72016820R00001 draft SOW.pdf

Statement of Work

USAID's Financial Reform Activity in Bosnia-Herzegovina: Greater fiscal accountability and transparency in Bosnia-Herzegovina

Objective The fiscal sector is one of the key components of every country’s economic condition, which can be described as finding a balance between a government’s financial position and its ability to meet its financial obligations and service commitments on an ongoing basis. Hence, accountability and accessibility of the fiscal sector is of extreme importance for the sustainability of every country/society.

The purpose of this SOW is to recommend the set of fiscal reforms that will be supported by the Information Technology (IT) interventions, with the goal of greater fiscal accountability and transparency in both BiH entities, and enhanced services for citizens and private sector. The activity has two main purposes: first to improve fiscal discipline and fiscal regulatory framework conducive to business in BiH; and second, to improve overall public financial management through enhanced fiscal planning, tax compliance, control of spending, and debt management.

The activity purpose will be measured by two result outcome indicators of which one will be a score card developed by the implementer in close collaboration with MEL project, while the other indicator will record the number of financial stability management requirements significantly advanced with FITRA assistance. The second indicator will be measured through a self-assessment questionnaire with stakeholders and targeted government institutions.

This activity design document provides rational for such assistance and argues that the fiscal sustainability will be achieved through greater fiscal discipline – through a set of measures designed to enhance and rational the taxation systems, increase transparency, and achieve greater accountability and transparency through improved management of public expenditures at different levels of the economic governance. Since modern fiscal systems depend heavily on quality and efficiency of IT platforms used to improve its functionality, the proposed activity leans heavily on the ICT technology to improve quality of public spending, improve compliance, and enhance business environment through number of e-services.

Scope of the activity The project will be implemented for five years, starting in fall of 2020. The overreaching theme of the activity is a fiscal discipline as a remedy for the country’s primary fiscal balance. To improve fiscal discipline this activity will entail multiple initiatives to rationalize and enhance the taxation system and improve control over the pubic funds, both at revenue and expenditure side. All fiscal activities approved under this project will have strong IT component rooted in their scopes, for added benefits such as transparency and accountability fraud prevention, fair business environment and enhanced interaction between governance and end-users (citizens and businesses).

The main activity goals are:

- Enhanced modern taxation system that corresponds to the best practices in taxation of EU member countries

- Increased tax compliance and reduce tax evasions

- Better control over the public expenditures

- Improved fiscal discipline and public financial management

- Improved business environment through further reduction of burden on private sector

Executive Summary and Development context

As already noted, BiH’s public finances is a focus area for the EU that has been continuously reviewed and evaluated by the EC. The Public Administration Reform, which entails public finance reform in Bosnia and Herzegovina, is necessary for establishing effective, accountable and financially efficient services for businesses and citizens. This reform is a precondition for integration into the EU. There are the four major chapters in the acquis that evaluate BiH’s fiscal capacity to join the EU:

1. Chapter 17 of the EU acquis, concerning macroeconomic policy (fiscal and monetary policy), requires mid-term fiscal programming, and monitoring and evaluation of budgetary system results according to the Support for Improvement in Governance and Management (SIGMA) approach.

2. Chapter 22 of the EU acquis, for reducing socio-economic disparities between the regions, and implementation of general regulations and specific regulations related to Structural Funds and Cohesion Fund.

3. Chapter 32 of the acquis relates to the adoption of internationally agreed upon and EU-compliant principles, standards and methods of public internal financial control (PIFC), which essentially need to be in place to ensure transparent use of public funds.

4. Chapter 33 of the EU acquis, concerning the financial resources made up mainly from contributions from Member States, necessary for the funding of the EU budget.

Although USAID does not contribute to all four Chapters (USAID mainly focuses its assistance on Chapters 17 and 32), USAID’s assistance is often indirectly enhancing systems that operate and are reviewed and scrutinized by the EC under different Chapters.

Relationship to the CDCS, and applicable agency policies

USAID Mission Strategic Plan. The 2012-2016 CDCS (which was extended throughout the FY20) for the USAID Mission in BiH identified economic growth and the strengthening of economic aspects of governance relevant to the business environment and private sector development as key foreign policy priorities for the United States Government (USG) in the country.

Development Objective and Crosscutting Linkages. The proposed Fiscal, Information Technology and Reform Agenda (FITRA) Reform activity which will be implemented under the PAD 2.2, Improving Economic Governance (IEG) Project, and in close cooperation with other USAID-funded projects, is designed to address critical needs identified in BiH’s CDCS. The overarching objective of this economic development project will indirectly address several crosscutting initiatives: 1) anti-corruption measures by simplifying procedures for businesses and citizens and by reducing opportunities for regulatory abuse that deter private sector development; 2) improved business enabling environment; and 3) creation of the single economic space in ethnically divided BiH

Linkages with the Results Framework. The following hypothesis designed by EG office is applicable to this activity:

This Project Design Paper (PDP) argues that the fiscal sustainability will be achieved through greater fiscal discipline – through measures designed to enhance the taxation systems, increase transparency, and achieve greater accountability through improved management of public expenditures at different levels of the economic governance. Since modern fiscal systems depend heavily on quality and efficiency of IT platforms this PDP note states that deployment of such systems will improve efficiency and transparency of the government spending by increasing scrutiny over the government’s transactions, while minimizing discretion of public officials.

Further, this PDP argues that the proposed activity will benefit the local business environment through reducing cost of doing business in BiH and by introducing greater scrutiny over illicit funding flows, which decrease competitiveness and disadvantage compliant businesses.

For this hypothesis to hold the businesses community, CSOs, media and governments at different levels must be willing and engaged in the reform and the necessary regulatory framework must be developed and implemented.

The planned project falls under and it will be implemented and accounted for under the DO2:

Economic Growth/Economic Opportunity, as identified in the 2012-2016 USAID/BiH Country Development Cooperation Strategy. The activities that will be implemented under this project will directly support Intermediate Result (IR) 2.2 “Improved economic aspects of governance relevant to business activity”, with a focus on Sub IR 2.2.1 “Regulations and policies which foster a single economic space and private sector development and investment”.

This IR was envisioned to improve business-relevant strategies and policies that will stimulate economic growth and attract investment by improving the economic governance while reducing corruption and improving the overall image of the country.

USAID Achievements in the Fiscal Sector to date This section provides a brief overview of USAID funded activities related to the fiscal sector.

1. FAR Project (2014-present): Established the Registers of the Para-fiscal fees in both entities and Brcko District. Introduced umbrella Laws on Fiscal systems that codify the Registers effectively preventing chaotic introduction of new para-fiscal fees by different levels of the government.

Reduce, consolidate or terminate number of unjust fees. Introduced e-filing in Respublika Srpska and developed number of IT tools that enhance communication between the government and citizens. Assisted Tax administrations in both entities to digitize and improve their processes and procedures. Provide IT tools for different levels of government to forecaster revenues and microsimulations to predict revenue implications due to policy changes (for PIT, CIT, SC, and property tax). Enhance risk-based audit system in FBiH. Provide solutions for increased compliance of providers of games of chance.

2. TAF Project (2010-2013): Completed the efforts for the Unified Collection System (UCS) in FBiH and RS. Implemented regulations and IT solutions for detecting stop-fillers and non-fillers of direct taxes. Introduced a simplified payroll processing IT system by reducing the number of payment orders for the average of 10 orders down to five. Harmonization of Direct Taxation within Bosnia and Herzegovina by focusing on Brcko District as the direct taxation differed there from the entities. New Personal and Corporation Income tax laws drafted and enacted in Brcko District. Development and Implementation of Audit software to automate the taxpayer audit processes and to avoid discretion among tax administration staff in the selection of returns for audit. Developed the Fiscal Analyses Capacity in the RS and the FBiH by providing training on micro-simulation models using internationally recognized STATA software.

3. ELMO Project (2006-2010): Introduction of the Unified Collection System (UCS) in Republika Srpska and FBiH for simplified, one-stop-shop registration/deregistration of employees for taxes and social contributions.

4. TARA Project (2006-2010): Reform of direct taxation in both entities. Harmonization of direct taxes by introduction of the Personal Income tax (PIT) and Corporate Income Tax (CIT) in RS and FBiH, at unified/identical rates. Modernized TAX administration systems. Introduction of the Property Tax in RS, and Brcko District (FBiH delayed the implementation).

5. TAMP Project (2001-2006): The reform that modernized tax structures in both entities and Brcko District. During this project, a work on Personal Income Tax and Corporate Income Tax commenced in both entities.

Other Donors in the Fiscal Sector In addition to the USAID’s efforts in the fiscal sector, other donors recognized the importance of the sound fiscal management for the country’s economic and political stability.

European Commission Given that the economic criteria for integration with the EU is prescribed in the SAA agreement, it is logical that the EU Delegation to BiH is one of the major donors in the reform of BiH’s public administration, including public finances and the fiscal system. In 2013, the European Commission allocated approximately 47 million Euros for IPA’s Component 1, focusing on Transition Assistance and

Institution Building. Of that, approximately 1.6 million Euros will be provided for assistance in public procurement reform. IPA projects funded in previous years are listed below:

• IPA 2007 project “Development and implementation of overall BiH PIFC strategy” designed to strengthen the financial control environment of public administration. It ended in April 2012.

• IPA 2009 project “Capacity building for the compilation of accounting data within the General Government and statistics of public finance.” Its purpose is to support the Ministries of Finance of the State and the Entities and the Brcko District Directorate in providing sound and inter-institutional harmonized data on public finance on the basis of accrual accounting in accordance with international, especially EU principles, standards and practices. It will end in early 2014.

• IPA 2010 project “Coordination of policy making capacities and public financial management” with the purpose of improving the quality of fiscal policy and the links between policy makers and budgeting procedures.

• IPA 2011 fund: EC allocated approximately 4 million Euros for public finance restructuring, and financial management in compliance with EU standards. Component I of the project is related to the strengthening of treasury operations at the level of the state and the entities and is currently in the drafting phase of terms of reference.

• IPA II Fund: IPA II sets a new framework for providing pre-accession assistance for the period 2014-2020. Bilateral IPA II allocations in the period 2014-2020 amount to €552.1 million (including funds for the Civil Society Facility (€ 9.1 million), Regional Housing Program (€ 10 million) and special measures following 2014 floods (€ 51 million). The most relevant key focus area for FITRA Activity is Democracy and Government which focuses on improving economic governance, public financial management, public service delivery, and anti-corruption.

PARCO (Public Administration Reform Coordinator’s Office) The Government of BiH, through the Council of Ministers (CoM) and the Public Administration Reform Coordinator’s Office (PARCO), is tasked with implementation of the public administration reform projects. Under PARCO, a Public Administration Reform Fund (PAR Fund) has been established as a source of financing for technical assistance in the implementation of the projects that were defined in the Action Plan (later modified and referred to as the Revised Action Plan – RAP 1). Main contributors to the Fund are international donors and foreign governments: Delegation of the European Union in BiH, Ministry of Foreign Affairs of Great Britain, Swedish International Development Agency (SIDA), The Royal Netherlands Embassy, and Ministry of Foreign Affairs of the Kingdom of Norway. However, the reforms under PARCO are often implemented at a very slow pace and do not meet the expectations of the entity ministries. Although PARCO still formally exists, most of the international donors (as well as the entity governments) have refused to extend financial support to PARCO, which was in the past became notorious for its inefficiency.

IMF (International Monetary Fund) The IMF Mission is a strong supporter of fiscal sector reform. IMF and USAID coordinated their activities in the fiscal arena in past years: USAID’s ELMO and TAF activities (Unified Collection System and Payroll

Processing System) were recognized by the IMF as highly important reforms and were included in the negotiations for the Stand –By – Arrangement with BiH authorities. IMF also strongly supports work of all four Tax Administrations (TAs) in BiH, and conditions further monetary assistance for the country with direct assistance to the TAs. USAID traditionally has excellent relationship with IMS, as in the past many reforms made it into SBA agreements with the entity governments.

GIZ (German Government) There is ongoing cooperation between the Governments of BiH and the German GIZ project for technical assistance for public administration reform. This project will introduce electronic processing in the public procurement system of Bosnia and Herzegovina. GIZ also supports the Public Procurement Agency (PPA).

DFID (ended in 2010) The Project for Strengthening Public Expenditure Management in BiH addressed the process of budget planning and preparation at all levels and has introduced the process of “Budget Planning in 10 Steps” representing basic concepts of program budgeting and strengthened medium term budget planning and preparation. In 2013, DFID initiated basic education on program budgeting for budget users and MOF employees.

Planned activities

A.1. Assistance for improved fiscal planning and analysis

Beneficiary: State (Indirect taxes), FBiH, RSBiH, Brcko District BD, Parliament members, non-governmental groups

Focus of assistance: Fiscal policy/ fiscal discipline

The capacity for static macroeconomic modeling and forecasting is still insufficient at all levels of government. Forecasting of expenditures is weak while analysis and forecasting of tax gaps is non-existent. Further, static micro-simulations are not inclusive of indirect taxes which represent approximately 70% of all tax-related revenues. The static micro-simulation models need to be expanded to include Cantons (so far only Sarajevo Canton was covered by USAID assistance), as social welfare/benefits/revenues are at the level of Cantons in the FBiH. As currently there is no modeling analytical unit in the Ministry of Finance, in order to expand the capabilities for fiscal accountability and fiscal oversight in BiH, this activity should train non-profit professionals in statistical modeling. Also, governments must learn other modelling technics such as dynamic modeling, an exercise that considers the corresponding "dynamic effects"--changes to the economy that are caused by the tax changes themselves. This modeling which includes the impact of population age(ing) and demographic changes are highly relevant for the current economic and development moment of BiH. And lastly, current modelling does not include behavioral elements that can be incorporated into static and dynamic models, to help us understand the possible changes in behavior as a result of reforms.

Activities will include:

- Analyze the current level of static (macro and micro) modeling and identified future needs for each level of government

- Provide analysis of IT requirements required for continued interventions on static forecasting through follow-up training and routine training in institutions (licenses, etc.)

- Further expand the knowledge and training on static macroeconomic forecasting, to include forecasting of expenditures and forecasting of tax-gaps as information provider for the ministries of finance on possible maximum tax revenues (State, Entities, Brcko District, Cantons)

- Continue and further expand the knowledge and training on static micro-simulations through follow-up and routine training. Expand the current versions of micro simulations which are static in time to include time dimension for multi-year simulations

- Further expand the knowledge and training on static micro-simulations to include simulations of indirect revenues

- Further expand the knowledge and training on static micro-simulations to include direct revenues and social benefits (for Cantons)

- Further expand the knowledge and training on static micro-simulations to include direct revenues and social benefits (for Parliamentary specialized working groups and non-government stakeholders)

- Procure software and licenses for dynamic modelling (State, Entities, Brcko District)

- Provide training on developing dynamic models, enabling development of dynamic models with static ageing where ageing is carried out through individual weights which are recalculated in line with demographic changes

- Provide training on static and dynamic modeling that is inclusive of behavioral elements

- Expand models to enable additional modules, which require the multi-year simulations (pension module, health-care module, long-term care module)

- Provide education on fiscal analysis to enable interpretation of the results, particularly on a follow-up steps that include setting reform goals, measuring inequality and progressivity, vertical and horizontal equity, redistributive effects, simplicity, costs of reforms, potential influence on the deadweight loss, etc.

Expected Results:

Result 1: Analytical capacity of the Fiscal Council (FC), Federation of BiH Ministry of Finance (FBIH) and Republika Srpska Ministry of Finance (RS MoF) strengthened, resulting in enhanced fiscal analysis, forecasting and policies, planning and reporting

Result 2: Macro-econometric and micro models implemented at State and the level of the entities.

Result 3: Dynamic and behavioral models introduced in economic forecasting in BIH, at different levels of the government. Better forecasting of changes to the economy resulting in progressive policies.

A.2 Strengthening of the FBiH and Republika Srpska Health Sector Treasury Systems

Beneficiary: Federation of BiH (Cantons and municipalities)

Republika Srpska (Health Sector Institutions)

Focus of assistance: Public revenue/expenditure, fiscal discipline

Entering of transactions for budget users for health sector institutions in both entities, which are currently outside the system, is done by filling in paper forms. This is a slow, non-transparent process of reporting, open to mistakes and delays, particularly when preparing consolidated statements.

Therefore, it is necessary to expand the treasury business operation and the real-time IT system to all budget users of the FBiH and RS Health Institutions to offer them a more efficient and transparent management of public funds.

In Republika Srpska, the government is taking the phased approach to inclusion of the health sector (HS) into the Treasury System (TS). In the Federation of BiH, USAID will select the pilot Cantons for inclusion of the health sector into the treasury operations.

- Updated analysis and inventory of the present state of the TS system at the lower levels of governance in FBiH, identifying issues and weaknesses and focusing on effective solutions for Health sector in FBIH (focus on inclusion of HS into Cantonal TS)

- Detail analysis of the present financial and technical capacity and condition of FBiH HS and the arrears in FBiH HS

- Select 3 pilot Cantons for inclusion of the Health Sector into TS operations

- Implementation of the most viable solution for inclusion of selected cantonal Health sector institutions into Treasury operation

- Further advancing of the TS system in RS Health Sector (coordination and technical assistance for phased integration of health institutions into the RS TS)

Expected Results:

Result 1: Analysis produced, recommending the most viable solution for FBIH health sector TS system Result 2: Upgrades to the TS system(s) for number of Cantons in the FBiH (if required) Result 3: Number of health sector institutions in the FBiH included in a real-time treasury system.

Result 4: Additional health sector budget users in RS included in the RS Treasury System

A.3 Strengthening of the business environment in BiH

Beneficiary: Federation of BiH (FBiH)/Cantons, Republika Srpska (RS), Brcko District

(BD)

Focus of assistance: Business environment/parafiscal fees

There is excessive number of parafiscal fees and charges that are imposed on businesses and citizens at all levels of the government. In order to keep the momentum for further abolition of unjust fees and charges, USAID will continue with the adoption of the Law in FBiH, as well as on orchestrated work for elimination /consolidation/reduction of charges in both entities and BD. The continuation of these works is fundamental for creation of better business environment.

- Adopt innovative technical approach to address the issue of para-fiscal taxes; Draft legislative amendments to improve the relevant legislation and eliminate burdensome fees.

- Assist all levels of the government in identifying parafiscal fees and charges; promote efficient reduction or abolition of parafiscal fees.

- Assist different levels of local government to replace the lost revenues by identifying other more productive and investor-friendly sources of revenue.

Expected Results:

Result 1: # of nuisance fees eliminated /reduced in both entities and BD Result 2: Fiscal stability of different levels of local government preserved Result 3: Cost and time for business operations in BiH reduced

A.4 Strengthening Public Debt Management

Beneficiary: State, FBiH, RS, Brcko District (BD)

Focus of assistance: Fiscal Sustainability – Debt Management

Bosnia and Herzegovina does not have an overreaching system for public debt management. The State, two entities and Brcko district are using old Access databases to record and trace the external debt, while internal debt is recorded in Excel files. Risk management and analyses are very poor and random.

The contractor shall provide technical assistance in implementing IT solutions for debt management.

Activities will include:

- Finalize/verify agreement with the BIH authorities (State, Entities) for viable IT solution for debt management (Focus on Debt Management and Financial Analysis System – DMFAS system for being reasonably priced, already approved from all 3 governments and for the fact that provisional agreement with United Nations Conference on Trade and Development (UNCTAD) already exists)

- Assist BiH authorities in implementation of legislative and procedural changes if required

- Assist UNCTAD in defining business, administrative and legal requirements for the new system at all levels of governance

- Assist UNCTAD in implementation, expansion and modification of the system to cover all levels of the government based on the EC analysis and WB recommendations.

Expected Results:

Result 1: Legislation and procedures improved to enable software installation Result 2: DMS system installed at all levels of the government (State, both entities) using appropriate tools and techniques to manage and use the best methods and procedures for debt management. The IT solution will increase analytical capability of the three MoFs in debt management and debt reporting. It will also Increase the accuracy in the public debt reporting process.

A.5 Increased tax compliance

Beneficiary: MOFs in FBiH, RS, and BD (and Tax Administrations)

Focus of assistance: Tax compliance – reducing tax evasion and improving services to citizens; Domestic Resource Mobilization

To increase the tax compliance and improve public revenue collection, while simultaneously leveling the playfield for compliant businesses, the contractor will implement several initiatives under this component. All IT solutions will be deployed on the current TA FBiH and TA RS infrastructure and environment, which satisfies all IT security concerns.

1. Address the widespread tax avoidance through offshore transactions

This activity aims at helping BiH mobilize domestic resources through increased scrutiny and control over the Illicit Finance Flows (IFF) or tax evasion. There are between 100 and 200 offshore companies associated with BiH citizens which are registered in the well-known tax havens, often for sole purpose of tax avoidance, i.e. IFF. The IFFs are capital flows that are illegal in the way they are created, transferred, or utilized. IFFs undermine fiscal stability and damage the competitiveness of compliant local companies. The most common IFF-related actions relevant to BiH companies are:

- tax avoidance through offshore companies

- non-transparent privatization of public enterprises through virtual offshore companies

- trade mispricing or one of sub-categories that fall under this category

BiH should address this issue by introducing efficient policies, procedures and mechanisms that will prevent such behaviors and tax leakages to avoid fiscal deficits.

The IFFs could be a highly politicized and sensitive issue. This activity requires active participation of tax administrations in BiH and data exchange at the highest levels as well as internationally. This component requires complex and safe data exchange mechanisms, but also the political will and commitment, which seems to exist now.

In order to address the issue USAID needs to understand the types and volume of the IFFs in BiH. The first remedy for preventing tax avoidance would be through the appropriate legislative instruments known as specific and general anti-avoidance rules. Specific rules target the specific types of abuse and may include anti-avoidance clauses in tax treaties and regulations that prevent profit shifting to tax havens. General rules provide generalized definitions and procedures for preventing tax avoidance.

Activities will include:

- Work with tax administrations to analyze the transactions with tax-haven countries, analyze export-import transactions, and apply risk-based auditing to identify possible dishonest transactions

- Work with tax administrations to establish relationships and signed tax agreements & treaties with the relevant tax administrations in the region and outside the region (with main trade partner countries.

- Strengthen BiH’s technical capacity to fulfill its role in Organization for Economic Co-operation and Development (OECD) and in forums focusing on IFFs; help local authorities to adopt international standards on transparency and information exchange for prevention and detection of tax avoidance.

- Define specific sets of data and activities to meet the OECD Global Forums’ requirements. Define tasks required for data and information exchange

- Implement 13 tasks/requirements associated with Base Erosion and Profit Sharing (BEPS) project requirements (Action 13). Meet the Country-by-Country BEPS reporting standards

- Use available BEPS tools and assistance programs to benefit BiH tax administrations

- Explore commonly used solutions and design software solution for BiH, for information exchange on regular basis according to the OECD Global Forum’s specific standards and for the BEPS Country-by-Country reporting. Define a way in which data and information will be exchanged, considering complex governmental structure in BiH (four tax administrations)

- Draft specific and general anti-avoidance rules for the TAs

- Provide capacity building assistance to the TAs

2. Strengthen the technical capacity of the three tax administrations, improve information exchange, digitize internal processes and enhance IT systems for efficient services for private sector and citizens

USAID will improve the business environment in both entities by strengthening the capacity of the on-line tax e-services in both entities and Brcko District. The goal of this activity is to introduce modern IT solutions which will reduce work loads and burden on tax officials, while resulting in savings in time and money for employers, citizens and Tax Administrations.

FBiH Activities will include:

a. Facilitate data exhange between FBiH TA and FBiH Financial and Information Agency (FIA):

- Analyse and define information and data that needs to be exchanged on the regular basis under and according to specific protocols

- Design and develop software solution that will enable interoperability and data exchange between these two institutions

b. Anlayze the business processes in the FBiH TA to identify weaknesses and recomend solutions:

- Perform a a comprehensive SWOT analysis, to include all phases of revenue collection from tax filing to enforced collection and provide recommendations for improvements

- Based on findings of the SWOT analysis recommend reform of organisational and work procedures in the tax administration for different areas of work, e.g. Inspection, revenue collection, reporting etc.

c. Provide IT support for the further digitization and automatization of business process, more efficient risk based auditing and revenue collection

- Provide upgrades and expand the TA's ADRIS IT system for inspection services

- Enable interoperability and data exchange with the TA's nPIS system for enhanced data exhange

- Develop interactive database of taxpayers that are under investigations or sucbject of criminal investigations andcourt proceedings. Enable interoperability and data exchange with the ADRIS software (possibly develop this as an additional modul to ADRIS system).

RS Activities will include:

- Annual Online Statement: Develop the web-based application that will allow all employees in the Republika Srpska to log on to the Tax Administration’s web site and see all their tax payment and social contribution payment history and records. The Aplication works in real time and must ensure data privacy and cyber security standards. A legislation changes may be needed to enable public access to annual statement data on paid contributions.

- Early warning system in RS to alert TA of non-compliance and failure of businesses to report taxes

- E-tracking of seized assets, tax appeals and law suit cases – develop a database that helps monitor the disputed cases, or the way they are settled so do not get timed out to expiry of statutes of limitation

- Provide additional e-services that will improve business operation of the tax administrations and esy burden on rpivate sector and citizens, including communication tools with the clients

3. Enhance the functionalities of the Unified Collection System (UCS) for registration and collection of social benefits in both entities. The activity is aimed at functional expansion of the existing IT platform for the Unified Collection System. The expansion is required in both BiH entities.

Activities in RS will include:

- Analysis of the current condition and needs for upgrades in RS, including legislative deficiencies and required changes

- Design and implement the IT solutions for improved management and reporting in USC, to address the specific needs and requirements form each of the extra-budgetary funds (pension, health, employment and child protection fund). These are sets of small interventions that are required in USC system to enhance reporting and data exchange between the responsible Tax administration and funds.

Activities in FBiH will include:

- Harmonization of the legal acts regulating registration and aplication process in USC; enhancing process of issuance of certificates and forms by the Tax administration to beneficiaries (businesses and citizens) by further simplification and digitization. Furhther expansion of the USC system with additional modules or development of applications which will be interoperabille with USC

- Further digitization of business processes and services related to USC provided by the tax administration. Introducing electronic submission of social welfare/insurance applications, as well as all electronic reporting on obligations and payments, and other means of enhanced electronic communications with benefitiaries of the system (companies and citizens)

Result 1: Tasks/requirements associated with Base Erosion and Profit Sharing (BEPS) project requirements (Action 13) implemented

Result 2: Reporting on BEPS Country by Country (CbC) implemented Result 3: Specific and general anti-avoidance rules implemented Result 4: Data exhange between FBiH TA and FBiH Financial and Information Agency established Result 5: Additional IT support for the further digitization and automatization of business process impleemnted in Tax Administrations, resulting in reduced time and cost for citizens

A.6 Improved quality of budgeting and public spending

Beneficiary: FBiH & Cantonal Ministries of Finance; Brcko District

Focus of assistance: Public Finance Management/Budget planning/Public expenditures

At the moment, there is a total imbalance between the government’s strategic planning and its spending. BIH’s ability to access EU assistance and funds will be viewed through the country’s quality of economic governance and fiscal management. For the potential member countries, the EU’s enlargement plan requires sound fiscal discipline and management that provides assurance for strong economic governance that can manage the EU accession funds, such as the IPA. Essentially, this boils down to proving that your country is capable and ready to manage the accession funds in responsible and transparent manner, in order to be able to manage the large budgets associated with the full EU member-countries. The bottom line is that BiH needs to upgrade the quality of its spending, based on the strategic prioritizing and performance-based evaluation of results.

Activities will include:

- Evaluate progress made by USAID and EU-funded activities in terms of strategy and methodology for program and performance budgeting

- Coordinate its workplan and actions with the EU, and relevant Ministries of Finance which will be in focus for USAID’s assistance

- Provide training on program and performance budgeting for cantonal budget users

- Adjust and deploy the software application for program& performance (P&P) budgeting, which will be developed under the FINRA for Sarajevo Canton, to other FBIH Cantonal MOFs, and Brcko District, integrated in the e-budget software

- Work with the relevant Ministries of Finance to create spending programs; Work with MOFs and budget users to design and approve the planned results, and to determine measurable performance indicators for each budget user

Result 1: Cantonal budget users familiar with program and performance budgeting Result 2: Software solution for P&P budgeting deployed in e-budget software in all cantons

Result 3: Spending programs developed in accordance with strategy and methodology; results and indicators developed for all budget users.

Monitoring, Evaluation, and Learning (MEL) Monitoring and evaluation of performance and impact will be a collaborative process with the participation of the project implementer(s), USAID, and the third party (MEL contractor). USAID will conduct a third-party performance evaluation for this award. The evaluation will be conducted to evaluate activity performance and to ensure that the approach is relevant to the current context.

USAID will monitor the impact using the approved project-level (see attached Annex X) logical framework that provided basic guidance for project monitoring and evaluation. For the FITRA Activity, Project Design Team in cooperation with a third party contracted under the M&E award will develop an activity-specific indicator named Economic Governance Index (EGI), and the self-assessment questionnaire through collaborative work with stakeholders and targeted government institutions.

These indicators will be tailored to aggregate and analyze outputs from the individual sub-activities implemented under this reform and place them in a context of the overall achievement towards the DO Purpose and Goal. The overall EGI indicator will have to provide an overall review of the achieved improvements in fiscal efficiency, improved compliance in revenue collection, and improved business environment in terms of reduction of cost and time to operate a business, while the self-assessment questioner will measure and record the perception of the stakeholders on the progress achieved towards meeting financial stability requirements. The minimum agreed number of measurable outputs that will be collected by the implementer of this activity, aggregated and combined by the third-party M&E contractor in this process are listed below:

Assistance for improved fiscal planning and analysis

1. # of macro-econometric and micro models implemented at State and the level of the entities.

2. Dynamic and behavioral models introduced in economic forecasting in BIH, at different levels of the government

Strengthening of the FBiH and Republika Srpska Health Sector Treasury Systems

1. Number of health sector institutions in the FBiH included in a real-time treasury system

2. #of additional health sector budget users in RS included in the RS Treasury System

Improved business environment in BiH 1. # of nuisance fees eliminated /reduced in both entities and BD

2. Cost and time for business operations in BiH reduced

Government debt management strengthened

1. Number of procedures/regulations /IT systems introduced

Improved tax compliance 1. # of requirements associated with Base Erosion and Profit Sharing (BEPS) project requirements (Action 13) implemented

2. # of specific and general anti-avoidance rules implemented

3. Data exhange between FBiH TA and FBiH Financial and Information Agency established

4. # of IT solutions and upgrades impleemnted in Tax Administrations

5. Amount of revenue collected as direct result of USAID compliance initiatives

Improved budgeting and public spending 1. # of software modules for P&P budgeting deployed in e-budget software in cantons (1-10)

2. # of spending programs developed in accordance with strategy and methodology

The Contractor shall propose an M&E plan that will include all indicators necessary for activity monitoring. The M&E plan shall include baseline data, and clear targets throughout the life of activity.

Also, the Contractor shall develop a Performance Indicator Sheet (PIRS) for each indicator in the M&E plan (PIRS template to be provided by USAID/BiH).

The last stage will be the learning process: This is often omitted because organizations have not adopted monitoring and evaluation as a way of evolving, and M&E is often done internally by the missions or projects. Since this is not the case with the FITRA, (as described above, the third party will be aggregating, analyzing and interpreting the measurable outputs), we can stipulate that the M&E results will be used for learning purposes. The outputs and milestones that will be defined in the work-plan and measured continuously during the implementation will be used for adjusting purposes during the project cycle in response to ongoing events.

Sustainability Analysis

To address the sustainability issue in a broad context, in order to protect the USG investment in the targeted sectors by ensuring permanence of the implemented reforms, EDO decided to design its activities around the relevant recommendations prescribed in the EU accession documents for BiH.

These reforms are required for EU accession, so their sustainability is guaranteed by the strict EU conditionality and driven by the country’s strong commitment and keenness to join the EU. USAID also consulted the recommendations for BiH prescribed by the International Monetary Fund and the World Bank.

In order to verify the importance of the activities described in this PAD, USAID had consultations with host government officials during the concept and project design phases. Most of the activities proposed in this PAD were recommended by the relevant host government officials, or the local authorities confirmed their interest in the reforms during the consultations. In order to create a sense of ownership with the host government, USAID will include economic governance authorities in all phases of the project implementation. USAID/EDO’s technical team plans to identify champions for each of the proposed activities/reforms. These champions may include entire governmental agencies that can carry out the burden of implementation, or individuals from the government that have authority to make changes, NGOs, political parties etc. EDO plans to develop strong cooperation in the form of official coordinating/implementing bodies/workgroups that will include USG agencies but also the other donors and local partners. This broad inclusion of all stakeholders in all phases of planning and implementation was a key ingredient for EDO’s achievements and successes in a policy arena to date.

EDO also anticipates that most of hardware and software under the project will be procured locally or in US, but extensive knowledge and understanding of the EU PFM standards and regulations may be required during the implementation. Therefore, EDO will be applying the geo 935 code, to ensure adequate assistance id provided to the beneficiaries. Furthermore, to ensure appropriate technical skills and transfer of knowledge related to new ICT systems and databases, EDO will explore and insist on maximum engagement of the local ICT consulting companies, and full participation of the beneficiaries/recipients in all phases of the system(s) development.

The local partners and beneficiaries are willing and ready to accept the transfer of the hardware and software that will be provided under this project. All partners confirmed that they will cover the costs associated with maintenance and upgrades of the systems provided under this project, including the software licenses. To verify this, USAID plans to sign a Memorandum of Understanding with the relevant governments and governmental institutions which will specify the roles and responsibilities of USAID and the host government beneficiaries, including training, maintenance, renewal of licenses and warranties. Further, USAID plans to utilize the existing agreements that both entity governments have already signed with the major IT providers, such as Microsoft Inc. These existing Microsoft Products and Services Agreements (MPSA) for entity governments consolidate purchasing of Microsoft cloud services, software, and Microsoft Software Assurance. These are commitment-based licensing agreements for the governments, which enable governments to use Microsoft products. These are already existing agreements.

All activities that are described in this PAD have a strong capacity building component that anticipates extensive training and transfer of knowledge to the final beneficiaries.

Environmental Analysis

As provided in USAID regulation 22 CFR 216 Environmental Procedures, all activities under the Fiscal reform fall under the categorical exclusion provided in Sections 216.2(c)(1)(i) and (c)(2)(i), for training and technical assistance, as they will not result in adverse environmental impacts. An Initial Environmental Examination (IEE) Amendment for PAD 2.2 level, recommending Categorical Exclusion (CE) for all fiscal activities was approved by the Bureau Environmental Officer (BEO) on October 02, 2018. The valid IEE AMD covers this activity until 09/30/2022. All components of this activity are categorically excluded from further environmental review.

Gender Analysis

All activity components will follow the applicable recommendations from 2019 Gender Assessment. To ensure gender equality the implementers will be asked to ensure gender balanced representation and participation in policy-making processes. The Project Manager and COR should insist on improving the socio-economic situation of women when analyzing and drafting regulations/policies. Also, Project Manager/COR shall ensure gender balanced participation in all USAID funded capacity building events, trainings, technical assistance programs, study-tours etc.

The applicable recommendations are summarized below:

• Extending the set of data for gender to static and dynamic models to simulate fiscal policy impact analysis separately for women, men and the younger population

• Through public finance support consider integrating gender-responsive budgeting capacities, especially on the public revenue side of budgets

• Require all implementing partners to collect and report gender-disaggregated data.

• Monitor work plans for consistency with gender considerations in proposals.

• Continue to monitor gender components in evaluation criteria in USAID’s procurement processes.

• Improve gender statements in activity approval documents. Ensure that no new activity documents are approved without an adequate gender statement.

• Strengthen gender language in contracts/grants/ cooperative agreements.

Gender and Disability Considerations

Gender Considerations

Throughout its work, USAID aims to integrate a gender perspective that identifies and addresses the differential impact of development on women and men, as well as other groups such as the LGBTI community. As a policy, USAID strives to promote equality, in which all people have equal opportunity to benefit from and contribute to economic, social, cultural, and political development; enjoy socially valued resources and rewards; and realize their human rights. Ultimately, the goal of development programs is to achieve healthy outcomes and transform norms towards greater equality.

USAID requires that all activities that the Agency supports fully address gender considerations, ensuring that both men and women benefit from USAID support and that gender awareness is a built-in component of a project's activities. A commitment to advance gender equality and to pursue gender as a key development issue should be fully reflected as an element of the statement of work or program description.

Disability Considerations

USAID has a priority to help underserved groups, including people with disabilities. According to the United Nations Convention on the Rights of People with Disabilities, a person with a disability is defined as someone who has long term physical, mental, and intellectual or sensory impairments which, in interaction with various barriers, may hinder their full and effective participation in society on an equal basis with others.

Under this award, every effort will be made to accommodate the needs of people with disabilities.

Furthermore, the offeror shall include a disability inclusion plan specifically delineating how the project will address barriers for people with disabilities relevant to the project and ensure equal access and disability inclusive development practices.

Gender Performance Monitoring and Evaluation:

There are different gender analysis frameworks and there is no one framework that has been adopted as the standard USAID approach. The offeror shall describe proposed data collection and verification strategies to ensure reliability and accuracy of progress towards expected results related to gender. In all cases the Contractor will be encouraged to collaborate with relevant stakeholders in monitoring efforts to assure that monitoring and evaluation systems are as cost-effective as possible. Most gender analysis frameworks involve collecting quantitative and qualitative information in the following areas:

• Laws, Policies, Regulations and Institutional Practices

• Cultural Norms and Beliefs

• Gender Roles and Responsibilities

• Access to and Control…