IDocument of The World Bank

Report No. 16993-GU

PROJECT APIPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$28.0- MILLION EQUIVALENT

TO THE

REPUBLIlC OF GUATEMALA

FOR

TAX ADMINISTRATION

TECHNICAL ASSISTANCE LOAN

Aniust 4, 1997

Poverty Reduction and Economic Management Central America Department Latin America and the Caribbean Region

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CURRENCY EQUIVALENTS (Exchange Rate Effective August 4, 1997)

Currency Unit = Quetzal (Q) US$1.00 = Q5.98 Q1 =US$0.167

FISCAL YEAR January 1 to December 31

ABBREVIATION AND ACRONYMS

CAS - Country Assistance Strategy CEM - Country Economic Memorandum CQ - Selection Based on Consultant's Qualifications ECU - European Community Unit ESW - Economic Sector Work FARAH - Financial Accounting, Reporting, and Auditing Handbook GANTT - Time Chart GDP - Gross Domestic Product GUA - Guatemala IDA - Institutional Development Agreement IDB - Inter-American Development Bank IFC - International Financial Corporation AIM - International Monetary Fund ISET - Temporary Tax on Gross Earnings ISR - Income Tax NBF - Not Bank Financed NCB - National Competitive Bidding NGO - Non-Governmental Organization PCU - Project Coordination Unit PIP - Project Implementation Plan PIR Public Investment Review PV - Project Value QBS - Quality Based Selection QCBS - Quality and Cost Selection SAT - Superintendency of Tax Administration SOE - Statement of Expenditures TAL - Technical Assistance Loan TOR - Terms of Reference VAT - Value Added Tax USAID - US Agency for International Development

Vice President S.J. Burki Director D. Dowsett-Coirolo Task Manager R. Myers

GUATEMALA

Tax Administration Technical Assistance Loan

TABLE ODF CONTENTS

Project Financing Data ........................ 1 Block 1: Project Description

1. Project development objectives .......................... 2........2 2. Project components .2 3. Benefits and target population ................................ ;. 3 4. Institutional and implementation arrarngements .3

Block 2: Project Rationale

5. CAS objectives supported by the project ................................ 4 6. Main sector issues and Government s1trategy ................................ . . 4 7. Sector issues to be addressed by the project and strategic choices .6 8. Project alternatives considered and reasons for rejection .7 9. Major related projects financed by the Bank and/or other development agencies 7 10. Lessons learned and reflected in the project design .7 11. Indications of borrower commitment amd ownership .8 12. Value added of Bank support .8

Block 3: Summary Project Assessments

13. Economic Assessment .8 14. Financial Assessment .9 15. Technical Assessment ..................... ; 9 16. Institutional Assessment .9 17. Social Assessment ..................... .. 9 18. Environmental Assessment .10 19. Participatory Approach .10 20. Sustainability .10 21. Critical Risks ..................... ; 10 22. Possible Controversial Aspects .11

Block 4: Main Loan Conditions

23. Effectiveness Conditions .12 24. Other ........................... 12

Block 5: Compliance with Bank Policies .12

List of Annexes Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Fiscal Impact Calculation Annex 5: Financial Summary Annex 6: Procurement and Disbursement Arrangements Annex 7: Project Processing Budgets and Schedule Annex 8: Documents in the Project File Annex 9: Statement of Bank Group Operations in Guatemala Annex 10: Guatemala at a Glance

INTERNATIONAL BANK FOR RE:CONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEvELoPmENT ASSOCIATION

Latin America and thie Caribbean Regional Office Central America

Project Appraisal Document

Guatemala Tax Administration Technical Assistance Loan

Date: August 4, 1997 1 ] Draft [X] Final Task Manager. Ronald E. Myers Country Director: Donna Dowsett-Coirolo Project ID: GT-PA-48654 Sector: Public Sector Management Lending Instrument: Technical Assistance Loan PTI: [ Yes [XI No

Project Financing Data X Loan [ Credit I] Guarantee [ Other [Specify]

For Loans/CreditslOthers:

Amount(gUSm/SDR1T:.US$ 28.2 million... ..... ......................................................... ... ............................................................ .................. ............................................................... .............. Proposed Terms: [ Multicurrency X Single currency

Grace period (years): 3 [ Standard Variable X Fixed [ LIBOR-based Years to maturity: 15 Commitment fee: 0.75%

Financing plan (US$m): Source Local Foreign Total

Government 9.2 9.2 IBRD/IDA 15.7 12.5 28.2 USAID Grant 1.5 1.5 IDB 0.5 0.9 1.4 Total 25.4 14.9 40.3 Other Potential Financiers (uropean Union Grant) TBD ................................ ....... .... ...... ....................... ..... .................. .................................................................................. .........

Borrower: Republic of Guatemala Responsible agency(ies): Superintendency of Tax Administration Estimated disbursements (Bank FY/US$M): 1998 1999 2000 2001 2002

Annual 8.0 10.5 6.0 3.0 0.7 Cumulative 8.0 18.5 24.5 27.5 28.2

Expected effectiveness date: December 1, 1997 Expected closing date: March 31, 2002

Block 1: Project Description 1. Project development objectives (see Annex 1 for key performance indicators): The project seeks to assist Guatemala in raising its revenue perfonnance above historically low rates (averaging only between 6 and 9 percent of GDP over the last decade):

(i) improving the effectiveness and efficiency of tax and customs administration through strengthening collection, audit, and enforcement procedures; (ii) increase tax revenues; and (iii) achieving stronger revenue performance is critical in order for Guatemala to increase social sector spending, meet basic infrastructure needs, and implement the December 1996 Peace Accords between the Government and the Union Revolucionaria Nacional de Guatemala (URNG), which ended thirty years of civil war.

Key to the strategy will be the creation of a new institution for internal revenue and customs with operational, financial, and human rcsources management; the strengthening of tax collection and auditing processes; the establishment of taxpayer assistance services; the elimination of loopholes in the law and simplification of norms and procedures; and the introduction of more rigorous cnforcement mechanisms.

Project Appraisal Document Page 2 Country: Guatemala Project Title: Tax Administration Technical Assistance Loan

2. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

Com onent Categorv Cost Incl. % of Contingencies Total

(US$M) 1. Creation of a Superintendency of Tax Administration (SAT): The component Institution 6.5 17 would support the design and development of an operational and financial building independent institution responsible for national internal and customs revenue collection. The assistance would help develop the new organizational structure and management systems, and to address training and professional development needs.

2. Facilitating Taxpayers' Compliance; This component would help identify and operationalize measures to improve voluntary taxpayer compliance through review Institution 11.7 31 and simplification of procedures and modernization of information technology building including tax collection through the banking system; creation of a Special Taxpayers Unit to give priority attention and service to the needs of taxpayers providing the bulk of tax revenues; and by establishing a network of taxpayer services (assistance and grievances) offices to give taxpayers access to recourse and help them understand, and comply with, the tax code.

3. Strengthening Enforcement Mechanisms: This component would finance the carrying out of the review of the legal and regulatory framework applicable to tax Institution 10.4 27 administration and the institutional structures to improve tax collection enforcement. building A new Audit Department would consolidate all audit and investigation expertise within the SAT, with updated information technology and analytical tools to facilitate data cross-checking, logistical support, and strengthened legal power to investigate tax evasion. Particular attention would be given to training.

4. Social Communications: This component would help secure citizen understanding for the tax administration reforms by financing a social Institution 4.8 13 communication campaign to inform and educate the public about the benefits of an building independent and professionalized tax collection authority, on changes in the tax law, compliance and enforcement mechanisms, and