FOREIGN FINANCING PROJECTS MANAGEMENT CENTRE

TAX ADMINISTRATION MODERNIZATION PROJECT

CREDIT No. 5114-AM

SPECIAL PURPOSE FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITORS' REPORT

For the year ended 31 December 2016

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CONTENTS

Independent Auditors' Report 3

Statement of Project Sources and Uses of Funds 5

Statement of Uses of Funds by Project Activity 8

Notes to the Special Purpose Financial Statements 9

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INDEPENDENT AUDITORS' REPORT

To the Director of Foreign Financing Projects Management Centre

Opinion

We have audited the accompanying special purpose financial statements of the Tax Administration,Modernization Project (hereinafter the TAMP) implemented by Foreign Financing ProjectsManagement Center State Institution (hereinafter the FFPMC), which comprise Statement of ProjectSources and Uses of Funds, Statement of Uses of Funds by Project Activity, Reconciliation Statementof Withdrawal Applications, Statement of Designated Account and Government Co-financed Accountfor the year ended 31 December 2016, and Statement of Financial Position as at 31 December 2016and a summary of significant accounting policies and other explanatory notes.

In our opinion, the accompanying special purpose financial statements present fairly in all materialrespects the project sources and uses of funds, uses of funds by project activity and its cash flows forthe year ended 31 December 2016 in accordance with the cash basis of accounting in line withInternational Public Sector Accounting Standard (IPSAS): Financial Reporting under the Cash Basisof Accounting and Financing Agreement between the Republic of Armenia and InternationalDevelopment Association dated July 9, 2012 (Credit #5114-AM).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Ourresponsibilities under those standards are further described in the Auditors Responsibilities for theAudit of the Special Pinpose Financial Statements section of our report. We are independent of theUnion in accordance with the International Ethics Standards Board for Accountants' Code of Ethicsfor Professional Accountants (IESBA Code) and we have fulfilled our other ethical responsibilities maccordance with these requirements. We believe that the audit evidence we have obtained is sufficientappropriate to provide a basis for our opinion.

Emphasis ofAatter - Restriction on Distribution or Use

We draw attention to Note 2(a) to the special purpose financial statements, which describes the basisof accounting. The special purpose financial statements have been prepared for providing informationto the Government of the Republic of Armenia and the International Development Association toassist them in evaluating the TAMP's implementation. As a result, the special purpose financialstatements may not be suitable for another purpose. Our opinion is not modified in respect of thismatter.

Key A udi Matters

Key audit matters are those matters that, in our professional judgment, were of most significance inour audit of the special purpose financial statements of the current period. These matters wereaddressed in the context of our audit of the special purpose financial statements as a whole, and informing our opinion thereon, and we do not provide a separate opinion on these matters,

Independent Auditors' ReportPage 2

in the scope of implementation of TAMP's objectives, the procurements incurred for receipt ofconsulting services, works and supply of goods amounted to USD 797,421. The procurements shall beperformed in line with applicable procurement guidelines designated by World Bank.

Our audit procedures in this area included, among other:

* Corroborating with management the process of procurement and compliance to applicableprocurement guidelines designated by World Bank;

* Analysing the procurement plan, conditions associated to each procurement, correspondencewith the World Bank, method of procurement and discussing compliance of these conditionsto applicable procurement guidelines designated by World Bank;

* On sample basis, reviewing compliance of procurement packages to applicable procurementguidelines designated by World Bank;

* On sample basis, reviewing the documentation supporting the procurement as well asavailability of deliverables designated by the procurement contracts.

As result of our audit procedures, we concluded that procurements were performed in line with

applicable procurement guidelines designated by World Bank.

Responsibilities of Management and Those Charged with Governance for the Special PwnposeFinancial Statenwts

Management is responsible for the preparation and fair presentation of the special purpose financialstatements in accordance with accrual basis of accounting as described in Note 2(a), and for suchinternal control as management determine is necessary to enable the preparation of the special purposefimancial statements that are free from material misstatement whether due to fraud or error.

In preparing the special purpose financial statements, management is responsible for assessing theTAMP's ability to continue as a going concern, disclosing, as applicable, matters related to goingconcern and using the going concern basis of accounting unless management either intends to liquidatethe FFPMC or to cease operations of TAMP, or has no realistic alternative but to do so.

Auditor's Responsibilities for the Audit of the Special Pupose Financial Statements

Our objectives are to obtain reasonable assurance about whether the special purpose financialstatements as a whole are free from material misstatement, whether due to fraud or error, and to issuean auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but isnot a guarantee that an audit conducted in accordance with ISAs will always detect a materialmisstatement when it exists. Misstatements can arise from fraud or error and are considered materialif, individually or in the aggregate, they could reasonably be expected to influence the economicdecisions of users taken on the basis of these special purpose financial statements.

Davit Yedigaryan Lilit MinasyanDirector Manager, Audit Department

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Tax Administration Aloderni-ation ProjectNotes to the Special Purpose Financial Statemenis

for the year ended 31 December 2016

1 Background

(a) Organisation and operations

The Foreign Financing Projects Management Centre (FFPMC) State Institution was established byRoA Minister of Economy Decree No. 37, dated 29 March 2000. Within the scope of its operation, theFFPMC is guided by local legal acts and Credit and Grant Agreements, signed between theGovernment of Armenia and the International Development Association (World Bank). The mainobjective of operation of FFPMC is to implement projects on the account of credit and grant proceedsallocated to the Republic of Armenia by the World Bank.

According to the financing agreement concluded between the International Development Associationand Republic of Armenia dated 9 July 2012 (Financing Agreement) a credit in an amount equivalent toseven million eight hundred thousand Special Drawing Rights (SDR 7,800,000) was extended for theimplementation of Tax Administration Modernization Project to finance procurement of goods,consultants' services and incremental operating expenses.

Tax consequences arising from the procured goods, consultants' services and incurred operatingexpenses are paid form the proceeds of the co-financing received from the Government of theRepublic of Armenia. Total amount of Government co-financing approximates to USD 3,100,000.

The Project's objective is to modernize Armenia's tax administration in order to:

* Increase voluntary tax compliance,* Reduce tax evasion,* Reduce compliance costs,* Increase administrative efficiency.

The Project consists of the following parts:

* Part A: Institutional Development and Change ManagementProvision of consultants' services to the Ministry of Finance (former State RevenueCommittee for Tax) of the Republic of Armenia workflow analysis and developingorganizational restructuring plan, and purchase of equipment for tax administration centers,

* Part B: Strengthened OperationsProvision of consultants' services to the Ministry of Finance, and goods and informationtechnology (IT) systems and software to tax service centers providing range of services totaxpayers,

* Part C: IT Infrastructure and Systems ModernizationProvision of goods to the Ministry of Finance to upgrade its Information and CommunicationTechnology to develop a comprehensive and integrated tax management system,

* Part D: Project ManagementProvision of Operating Costs and consultants' services to FFPMC and Ministry of Finance toassist in the Project implementation and management, and provision of technical assistance,including Training.

Closing date of the Project was revised from 30 April 2017 to 31 December 2017 in November 2015.

. -...... ......................

Tav Administration Modernization ProjectNotes to the Special Purpose Financial Statenients

for the year ended 31 December 2016

2 Basis of preparation

(a) Statement of compliance

The special purpose financial statements are prepared in accordance with the cash basis of accountingin line with the International Public Sector Accounting Standard (IPSAS): Financial Reporting underthe Cash Basis of the Accounting.

The special purpose project financial statements consist of:

- Project Sources and Uses of Funds,- Uses of Funds by Project Activity,- Statement of Financial Position,- Statement of Designated Accounts,- Statement of Project Account.

Cash basis of accounting recognizes transactions and other events only when cash is received or paid.

(b) Reporting currency

The reporting currency of special purpose financial statements is US dollar (USD). All financialinformation presented in USD has been rounded to the nearest USD.

3 Significant accounting policies

(a) Foreign currency transactions

In the scope of the Project IDA makes disbursements in USD on the designated account90000090345 1 for the project. Payment of eligible and accepted expenditires (goods, services andother) should be made by the FFPMC out of designated account, or FFPMC will submit withdrawalapplications to the Bank for payments to contractors, suppliers and consultants directly from loanaccount. FFPMC converts the amounts received and transfers to contractors, suppliers and consultants.

The outstanding balances of the project account are translated to USD based on the USD exchangerate defined by the Central Bank of the Republic of Armenia as at 31 December 2016 equaling toAMD 483.94.

(b) Taxes

All the applicable tax liabilities are calculated and paid in accordance to tax regulations of theRepublic of Armenia.

(c) Funds for the Project

Funds for the Project are received from the International Development Association and fromGovernment of Armenia.

Tax Administraion Modernization ProjectNotes to the Special Purpose Financial Statements

for the year ended 31 December 2016

4 Reconciliation statement of withdrawal applications

Withdrawal Amount Amount Paid 2016Application Application Type Requested by by World DifferenceReference FFPMC Bank

USD USD USDAdvance to Designated

II DA Account 292,124 292,124Advance to Designated

12 DA Account 240,118 240,118 -532,242 532,242 -

2015Withdrawal Amount Amount PaidApplication Application Type Requested by by World DifferenceReference FFPMC Bank

USD USD USDReplenishment to

6 DA Designated Account 274,462 274,462Advance to Designated

8 DA Account 680,308 680,308Direct Payment under

7 DP Category 1 393,788 393,788Direct Payment under

9 DP Category 1 860,096 860,096Direct Payment under

10 DP Category I 415,107 415,107 -2,623,761 2,623,761 -

Tax Administration Modernization ProjecNotes to the Special Purpose Financial Statements

for the Year ended 31 December 2016

5 Statement of Designated Account and Government Co-financed Account

USD 2016 2015

Opening balance 607,876 147.666Add:Advance received from World Bank during the current period 532,242 954,770Present outstanding amount advanced to the designated account 1,140,118 1,102,436Closing balance carried fonvard to next period 482,848 607,876Add: Amount of eligible expenditures paid during the current period 657,270 494,560Total advance accounted for 1,140,118 1,102,436

USD 2016 2015

Opening balance - 263,217Add:Government co-financing during the current period 198,698 315,688Foreign exchange difference 895 (1,317)Present outstanding amount advanced to project account 199,593 577,588Closing balance carried fonvard to next period (Note 1) 3,623 -Add: Amount of eligible expenditures paid during the current period 195,970 577,588Total advance accounted for 199,593 577,588

7.

Tax A din inistration Modernization ProjectNotes to the Special Pinpose Financial Statements

for the Year ended 31 December 2016

6 Statement of Financial Position

USD 2016 2015ASSETSCurrent assetsCash and cash equivilentsGovernment co-financing account for credit 3,623 -Designated Account for credit (World Bank financing) 482,848 607,876Total current assets 486,471 607,876

Non-current assetsCunlative Project ExpeniletureGovernment co-financed cumulative expenditure 1,355,521 1,159,551Credit financed cumulative expenditure 6,183,489 5,526,219Total non-current assets 7,539,010 6,685,770Total assets 8,025,481 7,293,646

FUNDSProject financingGovernment co-financing account for credit 1,374,671 1,175,972Designated Account for credit (World Bank financing) 6,666,338 6,134,096Total funds 8,041,009 7,310,068

Foreign exchange differenceGovernment co-financing account for credit (15,528) (16,422)Designated Account for credit (World Bank financing)

Total foreign exchange difference (15,528) (16,422)

Total net assets and liabilities 8,025,481 7,293,646