SERBIA: TAX ADMINISTRATION MODERNIZATION PROJECT (TAMP) (P163673/IBRD-8936) Implementation Support Mission (February 18 to 21, 2025) Aide Memoire I. Background and Mission Objectives 1. In October 2024, the World Bank approved a restructuring of the TAMP as part of a 2-step approach. The first step was a one-year extension to October 31, 2025, to allow for: (i) signing of the commercial off-the-shelf (COTS) solution for the integrated tax management system (ITMS) with full financing, (ii) implementing critical non-COTS activities, and (iii) achieving at least a moderately satisfactory (MS) rating for outcome by the proposed new closing date. The restructuring was used to revise the Results Framework (RF) to drop outcome indicators that are no longer relevant. Step 2 will involve an extension and Additional Financing (AF) to fund the acquisition and the implementation of the COTS. Step 2 will be only considered when the award notice is issued to the winning vendor, and critical non-COTS activities register implementation progress. 2. The project development objective (PDO) rating continues to be assessed as MS. In November 2024, the Bank upgraded the PDO rating to MS.1 Following the extension of the closing date through October 2025, the project has improved its prospects of achieving the PDO by enabling completion of critical activities and to complete contracting of the COTS solution for the ITMS. The overall implementation progress (IP) is assessed to be moderately unsatisfactory (MU), but this rating is expected to be upgraded following the issuance of award notice of the COTS to the winning vendor. The IP rating was downgraded in March 2024 to MU 2 due to the cancellation of the procurement of the COTS solution. A new bidding process has since been relaunched with bids submitted on December 2, 2024. 3. The objective of the World Bank mission conducted between February 18 and 21, 2025 was to assess TAMP implementation progress, namely the latest development on the procurement of a COTS solution and the status of non-COTS activities, and to discuss next steps including the potential AF. The Bank mission wishes to thank the Serbia Tax Administration (STA) Director General Ms. Dragana Marković for her guidance and continuing support to the TAMP operation. The Bank also extends a special thanks to Mr. Rade Šević, Assistant Director, Transformation Sector and TAMP Coordinator and to Mr. Dušan Glišić, Project Manager of the TAMP Project Implementation Unit (PIU). Key findings and agreed next steps are recorded in this Aide Memoire. 3 II. Key Findings 4. The Bank mission discussed the latest developments on the procurement of the COTS ITMS solution. The rebidding process initiated in October 2024 led to two successful bids submitted on December 2, 2024. On February 13, 2025, the STA submitted the technical evaluation to the Bank for review. The Bank congratulated the STA and the PIU for their thorough 1 See Implementation Summary and Results (ISR) Report archived and published on the World Bank external website for November 2024 2 ISR Report archived and published on the World Bank external website on March 6, 2024. 3 See Annex 1 for the list of officials met and composition of the Bank team. 1 assessment and used the mission to request additional clarifications. The STA revised and resubmitted the technical evaluation report on the 27th of February, to be followed by the Bank formal review. Following the issuance of the award notice to the winning bidder and critical non-COTS activities are implemented, the Bank is expected to upgrade the TAMP IP rating to MS paving the way for the AF. 5. With respect to non-COTS activities, the Bank mission reviewed recent developments and disbursement plans. Over the last six months, three activities 4 - contracted for about 700,000 Euro - were initiated and will be completed before the TAMP current closing date. The preparation for six other activities 5 is near completion with contract signatures expected by the middle of March 2025 and implementation completed by October 2025. In addition, the Request for Proposal (RFP) for the record management activity 6 was sent for Bank review on February 28, 2025. This activity will cover withholding tax and will be completed by October 2025. Finally, the Bank mission discussed with the STA the remaining two activities (i.e., ChatBot and upgrade to data warehouse to support strategic KPI reporting) whose implementation may extend beyond October 31, 2025. Both activities are deemed not critical to the COTS roll-out. The mission explored piloting the ChatBot for one tax type and rescoping the upgrading the data warehouse strategic KPI reporting activity to ensure their timely implementation. 6. In terms of disbursement, the project has disbursed 9.7 million Euro on non-COTS related contracts and is expected to disburse another 4.6 million Euro by October 2025. The total disbursement amount by the TAMP current closing date is expected to be larger with the first payment of the COTS contract -if the procurement is successful. III. Implementation Progress, Issues, and Agreements COTS ITMS Procurement 7. The mission noted the successful re-bidding of the COTS that resulted in two bids that were technically evaluated by the PIU. The technical evaluation report was submitted to the World Bank on February 13, 2025 and following the request by the Bank for additional clarifications, the STA revised and resubmitted the evaluation report on the 27th of February. Next, the Bank will conduct its review of the report by March 10, 2025. Assuming a No Objection (NO) is provided, the financial envelope will be opened to be followed by an award notice, expected by mid-April, 2025. Recently Completed Non-COTS Activities 8. Over the last six months, the STA has contracted a few non-COTS activities, and these include: a. Security IT Audit Follow-Up. – During previous missions, the Bank team endorsed all three activities proposed as follow-up to the security IT audit: e-mail archiving, single sign-on, and 4 Audit Services, Transfer Pricing database subscription, and SAPS/PROFIL software upgrades 5 HRMIS, big data analysis, STA branding, taxpayer surveys, HR initiative, and new business model support 6 The record management activity may be extended to other tax types to be implemented in early 2026 - if an AF is secured. Otherwise, the STA will assume the cost of any subsequent phase of this activity. 2 upgrade of electronic services. All these activities have been completed and associated amounts disbursed. 7 b. Tax Police IT System – The STA and Bank team agreed to support the activities of the Risk Analytics unit of the Tax Police with: (i) new licenses/subscription for their data analysis and investigation software; and (ii) upgrade the Tax Police’s IT systems (SAPS case management system and PROFIL application). The IBM license was renewed and payment disbursed. The upgrade of the SAPS and Profil applications was recently approved (see section below). c. Document Management System. An international expert was contracted and work completed to develop a user training for the effective and tax administration-wide use of the existing Document Management System. This was needed to support the STA in making more use of digital data instead of paper. On-going Non-COTS Activities – to be completed by October 2025 9. The STA has also initiated over the last few months, and particularly since TAMP was extended in October 2024, several non-COTS activities that are expected to be completed by the closing date and these include: a. Taxpayer Satisfaction Survey – The contract valued at 80,000 Euro was signed with IPSOS on the 14th of February 2025. The surveys will be launched in March 2025, with results produced shortly thereafter. b. Upgrade of SAPS and Profil Applications for tax police. The contract valued at 460,000 Euro was signed and is now active. Its full implementation is expected before October 2025. c. Database Subscription – Transfer Pricing: The contract, valued at about 160,000 Euro, was signed and is active. In the case an AF is approved, the subscription will be renewed annually. d. Audit Services: The contract valued at 30,000 Euro is active and about 24,000 Euro has already been disbursed. In case the AF is approved, the contract will be renewed annually. e. Public Campaign for STA Branding: Two expressions of interest were received on February 13, 2025, and the contract valued at 300,000 Euro is expected to be signed by mid-March. To complement the HR action plan, the STA and the Bank agreed on some activities to support the branding of the STA as an employer of choice. f. Big Data Analysis. Request for proposals from 3 shortlisted firms are expected to be submitted by March 3rd, 2025, and the evaluation and selection will be completed by the end of March. The contract value is 325,000 Euro. This task will enhance the data and risk analytics capabilities of the STA. g. Support to the New Business Model (NBM). The contract valued at 500,000 Euro is expected to be signed with the firm KPMG by February 24, 2025. The tasks include drafting required new legislations, supporting the STA in the implementation of amended legislation that sanctions data cleansing and subsequent migration to the COTS, and providing technical and advisory support (e.g., draft functional documents) to the STA ahead of the COTS roll-out. h. Upgrade of HRMIS. The ToR was initially prepared by the firm EY for a basic HRMIS but it was subsequently revised by the STA that led to an increase in scope and an increase level of effort. This post-review activity has started, and the draft contract was uploaded in STEP. STA is expected to sign the contract and initiate implementation during the week of February 24, 2025, with a revised scope and budget of ~ 840,000 Euro. i. HR Institutional Development. The contract, valued at ~800,000 Euro, will be initiated by February 28, 2025. Using the HR strategy as a baseline, this activity will cover two main work streams: the organizational restructuring with job description documentation and a workload 7 Total amount is 1.84 million Euro. 3 analysis. The Bank had recommended that a workforce analysis be conducted to determine the existing skills gap in critical functions and adequately address them. 8 j. Record Management. The STA sent the ToR for Bank review on February 28, 2025. The task entails the design and installation of an electronic archiving system of e-filed withholding tax records – the largest by volume of transactions - and will be completed by October 2025. The e-archiving activity of the remaining tax types – VAT and other tax types 9- will be implemented in early 2026 if an AF is secured. Otherwise, the STA will assume the cost of any subsequent phase of this activity. The estimate of the contract to be implemented by the TAMP closing date is ~750,000 Euro. A similar amount is estimated for the second phase. Non-COTS Activities – to be initiated – but not fully completed before closing date 10. The STA has also initiated two non-COTS activities that are expected to be completed under a revised scope before the TAMP closing date. Both of these activities are deemed not critical to the implementation of the COTS solution. The activities are: a. ChatBot Implementation. The ChatBot is a useful tool for taxpayers. The Bank mission explored with the STA piloting this tool for one tax type that could be completed by October 2025. The STA will revisit the implementation timeframe and inform the Bank about the next steps. The value of the contract is estimated at 350,000 Euro. 10 Other tax types may be explored in case an AF is approved. b. Data Warehouse Upgrade (Strategic KPI’s). This activity aims to develop reports and dashboards of strategic and operational indicators with data extracted from the data warehouse. The preparation of the ToR awaits the finalization of the selection of indicators and the associated algorithms. This sub-task is entrusted to a working group (WG) at STA. The WG has so far identified two strategic indicators. The Bank and the STA explored the possibility of rescoping and piloting the task with a smaller set of indicators. The WG and the STA IT department will explore during the week of February 24, 2025, the estimated workload and the implementation timeframe. This will inform the preparation of the ToR. The estimated budget for this contract is 500,000 Euro. The procurement process needs to be initiated by early March 2025 with a target implementation start in early June to ensure its timely implementation. 11. Finally, the STA expressed interest in procuring hardware (e.g., servers, storage space) to upgrade their capacity and support the implementation of on-going IT-related activities that could not be sourced in a timely manner by the STA. The STA will next identify the exact need, cost it, and inform the Bank. IV. Procurement and Financial Management 12. Procurement. The procurement performance is assessed as Moderately Satisfactory. The STA has completed the technical Bid Evaluation Report for the two bids received which were submitted for Bank review on February 13, 2025. Following the first round of comments issued by the Bank team on February 18, 2025, a revised version of the Technical BER is anticipated 8 Improving HR management is a shared concern with the International Monetary Fund. The Bank and IMF mission teams met in March 2024 and again in November 2024. 9 The other tax types have a smaller volume of transactions but given their diversity, there are specific considerations to be accounted for and hence the level of effort of the phase 2 is expected to be roughly the same as phase 1 (to be carried out by October 2025). 10 If the ChatBot will be implemented in stages. A pilot for one tax type to be implemented by October 2025 may cost less than the estimated budget of 350,000 Euro. 4 to be shared with the Bank by February 25, 2025. Concurrently, there are ongoing procurement for non-COTS activities. Two procurements (Branding and big data analysis) are under bids evaluation and are anticipated to be signed by March 2025. However, it is noted that at least two procedures currently in the technical preparation stage (ChatBot and Data Warehouse Strategic KPI’s) may be at risk of not being fully implemented by October 31, 2025 (for more details, see section on non-COTS activities). The mission agreed that STA would make a decision either to re-scope the activities or drop them. STEP data is kept up to date, while the Contract Management Module requires more frequent updates. 13. Financial Management. The financial management arrangements of the Project, including budgeting, accounting, internal controls, contract management, funds flow, financial reporting, staffing arrangements, and external audit, remain satisfactory. The last comprehensive portfolio financial management implementation support and supervision mission was conducted at the end of October 2024. 14. The Project audit for the fiscal year ending December 31, 2023, was performed by the approved audit firm BDO d.o.o. Belgrade. The auditors issued an unmodified audit opinion, and the management recommendations letter did not identify any deficiencies in internal controls or accounting issues. However, the report was received over a month late. The CFU is kindly reminded to submit the audit report for FY 2024 on time, no later than June 30, 2025. 15. The quarterly Interim un-audited financial reports (IFRs) have been submitted to the Bank on time. The latest IFRs were submitted for the last quarter of 2024, and the next IFRs are due on May 15, 2025. V. Additional Financing and Extension 16. The STA and the Ministry of Finance are eager to successfully procure and implement the COTS thereby achieving the TAMP development objectives. They have revised the RFP, evaluated a 2nd round of bids, and are expected to award soon a contract to the winning vendor. The STA/Ministry intend to sign the contract with the winning vendor in June 2025. However, they requested assurances on availability of full financing from the World Bank by the time of contract signing. 17. The Bank mission discussed with the STA the proposed AF arrangement with an extension to ensure the timely implementation of the COTS solution. The Bank explained that there will be no additional activities planned under the AF and no changes to existing activities. Moreover, the implementation and monitoring and evaluation arrangements will also remain unchanged. 18. The TAMP undisbursed balance is approximately 35.5 million Euro, and by October 2025 it is expected to be close to 29 million Euros. 11 The estimated budget for the COTS will be known once the financial proposal is opened towards the end of March 2025. The total budget (undisbursed amount plus the AF budget) will finance the cover cost-overrun of the COTS, the recurrent cost of the PIU (e.g., salaries, operating costs), and any on-going activities appraised and approved in TAMP (e.g., taxpayer surveys, annual subscription to transfer pricing database). 11 The undisbursed amount may reach 28 million Euro. The exact amount will depend on the progress registered on certain Non-COTS activities and the exact estimates of certain activities that are in the ToR preparation stage. Total undisbursed amount does not take into account the expected advance payment to procure the COTS ITMS solution that may be requested if the AF is approved. 5 19. Looking ahead, and upon issuing the award notice, the Bank will take the necessary steps – including the preparation of the AF package – leading to the formal approval of the AF in the coming months and ahead of the closing date of the TAMP. VI. Agreed Actions / Next Steps Date Action Responsible March 10, 2025 Review and provide a NO on the revised technical World Bank evaluation report for the COTS March 30, 2025 Launch procurement of all other non-COTS activities: STA/CFU - Record Management - Update HRMIS - HR Institutional Development - Support to New Business Model - Data Warehouse Strategic KPI’s - Big data analysis - STA Branding - ChatBot April 15, 2025 (TBC) Issue the Award Notice for COTS STA/CFU April 20, 2025 (TBC) Upgrade TAMP Implementation Progress Rating and World Bank Secure exemption to process an Additional Financing (AF) June 2025 (TBC) Appraise and Negotiation the AF STA/MoF And World Bank June 2025 (TBC) Sign with COTS Vendor STA/CFU October 31, 2025 Complete all critical non-COTS activities to be financed by STA TAMP and expected to be completed by Oct 2025 Annex: Annex 1: List of key officials and other stakeholders met and composition of Bank team 6 Annex 1: List of Officials/Staff Met and Bank Mission Team Members Serbian Tax Administration • Ms. Dragana Marković, Director General, STA • Ms. Snežana Ilić, Chief of Staff, STA • Mr. Rade Šević, Project Coordinator, STA • Ms. Branka Perišić, Transformation Sector Coordinator, STA • Ms. Snežana Bekčić-Šišmanović, Coordinator, Transformation Sector, STA • Ms. Maja Vujović, Deputy Director – Head of Human Resource Sector, STA • Ms. Boba Babić, Head of Department, Human Resource Sector, STA • Ms. Sanja Kordić, Human Resource Sector, STA • Mr. Dragoslav Glišović, Coordinator, ICT Sector, STA • Mr. Siniša Sekulić, Coordinator, ICT Sector, STA • Ms. Vesna Marković, President of the Working Group for KPI definition • Ms. Milica Bisić, Key Expert for Support to the implementation of New Business Model, KPMG • Mr. Aleksandar Bucić, Project Director Support to the implementation of New Business Model, KPMG • Mr. Dušan Glišić, Project Manager, PIU • Mr. Dejan Stojanović, Local advisor to the Change management, PIU Ministry of Finance/Central Fiduciary Unit (CFU) • Mr. Nenad Vlaketić, Head, CFU • Mr. Vuk Delibašić, Advisor to the Minister • Ms. Zorica Petrović, Procurement Expert, CFU • Ms. Snežana Jovanović, FM Specialist, CFU • Mr. Željko Matijević, FM Specialist, CFU • Ms. Ljiljana Džuver, Head of Operations, CFU World Bank Team • Mr. Aleksandar Crnomarković, Task Team Leader • Mr. Joey Ghaleb, Task Team Leader • Mr. Srdjan Svirčev, Senior Public Sector Specialist • Ms. Orjana Ibrahimi, Senior Procurement specialist • Ms. Elena Corman, Senior Procurement specialist • Mr. Zoran Skopljak, Public Sector Specialist • Ms. Ivana Novaković, Environmental Specialist • Ms. Lamija Marijanović, Senior Financial Management Specialist (remotely) • Ms. Selma Ljubijankić, Senior Social Development Specialist (remotely) • Mr. Wyatt Grant, Senior Tax IT Advisor/Consultant • Ms. Hermina Vuković Tasić, Senior Operations Assistant 7