Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 37772 - PH PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHEAMOUNT OFUS$l1MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A NATIONAL PROGRAM SUPPORTFOR TAX ADMINISTRATION REFORM February 12,2007 Poverty Reductionand Economic ManagementUnit East Asia andPacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange RateEffectiveJanuary 26,2007) Currency Unit =PhilippinePeso(PHP) US$1 =P 49.09 PHP 1= US$0.02 FISCALYEAR January 1-December 3 1 ABBREVIATIONS AND ACRONYMS AusAID AustralianAgency for International ManCom ManagementCommittee ofthe BIR Development AAB AccreditedAgents Bank MIGA MultilateralInvestmentGuarantee Agency ACL Audit CommandLanguage MOA MemorandumofAgreement AIM AsianInstituteof Management MOU MemorandumofUnderstanding Am Accounts Receivable MTPDP MediumTerm PhilippineDevelopment Plan ARMM Autonomous Regionin Muslim NBF Not Bank Financed Mindanao ASEM Asia EuropeMeeting NCB NationalCompetitiveBidding BAC Bidsand Awards Committee NCA Noticeof CashAllotment BIR Bureauof InternalRevenue NEDA NationalEconomic and Development Authority BOC Bureauof Customs NGAS NationalGovernment Accounting System BSP Bangko SentralngPilipinas NGO Non-GovernmentOrganization BTR Bureauof Treasury NOMIS NationalOffice Management InformationSystem CAS CountryAssistance Strategy NPSTAR NationalProgram Support for Tax AdministrationReform CAATS ComputerAssisted Audit Techniques NRCS NationwideRoll-outofComputerized and System System COA Commission on Audit NSO NationalStatistics Office CPAR CountryProcurementAssessment NTRC NationalTax ResearchCenter Report CQ SelectionBasedon Consultant ODA Official DevelopmentAssistance cso Qualifications Civil Society Organization OG OperationsGroup DA DesignatedAccount ONETT One Time Transactions DBM Departmentof Budgetand OP OperatingProcedures Management DCIR DeputyCommissionerof Internal PAD ProjectAppraisalDocument Revenue DECDG DevelopmentEconomics PAF PersonnelAction Form DevelopmentDataGroup DOF Department of Finance PAGC PhilippineAnti-GraftCommission FOROFFICIAL USE ONLY DTI DepartmentofTradeand Industry PAN PreliminaryAssessmentNotices EA Environmental Assessment PCN ProjectConceptNote EFPS ElectronicFilingand Payment System PMIS PerformanceManagementInformation System eGPS ElectronicGovernmentProcurement PMS PerformanceManagementSystem System EIS ExecutiveInformationSystem PPF ProjectPreparationFacility eITS-CBR ElectronicIntegratedTax System PPP Private-Public Partnership Collectionand Bank Reconciliation EO ExecutiveOrder PPS Policyand PlanningService eNGAS ElectronicNationalGovernment PSB PersonnelSelectionBoard Accounting System eREG ElectronicRegistration QAG QualityAssuranceGroup eTCR ElectronicTax Credit and Refund QBS Quality BasedSelection EVAT ExpandedValue Added Tax QCBS QualityandCost BasedSelection FAD FiscalAffairs Department RATES RunAfter Tax Evaders FAN FinalAssessmentNotices RAO RevenueAdministrativeOrder FMA FinancialManagementAssessment RDC RegionalDataCenter FM FinancialManagement RDO RevenueDistrictOffice FMR FinancialManagementReport RIPS RevenueIntegrityProtectionService FSL FixedSpreadLoan RM ReformManager FY FiscalYear RMD ReformManagementDepartment GDP Gross Domestic Product RMO RevenueMemorandumOrder (administrative directive) GNI GrossNationalIncome RMG ResourceManagementGroup GOP Government ofthe Philippines RSO Revenue ServiceOrder (appointment directive) GPPB Government ProcurementPolicy RVAT ReformedValue-Added-Tax Board GSIS Government Service InsuranceSystem RVP RegionalVice President G-Watch Government Watch SALN Statements ofAssets, Liabilitiesand Net Worth HRD HumanResourceDepartment SBD StandardBiddingDocument HRDS HumanResourceDevelopment SCG Special ConcernsGroup Service HR HumanResources SFB SelectionBasedon FixedBudget HRIS HumanResourceInformationSystem SEC Securitiesand ExchangeCommission H R M I S HumanResourceManagement SG Shoppingof Goods InformationSystem HRMU HumanResourceManagementUnit SG Salary Grade IA InternalAudit SIDA SwedishInternationalDevelopment Agency IAU InternalAudit Unit SJL Sector InvestmentLoan IBRD InternationalBank for Reconstruction S I M L Sector InvestmentandMaintenance andDevelopment Loan ICB InternationalCompetitiveBidding SMIS Senior ManagementInformation System ICR ImplementationCompletionReport SNITS SimplifiedNet IncomeTaxation Scheme ICT InformationandCommunications SOE Statementof Expenditure Technology This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. IDA InternationalDevelopmentAgency SSSM Single Source Selection Method IDF InstitutionalDevelopmentFund sss Social Security System IFR InterimUn-auditedFinancialReport sws Social Weather Station IMF InternationalMonetaryFund TRAG Tax ReformAdministrationGroup IP IRS . IntegrityPlan TA TechnicalAssistance Internal RevenueService TAA Tax AdministrationAdvisor ISC IndividualSelection-Competitive TAN TransparencyandAccountability Network ISSS IndividualSelection- Sole Source TAS Taxpayer Assistance Service ISG InformationSystems Group TCC Tax CreditCertificate ITS IntegratedTax System TCVD Tax ComplianceVerification Drive Kalahi- KapitbisigLaban sa Kahirapan- TOR Terms of Reference CIDDS Comprehensiveand Integrated Deliveryof Social Services LA LettersofAuthority TPI TaxpayersInformation LAMS LetterofAuthority MonitoringSystem TRA Tax RemittanceAdvise LBP LandBank ofthe Philippines TRU Taxpayer RegistrationUpdate LCS LeastCost Selection TSE Taxpayers Service Excellence LCD LiquidCrystalDisplay USAID UnitedStatesAgency for International Development LIB LimitedInternationalBidding USDOJ UnitedStates DepartmentofJustice LGU LocalGovernment Unit VAT Value-AddedTax LTS Large Taxpayer Services WBG World Bank Group MCC MillenniumChallenge Corporation Country Director: Joachim von Amsberg Acting Sector Director Indermit S. Gill Sector Manager: BarbaraNunberg PHILIPPINES NATIONAL PROGRAM SUPPORT FOR TAX ADMINISTRATION REFORM (NPSTAR) CONTENTS A. STRATEGIC CONTEXT AND RATIONALE .............................................................. 4 Country and sector issues ............................................................................................................ 4 Rationale for Bank involvement .................................................................................................. 4 Higher level objectives to which the project contributes ............................................................ 5 B . PROJECT DESCRIPTION .............................................................................................. 5 Lending instrument...................................................................................................................... 5 Project development objective and key indicators ...................................................................... 6 Project components..................................................................................................................... -6 Lessons learned and reflected inthe program design.................................................................. 9 Alternatives considered and reasons for rejection..................................................................... 11 Loan financing ........................................................................................................................... 12 C. IMPLEMENTATION ..................................................................................................... 12 Partnership arrangements .......................................................................................................... 12 Institutional and implementation arrangements ........................................................................ 12 Monitoringand evaluation o f outcomeshesults ........................................................................ 14 Sustainability ............................................................................................................................. 14 Critical risks and possible controversial aspects ....................................................................... 16 Loadcredit conditions and covenants ...................................................................................... -17 D. APPRAISAL SUMMARY. ............................................................................................. 18 Economic and financial analyses............................................................................................... 18 Fiduciary .................................................................................................................................... 20 Social ......................................................................................................................................... 21 Environment .............................................................................................................................. 22 Safeguard policies...................................................................................................................... 22 Policy Exceptions and Readiness .............................................................................................. 23 Annex 1B: Critical Priorities inTax Administration Reform ....................................................... Annex 1A: Country and Project Background................................................................................ 25 Annex 3A: Resultsand Monitoring Framework ........................................................................... 32 Annex 2: Major Related Projectsby the Bank and other Agencies .............................................. 28 31 Annex 3B: Arrangements for Results Monitoring ........................................................................ 34 Annex 4: Detailed Project Description.......................................................................................... 36 Annex 5: Detailed Project Activities and Costs ............................................................................ Annex 6A: Institutional and Implementation Arrangements ....................................................... 41 .............................................................................. -44 Annex 7: Financial Managementand DisbursementArrangements ............................................. Annex 6B: Institutional Capacity Assessment 48 50 Annex 9: Economic and Financial Analysis.................................................................................. Annex 8: ProcurementArrangements ........................................................................................... 57 61 ............................................................................................... Annex 11:Anticomption Measures............................................................................................. 67 Annex 10: SafeguardPolicy Issues 66 Annex 12: Project Preparation and Supervision ............................................................................ 72 Annex 13: Documents inthe Project File 73 Annex 14: Program inBIR Budget ............................................................................................... ...................................................................................... 75 Annex 15: Statementof Loans and Credits ................................................................................... 76 Annex 16: Country at a Glance ..................................................................................................... 78 Annex 17: Map .............................................................................................................................. 81 THE PHILIPPINES NATIONAL PROGRAMSUPPORT FOR THE TAX ADMINISTRATION REFORM PROJECT APPRAISAL DOCUMENT EASPR Date: February 12,2007 Team Leader: Vera Songwe, EASPR CountryDirector: Joachimvon Amsberg Sectors: CentralGovernment Administration(100%) Acting Sector Director: IndermitS. Gill Themes: Tax administration(P), Governance(S), Change Sector Manager: BarbaraNunberg Management(S) ProjectID: 37772-PH EnvironmentalScreeningCategory: Notrequired, (C). [XILoan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: ForLoans/Credits/Others: TotalBank financing(US$m.): 11.OO Proposedterms: This loan i s a fixed spread US dollar denominated loan with 8 year grace period and Source Local Foreign Total BORROWER 0.00 0.00 0.00 INTERNATIONAL BANK FOR 8.30 2.70 11.00 RECONSTRUCTIONAND DEVELOPMENT TOTAL 8.30 2.70 11.oo Borrower: Republicofthe Philippines,Departmentof Finance DOFBuilding, ExecutiveTower, CentralBank Complex, Roxas Blvd., Manila,Philippines Tel: +63.2.523.9215; gteves@dof.gov.ph ResponsibleAgency: Bureauof InternalRevenue(BIR) Tax ReformAdministrationGroup (TRAG) 3Tdfloor, BIRNationalOfficeBldg., Agham Road, EastAvenue, Diliman, QuezonCity, Philippines Tel: +63.2.920.7506/08/10; 928.41.99; 981.7487; lucita,rodriauez@bir.gov.ph Fax number: +63.2.920.7502 EstimatedDisbursements(Bank FY/US%m) FiscalYear FY08 FYo9 F Y l O FYll Annual 2.72 4.08 2.62 1.58 Cumulative 2.72 6.80 9.42 11-00 Program implementationperiod: Start: 1 April 2007 End: 3 1 December 2011 Expectedeffectiveness date: 1 April 2007 Expectedclosingdate: 3 1 December 2011 Doesthe projectdepart from the CAS in content or other significantrespects? [ ]Yes [XINO 1 Ref.PADA.3 Doesthe projectrequireany exceptions from Bank policies? [ ]Yes [XINO Ref.PADD.3 Havethese beenapprovedby Bank management? I s approval for any policyexception sought fromthe Board? [[ ]Yes [ IN0 ]Yes [XINO Doesthe projectincludeany criticalrisks rated"substantial" or "high"? Ref.PADC.5 [XIYes [ ]No Doesthe projectmeetthe Regionalcriteriafor readiness for implementation? Ref.PAD D.7 [XIYes [ ]No Projectdevelopment objective Ref.PADB.2, Technical Annex 3 To increasetaxpayer complianceby increasingthe efficiency and effectivenessof the BIR, andto preparethe BIR for a sustainableand long-termreform. Programdescription Ref.PADB.3., Technical Annex 4 The program is part of a comprehensivetax reformsupport programto BIR governancewhich includesadditional support from the following development partners: Millennium Challenge Corporation (MCC), United States Agency for InternationalDevelopment (USAID), Australian Agency for InternationalDevelopment (AusAID), andthe Swedish InternationalDevelopmentAgency (SIDA). Bank-financedactivitiesare describedinthe context of the Reformin Annex 4. A. Tax Compliance: This component will finance the improvement ofthe registrationprocess, the clean-up of the taxpayer registry, and strengthen detection of non-registered taxpayers; improve the processing of stop- filers andreduce its inventory; and improvetaxpayer e-services, e-filing and e-payment. B. Tax Enforcement and Control: This component will address the collection of arrears, review proceduresand clean up of the inventory.It will improvetaxpayers' services and informationlinkages as well as transactions with tax credit certificatesandtax remittances advices. Itwill also strengthenthe legal department of BIR in the preparation of non-RATEcases for prosecutionand codifytax administrationrulingsand regulations. C. Human Resource Development and Management.This component will finance the improvements of humanresource planningand managementsystems and processes, the review ofHR policies,expansionof a staff and organizationalperformancesystem, and the use of a Human Resource InformationSystem and Performance Management System. D. BIR Management, Change Management,and Program Management. This component will finance the enhancement of the BIR governance and managementculturethroughtrainingand tools; facilitate the reform and its sustainability through communication (internal and external), project and change management training, consulting assistance and office equipment. In addition, the function of internal control will be strengthenedto better detect deviations from approved procedures and strengthen anti-corruption measures, including an assessment of major IntegrityRisks andthe preparationof an IntegrityPlan. Which safeguardpoliciesare triggered, ifany? None Ref.PADD.6, Annex 10 EnvironmentalCategory: C Loaneffectivenessconditions: Terms ofreference for a reformchangemanagementexpert have beenissuedand short-listinghasbegun. A Project Operations Manual and an Agency Procurement Manual have been adopted and agreed with 2 the Bank. 0 Appropriatefinancialarrangementsand internalcontrolpoliciesandprocedures are inplace and satisfactoryto the Bank. Covenantsapplicableto projectimplementation: The BIR will maintainan active Steering Committee duringProjectimplementationto provide oversight, policyguidance, overall coordination,and conflictresolution. The BIR will ensure that its annual budget provides for sufficient funds for the operating and maintenancecosts ofthe enhancementsachievedthrough this project. The TRAG will maintainan organizationaland management structure, staffing and resourceswhich shall be adequateto enableTRAGto effectively implementthe Project. The TRAG will take all necessary measures to implement the Project in accordance with the Project Operations Manualandthe ProjectImplementationPlan. The BIR will furnish to the Bank semi-annual reports on the results of monitoring and evaluation activities. On or about June 15,2009, the BIR andthe Bank shalljointly carry out a midtermreview of the progress made in implementingthe Project. The Project will maintain an adequate financial management system with appropriate accounts and in accordancewith generally acceptedaccounting principles. Interimun-auditedfinancialreportsfor the Projectshall be submittedto the Bank no later than one month after the end ofeach calendar quarter in form and substancesatisfactory to the Bank. Annual audited financial statements for the Projectshall be submitted no later than six months after the end ofthe Project'sfiscal year. The BIR will maintain a Financial Management Unit under the DCIR for Special Concerns to be responsiblefor the financialmanagementaspects ofthe Project. The BIR shall prepare, adopt and implement the Project based on an Agency Procurement Manual (includinganti-corruptionmeasures). The BIR shall not amend, abrogate, suspend or waive any part of the Project Operations Manual or the Agency ProcurementManual, withoutthe prior concurrenceofthe Bank. The BIR shall select a reformchange managementexpert, with qualificationand experienceacceptableto the Bank, andunder terms ofreference satisfactory to the Bank. The Borrower shall hold semi-annual high levelreviewmeetingschairedby the Secretary of Finance, by June 1 and December 1 of each year startingJune 1, 2007 to review implementationprogress (including the performance indicators)and address issues arisingfrom the Project implementation. 3 A. STRATEGIC CONTEXT AND RATIONALE Country and sector issues 1. After several years of slow growth, GDP growth inthe Philippines was 6 percent in2004 and 5 percent in 2005. After a near shut out in 2003, foreign investments levels tripled, due mostly to renewed confidence in the economy, and key reforms in the mining sector. The sizeable fiscal consolidation of the last two years has contracted the national government deficit from 4.8 percent in 2004 to 2.7 percent in 2005 and reduced debt levels by about 7 percentage points over the same periodto 72 percent of GDP. 2. The fiscal consolidation, achieved largely through expenditure reductions of over 1.9 percent GDP over the last two years was a quick responseto the weight and urgency of the fiscal burden and not meant to be sustainable. The main source of the fiscal imbalance was a sharp contraction in tax effort of about 7 percentage points of GDP over seven years. With the recent passage o f the comprehensive VAT law, the government is now concentrating on increasing revenue, through improvements in tax administration. Tax administration reform is a key government priority, and this is reflected in the Country Assistance Strategy (CAS) for the Republic of the Philippines of April 19, 2005 and the Medium Term Philippine Development Plan (MTPDP) 2004-2010. 3. Inresponseto a request from government for assistanceinthe area of tax administration reform, a joint BanMFund diagnostic mission in December 2005' determinedthat a sustainable tax administration reform program should address basic managerial, systemic and human resource issues. 4. Following these recommendations, the Government is aiming at an initial project to address some of the core constraints to effective revenue administration, obtain buy-infrom staff and enhancethe credibility of government's reform efforts through early short-term successes, in order to prepare for a later, more comprehensivereform. Rationalefor Bankinvolvement 5. Building on the lessons of the past and aligned to the Government's MTPDP, the new Country Assistance Strategy (CAS) 2006-2008 seeks to achieve economic growth and promote social cohesion via fiscal reform in the short to medium term and making public institutions more effective in the longer perspective. The strategy is designed to support the Government's overall reform agenda and inparticular to align Bank assistanceto those strategic priorities inthe existing national budget that address reforms to achieve fiscal stability, improved governance, and fight corruption. This approach requires a shift from financing discrete projects towards support for coherent multi-year programs. The Bank assistance through the National Program Support for Tax Administration Reform (NPSTAR) will compliment and support the government's implementation of muchneededreform inthe area of tax administration. 6. The Bank is well placed to support these reforms, having been an active contributor in fiscal policy and tax administration dialogues in the Philippines. Over the years, the Bank has ' "CriticalPrioritiesinTax and CustomsAdministrationReform." World Bank& IMF. February2006. 4 developed a strong knowledge base and experience through integrated policy advice and innovations in investment lending, including the Tax Computerization Project in the nineties as well as various technical assistance activities provided though grants and analytical and advisory activities (AAA). The Bank draw on the considerable international knowledge and expertise it has built up on tax administration projects throughout the world to ensure that the program design, implementationandmonitoring are adequate. 7. This project also builds on on-going and proposed complementary government and development partner efforts. U SAID has funded a performance management program within the Large Taxpayer Service (LTS) and at the department director level, which this project would help extend to the rest of the organization, and will finance international consulting assistance to the Tax Reform Administration Group (TRAG) to help with change management in the initial stages. The Millennium Challenge Corporations (MCC) will be funding the extension o f the Integrated Tax System, at present in use in 42 district offices, to the remaining 77, through the acquisition o f new equipment, modification o f software, and training; inaddition, it will finance the acquisition o f hardware, software and training for the BIR Human Resource Information System. AusAID will provide assistance inthe humanresource area, carrying out a gap analysis o f training needs, providing technical assistance, and training. SIDA would assist in revenue forecasting and taxpayer audits. 8. The IMF supports these efforts and has recently approved the Secretary o f Finance's request for a tax advice in the form o f 26 weeks o f assistance by an international tax administration consultant over the next 12-18 months; the reform project has been prepared in close coordination with the all development partners. Higher levelobjectivesto which the projectcontributes 9. The 2006-2008 CAS recognizes that higher and sustained growth need to be the major driver o f poverty reduction, in parallel with more social inclusion to empower the poor and enable them to participate inthe opportunities afforded by economic growth. Both fiscal reforms and governance improvements are essential for achieving these goals. Improving tax administration i s directly aimed at facilitating both, and i s therefore specifically recognized as a Government priority and supported by the Bank. Annex 1 provides a more thorough discussion o f the country and program background. B. PROJECT DESCRIPTION Lendinginstrument 10. The lending instrument that has been selected i s the Sector Investment and Maintenance Loan (SIML). The SIML design features allows the loan to align sector budget expenditures, policies and performance with the Government's thrust to reform tax administration. Buildingon experience from the last Bank tax administration investment project, this loan i s designed as a National Program Support project. This implies.that activities funded under the loan have been directly included in the government's budget and are now part o f the recurrent budget o f the BIR. In other words, the loan will not provide additional financing to the BIR, but rather complement and ensure the implementation o f activities critical to the reform agenda. The additional significance o f this i s that the loan finances a share o f the budget and once the loan 5 runs out, the elements financed by the loan will continue to receive financing. This i s essential for sustainability o f the reform program and for ensuringa higher level o f project ownership. Project developmentobjectiveand key indicators 11. The project aims to: a. Increasetaxpayer compliance by increasingthe efficiency and effectivenessof the BIR; b. EnhanceBIR capacity to undertakea sustainableand long-term reform program 12. The objectives will be measured against a set of selected key performance outcome indicators: Efficiency e Increase in the number o f accounts receivable (Am) settled and improved settlements process. 0 Increase in the number o f stop filer cases arising from erroneous registration information eliminated from registration database. Effectiveness 0 A unifiedhntegrated and comprehensive registration system with improved up-to-date taxpayer information. 0 Increase in the number o f new registered taxpayers over estimated potential number o f unregistered taxpayers. 0 Increase in the use o f output and outcome indicators in internal management reports and decisions. e Increase in the use o f performance management system for office and staff appraisal and development. Sustainabilityof reform 0 Increase in external expectations o f reform accomplishments. 0 Increase in staff awareness and understanding o f the need for reform as well as the reform. Projectcornponents 13. The project will finance consulting services, goods, training, workshops, study tours and incremental operating costs over four years, through four components. The total cost for each project component is provided below with the bank's component included as a subset. Component A: Tax Compliance (Total Reform cost US$9.09millionof which the Bankwill finance US$3.59 million). 14. Tax registration and verification: This component will finance the consulting assistance necessary to develop a cost-benefit based registry verification and clean-up strategy, as well as efforts to identify non-registered taxpayers. A review o f legal impediments to obtaining third-party data for verification purposes i s also planned. In addition, this component will also finance consulting assistance to review existing registration and quality assurance 6 procedures, with a view towards the sustainability o f the clean-up effort. Under the M C C program, the registry's computer equipment will be upgraded. MCC will also finance the computerization o f the 77 non-computerized revenue district offices (RDO). The remaining 48 RDO's were computerized under the 1994 tax computerization project. The Bank would help set upthe thirdregional data center (RDC) inMindanao. 15. Stop-filer and e-services: This component will finance consulting assistance to establish the exact nature and dimensions o f the stop-filer problem. There are over 11 million identified instances o f returns not filed by taxpayers. As such, this component will support the development o f a strategy to address this issue, it will also fund taxpayer information campaigns, provide opportunities for taxpayers to file voluntarily, computer assistance to produce special automated mailings; and monitoring o f collection enforcement. In conjunction with this effort, the component will finance a review o f the payment system, including expansion o f e-payment, negotiations with commercial banks, and related payment issues. Finally, the component will finance activities aimed at strengthening taxpayer services, in particular in internet-based assistance to the taxpayer. Component B: Tax Enforcement and Control (Total Reform cost US$5.37 million of which the Bank will financeUS$1.72 million). 16. Arrears Management and Accounts Receivable: This sub-component would support technical assistance to analyze and evaluate the arrears inventory, estimate ease o f "collectibility" and amount to be collected, design a strategy for collection. The sub-component will also provide suggestions on business process improvements to enhance the existing arrears management system and provide recommendations for improvement. In addition, it will finance the arrears clean-up exercise and the development o f an accounts receivable system. Related activities such as the efficient administration o f tax credit certificates and tax remittance advice; and improvements in taxpayer services and information linkages are also supported. This sub- component is financed through Bank assistance. 17. Case preparation and prosecution: Activities under this sub-component will also include support for tax enforcement efforts by strengthening the ability o f the BIR to prepare non-RATE cases for prosecution, and by continuing the codification o f rulings and regulations begunwith USAID assistance. 18. The Run after Tax Evaders (RATE) program has had a number o f successes in identifying and prosecuting well-known figures in the Philippines and publicizing these successes, with a noted effect on the BIR image. MCC will provide financing to expand the RATE program, primarily with equipment and training. This component will provide support in the form o f technical assistance for the installation o f a case monitoring system and a workflow/automated archiving system. 19. Risk Based Audits: Preliminary evasion and statistical studies, the development of a risk-based audit selection system, the definition o f the national audit plan and monitoring systems will be financed by the Swedish International Aid Agency (SIDA). They will also finance software and equipment for computer-based auditing o f computerized audit cases. 7 Component C: Human Resource Development and Management (Total Reform cost US$6.20 million ofwhich the Bankwill finance US$2.33 million). 20. Human Resource Development and Management: This component would finance activities in support o f the modernization o f the Human Resources (HR) function, providing the tools needed to improve HR management and enhance the staff development aspects o f HR. In addition to technical assistance on a review o f HR policies and procedures, this component will finance training in staff planning and the implementation o f a skills inventory, which will be combined with the verification and clean-up o f the personnel action files, and the loading o f these files into an MCC-Financed Human resources Management and information System (HRMIS). 21. PerformanceManagementSystem: This component will finance consulting assistance to undertake the review and implementation o f the USAID-financed organizational and individual performance management system. This system was developed for the large taxpayer service and USAID i s considering its extension to the department director level. Bank financing would further extend it to the rest o f the BIR. The organizational performance indicators will improve the management o f the organization, motivate employees by providing better direction, and help infighting corruption through improved monitoring. 22. In conjunction with AusAID assistance, this component will prepare training planners train TRAG staff and implementation task forces as well as other staff in management, project and change management, andprovide, specific training to the InternalAudit Unit (IAU). Component D: BIR Management, ChangeManagement, and Program Management (Total Reform cost US$3.42 million ofwhich the Bank will finance US$3.36 million). 23. Governance and management:The need to strengthen governance and management was diagnosed by the BarWFund mission in 2005 as a critical element in poor revenue performance at the BIR. This component aims to increase management capacity through improved strategic planning and quality assurance, a Senior Management Information System (SMIS), and the strengthening o f the Internal Audit Unit (IAU) to increase internal control, including an assessment o f major integrity risks and the preparation o f an Integrity Plan (IP). For implementation reasons, the expansion o f the prototype organizational and individual performance measurement system and management training are provided through the previous component. 24. Change management: To minimize resistance to change, and to facilitate sustainability by increasing knowledge of the reform and public expectation o f its stated goals, 14 percent o f Bank financing will consist o f change management activities such as external and internal information dissemination campaigns, workshops, and information dissemination materiel, with staff and user surveys to provide feedback. In this way the changing perception o f staff will be measured, as well as the expected changes inthe private sector's perception o f tax administration as a major constraint. Not included inthis amount i s the training o f staff on change management to increase understanding o f the reform process, and the creation o f a change management unit withinthe Tax ReformAdministration Group (TRAG). 8 25. Tax reform administration: The TRAG is a recently defined unit reporting directly to the Commissioner. The TRAG head has the rank o f Deputy Commissioner, that is, only one level below that o f the Commissioner himself. The TRAG will be responsible for the implementation o f the reform, under the guidance o f a Steering Committee composed o f all Deputy Commissioners and their appointees, chaired by the Commissioner. The TRAG will also be responsible for the coordination o f development partner-financed activities. This component will finance the strengthening o f the TRAG, through training, technical assistance and office equipment. 26. This component will also finance activities and feasibility studies to prepare the BIR for the next steps in reform, such as a new organization, improved performance indicators, and the introduction o f budget programming and cost accounting systems. Lessonslearnedand reflectedin the programdesign 27. There are several lessons learnt from the Tax Computerization Project, Loan 36030/3603A, completed in 1999. These lessons have been addressed inthe program as follows: The needfor: a. Visible, top managementsupport.Top management i s intimately involved in directing the reform, through a reform Steering Committee composed o f senior management and their representatives. In addition, consistent interest on the reform at the Secretarial (Le. Ministerial) level has been apparent throughout program preparation. b. Flexible strategies. All major activities have feasibility studies to address issues in a cost-benefit, phased manner, learning by successes and mistakes from one phase to another, and making use whenever possible o f outsourcing to leverage knowledge and resources. c. Involvement of user/stakeholders in all phases of the program. The major stakeholders are management and staff o f the BIR, who, in addition to the Steering Committee, form part o f the 26 task forces from the affected reform areas, both middle- management and staff assigned to the reform and who will actually implement the reform. A revenue committee chaired by the Secretary of Finance which includes members o f congress has also been formed to oversee the performance o f the BIR. During project preparation, the private sector was extensively involved, including the use o f IDF funding to further private-public sector dialogue. It was felt, however, that it would be premature and even counterproductive to involve the private sector formally at this stage, which aims to strengthen government and staff commitment to reform. d. Hard work, dedicationand skills of the major players. The reform management and the members o f the 26 task forces have shown their dedication and hard work during project preparation; skills such as project and change management will be taught throughout the program, and expert technical assistance will be used consistently throughout the program. 9 e. Change management program. The program's change management program i s 14 percent of Bank financing and will consist of external and internal information dissemination campaigns, workshops, and information dissemination materiel, with staff and user surveys to provide feedback. In addition, and not included in this amount, there will be training of staff on change management a change management unit will be created withinthe TRAG. 28. Lessonsfor the Borrower, as statedinthe ICR are: a. Embedtax computerizationwithin a broader public sector reform.All reform of tax administration must inevitably and appropriately be accompanied by computerization; this i s not, however, the focus of the WB-financed program, with only 8 percent allocated to hardware and 22 percent to software and application modification, concentrates more on the use of informationtechnology than on its introduction. Replication of existing systems, which does include hardware acquisition, will be carried out in parallel, financed by the MCC. b. Balancethe complexity and the scope of the achievements.A small, focused program has been decided on, to carry out immediate activities, and to prepare the BIR for future reform. Feasibility studies and a phased approach to major activities present a number of milestones and decision points which permit flexibility in determining the scope of the activity. c. Select a solution to retain the skilled IT staff. Not applicable to this program, but is important for the complementary MCC support. The Bank is discussing ways of ensuring sustainability with the Government andthe MCC team. d. Maintain good communicationwith oversight agencies (DOF, DBM and NEDA). Communication with these agencies has been constant and fluid during program preparation. 29. Lessons for the Bank, as stated inthe ICR are: a. Avoid software developmentwhen an "off the shelf package exists in the market. The only large application software contemplated in the program is the HRIS, which will be financed by MCC; selection from a short-list of available customizable packages is contemplated. b. Simplify and train the borrower on financial management, disbursement and procurement process. Training is foreseen in Bank financial management, disbursement and procurement for the administrative unit of the TRAG, to enable them to efficiently support the reform. c. Include a tax administration specialist from the start in such a program The IMF- financed Tax Administration Advisor (TAA) has participated in the preparation of the program, and i s expectedto continue to provide assistance to the BIR. 10 d. Finance a larger, more comprehensive change management and training plan for the agencies' staff. As mentioned above, a large change management subcomponent is planned. 30. Lessonslearnt from experienceininstitutional development programs are: a. Inadequate change/closure of nonperforming subcomponents. Performance indicators will assist inidentifyingslow performing subcomponents,and a decision on their continuation or modificationformally made during supervision missions. b. Inadequate monitoring and evaluation, and accountability. The improvement of accountability and performance monitoring throughout the institution is explicitly addressed by the program. Baselines will be calculated during the first phase of program execution. c. Institutional modernizationas an iterative process. The program action plan will be revised semi-annually during supervision missions, to provide flexibility to introduce changes, gather knowledge, and increasethe credibility of the reform. d. Need for immediate gains to gain program credibility. Although institutional change i s a long-term activity, short-term successes are essential to enhance the credibility of the reform and facilitate political support. "Early activities" have beenspecifically designedfor the first phase of the program and an information dissemination campaign, both external and internal, plannedto makeknownthe results from these activities. 31. Lessons learned on project implementation include: a. The implementation of Bank-funded projects can be seriously impeded if capacity for implementation andmanagementoversight is not developedinthe implementing agency. b. Fully committed and trained staff members are neededto coordinate the implementation of the project components so as to avoid delays assure quality o f outcomes and embed change. c. Various Bank projects highlight the importance of giving responsibility to the organization's regular staff to ensure institutionalization and mainstreaming of policies and programs. Alternatives consideredand reasons for rejection 32. A more comprehensiveproject was considered, but rejected due to a need to balance the scope of reform needed with the implementation and change absorption capacity of the BIR. Limited managerial capacity and lack of organization-wide experience in the management of change precludes large-scalereform. Discrete, selected incremental changes will thus have more chance of success and be instrumental inlaying the foundations for further and more far-reaching future reforms. 11 Loan financing 33. The table below indicates the scope o f the proposedfinancing by component. Table 1:ProjectFinancingby Component($US million) Project Components FY07 FYO8 FY09 FYlO TOTAL Component A: TAX COMPLIANCE $1.35 $0.86 $0.64 $0.75 $3.59 Component B: TAX ENFORCEMENTAND CONTROL $0.26 $1.03 $0.41 $0.02 $1.72 Component C: HUMANRESOURCE DEVELOPMENT& MANAGEMENT $0.40 $1.12 $0.71 $0.10 $2.33 Component D:BIR MANAGEMENT, CHANGE MANAGEMENT, AND PROJECTPROGRAM I TOTAL MANAGEMENT $0.71 $1.07 $0.88 $0.71 $3.36 $2.72 $4.08 $2.62 $1.58 I$11.00 Note: Priceandphysicalcontingencies incorporated.Front-endfee waived. Values may not addup exactlydue to rounding. 34. Specific items were selected from within the proposed 2007 budget documents to support the financing o f key elements in BIR's reform agenda, while also taking into account current institutional capacity for more effective tax administration. The selection was based on the bureau's priority action plans as ordered under Revenue Special Order (RSO) No. 149-2006, 379-2006 and 381-2006 which created the Tax Reform Administration Group, the Steering Committee, and the 26 Task Forces to manage each o f the priority actions o f the tax reform agenda respectively. Annex 6 gives more information on the task forces and the mapped priority action that the reform package is supporting. C. IMPLEMENTATION Partnershiparrangements 35. The welcome participation o f the AusAID, MCC, USAID, and SIDA will serve to secure and assist the reform effort, and the Bank-financed action plan has been prepared inconsultation and with the participation o f the development partners to result in a dove-tailed reform plan of complementary and mutually supporting activities. The IMF's Advisor will provide tax administration assistance to the Reform Manager (RM) through a series o f interventions Coordination o f development partner assistance will be carried out by TUG, based on this combined work plan, described inthe reform description annex. Institutionaland implementationarrangements 36. The Project will be implemented over a period of four years. Overall responsibility for the project is vested with the BIR through the Office o f the Deputy Commissioner for Tax Reform Administration Group (TRAG). This office will be responsible for the implementation o f the reform and coordination o f development partner activities, under the guidance of a Steering Committee composed o f all the Deputy Commissioners and their appointees, chaired by the 12 Commissioner (see terms of reference in the project file). The Steering Committee was created on 8 August 2006 through the issuance of Revenue Special Order 379-2006. 37. The TRAG will be responsible for overall administration and coordination as well as change management, project management, financial management and procurement. Specifically, TRAG will (i) coordinate and facilitate the expeditious implementation of each component; (ii) facilitate regular project monitoring and ensure the completion and timely submission of agreed monitoring reports (including the semi-annual Internal Audit reviews); (iii)liaise with implementing units (i.e. task forces) to ensure that agreed benchmarks are met; and (iv) oversee loanwithdrawal applications and track the use of funds. 38. To this effect, the TRAG has organized 26 Task Groups to implement the project. However, members of the task forces are not assigned full time to them, and the matrix managementmechanismsinvolvedwill present an implementation challenge. 39. The conditions of effectivenessfor the loanincludethe issuanceof a change management expert's TORS, and a preliminary short list; preparation and adoption of a Project Operations Manual and an Agency Procurement Manual (including anticorruption measures) to guide administrative, financial and procurement procedures of the T U G , 40. A Project Implementation Plan (PIP), to be completed and revised as necessary, will guide implementation. The PIP describes annual work and financial plans and defines implementation mechanisms, procurement, financial management, and monitoring and evaluation mechanisms. Procurement 41. The Procurement Service (PS) of the BIR under the Resource Management Group (Rh4G) in coordination with TRAG is responsible for procurement of consultant services and goods. Procurement for the proposed program would be carried out in accordance with the World Bank's "Guidelines:Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual program implementation needs and improvements ininstitutional capacity. Financia1Management 42. The FM capacity of the Accounting Division and the internal control division are weak due to inadequate staffing. As a result of this the F M risk rating is high. To address this issue following have beenor shall be undertaken: 0 A fully staffed FM Unit under the DCIR for Special Concern with appropriate systems and procedures ready and operationalwas created on December 20, 2006 through Revenue Special Order 32-2007. 13 0 The Internal Audit (IA) function shall be strengthened through a program including training and hands-onIA review of the Project.Thus, the Project shall be covered by semi-annual Internal Audit reviews with the correspondingreportto be submittedto the Bank by the BIR. Beforethe training, IA would still need to review the Project so that there could be a benchmark comparison on the strengtheningeffort. 43. Expenditure will be controlled, tracked, accounted for and reported using the Government's own financial accounting system as defined in the National Government Accounting System (NGAS). The external auditor for the project will be the Commission on Audit (COA). Annual audit reports and management letters will be submitted to the Bank within six months after the end o f each fiscal year. Interim un-audited financial reports for the Project shall be submitted quarterly. Monitoring and evaluationof outcomedresults 44. T U G will be responsible for monitoring reform outcomes and results and results with the assistance o f the BIR Policy and Planning Service (PPS). The indicators will be based on project indicators and indicators already defined for the organizational performance system and refined with technical assistance financed by the project, and managed through a Reform Monitoring System. Base-line values for the indicators as well as the indicators themselves will be progressively refined and agreed with the Bank during the Bank's semi-annual supervision visits. The T U G office will produce quarterly monitoring reports on task force performance. 45. A joint semi-annual review process will assess progress against the targets o f agreed outputs and against the designed outcomes to identify issues to be addressed and plans for the next steps in implementation; the review process will include monitoring and approval by the highest levels o f government, including the Secretary o f Finance and/or his delegates. A mid- term review will be conducted during the third year to assess progress and any need for mid- course adjustments. An implementation completion review will be carried out jointly by the Bank and the Government at the end o f the project implementation period to allow a full evaluation. Sustainability 46. The introduction o f organizational and individual performance management systems, strengthening o f management tools, and training inmanagement will increase accountability and result in more efficient and effective management. This should create a supply-and-demand spiral for increased management effectiveness as the benefits of improved results-oriented management are felt inday-to-day operations. 47. The extensive change management activities will keep stakeholders informed on aims and accomplishments o f the reform, improving transparency and, it is hoped, will make it difficult to go back on or modify the reform objectives, as expectations o f the mission, values and quality of services of the BIRare raisedbothexternally and internally. 48. The strengthening o f the Human Resource aspect of tax administration through manpower planning, improved policies and an operating HR Management Information System 14 (HRMIS)will support the reformbyhelpingto align unit andindividualefforts with the goals of the tax administration and create a beneficial organizational inertia providing impetus to continuing the reform. 49. In the specific cases of taxpayer registry, non-registered taxpayers and arrears management, the update of existing systems and procedures and the introduction of quality assurance are expected to provide the means for on-going and continuing improvements inthese processes. 50. Finally, the Tax Reform Administration Group is to be a permanent organizational unit reporting to the Commissioner, to ensure that future reform activities are designedto build on the results of this initial reform and provide a permanent in-house capacity for change management and project management and serve as the primary change agent for improvement. 15 Critical risks and possible controversial aspects Table 2: Risks, Mitigation and Ratings Risks RiskMitigation Measures RiskRatingwith Mitigation Lack of sustainedpolitical Creationofa Steering Committee; raising M commitmentto the reformand internaland external expectationsofreform possible change of administration. through informationdissemination campaigns. Internalresistanceto the reform. Emphasison enhancingmanagementskills H and a strongchange management subcomponent. Lack of clear responsibilitiesand TORSfor TRAG and Steeringcommittee authority of TRAG vis-a-visline shouldprovideclear and sufficient H officers and staff. authority. Lack of managementexpertise in On-the-jobtraining inmanagementand staff involvedinthe reformmay projectmanagementand assistance by H delay implementation. experts with the requisiteexperience. Lack of matrix management Inadditionto training, particularattention H expertise in BIR andTRAG may to this issuewill be placedduring affect overallTask Forcework supervision missions, andconsulting assistancesought. Insufficientcoordinationwith TRAG, assistedby the IMFAdvisor, will development partnersmay affect coordinatedevelopment partner activities. L programactivities. Absence of adequatebudget The Sector Investmentand Maintenance resourcesto support reform. Loan(SIML)instrument ofBank support L will be usedto ensure commitment and sustainability. Lack of future resourcesin steady The Sector InvestmentandMaintenance stream. Loan(SIML) instrument ofBank support L will be usedto ensure commitment and sustainability. Fiduciary:The riskthat the funds Creationofan FMUnit for the Projectfully will not be efficientlyand staffedwith appropriatesystems and M effectively usedfor the purposesit procedures, semi annual Internal Audit was madeto attaindevelopment reviewand annual ExternalAudit reviewof objectives. the Project. H- High M-Medium L - The overallproject risk is ratedHigh. Tax administrationreformwill require difficult institutionalchangewithin the BIR and will needto rely on a concertedeffort by a wide set of stakeholdersingovernment andthe privatesector. The Bank's 16 previous support for tax administrationreforminthe Philippinesfaced serious difficultiesin meeting similarchallenges, andtherefore the presentproject's risk is ratedas high. Loadcreditconditionsand covenants Conditions of Effectiveness: Terms of referencefor a reformchangemanagementexpert havebeen issuedand short-listinghas begun. A ProjectOperations Manualand an Agency ProcurementManualhave been adopted and agreed with the Bank. Appropriate financial arrangements and internal control policies and proceduresare in place and satisfactory to the Bank. Legal Covenants: The BIR will maintain an active Steering Committee during Project implementationto provide oversight, policy guidance, overallcoordination,and conflict resolution. The BIR will ensure that its annual budget provides for sufficient funds for the operating and maintenance costs ofthe enhancementsachievedthroughthis project. The T U G will maintain an organizational and management structure, staffing and resources which shallbeadequateto enable TRAG to effectively implementthe Project. The T U G will take all necessary measures to implement the Project in accordance with the ProjectOperations Manualandthe ProjectImplementationPlan. The BIR will furnish to the Bank semi-annualreports on the results of monitoringand evaluation activities. On or about June 15, 2009, the BIR and the Bank shalljointly carry out a midterm review of the progress made in implementingthe Project. The Project will maintain an adequate financial management system with appropriate accounts and in accordance with generally accepted accountingprinciples. Interim un-audited financial reports for the Project shall be submitted to the Bank no later than one month after the end of each calendar quarter in form and substancesatisfactory to the Bank. Annual audited financial statements for the Project shall be submitted no later than six months after the end ofthe Project'sfiscal year. The BIR will maintaina FinancialManagement Unit under the DCIR for Special Concerns to be responsiblefor the financialmanagementaspectsofthe Project. The BIR shall prepare, adopt and implement the Project based on an Agency Procurement Manual(includinganti-corruptionmeasures). The BIR shall not amend, abrogate, suspend or waive any part of the Project Operations Manual or the Agency ProcurementManual, without the prior concurrenceofthe Bank. The BIR shall select a reform change management expert, with qualification and experience acceptableto the Bank, and underterms of referencesatisfactory to the Bank. The Borrower shall hold semi-annual high level review meetings chaired by the Secretary of Finance, by June 1 and December 1 of each year startingJune 1, 2007 to review implementation progress (including the performance indicators) and address issues arising from the Project implementation. 17 Counterpartfunding 51. The program i s financed through a Sector Investment and Maintenance Loan (SIML), which inserts Bank financing into the national budget.N o counterpart financing i s required under this modality. D. APPRAISAL SUMMARY Economic and financial analyses 52. The economic justification for the National Program Support for Tax Administration Reform (NPSTAR) is that implementation o f the relatively small-scale reform program (USDl1 million) will yield significant payoffs in terms o f more effective and more efficient tax administration, higher level o f compliance among taxpayers and consequently higher revenue collection in the medium to long term. While it i s not possible to estimate the likely revenue impact o f the project in the short-term since there were no reliable estimates o f the size o f revenueleakages from the deficient controls, gap analyses or baseline figures, implementation o f the project inthe first two years would improve the systems necessary to generate data2.Receipts from the higher collection would then be able to fund more and better infrastructure and social services needed to improve the country's competitiveness and reduce poverty. 53. A key contributor to poor tax collection has been the emphasis givenby BIR to promote voluntary compliance and less attention than necessary on compliance enforcement work. Another contributor to poor tax collection is that many businesses operate outside the tax net with limited concern for detection and sanction. Despite BIR's efforts to increase the taxpayer base, the under-registrationo f taxpayers remains high. 54. On the side of indirect taxes, the inefficiency o f the tax system, particularly o f the VAT, i s endemic. VAT efficiency i s only about 35 percent annually over the last decade. VAT registration o f businesses relative to the size o f the economy i s very low and the probability o f beingaudited is insignificant at 2 percent. Available data suggests that businesses required to be registered for VAT on their sales are not currently in the Philippines tax base, and that the number o f business taxpayers is low relative to the size o fthe economy and the population. 55. The proposed loan would devote about half o f the total amount to address the grave problems o f poor registration and audit inthe tax system. Two major components inthe loan, tax compliance and tax enforcement and control aims to improve the registration process and increase risk-based audit to increase the tax base and reduce opportunities for discretion and abuse o f power. To this end, an annual increase o f five percent o f taxpayers inthe database and at least 80 percent o f taxpayers in the database filing and paying income and sales taxes are expected to boost collection over the medium term. Interms o f audit, the creation o f a national audit plan and a shift to risk-based audit where five to ten percent o f risky taxpayers are audited annually would begin to improve voluntary compliance as well as signal the seriousness o f the tax bureau in enforcing tax laws and rulings. As thejoint Banmund missionof December2006 observedit 18 56. When compared to the size o f the project loan, the figures above suggest that the economic rate o f return from a unified, complete and integrated registration database and a systematized risk-base audit plan is very high. Moreover, riding on the trend o f electronic-based transaction, relatively simple procedures such as making filing and payment o f taxes available online to more taxpayers and improving taxpayer service and information would reduce transactions cost and increase general compliance. These resonate with surveys conducted that majority o f businesses were willing to pay the right amount o f taxes provided that the tax bureau makes it easier for them. 57. The loan would also address the growing number o f stop-filers. Serious problems have developed inthe management o f returns filing processes. The loan would support the operations o f a high level internal task force to establish the exact nature and dimensions o f the problem and then develop a strategy to fix it. The expected economic rate o f return o f accomplishing such a feat i s high. With modest amount, the project aims to eliminate 80 percent o f invalid stop-filers arising from the cleanup o f the registration database. This i s feasible if done systematically with the cleanup and integration o f the taxpayers' database. BIR can then devout energy and focus on the valid stop-filers and other major tax administration concerns. 58. On organization and management, experience from previous tax reform projects helped shape the structure o f the present project to include assistance in the area o f human resource development and general tax reform management. The excessive focus o f the BIR on advanced technological solutions aimed at improving taxpayer compliance without giving equal importance to performance measurement and change management have resulted in suboptimal project outcomes. Given this, the proposed project loan would devout the other half o f the total amount to human resource development and general tax reform management, which includes strengthening key areas o f performance management, change management and internal control. 59. The economic rate o f return o f these two components is very high. Management move from purely revenue accounting to include performance measurement against objectives and results and change management would help improve effectiveness and efficiency in the organization as seen inpilot projects inside the BIR. FinancialAnalysis 60. The BIR faces a significant resource constraint challenge. Its annual budget o f about P5 billion translates to only P700 per registered taxpayer per year. Given the amount needed to enforce collection and audit, the per capita allocation o f P700 per registered taxpayer i s way too low to effectively provide adequate incentives for BIR staff to perform their duties well. Moreover, the lack o f examiners, numbering only about 1250 or 10 percent o f total BIR staff, has allowed the far majority o f taxpayers to avoid being audited, thereby lowering collection vis- a-vis potential. This is in contrast to more than a quarter o f staff in administrative or support positions. 61, Giventhe fiscal pressures that have persisted inthe last nine years, a significant increase in the allocated budget of BIR is unlikely until the revenue effort returns to more sustainable levels. However the BIR can and must take the opportunity provided by donor support in enhancing its systems to improve its efficiency and effectiveness in tax administration. This 19 would then result in a virtuous cycle where higher collections results in more allocation to BIR and more pro-poor spending. The higher agency allocation can then be usedto higher qualified examiners and improve its business process system. 62. Since the NPSTAR is aimed at supporting existing expenditure items inthe BIR budget, it will have little direct additional impact on recurrent allocations for the BIR.However, some of the NPSTAR supportedreforms are very likely to yield greater efficiencies intax administration inthe short-run thereby closing the funding gap betweenfunding requiredfor minimumresource provisionfor quality tax administration and the budget allocation to BIR. Technical No technical constraints exist. Fiduciary Financia1Management 63. Overall, the Financial Management (FM) systemof the BIR is not adequate to handle the minimumrequirementsof the Bank and the FM risk is rated High. This is primarily due to the inadequate F M staffing of the Accounting Division and weaknesses in Internal Control. However, the BIR proposed an F M arrangement for the proposed NPSTAR. This included the creation of a separate Financial Management (FM) Unit under the Deputy Commissioner (DCIR) for Special Concerns (former DCIR of the Resource Management Group handling the Financial and Administrative Service) and will have the appropriate systems and procedures ready and operational including separate accounts, financial reporting, and Internal Control policies and procedures. The FM arrangements proposed for NPSTAR mitigates the FM risks reducing them to an acceptable level. 64. The following are the main action plan items for the Project (please see "Action Plan" underAnnex 7 for details): 1. The BIR shall create a fully staffed FM Unit under the DCIR for Special Concern with appropriate systems and procedures ready and operational before the effectiveness of the project. 2 The Internal Audit function shall be strengthened through a program including training and hands-on IA review of the Project.Thus, the Projectshall be covered by semi-annual InternalAudit reviews with the corresponding report to be submittedto the Bank by the BIR. Procurement 65. The assessment uncovered no major procurement issue. The BIR follows the procurement law and its implementing rules and regulations. It generally follows the procurement planning processes under the law from which its annual budget i s based. The standard Philippine Bidding Documents and standardcontract forms are adopted. Further, civil society observers are invited regularly inthe bidding processes. For the program, BIR will carry 20 out project procurement activities through its Procurement Division under the Resource Management Group. A separate Bids and Awards Committee (BAC) for Tax Reform Administration (TRA) will be setup together with its own technical working group and secretariat. A TRAG representative will be a member o f the B A C TRA for smooth coordination o f procurement process. 66. In 2005 BIR Head Office procured a total o f P644 million comprising 38 percent consulting services, 33 percent for non-consulting services and 29 percent for goods. Sixty five percent o f these procurements were done through public bidding as prescribed in the public procurement law. Based on the agency capacity assessment completed on August 31, 2006 (on file), the BIR's risk procurement assessment i s rated as average. Social 67. Inassessingthe poverty and social impactsofrecent adjustment measures, several factors need to be considered. First, not undertaking a fiscal adjustment would have been irresponsible as it would have increased the risk o f a full-fledged economic crisis in which the poor would have suffered disproportionately. As fiscal pressures built, the government initially responded with expenditure restraint and efforts to improve tax administration-given legitimate concerns about leakages from public spending programs and the foregone revenue from uncollected taxes. But ultimately, the government concluded that adjustments in tax policy and power generation tariffs would also be needed, and that adjustments to the VAT would need to be part o f the reform package ifa significant impact on tax revenuewas to be realized. This conclusion i s fully consistent with the advice o f the Bank for a period o f several years. The fiscal reforms undertaken thus far are essential for reversing the compression o f public expenditures for basic public services. Even with untargetedpublic services, the poor would still receive a much larger share o f benefits from such spending than their own contribution through taxation. Moreover, the substantial fiscal adjustment o f the past two years has already played a role in easing investor concerns about fiscal sustainability. Private capital inflows have increased and financial market indicators have improved. Growth has thus been maintained at robust levels, employment has increased, and poverty i s estimated to have declined at a faster pace than prior to 2004. Such an environment provides the appropriate framework for pursuing the government's medium-term reform agenda. 68. An improved tax administration will benefit citizens o f the Philippines by providing the wherewithal for government to address poverty alleviation and economic growth. It will also increase the equity o f the tax burden throughout the population, provide predictability and sustainability to the budget, and the perception o f increased effectiveness will have a positive impact on markets both national and international. 69. The equity o f the current Philippine tax system is somewhat distorted due to poor tax administration. Indirect taxes have tended to be defacto more progressive while income taxes have tended to be de facto more regressive. The proposed project would aim to improve the equity o fthe tax system. 70. Emphasis on voluntary compliance and less attention than necessary on compliance enforcement work has resulted in widespread underreporting o f income and over-reporting o f 21 allowable deductions especially among self-employed and professionals. There i s ample evidence in the Philippines that the individual income tax suffers from rampant evasion and avoidance from self-employed individuals. This i s indicated in Bureau of Internal Revenue data by the disproportionate collection o f income tax from employed individuals; and from Department o f Finance estimates that the tax gap (the difference between collected taxes and the potential tax base) o f self-employed individuals i s about 70 percent versus only 7 percent for employed individuals. The National Tax Research Center (NTRC) estimates that almost P30 billion in taxes from the self-employed and professionals were not collected on an annual basis inthe last six years. 71. Even though the net positive impact of the fiscal reforms supported by the DPL is apparent, this PSIA section nevertheless assesses the separate impact o f the VAT reform and power tariff adjustments on low income groups. In doing so, it i s important to recognize the counterfactual o f higher poverty incidence without enactment o f the government's adjustment program for the reasons outlined above. 72. Ifapplied uniformly to all goods without exemption, a VAT may be regressive intheory; but discriminate application o f the VAT can soften its impact on the poor and make the tax less regressive. Empirical analysis o f household surveys inthe Philippines suggests that the VAT i s mildly regressive in the sense that the effective VAT rate (the actual VAT paid as a percent o f total expenditures) o f the poor i s slightly higher than that o f the rich. A National Tax Research Center (NTRC) study usingthe FIES 2000 indicates that the effective VAT rate ofthe poorest 50 percent o f families was 5.2 percent while that o f the richest 50 percent was 4.1 percent. The richest three percent of families had an effective VAT rate o f 3.7 percent. The same FIES 2000 (and later also the FIES 20033), indicated that 39 percent of VAT revenue was collected from the richest 10 percent o f families while only 17 percent o f VAT revenue was collected from the poorest 50 percent o f families. Environment 73. The Project will finance consulting services, goods, training, workshops, study tours and incremental operating costs over four years. There are no civil works or any activity that will have negative environmental implications. The project is classified under category C. Safeguard policies SafeguardPolicies Triggeredby the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [I [x 1 Natural Habitats(OP/BP 4.04) [I [x 1 Pest Management(OP 4.09) [I Cultural Property(OPN 11.03, beingrevisedas OP 4.11) [I [x 1 [x 1 Involuntary Resettlement(OP/BP 4.12) [I IndigenousPeoples (OD 4.20, beingrevisedas OP 4.10) [I [x 1 [x 1 Forests(OP/BP 4.36) [I [x 1 At that time of computation, the final versions of the 2003 FIES was not available. The data set used here was the preliminary and restricted-access version. 22 Safeguard Policies Triggered by the Project Yes No Safety of Dams (OP/BP 4.37) [I [x 1 Projects in Disputed Areas (OP/BP/GP 7.60)' [I [x 1 Projects on International Waterways (OP/BP/GP 7.50) [I [x 1 74. There are also no adverse social safeguards implications (involuntary resettlement, Indigenous Peoples, etc.). Improved tax compliance, tax enforcement and strengthened performance accountability of BIR personnel should result in increased public revenue. This should create space for better and more effective and efficient service delivery to the poor that will enable them to participate inthe opportunities for economic growth. To mitigate unintended impacts to the poor that could raise cost of consumer goods, mitigating measures have beenput inplaceto exempt the application ofVAT andothertaxesto basic consumer goods. Policy Exceptions and Readiness 75. There are no policy exceptions being sought. 76. On readiness, three of the original effectiveness conditions have already been met even before Project negotiations: establishment of a SteeringCommittee, conduct of initial training for BIR staff on reform related change management, project management and monitoring of performance indicators, and establishment of a financial management unit under the DCIR for Special Concerns. Moreover, a full time tax reform administration group was established at the BIR to managethe reformprogram. 77. The Tax Reform Administration Group (TRAG) is a recently defined unit created under Revenue Special Order (RSO) No. 149-2006 and reporting directly to the Commissioner of Internal Revenue. The creation of this new high level group in the BIR stemmed from years of tax reform experience in which institutionalization was necessary for successful reform. The TRAG head has the rank of Deputy Commissioner, that is, only one level below that of the Commissioner himselfherself. The TRAG is responsible for ensuring the operationalization of the bureau's reform agenda and the institutionalization of the reform program. A second RSO, RSO No. 379-2006, created the Project Steering Committee composed of all Deputy Commissioners and their appointees, and chaired by the Commissioner. Finally, a third RSO, RSO No. 381-2006, created 26 task forces to manage each of the 26 priority actions of the tax reform agenda. Pending formal approval by the President, the TRAG has since its creation in May 2006, spearheaded the bureau's reform agenda. In the last four months, TRAG and task force members participated in business plan workshop, financial management, procurement and project management seminars; risk assessment and performance indicators/monitoring and evaluation workshops to equip them with the tools necessary to implement their action plan. In addition, the Steering Committee meets regularly to review milestones and progress of the task forces. This new organization setup (TRAG, SteeringCommittee, task forces) is a big step inthe consolidation of tax reform efforts and is crucial in ensuring that reforms begin to be institutionalized in the bureau. Regular capacity building activities funded by development partners are now neededto ensure that that the reform momentum under the new setup does not * By supportingthe proposedproject, the Bank does not intend to prejudice the final determination of the parties' claims onthe disputedareas. 23 slip. Bank assistance in particular will provide continuing project management and change management training throughout the life of the loan in the hope that reforms continue to be implementedbeyondthe loanhorizon. 24 Annex 1A: Countryand ProjectBackground4 A. BroadContextof Reform The Philippines economy has recently performed well. Increased remittances have partially offset the impact of oil prices and indirect taxes on consumption (including extension of the Value Added Tax (VAT) baseto petroleum productsand electricity), and growthof about 5 percent is projected in 2005 and in2006. As reflectedin a sluggish third quarter (recently releasedgovernment figures indicategrowth of 4.1 percent for the quarter) the vulnerabilities that stem from high public sector debt and borrowing requirements remain-particularly to high-oil prices, soft agricultural performance, sudden shifts in investor confidence, adverse developments in international capital markets, and possible lessening of demandfor Philippineexports. As shown in Table 1, the ratio of tax revenues to Gross Domestic Table: Philippines:Central GovernmentRevenue Product (GDP) has steadily (In percent of GDP) declined, although a moderate 1999 2000 2001 2002 2003 2004 2005` increase is projectedfor 200S5.The 1/ deterioration in the Philippines' Revenue 16.4 15.5 15.7 14.4 14.6 14.5 14.7 public finances between 1997 and Tax Revenue 14.5 13.7 13.5 12.5 12.5 12.4 12.7 2002 was, at least in part, due to weakeningtax administration. BIR 11.5 10.8 10.7 10.0 9.9 9.7 10.0 Table 2 indicates that the ratiomay Corporate 2.6 2.6 2.7 2.5 2.6 2.7 2.9 have declined more sharply in the income tax Philippines than in neighboring Personalincome 2.4 2.4 2.2 2.2 2.1 2.1 2.1 countries, between 1995-99 and tax 2000-03. Other income & 1.1 1.1 1.2 1.0 0.9 1.o 0.9 profits Significant gains are expected Excises 2.1 1.8 1.6 1.4 1.3 1.2 1.4 from the long-delayed extended VAT 1.9 1.6 1.6 1.7 1.9 1.7 1.7 value added tax (EVAT) implemented from November 1, Other indirect 0.7 0.7 0.8 0.6 0.4 0.6 0.6 taxes 2005. Expansions of the VAT Other 0.6 0.5 0.5 0.5 0.5 0.5 0.5 base, together with an increase in the rate of VAT from 10 to 12 BOC 2.9 2.8 2.6 2.4 2.5 2.5 2.5 percent from February 1 2006, are Tariffs 1.4 1.4 1.1 0.9 1.o 1.o 1.o expected to generate an additional VAT on imports 1.2 1.3 1.3 1.2 1.2 1.2 1.1 1.4 percent of GDP. The authorities envisage that full Excises 0.1 0.1 0.2 0.2 0.3 0.4 0.3 implementation of the EVAT and Other offices 0.1 0.1 0.1 0.1 0.1 0.2 0.2 measures to improve tax administration will be sufficient to enable it to meet its medium-termtarget of a balanced budget by 2010, though a September 2005 M F mission concludedthat additionalmeasures would be necessary, such as extensive rationalizationof tax incentives.Although introductionof the EVAT was a significant achievement, and did in fact eliminate some exemptionsfor businesses, it is essentially a strategyto collectmoretax from those who are already Extracted from "Republic of the Philippines: Critical Priorities in Tax and Customs Administration Reform", IMF/WorldBank February 2006 The decline followed a high of 17.0percent in 1997. 25 paying tax and was criticized as such within the Philippines-lending weight to the necessity to strengthen tax administrationand improve public perceptionofthe fairness ofthe tax system. Table 2: Selected Countries: Central Government Tax Revenues, 1999-2003 (Inpercent of GDP) 1999 2000 2001 2002 2003 Average Average 1995-99 2000-03 Indonesia 16.3 .. 13.2 .. 15.3 13.26 Malaysia 14.2 14.3 18.8 18.8 17.6 18.0 17.4 Philippines' 14.5 13.7 13.5 12.5 12.5 16.1 13.1 Singapore 15.2 15.4 15.2 13.3 .. 15.8 14.68 SriLankag 15.0 14.5 14.6 14.0 .. 16.0 14.4" Thailand" 14.4 14.5 14.9 15.6 16.7 16.4 15.4 B. Current Status ofRevenueAdministration Revenue administration in the Philippines is characterized by an underlying weak community culture towards paying tax. Extensive efforts over many years to improve revenue administration, supported by substantial external assistance from the IMF, the World Bank and USAID, have not brought about significant or sustained improvements in enforcement of the revenue laws or increases in revenue collections'2.The Fund's support to these efforts for example has includedtechnical advice on aspects of tax policy and revenue administration in 1994, 1997, 1998, 2000, 2001, and 2002 and follow-up of progress in 2004 and 2005. Overall the authorities have struggled to implementtherecommendations made by previous mission^'^, including, importantly, those relatedto institutionalstrengthening, extension ofthe coverageofthe LargeTaxpayers Office (LTO), andtax incentive^'^. The BIR continues to suffer from serious shortcomings in almost all aspects of revenue administration. Over the years this has firther fieled the Philippine taxpayers' relaxed attitude to tax compliance, resulting in a level of compliance which is now alarmingly low. Undoubtedly, the impact on revenue collection is considerable.The majorconcerns identifiedby the previousWIF mission's are listedbelow. Tax evasion is widespread, and many businessesoperate outsidethe tax net with limited concern for detection and sanction. There is a lack of enforcement of basic obligations of registered taxpayers, resulting in major problems with non-filersand non-payers. 'Budgetarycentralgovernment sampleperiod2001 sample period2000-02 Budgetarycentralgovernment In sampleperiod2000-02 ' IGeneral government I' Initiatives in the customs administration-especially in the automation of import clearance procedures-were initiallysuccessful, inthe mid-to late-1990s, buthavenotbeensustained. l3 The recommendations madeby the 1998,2001 and2002 missionsmaybe found inthe Annex. I4 The mission was informed that a Fiscal Incentives Bill is currently before the Senate, which is intended to rationalizethe approvalprocess and limitthe purposes for whichtax exemptionsmaybe approved. 26 The Government and BIR management focus almost exclusively on achievement of day-to-day revenuetargets, to the exclusionof other critical performance objectives. * Major emphasis has been placed on basic taxpayer services to promote voluntary compliance, and less attentionthan necessary has beengivento compliance enforcementwork. Frontlineexaminers availableto undertake audits may be as few as 10percent of BIR staff. The maze of regulations, rulings, memoranda, and orders relatedto tax laws is complex and can be understoodonly by experiencedtax specialists. There is no currently operable nationalaudit plan based upon analysis of compliance risks and ensuringreasonableaudit coverageofthe taxpayer population. There has been an excessive focus on advanced technological solutions aimed at improving taxpayer compliance, as a substitute for more fundamental attention to the underlyingprocedural and enforcement problems. Aging information systems for basic processing are causing significant problems (including major backlogs of unprocessed returns and duplicate tax registrations) that are exacerbated by limited networkcoverage. More than 500 of the largest taxpayers remainoutside of the supervisionof the LTO; risk-based audit selection systems are lacking; and there is excessive reliance on detailed checking of all VAT refundcases. The headquarters structure is top heavy and a wide span of control makes management of regional offices problematic; excessive numbers of information technology and administrative staff are assignedto headquarters. 27 Annex 1B: Critical Prioritiesin Tax AdministrationReform" 1. EXECUTIVE SUMMARY 1. The Secretary of Finance of the Republic of the Philippines requested FAD and WB advice on improvingtax administration, compliance andenforcement in boththe BIR andthe BOC. A joint WB and FAD missionundertooka reviewof selected areas ofmanagement and operations of boththe BIR and the BOC inNovember2005. . 2. Based on the mission's analyses and following extensive discussions with the Secretary, advisers within the DOF, senior and other officials in the BIR and the BOC, and representativesof private sector interests with regard to both, tax and customs administration, the mission reached the following broad conclusions which are consistent with the IMF's previousreports but more specific in nature. : The major problems faced by both bureausare organizational,managerial, and systemic. 0 There is very little likelihood that new, sustainable, revenue-generating initiatives can successfully be implemented beforesome ofthe more basic matters of concernare addressed. Conversely, some immediate improvements in systems and controls are necessary to reduce current levels of revenue evasion and leakage. However, once implemented, they will require time to generate the required changes in operational behaviors, and therefore should not be expectedto generate significant additionalrevenues immediately. Also interms of improvingcontrols, some "one-off' actions (particularly involving the formation of task groups) are highly desirable-at least as interim measures while more comprehensive responsesare developed. It is not possible to estimate the likely revenue impact of any responses of this type, since there are no reliable estimates of the size of revenue leakage from the deficient controls. 3. The key priorities for improvingrevenue performance in the tax administrationbasedon the report are as follows: Improvingmanagementand organization(Chapter II). Undertakea top-down review of the organization structure, at headquarters, regionaland district levels to ensure that it can effectively implement the agency's major strategic and operational objectives. Develop a comprehensive performance management system that enables performance to be measured against a broad range of compliance indicators, in addition to indicators of revenue performance; and Develop an audit monitoring system to improve the quality and effectiveness of BIR's audit work. I5Extracted from "Republic of the Philippines: Critical Priorities in Tax and Customs Administration Reform", IMF-WorldBank, February2006. 28 Addressingcritical taxpayer registration and returnfiling problems (Chapter IIO. Set up a high-leveltaskforce to develop and implement a strategy to fix urgently the BIR's stop filer problems and subsequently the taxpayer registrationproblems: for both matters, a particular emphasis should be put on ensuringcompliance by the large and mediumtaxpayers. Give immediatepriority to cleaning up the taxpayer register and ensure that all registrationdata held by Revenue District Offices (RDO) are properly validated and included in the central taxpayer register; and Refocus registration activities to give priority to identifying unregistered large and medium businesses. Use appropriately trained personnel (other than examiners) to undertake routine registrationcheckingwork. Strengtheninglarge taxpayer administration (Chapter Iv). Bring all large taxpayers under close supervisionby the LTS; revisethe selection criteria for the inclusion of large taxpayers in the LTS and ensure that those taxpayers who meet the basic criteria (which should be mainly based on turnover) are automatically transferred to the jurisdiction ofthe LTS; and Modernize and streamline audit procedures; review the criteria that are used for the selection of large taxpayer cases for audit and the content of the audit manual, to ensure that risk based approaches are used both in the selection of the cases and in the identification of issues to be audited. Focusing audit strategies to address major compliance risks (Chapter Iv). Develop and implementa 2006 nationalaudit planthat provides a broadcoverage ofthe taxpayer populationwhile focusingon major compliance risks; Ensurethat risk-based principles are introducedin the selectionof refundclaims for audit; review the "benchmarking" program in the medium term to ensure that it is effective in achieving sustainable improvements in tax compliance and that it is not being exploited to understate liabilities; and Review the level of supervision of examiners' work needed at the regional office level with a view to reassigning regional office staffto field audit work. Improving taxpayer services (Chapter Iv). Give priority to consolidating, rationalizingand updatingregulations,memoranda and rulings to facilitate taxpayer compliance with the laws; and Undertake a review of the management of the ruling program (including the provision of feedback to the Assessment Division), and, as part of that review, consider a revision of delegations to streamline the rulingswork. 29 Preparingfor Simplijied Net Income Tax Scheme (SNITS) implementation (Chapter Iv). Clarify with congressional sponsors of the SNITS bill: (1) the intended commencement of the new SNITS regime, and (2) whether it may be appropriate, and technicallyfeasible, to strengthen the tax law to advance the collection of some SNITS revenue under the quarterly installment system. These recommendations all form the basis of the proposed National Program Support for Tax AdministrationReform(NPSTAR) Project. 30 Annex 2: Major Related Projects by the Bank and other Agencies Priority Action DONORS FY07 FY08 FY09 FYlO TOTALS (2006-07) (2007-08) (2008-09) (2009-10) ILegal and Enforcement WB 32,000 I 555,000 I 45,000 I 0 1 632,000 MCC I 750,000 I 550,000 I 0 1 0 I 1,300,000 [Collection Enforcementand Arrears IDF 50,000 0 ) 0 0 50,000 WB 171,000 478,000 I 360,000 19,000 1,028,000 IImprovedOrg. and Management AusAID I 242,000 I 182,000I 172,000 I 0 1 596,000 MCC 1,940,000 I 660,000 0 1 0 I 2,600,000 USAID 416,000 300,000 0 1 0 1 716,000 WB III 899,000 II 1,921,000III 1,444,000 I 727,000 I 4,991,000 Nationwide Roll-out of Computerized System WB 519,000 136,000 85,000 90,000 830,000 MCC 1,600,000 2,895,000 1,000,000 0 5,495,000 ITax Reform Management WB 211,000 267,000 139,000 80,000 697,000 USAID 20,000 0 0 0 20,000 TOTAL WORLD BANK COST 2,7 19,000 4,078,000 2,624,000 1,579,000 11,000,000 TOTAL COST 9,577,000 9,015,000 3,906,000 1,579,000 24,077,000 ~~~ Note: See also Annex 5: Detailed Project Cost with donor partner mapped to specific reform item. 31 Annex 3A: Results and MonitoringFramework To increase taxpayer complianceby Efficiency The gap studiesnecessaryto increasingthe efficiencyand Increaseinthe numberof measureevasionwill be usedfor effectivenessofthe BIR inthe short- accounts receivable(AR)settled risk-basedaudit selection, for term, andto preparethe BIR for a and improvedsettlementsprocess. targetednon-registeredtaxpayer sustainableand long-termreform. Increaseinthe number of stop filer identification,and for determining cases arisingfrom erroneous the gap betweenactual andpotential registrationinformation eliminated collection. Informationon arrears from registrationdatabase. will be usedto fine-tune the selection o f potential cases for Effectiveness prosecution. A unifiedintegratedand comprehensiveregistrationsystem with improvedup-to-datetaxpayer information. Increase inthe numberofnew registeredtaxpayers over estimated potentialnumberof unregistered taxpayers. Increase inthe use of output and outcome indicators ininternal managementreports anddecisions. Increase inthe use ofperformance managementsystem for office and staff appraisalanddevelopment. Long-term reform preparation Increase inexternal expectationsof reformaccomplishments. Increase instaffawareness and understandingofthe needfor reformas well as the reform. 32 In IntermediateOutcome Use of IntermediateOutcome Indicators Monitoring Component A: Tax Compliance Quality informationfor use by A unifiedintegratedand Operations Group (OW, critical BIR revenue-generating comprehensiveregistrationsystem Information Systems Group (ISG) processes. with complete andup-to-date taxpayer information. Improvedreturn filing process. Increaseinthe number of stop filer Operations Group, ISG. cases arisingfrom erroneoushnvalid registrationinformationeliminated from registrationdatabase. Improvedequity of the tax burden. Increase inthe number of new Operations Group, ISG. registeredtaxpayers over estimated potentialnumber of unregistered taxpayers. Component B: Tax Enforcement and Control Improvedcollectionthrough Increase in the number of accounts Collection Service, Enforcement liquidation of non-cashassets. receivable (NR) settled and Service. improvedsettlement process Component C: Management and Human Resources Improvedoffice leveland staff level Increase in the use of performance HRDS, PPS, ISG appraisaland development. management system for office and staff appraisal and development. Component D: Management Tools, Change Management and ProjectD'rogram Management Increasedresults-basedorientation Increaseinthe use ofoutput and Informationis usedby DOF, used and improvedgovernance. outcome indicatorsininternal for transparency,to incrementally management reports. enrich the Strategic Planning Process. 33 m- t; 3E w m a 3 4 E $ 4 - (d E 1 4 m v, I * Annex 4: Detailed Project Description The National Program Support for Tax AdministrationReform(NPSTAR) Project supportsthe larger Tax Administration Reform, composed of activities financed by the BIR as well as various development partners. A description of the Bank assisted project alone would raise questions to identified needs left unaddressed. The description below thus encompasses the totality of the reform, indicatingthe various sources of financing. World World Millennium Swedish United Australian TOTAL Bank Bank Challenge Int'l States AID SIML IDF Corp Dev't AID Agency ComponentA: TAX $3.59 $0.00 $5.50 $0.00 $0.00 $0.00 $9.09 COMPLIANCE ComponentB:TAX $5.37 ENFORCEMENTAND CONTROL $1.72 $0.05 $1.30 $2.30 $0.00 $0.00 ComponentC: HUMAN $6.20 RESOURCE DEVELOPMENT& MANAGEMENT $2.33 $0.00 $2.60 $0.00 $0.68 $0.60 ComponentD:BIR $3.42 MANAGEMENT, CHANGE MANAGEMENT,AND PROJECTPROGRAM MANAGEMENT $3.36 $0.00 $0.00 $0.00 $0.06 $0.00 TOTAL $11.00 $0.05 $9.40 $2.30 $0.74 $0.60 $24.08 United States Australian Agency Agency for International for International Development Development Swedish 3% 2.5% International Demlopment -.. a Millenium rn World Bank Challenge Institutional Corporation Development 39% Facility 0.2% 36 ComponentA: Tax Compliance(Total Reform cost US$9.09million of which the Bank will finance US$3.59million). Despite BIR's efforts to increase the taxpayer base, the under-registration of taxpayers remains high. A labor force survey released by the PhilippinesNational Statistics Office on September 15, 2005 estimates the population of the Philippinesat 85.2 million. In July 2005, the number of persons in the labor force (employed and unemployed) was 35.2 million, of which 32.5 million were employed persons. Despite a general obligation for employees to register for tax purposes, at present only 5.6 million are registered with the BIR and are payingincome taxes (mostly withholding). The under-registration,approximately27 million potential taxpayers, is massive. It must be assumed, however, that many of these persons have incomes below the threshold. The number of registered businesses seems low as well; in particular, it is notable, that only 270,000 businessesare registered for VAT9. The taxpayer register is corrupted and needs to be cleaned up. It is corrupted with registrations of businessesthat have longceasedto operate and peoplewho have died or left the country. Some taxpayers have also obtained multiple registrations, either fraudulently or innocently. Importantly, data related to taxpayer registrations that is held by the revenue district officers (RDOs) may not have been systematicallyincludedinthe centraltaxpayer register. The component will finance the consulting assistance necessary to plan cost-benefit based registry verification and clean-up strategy, as well as efforts to identify non-registeredtaxpayers. This clean-up will require a review of legal impediments to obtaining third-party data. In addition, it will finance consulting assistance to review existing registration and quality assurance procedures, with a view towards the sustainability ofthe clean-up effort. The numbers of stop filers have reached dramatic proportions and this could potentially involve significant revenue losses. Because of serious shortcomings in the BIR's management of the returns filing processes, the resultingnumber of "outstanding" returns runs into the millions. Linked to this, it seems that BIR also has huge backlogs of returns that it has received but not encoded to the computer system. While these uncoded returns certainly comprise some part of BIR's "missing" returns problem, the upshot is that BIR has no understanding or overview of its stop filer situation and is therefore unable to identify and pursue in any systematic way those taxpayers that have not filed returns or have not paid taxes. At present, RDOs are using essentially manual techniques to track filing and payment compliance by their more importanttaxpayers. Table 1: Stop Filing-Withholding, VAT, Excises, Other PercentageTaxes" Taxpayer Segment NumberofNon-CompliantTaxpayers Non-FiledReturns Balance "Top taxpayers" 29,70 1 254,866 Other taxpayers 550,274 9,236,9 15 Total 579,975 9,49 1,77 1 Table 2: Stop Filing-VAT18 Taxpayer Registered Taxpayers Returns New Closed Returns Segment Taxpayers with Outstanding Cases Cases in Outstanding Outstanding- end-June 2005 inJuly July end-July2005 Returns 2005 2005 Large 1,049 57 121 9 18 112 Other 242,2 13 156391 972,377 383 18,299 954,461 Total 243,262 156,648 972,498 392 18,317 954,573 "Source:BIR l8Source:BIR 37 The component will finance consulting assistance to establish the exact nature and dimensions of the problemand then develop a strategy to deal with the agency's stop filer issues. The component will also finance publicity campaigns to inform taxpayers and provide an opportunity for taxpayers to file voluntarily; computer assistance to produce special automated mailings; monitoring of collection enforcement; and a review of payment options, in particular the difficulties reported with commercial banks, and provide recommendations for new payment methods, including expansion of the e-payment program. Insupport oftaxpayer compliance, the component will finance various mechanismsfor informationto the taxpayer, improvement of e-services including the complaints procedure, and e-filing, and surveys of ComponentA: TAX COMPLIANCE taxpayers to detect areas of concern. Improvement of the BIR hardware and ,-World39.5, Bank NPS, 40% communications, comprising upgrading existing equipment at headquarters and in 42 revenue district offices in addition to equipment for the non- computerized 77 revenue district offices will be financed by a grant from the Millennium Challenge Mllenium Corporation. Challenge Corp, 60.5,- 60% ComponentB: Tax Enforcementand Control (Total Reform cost US$5.37 million ofwhich the Bank will finance US$1.72 million). No national audit plan for 2005 was issued from BIR headquarters. Following a January 31, 2005 instruction from the Commissioner, responsibility for audit selection and audit priorities (including the number andtype oftaxpayers to be audited) inthe 2005 year was fully delegatedto the regionaldirectors. Without a national audit plan, the BIR cannot ensure an appropriate coverage of the taxpayer population and cannot ensure that major compliance risks are being addressed. At present, audit coverage of the taxpayer populationis quite low when comparedto the total number of taxpayers (only 11,032 completed cases in December 2005), and taxpayers who pose the greatest compliance risks may not be pursued through audit action ifexaminers perceive that auditingthose taxpayers will be difficult, take an extended periodto complete, and ultimately it may be difficult to collect assessed liabilities. Selection of audit cases is not at present carried out based on risk principles and profiles that apply generally in establishing an audit program. Development of risk profiles for claimant taxpayers is requiredto identify which refund claims should be audited and to what depth. Similarly, the information that will be sought for verification purposes in each case should be very selective and samplingshould be the norm. Component B TAX ENFORCEMENTAND Preliminary evasion and statistical studies, the CONTROL development of a risk-basedaudit selection system, the World Bank definition of the national audit plan and monitoring Swedish lntl rNPS. 32.0. 32% systems will be financed by the Swedish International Aid Agency (SIDA). They will also finance software and equipment for computer-based auditing of computerized audit cases. Woiid Bank The component will support tax enforcement efforts by IDF, 0 9, 1% strengthening the ability of the BIR to prepare cases for Corp, 24.2,- 24% 38 prosecution, andby continuingthe codificationof rulingsand regulationsbegunwith USAIDassistance. There is a lack of clarity, from both policy and procedure aspects, on the quality of the arrears inventory. The component will support technical assistance to analyze and evaluate the arrears inventory, estimate ease of "collectibility" and amount to be collected, design a strategy for collection, and evaluate the existing arrears management system and provide recommendations for improvement. Inaddition, it will finance the arrears clean-up exercise andthe development of an accounts receivable system. The Run After Tax Evaders (RATE) program has had a number of successes in identifying and prosecuting well-knownfigures in the Philippinesand publicizingthese successes, with a noted effect on the BIR image.The MCCwill providefinancingto expandthe RATEprogram, primarilywith equipment and training. This component will provide support in the form of technical assistance for the installation of a case monitoringsystem and a workflow/automatedarchivingsystem. Component C: Human ResourceDevelopmentand Management (Total Reform cost US$6.20 million ofwhich the Bankwill financeUS$2.33 million). This component would finance activities in support of the modernization of the Human Resources function, providing the tools needed to improve HR Management and enhance the staff Component C: HUMAN RESOURCE development aspects of HR. In addition to DEVELOPMENT 8 MANAGEMENT technical assistance on a review of HR policies Australian AID, 9.6, 1 ,-World37.5, Bank NPS, and procedures, this component will finance 36% training in staff planningand the implementation of a skills inventory.The component will provide support to the acquisition and installation of a 10 9, 11% Human Resource Information System (HFUS), financed by the Millennium Challenge Challenge / Corporation, by financingthe cleaning of existing Corp, 41.9, 41% files and loading of the database, the acquisition of a payroll module, and the further custdmizationof the HRIS in the years after the MCC financing is finished. The HFUS will enable the BIR to allocate human resources more effectively and improve planning of human resource requirements, permit the systematic evaluation and monitoring of performance, and help professionalize of the BIR by facilitating training administration and career management.In addition, the HRIS will be a significantfactor inthe fight against corruption,through its computerized database showing employees statements of assets and liabilities, which will be used, for example, to determine if an employee is living beyond his means. The system will assist HR in the detection of ghost workers, inthe managementoftraining, and in manpower planning. The component will finance consultingassistance for the review and adaptation of the USAID-financed organizationaland individualperformancemanagement system. This system was developed with USAID financing for the Large Taxpayer Service, and its extension to the director level is contemplated. Bank financing would further extend it to the rest of the BIR. The organizationalperformance indicators will improve management of the organization, motivateemployees by providingbetter direction, and help in fightingcorruptionthroughimprovedmonitoring. Finally, this component will support training programs in Management, Internal Control, Project Management and Change Management, which will be defined and partly financed by the Australian Agency for InternationalDevelopment(AusAID). This component will preparetraining planners as well as trainingTRAG staff and implementationtask forces as well as other staff. Inaddition, specifictraining will be providedfor the InternalAudit Unit. 39 Component D: BIR Management,Change Management,and ProjectManagement(Total Reform costUS$3.42 millionofwhich the Bankwill finance US$3.36 million). Weak management was diagnosed by the Bank/Fund mission in 2005 as a critical element in poor revenue performance and lack of sustainabilityat the BIR. This component aims to increasemanagement capacity through improved planning and quality assurance, a Senior Management Information System (SMIS), and strengthening of the Internal Audit Unit to increase internal control. For implementation reasons, the expansion of the prototype organizationaland individual performance measurement system and managementtrainingare providedthroughthe next component. To minimize resistance to change, and to facilitate ComponentD: BIR MANAGEMENT, CHANGE sustainability by increasing knowledge of the reform MANAGEMENT,AND PROJECTIPROGRAM and public expectation of its stated goals, fully 14 MANAGEMENT percent of Bank financing will consist of change United management activities such as external and internal information dissemination campaigns, workshops, and informationdissemination materiel, with staff and user surveys to provide feedback. Not included in this amount is the trainingof staffon changemanagementto increase understanding of the reform process, and the creation of a change management unit within the Tax \NPS,98.2, 98% ReformAdministrationGroup. This component will also finance activitiesand feasibilitystudies to prepare the BIR for the next steps in reform, such as a new organization, improved performance indicators, and the introduction of budget programmingand cost accounting systems. The Tax Reform Administration Group (TRAG) is a recently defined unit reporting directly to the Commissioner.The TRAG leader hasthe rank of Deputy Commissioner,that is, only one levelbelow that ofthe Commissioner himself.The TRAG will be responsible for the implementationof the reform, under the guidance of a Steering Committee composed of all Deputy Commissioners and their appointees, chaired by the Commissioner (see terms ofreference inProjectFiles). The TRAGwill also beresponsible for the coordination of Development partner-financed activities. This component will finance the strengtheningofthe TRAG, throughtraining, technicalassistance, office equipment. 40 Annex 5: DetailedProjectActivitiesand Costs PROGRAM COST by COMPONENT FY07 FY08 FY09 FYlO TOTAL Component A: TAX COMPLIANCE $1.35 $0.86 $0.64 $0.75 $3.59 Component B: TAX ENFORCEMENT AND CONTROL $0.26 $1.03 $0.41 $0.02 $1.72 Component C: HUMAN RESOURCE DEVELOPMENT & MANAGEMENT $0.40 $1.12 $0.71 $0.10 $2.33 ComponentD:BIRMANAGEMENT, CHANGE MANAGEMENT, AND PROJECTPROGRAM MANAGEMENT $0.71 $1.07 $0.88 $0.71 $3.36 TOTAL $2.12 $4.08 $2.62 $1.58 $11.00 Component D: BIR MANAGEMENT, Component A: TAX CHANGE COMRLNCE MANAGBv~ENT, AND 32% / PROJECTPROGRAM J MANAGEMENT 31% Component C: Component B: TAX HUMAN RESOURCE I ENFORCEMENTAND DEVELOPMENT& / CONTROL MANAGEMENT 16% 21% 41 World BankFinanced (US$ million) Project Cost by Component Foreign Local Total USD USD USD millions millions millions Component A: TAX COMPLIANCE 0.92 2.68 3.59 ImprovedRegistrationProcess 0.09 0.23 0.32 Cleanup existing inventory 0.21 0.68 0.89 Identificationof non-registeredtaxpayers 0.170 0.427 0.597 Stop Filer control 0.104 0.393 0.497 Filing and Payment (Expansion of eFPS) 0.116 0.348 0.464 E-services 0.112 0.235 0.347 Roll-out of Computerized SystedITS 0.116 0.367 0.483 Component B: TAX ENFORCEMENTAND CONTROL 0.327 1.392 1.719 Taxpayers Services 0.000 0.035 0.035 Taxpayers InformationLinkage 0.002 0.022 0.024 Arrears management 0.184 0.844 1.028 Legalissues 0.114 0.398 0.512 Institutionalizingthe Runafter Tax Evaders(RATES) program 0.027 0.093 0.120 Component C: HUMAN RESOURCE DEVELOPMENT & MANAGEMENT 0.501 1.825 2.326 Strategic Transformationfrom Personnelto HR 0.161 0.634 0.795 Staff Performance & EvaluationSystem 0.141 0.519 0.660 Implementationofthe HRIS 0.105 0.334 0.439 Special internalcontrol program 0.014 0.079 0.093 Introductionof Results-orientedmanagement culture in BIR 0.066 0.189 0.255 Project Managementand Change ManagementProgram 0.013 0.071 0.084 Component D: BIR MANAGEMENT, CHANGE MANAGEMENT, AND PROJECTE'ROGRAM MANAGEMENT 0.958 2.404 3.362 Planning, Monitoring and Evaluation 0.27 1 0.373 0.643 Increase internalcontrol 0.134 0.324 0.458 Change management& transparency 0.390 1.174 1.564 Tax ReformAdministrationGroup 0.163 0.534 0.697 Total baseline cost 2.702 8.298 11.000 Physical contingencies 0.000 0.000 0.000 Price contingencies 0.000 0.000 0.000 Total project cost 2.702 8.298 11.000 Interest 0.000 0.000 0.000 Front-endFee 0.000 0.000 0.000 Total financing required 2.702 8.298 11.000 Notes 1. Price andphysicalcontingencies incorporated in costing 2. Front-endFee waived 42 EstimatedTotal ReformCost by DevelopmentPartner (US% million) World World Gov't of Millenniu World Swedish United Australian TOTAL Bank Bank The rn Bank Int'l States AID SIML IDF Philippines Challenge PPF Dev't AID Corp Agency Component A: TAX $3.59 $0.00 $0.00 $5.50 $0.00 $0.00 $0.00 $0.00 $9.09 COMPLIANCE Component B:TAX $5.37 ENFORCEMENT AND CONTROL $1.72 $0.05 $0.00 $1.30 $0.00 $2.30 $0.00 $0.00 ComponentC: HUMAN $6.20 RESOURCE DEVELOPMENT& MANAGEMENT $2.33 $0.00 $0.00 $2.60 $0.00 $0.00 $0.68 $0.60 ComponentD:BIR $3.42 MANAGEMENT, CHANGE MANAGEMENT, AND PROJECTPROGRAM 1 1MANAGEMENT $3.36 $0.00 $0.00 $0.00 $0.00 1 $0.00 1 $0.06 1 $0.00 TOTAL I $11.00 1$0.05I $0.00 I $9.40 I$0.00 I $2.30 I $0.74 I $0.60 I$24.08 I Swedish m United States International Agency for Q Australian Agency International for International World Bank World Bank 45.7% Millenium World Bank Challenge 1 I \ institutional Corporation Gomrnment of The Devsloprnent 39.0% Philippines 0Yo Facility 0.2% 43 Annex 6A: Institutionaland ImplementationArrangements Overall responsibilityfor this projectwill be vested with the Bureau of InternalRevenue (BIR), as it has ultimateresponsibilityfor meetingthe objectives ofthe tax reformproject.Day to day managementofthe projectwill be handledby the Tax ReformAdministrationGroup (TRAG) inthe BIR. The Tax ReformAdministrationGroup is a recentlydefinedunit reportingdirectly to the Commissioner of InternalRevenue.The TRAG headhas the rank of DeputyCommissioner, that is, only one levelbelow that of the Commissioner himselfherself. The TRAG is responsible for the coordination of the reform, underthe guidance ofa SteeringCommitteecomposedofall DeputyCommissioners and their appointees, chaired by the Commissioner. The TRAG will also be responsible for the coordination of development partner-financedactivities.No separate project managementoffice (PMO) is neededas the TRAG, which is being institutionalizedas a permanent group inthe BIR, will function as PMO. The TRAG as PMO shall (i) coordinate and facilitatethe expeditious implementationof each component; (ii)facilitate regular project monitoringand ensure the completionand timely submission of agreed monitoringreports (including semi-annual Internal Audit reviews); (iii)liaise with implementingunits (Le. task forces) to ensurethat agreed benchmarks are met; and (iv) oversee loan withdrawalapplications and track the use of funds. The TRAG shall liaise and coordinate procurementand financial management aspects of the projectwith the existingProcurement Service (PS) and the new FM unit reportingdirectly to the DCIRfor special concerns, respectively. The TRAGwill coordinate26 task forces under sevenactionagendacomposedof representativesfrom all BIR Groups involved in the reform agenda. Members of both TRAG and the task forces will receive training in project and change management, and in the definition and use of indicators. A large internal and external communications budget will serve to inform on the reform and get feedback from taxpayers and staff. The accounting and reporting project expenditures will be subject to the Government's accounting policies and procedures as definedin the NationalGovernmentAccountingSystem (NGAS). In addition, interimun-auditedfinancialreportswill be producedquarterlyin formats agreedwith the Bank. The procurement of goods and services will be carried out in accordance in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines:Selectionand Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisionsstipulated inthe LegalAgreement. A Project Operations Manual (POM) will guide the implementation. This manual describes the guidelines and procedures to successfully carry out the tax reform program as stipulated in the annual work and financial plans, in line with the Project ImplementationPlan (PIP). It defines implementation mechanisms, procurement, financial management, and monitoring and evaluation mechanisms. The document will be disseminated to the implementing units before project implementationand will be available online. The contents of the POM will be regularly reviewed, and when necessary, revised as projectimplementationprogressed. This is a conditionof effectiveness. 44 e . * 1E Q) 9 W C 5 a C I a t! c;l e a * e g * .I 5 4 e . . e * e * 12 5 C n a 5 8 a M .I d C iz80 H .I 4- .I v1 - f Ew 0 L 0 . Ir IIIIIII I II IIIIII U I I III I III I III c - II VI - I ( I I I I I I i I I' I L ' I * I - 1 I 'I I I - L rp I I d (u n PI I.. . a Annex 6B: InstitutionalCapacityAssessment The Bureau of Internal Revenue (BIR) is the country's premiererevenue agency that is tasked to collect 80 percent of total revenues. It is mandated by Iaw to assess and collect all national internal revenue taxes, fees and charges, and to enforce all forfeitures, penaltiesand fines connectedtherewith, including the executionofjudgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The bureau is composed of about 11,000 staff working in the national office, 19 regional offices and 119revenuedistrict offices. Tax administration has been a perennial problem in the bureau. The over-reliance of BIR on voluntary assessmenthas been symptomaticof severe administrativeweaknesses in implementingtax laws and has resulted in low collection effort in the last eight years. From a high of 17 percent of GDP in 1997, collection dropped to less than 10 percent of GDP in 2002. Poor tax administration in both income and sales taxes are equally to blame. The Departmentof Finance(DOF) estimates that the personal income tax gap (the difference between collected taxes and the potential tax base) of self-employed individuals is a high of 70 percent. Moreover,the National Tax ResearchCenter (NTRC) estimates that almost P30 billion (700 percent of historical collection) in taxes from self-employed and professionals are not collected annually in the last six years. On value-added taxes, the government think tank estimates that the efficiency ratio is lowerthan 50 percent. Moreover, collusionbetweenBIR examiners and taxpayers has resultedin a total collectioneffort that is estimatedto be only half oftotal potential collection. To arrest the declining tax effort, the government has enacted several policy reforms of which the reformed value-added tax (RVAT) law is primary. However, both government and private sector agree that policy changes would not be enough. In 2002, a new commissioner of internal revenue began serious reforms that included improvements in business processes and electronic services, tax verification and compliancedrives, creationof a business intelligenttask force that aim to use third party information in assessingthe veracity of taxpayers' tax declaration and payment, and a strict enforcement of tax laws without resort to settlement. Many of these reforms however were short-livedand were not institutionalized. The new management in the bureau havinglearned from its tax reform experience and upon the advice of the joint Bank-Fund mission in December 2005 formally established a new Group within the BIR solely to manage and coordinate the reform agenda of the bureau: The Tax Reform Administration Group (TRAG). The Tax Reform Administration Group (TRAG) is a recently defined unit created under Revenue Special Order (RSO) No. 149-2006and reportingdirectly to the Commissionerof Internal Revenue. The TRAG head has the rank of Deputy Commissioner, that is, only one level below that of the Commissioner himselfherself. The TRAG is responsible for ensuring the operationalization of the bureau's reform agenda and the institutionalizationof the reform program. A second RSO, RSO No. 379-2006, created the Project Steering Committee composed of all Deputy Commissioners and their appointees, and chairedby the Commissioner.Finally, a third RSO, RSO No. 381-2006, created 26 task forces to manage each of the 26 priority actions of the tax reform agenda. Pendingformal approval by the President, the TRAG has since its creation in May 2006, spearheadedthe bureau's reformagenda. In the last four months, TRAG and task force members participatedin business plan workshop, financial management, procurement and project management seminars; risk assessment and performance indicators/monitoringand evaluation workshops to equip them with the tools necessary to implement their actionplan. Inaddition, the SteeringCommitteemeets regularlyto reviewmilestonesand progress of the task forces. This new organizationsetup (TRAG, Steering Committee, task forces) is a big step in the consolidationoftax reformeffortsand is crucial inensuringthat reformsbeginto be institutionalized in the bureau. Regular capacity building activities funded by development partners are now needed to ensure that that the reform momentum under the new setup does not slip. Bank assistance in particular 48 will provide continuing project management and change management training throughout the life of the loan inthe hopethat reforms continue to be implementedbeyondthe loan horizon. 49 Annex 7: FinancialManagementand DisbursementArrangements I.ExecutiveSummary A FinancialManagement Assessment Review of the Bureau of InternalRevenue (BLR) was undertaken with the objective of ensuring that there is in place an adequate financial management system that satisfies the Bank's OP43P10.02 for the Proposed National Program Support for Tax Administration Reform (NPSTAR). Under OPBP 10.02, the borrower and the project implementing entities should maintain financial management systems--including accounting, financial reporting, and auditing systems--adequateto ensurethat they can provideto the Bank accurate andtimely informationregarding projectresourcesand expenditures.The reviewwas carriedout in accordancewith the Bank's guidelines under FinancialManagement Practices in World Bank-Financed InvestmentOperationsdated November 3, 2005. It focused on the assessment of the Agency's FM system includingthose for ForeignAssisted Projectsand consideredthe countryandthe sector's FMsituation. The proposed loan of US$ll million for the NPSTAR has the objective of improvingcompliance of taxpayers with the country's tax policy through improvements in the tax administrationinstitutional set up, processesand systemsofthe BIR. On the overall, the FinancialManagement (FM) system of the BIRwould not be adequate to handle the minimum requirements of the Bank and the FM risk is rated High. This is primarily due to the inadequate FM staffing of the Accounting Division and weaknesses in Internal Control. The Internal Control weaknesses pertain mainly to unreconciled cash in bank accounts and intra agency /reciprocal accounts not properly eliminated in the consolidation of accounts, negative balances of subsidiary ledgers of both Accounts Receivable and Accounts Payable, and unreconciled Inventory and Property, Plant & Equipment accounts. The foregoingweaknesses resulted to the issuance of an adverse opinion by the Auditors on the 2005 FinancialStatementsofthe Bureau. However, the BIR proposed an FM arrangement for the proposedNPSTAR. This includedthe creation of a separate Financial Management (FM) Unit under the Deputy Commissioner (DCIR) for Special Concerns (former DCIR of the Resource ManagementGroup handlingthe Financialand Administrative Service) and will have the appropriate systems and procedures ready and operational includingseparate accounts, financial reporting, and Internal Control policies and procedures. The FM arrangements proposedfor NPSTAR mitigates the risks and reducesit to an acceptable level. Thus, following are the mainactionplanitemsfor the Project(please see "Action Plan" for details): 1. The BIR shall create the FM Unit fully staffed under the DCIR for Special Concern with appropriate systemsand proceduresready and operational beforethe effectiveness ofthe project. 2. The Internal Audit function shall be strengthened through a program including training and hands-on IA review of the Project. Thus, the Project shall be covered by semi-annual Internal Audit reviews with the correspondingreportto be submittedto the Bank by the BIR. Beforethe training, IA would still need to review the project so that there could be a benchmark comparison on the strengtheningeffort. The country issues are: a) the perceivedcorruptionin government which puts the country at a high risk ratingby internationalcorruptionmonitoringinstitutions; andb) the weak InternalAudit (IA)capacity in the country. These are being currently addressed by the Bank's Grant on Strengthening the Internal Audit function through the Philippine Anti Graft Commission complemented at the project level by inclusionof InternalAudit strengthening in the Project.The sector issue is on the weak tax compliance 50 and ineffectiveefforts to improve tax revenue administrationwhich shall be addressedby the proposed Project. The flow offunds would be fromthe Bank, funds are remittedto the Bureauof Treasury's account at the Central Bank of the Philippines. Then after approval by the Department of Budget & Management, throughthe issuance of a Notice of CashAllotment (NCA), funds flow to the BIR's DesignatedAccount (DA) maintained in an acceptabledepository government commercial bank. These funds are then usedto pay for eligible expenditures which are mainly for consultancy services, goods, training, workshops, study tours and incremental operating costs over four years. As part of its financial reportingarrangement, the Projectshall be submittingto the Bank on a quarterly basis, Interim un-audited Financial Reports (IFRs). For its disbursements of loan funds from the DesignatedAccount (DA) it will be done throughthe submission of Statementof Expenditures and will not be using the report based disbursement as the Project FM function will be a newly set up unit. However, should they opt in the future to use the report based disbursement, this will be allowed if acceptableto the Bank. 11.FinancialManagementAssessment Countrv Issues The Country issues identifiedare as follows: 1. Perceivedcorruption in the country-The country's corruptionratingby internationalinstitution monitoringcorruption is high.While the ratingis a perception, there is a relatedrisk involved in the country. 2. Weak InternalAudit capacity- Internal auditing in government agencies is not well developed mainly due to budget constraints. This weakens the InternalControls in the said agencies. The weak Internal Audit (IA) capacity in the country is being currently addressed by the Bank's Grant on Strengthening the IA function on a country level and on a project level this is part of the project components in improvingInternalControl. The IA staff would be given trainingto strengthentheir capacity. Sector Issues The sector issues of weak tax compliance and the lack of significant results of previous efforts to improve revenue administration contributes to the tight budget situation of the country. This will be addressedby the proposedTax RevenueAdministrationProject. RiskAssessment & Mitigation The FMrisk for the Project is ratedHigh. A separateProjectFM arrangementhas been proposedby the Agency which reduces the risk to an acceptable level. The Risk assessment table below gives details to the ratingofthe BIR FM system. 51 Risk Category/ Risk RiskmitigatingMeasures Conditionof Main FMRisk Rating Negotiations, Board or Effectiveness (YfN?) InherentRisk H Zountry: H Beingaddressedby the Bank's Grant on Anti a. Perceived corruptionwith the PAGC(Philippine Anti Graft N corruptioninthe Commission) as its implementingentity. country. b. Weak Internal H Beingaddressedby the Bank's Grant on Audit function. Strengtheningthe InternalAudit (IA) function of N the country. lector: Weak tax compliance H The Projectobjectives addressthese issues. N and ineffectivetax administration improvement effort. mplementingEntity H Audit opinion on the entity is Adverse. Audit opinion on previousBank Project N implementedthroughan FMUnit created for the Projecthad a clean audit opinion. 'roject Level H Will create a separateProjectFMUnit. N ControlRisk M N 1. Funds Flow N Adopt Projectfunds flow N 2. Staffing H HireseparateFMstaffingfor the Project N 3. Accounting Policiesand N Use NGAS with Chart ofAccounts adaptedto the N Procedures Projectcomponents. 4. InternalControl M Use current Government Internal Control procedures andpoliciesunder the NGAS. N 5. Internal Audit H Some trainingfor InternalAudit availableunder the proposedproject.Projectwill be requiredto be N coveredby semi-annual InternalAudit reviewsand submissionof correspondingreport. 6. ExternalAudit M Continueuse of COA as auditors. N 7. Reportingand M Require submissionof Interim un-auditedFinancial Monitoring Reports(IFRs) N H-High M-Moderate N-Negligible or Low 52 Strenpths and Weaknesses The strengths ofthe FinancialManagement system for the project are: 1. The NGAS is more than an accounting system as it also contains relevant accounting standards. NGAS prescribes standards on Accounting Policies & procedures including Internal Controls, presentation of financial statements, accounting for government transactions, property and inventory accounting, methods of accounting for income, budgeting standards, required books of accounts, budget registries, records, forms and reports including instructions on its preparationor maintenance. It also defines its Chart of Accounts and provides pro forma entries and other more. This provides the foundation for good InternalControl, Accounting and Financial Reporting. eNGAS on the other hand is a bookkeepingsoftware that is consistent with the bookkeeping part of the NGAS. The BIR uses the NGAS for its standardsand eNGAS for its book keeping. 2. The openness of FM management to change and the recognition of the weaknesses in the FM systemwhich is rootedinthe lack of budget for additionalFM staffing. The weaknesses or areas of improvementof the financial management system of BIR are mainly on: a) its lack of FM staffing ofthe Accountingdivision, b) the weaknesses ofthe InternalControls as notedin the adverse opinionof the Auditor; c) the low capacity of its Internal Audit function. The IA only has 26 staff of whom 8 are CPAs and the rest are accountingmajor. They do not have any IA training Program in place. They only do financial audit (more compliance based), limited computer audit and very limited performance audit. There is no coverage on risk management, governance and a comprehensive control review. No one has undergone a formal training course on IA and no one is a holder of the Certified Internal Auditor certificate. The IA have a limited budget including those for traveling; and d) the inflexible chart of accounts of the eNGAS, which has been hard coded into the computer applications. While the detailed description of chart of accounts is a strength of the NGAS, its being hard-coded into the eNGAS such that these could no longer be changed and are not flexible is a weakness of the eNGAS, the simplebookkeepingpart ofthe NGAS. 111.FinancialManagementArrangements Financinp& Funds Flow The Projectwould be a support for the nationalprogram of the BIR and shall be a US$I1Mloan under a Fixed SpreadLoan(FSL) facility ofthe Bank. Funds flow from the Bank will go through the general bank account of the Bureau of Treasury with the Central Bank and flows to the Agency based on the NCA issued by DBM. This goes into the DA establishedbythe Central Office (CO). Eligible expenditureswould then be paidout ofthis DA. FMOrpanization& Staffing The FM organization for the Project will be an FM Unit under the DCIR for Special Concern in coordination with the TRAG. The FM unit shall be staffed by a Finance Unit Head reporting to the DCIR and with a Bookkeeper and an AccountingClerk as staff. The FinanceHeadmust be familiar with the BIR's operations as well as the Bank's FM requirements and procedures. Should the volume of transactions require, additional staffing may be provided. The Cashieringand budgeting functions will use the current Cashier andBudget staffof BIR. 53 Planninp& Budpet The Projectwhile doing its own planningwill be integratedinto the BIR's planningandbudgeting process. Internal Control The following are the key InternalControlarrangementsfor the ProjectFMunit that will be created: 1. Will follow the Internal Controlapplicable inthe NGAS. 2. Approval of transactions shall be under the DCIR-TRAG, and DCIR Special Concern and thereafter follow the BIR's Cash disbursement procedures. 3. Separatebooks of accountsand subsidiaryledgers shall be used. 4. A DesignatedAccount shallbe separately createdfor the Project. 5. CashAdvances shall not be allowed since a DesignatedAccount will be set up. 6. Monthly Bank Reconciliation Statements shall be prepared to be submitted no later than the end ofthe following month. 7. A FinancialPlan shall be prepared for the whole term of the Projectwith details per monthfor the current year. 8. The Unit shall maintain copies of supporting documents and contracts in addition to those submittedto AccountinglCOA. 9. The DCIR TRAG shall be one ofthe counter signatories to checks ofthe Project. 10. Properties and Inventories under the Project shall be required to have a physical inventory taking annually with a report to be submitted to the DCIR-TRAG on the results and its reconciliationwith recordedaccountabilitiesandthe dispositionofthe differences. 11. The responsibilitiesof the FM staff for the Project shall have a detailed list of the Duties and Responsibilities.This should indicate their majorjob responsibility, their activities, reports to be submitted and outputs expected of them on a monthly or periodic basis. It would also includetheir reportingrelationship as to their supervisor/manager andtheir subordinates. Accountinp & Reporting The NGAS shall be used as the accounting system for the Project. The FM Unit shall prepare the Financial Statements of Balance Sheet and Sources and Uses of Funds on a monthly basis includingthe regulatory accounts of the Project. The Project will need to move to a computerized accountingsystem when necessary to improveefficiency. The Projectshall be requiredto submit a quarterly Interimun-auditedFinancialReport(IFR) to the Bank consistingofthe following: - b. Statement of Sources and Uses of Funds - A report on the receipt and uses of funds by a. Balance Sheet A statement of resources ofthe project. projectcomponents by categories. InternalAudit The InternalAudit function shall be strengthened through a program includingtraining and hands-on IA review of the Project.Thus, the Project shall be covered by semi-annual Internal Audit reviews with the correspondingreportto be submittedto the Bank by the BIR. Beforethe training, IA would still needto reviewthe projectso that there couldbe a benchmark comparison onthe strengthening effort. 54 ExternalAudit The external Auditor for the Bank's Projects would be the COA. Audited Financial Statements shall be required to be submitted no later than 6 months after the Fiscal Year including a Management Letter which would contain the auditors' comments on the Project's Financial Management including its InternalControl.The audited Financial Statements shall consist ofthe: 1. Balance Sheet; & 2. Sources & Uses ofFunds Disbursements The proposedProjectshall be disbursed within a periodof 4 years in the amount of $11M.Following are the categories for the disbursement ofthe loan: % of Categories IBRDLoan Expendituresto (in US$'OOO) be financed Consultant Services, Goods, 11,000 100% Training& Workshops, Study Tours, & Incremental OperatingCost Total 11,000 100% DesignatedAccounts(DA) shall be maintained at the CentralOffice ofthe BIR with the LandBank of the Philippines (LBP). The DA allocation shall be US$lSM. Should the DA become insufficient for the operations of the Project, a request for an increase with justification or supports may be done. Direct payments shall be allowed. Disbursement for the Project shall be through the use of a summary report in the form of a Statement of Expenditure with option to convert to a summary report in the form of IFRs with concurrence of the Bank. Inany case, IFRs shall be required to be submitted by the Project, the format for which shall be agreedwith the Bank. IV. Action Plan Following are the action plans for the Project: Action Responsibility Timetable 1. The BIR shall createthe FMUnit fully staffedunderthe DCIR-Tax Before loan DCIR for Special Concern with appropriate systems and Reform effectiveness proceduresready and operationalbefore the effectiveness Administration of the project. & DCIR-Special Concern 2. The InternalAudit (IA)function shall be strengthened CIR, DCIR- To be througha programincludingtraining and hands-onIA review Tax Reform implemented of the Project.Thus, the Project shall be coveredby semi- Administration by Project. annual InternalAudit reviewswith the correspondingreport First IA 55 Action Responsibility Timetable to be submittedto the Bankby the BIR. Beforethe training, reviewto be IAwouldstill needtoreviewthe projectsothat therecould done within be a benchmark comparison on the strengthening effort. The six months IA Review TOR will be reviewedby the Bank beforeits after loan implementation. effectiveness. The First IA review (with corresponding report submitted to the subsequentIA Bank thereafter) to be done within six months after loan review shall effectiveness. The subsequent IA review and report be done every submission to the Bank shall be done every 6 months 6 months thereafter until Projectcompletion. thereafter until Project completion. ~~ ~~ Loan Conditions Pleasesee "Effectiveness condition" section ofthe mainPAD. FinancialCovenants Please see the "Legal Covenants" sectionofthe mainPAD andthe FMAssessment report on file. SupervisionPlan Objective & Nature: The FM supervisionof the project shall be periodically done to ensure that loan proceeds are used only of the purposes for which it was granted, with due regard to economy and efficiency andthe achievement ofthe Project's objectives. Coverage: The coverageofthe supervisionshould address the total projectfinancial arrangements. Frequency & duration: Based on its risk rating, the project should be supervised periodically, at least every six months. Staffing: The supervisionshould be done by at least a qualified FinancialManagement Specialist(FMS). 56 Annex 8: ProcurementArrangements A. General Procurement for the proposed program would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulatedin the Legal Agreement. The various items under different expenditure categories are described in general below. The different procurement methods or consultant selectionmethods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed betweenthe Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual program implementationneeds and improvements in institutionalcapacity. Procurement of Goods: Goods procured under this project include: office equipment including computers and peripherals, portable computers, call-centerfurnishing, computerizedaudit tools, training equipment, audio-visual equipment, quality control software, etc. The procurement will be done using the Bank's Standard Bidding Documents for International Competitive Bidding (ICB) and Limited InternationalBidding (LIB). The Philippine Bidding Documents will be used for National Competitive Bidding (NCB) and standard forms agreed with or satisfactory to the Bank shall be used for other methods of procurement. A certain amount of computer software to complement softwarealready in use at the BIRwill be negotiatedwith the original manufacturer following directcontractingmethod. Limited International Bidding (LIB): Computer applications software and software development tools, which the Bank agrees are available only from a limited number of suppliers, may be procured through LIB. Procurement of Consulting services: This includes software development for such purposes as resource management improvementand implementation,business processes reengineering, data sources and requirements, tax audit functions improvement, tax modelingand analytical forecasting, backup and security planning, architectural design, internal audit, project audit, compliance and distribution studies, financial management. Training: The entities which will provide training, conduct seminars, and arrange study tours will be selected on the basis of an analysis of the most suitable program of training offered by the institutions, availability of services, andperiodof training andreasonableness ofthe cost. Short listsof consultants for services estimatedto cost less than $200,000 equivalentper contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The procurement procedures and biddingdocuments to be usedfor each procurement method, as well as modelcontracts for works and goods procured, are presentedinthe BIRProcurementManual. B. Assessmentof the agency'scapacityto implementprocurement An assessmentofthe capacity ofthe Bureau of InternalReview (BIR) to implementprocurement actions for the program was done by Ms. Cecilia Vales, Lead Procurement Specialist assisted by Ms. Alicia Tiongson, Procurement Consultant. The assessment reviewed the organization structure for implementing the program and the interaction between staff responsible for procurement and other involvedunitsresponsiblefor administrationand finance. The assessment uncovered no major procurement issue. The BIR follows the procurement law and it's implementingrules and regulations. It generally follows the procurement planningprocesses under the law from which its annual budget is based. The PBDs and standard contract forms are adopted. Further, civil society observers are invitedto participateregularly in the biddingprocesses.For the program, BIR will carry out project procurement activities through its Procurement Division under the Resource 57 Management Group. A separate Bids and Awards Committee (BAC) for Tax Reform Administration (TRA) will be setup together with its own technical working group and secretariat. A TRAG representativewill be amember ofthe BAC TRA for smooth coordinationof procurement process. In2005 BIR HeadOffice procuredatotal of P644 million comprising38 percentconsultingservices, 33 percent for non-consultingservices and 29 percent for goods. Sixty five percent of this procurementwas done through public bidding as prescribedin the public procurement law. Based on the agency capacity assessment completed on August 3 1, 2006 (on file), the BIR's risk procurement assessment is rated as average. C. ProcurementPlan The procurement plan agreed on 11 January 2007 between the BIR and the Bank Task Team provides the basis for the procurement method, the prior review thresholds and the timetable for procurement implementation. The complete procurement plan for each package is available on file in the BIR head office, in the project's database and in the Bank's external website. The procurement plan is composed of contracts to be procured in the first 18 months of program implementation, and will be updated in agreement with the Bank annually or as requiredto reflect the actual project implementationneeds and improvements in institutionalcapacity. The bidding documents and forms for the advance procurement actions on the procurement of IT software and the request for proposals and terms of reference for the communications strategy and implementation are being prepared by the TRAG. These documents will be reviewed by the Bank as part of advance procurement action. Other biddingdocuments for other packageswill be preparedusing the Bank's standard bidding documents for ICB and consultant selection, and the Philippine Bidding Documentsfor NCB procurement. D. FrequencyofProcurement Supervision Three regular supervision missions will be conducted annually. In addition to the prior review supervisionto be carried out from Bank offices, the capacity assessment of the ImplementingAgency has recommended bi-annual supervision missions to visit the field to carry out post review of procurement actions. E. Goods 1. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement as determined by the Procurement Specialist basedon the on the assessmentofthe implementingagencies' capacities. Procurement Method Prior Review Comment Threshold 1. LIB (Goods) More than $500,000 Use Bank's StandardBiddingDocuments 2. NCB Goods Morethan $500,000 Usethe GPPB's PhilippineBiddingDocuments prescribed in the Procurement Manual except unacceptable rules. 3. Shoppingfor Goods Morethan $50,000 Use the GPPB'sforms prescribed by the (SG) Procurement Manual 4. DirectContracting for All contracts Goods 58 A7.1 RDC Mindanao 241.5 NCB No No Post June 2007 systems A7.2 RDC Mindanao 241.5 NCB No No Post June 2007 rehrbishments B10 Institutionalization 120 NCB No No Prior June2007 of RATE B5,6 Taxpayer services 59 Shoppin No No Prior June2007 andinformation g linkages B8 Management 649 ICB No No Prior May2007 system B9 Legal support 467 NCB No No Post June 2007 services C1 AND HRISand strategic 1076 ICB No No Prior June2007 c3 transformation (support) c 2 Performance 447 NCB No No Post June 2007 management system D2.1 Internal control 255 NCB No No Post May2007 systems G.Selectionof Consultants. 1. Prior Review Threshold: Selectiondecisions subject to Prior Reviewby Bank as stated in Appendix 1to the Guidelines Selectionand Employment of Consultants: Selection Method Prior Review Threshold Comment 1. I Quality and Cost BasedSelection(QCBS) . - II$200,000 IIBasedon July 15,2002 memo of OPCPR. 2. Quality BasedSelection(QBS) $200,000 -do- 3. ConsultantQualification Selection $200,000 -do 3. Single source selection(SSS) All contracts l 9Prequalification 2o Domestic Preference 59 Selection Method Prior Review Threshold Comment 4. Individual Selection-competitive (ISC) $100,000 Basedon July 15,2002 memo of OPCPR. 5 Individual Selection-sole source(1SSS) All contracts -do- 2. Consultancyservices selectionplanwill includethe packages below for the first 18 months o f implementation: IRef. No. I Description of I Estimated I Selection I Review I Proposals I Comments I Assignment I Method by Bank Submission cost 1 1 I Date 1 $000 D1 and Tax reform administration 586 CQS Prior May 2007 D4 Iand planning, monitoring and evaluation D4 1Tax administrationproject I 100 ISole IPrior IJune2007 management (finance)- Source D2.2 Internal Audit 130 CQS Post May 2007 D3 Changemanagement and 704 QCBS Prior May 2007 tranmarencv H.ImplementingAgencyCapacityBuildingActivitieswithTime Schedule Estimated I Estimated Start Date Comments November Attend AIM and those involved inthe 2006 course in process December 2006 (3 stafl; March 2007 (2 mfl Attend DAP course in + February 2007 (all sta@ 2. Designationof 3 Staff of October ProcurementDivision, RMG 2006 as procurementofficers for the Program, and one staff from TRAG as procurement coordinator 3. II I Preparationand issuance of $5,000 2 months September ProcurementManual 16,2006 60 Annex 9: Economic and FinancialAnalysis" EconomicAnalysis The economicjustificationfor the NationalProgram Support for Tax AdministrationReform (NPSTAR) i s that implementation of the relatively small-scale reform program (USD11 million) will yield significant payoffs in terms of more effective and more efficient tax administration, higher level of compliance among taxpayers and consequently higher revenue collection in the medium to long term. Receipts from the highercollection would then be able to fund more and better infrastructureand social services neededto improvethe country's competitiveness andreduce poverty. A key contributor to poor tax collection has been the emphasis given by BIR to promote voluntary compliance and less attention than necessary on compliance enforcement work. This has led to widespread underreporting of income and over reporting of allowable deductions especially by professionalsand self-employed. The NationalTax ResearchCenter (NTRC) estimates that taxes evaded by self-employed and professionalsamounted to about P25.5 billion pesos per year inthe last five years alone (versus an annual collection of about P4 billion only) thereby seriously underminingthe dejure progressivity of the Philippines income tax system. Moreover, the Department of Finance (DOF) estimates that close to P65 billion in tax revenue is uncollectedevery year due to the non-issuance of official receipts. Another contributor to poor tax collection is that many businesses operate outside the tax net with limited concern for detection and sanction. Despite BIR's efforts to increase the taxpayer base, the under-registrationof taxpayers remains high. A labor force survey released by the PhilippinesNational Statistics Office on September 15, 2005 estimates the population of the Philippinesat 85.2 million. In July 2005, the number of persons in the labor force (employed and unemployed) was 35.2 million, of which 32.5 million were employedpersons.Despitea generalobligationfor employeesto register for tax purposes, at present only 5.6 million are registered with the BIR and are paying income taxes (mostly withholding). The under-registration,approximately 27 million potentialtaxpayers, is massive. It must be assumed, however, that many of these persons have incomes below the threshold. The number of registered businesses seems low as well; in particular, it is notable, that only 270,000 businesses are registeredfor VAT.22 Sources of informationalready existthat would help BIR to increasethe number ofregistrants.Although the BIR is cross checking registration files with other government sources, such as customs and government agenciesthat issue licenses, it appears that it does not access commercial lists of businesses, identify big customers of electricity and telephone companies, and monitor advertisements in newspapers and magazines. On the side of indirect taxes, the inefficiencyof the tax system, particularly of the VAT, is endemic. VAT efficiency which is calculated as the shareoftotal VAT collectionto GDP dividedby the VAT rate yields an efficiency ratioof about 35 percentannually over the last decade. Until recentlythe Philippines 21 Based on "Republic o f the Philippines: Critical Priorities in Tax and Customs Administration Reform", IMF/WorldBank February2006 22 The number of registeredVAT taxpayers in a country depends on factors such as thresholds, exemptions, total turnover values, economic development, business cultures (small or large businesses), size of population, etc. Hence, countries are not easily comparable.Notwithstanding, some indicative guidance may be possible from the VAT registration figures for Mexico, 1.3 million (population: 106million), Turkey , 2.9 million (population: 69 million), and Chile 0.7 million (population: 16 million) against which to consider the situation in the Philippines. 61 maintained a large set of exemptions that significantly reduced the tax base, notwithstanding poor compliance on the issuance of VAT receipts. This inefficiencyis also systemic in excise taxes. The use of a specific tax on sin products which levy taxes based on volume have substantiallyeroded real tax receipts and collectionefficiency. From an administrationpoint of view, VAT registrationof businesses relativeto the size of the economy is very low and the probabilityof being audited is insignificantat 2 percent. Table 1: Number of Registered Taxpayers 23 Businesses Year Employees Corporate Professional Individual Total VAT Business (active) 2002 4,181,151 229,35 1 42,567 635,477 907,395 2003 4,601,595 254,085 58,539 719,293 1,03 1,917 238,872 2004 5,192,650 286,6 89 99,675 836,866 1,223,230 256,3 16 2005 5,646,266 307,801 118,822 918,718 1,345,341 271,04 1 Percent 35.04 48.26 13.46 Increase Table 2 shows a comparison of VAT registrations between the Philippines and a number of OECD countries. Although the situation in the Philippinesis not entirely comparable with the countries listed, and the VAT threshold has not beentaken into account, the table suggeststhat businessesrequiredto be registered for VAT on their sales are not currently in the Philippinestax base, and that the number of businesstaxpayersis low relativeto the size ofthe economy andthe population. Table 2: VAT registration comparison (millions) Country Population Labor VAT Registrations Force No. of Percent of Labor Registrations Force Philippines 82.5 35.2 0.3 0.8 Australia 19.5 9.8 2.3 22.9 Japan 127.3 67.5 2.3 3.4 Korea 47.3 22.4 3.9 17.2 Canada 33.1 16.3 2.7 16.6 Germany 81.4 39.7 4.9 12.3 Greece 10.6 4.4 1.5 33.0 Hungary 10.2 4.1 0.6 13.4 Poland 38.6 17.5 1.3 7.4 Spain 40.3 17.9 2.8 15.6 ITurkey 68.6 22.6 2.9 12.8 UK 59.8 29.5 1.7 5.9 Sources: BIR, Philippines National Statistics Office, OECD, and IMF staff calculations 23 This is the number of registered taxpayers according to the BIR central database. The database automatically includes data from taxpayers who have been registered at the 4lcomputerized RDOs. The 74 non-computerized RDOs are supposed to regularly provideheadquarters with data diskettes on taxpayers who have beenregistered at these RDOs. HQ management advised the missionthat this does not always happen. In addition, there have been instanceswhere the receiveddiskettes were unreadable;datawere therefore not loadedinthe central database. 62 The total number of audits performedeach year is low by internationalstandards. The very low number of audits with respectto the taxpayer population(17,297 in 2004 out of 1.3 milliontaxpayers) meansthat the probability of being audited is less than 2 percent, which results in a very low perceptionof risk by taxpayers. In addition the revenue generated through audits is very low compared to voluntary compliance collections (less than 1 percent); actual collectionsdue to audits are less than 10 percent of amounts assessed. This suggestsa lack of coordinationbetweenthe functions of audit and collection. Table 3: Non Large Taxpayers 2002 2003 2004 2005 Totalturnover audited NA 6,530 17,297 13,241 Number ofperformedaudits NA 17,830 43,558 11,032 (LA) Additionaltax assessed 36,138 18,967 3,850 8,016 Additionaltax collected 1,40 1 1,660 1,700 1,086 Cumulative stock of NA 9,300 35,559 33,550 pendingaudits 2002 2003 2004 2005 Totalturnover audited 374 406 228 276 Number of performedaudits NA 836 513 517 (LA) Additionaltax assessed 6,923 11,151 8,776 11,288 Additionaltax collected 0.689 0.1045 0.876 1.098 Cumulativestock of NA 430 715 954 pendingaudits Source: World Bank The proposed loan would devout about half of the total amount to address the grave problems of poor registration an audit in the tax system. Two major components in the loan, tax compliance and tax enforcement and control aims to improve the registration process and increase risk-based audit to increase the tax base and reduce opportunities for discretion and abuse of power. To this end, an annual increase of five percent of taxpayers in the database and at least 80 percent of taxpayers in the database filing and paying income and sales taxes are expected to boost collection over the medium term. In terms of audit, the creation of a national audit plan and a shift to risk-based audit where five to ten percent of risky taxpayers are audited annually would beginto improve voluntary compliance as well as signalthe seriousnessofthe tax bureau in enforcingtax laws and rulings. When comparedto the size of the project loan, the figures above suggest that the economic rate of return from a unified, complete and integratedregistrationdatabase and a systematized risk-base audit plan is very high. Moreover, riding on the trend of electronic-based transaction, relatively simple procedures such as makingfiling and payment of taxes availableonline to more taxpayers and improvingtaxpayer service and informationwould reduce transactions cost and increase general compliance.These resonate with surveys conducted that majority of businesses were willing to pay the right amount of taxes providedthat the tax bureau makes it easier for them. The loan would also address the growing number of stop-filers.Serious problems have developed in the management of returns filing processes. The numbers of stop filers have reached dramatic proportions and this could potentially involve significant revenue losses. Because of serious shortcomings in the BIR's management of the returns filing processes, the resulting number of "outstanding" returns runs 63 into the millions. Linkedto this, it seems that BIR also has huge backlogsof returns that it has received but not encoded to the computer system. While these uncoded returns certainly comprise some part of BIR's "missing" returns problem, the upshot is that BIR has little understandingor overview of its stop filer situationand is therefore unable to identify and pursue in any systematic way those taxpayers that have not filed returns or have not paidtaxes. At present, RDOs are using essentiallymanual techniques to track filing andpayment compliance by their more importanttaxpayers. Table 4: Stop Filing-Withholding, VAT, Excises, Other Percentage Taxes 24 Taxpayer Segment Number ofNon-Compliant Non-FiledReturns Taxpayers Balance "Top taxpayers" 29,701 254,866 Other taxpayers 550,274 9,236,915 Total 579,975 9,49 1,771 Source: BIR Table 5: Stop Filing-VATZ5 Taxpayer Registered Taxpayers Returns New Cases Closed Returns Segment Taxpayers with Outstanding in Cases in Outstanding Outstanding end- July 2005 July 2005 end- Returns June 2005 July 2005 Large 1,049 57 121 9 18 112 Other 242,2 13 156,591 972,377 383 18,299 954,461 Total 243,262 156,648 972,498 392 18,317 954,573 Source: BIR A systematic and disciplined approach is necessary to address BIR's returns filing problems. The loan would support the operations of a high level internal task force to establish the exact nature and dimensions of the problemandthen develop a strategy to fix it. The expected economic rate of returnof accomplishing such a feat is high. With modest amount, the project aims to eliminate 80 percent of invalid stop-filers arising from the cleanup of the registration database. This is feasible if done systematicallywith the cleanup and integration of the taxpayers' database. BIR can then devout energy and focus on the valid stop-filersandother majortax administrationconcerns. On organization and management, experience from previous tax reform projects helped shape the structure of the present project to include assistance in the area of human resource development and general tax reform management. The excessive focus of the BIR on advanced technological solutions aimed at improvingtaxpayer compliance without giving equal importance to performance measurement and change management have resulted in suboptimalproject outcomes. Giventhis, the proposedproject loan would devout the other half of the total amount to human resource development and general tax reform management, which includes strengthening key areas of performance management, change managementand internalcontrol. The experience of the USAID funded Performance Management System (PMS) in the Large Taxpayers Service (LTS) is a good model for the loan. The project invested heavily on change management sessions and advocacy for bothBIR LTS managementand staffandthis has contributedto the success of 24 As o fNovember 13, 2005. The numbersrelateonly to taxpayers registeredat the 44 computerizedRDO's. 25 As o fNovember30, 2005. The numbersrelateonly to taxpayers registeredat the 44 computerizedRDOs. 64 the overall project. Employees' understanding of the reform and the need for reform greatly improved and helped minimized resistance to change. The same approach shall be used in the proposed project. About 15 percent of the loan is dedicated for change management, a relatively small price to pay compared to strong support the project can get from management and staffs buy-in of the reform agenda.Regular change managementsessionswill be interspersedthroughout the life of the loan. The economic rate of return of these two components is very high. Management move from purely revenue accounting to include performance measurement against objectives and results and change management would help improve effectiveness and efficiency in the organization as seen in pilot projects insidethe BIR. FinancialAnalysis The BIR faces a significant financial challenge. Its annual budget of about P5 billion translates to only P700 per registeredtaxpayer per year. Giventhe amount needed to enforce collection and audit, the per capita allocation of P700 per registered taxpayer is way too low to effectively provide adequate incentivesfor BIR staff to perform their duties well. Moreover, the lack of examiners, numberingonly about 1250 or 10 percent of total BIR staff, has allowed the far majority of taxpayers to avoid being audited, thereby loweringcollectionvis-a-vispotential. This is incontrast to morethan a quarter of staff in administrativeor support positions. Giventhe fiscal pressuresthat have persisted in the last nine years, a significantincrease in the allocated budget of BIR is unlikely until revenue effort return to more sustainable levels. However the BIR can and must take the opportunity provided by donor support in enhancing its systems to improve its efficiency and effectiveness in tax administration. This would then result in a virtuous cycle where higher collections results in more allocation to BIR and more pro-poor spending. The higher agency allocationcanthen be usedto higher qualifiedexaminersand improveits business process system. Since the NPSTAR is aimed at supporting existing expenditure items in the BIR budget, it will have little directadditional impacton figure recurrent allocationsfor the BIR.However, some ofthe NPSTAR supported reforms are very likely to yield greater efficiencies in tax administration in the short-run thereby closingthe funding gap between funding required for minimum resource provision for quality tax administrationandthe budget allocationto BIR. 65 Annex 10: SafeguardPolicy Issues EnvironmentCateporv: C Safeguard Issues and Policies Triggered: The Project will only finance consulting services, business and information systems and training. There are no civil works or any activity that will have negative environmentalimplications. There are also no social safeguard implications (involuntary resettlement, IndigenousPeoples) since there will be no requirementfor landacquisition.The Projectshall not prevent access to source of livelihood to any one, including indigenouspeople. It is envisaged that improved tax compliance, tax enforcement and strengthened performance accountability of BIR personnel will result in greater revenue that would be channeled to increasedand improved services to the poor (Le. education, health and others) that will enable them to participate in the opportunitiesfor economic growth. Beginningin 2007, the highertax effort would permit non-interestpublic sector spendingto increaseas a share of GDP, even as both the national government and consolidated public sector accounts move towards balance in the medium term. The CPSD path outlined in Table 3 implies the maintenanceof a primary surplus averaging slightly over 4 percent of GDP through 2010. In this scenario, public debt would fall to 60 percent of GDP by 2010 and public sector interest payments would decline from 6.4 percent of GDP in 2005 to about 4 percent by 2010. The fiscal space afforded by higher revenues and lower interest payments would permit increases in public sector spending, including for investment. With easing investor concerns about fiscal sustainabilityderivedfrom a falling public debt ratio, private investment shares would begin to increase, helping to boost average GDP growth to average about 6 percent during 2007-10. The government's 2007 already providesfor increased spending for education, healthand infrastructure. # 66 Annex 11:AnticorruptionMeasures The issue of governance in the Philippines presents a paradox. Despite the presence of a strong civil society, an open media and highly skilled staff working in the government, corruption remains an important barrier to the achievement of good governance. Governance indicators from a cross-country database indicate that, despite having good democratic processes, rule of law, political stability and control of corruptionare lower inthe Philippinesthan in comparable EastAsian economies. (See Figure 1 below) In addition, about 35 percent of Filipino firms included in the Investment Climate Survey reportedcorruption as a major constraint to doing business in the Philippines, secondto macroeconomic instability.26Corruption and collusion also pose significant challenges for government revenue administrationand expenditure management. Accordingly, it is importantto highlight the steps taken by the government to respond to concerns about corruption and indicate the specific strategies the project will adopt to help mitigatethe risk of corruption. Figure1 Governance Indicators Among East Asian Countries Corruptbon Rule of Law Regufatory Qualtly Government Erfectlveness Political peiceptwisSIX governance Nole The o b Indicatorsag%r alnwst 200 counirtesand terntones The regateseveral hundredsuwey-basedvariables on indicatorsare tsormally distributedwth a meanof 0 and a standarddeviabonof 1 The nine ather EastAaan eoanomles are Chrna,Hcng Kong (China), Indonesila.Korea,Malaysm.Singapore. Tar- (China).Thadand. andVietnam. Sowrcs. Kaufmann.Kraay. and Mastrun(2004). WBI Governance Indicators GovernmentEfforts to ReduceCorruption The government, with support from the Bank and other donors, has been making some progress in improving governance and combating corruption. This has been primarily supported through national level reforms, but innovativeefforts have also been instituted at the local level. National level reforms are described as follows: Oflce of the Ombudsman The Office of the Ombudsman is a major anti-corruption agency of the government. As part of its functions to prevent graft, it has the power to investigate, prosecute and adjudicate cases involving government entities and employees. In 2003, the Office formally adopted the government's Lifestyle Checks Program, which allows it to undertake life-style checks on government employees and if warranted, remove them from their positions and initiate prosecution. Further, the Government has committedto doublingthe Office's budget over the next two years, allowing for the hiring and training o f a significant number of new investigatorsandprosecutors. 26Asian DevelopmentBank and World Bank, 2004; 716 Philippine firms surveyed. 67 Procurement and Financial Management Improvements As part of the nationalprocurement reformthat beganwith the government Procurement ReformAct in January 2003, the government's Procurement Policy Boardwas established with the mandate to set up and monitor procurement performancebenchmarks, provide for protest mecbnisms, coordinate training within the government and among civil society organizations who observe on bid and evaluation committees and to issue generic and department-specific procurement manuals and related bidding documents. Concurrent with procurement reform, the government also institutedfinancial management improvementsthroughthe implementationof the E-NGAS accounting systems and the strengthening of internaland external audit functions. Increased Involvement of Civil Society in Government The Philippineshas increased transparency in government processes and transactions by successfully involvingthe participationo f civil society in these processes. This includes the active involvement of civil society observers in public bid committees, providinggreater transparency in the biddingprocess. Civil society groups have also initiated their own activities to fight corruption. For example, Government Watch (G-Watch) monitors government projects and provides reliable independent and external information on the performance of government projects. Findings from the group have prompted the Office of the Ombudsman to initiate investigations into alleged corruption. The Transparency and Accountability Network (TAN) is another group of non-government organizations actively involvedin anticorruptionmeasuresinthe tax agencies. World BankEffortsto Reduce Corruption As of July 2004, the Bank had channeled over US $5 million in grants to support improvements in governance. These grants addressed systemic issues such as procurement and judicial reform and increasedthe role of civil society in monitoringgovernment transactions. The Bank has been working with the Department of Finance and the Bureau of InternalRevenue in improvinginternal and external audit. The Bank, though the ASEM and IDF grants has supportedenhancementof the Revenue Integrity ProtectionService (RIPS), an anticorruptionmeasure aimed at curbingcorruption in the tax bureaus by running after corrupt revenue collectors, assessors and auditors. The grant also procured computerized audit systems to improve audit and limit opportunities for corruption. Furthermore, to guard against corruptionin Bank programs, the Bank has strengthened its procurement and financial managementstaff in Manila. The Bank is also implementinga Judicial ReformProject that will assist the Supreme Court in undertakinginstitutionalreformsto strengthenpublicconfidence inthejudiciary system. BIReffortsto ReduceCorruption The BIR has recently completed its Agency Integrity Development Assessment (IDA). The following are some recommendations of the Assessment which the BIR intends to implement to boost its anticorruption effort. The details of each recommendation can be found in "Integrity Development Review of the Bureau of InternalRevenue" August 2006. Additional information can be derived from the Bureauof InternalRevenueAnticorruptionActionPlandatedJune 2006. On management 1. Empower senior leaders in preventing corruption [through training and the use of a senior managementinformationsystem]. (Supported by loan) 2. Fix the term ofthe commissioner of internalrevenue. 68 On internal auditandcontrol 3. Improve internal audit capacity especially at the district level via provision of equipment as supplements to field investigators, provisionbasic and advance internal audit and control, and risk managementcourses adheringto internationalstandards for the practice of internalaudit and the Code of Ethics as promulgated by the Association of Government Internal Auditors and achieving100percentcertificationof internalauditors inthe bureau.(Supported by loan) 4. Develop a handbook on internal control which contains the duties and responsibilities of each and every accountable employee in the BIR. It will include basic internalcontrol measures for proper office and personneladministration. 5. Efficientuse of the bureau's AdministrativeCase TrackingSystem (ACTS) and development of an electronicdatabank ofadministrativecases decided. 6. Analyze the statements of assets, liabilitiesand net worth (SALN) of employees and enhancethe reward systemto encouragecompliancewith the code of conduct. 7. Formulate an unambiguousgift policy. 8. Institutionalizecorruptionriskmanagement. 9. Strengthenthe whistle-blowing,internalreportingand investigation.(Supported by loan) 10. Conduct compliance auditon selectedHRprocesses. 11. Discouragepoliticalrecommendations. On procurement 12. Enhance procurement management through formal training on project and procurement management for all staff in the Procurement Service and those involve in managing grants and technicalassistance. (Supportedby WB grant) 13. Adopt an agency specific procurement manual.(Supportedby WB grant) 14. Facilitatefree data sharingwith stakeholders on blacklistedsuppliers. On external audit and legal 15. Maintaina complete recordof complaints and feedback from clients. 16. Consultationinthe preparation of the Audit Program.(Supportedby loan) 17. Improvesafekeepingmechanismsoftax returns. (Supported by loan) 18. Reviewof case dockets. 19. Make preliminary assessmentnotices (PAN) and final assessment notices (FAN) as accountable forms. 69 20. Maintain an annual list oftaxpayers issuedwith lettersof authority(LA). (Supported by loan) 21. Improveand expandthe letterof authoritymonitoring system (LAMS). (Supported by loan) On taxpayer service 22. Providetaxpayers of informationon their bill of rights. (Supported by loan) 23. Presenttaxpayers initial and final findings at the BIR premises. 24. Advocate for simplertax laws and procedures. (Supported by loan) Ontax compliance 25. Improvetaxpayer database.(Supported by loan) 26. Reforms in one-time transactions (ONETT) such as capital gains tax in the areas of control mechanism, sampling criteria for review of capital gains dockets, team rotationand the sharing of information.(Supportedby IDFto BIR) On organizationand humanresource 27. Improvehuman resourcemanagementprocess includedchecks on the Personnel Selection Board (PSB). (Supported by loan) 28. Bolsterthe performance management system. (Supported by loan) 29. Provideexclusivetestingrooms inthe nationaloffice. 30. Updatetest questionnaires. 3 1. Execute MOA with externalexaminationproviders. 32. Providean item of a psychometricianin regionalHRMUs. 33. Attach supportingdocuments to evaluationmatrices of candidates. 34. Strictly enforce RMO 26-83 to requirea shorter list of promotableemployees. 35. Decentralizepower to appoint employees with salary grades up to SG 19to regional offices. 36. Expandpersonnelcomplementof investigationoffices. Steps to Mitigate Corruption underProposedProgram Anchored on the Bank's five-pronged strategy of improving political accountability, civil society participation,private sector involvement,public sector managementand limit on institutionalpower, and in complementingthe broader effort at country program level, the following steps will be undertakento help mitigatecorruption inthe project: 70 1. Civil Society/CommunityParticipation. The BIR will continue its partnershipwith CSOs to ensure a fair and transparent process in the procurement and delivery of goods. The BIR will continue to involve CSOs as active observers throughoutthe bidding, evaluation, awarding, productionand delivery acceptance processes. In addition, the loan shall fund external surveys with CSO partnersto determine progress in public perceptionof BIR inthe course ofthe reformprogram. 2. PublicSector Management. Steps will be taken to enhance transparency and accountability in procurement and financial management. These include:a) strict adherenceto the ProcurementReformAct and measuresto ensure that bid notices and contracts are published in the eGPS where appropriate; b) full enforcement of delayed penalty provision of contracts, particularly those involving ICB and/or large contract values; c) strengthening of internal control and accountability for tax collection and expenditure management at national office and regional levels; and d) reform of BIR management in planning,monitoringand evaluation. 3. InstitutionalRestraintson Power. The maze of complex tax rulings and procedures, the lack of a national audit plan and inadequate performance management system are key contributors to high discretionary powers inthe tax bureau. To limit discretioninthe conduct of assessment, collectionandaudit, the loan would finance the development of an integrated and complete taxpayer registry as well as improving taxpayer service and streamlining procedures in the collection of taxes. Internal control will also be strengthened. In collaboration with other development partners, the loan shall support the creation of a national audit plan, and the development and implementation of the human resource management information system (HRMIS) and the Performance Management System (PMS) for both office and individual levels. These activities aim to limit opportunitiesfor discretionand abuse of power. 4. PrivateSector Involvement. Steps will be taken to ensure that private sector is involved in some areas of tax reform such as consultation with various industries (especially hard to tax industries) to enhance transparency and accountability in taxpayer service. Expertise of reputable accounting firms can also be tapped to assist formulate the national audit plans and to share advancement in the field of taxation. 71 eparation and Supervision Planned Actual IPCNReview May 16,2006 June 15,2006 Appraisal December 11,2006 December 11,2006 Negotiations December 192006 January 16,2007 April 1, 2007 IPlanned date of midtermreview IPlanned June 15,2009 date of closing December 31.2011 Key institutionresponsible for preparationofthe project: Bureauof Internal Revenue(BIR) Bank staff and consultantswho worked on the Program: NecitasGarcia Team Assistant EACPF MichaelEngelschack Tax Policyand Administration Specialist Consultant Luis-JosCMejia ProjectDesigner and Editor Consultant Stuart Jamieson ProjectManagement& Systems Specialist Consultant John Crotty IMFtax advisor Consultant 72 Annex 13: Documents inthe ProjectFile Bureauof Internal Revenue.AnticorruptionAction Plan. June 2006. Crotty, Walsh, Fulford, and Higgins, IMF FAD. Philippines:Challengesin Revenue Administration and Tax Compliance Improvement.April 1998. DevelopmentAcademy of the Philippines. Integrity DevelopmentReview of the Bureauof Internal Revenue. EC-OMB Project.August 2006. Highfield, Seymour, Dawe, IMF FAD. Philippines:Future Directionsfor the Bureauof Internal Revenue's Tax ComputerizationProject.February2000. Holland and Sawyer, IMF FAD. Philippines:ImprovingVAT and Excise Performance.September 2002 Holland, Grahamand Anthony Sawyer, IMF FAD. Philippines:ImprovingVAT and Excise Performance.September 2002. IRS.Philippines:Tax AdministrationAssistanceProjectEnd-of-ProjectReport.December9, 1998. Sunley, Fanizza, Graystonand Shuldiner, IMF FAD. Philippines:A Programfor Reform of the Structureand Administrationof the Tax System.August 1994. Sunley, Ha, Isaac, and Morris, IMF FAD. Philippines:The Taxation of the Financial Sector. April 1997. Sunley, Highfield, Ferguson, Gravelle, and Li.Philippines:Tax Administrationand Tax Policy Reformto Reversethe RevenueDecline.July 2001. World Bank. CountryAssistanceStrategy for the Philippines2006-2008.Discussedby the Board on May 17,2005. World Bank. StaffAppraisal Report:PhilippinesTax ComputerizationProject(L1135-PH). March 31, 1993. World Bank.ImplementationCompletionReport-PhilippinesTax ComputerizationProject (L1135-PH). June 29,2000. World BanWIMF. Philippines: Critical PrioritiesinTax and CustomsAdministrationReform. February 2006. Bank StaffAssessments Reyes, Joseph. BIRFinancialManagementAssessment. August 2006. Tiongson, Alice. ProcurementCapacityAssessment and Agency PerformanceIndicatorReportfor the Bureauof InternalRevenue. August 2006. Vales, Cecilia. BIRProcurementAssessment. August 2006. 73 Miscellaneous Documents related to BIR CompletionReport for the WorkshopTowards Operationalizingthe BIRTax ReformAgenda, conducted inAntipolo City on June 28-30,2006, datedJuly 5,2006. Senate Bill 2243, introducedby Sen. Alfred0 S. Lim, to exempt the BIR from the Salary Standardization Law. BIR Collection Service Workflow. BIR TaxpayerAssistance ServiceWorkflow. Miscellaneous Terms of Reference SteeringCommittee ReformManager ChangeManagement Expert Office Management, Organizationand ProceduresExpert Business Expert 74 Annex 14: Programin BIR Budget CY ZW7 N I P-- - FORWARDESTIMATES ZOO1 PR ZWO PROPOSED PROGRAM PROGRAMI l.lnm"c. ACTlWTll TOW and other PROJECT -- )pe,.UWl. OYUlYl EXp.n..* TtG-pi- EXpe",., 1111 1131 I 200.087 M.504 --380 190 230,100 70,954 428.213 264.815 78.050 482,540 183.825 64,504 342,340 222,689 70,954 3M.255 258,089 78,050 438.014 37,850 7,431 . 41,958 8.548 . 46.525 - 16,474 1,538 18.188 1,770 20,084 1338 16,474 1.538 .. 18,188 1,770 .. 20.084 --135,513 4 . m 149,255 5.048 1M.4W 135,513 4 . m .. 149,255 5.048 .. 1M.400 I - 18,350 14.08: 20,185 16.174 22.807 111.350 l4.W: .. 20,185 16,174 .. 22.807 -- 8.058 38: 8,877 418 7.383 8.058 2a: .. 8.677 419 .. 7,383 18,368 - 138,6111 22,271 154.548 25.812 . 171.118 19 368 139.8111 22,271 .. 154,548 25,612 . 171.118 -- I 75 Annex 15: Statement of Loansand Credits Difference between expected and actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. F n . Rev'd PO94063 2006 PH-HEALTHREFORMPROJECT 110.00 0.00 0.00 0.00 0.00 110.00 0.00 0.00 PO75464 2006 PH-BASICEDUCATION PROJECT 200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 PO64925 2006 PH-SUPPORTFOR STRATEGIC 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 LOCAL DEVELOPMENT AND INVESTMENT PROJECT PO79661 2005 PH-MANILA THIRD SEWERAGE 64.00 0.00 0.00 0.00 0.00 54.7 0.00 0.00 PROJECT PO79628 2005 PH-2NDWOMEN'S HEALTH 16.00 0.00 0.00 0.00 0.00 15.6 0.00 0.00 PO73206 2005 PH-LAMP2 19.00 0.00 0.00 0.00 0.00 18.4 0.00 0.00 PO66532 2004 PH-GEF-ELECTRIC 0.00 0.00 0.00 12.00 0.00 6.8 0.00 0.00 PO75184 2004 PH-DIVERSIFIED FARM INCOME & 60.00 0.00 0.00 0.00 0.00 56.4 0.00 0.00 MKT. DEVT PO72096 2004 PH-GEF-RURAL POWER 0.00 0.00 0.00 9.00 0.00 8.1 0.00 0.00 PO66397 2004 PH-RURAL POWER PROJECT 10.00 0.00 0.00 0.00 0.00 10.86 0.00 0.00 PO66076 2004 PH-JUDICIAL REFORMSUPPORT 21.90 0.00 0.00 0.00 0.00 21.68 -0.22 0.00 PROJECT PO70899 2004 PH-LAGUNA DE BAY 5.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 ENVIRONMENT PO71007 2003 PH-SECONDAGRARIAN REFORM 50.00 0.00 0.00 0.00 0.00 48.50 3.57 0.00 COMMUNITIES DEV PO73488 2003 PH-ARMM SOCIAL FUND 33.60 0.00 0.00 0.00 0.00 31.98 2.68 0.00 PO77012 2003 PH-KALAHI-CIDSS PROJECT 100.00 0.00 0.00 0.00 0.00 94.91 0.57 0.00 PO69916 2002 PH-2NDSOCIAL EXPENDITURE 100.00 0.00 0.00 0.00 0.00 70.33 -10.34 0.00 MANAGEMENT PO69491 2002 PH-LGU URBAN WATER APL2 30.00 0.00 0.00 0.00 0.00 33.24 8.20 0.00 PO66509 2001 PH-MMURTRIP-BICYCLE NWK 0.00 0.00 0.00 1.30 0.00 1.35 0.45 0.00 PO57731 2001 PH-METROMANILA URBAN 60.00 0.00 0.00 0.00 0.00 54.05 14.65 0.00 TRANSPORT PO66069 2001 PH-LAND ADMIN & MANAGEMENT 4.79 0.00 0.00 0.00 0.00 2.30 2.31 0.00 PO65113 2000 PH-SOCIAL EXPENDITURE MGMT 100.00 0.00 0.00 0.00 0.00 12.61 12.61 0.00 PO39019 2000 PH-FIRSTNAT'L RDS IMPROVE. 150.00 0.00 0.00 0.00 0.00 84.18 71.73 0.00 PO59933 2000 PH-COASTAL MARINE 0.00 0.00 0.00 I.25 0.00 1.12 1.60 0.33 PO58842 2000 PH-MINDANAO RURAL DEV 27.50 0.00 0.00 0.00 5.50 7.68 13.18 0.67 PO48588 1999 PH-LGU FINANCE & DEV. 100.00 0.00 0.00 0.00 40.00 51.18 5 1.03 4.93 PO57598 1999 PH-RURAL FINANCE I11 150.00 0.00 0.00 0.00 0.00 61.28 61.28 0.00 PO04566 1998 PH-EARLY CHILD DEV. 19.00 0.00 0.00 0.00 0.00 5.68 5.68 0.00 PO04576 1998 PH-WATER DISTRICTS DEV. 56.80 0.00 0.00 0.00 6.53 17.01 41.74 0.07 PO04595 1998 PH-COMMUNITY BASED RES0 50.00 0.00 0.00 0.00 12.00 18.71 29.61 17.03 PO04602 1997 PH-THIRD ELEMENTARY 113.40 0.00 0.00 0.00 20.10 41.19 60.73 29.61 EDUCATION PO04613 1997 PH-WATER RESOURCES DEVE 58.00 0.00 0.00 0.00 16.27 6.42 22.69 3.79 PO37079 1997 PH-AGRARIAN REFORM COMM 50.00 0.00 0.00 0.00 0.00 0.26 -0.14 0.00 PO04611 1996 PH-MANILA SEWERAGE I1 57.00 0.00 0.00 0.00 20.90 20.93 41.83 0.91 PO04571 1996 PH-TRANS GRID REINFORCE 250.00 0.00 0.00 0.00 79.51 15.50 79.63 10.46 Total: 2,165.99 0.00 0.00 23.55 200.81 1,287.95 515.07 67.80 76 STATEMENTOF IFC's Heldand DisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 AEI 1.oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001/02 APW Trade 0.67 0.00 0.00 0.00 0.67 0.00 0.00 0.00 2003 Alaska Milk 0.00 0.62 0.00 0.00 0.00 0.62 0.00 0.00 1996 All Asia Growth 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 All Asia Manager 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 All AsiaVen Mgmt 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 Asian Hospital 7.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 2006 BahayFinancial 0.00 0.16 0.00 0.00 0.00 0.16 0.00 0.00 2005 BalikatanHE 0.00 1.89 36.17 0.00 0.00 1.89 33.94 0.00 2002 Bancode Oro 0.00 0.00 20.00 0.00 0.00 0.00 20.00 0.00 1997 BataanPIE 29.82 0.00 10.00 116.55 29.82 0.00 10.00 116.55 2005 Cepalco 16.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 DrysdaleFood 10.96 0.00 0.00 7.80 10.96 0.00 0.00 6.60 2002 Eashvood 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 2001 Filinvest 22.00 0.00 0.00 0.00 16.00 0.00 0.00 0.00 2005 Filinvest Land 44.85 0.00 0.00 0.00 22.42 0.00 0.00 0.00 2004 Globe 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 I998 H&Q PV 111 0.00 5.76 0.00 0.00 0.00 5.76 0.00 0.00 1989 H&QPV-1 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 1993 H&QPV-11 0.00 1.11 0.00 0.00 0.00 1.1 1 0.00 0.00 2004 LARES 22.00 2.70 0.00 0.00 0.00 0.00 0.00 0.00 2000 MFI MEP 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.00 2001 MNTC 46.00 0.00 0.00 0.00 19.81 0.00 0.00 0.00 2003 MWC 32.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1970172/00 Mariwasa 11.22 0.00 3.00 0.00 11.22 0.00 3.00 0.00 1993194 Mindanao Power 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1993 Mirant Pagbilao 21.00 10.00 0.00 0.60 21.00 10.00 0.00 0.60 2002 PSMT Philippines 12.50 0.00 0.00 0.00 10.20 0.00 0.00 0.00 2001 PEDF 0.25 0.00 0.00 0.00 0.25 0.00 0.00 0.00 2005 PLGIC 0.00 0.00 1.50 0.00 0.00 0.00 1.50 0.00 1992 PilipinasShell 0.00 1.56 0.00 0.00 0.00 1.56 0.00 0.00 2000 PlantersBank 0.00 0.00 8.71 0.00 0.00 0.00 8.71 0.00 I998 PryceGases 13.00 0.00 0.00 5.00 13.00 0.00 0.00 5.00 2000 SME.COM 0.00 0.20 0.00 0.00 0.00 0.12 0.00 0.00 2000 STRADCOM 11.99 0.00 8.00 0.00 9.59 0.00 8.00 0.00 2003 SVI 0.00 4.00 0.00 0.00 0.00 0.00 0.00 0.00 1995 Sua1Power 24.67 17.50 0.00 97.54 24.67 17.50 0.00 97.54 1992 UnionCement 0.00 5.63 0.00 0.00 0.00 5.63 0.00 0.00 1994 Walden Mgmt 0.00 0.05 0.00 0.00 0.00 0.05 0.00 0.00 1994 Walden Ventures 0.00 1.04 0.00 0.00 0.00 1.04 0.00 0.00 Total portfilio: 347.17 52.93 87.38 227.49 214.61 46.15 85.15 226.29 77 Annex 16: Country at a Glance Philippines at a glance 8113/06 East Lower Key Development Indicators Asia & middle Philippines Pacific income Ape dbtributlon, 2006 (2005) Male Female Population,mid-year(millions) 83.1 1,865 2,475 Surfacearea (thousandsq. km) 70.74 300 16,301 39,946 Populationgrowth (%) 1.7 0.8 1.o Boa4 Urban population(% of total population) 63 42 49 50-54 40-44 GNI (Atlas method,US$ billions) 108.3 3,067 4,746 30-34 GNI per capita (Atlasmethod, US$) 1,300 1,627 1.918 20-24 GNI per capita (PPP,international8) 5,300 5,914 6,313 10-14 w GDP growth (%) 5.0 8.7 6.9 15 10 5 0 5 10 15 GDP par capita growth(%) 3.3 7.8 5.9 psrwnt (mort recent wtlmah, 200&2005) Povertyheedcountratio at $1 a day (PPP, %) 15 12 Povertyheadcountratio at $2 a day (PPP, %) 47 41 Jnder-6 mortality rate (per 1,000) Life expectancyat birth (years) 71 70 70 Infantmortality(per 1,000 live births) 26 29 33 Child malnutrition(% of childrenunder 5) 28 15 12 751 Adult literacy,male (% of ages 15 and older) 93 95 93 Adult literacy,female (% of ages 15 and older) 93 87 85 Grossprimary enrollment,male (% of age group) 113 116 115 Gross primaryenrollment,female (% of age group) 111 114 113 Access to an improvedwater sourca (% of population) 85 79 82 Access to improvedsanitationfacilities (% of population) 72 51 57 1880 1995 2000 2W4 0Philippines LQEastAsia 8 Pacific Net Aid Flows 1980 1990 2000 2006 ' (US$ millions) Net ODA and officialaid 300 1,274 578 463 IGrowth of GDP and GDP per capita (K) Top 3 donors (in 2004): Japan 94 647 304 211 United States 50 248 75 79 l o1 Germany 12 44 23 39 Aid (% of GNI) 0.9 2.9 0.7 0.5 Aid per capita (US$) 6 21 8 6 Long-Term Economic Trends Consumerpnces (annual % change) 18.2 12.7 4.0 7.6 GDP implicit deflator (annual % change) 14.3 13.0 6.3 6.2 Exchangerate (annualaverage,local per US$) 7.5 24.3 44.2 Terms of trade index (2000 = 100) 55.1 99 87 100 84 1980-90 1890-2000 2000-06 (average annualgrowth %) Population,mid-year(millions) 48.1 61.1 76.5 83.1 2.4 2.2 1.8 GDP (US$ millions) 32,450 44,312 75.909 98,371 1.o 3.3 4.7 (% of GDP) Agnwlture 25.1 21.9 15.8 14.3 1.o 1.7 3.8 Industry 38.8 34.5 32.3 32.2 -0.9 3.5 4.0 Manufacturing 25.7 24.8 22.2 23.3 0.2 3.0 4.5 Services 36.1 43.6 52.0 53.4 2.8 4.0 5.6 Householdfinal consumptionexpenditure 66.7 71.5 63.8 79.8 2.3 3.5 4.5 General gov't final consumptionexpenditure 9.1 10.1 13.1 9.7 0.6 3.6 0.8 Gross capitalformation 29.1 24.2 21.2 15.1 -2.3 4.1 2.7 Exportsof goodsand services 23.6 27.5 55.4 47.3 2.9 7.8 6.8 Imports of goods and services 28.5 33.3 53.5 52.0 3.3 7.8 5.4 Gross savings 25.4 19.5 18.2 17.5 -0.6 9.6 14.1 Note Figuresin italics are for years otherthan those specified 2005 data are preliminaryestimates indicatesdata are not available a Aid data ere for 2004 DevelopmentEconomics.DevelopmentData Group (DECDG) 78 Philippines ~ ~~~~ Balance of Paymentsand Trade 2000 2005 (US%millions) Governance Indicators,2000 and 2004 Total merchandiseexports (fob) 37,347 40,231 Total merchandiseimports (cif) 43,318 47,777 Voica and accountability Net trade in goods and services -7.841 -8.942 I Politicaistability Workers' remittancesand compensationof employees(receipts) 5,161 10.668 Regulatoryquality ~ Current accountbalance -2,225 2,354 Ruleof law as a % of GDP -2.9 2.4 Controlof corruption Reserves,includinggold 15,083 18,495 0 25 50 75 100 Central Government Finance 2004 Country'spercanble rank (C-100) 02000 hrgher Y ~ Y O S!m#y benw ratings (% oFGDP) Revenue 15.3 14.7 S o u m Kaufmann-KraayMastrum, Wodd Bank Tax revenue 13.7 12.6 Expenditureand Net Lending 19.3 17.4 Technology and Infrastructure 2000 2004 Overall surplus/deficit -4.0 -2.7 Paved roads(% of total) 21.0 9.9 Highest marginaltax rate (%) Fixedline and mobile phone Individual 32 32 subscribers(per 1,000 people) 128 446 Corporate 32 35 Hightechnologyexports (% of manufacturedexports) 72.6 63.8 External Debt and Resource Flows Environment (US$ millions) Total debt outstandingand disbursed 58,299 60,550 Agnculturailand (Ohof land area) 41 41 Total debt service 7,060 11,570 Forestarea (% of land area, 2000 and 2005) 267 240 HlPC and MDRldebt relief (expected;flow) - - Nationaliyprotectedareas(Ohof land area) 5 7 Total debt (% of GDP) 77.3 67.2 Freshwaterresourcesper capita (cu meters) 5,889 Total debt service (% of exports) 14.1 21.0 Freshwaterwlthdrawal(Uof internal resources) 6 0 Foreigndirect investment(net inflows) 2,115 970 C02 emissionsper capita (mt) 1 0 094 Portfolioequity(net inflows) -183 418 GDP per unit of energyuse Compositlon of total external debt, 2004 (2000 PPP $per kg of oil equivalent) 7 2 7 8 Energyuse per capita (kg of oil equivalent) 560 525 IBRD. 3 3 1 7 7 \ /, IDA. 214 -IMF 758 Short-term 5 040 other mun,. lateral 3 538 (US$ m/l//ons) IBRD Total debt outstandingand disbursed 3,627 2.885 Disbursements 152 129 Principalrepayments 349 376 Pnvats,33.929u Interestpayments 223 124 US$ millions IDA Total debt outstandingand disbursed 207 197 Disbursements 10 0 Private Sector Development 2000 2005 Total debt service 5 8 Time requiredto start a business(days) - 48 IFC (fiscalyear) Cost to start a business(% of GNI per capita) 20.3 Total disbursedand outstandingportfolio 897 357 Time requiredto registerproperty(days) -- 33 of which IFC own account 312 263 Disbursementsfor IFC own account 104 18 Ranked as a majorconstraintlo business Porlfolio sales,prepaymentsand (% of managersSurveyedwho agreed) repaymentsfor IFC own account 48 45 Macroeconomicinstability 36.4 Corruption .... 35.2 MlGA Grossexposure 53 92 Stock market capitalization(% of GDP) 34.4 40.8 Newguarantees 0 0 Bank branches(per 100,000 people) .. 7.8 Note: Figuresin italics are for years other than those specfled. 2005 data are preliminaryestimates. ..Indicatesdata 8/13/08 are not available. -indicates observationis not applicable. DevelopmentEconomics,DevelopmentData Group(DECDG) 79 Millennium Development Goals Philippines With selected targets to achieve between 1990and 2015 (estimate closestto date shown, +/- 2 yeen) Goal 1:halve the rates for $1a day poverty and malnutrltion isso ISS6 2000 2004 Povertyheadcountratio at $1 a day (PPP, % of population) 19.8 14.4 15.5 13.1 Povertyheadcountratio at nationalpovertyline(% of population) 36.8 33.0 30.0 Share of incomeor consumptionto the poorestqunitile (%) 5.4 Prevalenceof malnutriion("0 of childrenunder 5) 34 28 31 28 Goal 2: ensure that children are able to complete primary schooling Primaryschool enrollment (net,%) 96 93 97 94 Primarycompletionrate (% of relevantage group) 68 65 66 66 Secondary school enrollment (gross,%) 72 77 79 83 Youth literacyrate (% of peopleages 15-24) 97 97 Goal 3: ellminate gender dlsparity in educatlon and empower women Ratioof girls to boys in primaryand secondaryeducation (Oh) 100 103 102 Women employed inthe nonagriculturalsector (% of nonagriculturalemployment) 40 40 41 41 Proportionof seats held bywomen in nationalparliament(Oh) 9 11 12 15 Goal 4: reduce under-5 mortalltybytwo-thlrds Under-5 mortaiitvrate (Der 1.000) 62 49 40 34 Infantmortalityrate (pe; 1,000 live births) 41 35 30 26 Measles immunization(proportionof one-year olds immunized,%) 85 12 81 80 Goal 5: reduce maternal morhllty by three-fourths Maternalmortalityratio(modeledestimate, per 100,000 live births) 200 Births attended by skilled heailh staff (% of total) 53 58 60 Goal 6: halt and begin to reversethe spread of HlVlAlDS and other malor diseases Prevalenceof HiV (% of populationages 1549) 0.1 Contraceptive prevalence(% of women ages 15-49) 36 48 47 49 incidenceof tuberculosis(per 100,000people) 336 293 Tuberculosiscases detectedunder DOTS (%) 0 40 13 Goal 7: halve the propottionof people without sustalnable access to bask needs Accessto an improvedwater source(% of population) 07 05 Access to improvedsanitationfacilities (% of population) 51 12 Forestarea (%of total land area) 35.5 26.7 24.0 Nationallyprotected areas (Ohof total land area) 5.7 C02 emissions(metrictons per capita) 0.7 0.9 1.o 0.9 GDP per unit of energyuse (constant2000 PPP $ per kg of oil equivalent) 9.1 7.5 7.2 7.8 Goal 8: developa global partnership for development Fixed line and mobileDhOnesubscribers(Der 1.000 DeoDle) .. . . , . 10 20 126 446 Internet users (per 1,000 people) 0 0 20 54 Personalcomputers(per 1,000people) 3 10 20 45 Youth unemployment(% of total laborforce ages 15-24) 15.4 16.1 21.2 26.3 - iducation indicaton (X) leasies immunization(% of I-year oids) CT Indicators(per 1,000 people) n 'W 1 1 75 50 1998 2wo 2w2 20w 1990 1995 2000 2004 2wo 2002 2W4 --O-Primary net enrollmentratio -0-Ratioofgirlstoboysinprimary8 0Philippines OEartAsia 8 Pacific OFixed + mobile subscribers sewndaly education Internetuser8 Note:Figures in italics are for years other than those specifled... indicatesdataare not available. 6/13/06 DevelopmentEconomics,DevelopmentData Group (DECDG). 80 MAP SECTION IBRD 33466R1 I Ilocos X Northern Mindanao 1 Ilocos Norte 58 Bukidnon Batan 2 Ilocos Sur 59 Camiguin PHILIPPINES Islands 3 La Union 60 Lanao del Norte BascoBasco 4 Pangasinan 61 Misamis Occidental 62 Misamis Oriental 1111 SELECTED CITIES CAR Cordillera Admin. Reg. 5 Abra XI Davao Reg. Luzon Strait 20šN PROVINCE CAPITALS 6 Apayao 63 Compostela Valley 7 Benguet 64 Davao del Norte REGION CAPITALS 8 Ifugao 65 Davao del Sur 9 Kalinga 66 Davao Oriental 10 Mountain Province NATIONAL CAPITAL Babuyan XII SOCCSKSARGEN Islands II Cagayan Valley 67 North Cotabato RIVERS 11 Batanes 68 Sarangani Babuyan Channel 12 Cagayan 69 South Cotabato MAIN ROADS 13 Isabela 70 Sultan Kudarat 14 Nueva Vizcaya RAILROADS 15 Quirino XIII Caraga Laoag City Laoag City 1 6 71 Agusan del Norte 12 12 III Central Luzon KabugaoKabugao PROVINCE BOUNDARIES 72 Agusan del Sur 16 Aurora 73 Dinagat Islands BanguedBangued 17 Bataan Tuguegarao uguegarao 74 Surigao del Norte REGION BOUNDARIES Vigan igan 18 Bulacan 75 Surigao del Sur 5 9 19 Nueva Ecija CAR Tabuk abuk II INTERNATIONAL BOUNDARIES 20 Pampanga ARMM Autonomous Reg. in 21 Tarlac Muslim Mindanao I BontocBontoc 10 10 IlaganIlagan 22 Zambales 2 76 Basilan LagaweLagawe 13 13 125šE 77 Lanao del Sur 8 Luzon NCR National Capital Reg. 78 Maguindanao ** San Fernando 3 San Fernando La Trinidad La rinidad CabarroguisCabarroguis 79 Shariff Kabunsuan IV-A CALABARZON BaguioBaguio BayombongBayombong 80 Sulu 7 23 Batangas 81 Tawi-Tawi 1414 15 15 LingayenLingayen 24 Cavite 25 Laguna 1616 4 26 Quezon **Shariff Aguak (Maganoy) and BalerBaler III 27 Rizal Sultan Kudarat serve as co-capitals of the province. PalayanPalayan Tarlacrlac 1919 IV-B MIMAROPA IbaIba 2121 PHILIPPINES 2222 IV-A 28 Marinduque San Fernando San Fernando 29 Mindoro Occidental 1818 Polillo 2020 30 Mindoro Oriental MalolosMalolos Islands 31 Palawan * BalangaBalanga QuezonQuezon 32 Romblon 1717 PasigPasig NCR MANILAMANILA AntipoloAntipolo Trece Martires ece Martires 2727 34 34 V Bicol 24 24 Santa Cruz Santa Cruz V 33 Albay CalambaCalamba25 DaetDaet 25 26 26 34 Camarines Norte 2323 35 Camarines Sur Lubang LucenaLucena 35 35 36 36 36 Catanduanes BatangasBatangas Catanduanes Islands PiliPili 37 Masbate Virac irac 38 Sorsogon CalapanCalapan BoacBoac MamburaoMamburao 28 28 30 30 Marinduque LegaspiLegaspi VI Western Visayas 33 33 SorsogonSorsogon Philippine 39 Aklan Mindoro Sibuyan Burias 40 Antique 29 29 Sea 38 38 41 Capiz Mindoro RomblonRomblon Sea 42 Guimaras Ticao CatarmanCatarman Tablas MasbateMasbate 43 Iloilo 32 32 Sibuyan 52 52 Samar 44 Negros Occidental Busuanga Strait 37 37 Masbate VII Central Visayas Semirara 53 53 Visayan 45 Bohol Culion Islands KaliboKalibo CatbaloganCatbalogan VIII 46 Cebu Roxas City Roxas City Sea BoronganBorongan 47 Negros Oriental Linapacah 39 39 NavalNaval 49 49 50 50 48 Siquijor Panay 41 41 Tacloban acloban VIII Eastern Visayas Cuyo Islands 40 40 51 51 49 Biliran 43 43 Leyte Leyte 50 Eastern Samar San Jose de San Jose de IloiloIloilo JordanJordan Cebu Gulf 51 Leyte BuenavistaBuenavista BacolodBacolod 52 Northern Samar Dumaran 42 42 46 46 53 Samar Cebu Cebu 54 54 Dinagat 54 Southern Leyte MaasinMaasin IV-B VI Negros VII 73 73 San Jose 10šN IX Zamboanga Peninsula Bohol San Jose Siargao 44 44 45 45 55 Zamboanga del Norte Puerto Princesa Puerto Princesa Tagbilaran gbilaran SurigaoSurigao 56 Zamboanga del Sur 3131 74 74 47 47 57 Zamboanga Sibugay Palawan DumagueteDumaguete SiquijorSiquijor Mindanao MambajaoMambajao Sea XIII 71 71 *Executive Order 429, May 23, 2005, 48 48 Siquijor 59 59 provides for the transfer of Palawan Camiguin Tandag ndag province (#31) from Region IV to Region VI; Administrative Order 129 X ButuanButuan 75 75 holds EO429 in abeyance until an IX CagayanCagayan implementation plan is approved Sulu Sea DipologDipolog OroquietaOroquieta de Oro de Oro ProsperidadProsperidad by the President. 62 62 72 72 Bugsuk 61 61 55 55 IliganIligan MalaybalayMalaybalay 60 60 58 58 Balabac PagadianPagadian MarawiMarawi Tubod bod IpilIpil Mindanao 77 77 63 63 57 57 56 56 64 64 NabunturanNabunturan CotabatoCotabato Ta um Tag 66 66 Cagayan 67 67 KabuntalanKabuntalan DavaoDavao XI Sulu ZamboangaZamboanga Moro 79 79 MatiMati Sultan Kudarat Sultan Kudarat 78 78 KidapawanKidapawan IsabelaIsabela Gulf Shariff Aguak Sharif Aguak DigosDigos CityCity (Maganoy)(Maganoy) ARMM Davao Basilan 76 76 IsulanIsulan 70 70 KoronadalKoronadal Gulf This map was produced by 69 69 65 65 the Map Design Unit of The JoloJolo Sulu Alabel Alabel World Bank. The boundaries, MALAYSIA colors, denominations and XII 68 68 any other information shown on this map do not imply, on 80 80 the part of The World Bank 0 50 100 150 Kilometers Tawi-Tawi Group, any judgment on the 81 81 Celebes Sea Sarangani legal status of any territory, PanglimaPanglima or any endorsement or 5šN SugalaSugala 0 50 100 Miles 125šE a c c e p t a n c e o f s u c h 120šE boundaries. FEBRUARY 2007