Adjustment Loan and the Tax Administration Institutional Development Loan, with the objective to facilitate the programs recently put in motion in our country. To emphasize the importance for Mexico of continuing with the agenda of taxation matters, a brief summary is presented of the highlights in the evolution of the Mexican economy, the most relevant aspects of the tax reforms recently approved by the Federal Congress, and the main themes in the tax area on which the Government of Mexico plans to focus its energies in the medium term. I. Macroeconomic SituatiDon In recent years, the Mexican economy has recovered favorably from the crisis faced in the middle of the previous decade and is advancing with firm steps toward integration with its main commercial and economic partners in the world. Mexico has recovered price stability, thanks to the fiscal discipline adopted by the authorities and to the prudent management of monetary policy on the part of the Central Bank. Despite the fluctuations of the econojmic cycle, the internal and external accounts have been maintained in order at all limes, thus strengthening the confidence of economic agents within and outside the country. This has made it possible to create a framework of stability that has favored investment by domestic and foreign firms. The evolution of macroeconomic variables reflects the strengthening of the national economy. In the period 1996-2000, the gross domestic product recorded an average annual growth rate of 5.6 percent, a process that was interrupted temporarily in 2001 along with the deceleration of the world economy. The prudent management of monetary policy and fiscal discipline have been helping to reduce inflation considerably. During 2001, for example, the national index of consumer prices reached is lowest rate of increase since the time it was created in 1968, registering an increase of 4.4 percent annually, lower than the official target of 6.5 - 74 - percent for the year. The domestic interest rates also registered a clear downward trend, reaching historic lows in April 2002. Furthermore, the exchange rate is showing strength and stability. The external accounts have evolved in an orderly manner. The deficit of the current account of the balance of payments has been maintained at levels congruent with the availability of long-term foreign savings. The above has been possible thanks to the discipline in the management of fiscal policy. The authorities have reacted opportunely in the face of the fluctuations of the economic cycle and the abrupt changes in the international price of petroleum- management that made it possible to achieve the fiscal goals announced in recent years. In this process, the public budget deficit has declined from 1.3 percent of GDP in 1998 to 0.7 percent in 2001. In matters of public debt the government has used a proactive policy that has permitted it to utilize certain opportunities to repay some debt, which translated into future savings and improvements in the maturity profile. The challenges that the Mexican economy will face in the short and medium term are to maintain discipline in economic policy management in order to guarantee an orderly and sustainable recovery, as well as to advance with the agenda of structural reforms that will modernize the regulatory framework and improve the productivity and competitiveness of the production system. II. Fiscal Reform. From its beginning in December 2000, the present administration in Mexico has accorded high priority to fiscal reform. The growing necessity for resources to cover satisfactorily the responsibilities of the State require an expansion of the permanent sources of public revenues, for which it has been necessary to implement actions in the three following areas: * Tax Policy- To reduce distortions and increase the permanent sources of tax revenue, to advance a more equitable tax scheme, to simplify and improve the tax compliance, to make the tax system more competitive, and to close the gaps for tax evasion and avoidance. * Tax Administration- To design and implement programs to increase the efficiency in tax collection and compliance, to reduce corruption and facilitate the compliance of obligations to the Treasury, to expand the mechanisms and the coverage of the assistance to taxpayers, and to strengthen the powers of the tax administration to combat tax evasion. * Subnational Finances- To increase the tax bases of the state and municipal governments in a form that is consistent with the Federal System. - 75 - Thanks to the combined effort of the Executive and the Congress to work constructively and seek consensus among their representatives, important changes were approved on December 31, 2001, in the tax legislation. The following are some of the advances that were achieved. Tax Policy. One of the: objectives of the reforn is to increase collections without introducing distortions. In this sense, the reform seeks to increase the tax receipts, expanding the taxable base through the elimination of exemptions and special regimes. The tax reforms that were approved contain significant advances, especially in the area of income taxes. This reform eliminates the special regimes for the agriculture, trucking, and publishing sectors; unifies the tax rate for corporate earnings, independently from whether they are distributed or not; reduces gradually the tax rate for corporations and individuals over the next 3 years; reduces the number of personal income tax brackets; sets forth the combination of all personal income into one taxable sum, including government and commercial bond interest, stock profits, and dividends; eliminates the cost to the government of salary subsidies up to 3 percent of the payroll of firms; and simplifies the calculation of the inflation adjustment and the tax compliance of small and medium enterprises. Also, the reform includes changes in the rates of excise taxes on tobacco and alcoholic beverages and introduces new taxes on beverages sweetened with fructose and on telecommunications. The impact of these changes on public revenue started when they came into effect in January 2002, and it is expected that it will grow in the medium term as the taxpayers assimilate completely the regulatory improvements. With relation to the agenda of tax policy reform, in the medium term, the drive will be continued to put more emphasis on indirect taxes relative to direct taxes, with the object to continue expanding the taxable base, to minimize the distortions and to reduce tax evasion and avoidance, as well as to continue strengthening the finances of the state and municipal governments. Tax Administration. The improvement of tax administration is also part of the objectives of the fiscal reform. In this sense, a series of measures have been orchestrated to improve the efficacy and efficiency of tax administration, which to date have indicated favorable results. Among other measures, the following stand out: to improve the coordination between the administrative units of the Tax Administration Service (SAT); to improve the process of auditing; to reduce corruption; to improve the capture, quality, and security of information within the organization; to intensify the training of personnel; improve the attention and ,ervice to the taxpayers; and to modernize the informatics programs and equipment. The Government of Mexico plans to continue with these improvements in the medium term. The previously mentioned Tax Administration Institutional Development Project will make an important contribution to that effort. Fiscal Federalism. Concerning federalism, the reform that was approved recognizes the necessity to increase the tax bases of the states and municipalities, since they are the ones that to a great extent carry out the spending of the public sector. In this sense, the - 76 - reform grants to the states new tax baseL, .n order to strengthen their own revenues, for which their respective state congresses would provide the authorization. In particular, the 2002 Revenue Law empowered the states to establish an additional tax, up to a certain maximum, on the final sales of goods and services. And it empowered states to tax the income of individuals with entrepreneurial activity, at a rate up to 5 percent on the net income of those with annual revenue up to 4 million pesos and at a rate up to 2 percent on the gross income of those with annual revenue not exceeding 1.5 million pesos. It should be mentioned that the additional revenues that the states collect with these measures are not shared with the Federal Government. In the future, the Federal Government will continue the efforts to improve the coordination of tax enforcement between the local governments and the Federation (SAT) and will maintain the assistance for local governments to strengthen their sources of own income, and thus to consolidate the stability of their local finances. III. Other Measures One of the priorities of the present administration is to strengthen public finances. In this sense, the government has orchestrated a series of measures, in addition to the tax reform recently approved by Congress, oriented to guarantee the sustainability of the fiscal stance. Among others, the following stand out: Fiscal Discipline and Transparency. With the objective to preserve the stability and certainty in the macroeconomic framework, the government has maintained fiscal discipline. In this sense, and in order to guarantee the compliance with the fiscal targets approved by Congress, a series of automatic adjustment procedures have been included in the Expenditure Budget. In particular, the 2002 Expenditure Budget provides that it is necessary to adjust the budgeted expenditure in the event that revenues are less than estimated. On the other hand, if the revenues are greater than forecast, then the additional revenues need to be destined, in equal proportions, to the Stabilization Fund for Petroleum Revenues, to improve the public sector balance, and to support infrastructure investment programs. Likewise, the government is continuing with the effort to improve fiscal transparency, publishing at regular periods the principal fiscal outcomes and the public debt, and also expanded fiscal indicators that reveal reliably the public sector borrowing requirement (PSBR). Thanks to the achievement of its fiscal targets and to the fiscal transparency, among other things, Mexico has recently obtained investment-grade credit ratings from the principal international rating agencies. Budget Reform. As part of the reform initiative for the New Public Finances, submitted to Congress in 2001, the executive sent a proposal for budgeting reform, that has as its objective to reduce the uncertainty in the process of discussing and approving the budget, as well as to facilitate the execution of multi-year investment projects. Public Spending Policy. It is a commitment of the Government of Mexico to continue the effort to attend to the needs of health, education, social security and basic infrastructure of all groups of the population, and especially those most in need. For that, a series of social programs has been instrumented, including Contigo and Oportunidades, - 77 - that have the objective to combat poverty, especially in urban areas. Nonetheless, due to the growing social needs, it is imperative to continue promoting measures that strengthen the permanent revenues o1 the State, to be able to assign more resources to combat poverty. Energy Pricing Policy. Recognizing the importance of the energy sector for public finances, and with the objective to promote conservation, the government announced in February 2002 the reduction in the subsidy for residential electricity tariffs. This policy translated into an increase in tariffs for the households with more than minimum power consumption, for the purpose of protecting the income of families with less resources. IV. World Bank Suppart Even though the fiscal reform that was approved represents important advances in all the taxation areas, it is recognized that there is much remaining to be done, especially in the area of tax administration. For that, the Government of Mexico is asking the World Bank for its help through the Tax Reform Adjustment Loan. In the same way, it is the intention to continue with improvements in the area of tax administration, a process for which Mexico is asking technical assistance and financing from the World Bank through the Tax Administration Institutional Development Project. Conscious of the importance of maintaining a healthy and sustainable fiscal stance, the World Bank has shown special interest in the theme of fiscal reform. By virtue of the above, the Government of Mexico is asking the technical and financial support of the World Bank for the consolidation of the programs mentioned above, and considered by the country authorities as being of highest importance, in order to continue the Program of Fiscal Reform during the next four years. Sincerely. Effective suffrage, no reeleccion. The Undersecretary, Dr. Agustin Guillermo Carstens Carstens Cc: General Directorate of Public Credit n~~~~~~&tV~~~~~~~~~~~7. to t00 90 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ IBRD 235,47 C0 ~ . S):1 ~~~~~~~'~ cSr O DAJA 4. Nogs - . J eM E X I C O I 30~~~~~~ fW'Sw~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Nt- -pit'.1 AS4~~~~~~Gt'L' '-Sit k DAJA 0 - ~~~.d. b, 0AH iAPrincipal Citi.s or town Co,remN.zz 1 > A O A H U l A tw C ._ Dioidod ldgKrwoys CALIf - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 iSelected snair r-ds Ri-et -It ati l bo-ndr-ies < FEERUfRY 1991. trw. - IMAGING Report No.: 24118 ME Type: PAD