Attachment7_IEE Tax Reform Project.pdf

DCN: 2011-ARM-004

Armenia / META IEE 1

U.S. Agency for International Development

REQUEST FOR CATEGORICAL EXCLUSION

MODERNIZATION AND ENHANCEMENT OF TAX ADMINISTRATION

PROGRAM AND ACTIVITY DATA

PROJECT NAME: Modernization and Enhancement of Tax Administra-tion (META)

ASSISTANCE OBJECTIVE: More competitive and diversified private sector

PROGRAM AREA: Macroeconomic Foundation for Growth; Program Ar-ea 4.1; Program Element 4.1.1 Fiscal Policy

COUNTRY: Armenia

ORIGINATING OFFICE: Economic Growth Office

DATE: April 12, 2011

IEE AMENDMENT: Yes No

DCN OF ORIGINAL IEE:

PURPOSE OF AMENDMENT:

IMPLEMENTATION START: FY 2011

IMPLEMENTATION END: FY 2013

LOP AMOUNT: $2,500,000

AMENDMENT FUNDING AMOUNT:

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 (check only one—the highest level action):

Categorical Exclusion: Positive Determination:

Negative Determination: Deferral:

Neg. Deter. with Conditions: Exemption:

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 international comparisons of the business environment. In the latest installment of the annual Doing Business exer-akarapetyan Typewritten Text akarapetyan Typewritten Text akarapetyan Typewritten Text Attachment 7

Armenia / META IEE 2 cise 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 problems 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 pay-ments 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 re-cent “tax gap” studies, a 2007 paper by the IMF concluded that the gap between potential and realized tax revenues might be as high as 6 percent or more of GDP. Recent reports, though, suggest that Ar-menia’s ratio may have been increasing. Even so, the low exploitation of the tax potential of the econ-omy 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 reimbursement for ex-porters.

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 com-petitive 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 ef-ficient 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 function. It ties in with tax policy, legislation and regulations. At long last, it appears that these reforms have be-gun 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 of-ten demands policy changes to provide the legal basis for certain options, or to remove legal and regu-latory barriers that hamper the adoption and of implementation of needed reforms.

The Modernization and Enhancement of Tax Administration (META) will support efforts to stream-line the interface between the taxpaying public, in particular businesses, and the tax authorities. Build-ing on improvements in the capacities of the SRC, such as the reinforcement of IT equipment and software, the project will focus more on the “demand side” of the process, ensuring that taxpayer views are reflected in policy decisions. The goal for the proposed project is to improve Armenia’s business climate for a more competitive economy. The principal objective is to make it easier for business and individual taxpayers to understand and comply with tax regulations.

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

• Electronic services. Reducing the compliance burden on taxpayers will require further stream-lining of the process of filing tax returns, paying taxes, and monitoring their own tax status. The

Armenia / META IEE 3 expected results here include (1) the expansion of e-filing to cover more forms and more taxpay-ers, (2) improved communications between the tax authorities and taxpayers, such as direct ac-cess to their own tax records and the ability to update them on-line, e-notifications and e-reminders, (3) the introduction of e-payment services, and (4) full implementation of risk-based audit and automated VAT reimbursement for exporters.

• Taxpayer services: The focus under this element is to expand access to service centers for tax-payers around the country, and to introduce protocols and procedures that improve the reliability of advice furnished by these centers. This element may also include support for the establishment of a taxpayer call center, which is currently included in a World Bank loan in preparation, the Public Finance Management – Revenue Administration Reform Project (PFM-RAP).

• Appeals, advocacy and policy: The appeals function has now been located in the Ministry of Finance, which lacks the capacity to handle it. Under this element, expected results focus on the development and implementation of a sound appeals procedure, including the option of electron-ically tracking appeals stats and any resulting refunds. The Ministry of Finance needs additional tools, such as microsimulation models for assessing options in tax and tax administration policy.

Finally, the META project will also emphasize greater participation by taxpayers in decisions on tax administration policy, including the development of a taxpayer forum, and exploration of the establishment of a Tax Ombudsman office.

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 country, 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 Vanad-zor.

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 environ-mental policies. If the opening of the policy process to broader participation brings in civil service or-ganizations with an environmental agenda, that situation may change. However, these conjectures are speculative at this point.

Armenia / META IEE 4

D. EVALUATION OF ACTIVITY WITH RESPECT TO ENVIRONMENTAL

IMPACT POTENTIAL AND IDENTIFICATION OF MITIGATION

MEASURES

Expected results area 1 – Improvement of electronic means to streamline taxpayer-tax authority inter-actions. This results area includes the expansion of e-filing, improved communications between the tax authorities and taxpayers, e-payment, and follow-up on risk-based audit and VAT reimbursement for exporters.

Table 1 Illustrative activities regarding Results Area One – Improvement of electronic means to streamline taxpayer-tax authority interactions.

Illustrative Activities Potential Impacts 22 CFR 216 Environmental

Determination

Increasing the document coverage of e—filing

Assisting in expanding the range of taxpayers involved

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities directly affecting the environment (e.g.

construction of facilities)

Technical Assistance

Development of protocols and software solutions to facilitate tax-payer access to their records

Development of procedures and mechanisms to ensure consistent tax-payer notifications/reminders, etc.

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities directly affecting the environment (e.g.

construction of facilities)

Design of a system to handle e-payment procedures

Negotiations with prospective e-payment providers and banks

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities directly affecting the environment (e.g.

construction of facilities)

Training of the staff of SRC and lo-cal tax inspectorates in the use of risk-based audit systems

Training of the staff of SRC and local tax inspectorates regarding pro-cedures for automated VAT refunds for exporters

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities

Armenia / META IEE 5

Expected results area 2 – Enhance access to and reliability of advisory and other services provided to taxpayers.

Table 2 Illustrative activities regarding Results Area Two – Improvement of taxpayer services

Illustrative Activities Potential Impacts 22 CFR 216 Environmental

Determination

Continued training for the staff of taxpayer service centers Training for staff operating the taxpayer services call centers

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities directly affecting the environment (e.g.

construction of facilities)

• Development of protocols and procedures for improving the reliability of advice furnished by staff of the taxpayer services centers.

• Development of manuals and other materials for the staff of the taxpayer services call center (as needed)

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities

Expected results area 3 – Improvements in the appeals procedure and the tax and tax administration policy determination, including stronger advocacy mechanisms for taxpayers.

Table 3 Illustrative activities regarding Results Area Three – Improved appeals and policy advoca-cy mechanisms and procedures.

Illustrative Activities Potential Impacts 22 CFR 216 Environmental Determi-nation Development of a standard appeals procedure for the Ministry of Finance.

Preparation of Taxpayer 3 plug-ins for enabling e-appeals.

Development of an appropri-ate advocacy system for taxpayer participation in policy articulation and vetting.

Exploration of the feasibility of setting up a Tax Ombudsman of-fice.

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities directly affecting the environment (e.g.

construction of facilities)

Training of staff of both the Ministry of Finance and SRC in the new appeals procedures.

Training for taxpayer advocacy advisers in tax (administration) policy appraisal

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities

Startup and subsequent work-shops for taxpayer representatives re-garding tax policy appraisal and advoca-cy.

None expected

216.2c(2)(i) Education, technical assis-tance, or training programs except to the extent such programs include activities

Armenia / META IEE 6

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;

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’.

Armenia / META IEE 7

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 AOTR to keep the MEO and BEO informed of any new information or changes in the activity that might require revi-sion of the IEE.

I. RECOMMENDED ENVIRONMENTAL THRESHOLD DECISION

A categorical exclusion is recommended for the following activities:

Illustrative activities 1, 2 and 3 are recommended for a categorical exclusion pursuant to 216.2c(2)(i) Education, technical assistance, or training programs except to the extent such programs include ac-tivities directly affecting the environment (e.g. construction of facilities).

Armenia / META IEE 8

USAID Approval of Recommended Environmental Threshold Decision:

Approval:

Mission Director/JCheema ate

Approval:

Preparer/UErnst

Date

Approval:

Mission Environmental Officer/MVardanyan

Date

Concurrence:

Barbara R. Britton

E&E Bureau Environmental Officer

Date

Distribution:

IEE File

Mission Environmental Officer