Attachment_C_IEE_Mod2_SOL_TRP.pdf

DCN: 2012-ARM-001

Modernization and Enhancement of Tax Administration/Request for Exclusion 1

U.S. Agency for International Development

REQUEST FOR CATEGORICAL EXCLUSION (AMENDMENT 1)

MODERNIZATION AND ENHANCEMENT OF TAX ADMINISTRATION

PROGRAM AND ACTIVITY DATA

PROJECT NAME: Tax Reform Project

ASSISTANCE OBJECTIVE: More Competitive and Diversified Private Sector

PROGRAM AREA: Macroeconomic Foundation for Growth; Program Area 4.1; Program Element 4.1.1 Fiscal Policy

COUNTRY: Armenia

ORIGINATING OFFICE: Economic Growth Office

DATE: December 30, 2011

IEE AMENDMENT: Yes No

DCN OF ORIGINAL IEE: DCN: 2011-ARM-004

PURPOSE OF AMENDMENT:

IMPLEMENTATION START: FY 2011

IMPLEMENTATION END: FY 2013

LOP AMOUNT: $7,000,000

AMENDMENT FUNDING AMOUNT: $ 4,500,000

CONTRACT/AWARD # IF KNOWN:

Environmental Media and/or Human Health Potentially Impacted (check all that apply):

None Air Water Land Biodiversity Human health Other

Environmental Action Recommended:

Categorical Exclusion: Positive Determination:

Negative Determination: Deferral:

Neg. Deter. with Conditions: Exemption:

akarapetyan Typewritten Text Attachment C akarapetyan Typewritten Text SOL-111-12-000001, Amendment 2

USAID | Armenia – TRP Amendment 1 2

A. SUMMARY OF FINDINGS:

A categorical exclusion is recommended for the all activities illustrated below pursuant to 22 CFR 216.2(c)(2)(i) for education, technical assistance, or training programs except to the extent such pro-grams include activities directly affecting the environment (such as construction of facilities, etc).

B. BACKGROUND AND ACTIVITY/PROGRAM DESCRIPTION

Tax regulations and administration are regularly cited as one of the worst aspects of the Armenian economy’s business environment. Overall, Armenia actually performs reasonably well in interna-tional comparisons of the business environment. In the latest installment of the annual Doing Busi-ness exercise by the World Bank/IFC, Armenia ranks just below the top quartile of countries (#48 out of 183) in terms of the average measure of “Ease of doing business.” However, tax-related prob-lems drag down its business climate performance. The country is ranked #159 on the “Paying taxes” indicator (87th percentile). If both the number of payments—essentially by moving from monthly to quarterly payments for VAT, corporate income tax, and social security contributions—and the total time required were cut in half, Armenia would move up to rank #109 on “Paying taxes,” and to #40 in the overall measure of “Ease of doing business.”

While imposing excessive compliance burdens, Armenia’s revenue collections have been lower than expected. According to the USAID tax collections database, the tax-to-GDP ratio was 17.4 percent, compared to 23.8 percent for Georgia and Russia, or 32.2 percent for Moldova. While there are no recent “tax gap” studies, a 2007 paper by the IMF concluded that the gap between potential and real-ized tax revenues might be as high as 6 percent or more of GDP. Recent reports, though, suggest that Armenia’s ratio may have been increasing. Even so, the low exploitation of the tax potential of the economy has also led to problems in government cash management. These problems in turn have created pressures for advance payment of taxes and delays in reimbursement, especially of value added taxes for exporters, undermining the competitiveness of the economy in international markets.

The SRC, with support from USAID, is now moving to a system that ensures faster VAT reim-bursement for exporters.

The quest for a better business climate in Armenia therefore hinges on visible improvements in the tax regime and revenue collections systems. Rapid reforms are critical to overcome the barriers to a competitive private sector imposed by well-known weaknesses in regulations and procedures. In the area of tax administration, the Government has launched a serious effort to restyle the SRC into a more efficient and more “user-friendly” operation, adopting the myriad of changes needed. There is also a growing recognition that tax administration policy is more than a merely administrative func-tion. It ties in with tax policy, legislation and regulations. At long last, it appears that these reforms have begun to gather momentum.

As part of drive toward better performance in tax administration, a number of detailed diagnostics have been prepared, including the KPMG reengineering study, the continuing design work for the Taxpayer 3 system, and design and related recommendations developed under USAID’s current TASTAR project. These diagnostics and design studies provide the framework for clearly delineated interventions that produce results. The TASTAR experience has shown that a focus on specific ele-ments of the system has achieved real progress in moving to risk-based audit selection, accelerated VAT reimbursements, and better taxpayer services. However, improving administrative functions

USAID | Armenia – TRP Amendment 1 3 often demands policy changes to provide the legal basis for certain options, or to remove legal and regulatory barriers that hamper the adoption and of implementation of needed reforms.

The Project will build upon on the results and lessons learned from the USAID TASTAR project and will be implemented in close collaboration with the World Bank Public Expenditure Management and Tax Administration Project (PEMTAM) (see more detailed Project Implementation Description under attachment I) and the IMF. The USAID and World Bank projects will work in tandem:

USAID will provide technical assistance and the World Bank will provide commodities and capital goods.

Technical assistance will fall into two major categories: tax policy and appeals process capacity building at the Ministry of Finance and tax administration capacity building at the State Revenue Committee. The Project will also support improving the relationship between tax authorities and tax payers.

The expected results for the proposed activities can be grouped into three major components:

Component 1: Human and Institutional Capacity Building at the Ministry of Finance Component 2: Human and Institutional Capacity Building at the State Revenue Com-mittee Component 3: Improved Discourse on Tax Policy and Administration

The recently initiated pension reform launched by the GOAM brought about the need for introduc-tion of personified record keeping system for unified income tax and pension contributions, which will require changes in the tax system, including modification of the automated tax administration system at State Revenue Committee. After January 1, 2013, instead of the existing income tax and mandatory social security contribution, one unified income tax will be applied. To ensure regular functioning of the pay-as-you-go and mandatory funded pension components, it is necessary to de-velop and implement a unified income tax and funded contribution personified recordkeeping system in the SRC, which will allow ensuring the collection, personified recordkeeping and supervision of income tax and mandatory funded contribution, transfer of mandatory funded contributions to the Registerkeeper of participants.

The uniqueness of unified income tax and funded contribution personified recordkeeping system is that it is not envisaged to be a new independent system at the SRC, but rather it will be one of the components of the information system “Taxpayer 3” operating in SRC and will function under one umbrella, as the income tax is only one of the tax types in RA, thus electronic submission of unified income tax and funded contribution personified recordkeeping system will mean adding another form to the current 27 forms. In this regard, the system that is being developed should be fully inte-grated with SRC’s “Taxpayer 3” electronic management system and should be in line with SRC’s ICT policy and standards.

This undertaking will be addressed under the project Component 2, as it is logically tied to the es-sence of enhancing the electronic/IT system under for tax administration at SRC, the co-called “Taxpayer 3”.

In particular the following will do done in in the framework of this amendment under the compo-nent 2:

Personified Record Keeping System. Implementation of the unified income tax and pension contribution personified record keeping system that is needed to implement the multi-pillar pen-

USAID | Armenia – TRP Amendment 1 4 sion reform. The expected results are a) finalized the design and software specifications for the System; b) prerequisites for implementation of the System are in place, including: summary of best international practices in this area and gap analysis; c) assessment of IT (hardware, soft-ware) and network connectivity/transmission quality needs, d) design of record keeping, internal controls and accounting systems for the unified tax system; and e) development of relevant training, educational materials to enhance capacity at SRC for implementation of the System.

C. COUNTRY AND ENVIRONMENTAL INFORMATION (BASELINE IN-

FORMATION)

Country Information (Baseline Information on the Need for the Project)

The Republic of Armenia is a relatively small, mountainous, land-locked country with a total area of 29,740 sq. km., located in the south-central Caucasus region of Eurasia. The population of the coun-try, which is overwhelmingly ethnic Armenian, is around 3.0 million. Most of population is found in urban centers, the greatest proportion of which live in the three major cities –Yerevan, Gyumri and Vanadzor.

Baseline Environmental Information

Environmental Context Related to the Project: The Project is designed to improve the interface be-tween taxpayers and tax authorities. The activities contemplated do not have any impact on the envi-ronment.

Description of Relevant Environmental and Natural Resources Policy, Law and Regulation: There is no relevant legislation addressing any environmental issues related to the improvement of taxpayer services. At present, tax policy and tax administration policy have not been used as tools for envi-ronmental policies. If the opening of the policy process to broader participation brings in civil ser-vice organizations with an environmental agenda, that situation may change. However, these conjec-tures are speculative at this point.

USAID | Armenia – TRP Amendment 1 5

D. EVALUATION OF ACTIVITY WITH RESPECT TO ENVIRONMENTAL IMPACT POTENTIAL AND

IDENTIFICATION OF MITIGATION MEASURES

Expected results area 2 – Human and Institutional Capacity Building at the State Revenue Committee

This result area includes the expansion of e-filing, follow-up on risk-based audit and VAT reimbursement for exporters, which has already granted the categorical exclusion for environmental compliance. The additional task that is included in this area is introduction of personi-fied record keeping of the unified income tax and pension contribution payments system. The relevant illustrative activities are enclosed in the table under the Illustrative Activity 1.

Table 1 Illustrative activities regarding Results Area Two Human and Institutional Capacity Building at SRC

Illustrative Activities Potential Impacts

22 CFR 216 Environmental Determination

Mitigation Measures/Conditions

Technical assistance

Legislative drafting of legis-lative acts and by-laws neces-sary for implementation of the personified record keeping sys-tem

None expected

216.2c(2)(i) Education, technical assistance, or training programs except to the extent such pro-grams include activities directly affecting the envi-ronment (e.g. construction of facilities)

Not applicable

Technical Assistance

Development of protocols and software solutions to facili-tate taxpayer declaration of the unified tax

Development of procedures and mechanisms to ensure smooth testing and piloting of the personified record keeping automated system software

None expected

216.2c(2)(i) Education, technical assistance, or training programs except to the extent such pro-grams include activities directly affecting the envi-ronment (e.g. construction of facilities)

Not applicable

USAID | Armenia – TRP Amendment 1 6

Table 1 Illustrative activities regarding Results Area Two Human and Institutional Capacity Building at SRC

Illustrative Activities Potential Impacts

22 CFR 216 Environmental Determination

Mitigation Measures/Conditions

Technical assistance

Design of a personified record keeping system for unified income tax pay-ment and pension contri-bution system

None expected

216.2c(2)(i) Education, technical assistance, or training programs except to the extent such pro-grams include activities directly affecting the envi-

Training sessions

Training of the staff of SRC and local tax inspec-torates in the use of per-sonified record keeping system for unified tax

Training of the taxpayers on how to submit the electronic declarations.

None expected

216.2c(2)(i) Education, technical assistance, or training programs except to the extent such pro-grams include activities directly affecting the envi-

USAID | Armenia – TRP Amendment 1 7

E. RECOMMENDED ENVIRONMENTAL ACTION

Recommended Environmental Threshold Determination:

Categorical Exclusions:

A categorical exclusion is recommended for the following activities:

A categorical exclusion pursuant to 22 CFR 216.2(c)(2)(i) for education, technical assistance, or training programs except to the extent such programs include activities directly affecting the environment (such as construction of facilities, etc) is recommended for activities under the Components 1, 2 and 3.

Per 22 CFR 216.2(c)(1), neither an IEE nor an EA is required for activities which are deter-mined to fall within one or more of the classes of activities listed in 22 CFR 216.2(c)(2).

F. MANDATORY INCLUSION OF ENVIRONMENTAL COMPLIANCE

REQUIREMENTS IN SOLICITATIONS, AWARDS, BUDGETS AND

WORKPLANS

Appropriate environmental compliance language shall be included in solicitations and awards for this activity.

G. LIMITATIONS OF THE IEE:

This IEE does not cover activities involving:

Classes of actions normally having a significant effect on the environment pursuant to 22 CFR 216.2(d):

o programs of river basin development;

o irrigation and water management;

o Agricultural land leveling o Drainage projects o Large scale agricultural mechanization o New land development o Penetration road building and road improvement o Powerplants;

o Industrial plants o Potable water and sewerage projects

Activities effecting endangered species or introducing exotic species Support to extractive industries (e.g. mining and quarrying).

Support for activities that promote timber harvesting;

USAID | Armenia – TRP Amendment 1 8

Assistance for the procurement (including payment in kind, donations, guarantees of credit) or use (in-cluding handling, transport, fuel for transport, storage, mixing, loading, application, clean up of spray equipment, and disposal) of pesticides or activities involving procurement, transport, use, storage, or disposal of toxic materials. Pesticides cover all insecticides, fungicides, rodenticides, etc. covered un-der FIFRA – ‘Federal Insecticide, Fungicide, and Rodenticide Act’.

Potential activity components dealing with privatization of industrial facilities or infrastructure with heavily polluted property. In such cases, an amendment to the IEE will be required to conduct Envi-ronmental Liability Assessment (ELA) as part of the privatization process.

Procurement or use of genetically modified organisms (GMOs).

Project preparation, project feasibility studies, and infrastructure investments for projects that may have a potentially significant impact on the environment.

Construction, reconstruction, rehabilitation, or renovation work.

Activities involving support to industrial enterprises, and regulatory permitting.

DCA or GDA programs.

Project preparation, project feasibility studies, and infrastructure investments for projects that may have a potentially significant impact on the environment.

Activities involving support to agro-processing, industrial enterprises, and regulatory permit-ting.

New construction.

DCA or GDA programs.

Any of the above actions would require an amendment to the IEE approved by the E&E Bureau Envi-ronmental Officer (EE/BEO).

H. REVISIONS:

Pursuant to 22 CFR 216.3(a)(9), if new information becomes available that indicates that activities covered by the IEE might be considered “major” and their effect “significant,” or if additional activi-ties are proposed that might be considered “major” and their effect “significant,” this recommendation for Categorical Exclusion will be reviewed and, if necessary, revised by the Mission Environmental Officer (MEO) with concurrence by the EE/BEO. It is the responsibility of the USAID COTR to keep the MEO and BEO informed of any new information or changes in the activity that might require revi-sion of the IEE.

USAID | Armenia – TRP Amendment 1 9

I. RECOMMENDED ENVIRONMENTAL THRESHOLD DECISION

A categorical exclusion is recommended for the following activities:

Illustrative activities under expected results area 2 is recommended for a categorical exclusion pursu-ant to 216.2c(2)(i) Education, technical assistance, or training programs except to the extent such pro-grams include activities directly affecting the environment (e.g. construction of facilities).

USAID Approval of Recommended Environmental Threshold Decision:

Approval:

Mission Director/JCheema

Date

Preparer/HBagratunyan

Mission Environmental Officer/MVardanyan

Concurrence:

William Gibson

Acting E&E Bureau Environmental Officer

Distribution:

IEE File

Mission Environmental Officer