FOR OFFICIAL USE ONLY Report No: PAD4760 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$750 MILLION TO THE FEDERAL REPUBLIC OF NIGERIA FOR AN ACCELERATING RESOURCE MOBILIZATION REFORMS (ARMOR) PROGRAM FOR RESULTS May 17, 2024 Governance Global Practice Western and Central Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Federal Republic of Nigeria GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 30, 2024) Currency Unit: Nigerian Naira (NGN) NGN 1,330= US$1.00 Regional Vice President: Ousmane Diagana Regional Director: Abebe Adugna Dadi Country Director: Shubham Chaudhuri Practice Manager: Tracey M. Lane Task Team Leaders: Moses Misach Kajubi, Samer Naji Matta ABBREVIATIONS AND ACRONYMS ARMOR Accelerating Revenue Mobilizing Reforms IGR Internally Generated Revenue BOF Budget Office of the Federation IMF International Monetary Fund Nigeria COVID-19 Action Recovery and CARES Economic Stimulus IPF Investment Project Financing CBN Central Bank of Nigeria ISR Implementation Status and Results Reports CIT Corporate Income Tax IVA Independent Verification Agent COVID- Corona Virus 19 KPI Key Performance Indicator CPF Country Partnership Framework M&E Monitoring and Evaluation CSO Civil Society Organization MDAs Ministries, Departments, and Agencies DLI Disbursement Linked Indicator MOU Memoranda of Understanding DLR Disbursement Linked Result MTEF Medium-Term Expenditure Framework DPF Development Policy Financing MTI Macroeconomics, Trade, and Investment DRM Domestic Resource Mobilization MTR Mid-Term Review E&S Environmental and Social NCB National Competitive Bidding EFCC Economic and Financial Crimes Commission NCS Nigeria Customs Service ESMP Environmental Social Management Plan NGN Nigerian Naira Environmental and Social Safeguard ESSA Assessment NLSS Nigeria Living Standards Survey FAAC Federation Account Allocation Committee NNPCL Nigerian National Petroleum Corporation FBS Fixed Budget selection OAGF Office of Accountant General of the Federation FEC Federal Executive Council PAP Program Action Plan FGIP Fiscal Governance and Institutions Project PCU Project Coordinating Unit FGN Federal Government of Nigeria PDO Program Development Objectives FIRS Federal Inland Revenue Service PEF Program Expenditure Framework FM Financial Management PEFA Public Expenditure and Financial Accountability FMF Federal Ministry of Finance PforR Program for Results FPRC Fiscal Policy Reforms Committee PIA Petroleum Industry Act Nigeria Fiscal, Revenue and Debt FRED 2.0 Programmatic Advisory Services and Analytics 2.0 PIT Personal Income Tax FSP Fiscal Strategy Paper PIU Project Implementing Unit FY Financial Year RA Result Area GBV Gender-Based Violence SABER State Action on Business Enabling Reforms Program GDP Gross Domestic Product SFTAS States Fiscal Transparency, Accountability and Sustainability GHG Greenhouse Gases SORT Systematic Operations Risk Rating Tools GRM Grievance Redress Mechanism SSA Sub-Saharan Africa GRS Grievance Redress Service STEP Systematic Tracking of Exchanges in Procurement Nigeria Human Capital Opportunities for HOPE Prosperity and Equality Program TA Technical Assistance International Bank for Reconstruction and IBRD Development TADAT Tax Administration Diagnostic Assessment Tool Implementation Completion and Results ICR Report TSA Treasury Single Account Information and Communications ICT Technology TTP Trusted Trader Program IFRs Interim Financial Reports VAT Value-Added Tax IFSA Integrated Fiduciary Systems Assessment WB World Bank The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) TABLE OF CONTENTS DATASHEET ........................................................................................................................................ i I. STRATEGIC CONTEXT .................................................................................................................. 1 A. Country Context ............................................................................................................................... 1 B. Sectoral and Institutional Context .................................................................................................... 2 C. Relationship to the CPS/CPF and Rationale for Use of Instrument .................................................. 4 II. PROGRAM DESCRIPTION ............................................................................................................ 5 A. Government Program ...................................................................................................................... 5 B. Theory of Change.............................................................................................................................. 5 C. PforR Program Scope ........................................................................................................................ 6 D. Program Development Objective(s) (PDO) and PDO Level Results Indicators................................. 8 E. Disbursement Linked Indicators and Verification Protocols............................................................. 9 III. PROGRAM IMPLEMENTATION .................................................................................................. 12 A. Institutional and Implementation Arrangements ......................................................................... 12 B. Results Monitoring and Evaluation................................................................................................. 13 C. Disbursement Arrangements.......................................................................................................... 13 D. Capacity Building ............................................................................................................................ 14 IV. ASSESSMENT SUMMARY .......................................................................................................... 15 A. Technical (including program economic evaluation) .................................................................... 15 B. Fiduciary ........................................................................................................................................ 17 C. Environmental and Social .............................................................................................................. 18 V. RISK ......................................................................................................................................... 20 ANNEX 1. RESULTS FRAMEWORK MATRIX ........................................................................................ 22 ANNEX 2. TECHNICAL ASSESSMENT .................................................................................................. 38 ANNEX 3. SUMMARY FIDUCIARY SYSTEMS ASSESSMENT .................................................................. 45 ANNEX 4. SUMMARY ENVIRONMENTAL AND SOCIAL SYSTEMS ASSESSMENT.................................... 47 ANNEX 5. PROGRAM ACTION PLAN .................................................................................................. 48 ANNEX 6. IMPLEMENTATION SUPPORT PLAN ................................................................................... 50 ANNEX 7. INVESTMENT PROJECT FINANCING COMPONENT .............................................................. 51 ANNEX 8. POVERTY ASSESSMENT .................................................................................................... 53 ANNEX 9. METHODOLOGY FOR DISBUSING AGAINST DLR ACHIEVEMENT .......................................... 55 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) @#&OPS~Doctype~OPS^dynamics@padpfrbasicinformation#doctemplate DATASHEET BASIC INFORMATION Project Beneficiary(ies) Operation Name Nigeria NG Accelerating Resource Mobilization Reforms PforR Does this operation have an IPF Environmental and Social Risk Operation ID Financing Instrument component? Classification (IPF Component) Program-for-Results P177308 Yes Low Financing (PforR) @#&OPS~Doctype~OPS^dynamics@padpfrprocessing#doctemplate Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [✓] Fragile State(s) [ ] Contingent Emergency Response Component (CERC) [ ] Fragile within a non-fragile Country [ ] Small State(s) [ ] Conflict [ ] Alternative Procurement Arrangements (APA) [ ] Responding to Natural or Man-made Disaster [ ] Hands-on Expanded Implementation Support (HEIS) Expected Approval Date Expected Closing Date 13-Jun-2024 30-Nov-2028 Bank/IFC Collaboration No Proposed Program Development Objective(s) The Program Development Objective (PDO) is to raise non oil revenues and safeguard oil and gas revenues. @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate i The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Organizations Borrower: Federal Republic of Nigeria Implementing Agency: Federal Ministry of Finance Contact: Lydia Jafiya Title: Permanent Secretary of Finance Telephone No: 002348094821958 Email: lydia.jafiya@finance.gov.ng @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate COST & FINANCING (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? No Is this project Private Capital Enabling (PCE)? No SUMMARY Government program Cost 1,173.50 Total Operation Cost 1,173.50 Total Program Cost 1,153.50 IPF Component 18.12 Other Costs (Front-end fee,IBRD) 1.88 Total Financing 1,173.50 Financing Gap 0.00 Financing (US$, Millions) World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 750.00 Non-World Bank Group Financing Counterpart Funding 423.50 Borrower/Recipient 423.50 ii The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) @#&OPS~Doctype~OPS^dynamics@paddisbursementprojection#doctemplate Expected Disbursements (US$, Millions) WB Fiscal Year 2024 2025 2026 2027 2028 Annual 0.00 155.70 187.30 199.50 207.50 Cumulative 0.00 155.70 343.00 542.50 750.00 @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Macroeconomics, Trade and Investment; Energy & Governance Extractives; Finance, Competitiveness and Innovation CLIMATE Climate Change and Disaster Screening Yes, it has been screened and the results are discussed in the Operation Document @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate SYSTEMATIC OPERATIONS RISK- RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ High 2. Macroeconomic ⚫ Substantial 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Moderate 5. Institutional Capacity for Implementation and Sustainability ⚫ Moderate 6. Fiduciary ⚫ High 7. Environment and Social ⚫ Substantial 8. Stakeholders ⚫ Substantial 9. Overall ⚫ High iii The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) @#&OPS~Doctype~OPS^dynamics@padpfrcompliance#doctemplate POLICY COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No ENVIRONMENTAL AND SOCIAL Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance ESS 1: Assessment and Management of Environmental and Social Risks and Relevant Impacts ESS 10: Stakeholder Engagement and Information Disclosure Relevant ESS 2: Labor and Working Conditions Relevant ESS 3: Resource Efficiency and Pollution Prevention and Management Relevant ESS 4: Community Health and Safety Relevant ESS 5: Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant ESS 6: Biodiversity Conservation and Sustainable Management of Living Natural Not Currently Relevant Resources ESS 7: Indigenous Peoples/Sub-Saharan African Historically Underserved Not Currently Relevant Traditional Local Communities ESS 8: Cultural Heritage Not Currently Relevant ESS 9: Financial Intermediaries Not Currently Relevant iv The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). @#&OPS~Doctype~OPS^dynamics@padlegalcovenants#doctemplate LEGAL Legal Covenants Sections and Description To facilitate the carrying out by FIRS and by NCS of their respective parts of the Program and the Project, the Borrower shall, no later than three (3) months after the Effective Date or such other date as the Bank may establish by notice to the Borrower, enter into (a) a subsidiary agreement with FIRS (“FIRS Subsidiary Agreement”), and (b) a subsidiary agreement with NCS (“NCS Subsidiary Agreement”), under terms and conditions acceptable to the Bank. Not later than ninety (90) days after the Effective Date, the Borrower shall: (i) recruit an independent verification agency or independent verification agencies (“Independent Verification Agent(s)” or “IVA(s)”), as the case may be, under terms of reference(s) satisfactory to the Bank, to be responsible for preparing and providing verifications reports in accordance with the Verification Protocol, certifying the achievement of those DLI/DLRs indicated to be verified by such independent verification agency or agencies in the Verification Protocol; and (ii) furnish the verification reports to the Bank in such scope and in such details as the Bank shall request. The Borrower shall furnish to the Bank, as soon as available, but in any case not later than November 30 of each year, the annual work plan and budget except for the annual work plan and budget for the Project for the first year of Project implementation, which shall be furnished no later than ninety (90) days after the Effective Date. The Borrower shall cause FIRS and NCS to furnish to the Borrower, as soon as available, but in any case not later than November 10 of each year, their annual work plans and budget, for the Borrower’s review and inclusion into the Borrower’s consolidated annual work plan and budget; except for the annual work plan and budget for the Project for the first year of Project implementation, which shall be furnished to the Borrower no later than seventy (70) days after the Effective Date. The Borrower shall, no later than three (3) months after the Effective Date, establish and thereafter maintain throughout the implementation of the Operation, an ARMOR Program Steering Committee (SC), with functions, composition and resources satisfactory to the Bank. The Borrower shall, no later than three (3) months after the Effective Date, establish and thereafter maintain throughout the implementation of the Operation, an ARMOR Technical Committee (TC) with functions, composition and resources satisfactory to the Bank. The Borrower shall prepare a Labor Management Procedures (LMP) within six months after effectiveness that will detail the aspects of Environmental and Social Standard 2 related requirements that will apply in case any direct or indirect workers (hired through a third party) are hired and will include a Grievance Redress Mechanism specifically for project workers to raise any issues. @#&OPS~Doctype~OPS^dynamics@padconditions#doctemplate Conditions Type Citation Description Financing Source The Borrower has adopted Effectiveness Article 5.01 IBRD/IDA the Operations Manual in v The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) accordance with the provisions of Section I.C of Schedule 2 to this Agreement. The Effectiveness Deadline Effectiveness Article 5.02 is the date ninety (90) days IBRD/IDA after the Signature Date. vi The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) I. STRATEGIC CONTEXT A. Country Context 1. Nigeria, Africa's most populous country and home to the second-largest population living below US$2.15 per day, possesses substantial untapped economic potential yet is one of the least developed nations globally. Nigeria is among the largest economies in Africa, with a gross domestic product (GDP) of approximately US$363 billion in 2023, but over 40 percent of its population live in poverty.1 Economic growth over the past decade has not maintained pace with population growth: real income per capita in 2023 was US$2,455, lower than US$2,490 recorded in 2010. Nigeria’s key development constraints include the high dependence on oil, insufficient economic diversification and inclusive growth, and a poor scorecard on good governance and service delivery including investments in human capital.2 As a diverse federation of 36 autonomous states and 220 million people, federal-state coordination is a challenge.3 Pathways for development include improving economic governance and generating more trust in State institutions, boosting government investments in human capital, expanding social assistance programs to sustain the move away from fuel subsidies, and improving opportunities for the young and entrepreneurial to diversify the economy and invest in inclusive economic growth. 2. Elections in 2023 brought in a new President and administration committed to improving macroeconomic stability and addressing fiscal and debt vulnerabilities due to low revenues and a dependence on global oil prices. Macroeconomic stability steadily deteriorated over the past decade leading to an increasing difference between official and parallel market exchange rates, a shortage of foreign exchange, and high inflation. Confronted with a fragile economic reality, the new administration that took office in May 2023 made two critical macro-fiscal reforms: the increase in the price of gasoline or premium motor spirit which was subsidized at a fiscal cost of 2.2 percent of GDP in 2022, and the liberalization of the exchange rate.4 These policies are expected to help boost revenues from 6.7 percent of GDP in 2022 to 8.6 percent of GDP in 2024. Nonetheless, the fiscal deficit is projected to remain above 3 percent of GDP for 2024-2027. This fiscal outlook limits scope for essential public investments and services and highlights the urgent need to mobilize domestic revenues to shore-up fiscal sustainability and provide funding for government investments in inclusive and sustainable development. 3. The economic and fiscal outlook continues to be vulnerable to shocks and oil-dependence and to the challenges associated with improving governance of the State. In recent years, the economy has been hit by the COVID-19 pandemic, a fall in global oil prices, increasing insecurity, and weak domestic oil production. The post-COVID recovery was short-lived with real GDP growth dropping from 3.6 percent in 2021 to 3.1 percent in 2022-2023, due to low oil production, flood- related low agricultural output, and the disruptive currency demonetization policy instituted in Q1-2023. The fiscal space is limited by the need to service debts (101.5 percent of revenues in 2022) and vulnerable to fully realizing the fiscal transfers from the oil and gas sector, thus restricting public investments. Long-standing perceptions of corruption and other governance challenges such as weak institutions and limited transparency and accountability also dampen business sector confidence. 1 “World Bank. 2022. A Better Future for All Nigerians: Nigeria Poverty Assessment 2022. Washington, DC. World Bank. https://openknowledge.worldbank.org/handle/10986/37295 2 See World Bank Systematic Country Diagnostic 2020. https://elibrary.worldbank.org/doi/epdf/10.1596/33347 3 https://www.unfpa.org/data/world-population/NG 4 Subsidies were deducted from gross oil and gas revenues resulting in lower remittance of oil and gas revenues to the Federation. Page 1 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) B. Sectoral and Institutional Context 4. Nigeria’s dependence on oil and gas revenue is a source of fiscal vulnerability. During the commodity-price boom of 1996-2014, the revenue-to-GDP ratio was 12 percent, (albeit considerably lower than the Sub-Saharan Africa (SSA) average of 21.5 percent at that time), while a decade later, revenue-to-GDP was just 7.7 percent in 2023 (Figure 1). Despite a 116 percent increase in international oil prices between 2020 and 2022-2023, net oil and gas fiscal revenues transferred to the Federation fell in the same period from 2 percent of GDP to 1.8 percent of GDP due to falling oil production and the retention of fiscal transfers to finance the gasoline subsidy. Oil production fell from 1.8 million barrels per day (mbpd) in 2020 to 1.4 mbpd in 2022-2023 due to insecurity and a lack of investment and adequate maintenance. The cost of the gasoline subsidy increased over this period from 0.9 to 1.6 percent of GDP, deducted directly by the Nigeria National Petroleum Corporation Limited (NNPCL)5 and reducing the net oil revenue transfers to the Federation Account. Additionally, NNPCL has retained oil and gas revenues for projects such as a gas pipeline to Morocco. NNPCL also entered contractual arrangements that pledge future oil and gas revenues to business partners in lieu of cash payments.6 Figure 1: Nigeria’s General Government revenues have fallen Figure 2: Tax revenue collection is low relative to considerably comparators Source: OAGF, IMF, and World Bank calculations Source: OAGF, FAAC, and World Bank Revenue Dashboard 5. In addition to reduced net oil revenues, opaque governance of NNPCL has significantly undermined the transmission of oil revenues to the Federation. Non-transparent reporting to the Federal Ministry of Finance (FMF) and the Federation Account Allocation Committee (FAAC), make it difficult for the authorities to oversee NNPCL’s performance, calculate anticipated oil and gas revenues and determine the difference between revenues received by the Federation and NNPCL’s total revenue. The reports submitted to FAAC by NNPCL are inconsistent and lack information such as details on pledged revenues, the tradeable value of crude oil, actual payments, and receipts from global trade, among others. As highlighted in the Nigeria Public Finance Review (2022),7 financial reporting is opaque due to quasi-fiscal activities such as in-kind revenues in the form of crude oil, and costs directly deducted from revenues that would have 5 NNPCL is governed by the Petroleum Industry Act (PIA) 2021 6 For example, NNPCL pledged 35,000 barrels of crude oil per day to the owners in exchange for a 20 percent stake in the privately owned Nigerian Dangote Refinery. The total value of the contractual investments for pledged oil revenues was estimated to be worth US$5.8 billion at end-2022. 7 https://documents1.worldbank.org/curated/en/099615211172222358/pdf/P1750950fbd29d02008429007d1ed499d61.pdf Page 2 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) otherwise been transferred to the Federation Account.8 6. Despite recent reforms, Nigeria’s non-oil tax revenues underperform due to low tax rates, poor compliance, a narrow tax base, and high tax expenditures. Reforms introduced in 2020-2021 increased non-oil tax revenues from 2.3 percent of GDP in 2020 to 3.7 percent of GDP in 2023 due to a rise in Value-Added Tax (VAT) rates, improvements in tax digitalization, and the unification of the exchange rate in 2023.9 Despite this increase, tax revenues in Nigeria remain very low compared to peers (Figure 2). Unlike most developing countries, Nigeria has yet to tap VAT (a federal responsibility to collect while sharing VAT revenues) as a significant source of revenues. In 2022, VAT revenues were only 1.2 percent of GDP while VAT tax expenditures were estimated at 1.98 percent of GDP in 2022 (latest available data).10 The current VAT rate of 7.5 percent is the lowest rate in Africa, and well below the SSA average of 15.8 percent. Under the VAT legislation the tax operates like a sales tax, since firms are unable to recover input VAT on purchases of fixed assets, services, and general administration costs. Meanwhile, Corporate Income Tax (CIT) has a very narrow tax base, and although collections have increased in recent years, they represented just 1.6 percent of GDP in 2023. By comparison, poorly designed and sometimes discretionary CIT expenditures were estimated to cost 0.4 percent of GDP.11 Excise rates are exceptionally low by global standards, and revenues were less than 0.1 percent of GDP in 2023.12 Personal Income Tax (PIT) is assigned exclusively to the States, where challenges persist in collection due to tax evasion and underreporting: only 13 percent of the workforce is registered for PIT (2018) and only 2 percent of those are reported as active.13 7. The tax and customs administrations need modernizing to improve efficiency. The 2023 Tax Administration Diagnostic Assessment Tool (TADAT) reported several priority areas for improvement: (i) The tax registration database does not provide all required information to facilitate taxpayer interactions; (ii) Low rates of filing (2022 average was 41 percent for CIT and VAT registered taxpayers), and payment (2022: VAT 22 percent) among registered taxpayers; (iii) The tax audit process does not use information gathered by the Federal Inland Revenue Service (FIRS), tax gap assessments, or third-party data-sharing to select cases or validate taxpayer declarations;14 and (iv) FIRS and Nigeria Customs Service (NCS) staff require training in modern methods of revenue administration (risk management and data science) to enhance effectiveness. Nigeria’s trade facilitation performance score of 2.6 (1=low to 5=high), ranks 88th out of 139 countries in the 2023 Logistics Performance Index, while the “efficiency of the clearance process" directly under NCS control was among the poorest scoring dimension at 2.4.15 8 All production sharing contracts signed by NNPC state that all fiscal payments shall be made in-kind by allowing the NNPC to lift tax oil, royalty oil, and profit oil. In joint venture operations, in which the Federation owns 55 percent or 60 percent of the equity oil and gas, the NNPC handles crude oil and natural gas receipts on behalf of the Federation. However, the share of oil production in these contracts amounts to more than two-thirds of the total oil production in Nigeria. 9 The VAT rate was raised from 5.0 to 7.5 percent in 2020, and a new IT system (TAXPROMAX) was introduced in mid-2021. In 2023, the implicit foreign exchange (FX) subsidy was terminated when the foreign exchange market liberalized. 10 2023-2025 Medium Term Expenditure Framework, Budget office of the Federation, 2022. https://www.budgetoffice.gov.ng/index.php/resources/internal-resources/budget-documents/2023-budget/other-2023-budget-documents 11 As above. 12 Excise tax on cigarettes, for example, is only 30 percent of the retail price, whereas the WHO recommends a minimum of 70 percent. See Nigeria Development Update, June 2021 edition. World Bank. 13 As per the distribution of taxing rights between levels of government the PIT and property taxes are solely the jurisdiction of states. 14 Nigeria Tax Administration Diagnostics Assessment Tool Performance Assessment Report, IMF, July 2023 15 https://lpi.worldbank.org/international/scorecard/radar/C/NGA/2023 Page 3 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) C. Relationship to the CPS/CPF and Rationale for Use of Instrument 8. The Accelerating Revenue Mobilizing Reforms (ARMOR) Program-For-Results (PforR) operation is aligned with the World Bank Group’s Nigeria Country Partnership Framework (CPF) for FY21 -25 and with several World Bank strategies as well as the corporate scorecard.16 The CPF supports Nigeria’s aspiration for faster, more inclusive, and sustained economic growth to help the government lift 88 million people out of poverty.17 This operation directly supports the CPF’s “strengthening the foundations of the public sector” pillar and the core objective of increasing domestic revenues. The operation responds to the analysis in the 2019 Nigeria Systematic Country Diagnostic (P162103), the 2022 Public Finance Review (AUS0002571), and the 2022 Country Economic Memorandum (AUS0002837) by supporting the Federal Government of Nigeria (FGN) in increasing non oil revenue collections and reducing dependance on oil and gas revenues.18 The World Bank Evolution Roadmap also identified domestic revenue mobilization as a crucial component in intensifying impact and delivering results at scale with a focus on countries such as Nigeria with a tax to GDP ratio below 15 percent. 9. The ARMOR Program complements other World Bank operations to balance the support for not just raising revenues but also achieving medium-term macro-fiscal stability and delivering public services. This operation has been designed in tandem with the Nigeria Reforms for Economic Stability and Economic Transformation (RESET) Development Policy Financing (DPF) (P501661). While the DPF aims to support critical macro-fiscal reforms and protect the poor in the short run, this operation will focus on Domestic Revenue Mobilization (DRM), which will help sustain the focus on reform implementation and continued fiscal consolidation. To complement the ARMOR Program, a World Bank executed Nigeria Fiscal, Revenue and Debt Programmatic Advisory Services and Analytics 2.0 (FRED 2.0) (P181272) supports technical assistance (TA) on DRM-related issues to FMF, FIRS, and NCS. In addition, the World Bank is supporting Nigeria to deliver services to citizens, and to use the fiscal instrument for protecting the poor and enhancing services through: (i) social assistance through the National Social Safety Net Program-Scale Up (P176935) and the Nigeria COVID-19 Action Recovery and Economic Stimulus (CARES, P174114); and (ii) human capital investments through the proposed Human Capital Opportunities for Prosperity and Equity (HOPE-Gov, P181476) and the proposed Primary Healthcare Provision Strengthening Program HOPE-PHC, P504693). The Nigeria program also includes efforts for the private sector opportunities through the State Action on Business Enabling Reforms (SABER, P177442); and to strengthen the expenditure-side of the budget by building fiscal governance institutions through the Fiscal Governance and Institutions Project (FGIP, P163540). 10. The PforR instrument is considered the most appropriate tool for supporting the resource mobilization program to increase revenues and reduce dependence on oil and gas. First, disbursements under a PforR are results-based allowing the operation to be aligned with the government’s revenue raising targets. Second, the PforR is comb ined with an IPF component to channel the technical assistance needed by FIRS and NCS as the implementing agencies. Third, the PforR is accompanied by the RESET DPF, which includes support to the government’s program to raise non-oil revenues from rationalizing tax expenditures, reforming the VAT regime, and ensuring auto remittance of revenues collected by Government Owned Enterprises (GOEs). The combined structure of a PforR and IPF allows for an engagement to sustain implementation and higher revenues over four years. The PforR also allows for disbursements for initial results, creating more fiscal space and allowing reform champions to move ahead quickly with difficult reforms as the operation is prepared. In fact, Nigeria has demonstrated both capacity and experience with implementing PforRs with eight operations 16 In this document, “ARMOR Program” refers to the PforR operation while “ARMOR program” refers to government’s ARMOR program. 17 https://documents1.worldbank.org/curated/en/526171611619063445/pdf/Nigeria-Country-Partnership-Framework-for-the-Period-FY21- FY25.pdf 18 https://documents1.worldbank.org/curated/en/099020012132216124/pdf/P1761970c336260ce0bd0e0ebd98a53275d.pdf Page 4 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) currently in place.19 II. PROGRAM DESCRIPTION A. Government Program 11. The government’s ARMOR program, which was approved by the Federal Executive Council (FEC) in June 2022 is a key component of the National Development Plan 2021-2025 and has the objective to boost tax revenues, develop the tax and customs administrations, and improve governance and transparency in the oil and gas sector, to enhance the fiscal space for social protection spending. The government’s ARMOR program is funded from annual budget allocations to the FMF, FIRS, and NCS. The ARMOR program contains revenue policy measures such as, raising pro-health taxes on tobacco, and alcohol, introducing taxes on online betting and gambling, a new excise on telecommunication services, “green” taxes in the form of excises on vehicles and single-use plastics, as well as the implementation of an electronic money transfer levy. In addition, the Presidential Committee on Fiscal Policy and Tax Reforms established in August 2023 has recommended more structural reform of the VAT regime.20 The program also aims to reform tax expenditures, and lower revenue foregone through tax exemptions and incentive programs. The program also includes tax administrative improvements and the modernization of FIRS and NCS, including through greater use of automated and simple procedures allowing businesses who voluntarily comply to do so easily. The program supports trade facilitation by introducing more efficient customs processing and lowering the administrative costs and time of collecting duties and taxes on imported goods and doing so in a fair, transparent, and predictable manner. Finally, the program aims to safeguard oil and gas revenues transferred to the federal budget by increasing transparency and improving the governance of the oil and gas sector and removing fuel subsidies. B. Theory of Change 12. The World Bank-financed ARMOR Program addresses the main constraints to the Federal government’s objective to raise revenues from 6.7 to 18 percent of GDP by 2027. These constraints are: (a) sub-optimal VAT system, low VAT and excise rates, and large foregone revenues arising from multiple tax expenditures leading to a low tax base; (b) the lack of administrative capacity and low rates of taxpayer compliance; and (c) lack of transparency and oversight of oil and gas revenues and transfers to the Federation. The Disbursement Linked Indicators (DLIs) and Disbursement Linked Results (DLRs) are aligned with both Program Actions and Program Outcomes as shown in the Theory of Change (Figure 3). Complementarities between the government ARMOR program, the ARMOR PforR and the RESET DPF are shown in Table 1. The detailed set of Program actions supported by the ARMOR PforR is set out in Annex 5. 19 The US$1.5 billion Power Sector Recovery Operation Program (P164001) is supporting reforms in the energy sector, the US$750 million State Action on Business Enabling Reforms Program (P177442) is supporting reforms to the private sector, and the US$1.5 billion States Fiscal Transparency, Accountability, and Sustainability Program (P162009) supports public financial management reforms. Other examples include: the US$75 million Edo Basic Education Sector and Skills Transformation Operation (P169921); the US$750 million NIGERIA: COVID-19 Action Recovery and Economic Stimulus Program (P174114); the US$604 million Better Education Service Delivery for All (P160430); the US$500 million Nigeria Distribution Sector Recovery Program (P172891); and the US$700 million Nigeria Sustainable Urban and Rural Water Supply, Sanitation and Hygiene Program-for-Results (P170734). 20 The Committee is Chaired by Mr. Taiwo Oyedele and is composed of representatives from 36 stakeholder groups. See https://fiscalreforms.ng/. Page 5 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Figure 3: The ARMOR PforR Theory of Change C. PforR Program Scope 13. The PforR Program scope includes a subset of actions from the government program to be conducted during 2024 to 2028 at the federal level (see Table 1). The alignment ensures that the World Bank's intervention supports and enhances the sustainability and impact of the government initiative during the main period of implementation with a focus on reforms of tax and excise regimes, tax and customs administrative improvements, and enhanced transparency of oil and gas revenues remitted by NNPCL The government program is funded from annual budget allocations of US$1.173 billion to FMF, FIRS and NCS. With results-based financing of US$730 million, and US$20 million Investment Project Financing (IPF), the PforR aims to bolster the following result areas: • Result Area 1: Implement tax and excise reforms. This result area focuses on: (i) enhancing VAT collections through improved VAT regulations, taxpayer outreach and a helpdesk designed to enhance the number of registered VAT traders; (ii) rationalizing tax expenditures and reducing foregone revenue; and (iii) raising excise rates on pro-health and green products. Page 6 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) • Result Area 2: Strengthen tax revenue and customs administrations. This result area focuses on: (i) boosting VAT and CIT compliance by improving ICT-systems to allow for e-filing and e-payment to lower the costs of compliance for taxpayers; (ii) boosting accuracy of VAT-trader declarations through the introduction of electronic invoicing for VAT- registered traders; and (iii) increasing revenues from audits by implementing automated data exchange between FIRS and NCS, and building an effective risk-based audit system. As regards customs administration, the goal is to facilitate compliant trade flows and process more goods through the green channel, and to implement more effective post- clearance audits. • Result Area 3: Safeguard oil and gas revenues. This result area aims to: (i) increase transparency of NNPCL financial and operational performance through a forensic audit and regular production of enhanced reports submitted to FAAC, including all relevant information; and (ii) increase net oil and gas revenues transferred to the Federation.21 Table 1: Program Boundary Characteristics and Complementarity with the RESET DPF Complementary revenue Item Government ARMOR program PforR ARMOR Program mobilization actions in the Comments on boundaries DPF (P501661) The PforR focuses on a subset Support strategic domestic Raise non-oil revenues and Medium-term macro-fiscal Objective of actions included in the fiscal revenue growth safeguard oil and gas revenues sustainability government program DPF has VAT reform and VAT • Additional 0.8–1.2 percent Additional 0.5-0.8 percent of rate changes. PforR has of GDP from improved GDP from: (i) VAT reform and administrative changes and collections of VAT, income rate rise; (ii) rationalizing tax excise rate rises. Additional 8.3 percent of GDP Target tax and excise revenues expenditures;22 and (iii) Complementary to the VAT in revenues • Increased compliance rates adopting a digital mechanism reform being supported in the • Enhanced oil and gas for MDAs and GOEs to remit DPF, ARMOR supports several revenue transparency their revenues VAT-related tax administration measures. Front-loaded support through Duration 2020-2030 2024-2028 2024-2026 DPF and PforR Geographic Federal Federal Federal No difference. Coverage RA 1: Sustainability in revenue The PforR will be more focused generation and targeted. It will not include RA 2: New and enhanced specific actions, such as Results areas revenue streams. RA 1-4 RA 2 and RA 4 managing people performance RA 3: Cohesion in revenue and some oil-related revenue ecosystem (people and tools) measures RA 4: Safeguard oil revenues The Program PforR finances 64 Overall US$730 million results-based US$1.173 billion US$1.5 billion percent of the Program Financing US$20 million IPF Expenditure Framework (PEF) 14. The Program will support climate change adaptation and mitigation, recognizing Nigeria's susceptibility to climate change and limited capacity to address natural hazards. Nigeria through its national climate change policy (2021- 2023), determined to reduce by 20 percent its greenhouse gas (GHG) emissions intensity by 2030 relative to 2014 baseline through implementation of adaptation and mitigation measures, that promote low carbon use and development.23 21 This DLR will incentivize adoption of reforms in the oil sector that would increase net oil fiscal revenues transferred to the Federation. Reforms under consideration and supported by TA include: (i) reduction in the premium motor spirit subsidy, which is being supported by the RESET DPF, (ii) improvement in the governance of the oil sector by ensuring that oil transfers to the Federation are done in cash and not in kind, and (iii) the phase out of the Domestic Crude Allocation which allows NNPCL to transfer revenues to the Federation in naira, instead of dollars. 22 This includes the reconstruction investment allowance, the rural investment allowance, and the exemption on incomes in convertible currencies. 23 https://climatechange.gov.ng/wp-content/uploads/2021/08/NCCP_NIGERIA_REVISED_2-JUNE-2021.pdf Page 7 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Aligned with this policy, Nigeria's international climate commitments, and with the Green, Resilient and Inclusive Development approach, the operation incorporates measures that will contribute to climate mitigation by curbing Greenhouse Gas (GHG) emissions. The PforR operation supports the implementation of an environmental surcharge on vehicles (excluding small, hybrid, electric, and mass-transit vehicles), thereby encouraging a shift to more fuel-efficient vehicles. The expected increase in e-filing is projected to annually reduce GHG emissions by at least 60,000 tons, stemming from fewer physical visits to the FIRS for tax purposes.24 The increased use of e-filing will also lower the environmental impact associated with toner and ink cartridges, lower the demand for paper, and mitigate deforestation. Additionally, the excise on single-use plastics aims to discourage excessive plastic use, thus contributing to a simultaneous reduction in GHG emissions. Lastly, the operation's focus on reducing tobacco consumption is expected to lower the carbon footprint and environmental harm associated with the tobacco industry, which are linked to issues such as deforestation and water pollution from pesticide use and cigarette littering. 15. The Program prioritizes gender equity in tax administration and tax policy by taking actions designed to engender gender-based tax systems. In a small survey done to understand whether tax policies discriminate against female traders, female traders reported negative incidents such as physical harassment, demand for bribes or sexual favors that arise when tax collectors physically interface with traders.25 Data from the 2019 Survey of Tax and Subsidy Perceptions in Nigeria shows that 36.9 percent of small firms owned by women do not trust the FIRS, compared to 28.6 percent for men. Moreover, 64.3 percent of surveyed firms owned by women consider corruption among tax officials a major problem in the tax system compared to 59.9 percent among men.26 While the Corporate Affairs Commission gathers gender particulars of first directors on registration of a company, this detail, is not transmitted to the tax systems. This constrains ability to collect, analyze, or disseminate gender disaggregated data for informed tax policy analysis or tax administration actions. As part of this PforR, tax and customs DLIs will involve FIRS and NCS in conducting taxpayer outreach to increase voluntary compliance and build trust. It will also support enhancement of tax administration processes, systems to collect and disseminate gender disaggregated data and build capacity for gender- based information impact analysis on revenue policy proposals. Enhancement of online filing will as much as possible reduce physical interfaces between FIRS and female taxpayers, which will reduce harassment. Establishment of a grievance and redress mechanism and system through which women can file complaints related to harassment and corruption will also be supported. D. Program Development Objective(s) (PDO) and PDO Level Results Indicators 16. The PDO is to raise non-oil revenues, and safeguard oil and gas revenues. The achievement of the PDO will be measured by the following PDO-level indicators: a. VAT collection as a share of non-oil GDP (percentage). b. Online on-time VAT filing compliance rate (percentage). c. Online on-time CIT filing rate (percentage) d. Customs registered, accredited and compliant firms (number). e. Enhanced reports received by FAAC from NNPCL. (number) 24 A comprehensive GHG accounting exercise was undertaken to arrive at estimated GHG reductions. Key assumptions in exercise include 13 filings per company, 60 percent of the 3 million registered companies will comply, GHG intensity by transport means data from International Energy Agency and 24 million trips undertaken resulting in annual release of 75,000 tons of carbon dioxide that would be saved when digitization takes place. The result is discounted by a rebound factor of 20 percent to account for uptick in use of computers and hence need to consume more energy. 25 https://onlinelibrary.wiley.com/doi/10.1002/pop4.349 26 https://www.ictd.ac/dataset/nesg-nigeria-tax-subsidy-perception-dataset/ Page 8 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) E. Disbursement Linked Indicators and Verification Protocols 17. Disbursements under the proposed ARMOR Program will be through nine DLIs structured around the Program’s three result areas. Details of the DLIs, and DLRs, and their scalability and targets are presented in Table 2 followed by a brief description of each DLI. Verification protocols are provided in Annex 1. Paragraph 31 contains details of the arrangements for Independent Verification Agent (IVA) to be brought on board. The disbursement allocations for each DLI are based on (i) the actual revenue generating impact; and/or (ii) the impact on good governance, where good governance is defined to mean improved transparency and equity of revenue administration (see Annex 9). Result Area 1: Implement tax and excise reforms. 18. DLI 1. “Increased revenues from VAT” This DLI, which complements the VAT policy reform proposed in the RESET- DPF to progressively increase the VAT rate and allow input tax credits on capital goods and services, will support FIRS and NCS to collect more VAT revenues by implementing the new rules and regulations at the higher rates and to expand the tax base by reforming processes and systems that increase the number of registered VAT traders, especially for those where the policy changes make it more advantageous to register as a formal VAT taxpayer. The reform will also support Nigeria’s compliance with the 2023 ECOWAS VAT directive to harmonize domestic taxes. 19. DLI 2. “Reduced forgone revenue” will increase revenues by rationalizing tax expenditures. It will support phasing out the exemption of interest income from corporate bonds which was introduced by Executive Order u/s 23(2) of the CIT Act (CITA). After supporting the development of the capital markets for a decade, the federal government plans to sunset this exemption, which costs an estimated NGN116.4 billion (US$290 million) per year.27 In addition, this DLI will support the rationalization of the Pioneer Status Tax Incentive Scheme (PSIT) exemption, which allows a CIT tax holiday for five years (with an initial period of three years, and renewable for an additional two), as well as additional tax benefits to qualifying industries.28 However, this scheme faces several issues, including administrative inefficiencies and the potential for abuse due to overlapping agency roles and loopholes that allow businesses to exploit tax holidays. The scheme's relevance is further questioned as it covers 99 industries, many of which are no longer pioneering by nature,29 underscoring the need for a thorough review to ensure its effectiveness. 20. DLI 3. “Increased revenue from pro-health and green taxes” aims to increase revenues while promoting healthier and more environmentally sustainable behaviors. This DLI supports increasing the excise rates on health harming products or services including tobacco, alcoholic products, as well as online betting and gambling services in order to dis-incentivize their consumption. In addition, this DLI (DLRs 3.3 and 3.4) will support introducing and implementing a green surcharge on large and high-polluting vehicles30 as well as an excise on single-use plastics, to encourage eco-friendly choices and reduce greenhouse gas emissions. These measures aim to prioritize environmental sustainability and wellbeing without significantly affecting the poor, who rely more on public transport and small motorbikes and do not consume much by way of alcoholic or tobacco products (see Annex 8). 27 The total value of the corporate bonds outstanding as listed on FMDQ is NGN 934.5 billion. The effective interest rate on the bonds is 12.45 percent, hence estimated annual interest of NGN116.4 billion. 28 The Pioneer Status incentive was established by the Industrial Development (Income Tax Relief) Act, No 22 of 1971. In addition to the CIT holidays, the tax incentives are: (i) deduction of fixed asset costs after the tax holiday; (ii) tax losses incurred during the tax holiday may be set off against taxable profits earned after the tax holiday; and (iii) tax-free dividends. 29 https://www.nipc.gov.ng/ViewerJS/#../wp-content/uploads/2019/01/Gazetted-List-of-Pioneer-Industries-and-Products.pdf 30 To make the tax more progressive, electric and hybrid vehicles, mass transit vehicles and vehicle with engine capacity under 2000 ccs, will all be exempted from this tax. Page 9 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Table 2: ARMOR DLI/DLR Matrix, Disbursement Allocation, and Targets Disbursement Linked Indicators DLI price Baseline Target in 2027 Disbursement Linked Results (DLRs) Scalability (DLIs) (US$ mln) (unit of DLI) (DLI unit) RA1: Implement tax and excise reforms 255.0 DLR 1.1: Revenues collected from VAT as a ratio of non-oil GDP, as per the verification protocol 105.0 1.3% 1.8% Scalable DLI 1: Increased revenue from VAT DLR 1.2: Number of VAT filers, as per the verification protocol 30.0 472,060 660,000 Scalable DLR 2.1: By December 31, 2023, the exemption of interest on corporate bonds removed and capital gains over 10.0 No Yes Not Scalable NGN100 million taxed, as per the verification protocol DLR 2.2: By December 31, 2024, The Pioneer Status Industry Tax Incentive (PSIT) scheme, was rationalized as per DLI 2: Reduced forgone revenues 10.0 No Yes Not Scalable the verification protocol DLR 2.3: Additional revenues collected from lower tax expenditures as a percent of non-oil GDP, as per the 15.0 0% 0.2% Scalable verification protocol DLR 3.1: A presidential order issued to increase excises on sin goods, as per the verification protocol 10.0 No Yes Not Scalable DLR 3.2: Additional revenues collected from excises on sin goods as a ratio of non-oil GDP, as per the verification 35.0 0.0% 0.3% Scalable DLI 3: Increased revenue from pro- protocol health and green taxes DLR 3.3: A presidential order issued to introduce green excises, as per the verification protocol 10.0 No Yes Not Scalable 30.0 0.0% 0.2% Scalable DLR 3.4: Additional revenues collected from green excises as a ratio of non-oil GDP, as per the verification protocol RA 2: Strengthen tax revenue and customs administrations 310.0 DLR 4.1: Online ontime filing compliance rate for CIT (%), as per the verification protocol 28.3 17 55 Scalable DLI 4: Increased on time on-line e- DLR 4.2: Online ontime filing compliance rate for VAT (%), as per the verification protocol 23.3 65 85 Scalable filing and e-payments DLR 4.3: Online VAT payment rate (%), as per the verification protocol 28.3 22 60 Scalable DLI 5: Enhanced VAT voluntary DLR 5.1: E-invoice system launched for VAT traders, as per the verification protocol 20.0 No Yes Not Scalable compliance DLR 5.2: E-invoice system adopted by traders (%), as per verification protocol 45.0 0 30 Scalable DLR 6.1: By April 31, 2024 the FIRS system receives NITDA certification, as per the verification protocol 15.0 No Yes Not Scalable DLR 6.2: An automated and integrated data sharing between NCS-FIRS is functional, as per the verification protocol 15.0 No Yes Not Scalable DLI 6: Improved tax audits DLR 6.3: A centralized risk-based tax audit selection system is launched, as per the verification protocol 10.0 No Yes Not Scalable DLR 6.4: Tax audit cases selected using a centralized risk based system, as per the verification protocol 25.0 0 30 Scalable DLR 7.1: By December 31, 2023, a compliant trader program launched and an Authorised Economic Operator 15.0 No Yes Not Scalable DLI 7: Increased compliant trade (AEO) framework enacted, as per the verification protocol flows DLR 7.2: Customs registered, accredited, and compliant firms, as per the verification protocol 10.0 125 300 Scalable DLR 7.3: Percent of goods directed through Green Channel, as per the verification protocol 35.0 0% 15% Scalable DLI 8: Increased customs revenues DLR 8.1: Risk Management and Compliance based criteria for conducting targeted and random inspections , as per 10.0 No Yes Not Scalable through better risk management and the verification protocol enhanced PCA DLR 8.2: Revenue assessed from the Post Clearance Audit (PCA) Unit (Naira bln) 30.0 37 110 Scalable RA 3: Safeguard oil and gas revenues 165.0 DLR 9.1: A forensic audit of NNPCL has been completed, as per the verification protocol 15.0 No Yes Not Scalable DLR 9.2a: By March 2025, the Federal Account Allocation Committee (FAAC) approves an enhanced template for 5.0 No Yes Not Scalable NNPCL reporting. DLI 9: Enhanced transparency and DLR 9.2b: Three months after the approval of the enhanced reporting template, FAAC receives reports from NNPCL, increased oil revenue flows which include (i) the total oil lifted in all the operations it supervises, (ii) existing liabilities, (iii) forward crude oil sales 55.0 0 33 Scalable (iv) and outstanding fiscal and regulatory (such as gas flare) payments, as per the verification protocol DLR 9.3: Net fiscal oil revenues as a ratio of GDP 90.0 1.8% 2.5% Scalable Page 10 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Result Area 2: Strengthen tax revenue and customs administrations 21. DLI 4. “Increased on time on-line e-filing and e-payments” to support the enhancement of online declaration and payment compliance for CIT and VAT through e-filing and e-payment systems. The adoption of online filing and payments is associated with increases in tax revenue, and reducing compliance and tax administration.31 Instant availability of tax data facilitates analysis, monitoring, and compliance enforcement. Furthermore, it diminishes the opportunity for high-risk firms to collude with tax officials to reduce their tax liabilities. With human resources freed from routine tasks, staff can focus on more value-adding and revenue-raising activities. Factors such as reduced compliance costs, increased transparency, and a narrower scope for corruption may also boost taxpayer willingness to comply, thus leading to increased revenues. 22. DLI 5. “Enhanced VAT voluntary compliance” to increase revenues through enhanced VAT voluntary compliance and accurate declaration of liabilities. VAT compliance gaps are largely driven by failure to register, or declare VAT due, and under-declarations of VAT liabilities to the tax authorities. To help mitigate these issues, this DLI will support the establishment of a VAT e-invoicing system, which has been shown to significantly improve compliance and accuracy in tax reporting. Studies conducted in Argentina, Brazil’s-Sao Paulo state, Ecuador, Mexico, and Uruguay found that adopting e- invoicing leads to a gradual increase in reported sales and VAT collection.32,33 23. DLI 6. “Improved tax audits” aims to strengthen enforcement and compliance activities by improving the effectiveness of the FIRS tax audit function. Despite TADAT 2023 acknowledging the use of decentralized risk-based audit case selection and third-party data,34 the NCS and FIRS data exchange systems are not seamlessly integrated. This leads to decentralized risk management and selection of audit cases, leading to sub-optimal compliance and enforcement results. DLI 6 aims to rectify this situation by implementing a centralized, risk-based, data-informed audit selection process, which has been shown to decrease tax avoidance and boost revenue collections significantly. 24. DLI 7. “Increased compliant trade flows” will facilitate trade by supporting the development of a compliant trader program. A voluntary compliance program for traders will help streamline border processes, provide a level playing field for the trade supply chain, and consequently increase the flow of compliant trade and associated revenues. To that end, this DLI supports enhancing the volume of compliant trade processed through the establishment of a simplified Authorized Economic Operator (Fast Track 2.0 Program) and increasing the flow of trade through the green channel. Simplified trade facilitation for accredited compliant or non-risky traders will increase revenues through higher volumes of trade as was the case in the United Arab Emirates, Kenya, and Uganda; reduce the cost of administration as customs resources are freed up to focus on higher-risk traders, and reduce time and cost of importing and exporting borne by the private sector, ultimately increasing exports and economic growth. 25. DLI 8. “Increased customs revenues through better risk management and enhanced PCA”: As a complementary 31 “Does E-Government Improve Government Capacity? Evidence from Tax Compliance Costs, Tax Revenue, and Public Procurement Competitiveness,” Ana Kochanova, Zahid Hasnain, and Bradley Larson, World Bank Economic Review, Volume 34, Issue 1, February 2020, p.101 –120. https://doi.org/10.1093/wber/lhx024 32 Electronic Invoicing in Latin America, Alberto Barreix, Raul Zambrano, 2018, Inter-American Development Bank & Inter-American Center of Tax Administrations. 33 A study on e-invoicing in Peru observed that e-invoicing increases reported firm sales, purchases, and value-added tax by over 5 percent in the first year after adoption. Further, e-invoicing had a larger impact on traditionally low compliance sectors, such as retail, business services and construction. This indicates a positive shift in firm compliance behavior. 34 The FIRS process to identify, rank and quantify risks is in infant stage, leading to allocation of audit resources to not sufficiently target high risky taxpayers. Page 11 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) measure to safeguard revenue, as more flow of compliant trading (DLI 7) increases, DLI 8 supports increasing revenues through more efficient Post-Clearance Audits (PCAs). This DLI will support improving NCS’s risk management and selection criteria for declarations targeted for inspections. This will maximize the detection rate of malfeasance per customs declaration or post clearance audit, thus improving the efficiency of the administration and revenues collected. By strengthening the PCA process, an increase of one to five percent of customs revenue collected can be achieved, as evidenced by similar programs in Jordan, Australia, and Japan. In the case of Canada, PCA resulted in additional customs revenues of US$128 million, or 3.6 percent of total customs revenues in 2010.35 While this DLI is expected to generate revenues in the long-term through reduced misdeclaration, it is also expected to improve the governance of customs. Result Area 3: Safeguard oil and gas revenues 26. DLI 9. “Enhanced transparency and increased oil revenue flows” will support the FGN in conducting a forensic audit of the NNPCL to clarify all claims and transfers made to the Federation. This DLI also supports the adoption of an enhanced template for NNPCL fiscal reporting, ensuring that the Federation receives more detailed monthly reports from NNPCL on fiscal flows. These reports will include detailed information on: (i) NNPCL’s stock of existing liabilities; (ii) forward crude oil sales; and (iii) outstanding fiscal and regulatory payments (such as those related to gas flaring), among others. Finally, the DLI will incentivize increased net oil and gas revenues for the Federation as improvements in the oil sector governance manifest and the gasoline/premium motor spirit subsidy is phased out according to complimentary reforms in RESET -DPF (P501661) and the enhanced financial reporting forms the basis for oil-revenue transfers to the government budget. III. PROGRAM IMPLEMENTATION A. Institutional and Implementation Arrangements 27. Successful implementation of the ARMOR PforR Program will require strong collaboration and robust implementation arrangements by FMF, FIRS, and NCS. Since all the MDAs are housed within the FMF, the role of the Office of the Permanent Secretary of Finance (PSF) directly supervising the Project Coordinating Unit (PCU) housed in the Technical Services Directorate (TSD) will facilitate coordination among the implementing units. 28. The ARMOR Program governance structure comprises two key committees and PCU. First, the ARMOR Program Steering Committee led by the Federal Minister of Finance and Coordinating Minister of the Economy and comprising the PSF and the Heads of FIRS and NCS, and the Presidential Committee on Fiscal Policy and Tax Reforms convening quarterly for strategic oversight. Second, the ARMOR Technical Committee chaired by the PSF and comprising relevant directors of FIRS, NCS, Budget Office of the Federation (BOF), TSD and FMF director of home finance and secretary to FAAC, meeting monthly for technical oversight. The PCU will function as the core task team reporting to the PSF and serving as the secretariat for the Steering and Technical Committees. The PCU, headed by a director-level Program Coordinator drawn from the civil service and reporting to the PSF, will meet weekly to steer day-to-day program activities. A Program Manager hired on a consultancy basis, will be responsible for daily execution of all program management activities including effective supervision of fiduciary functions for activities financed by the IPF and reporting to the Program Coordinator. This hierarchical structure draws upon the experience in other successful PforR operations implemented in Nigeria, and facilitates efficient communication, oversight, and resolution of implementation challenges at various levels. The structure is illustrated in Annex 2. 35 http://www.wcoomd.org/-/media/wco/public/global/pdf/events/2014/revenue_conference/revenue-impact-paper.pdf Page 12 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) 29. The implementation of the PforR Program will capitalize on existing systems within the FMF, FIRS and NCS, enhancing their capacity. The FIRS and NCS have their own Program Implementing Units (PIUs), which will be responsible for reporting on the DLIs and implementing technical assistance and reporting on progress to the PCU. Leading the policy reforms within the PforR component, the FMF, with support from the Presidential Committee on Fiscal Policy and Tax Reforms, will drive the overarching strategy and take overall responsibility for achieving DLI 9. Concurrently, the implementation of the IPF component falls under the purview of each respective agency i.e., FIRS, NCS and the PCU. The PCU will also be responsible for procurement and financial management for activities financed under the IPF Technical Assistance (TA) component. To strengthen the PCU's capabilities in Program coordination, supervision, communications, outreach, procurement, and monitoring and evaluation (M&E), the Program's IPF component will be used to provide additional technical assistance, hiring of consultants, and ICT equipment. The accountant and financial management (accounting and audit) functions will be conducted by civil servants within each agency. B. Results Monitoring and Evaluation 30. The PCU will be responsible for monitoring the implementation progress and results, defined in the Results Framework and the DLIs (Annex 1). The PCU will be staffed with an M&E expert to support data collection from the implementing agencies (TSD, FIRS, NCS), develop a program monitoring system and protocols and report progress updates on all indicators, DLIs, and DLRs. The PCU will prepare mid-year and annual progress reports for the oversight committees with copies sent to the World Bank before implementation support missions to guide discussions on key issues affecting Program implementation. 31. The PCU will hire an Independent Verification Agency (IVA), on terms of reference acceptable to the World Bank. The IVA will verify the achievement of DLRs in accordance with the approved verification protocol. Full details of the protocol will be included in the Program Operations Manual. While the World Bank may verify achievements of DLRs that are of a legal nature (the issuance of circulars, Finance Acts, and orders), the IVA will be tasked with verifying the achievement of the DLR targets based on data reported by the implementing agencies and other information sources identified in the protocol. Prior results should be ready for verification immediately after Program onset and will need to be verified by the IVA. The IVA will be funded from the IPF component of the operation and procurement should be advanced with the aim of having the IVA in place within a month of the Program’s effectiveness. The scope and details of the IVA reports will be based on the agreed verification protocol and satisfactory to the World Bank. C. Disbursement Arrangements 32. Disbursement of IBRD funds under the PforR component will be based on the achievement of Disbursement- Linked Results (DLRs), after verification by the IVA and validation by the World Bank. The FMF will present all documentation, to contain relevant validation information as per the agreed Verification Protocol. The World Bank will review the submitted documentation and will reserve the right for further due diligence on the robustness of data as needed. Disbursement will be made after the World Bank has reviewed and confirmed the validation results in line with the Program Financing Agreement. After the World Bank formally reviews the DLRs, it will issue an official letter to the Government confirming the achievement of the DLR targets and the amount of the disbursement. The FMF will then submit a Withdrawal Application (WA) for the disbursement of the respective amount. 33. Following the effectiveness of the Financing Agreement, up to 25 percent of the PforR component may be disbursed upon verification of achievement of prior results. At Program end, any amount disbursed under DLIs that exceeds the actual expenditure level for the entire Program period (ending with the Program closing date) will be reimbursed to the World Bank. Page 13 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) 34. Disbursements of IBRD funds for the IPF component will be conducted according to the Disbursement Guidelines for Investment Project Financing, dated February 2017. For the IPF component funded activities, the Program will receive disbursements from the World Bank through the advance, direct payment, reimbursement, and special commitment methods. Disbursement details are included in the Disbursement and Financial Information Letter. D. Capacity Building 35. The design of ARMOR builds on extensive TA provided by the World Bank to the government for developing a technically robust program of DRM reforms. The government received World Bank technical assistance under the Nigeria DRM Reform Advisory Services and Analytics Sub-Task (P173409) from January 2020 to February 2024 and continues to receive such TA during implementation through the FRED 2.0 (P181272) Program. First, as regards tax policy, the World Bank provided technical and analytical inputs to the Fiscal Policy and Reform Committee, which drafted the annual Finance Acts that served as a vehicle for the adoption of tax policy reforms. Second, the World Bank provided TA to the BOF to support the preparation of the Tax Expenditure Statements for 2019 and 2020. Third, the World Bank is providing ongoing TA to FIRS on measures to improve VAT compliance, improve risk-based compliance and enforcement measures, and develop a digital transformation strategy. Fourth, TA to NCS has supported the development of a Monitoring and Evaluation (M&E) unit, Key Performance Indicators (KPI), and data analysis designed to enhance decision making. The World Bank also supports the Ministry of Finance and the Nigeria Extractive Industries Transparency Initiative with technical advice on how to support the reconciliation of the oil and gas payments made to the government. Since the passage of the Petroleum Industry Act in August 2021, the World Bank’s assistance to the Ministry of Finance has focused on the implications of the Act for the fiscal flows to the Federation Account based on the NNPCL’s annual financial statements and monthly reports submitted to the FAAC. This robust engagement has helped build strong relationships with key counterparts in the agencies that have designed and will implement the ARMOR Program. 36. Building on this recent engagement, the World Bank will continue supporting FGN with TA and capacity building to facilitate achievement of the results through the IPF component of this operation. TA will focus on supporting FIRS and NCS to improve taxpayer and trader compliance, supporting a risk-based approach to identifying compliance problems and policies and tools for strengthening enforcement, and improving technical and procedural access to third-party data sources, and establishing M&E systems and use of data for management improvements. The TA support to NCS will also include improving risk management, procedural improvements to post clearance audits, and excise administration, and support for the NCS to operationalize, the Fast Track 2.0 Program, as a pathway to an Authorized Economic Operator model. As regards tax policy, the World Bank will continue providing TA on drafting regulations, providing inputs for a detailed review of tax incentives, conducting taxpayer compliance surveys, build capacity for gender impact analysis on revenue policy proposals, build capacity (including people, process, and tools) in the tax policy unit of the Technical Services Department and continue to support the BOF and FIRS in conducting tax expenditure analysis, and reforming international taxation. Page 14 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) IV. ASSESSMENT SUMMARY A. Technical (including program economic evaluation) 37. Strategic relevance and technical soundness of the operation. The ARMOR Program provides financing for reforms that enhance tax policy, strengthen revenue and customs administration, and safeguard oil and gas revenues. These goals are in line with the World Bank Group’s Nigeria CPF for FY21-25 (153873-NG) which reflects Nigeria’s aspiration for faster, more inclusive, and sustained economic growth.36 Key to achieving this aspiration is the ability to finance development by raising resources, a priority for the Nigerian Government. This Program addresses the main tax policy challenges faced by the FMF in raising revenues as well the revenue administration challenges faced by FIRS and NCS. These challenges are well documented in the Tax Administration Diagnostic Assessment Tool (TADAT, 2023) and the Public Expenditure and Financial Accountability (PEFA, 2019)37 assessments, the IMF work on lessons from successful reform episodes (2023)38 as well as World Bank work on fiscal adjustments for better results39 and the World Bank extensive TA under the DRM Reform Advisory Services and Analytics sub-task (P173409). The key challenges are summarized in the Sectoral and Institutional Context section. Whereas there are multiple challenges facing revenue collection in the oil and gas sector, there is limited World Bank engagement with key leaders in NNPCL and the Ministry of Petroleum Resources. For this reason, the Program scope is limited to what can be implemented by the Ministry of Finance. 38. The operation is aligned with the Paris Agreement on both climate change adaptation and mitigation. • Assessment and reduction of mitigation risks: Nigeria’s contribution to global GHG emissions is estimated at 0.7 percent of total global emissions. Nigeria committed to reducing GHG emissions by 20 percent by 2030. The Program is not at a material risk of having a negative impact on Nigeria’s low-carbon development pathways. While the Program is incentivizing the increase in net oil revenues received by the Federation, it does not incentivize an increase in oil production or any changes to their commitments to the global climate change agenda. No PforR proceeds will be used to finance large data centers. Two DLIs i.e., DLI 3 on green surcharge and excise duties enhancement and DLI 4 on increased online filing and payments, support reduction in GHG emissions. Therefore, the Program has no or low mitigation risks. • Assessment and reduction of adaptation risks: Risks from climate hazards and the vulnerability of the infrastructure network due to the repeating patterns of floods and droughts in Nigeria are not likely to have a material impact on the achievement of the DLIs or the PDO. 39. Implementation capacity and arrangements (including M&E). The operation will be implemented by the FMF through its departments and agencies (Technical Services Department, FIRS and NCS) and coordinated by the office of the PSF.40 The entire implementation arrangement is built on the existing governance structure within the FMF which will not 36 The Progress and Learning Review for the CPF is being circulated to the Board of Executive Directors along with this operation and the RESET DPF. 37 https://www.pefa.org/node/166 38 https://www.elibrary.imf.org/view/journals/018/2023/019/article-A001- en.xml#:~:text=Based%20on%20these%20cross%2Dcountry,measures%20for%20improving%20compliance%20by 39 https://documents.worldbank.org/en/publication/documents- reports/documentdetail/099615211172222358/p1750950fbd29d02008429007d1ed499d61 40 The FIRS Executive Chairman, the NCS Comptroller General and Boards of both FIRS and NCS are appointed by the President. In exercise of powers granted under the Federal Inland Revenue Service Act, 2007, or National Customs Act, 2023, the Boards do so under the direction of the Minister responsible for Finance (See Section 51 of the FIRS Act, or Section 12 of the NCS Act). Page 15 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) only ensure ownership of the Program but also serve to enhance capacity. The FMF has experience managing PforR programs that are supported by the World Bank. The Power Sector Recovery PforR Operation (P164001) of US$750 million is under implementation and lessons such as ensuring upstream engagement to get high-level buy in have been incorporated in the ARMOR Program design. There have been lengthy upstream discussions about ARMOR with FMF, NCS, FIRS, and other stakeholders. A steering committee chaired by Federal Minister of Finance has been set up. The PCU which will house the steering and technical committee secretariat will hire the IVA to verify the achievement of DLRs. The PCU will also receive support to strengthen its M&E, procurement, communication, and supervision capacity under the IPF component. Detailed implementation arrangements including the process for data collection for M&E and DLI verification protocols, the FM, disbursement, and procurement rules will be documented in the Program Operations Manual to be developed by the government with the help of the World Bank before project effectiveness. 40. Program sustainability. The FMF and implementing agencies (FIRS and NCS) are expected to use their annual budget allocations to sustain the reforms beyond the Program's life. While budget reliability in Nigeria is low, both FIRS and NCS legally retain, four percent, and seven percent of their total revenue collection, respectively to meet operational costs. The two agencies are highly receptive of the Program interventions and keen to generate more revenue which will in turn increase their operational budgets and keep their staff highly motivated. This pre-existing system mitigates the risk of underfinancing operations and expenditures associated with the Program which would affect Program sustainability after completion. The FIRS Executive Chairman and NCS Comptroller- General were both appointed on four-year terms in 2023. Both FIRS (with over 11,500 staff)41 and NCS (with over 18,000 staff) have fully fledged training schools to carry out continuous staff training. In addition, the reforms in tax expenditures will be sustained since they will be anchored in enacted laws. To sustain reforms in oil revenue transparency, there will be a need to embed enhanced in-year reporting requirements in the Allocation of Revenue (Federation Account, etc.) Act No.1 1982. 41. Fiscal and economic analysis. As further detailed in Annex 2, the Net Present Value (NPV) of the Program is estimated at US$23.4 billion or 6.3 percent of the 2023 GDP with a discount rate of 14.3 percent (the average inflation) over a period of 10 years, on the assumption of a sustained increase in revenues arising from the measures taken under the program and starting in 2025. Using sensitivity analysis, even with conservative estimates where only 20 percent of the base case revenue gains materialize the NPV remains positive at US$3.8 billion. The cost benefit analysis assumes program costs of US$1.173 billion over five years Program Expenditure Framework (PEF) and annual recurring costs estimated at ten percent of the investment; yielding annual benefits from year 3 in terms of time saving for taxpayers and traders and additional tax revenues due to better audits and fewer tax expenditures and lower administrative costs due to greater voluntary compliance and more efficient risk-based audit selection. The assumptions of greater revenues from tax administration reforms are consistent with the empirical estimates that strengthening the tax administration can lead to additional revenues, over time, of between 1.4 and 3.0 percent of GDP.42 Other efficiency gains, such as reduced consumption of health harming products, or reduced GHG emissions, are projected to accrue. Further, the program actions will also result in eased pressure on debt sustainability. Lower external financing and reduced debt accumulation will reduce the debt service share of Nigeria’s annual budget, creating space for investment in much needed social protection programs, and human capital. 42. Program Expenditure Framework (PEF). Projections for 2024 to 2028 in the PEF are based on the 2024 budgets of the implementing agencies, past disbursement ratios, the 2024-2026 Medium Term Expenditure Framework (MTEF), and the projected inflation and growth for 2027 and 2028. The total Government program financing is estimated at US$1.173 billion. The World Bank will contribute US$750 million, or 64 percent under the PforR and IPF components. The 41 https://www.firs.gov.ng/wp-content/uploads/2022/06/FIRS-Annual-Report-2021.pdf 42 https://www.imf.org/en/Publications/WP/Issues/2023/11/10/Quantifying-the-Revenue-Yields-from-Tax-Administration-Reforms-541407 Page 16 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Government program is funded through annual budget allocations to participating MDAs, and through retained revenue collections by NCS and FIRS. For the proposed PforR operation, the PEF will include expenditures for NCS, FIRS, and FMF that will facilitate achievement of DLRs and the PDO. Most results under the PforR component will require the time of staff and temporary specialists (consultants), utilities, operating expenses, and training and travel expenses. The following eligible expenditure categories have been identified for the PforR component as the most impactful for achieving DLIs: (1) Salaries and Wages; (2) Travel, transportation, and training; (3) Utilities and operating expenditures; (4) Current repairs and maintenance; and (5) Consulting and professional services. No capital expenditures are included in the PEF. Detailed Program eligible expenditures are presented in Annex 2. 43. ARMOR is aligned with the World Bank corporate commitments in the following manners: Two DLIs (DLI 3 and DLI 4 on green taxes and increased online filing and payments) support reduction in Climate change GHG emissions, while all other DLIs will not have a negative effect on climate change. The Program contributes to IDA20 commitment to support 15 countries improve DRM capacity and achieve IDA20 a 15 percent tax to GDP ratio in the medium term. The program contributes to establishing Gender Responsive Public Finance management by establishing ex-ante gender impact analysis on revenue proposals, with the aim of assessing potential gendered effects prior to policy approval. Processes and systems will be enhanced to collect, analyze, and disseminate gender disaggregated data. Increased e-filing and e-payment will facilitate women-owned businesses in Gender conducting online filing, which will reduce time spent on tax administration, an outcome specifically favorable for women-owned companies which are often time deprived. The measure will also reduce the risk of harassment or Gender-Based Violence through reduction of personal contact with tax officers and women will be availed non-discriminatory tax service when filing taxes. Citizen Engagement All proposed Result Areas will require and promote citizen engagement as FMF, NCS and FIRS conduct taxpayer outreach programs on tax policies or tax and customs administration reforms. A stakeholder engagement plan has been developed. It will leverage the Partnership for Amplified Voices (PAV), a CSO platform established under the Social Accountability and Citizen Engagement PASA to promote public engagement, and voice, and close the feedback loop. In addition, a Grievance Redress Mechanism will be designed to process complaints, concerns, and questions from stakeholders at different levels. B. Fiduciary 44. An Integrated Fiduciary Systems Assessment (IFSA) was conducted by the World Bank which reviewed the public financial management, laws, policies, systems, and practices of NCS, FIRS, and FMF. In addition, lessons learned from implementation of World Bank programs by the agencies were reviewed. Thanks to the existence of qualified staff, unqualified audit reports and the assessment of adequate planning, budgeting, accounting, internal controls, funds flow, financial reporting and auditing arrangements, processes, systems, practices, and capacity, all three implementing agencies: NCS, FIRS, and FMF are assessed to provide reasonable assurance that Program resources will be used for the intended purposes and will support the achievement of Program objectives in an effective, efficient, and transparent manner, subject to deployment of consulting procurement staff and training of procurement and finance management (FM) staff for the IPF component. 45. Overall fiduciary risk (FM, procurement, and governance) is rated High. The IFSA has identified fiduciary risks for which mitigation measures are proposed through methodical implementation of the Program Action Plan (PAP). The include: i. Program funds not used for intended purposes. The participating agencies will provide bi-annual reporting on the Page 17 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) use of funds under the PEF, using the pre-existing expenditure and accounting systems.43 The annual audits under the Program will also be used for periodic monitoring.44 Verification of results will be conducted by the IVA. The IVA will submit verification reports to the PCU and the World Bank for review. Additionally, the World Bank will conduct implementation missions to verify that results have been achieved and sustained. ii. Limited knowledge and experience in NCS and FIRS in World Bank procurement or finance management rules for the IPF component and financial management reporting and responsibilities under PforR operations. This will be mitigated through training and capacity building interventions to be financed through the TA as may be needed. 46. Mitigation of fraud and corruption risk using government and World Bank systems. The World Bank Anti- Corruption Guidelines will apply to the Program and Grievance Redress Mechanisms and will be implemented across all implementing agencies. The Program governance and anti-corruption arrangements will rely on the country’s national- level governance and anti-corruption arrangements with additional Program-specific reporting. The Economic and Financial Crimes Commission (EFCC), Independent Corrupt Practices Commission (ICPC), and Nigeria Police will handle investigations of fraud and corruption. Under the Program, the World Bank will be apprised by the PCU at the earliest opportunity of all allegations and complaints of fraud and corruption related to the Program activities. Signed submissions on integrity concerns declaring any reports, investigations and prosecutions will be sent to the World Bank from the PCU (covering FMF, NCS and FIRS) shall be made every six months as part of the semi-annual progress reports using a template agreed with the World Bank. This submission shall provide details of any allegations or complaints on fraud and corruption regarding any part of the program implementation and the status of actions taken to address allegations. Where there are no such allegations or complaints, a statement to that effect shall be included in the submission. An additional mitigation measure will involve the implementation of GRMs by the implementing agencies. 47. Procurement arrangements and exclusions. Procurement arrangements for the Program will be governed by Nigeria Public Procurement Act (2007). Procurement exclusions are not envisaged under the Program. The value of contracts for the procurement of Works, Goods, and Services under the Program are not expected to exceed the Operational Procurement Review Committee (OPRC) thresholds (no works will be financed in this operation). A simplified Project Procurement Strategy for Development that details the procurement packaging strategy, method, bid evaluation methodology of the IPF packages, timeline for the procurement activities, contracting arrangement etc., including the risk mitigation measures shall be concluded by the Government. The Project Procurement Strategy for Development is a live document and will be updated at least once annually. The major procurement activity shall be the engagement of the IVA procured by the PCU. The Procurement Plan for each contract to be financed under the TA, the selection methods, estimated costs, prior review requirements, and time frame will be agreed between the Borrower and the World Bank. The Procurement Plan will be updated at least annually, or as required, to reflect the actual project implementation needs and improvements in institutional capacity. C. Environmental and Social 48. An Environmental and Social Systems Assessment (ESSA) has been undertaken by the World Bank and consulted upon. The assessment concludes that there are adequate policy, institutional, and legal provisions to ensure that the Program’s social and environmental risks are minimized, and the Program’s effects are positive. While gaps exist, the World Bank has agreed with the Government on specific actions to strengthen the environmental and social (E&S) management systems to ensure positive benefits and to address some gaps and potential risks identified, such as e-waste 43 The Federal Ministry of Finance accounting system is the IFMIS, FIRS accounting system is SAP system, while NCS utilizes NCS-IFMIS. 44 Auditor General of the Federation audits Federal Ministry of Finance while independent external auditors are hired by NCS and FIRS. Page 18 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) and social unrest arising from tax rate increases. These have been stipulated in the Environment and Social Commitment Plan (disclosed in-country on April 22, 2024,45 and on the World Bank website on April 24, 2024) and incorporated into the PAP. 49. The environmental risk is rated Low. The operation entails no construction nor rehabilitation activities. The introduction of green excise on vehicles and plastics will help reduce greenhouse gas emissions. Increasing excises on tobacco products will discourage the consumption of tobacco and thus reduce carbon footprint and environmental damage caused by the tobacco industry. Increased use of ICT may generate e-waste. In mitigation, an e-waste strategy shall be developed and implemented. 50. The social risk is Substantial. The Program has many social benefits such as increasing government revenues, reducing tax expenditures, and reducing consumption of harmful goods, improving health outcomes. To ensure increased revenue and savings from tax expenditures are channeled for development purposes, the Program will also strengthen revenue administration infused with ICT and enhance tax payment compliance. Despite the huge benefits of the Program, there are potential social risks associated with the increases in taxes, which could affect certain industries and a small portion of the population. A poverty and social incidence analysis has been carried out and concluded that the measures proposed by the Program are largely borne by the rich deciles of the society. See details in Annex 8. To mitigate the potential poverty implication under DLI 3 (green taxes), this tax will exempt vehicles with engine capacity under 2000 cubic centimeters as most poor households rely on motorbikes and public transportation. The program TA component, will also support stakeholder engagement and awareness to create consensus among the citizens on the benefit of the program and strengthen the social contract. 51. Based on the outcome of the assessment, the Program’s E&S risk is rated Substantial. The ESSA was disclosed on April 22, 2024 for the identified Program and was completed in line with the World Bank Guidance for conducting ESSA for PforR financing operations. 52. The E&S risk from the IPF component is rated Low. No physical or civil work or data centers will be financed by the IPF. The IPF support will be limited to financing activities that lead to achieving the intended results, the PCU, and the engagement of an independent verification agency. The TA will also support the development and implementation of a communications strategy and an environmental strategy. In line with the World Bank’s Environmental and Social Framework requirements, the government has prepared the required Environmental and Social Review Summary (ESRS), that has been disclosed in the World Bank’s Environmental and Social Management system. Further, the Environmental and Social Management Plan (ESMP), Stakeholders Engagement Plan (SEP) and Environmental and Social Systems Assessment were disclosed on the Federal Ministry of Finance Website on April 22, 2024.46 53. Grievance Redress. Communities and individuals who believe that they are adversely affected by a Bank supported PforR operation, as defined by the applicable policy and procedures, may submit complaints to the existing program grievance redress mechanism or the World Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed to address pertinent concerns. Affected communities and individuals may submit their complaint to the World Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, because of World Bank non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank’s attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance 45 https://finance.gov.ng/mdas/documents/document-details/143fbaf0-466b-11ee-bd19-ad6d4ee66afc 46 https://finance.gov.ng/mdas/documents/document-details/143fbaf0-466b-11ee-bd19-ad6d4ee66afc Page 19 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit http://www.inspectionpanel.org. V. RISK 54. The overall residual risk of the Program is rated as high. This is due to high risks in the Political and Governance, and Fiduciary areas, and substantial risks in the Macroeconomic, Environmental and Social plus Stakeholder categories. Institutional capacity, and technical design are rated moderate risk. The complete SORT is presented in Table 3 below. Table 3: SORT Risk Category Rating Description Mitigation measures Challenges arise from both external The ARMOR Program, aims to raise tax revenues and conditions and domestic factors. Oil safeguard oil revenues and is designed to mitigate the revenues are susceptible to global oil price impact of global oil price changes on the macroeconomy volatility, potentially diminishing economic and fiscal situation. In addition to measures under activity and reducing oil and gas revenues. ARMOR, the planned US$1.5 billion RESET-DPF is External uncertainties including from events designed to support strong macroeconomic policies to Macroeconomic Substantial like Russia’s invasion of Ukraine and global control inflation and to maintain an exchange rate monetary policy tightening could reduce consistent with the domestic and global economic capital flows, increase sovereign risk, and fundamentals (and to reduce the risk of the re- elevate borrowing costs. Furthermore, emergence of the parallel exchange rate). Finally, the failure to contain increases in inflation and a FRED 2.0 programmatic ASA will provide TA to NCS, FIRS depreciation in the currency may further and TSD and support tax policy implementation to undermine macroeconomic stability. enhance fiscal consolidation. The annual work planning process and the related While coordinating mechanisms are clear governance structures led by the FMF will provide a and decision-making mechanisms well- platform to anticipate and mobilize the advisory support articulated there may be challenges Institutional and capacity-building measures needed for the receiving cooperation from NNPCL which capacity for participating agencies to implement the reforms. These could affect Program implementation. implementation Moderate measures will be complemented by targeted TA Coordination arrangements may be and supported by the IPF. For sustainability, many actions constrained by the independent nature of sustainability will follow changes in regulations that are also supported the participating agencies making it hard to through the proposed RESET-DPF. FIRS and NCS budgets achieve ambitious results such as are deducted at source, ensuring continuing funding of integrating operational systems. the reforms by government. A poverty and social incidence analysis concluded that the measures proposed by the Program are largely borne by the rich deciles. To further mitigate risks, Introduction and/or increase of taxes carry consultations as part of the ESSA was conducted to raise inherent risk of opposition from vested awareness of the short-term importance and long-term Stakeholders Substantial industry groups. Labor unions and civil benefits of mobilizing revenues planned. Strengthening society groups may oppose policies that social protection systems though the RESET-DPF will also they perceive as hurting the vulnerable. mitigate stakeholder reform resistance risk. ARMOR has an IPF component to support stakeholder communication. Devaluation of the currency and removal of High-level government buy-in exists as the new fuel subsidies create inflation tendencies administration is committed to reforms and actions to Political and that hurt the purchasing power of citizens. strengthen revenue administration and collect more High governance This potentially brings about potential revenues. The Government has rolled out a social protests resulting from the rising cost of protection program that may mitigate the adverse living. Concerted and well-coordinated impact of the reforms on the poor and most vulnerable. Page 20 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Risk Category Rating Description Mitigation measures efforts of the MDAs is challenging in the TA to develop and implement a communications Nigerian context, as there are significant strategy is part of the Program Action Plan and funded overlaps of institutional roles and through the IPF. responsibilities. The overall Program integrated fiduciary risk The IFSA has identified risks for which mitigation (FM, procurement, and governance) is rated measures were determined (training and capacity High, because of limited knowledge and building interventions) and will be supported by experience in NCS and FIRS on World Bank financing through the IPF component. These include Fiduciary High procurement and financial management training of procurement and financial management staff, rules and PforR operations and backlog of submission of interim and program financial reports unaudited financial statements (i.e., FY22 in based on PEF, dedication of procurement and financial NCS and FY21 and FY22 in FMF). management staff to the program and ensuring oversight of program activities. Program design is anchored in sound analytical work as Technical Limited success of previous initiatives to well as the reform priorities and pronouncements by the design Sector raise revenues that tax policy and revenue Government. FGN ARMOR program was endorsed by the strategies and Moderate administration reforms are inherently Federal Executive Council (FEC) and extensive policies of challenging. consultation was done with the new administration on Program the design of the project Environmental risks rated low as the An e–waste strategy shall be developed and program has no construction, or civil or data implemented by both FIRS and NCS. Stakeholder E&S risk Substantial center investments. Social risks rated engagement and communication plan shall be Substantial arising out of tax rate implemented. enhancements. Page 21 The World Bank NG Accelerating Resource Mobilization Reforms PforR(P177308) ANNEX 1. RESULTS FRAMEWORK MATRIX @#&OPS~Doctype~OPS^dynamics@padpfrannexpolicyandresult#doctemplate Program Development Objective(s) The Program Development Objective (PDO) is to raise non oil revenues and safeguard oil and gas revenues. PDO Indicators by Outcomes Baseline Period 1 Period 2 Period 3 Closing Period Implement tax and excise reforms VAT collection as a percentage of non oil GDP (Percentage) DLI Dec/2022 Dec/2027 1.3 1.80 Strengthen tax revenue and customs administration Online ontime VAT filing compliance rate (Percentage) DLI Dec/2022 Dec/2027 65.00 85.00 Online ontime CIT filing rate (Percentage) DLI Dec/2022 Dec/2024 Dec/2025 Dec/2026 Dec/2027 17.23 25.00 35.00 45.00 60.00 Customs registered, accredited, and compliant firms (Number) DLI Dec/2022 Dec/2024 Dec/2025 Dec/2026 Dec/2027 125 0 0 0 300.00 Safeguard oil and gas revenues Enhanced reports received by the Federal Account Allocation Committee (FAAC) from NNPCL (Number) DLI Dec/2022 Dec/2027 0 33 Intermediate Indicators by Results Areas Page 22 The World Bank NG Accelerating Resource Mobilization Reforms PforR(P177308) Baseline Closing Period Implementing tax and excise reforms Expected VAT filers (Number) Dec/2022 Dec/2027 472,060.00 660,000.00 Excise-collection from green taxes as a ratio of non-oil GDP (Percentage) Dec/2022 Dec/2027 0.00 0.20 Strengthen tax and customs administration A tax system that has capacity to collect and disseminate gender disaggregated data on business ownership or leadership (Yes/No) May/2024 Nov/2028 NO Yes Value of goods cleared through green channel (Percentage) DLI Dec/2022 Dec/2027 0.00 15.00 Safeguard oil and gas revenues Federal Account Allocation Committee (FAAC) approves enhanced template for NNPCL reporting. (YES/NO) (Text) Dec/2022 Dec/2027 Basic report with limited parameters New reporting template (Yes/No) Disbursement Linked Indicators (DLI) Period Period Definition Period 1 April 2024 Period 2 December 2024 Period 3 December 2025 Period 4 December 2026 Period 5 December 2027 Page 23 The World Bank NG Accelerating Resource Mobilization Reforms PforR(P177308) Baseline Period 1 Period 2 Period 3 Period 4 Period 5 1.1 : VAT collection as a percentage of non oil GDP (Percentage ) 1.3 0 0 0 0 1.8 0.00 0.00 0.00 0.00 0.00 105.00 DLI allocation 105.00 As a % of Total DLI Allocation 23.6% ➢ 1.2 : Expected VAT Filers (Number ) 472060 0 0 0 0 660000 0.00 0.00 0.00 0.00 0.00 30.00 DLI allocation 30.00 As a % of Total DLI Allocation 6.74% 2 : Reduced Foregone Revenue (Text ) 0 0 0 0 0 0.00 0.00 0.00 0.00 0.00 DLI allocation 0.00 As a % of Total DLI Allocation 0% ➢ 2.1 : DLR 2.1: By December 31, 2023, exemption of interest on corporate bonds removed and capital gains over NGN100 million taxed, as per the verification protocol (Text ) Exemption on corporate By December 31, 2023, Interest on corporate Interest on corporate Interest on corporate Interest on corporate bonds bonds and capital gains exemption of interest on bonds and CGT above bonds and CGT above bonds and CGT above and CGT above NGN100 over NGN 100 million corporate bonds removed NGN100 million taxable NGN100 million taxable NGN100 million taxable million taxable apply and capital gains over NGN100 million taxed, as perverification protocol (YES/NO) 0.00 10.00 0.00 0.00 0.00 0.00 DLI allocation 10.00 As a % of Total DLI Allocation 2.25% ➢ 2.2 : DLR 2.2: By December 31, 2024, The Pioneer Status Industry Tax (PSIT) Incentive Scheme, rationalized as per the verification protocol (Text ) Pioneer Status Industry 0 0 0 Pioneer Status Industry Tax not rationalized Scheme Rationalised as per verification protocol 0.00 0.00 0.00 0.00 0.00 10.00 DLI allocation 10.00 As a % of Total DLI Allocation 0% ➢ 2.3 : DLR 2.3 Additional revenues collected from lower tax expenditures as percentage of non-oil GDP, as per verification protocol (Percentage ) 0 0 0 0 0.2 0.00 0.00 0.00 0.00 0.00 15.00 DLI allocation 15.00 As a % of Total DLI Allocation 0% Page 24 The World Bank NG Accelerating Resource Mobilization Reforms PforR(P177308) 3 : Increased excise collection from pro health products and services (Percentage ) 0 No DLR No DLR No DLR No DLR 0.00 0.00 0.00 0.00 0.00 DLI allocation 0.00 As a % of Total DLI Allocation 0% ➢ 3.1 : DLR 3.1: A presidential order issued to increase excises on sin goods, as per the verification protocol (Number ) Excise rates on sin goods By December 31, 2024, A Presidential order A Presidential order very low Presidential order issued increasing excises on "sin" increasing excises on "sin" to increase excises on sin goods, in place goods, in place goods, as per the verification protocol 0.00 10.00 0.00 0.00 0.00 DLI allocation 10.00 As a % of Total DLI Allocation 2.25% ➢ 3.2 : DLR 3.2: Additional revenues collected from excises on "sin" goods as ratio of non-oil GDP, as per verification protocol (Percentage ) 0 0 0 0 0 0.3 0.00 0.00 0.00 0.00 0.00 35.00 DLI allocation 35.00 As a % of Total DLI Allocation 7.87% ➢ 3.3 : DLR 3.3: A Presidential order issued to introduce green excises, as per the verification protocol (Text ) No green taxes on many By December 31, 2024 A 0 No DLR A Presidential Order environmentally harming presidential order issued introducing green goods in products to introduce green excises, place as per verification protocol 0.00 0.00 10.00 0.00 0.00 0.00 DLI allocation 10.00 As a % of Total DLI Allocation 0% ➢ 3.4 : DLR 3.4: Additional revenues collected from green excises as ratio of non-oil GDP, as per verification protocol (Percentage ) 0 0 0 0 0 0.2 0.00 0.00 0.00 0.00 0.00 30.00 DLI allocation 30.00 As a % of Total DLI Allocation 6.74% 4.1 : Online ontime CIT filing rate (Percentage ) 17.23 0 0 0 55 0.00 0.00 0.00 0.00 0.00 28.30 DLI allocation 28.30 As a % of Total DLI Allocation 6.36% 4.2 : Online ontime VAT filing compliance rate (Percentage ) 65.00 0 0 0 85 Page 25 The World Bank NG Accelerating Resource Mobilization Reforms PforR(P177308) 0.00 0.00 0.00 0.00 0.00 23.40 DLI allocation 23.40 As a % of Total DLI Allocation 5.26% ➢ 4.3 : DLR 4.3: Online VAT payment rate, as per verification protocol (Percentage ) 22 0 0 0 0 60 0.00 0.00 0.00 0.00 0.00 28.30 DLI allocation 28.30 As a % of Total DLI Allocation 6.36% 5 : DLR 5.1E-Invoice System launched for VAT Traders, as per verification protocol (Text ) No DLR Do DLR E-Invoice system launched No DLR No DLR 0.00 0.00 0.00 20.00 0.00 0.00 DLI allocation 20.00 As a % of Total DLI Allocation 4.49% 5 : DLR 5.2: E - Invoice system adopted by traders, as per verification protocol (Percentage ) 0 0 0 0 0 30 0.00 0.00 0.00 0.00 0.00 45.00 DLI allocation 45.00 As a % of Total DLI Allocation 10.11% 6 : Improved tax audits (Text ) none none none none none 0.00 0.00 0.00 0.00 0.00 DLI allocation 0.00 As a % of Total DLI Allocation 0% ➢ 6.1 : DLR 6.1: By April 31, 2024, FIRS system receives NITDA certification, as per verification protocol (Text ) FIRS TAXPROMAX has no By April 31, 2024,FIRS None None None NITDA certification system receives NITDA certification, as per verification protocol 0.00 15.00 0.00 0.00 0.00 0.00 DLI allocation 15.00 As a % of Total DLI Allocation 3.37% ➢ 6.2 : DLR 6.2: Automated interoperable data sharing between NCS and FIRS is functional, as per verification protocol (Text ) Data sharing not Automated and No DLR No DLR integrated interoperable data sharing between NCS and FIRS is functional, as per verification protocol 0.00 0.00 15.00 15.00 0.00 0.00 DLI allocation 15.00 As a % of Total DLI Allocation 3.37% Page 26 The World Bank NG Accelerating Resource Mobilization Reforms PforR(P177308) ➢ 6.3 : DLR 6.3: Centralized risk-based tax audit selection system launched, as per verification protocol (Text ) Decentralized risk No DLR Centralized risk-based tax No DLR No DLR selection approach audit selection system launched, as per verification protocol 0.00 0.00 0.00 10.00 0.00 0.00 DLI allocation 10.00 As a % of Total DLI Allocation 2.25% ➢ 6.4 : DLR 6.4: Tax audit cases selected using centralized risk-based system, as per verification protocol (Percentage ) 0 0 0 No DLR 0 30 0.00 0.00 0.00 0.00 0.00 25.00 DLI allocation 25.00 As a % of Total DLI Allocation 0% 7.2 : Customs registered, accredited, and compliant firms (Number ) 125 0 0 No DLR 0 300 0.00 0.00 0.00 0.00 0.00 10.00 DLI allocation 10.00 As a % of Total DLI Allocation 0% ➢ 7.1 : DLR 7.1: By December 31, 2023, compliant trader program launched and Authorized Economic Operator (AEO) framework enacted, as per verification protocol (Text ) No compliant trader DLR 7.1: By December 31, No DLR No DLR No DLR No DLR program 2023, compliant trader program launched and Authorized Economic Operator (AEO) framework enacted, as per verification protocol 0.00 15.00 0.00 0.00 0.00 0.00 DLI allocation 15.00 As a % of Total DLI Allocation 3.37% 7.3 : VALUE OF GOODS CLEARED THROUGH GREEN CHANNEL (Percentage ) 0.00 0 0 No DLR 0 15 0.00 0.00 0.00 0.00 0.00 35.00 DLI allocation 35.00 As a % of Total DLI Allocation 0% 8 : DLI 8: Increased customs revenues through better risk management and targeted inspections (Text ) No DLR No DLR No DLR No DLR No DLR 0.00 0.00 0.00 0.00 0.00 DLI allocation 0.00 As a % of Total DLI Allocation 0% Page 27 The World Bank NG Accelerating Resource Mobilization Reforms PforR(P177308) ➢ 8.1 : DLR 8.1: Risk Management and Compliance based criteria for conducting targeted and random inspections, as per the Verification Protocol (Text ) No risk-based approach to No DLR No DLR Compliance & and Risk No DLR No DLR customs interventions management based criteria for conducting targeted AND random inspections as per verification protocol 0.00 0.00 0.00 10.00 0.00 0.00 DLI allocation 10.00 As a % of Total DLI Allocation 2.25% ➢ 8.2 : DLR 8.2: Revenue assessed from the Post Clearance Audit (PCA) Unit (Naira bln) (Number ) 37 0 0 No DLR 0 110 0.00 0.00 0.00 0.00 0.00 30.00 DLI allocation 30.00 As a % of Total DLI Allocation 0% 9.2 : Enhanced reports received by the Federal Account Allocation Committee (FAAC) from NNPCL (Number ) 0 0 By March 2025, FAAC 33 Approves Enhanced Reporting Template 0.00 0.00 0.00 5.00 55.00 DLI allocation 60.00 As a % of Total DLI Allocation 0% ➢ 9.3 : DLR 9.3: Net fiscal oil revenues as ratio of GDP (Percentage ) 1.8 0 0 No DLR 0 2.5 0.00 0.00 0.00 0.00 0.00 90.00 DLI allocation 90.00 As a % of Total DLI Allocation 0% ➢ 9.1 : DLR 9.1: Forensic audit of NNPCL completed, as per verification protocol (Text ) Reconciliation of oil No DLR A forensic audit of NNPCL No DLR No DLR revenues owed to has been completed, as Federation Vs Versa per the verification commenced protocol 0.00 0.00 0.00 15.00 0.00 0.00 DLI allocation 15.00 As a % of Total DLI Allocation 3.37% Page 28 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Monitoring & Evaluation Plan: PDO Indicators by PDO Outcomes Implement tax and excise reforms VAT collection as a percent of non oil GDP (Percentage) DLI Description Defined as annual net VAT collections divided by the annual non oil GDP Frequency Yearly Data source FIRS & NCS Calculated as net amount of VAT collected by FIRS & NCS as the numerator and the non-oil GDP of the respective year Methodology for Data as the denominator. GDP shall not be rebased (i.e. if GDP rebasing takes place during the Program period, it will be Collection recalculated to ensure consistency with the baseline). Reconciled FIRS and NCS data of VAT collections confirmed with the Accountant General will be used for the numerator. The GDP data will come from the National Bureau of Statistics. Responsibility for Data PCU Collection Excise collection from pro health products and services (Percentage) DLI Increase in Excise duty collected on goods specified in Harmonised System (HS) codes related to beer, alcoholic wines, Description spirits, smoking tobacco including cigarettes, other tobacco products, sugar sweetened beverages as defined in the verification protocol as a percentage of non oil GDP Frequency Yearly Data source NCS Excise and Customs Management systems Methodology for Data Total annual excise duty revenue collected data on specific HS codes related to non-alcoholic beverages, beer, alcoholic Collection wines, spirits, smoking tobacco including cigarettes, other tobacco products, sugar sweetened beverages. Responsibility for Data PCU Collection Improve tax and customs administrations Online ontime filing compliance rate (Value Added Tax) (Percentage) DLI VAT online on-time filing rate = (Number of VAT declarations filed by the statutory due date divided by Number of VAT Description declarations expected from registered taxpayers) times 100 Frequency Yearly Data source FIRS from the TAXPROMAX system 1. Number of VAT declarations filed by the statutory due date shall be collected from the TAXPROMAX. 2. ‘On-time’ filing means declarations (also known as ‘returns’) filed by the statutory due date for filing (plus any ‘days Methodology for Data of grace’ applied by the tax administration as a matter of administrative policy). Collection 3. ‘Expected declarations’ means the number of VAT declarations that the tax administration expected to receive from registered VAT taxpayers that were required by law to file declarations. Responsibility for Data PCU Collection Online ontime CIT filing rate (Percentage) DLI ‘Online on-time ’ filing means number of online declarations/ returns filed on TAXPROMAX by the statutory due date Description for filing (plus any ‘days of grace’ applied by the tax administration as a matter of administrative policy as a percentage of the total number of declarations expected from registered taxpayers, i.e. expressed as a ratio. Frequency Yearly Data source FIRS – TAXPROMAX 1 ‘On-time’ filing means declarations/returns filed by the statutory due date for filing (plus any ‘days of grace’ applied by the tax administration as a matter of administrative policy). Methodology for Data 2 ‘Expected declarations’ means the number of CIT declarations that the tax administration expected to receive from Collection registered CIT taxpayers that were required by law to file declarations. 3 The ‘on-time filing rate’ is number of CIT declarations filed by the due date divided by number of registered taxpayers expected to file CIT returns) times 100. Responsibility for Data PCU Page 29 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Collection Customs registered, accredited, and compliant firms (Number) DLI Number of compliant companies that have undergone the FT.2.0 or AEO simplified process (i.e., includes Application, Description Verification by NCS, Acceptance and are receiving Program Benefits) and received FT 2.0/AEO accreditation Frequency Yearly Data source NICIS II Master Data Volume, plus FT Application & Validation Process/NCS Count of number of compliant traders that have undergone the FT.2.0 or AEO simplied process (i.e., includes Methodology for Data Application, Verification by NCS, Acceptance and are receiving Program Benefits) and received FT 2.0/AEO Collection accreditation Responsibility for Data PCU Collection A tax system that has capacity to collect and disseminate gender disaggregated data on business ownership or leadership (Text) A process exists for tax systems to receive gender information on directorsips of companies, stored in master or Description transaction databases, and based on queries, tax system has capacity to generate or disseminate gender based information Frequency Yearly Data source FIRS Confirm company registration processes have been re-engineered to request for and receive gender data of first Methodology for Data directors on company registration from Corporate Affairs Commission. Confirm FIRS databases or systems have been Collection configered and receive the gender data on the directors. Genenerate a few reports and confirm gender disagregated reports can be generated. Responsibility for Data PCU Collection Safeguard oil and gas revenues Enhanced reports received by the Federal Accounts Allocation Committee from NNPC (Number) DLI Federal Account Allocation Committee (FAAC) reports that include: (i) the total oil lifted in all the operations it Description supervises; (ii) existing liabilities; (iii) forward crude oil sales; and (iv) outstanding fiscal and regulatory payments (such as gas flare), as per the verification protocol Frequency Monthly Data source FMF Obtain formal written decision on approval by FAAC of a revised and enhanced reporting template. Confirm the Methodology for Data revised reporting template was formally communicated to NNPC. Check monthly reports submitted to FMF to confirm Collection compliance to the enhanced template. Responsibility for Data PCU Collection Monitoring & Evaluation Plan: Intermediate Results Indicators by Results Areas Implementing tax and excise reforms Expected VAT filers (Number) Increase in VAT register evidenced by number of ‘expected to file’. Taxpayers Expected to File C = A – B where: A = Number of registered taxpayer in FIRS taxpayer database Description B= taxpayers who are registered but are currently not required to file declarations by law or regulation and are explicitly flagged in the automated tax administration system. C = Increase in VAT taxpayers expected to file Frequency Yearly Data source FIRS TAXPROMAX System • Gather information on total tax payers as at end of the period from FIRS TAXPROMAX system. Methodology for Data • Request FIRS for information of all taxpayers who were automatically registered for VAT by TAXPROMAX system Collection and yet are not required to be registered cause they are below threshold (not voluntary) and or are not making taxable supplies. Page 30 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) • Obtain the increase in expected filers. Responsibility for Data PCU Collection Excise-collection from green taxes as a ratio of non-oil GDP (Percentage) Description Excise duty revenue (percent of non oil GDP) collected from polluting products such as vehicles, plastics, fuels etc. Frequency Yearly Data source NCS Gather monthly collection data from NCS or FIRS for importation or production of polluting goods such as vehicles, Methodology for Data single user plastics, fuels by importer or producer, six-digit HS Code, engine type, engine size, port of entry, country of Collection origin with taxes collected and collectible on each. Calculate the sum of all collection for the specific period, while excluding hybrid, electric and mass-transit vehicles and divide by GDP. Rebasing of GDP shall be not considered. Responsibility for Data PCU Collection Strengthen tax and customs administrations Value of goods cleared through green channel (Percentage) DLI Number of containers or consignments directed though green channel divided by total number of containers or Description consignments cleared through customs as per verification protocol. Frequency Yearly Data source NICIS II Master Data Volume, plus FT Application & Validation Process/NCS. • Obtain NICIS II validated master data for volume of goods directed through green channel based on risk management/NCS and total number of goods cleared through customs. Methodology for Data • Confirm that goods channeled through the green channel are based on implementation of an NCS approved risk Collection management framework. • Calculate achievement of DLR by using formular number of containers or consignments directed though green channel divided by total number of containers or consignments cleared through customs. Responsibility for Data PCU Collection Safeguard oil and gas revenues Enhanced reports received by FAAC from the Nigerian National Petroleum Corporation (Number) Number of FAAC reports submitted by NNPCL which include: (i) the total oil lifted in all the operations it supervises; (ii) Description existing liabilities; (iii) forward crude oil sales; and (iv) outstanding fiscal and regulatory payments (such as gas flare), as per the verification protocol Frequency Monthly Data source FAAC Methodology for Data Obtain the oil and gas revenue FAAC reconciliation report from FMF and verify that it is published on the FMF or FAAC Collection website and contains amounts owed to Federation or vice versa by NNPCL. Responsibility for Data PCU Collection Page 31 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Verification Protocol Table: Disbursement Linked Indicators 1.1 : VAT collection as a percent of non oil GDP – Scalable (Percentage) Formula Defined as annual net VAT collections divided by the annual non oil GDP Description See details above Data source/ Agency VAT collections from NCS & FIRS submitted to Accountant General. Verification Entity IVA Obtain reconciled annual VAT collections confirmed by Accountant General. Obtain annual GDP statitisics from Procedure National Bureau of statistics, adjusting for any rebasing. Apply disbursement calculation formulae. ( −) × [ ] , if above result returns zero or negative result no disbursement or refund will occur. (−) 1.2 : Expected VAT Filers– Scalable (Number) No. of ‘expected to file’ VAT Traders Expected to File [C] = [(A) – (B)] where: A = registered VAT taxpayers on FIRS VAT Formula database B= taxpayers who are registered but are currently not required to file declarations by law or regulation and are explicitly flagged in the automated tax administration system. C = Increase in VAT taxpayers expected to file Description Measure added number of active VAT filers Data source/ Agency FIRS TAXPROMAX System Verification Entity IVA ( −) Collect data as described above and apply disbursement calculation formulae. × [ , if Procedure (−) above result returns zero or negative result no disbursement or refund will occur. 2 : Reduced Foregone Revenue (Text) Formula See details under 2.1, 2.2 and 2.3. Description Data source/ Agency Verification Entity Procedure 2.1 : DLR 2.1: By December 31, 2023, the exemption of interest on corporate bonds removed and capital gains over NGN100 million taxed, as per the verification protocol - YES/NO (Text) Formula Text Description Repealed tax exemption on interest on corporate bonds and capital gains described above. Data source/ Agency Finance Acts, Agencies – Budget Office of the Federation, FIRS or NCS webportals Verification Entity World Bank Obtain a copy of the appropriate Finance Act – confirm that the Finance Act indicates repeal of exemptions on interest Procedure on corporate bonds and capital gains over NGN 100 million. 2.2 : DLR 2.2: By December 31, 2024, The Pioneer Status Industry Tax Incentive (PSIT) scheme, was rationalized as per the verification protocol YES/NO (Text) Formula Text Description Repealed and rationalised PSIT scheme Data source/ Agency Finance Acts, Agencies - Budget Office of the Federation, FIRS or NCS webportals Verification Entity IVA Obtain copy of Finance Act(s) or related law and confirm that the number of industries or sectors qualifying for Pioneer Procedure Status Industries (PSI) has been reduced by at least 20 percent 2.3 : DLR 2.3 Additional revenues collected from lower tax expenditures as a percent of non-oil GDP, as per the verification protocol – Scalable (Percentage) Formula Additional revenues collected or saved from repealed tax expenditures divided by non oil GDP Description Revenues collected or saved from repealed and rationalized tax expenditures Data source/ Agency Finance Acts, Agencies - Budget Office of the Federation, FIRS or NCS webporta Verification Entity IVA Page 32 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) For the list of tax expenditures that have been removed or rationalized, compute or obtain from FIRS and or NCS the Procedure amount of revenue foregone that has been saved or additional revenue collected divided by non oil GDP. GDP rebasing not applicable. 3 : Increased revenue from pro health and green products (Percentage) Formula See details under 3.1, 3.2, 3.3 and 3.4 Description Data source/ Agency Verification Entity Procedure 3.1 : DLR 3.1: A presidential order issued to increase excises on sin goods, as per the verification protocol YES/NO (Text) Formula Text Presidential Order indicating imposition of excise or increase in rates on HS codes related to non-alcoholic beverages, Description beer, alcoholic wines, spirits, smoking tobacco including cigarettes, other tobacco products, sugar sweetened beverages, as defined in the verification protocol Data source/ Agency Presidential Order or other legal instruments – FMF Verification Entity World Bank Obtain the Presidential Order, confirm the Presidential Order is included in gazette and verify that excises have been Procedure imposed. Obtain data from NCS and confirm that collection has commenced. 3.2 : DLR 3.2: Additional revenues collected from excises on sin goods as a ratio of non-oil GDP, as per the verification protocol– Scalable (Percentage) Formula Excise revenue collected from sin goods divided by non oil GDP Total annual excise duty revenue collectedon specific HS codes related to non-alcoholic beverages, beer, alcoholic Description wines, spirits, smoking tobacco including cigarettes, other tobacco products, telecommunication excise, sugar sweetened beverages, as ratio of non oil GDP Data source/ Agency NCS revenues confirmed by Accountant General Verification Entity IVA Collect revenue data on excise collections for specific HS codes for sin goods. Obtain GDP data and apply disbursement ( −) Procedure formula. × [ ] if above result returns zero or negative result no disbursement or refund (−) will occur. 3.3 : DLR 3.3: A presidential order issued to introduce green excises, as per the verification protocol -YES/NO (Text) Formula Text Presidential Order indicating imposition of excise or increase in rates on polluting products such as vehicles, or plastics, Description or other polluting products Data source/ Agency Presidential Order or other legal instruments – FMF Verification Entity World Bank Obtain the Presidential Order, confirm the Presidential Order is included in gazette and verify that excises have been Procedure imposed. Obtain data from NCS and confirm that collection has commenced. 3.4 : DLR 3.4: Additional revenues collected from green excises as a ratio of non-oil GDP, as per the verification protoco– Scalable (Percentage) Formula Excise revenue collected from sin goods divided by non oil GDP Description Total annual excise duty revenue collected on specific HS codes related to green goods as ratio of non oil GDP. Data source/ Agency NCS revenues confirmed by Accountant General Verification Entity IVA Collect revenue data on excise collections for specific HS codes for greens products. Obtain GDP data and apply ( −) Procedure disbursement formula × [ ]. If result returns zero or negative result no disbursement or (−) refund will occur. 4.1 : Online ontime CIT filing complaince rate– Scalable (Percentage) Number of online declarations/ returns filed on TAXPROMAX by the statutory due date for filing (plus any ‘days of grace’ Formula applied by the tax administration as a matter of administrative policy as a percentage percentage of the total number of declarations expected from registered taxpayers, i.e. expressed as a ratio. Page 33 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ‘On-time online’ filing means online declarations (also known as ‘returns’) filed on TAXPROMAX by the statutory due Description date for filing (plus any ‘days of grace’ applied by the tax administration as a matter of administrative policy Data source/ Agency TAXPROMAX – FIRS Verification Entity IVA Obtain CIT declaration data and total number of expected CIT returns from FIRS system. Confirm filing done by due ( −) Procedure date. Apply disbursement formula × [ ] , if above result returns zero or negative result no (−) disbursement or refund will occur. 4.2 : Online ontime filing compliance rate for Value Added Tax – Scalable (Percentage) (Number of VAT declarations filed by the statutory due date divided by Number of VAT declarations from registered Formula taxpayers) times 100 ‘On-time’ filing means declarations (also known as ‘returns’) filed by the statutory due date for filing (plus any ‘days of Description grace’ applied by the tax administration as a matter of administrative policy). Data source/ Agency TAXPROMAX – FIRS Verification Entity IVA • Number of VAT declarations filed by the statutory due date shall be collected from the TAXPROMAX. • ‘Expected declarations’ means the number of CIT declarations that the tax administration expected to receive from Procedure registered CIT taxpayers that were required by law to file declarations. • Apply disbursement formulae × [ ( −) (−) ], if above result returns zero or negative result no disbursement or refund will occur. 4.3 : DLR 4.3: Online VAT payment rate (%), as per the verification protocol– Scalable (Percentage) On time online VAT payment rate = (number of VAT payments made by the due date/ total number of VAT payments Formula due) times 100 Description VAT paid on time as a ratio of total VAT payments due Data source/ Agency TAXPROMAX – FIRS Verification Entity IVA • Gather VAT payment data on a monthly basis from FIRS. Calculate average for the year. • Calculate the percentage of taxpayers that paid on time using TAXPROMAX considering formulae above. Procedure ( −) Determine disbursement value using indicator × [ ], if above result returns zero or (−) negative result no disbursement or refund will occur. 5.1 : DLR 5.1: E-invoice system launched for VAT traders, as per the verification protocol YES/NO (Text) Formula Text Description VAT traders enabled to generate electronic VAT invoices and issue them to customers Data source/ Agency FIRS, Press releases, system specification documents Verification Entity IVA Confirm launch of e-invoicing System to generate VAT invoices as evidenced by: Legal framework enabling operation of E-Invoice system; press releases or communication instructing taxpayers to adopt the system; at least 5 large taxpayers Procedure and 35 medium taxpayers using the system; and regular update of FIRS tax administration system of taxpayer transactions from E-invoicing system. 5.2 : DLR 5.2: E-invoice system adopted by traders (%), as per verification protocol – Scalable (Percentage) Formula VAT traders registered by FIRS and issuing E-invoices, divided by total VAT taxpayers expected to file Description VAT traders enabled to generate electronic VAT invoices and issue them to customers Data source/ Agency FIRS, Press releases, system specification documents Verification Entity IVA Generate from FIRS system list of VAT traders operating E-invoices. Confirm that each of those traders has dumped e- invoices data to FIRS tax administration system during review period. Obtain total number of expected to file VAT Procedure ( −) traders. Apply above formulae. To determine disbursment apply × [ ] , if above result (−) returns zero or negative result no disbursement or refund will occur. 6 : Impoved tax audits (Text) Page 34 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Formula See details under 6.1, 6.2 and 6.3 Description Data source/ Agency Verification Entity Procedure 6.1 : DLR 6.1: By April 31, 2024 the FIRS system receives NITDA certification, as per the verification protocol YES/NO (Text) Formula Text Description FIRS system has NITDA certification & MoU FIRS – NCS on data sharing is operational as evidenced by sharing of data Data source/ Agency FIRS Verification Entity IVA Obtain and confirm that FIRS TAXPROMAX has NITDA certification- confirm that NCS and FIRS MoU addresses Procedure pertinent elements to protect confidentiality of data exchanged. 6.2 : DLR 6.2: An automated and integrated data sharing between NCS-FIRS is functional, as per the verification protocol YES/NO (Text) Formula Text Description Auto exchange of data between NCS customs adminitration and FIRS tax system operates Data source/ Agency URS/ UAT test reports/reports – FIRS & NCS Verification Entity IVA Confirm that auto data exchange protocol (API or BUS) is approved. Confirm that User requirements (URS) for auto pull/push of data between TAXPROMAX and NCS system approved, confirm User Testing of interface completed and Procedure Auto Exchange of data between TAXPROMAX and FIRS system in place as per user requirements commissioned is operational. 6.3 : DLR 6.3: A centralized risk-based tax audit selection system is launched, as per the verification protocol YES/NO (Text) Formula Text Description Centralised risk based system, which replaces existing decentralised risk assessment and collection system in place. Data source/ Agency Tax Audit re-engineered processes, instructions to staff, TAXPRO or eTAPS reports – FIRS Verification Entity IVA Confirm re-engineered audit and risk Business Processes exist, confirm approved processes for case selection coded in Procedure TAXPROMAX or e-TAPS and Headquarter system generated reports indicating cases assigned to field offices. Confirm that audits commenced on at least 5 cases centrally assigned. 6.4 : DLR 6.4: Tax audit cases selected using a centralized risk based system, as per the verification protocol – Scalable (Percentage) Number of completed audit cases selected by FIRS approved centrally managed risk management system divided by Formula total number of audit cases completed by all FIRS audit centres in the Year. Description A centralised risk based system is developed and used to select and assign cases to audit centres. Data source/ Agency eTAPS or TAXPROMAX/FIRS Verification Entity IVA From eTAPS or related tax audit/risk management system obtain list of cases assigned for audit in the year. Obtain list of audit cases completed (i.e. assessments were issued to taxpayer). Determine cases that were completed and also Procedure exist on the list generated from a centralised risk management system. Apply above formulae. To determine ( −) disbursement apply formulae × [ ], if above result returns zero or negative result no (−) disbursement or refund will occur. 7.2 : Customs registered accredited compliant firms YES/NO (Number) Formula A + B + C, where ABC represent no. of firms accredited. No of Compliant companies that have undergone the FT.2.0 /AEO process (i.e., includes Application, Verification by Description NCS, Acceptance and are receiving Program Benefits) and received FT 2.0/AEO accreditation Data source/ Agency NICIS II Master Data Volume, plus FT Application & Validation Process/NCS Verification Entity IVA • NCS’s Trusted Trader Program (TTP) or equivalent unit to provide a list of the TTP clients with information needed to Procedure verify including name of company, TIN, address, contact name, phone number, email address, date entered the TTP, date exited (if applicable), number of declarations, value, and similar information. Page 35 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) • Count of No. of Compliant traders that have undergone the FT.2.0 or AEO simplied process (i.e., includes Application, Verification by NCS, Acceptance and are receiving Program Benefits,) and received FT 2.0/AEO accreditation • Verify through random sampling of FT2.0/AEO registered companies to confirm information from the NCS • Performance and monitoring data from the NCIS (the NCS computer system) to evaluate the reported use of the TTP 7.1 : DLR 7.1: By December 31, 2023, a compliant trader program launched and an Authorised Economic Operator (AEO) framework enacted, as per the verification protocol - YES/NO (Text) Formula Text Description The DLR establishes launch of program that paves way to accredit and fast track customs clearance of goods. Data source/ Agency Public documents, NCS reports, NCS website /NCS Verification Entity IVA Obtain and confirm Official publications showing the approval of the FT2.0 or AEO launch; check launch Procedure announcements on the NCS website. Confirm that AEO or compliant trader program is enabled by existing legal framework 7.3 : Value of goods cleared through green channel– Scalable (Percentage) Number of containers OR consignments directed though green channel divided by total number of containers OR Formula consignments cleared through customs Description Consignments identified through a robust risk management framework Data source/ Agency NICIS II Master Data Volume, plus FT Application & Validation Process/NCS. Verification Entity IVA • Confirm that NCS SOPs approved implementation of risk informed and analyzed green channel • Obtain NICIS II validated master data for volume of goods directed through green channel based on risk management/NCS and total number of goods cleared through customs. • Confirm that goods channeled through the green channel are based on implementation of an NCS approved risk Procedure management framework. • Calculate achievement of DLR by using formular above. To determine disbursement apply formula ( −) × [ ], if above result returns zero or negative result no disbursement or refund will (−) occur. 8 : DLI 8: Increased customs revenues through better risk management and targeted inspections (Text) Formula Details under 8.1 and 8.2 Description Data source/ Agency Verification Entity Procedure 8.1 : DLR 8.1: Risk Management and Compliance based criteria for conducting targeted AND random inspections , YES/NO (Text) Formula Text Description Changes in NCS Standard Operating Procedures embedding risk management determing inspections and PCA. Data source/ Agency Standard Operating Procedures, automated Risk management systems & prcesses – NCS Verification Entity IVA • The M&E unit would be charged with collecting and reporting on the number of physical inspections, results on each inspection and results of any discrepancies found including financial impact (changes in duties, taxes, fees, penalties and other additional charges collected due to the results of the declaration inspection) • Inspect NCS systems, SOPs, to confirm existence of approved risk management criteria, evidence of use of risk Procedure management criteria to identify, evaluate risks, evidence of using the results of the evaluation to guide the targeted consignements or traders to inspect or audit, reports from PCA unit to indicate assessments financial impact (changes in duties, taxes, fees, penalties and other additional charges collected due to the results of the declaration inspection) 8.2 : DLR 8.2: Revenue assessed from the Post Clearance Audit (PCA) Unit (Naira bln) – Scalable (Number) Formula A+B+C where A, B, or c represent value of assessments from PCA process issued to traders Page 36 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Description Value of agreed assessments from a restructured PCA Unit as computed using the above formulae Data source/ Agency restructured organogram. PCA audit Procedures Manual or SOPs adopted. PCA reports. PCA automated system. Verification Entity IVA Confirm approved restructured PCA organization in place. Obtain value of agreed assessments from a restructured PCA Unit (indicating trader, assessment number. Compute using the above formulae. To determine disbursement apply Procedure ( −) formula × [ ], if above result returns zero or negative result no disbursement or refund (−) will occur. 9.2 : Enhanced reports received by the Federal Accounts Allocation Committee from NNPCL– Scalable (Number) Formula A+B+C where A, B, or c represent enhanced reports received by FAAC and Ministry of Finance Reports received by FAAC are ammended to include (i) the total oil and gas lifted in all the operations it supervises, (ii) Description existing liabilities, (iii) forward crude oil and gas sales (iv) and outstanding fiscal and regulatory (such as gas flare) payments, Data source/ Agency FAAC report - FAAC Committee Verification Entity IVA • Obtain a copy of the reports received by FAAC • Review each report and confirm that it contains additional details which include (i) the total oil and gas lifted in all the operations it supervises, (ii) existing liabilities, (iii) forward crude oil and gas sales (iv) and outstanding fiscal and Procedure regulatory (such as gas flare) payments, as per the verification protocol • Confirm from FAAC Secretariat that reports have been reviewed by FAAC. To determine disbursement apply formula ( −) × [ ], if above result returns zero or negative result no disbursement or refund will (−) occur. 9.3 : DLR 9.3: Net fiscal oil and gas revenues as a ratio of GDP – Scalable (Percentage) Formula Net oil and gas revenues remitted to the Federation divided by GDP including oil economy Description Oil revenues available for use by the Federation Data source/ Agency Accountant General’s Office – Reconciled revenue report Verification Entity IVA Obtain from Accountant General’s Office report of revenues remitted by Oil contractors, or FIRS or NNPCL to Government. Obtain official GDP statistics from National Statistics Office. Apply above formulae. To determine Procedure ( −) disbursement apply formula × [ ], if above result returns zero or negative result no (−) disbursement or refund will occur. 9.1 : DLR 9.1: Forensic audit of NNPCL completed, as per verification protocol YES/NO (Text) Formula Text Description A forensic audit to understand among others, issues limiting increase in oil revenue transferred to the federation Data source/ Agency Federal Ministry of Finance and Office of Auditor General for the Federation Verification Entity IVA For DLR 9.1 • Obtain copies of the Audit ToR; • Confirm through interview whether forensic audit was executed Procedure • Obtain formal representation from the Office of Auditor General for the Federation and Federal Ministry of Finance confirming that audit was completed and report submitted for gorvenement action. • Confirm that an action plan was developed and submitted to responsible authorities for implementation of recommendations Page 37 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 2. TECHNICAL ASSESSMENT A. Program Development Objective (PDO) 1. The PDO is to raise non-oil tax revenues and safeguard oil revenues. Low revenues, weak tax administration, and opaque governance in Nigeria hinder economic development. The ARMOR Program aims to address this and raise revenues by, among others, supporting implementation of a reformed VAT, raising taxes from pro-health and green products, and rationalizing tax expenditures. Improving taxpayer services, voluntary compliance, risk management, customs trade flows, plus tax and post clearance audits will help simplify the tax system and strengthen the revenue/customs administration. Finally, increasing transparency and reducing leakages would help safeguard oil and gas revenues. B. Program Scope 2. The ARMOR Program, slated for implementation from 2024 to 2028, supports achievement of the following Result Areas (RAs). RA 1 supports the implementation of the VAT regime reform planned by the government and supported by the RESET DPF (P501661). Furthermore, this RA will support the rationalization of tax expenditures and increased revenues from pro-health and green taxes. RA 2 aims to strengthen tax revenue administration through enhanced voluntary compliance, automation of processes, risk management, and enforcement, prioritizing taxpayer services and advanced tax audit methods. Customs administration reform efforts include enhanced customs clearance processes, enhanced compliant trade flows, enhanced risk management, use of the green channel and strengthened post clearance audits. RA 3 will support the FMF to complete a forensic audit of the NNPCL. It will also support enhancement of the NNPCL’s monthly report to the FAAC contain more content that substantiates oil lifted in operations, existing liabilities, forward crude oil and gas sales and outstanding fiscal payments. Ultimately the project supports more fiscal net oil and gas revenue flows to the Federation arising out of enhanced transparency exercised by FAAC on NNPC L’s operations and reduced petroleum subsidies. 3. This operation aligns with the government program. It is built around and supports the government ARMOR program which has four pillars: (i) safeguarding oil and gas revenues; (ii) reducing forgone revenues from a variety of tax expenditures; (iii) enhancing tax and excise revenues through appropriate policy reforms and tax administration measures; and (iv) boosting custom revenues through trade facilitation. The ARMOR Program DLIs, DLRs and targets which support the government program are summarized in Table 2. C. Technical Analysis a) Macroeconomic Context and Fiscal Considerations for the Proposed Program 4. The economic and fiscal outlook continues to be vulnerable to shocks and oil-dependence and the challenges associated with improving governance of the State. GDP growth decreased from 3.6 percent in 2021 to 3.1 percent in 2022-23. With continued implementation of reforms, economic growth is projected to rebound to 3.3 percent of GDP in 2024 while the fiscal deficit will drop to 4.5 percent of GDP.47 At 6.7 percent in 2022, the revenue to GDP ratio is well below the government target of 18 percent by 2027. There are perceptions of corruption, weak institutions, limited transparency, and accountability that dampen business confidence. The ARMOR Program will contribute to the 47https://www.worldbank.org/en/country/nigeria/publication/nigeria-development-update-ndu Page 38 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) government’s fiscal consolidation agenda through its focus on strengthening revenue mobilizing institutions and raising more resources. b) Strategic Relevance and Technical Soundness of the Proposed Program 5. Extensive analytical work underpins the design of ARMOR. ARMOR design drew heavily on the PEFA (2019)48 and TADAT (2023)49 assessments, lessons from successful reform episodes (2023)50, World Bank work on fiscal adjustments for better results51 publications and the World Bank extensive TA delivered under the DRM Reform ASA Sub- Task (P173409) and analysis and simulations of tax policy options. The important conclusions of these analyses include: i. Very low tax rates and large tax expenditures. Extremely low VAT rate, cascading nature of VAT (no VAT credits for capital items or services) with low VAT yields of about 1.2 percent of GDP in 2022 compared to SSA average of more than 4 percent. Further, low excise tax rates across various products and services, and a narrow tax base exacerbated by tax expenditures, undermine non-oil revenues. ii. Tax administration weaknesses that depress the tax administration. These include: (i) an incomplete registration database; (ii) low level of taxpayer compliance for filing rates (average 35 percent for CIT and VAT), payment rates (22 percent), and inaccurate reporting of taxpayer liabilities; and (iii) decentralized and nonsystematic compliance risk management. In addition, weak trade facilitation and high trade costs dampen enterprises and impede diversification and growth. Nigeria’s trade facilitation performance score of 2.6 (1=low to 5=high), ranks 88th out of 139 countries in the 2023 Logistics Performance Index, but the “efficiency of the clearance process" directly under NCS control was among the poorest scoring dimension at 2.4.52 Tax morale is low due to limited knowledge and little readily available information about the tax system and inefficient tax administration.53 iii. The oil and gas sector suffers from opaque governance and weak transparency. Although oversight of NNPCL is governed by the Petroleum Industry Act (PIA) 2021, the reports submitted to FAAC by NNPCL are inconsistent and lack information such as the details on the pledged revenues, the tradeable value of crude oil, the actual payments and receipts from global trade and the actual exchange rate used in these transactions. Financial reporting is opaque due to quasi-fiscal activities such as in-kind revenues in the form of crude oil, and costs directly deducted from revenues that would have otherwise been transferred to the Federation Account. 54 6. To address the critical impediment to sustained and inclusive development, the government prepared the ARMOR program, anchored in the 2021-2025 National Development Plan. The Federal Executive Council endorsed ARMOR program on June 29, 2022. The new administration reiterated the need for implementation of government’s ARMOR program in an October 2023 request to the World Bank. The government program builds on the Strategic Revenue Growth Initiative that was launched in 2019, with the ambitious goal of achieving a revenue-GDP target of 15 percent by 2023. The target has been revised to 18 percent tax to GDP ratio by 2027 from 6.7 percent in 2022. 48 https://www.pefa.org/node/166 49 Tax Administration Diagnostic Assessment Tool Assessment Report, IMF, July 2023 50 https://www.elibrary.imf.org/view/journals/018/2023/019/article-A001- en.xml#:~:text=Based%20on%20these%20cross%2Dcountry,measures%20for%20improving%20compliance%20by 51 https://documents.worldbank.org/en/publication/documents- reports/documentdetail/099615211172222358/p1750950fbd29d02008429007d1ed499d61 52 https://lpi.worldbank.org/international/scorecard/radar/C/NGA/2023 53 https://www.tandfonline.com/doi/epdf/10.1080/00220388.2020.1797688?needAccess=true 54 All production sharing contracts signed by the NNPC state that all fiscal payments be made in-kind by allowing the NNPC to lift tax oil, royalty oil, and profit oil. In joint venture operations, in which the Federation owns 55 percent or 60 percent of the equity oil and gas, the NNPC handles crude oil and natural gas receipts on behalf of the Federation. The share of oil production in these contracts amounts to more than two-thirds of the total oil production in Nigeria. Page 39 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) 7. The ARMOR Program-For-Results (PforR) operation is aligned with the World Bank Group’s Nigeria CPF for FY21- 25 (Report No. 153873-NG) and is aligned with and contributes to several World Bank corporate strategies and the corporate scorecard.55 The CPF supports Nigeria’s aspiration for faster, more inclusive, and sustained economic growth to help the government lift 88 million people out of poverty. This operation directly supports the CPF’s core objective of increasing domestic revenues. The operation responds to the analysis in the 2019 Nigeria Systematic Country Diagnostic (P162103) and the 2022 Country Economic Memorandum (AUS0002837) by supporting increasing non-oil revenues and reducing dominance on oil and gas revenues.56 This operation is also aligned with the World Bank’s Global Crises Response Framework by strengthening revenue polices and institutions such as NCS, FIRS and Ministry of Finance to utilize long term policies to improve development outcomes. The World Bank Evolution Roadmap also identified domestic revenue mobilization as a crucial component in intensifying impact and delivering results at scale with a focus on countries such as Nigeria with a tax to GDP ratio below 15 percent. To complement ARMOR Program, the FRED 2.0 program provides TA to FMF, FIRS and NCS. In addition, the World Bank strengthens social assistance through NG-CARES (P174114), human capital through the proposed HOPE (P181476) and business environment through the SABER (P177442) projects. c) Results Framework and Monitoring and Evaluation 8. The Results Framework comprises the PDO indicators and Intermediate Results Indicators drawn from the DLIs and DLRs. Each indicator (see details in Annex 1) has a baseline (December 2022) and end target (December 2027). The M&E plan includes charging the PCU with responsibility for monitoring implementation progress and results. It will support data collection, report progress updates on the PDO indicators and DLIs, and prepare quarterly, mid-year and annual progress reports, all of which will be submitted to the World Bank and the Program steering committee, and the technical committee. The PCU will also be tasked to hire the IVA on terms of reference acceptable to the World Bank, to verify the achievement of DLI results. As part of the IPF component the PCU will receive support to strengthen its M&E capacity. Finally, the World Bank team will also report on the progress of implementation internally through regular Implementation Status Reports, a Mid-Term Review, and an Implementation Completion and Results Report at the end of the Program. The Program Operations Manual will detail the verification protocols for the DLIs and DLRs. d) Economic and fiscal justification of the Program 9. The Program will yield large economic benefits in terms of revenue gains and time savings for taxpayers and traders. The Net Present Value (NPV) of the Program is estimated at US$23.4 billion or 6.3 percent of the 2023 GDP. Even in a scenario when only 20 percent of estimated revenues are generated by the program, the NPV remains largely positive at US$3.8 billion or 1 percent of GDP (Table 4). Increased revenues can translate into lower financing needs and reduced public debt accumulation especially if this leads to a reduction in short-term debt issuances. The debt service as a ratio of revenues will also drop significantly relative to a no-ARMOR scenario (Figure 4), creating room for much needed efficient public spending in social sectors. In addition to the direct benefits in terms of supporting the government’s fiscal consolidation agenda, this operation will help generates efficiency benefits for businesses and tax authorities by reducing administrative and compliance costs (though tax administration measures), facilitating trade, improving the integration of 55 In this document ARMOR Program refers to the PforR operation while ARMOR program refers to government’s ARMOR program 56 https://documents1.worldbank.org/curated/en/099020012132216124/pdf/P1761970c336260ce0bd0e0ebd98a53275d.pdf Page 40 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) billing and payment systems, enhancing accuracy and information security, and increasing transparency in the oil sector. Table 4: Calculation of Net Present Value of ARMOR Unit 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Total disbursment costs US$ million 151 198 233 275 317 117 117 117 117 117 ARMOR PEF costs US$ million 151 198 233 275 317 0 0 0 0 0 Recurrent cost assumptions US$ million 0 0 0 0 0 117 117 117 117 117 Total base case benefits US$ million 8 1,932 3,195 4,295 5,764 6,735 7,816 8,992 10,256 11,596 Revenue gain US$ million 0 1,709 2,830 3,805 5,109 5,981 6,942 7,988 9,112 10,302 Taxpayer time US$ million 0 171 283 381 511 598 694 799 911 1,030 Trader time savings US$ million 0 43 71 95 128 150 174 200 228 258 Administrative cost savings US$ million 8 10 12 14 16 6 6 6 6 6 Total low case benefits US$ million 2 380 628 844 1,132 1,323 1,535 1,767 2,015 2,278 Revenue gain US$ million 0 342 566 761 1,022 1,196 1,388 1,598 1,822 2,060 Taxpayer time savings low US$ million 0 34 57 76 102 120 139 160 182 206 Trader time savings US$ million 0 2 3 4 5 6 7 8 9 10 Administrative cost savings US$ million 2 2 2 3 3 1 1 1 1 1 Net benefits base US$ million -144 1,735 2,963 4,020 5,447 6,617 7,698 8,875 10,139 11,478 NPV base case US$ million 23,406 NPV base case % of GDP 6.3 Net benefits low US$ million -150 182 395 569 815 1,206 1,418 1,649 1,897 2,161 NPV base low US$ million 3,821 NPV base low % of GDP 1.0 Source: World Bank staff calculations. Note: The low case scenario assumes that (i) revenue gains are 20 percent relative to the base case scenario, and (ii) taxpayers, administrative cost, and trade time savings are all 20 percent of the base case scenario. Figure 4: Revenue gains from ARMOR will help significantly reduce debt service costs Source: Nigerian authorities and World Bank staff calculations D. Program Expenditure Framework 10. The Program Expenditure Framework (PEF) is fiscally sustainable. The government program is funded through annual budget allocations to NCS, FIRS and FMF. The FIRS and NCS respectively retain 4 percent and 7 percent of revenues Page 41 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) at source to finance their budgets.57 The PEF includes expenditures for NCS, FIRS, and the FMF. The government program is estimated at US$1.173 billion ( 11. Table 5). The World Bank will contribute US$750 million or 64 percent of the total program expenditures. The expenditures under the Program are projected based on the 2024 budgets of the implementing agencies, past disbursement ratios, and the 2024-2026 Medium Term Expenditure Framework. They will comprise largely of staff and temporary specialists (consultants), utilities, operating expenses, and expenses for training and travel. No capital expenditures are included in the PEF. Overall, the actual expenditures are projected to be well beyond the amount of disbursements under the PforR financing. Table 5: Expenditures of ARMOR Government Program Yearly projections of program expenditures (Naira) US$ million Budget Code 2024 2025 2026 2027 2028 TOTAL ARMOR TOTAL ARMOR (A) NCS 21010101 Consolidated Salary 90,525,597,070 110,741,018,839 132,016,916,439 137,132,276,754 142,445,845,844 612,861,654,945 585.5 22020201 Electricity Charges 242,095,879 296,158,713 353,057,616 366,737,809 380,948,079 1,638,998,096 1.6 22020203 Internet Access Charges 27,140,123 33,200,829 39,579,472 41,113,088 42,706,128 183,739,640 0.2 22020210 Software Charges/Licence Renewal 6,745,338 8,251,650 9,836,982 10,218,143 10,614,073 45,666,186 0.0 22020301 Office Stationeries / Computer Consumables 176,871,807 216,369,344 257,938,873 267,933,428 278,315,249 1,197,428,701 1.1 22020404 Maintenance of Office/IT Equipment 80,614,186 98,616,275 117,562,730 122,118,023 126,849,823 545,761,037 0.5 22020501 Local Training 788,685,836 964,808,583 1,150,170,510 1,194,737,046 1,241,030,435 5,339,432,411 5.1 22020702 Information Technology Consulting 15,496,659 18,957,244 22,599,366 23,475,041 24,384,646 104,912,956 0.1 22020703 Legal Services 6,850,400,097 8,380,174,346 9,990,198,645 10,377,296,504 10,779,393,540 46,377,463,133 44.3 22021003 Publicity & Advertisements 131,108,171 160,386,155 191,200,025 198,608,598 206,304,237 887,607,186 0.8 22021014 Annual Budget Expenses & Administration 4,350,966 5,322,588 6,345,179 6,591,041 6,846,429 29,456,203 0.0 Total Government ARMOR - NCS 98,849,106,132 120,923,264,566 144,155,405,838 149,741,105,475 155,543,238,484 669,212,120,494 639.4 Total ARMOR PEF - NCS 63,176,327,412 77,284,338,249 92,132,437,750 95,702,363,700 99,410,616,298 427,706,083,408 408.6 Total Government ARMOR - NCS (% of NCS budget) 0.4 0.4 0.4 0.4 0.4 36.5% (B) FIRS 210101 Salaries and Wages - General 59,310,358,797 72,555,053,747 86,494,548,887 89,846,019,250 93,327,351,596 401,533,332,277 383.6 210202 Contribution pention 7,814,185,009 9,559,183,671 11,395,722,788 11,837,281,564 12,295,949,756 52,902,322,788 50.5 220202 Utilities – General 2,978,527,930 3,643,667,960 4,343,700,407 4,512,009,085 4,686,839,347 20,164,744,728 19.3 220205 Training – General 4,065,834,190 4,973,782,391 5,929,360,422 6,159,109,880 6,397,761,616 27,525,848,499 26.3 220207 Consulting and professional services 944,869,395 1,155,869,752 1,377,938,925 1,431,330,977 1,486,791,852 6,396,800,901 6.1 220209 Financial General 5,270,571,423 6,447,551,500 7,686,274,486 7,984,100,435 8,293,466,474 35,681,964,318 34.1 Total Government ARMOR - FIRS 80,384,346,743 98,335,109,021 117,227,545,914 121,769,851,192 126,488,160,642 544,205,013,511 519.9 Total ARMOR PEF - FIRS 51,375,151,555 62,847,822,167 74,922,334,780 77,825,407,722 80,840,968,250 347,811,684,474 332.3 Total Government ARMOR - FIRS (% of FIRS budget) 44.7% 44.7% 44.7% 44.7% 44.7% 44.7% (C) FMF 2101 Salaries and wages 1,730,921,756 2,117,456,774 2,524,268,938 2,622,078,715 2,723,678,402 11,718,404,586 11.2 220202 Utilities - General 156,211,174 191,094,951 227,808,688 236,635,765 245,804,872 1,057,555,448 1.0 220205 Training - general 287,419,156 351,603,206 419,154,271 435,395,562 452,266,166 1,945,838,361 1.9 22020702 Information and technology services 6,999,779 8,562,911 10,208,043 10,603,582 11,014,447 47,388,762 0.0 22020703 Legal services 13,467,970 16,475,525 19,640,852 20,401,891 21,192,419 91,178,657 0.1 Total Government ARMOR - FMF 2,195,019,834 2,685,193,367 3,201,080,792 3,325,115,515 3,453,956,306 14,860,365,814 14.2 Total ARMOR PEF - FMF 1,402,878,560 1,716,157,707 2,045,871,087 2,125,144,017 2,207,488,596 9,497,539,966 9.1 Total Government ARMOR - FMF (% of FMF budget) 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% TOTAL Government ARMOR 181,428,472,709 221,943,566,953 264,584,032,544 274,836,072,182 285,485,355,431 1,228,277,499,819 1,173.5 TOTAL ARMOR PEF 115,954,357,527 141,848,318,122 169,100,643,617 175,652,915,439 182,459,073,144 785,015,307,848 750 TOTAL Government ARMOR (% of budgets of PIUs) 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% Source: Budgets of FIRS, NCS, FMF, MTEF 2024-2026, and World Bank staff calculations. Note: The PEF assumes that the NCS and FIRS will allocate two third of their wages and salaries and half of their operating expenditures described above to implement the ARMOR program. 12. The PforR operation will enhance the efficiency of Program expenditures across several dimensions. A sound institutional setup has been devised that leverages the existing structures and capacity and lessons learnt from DRM reforms globally and existing PforR operations in Nigeria. This has led to effective stakeholder engagements as the relevant Ministries Departments and Agencies now understand how the reforms are going to benefit them in performing their day- to-day responsibilities with greater efficiency and effectiveness. In addition, presentations and technical notes drafted 57 FIRS retains 4 percent of non-oil revenues they collect, while NCS retains 7 percent. Page 42 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) during preparation of this operation explained the benefits of each DLI and how to surmount the anticipated challenges through the reform sub-activities and TA support. This in-depth engagement along with fiduciary systems oversight will continue throughout the Program implementation to enhance the efficiency of the PEF. Moreover, this operation will improve the efficiency of resources spent on tax and customs administration by increasing the use of digital services through e-filing, e-invoicing, risk management, and tax audits, reducing physical inspections, and improving excise administration to improve capacity to enforce excise revenue collections. The implementation of a sound risk-based audit selection system will improve compliance risk management. Strengthening the governance and increasing the transparency surrounding oil and gas revenues will render the system more efficient. 13. Responsibility for administering and reporting on the PEF will rest with NCS, FIRS, and PCU. The computerized accounting system in NCS and FIRS will be used to generate reports on the PEF. In the FMF, the information will be captured and reported using the core accounting system of the ministry. The PCU will work closely with the Office of the Accountant General of the Federation to generate reports on the PEF. NCS, FIRS and the PCU will prepare PEF reports bi- annually for submission to the World Bank within 45 days from the end of the calendar semester. Based on the annual Program specific audited financial statements, the PCU will consolidate the total actual Program expenditures to enable reconciliation at the end of Program life for comparison with disbursements made. If World Bank disbursements under the PforR exceed actual Program expenditures, the excess amount will need to be refunded by the Federal Government to the World Bank. E. Program governance structure and institutional arrangements 14. Successful implementation of the ARMOR Program will require a robust program monitoring and oversight system that will monitor and guide the relevant PIUs towards the achievement of PDOs. This oversight structure has three layers: the steering committee, the technical committee, and the Implementation. The PCU housed in the Technical Services Department and directly supervised by the PSF office will be the main interlocutor of the World Bank on behalf of the government, responsible for finalizing the monitoring framework and verification protocols, audits, procurement of the IVA, and Program coordination. The PCU will use the existing capacity within the PSF office supplemented by a professional project manager, a procurement specialist, an E&S specialist, and a communications specialist, in addition to the FM staff deployed to the PCU by the Accountant General. At implementation level, FIRS and NCS will set up Project implementation Units to take responsibility for technical delivery of FIRS and NCS DLRs. The implementation and monitoring structure is summarized in Figure 5 below. Figure 5: Governance and Implementation Arrangement of ARMOR ARMOR Steering Committee: Chair- Minister of Finance, Secretary - PS Finance, Members: Heads of FIRS, NCS, BOF, PCFPTR, FAAC Program Monitoring & Armor Technical Committee: Chair- PS Finance, Members: Relevant Directors of Oversight FIRS, NCS, BOF, TSD, FMF director home finance and secretary of FAAC. NCS - PfoR Secretariat in PSF's Office also IPF TA Implementation FIRS - PfoR FMFBNP - PfoR Page 43 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) F. Technical Risk Management 15. Technical design risks of the Program are assessed as moderate. The risks are largely driven by the fact that whereas the selectivity of the DLRs is based on sound analytical work, vested stakeholder interests and lobbying can hinder the implementation of reforms. In mitigation, the reforms are based on government priorities, strategy, and pronouncements. The government ARMOR program was endorsed by the Federal Executive Council and extensive consultation was done with the new administration on the design of the project and implementation arrangements. Further, a communications strategy will be developed and implemented as part of the Program Action Plan. The detailed Program risk assessment is in Table 3 of the PAD. Page 44 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 3. SUMMARY FIDUCIARY SYSTEMS ASSESSMENT 1. Residual fiduciary risk is rated High.58 The key risk factors include: (i) limited knowledge and experience in NCS and FIRS of PforR operations which will be mitigated through training and capacity building interventions financed from the TA; (ii) Program funds not being used for intended purposes. This will be mitigated through the implementation of risk-based internal audit coupled with the submission of annual audited Program financial statements; (iii) inadequate internal audit function. This will be mitigated through the introduction of risk-based internal audit function outside the expenditure processing cycle but focusing on fiduciary issues and risk prone areas; and (iv) backlog of unaudited annual financial statements, FY22 in NCS and FY21 and FY22 in FMF. For FMF, the recent appointment of a substantive Auditor General for the Federation, planned enhancement to the Government Integrated Financial Information Management System and now regular release of bank statements by the CBN for accounts preparation will mitigate recurrence of backlogs. The World Bank under the FGIP is supporting enhancement of the Government Integrated Financial Information Management System. The conclusion of the Integrated Fiduciary Risk Assessment (IFSA) is that the fiduciary systems and performance in the NCS, Federal FIRS, and FMF are adequate to provide reasonable assurances that the Program funds will be used for the intended purposes in an effective, efficient, and transparent manner subject to the implementation of a set of risk mitigation measures. The enabling institutional and legal framework for financial management in Nigeria is contained in a variety of sources, which are acceptable to the World Bank. , 2. Planning, and budgeting. Budget controls exist in all implementing entities. Appropriation Bills for FYs 2020 to 2023 were signed into law before January 1. FIRS and NCS retain 4 and 7 percent of their revenue collections towards their operational budgets. This assures adequacy and availability of budgets for the PforR. 3. Treasury Management and Funds Flow. The NCS and FIRS, retain their budgeted funding at source. The PforR proceeds of the IBRD loan will be disbursed to the Federal Government’s Special Fund Account, a sub-account of the Treasury Single Account held with the Central Bank of Nigeria and managed by the PCU. Disbursements are triggered by the achievement of the DLI-related results, following IVA verification and World Bank authorization. The IVA will prepare a Results Verification Report to be shared simultaneously with the PCU and the World Bank. The PCU will notify the World Bank of any comments on the report and whether the results are acceptable. At that point, the World Bank will make a final determination on acceptance of the results. Upon notification of acceptance of the verification report, a Withdrawal Application (WA) will be submitted by the PCU, using the e-disbursement functionality in the World Bank Client Connections system. Prior results will be subject to verification and are capped at 25 percent of the PforR financing. 4. Accounting and financial reporting. Existing financial management regulations and financial reporting systems are adequate to enable Program accounting and reporting. The accounting and reporting function at NCS and FIRS has been assessed and external audit reports indicate that it is adequate to record and report the transactions. The accounting functions at FMF have performed well on PforR instruments implemented by government. There is adequate staff capacity for fiduciary oversight. The staffing level at the finance and accounting departments of the implementing entities are adequate. Timely submission of the annual financial statements to external audit is an issue to be improved. However, clean audit reports have been issued in respect of NCS and FIRS financial statements. 5. ARMOR will have the annual total Program-specific expenditures compiled by the PCU from the audited financial statements of the NCS and FIRS, and FMF. Biannual expenditure reports will be submitted to the World Bank within 45 days after the end of the six months. At the closure of the Program, expenditure reconciliation will be carried out to 58 A detailed standalone Fiduciary Systems Assessment has been prepared and will be disclosed separately. Page 45 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) confirm that overall Program expenditure exceeded the IBRD disbursement. 6. Procurement processes and practices. Assessment made at FMF, NCS, and FIRS revealed that they do not publish their General Procurement Notices. Procurement under the Program will be in accordance with Nigeria’s National Procurement Procedures. The Procurement Officers at NCS, FIRS and FMF are assessed to have the capacity, qualifications, competence, and skills to manage the procurement functions. Although high-value procurement will not be part of the Program, high-value contracts under the Program shall be monitored during implementation support missions to ensure that it conforms with the World Bank’s policy on high-value contracts in Program for-Results Financing. Adequate competition was observed in the 47 National Competitive Bidding civil works contracts implemented by NCS in 2019 where an average of 15 bids were received. In FIRS, 75 percent of consulting services contracts implemented in 2019 were awarded through Direct Selection, mainly contract renewals. Of the remaining 25 percent, an average of three proposals were received which depicted lack of competition. Competitive bids and proposals have been received in FMF under World Bank-funded FGIP, SFTAS and CARES being implemented by the Ministry. The evaluation reports reviewed in NCS were consistent with the pre-disclosed bid evaluation criteria. The team had no access to sample bid evaluation reports of FIRS. Procurement performance and contract administration in NCS was good. FIRS availed limited information to enable evaluation. 7. Based on this, the procurement fiduciary risk was rated Substantial. In mitigation, the World Bank Standard Procurement Documents will be used for all International Competitive Bidding procurements, while the National Standard Bidding Documents may be used for procurements that fall within the National Competitive Bidding thresholds but with a ‘side letter’ which shall be issued to require that in addition to the provisions of the underlisted sections of the National Bidding Documents, the World Bank’s Anti-Corruption Guidelines, including without limitation the World Bank’s right to sanction and the World Bank’s inspection and audit rights, shall apply to all contracts funded under the Program. Procurements under the Program IPF shall be subject to World Bank procedures. Electronic filing shall mitigate lack of access to procurement documentation. 8. Internal controls and Internal Audit. The NCS and FIRS have Governing boards responsible for establishing the policies and overseeing the governance of these Departments of Government. Both NCS and FIRS have Board Audit Committees responsible for oversight over risks, internal controls, and ethics amongst others. The internal control arrangements in the implementing agencies provide for adequate segregation of duties. The internal audit function is in place in FMF, but has weak capacity, is largely focused on pre-payment audits, and lacks in oversight as a support to internal management. There is a dearth of risk-based internal audit and control processes, and lack of focus on systemic issues. TADAT scored efficiency of FIRS internal audit department with an A, implying they possess and deploy best practices. NCS Internal Audits are diverse and include revenue and expenditure audits. While NCS shared the internal audit report for FY21, the report only included financial information regarding the operations of NCS for the 12 months and there was no report per se covering the scope of the internal audit, the findings, and recommendations. Given this, the World Bank could not confirm the robustness or otherwise of the NCS internal audit function. 9. Acceptable External Program Audit arrangements are in place. The Auditor General for the Federation conducts independent audits of public finances at the federal level and will also be responsible for the audit of this Program. NCS and FIRS have their entity financial statements audited by independent external auditors hired by them. The audit reports issued for the GPFS (General Purpose Financial Statements) for FMF and the entity financial statements for NCS and FIRS shall include or be accompanied by a special audit opinion on the ARMOR PEF disclosure note. The audited financial statements, audit reports and management letters shall be submitted to the World Bank by FMF, NCS and FIRS within nine (9) months after the fiscal year ends. Page 46 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 4. SUMMARY ENVIRONMENTAL AND SOCIAL SYSTEMS ASSESSMENT 1. The environmental and social (E&S) risks have been assessed and deemed to be Substantial.59 Environmental risks were assessed as Low because the Program does not involve construction or rehabilitation works and Program activities are not likely to require significant changes to the Borrower’s overall environmental systems. Meanwhile, social risks were assessed as Substantial given potential social risks associated with increases in taxes. A series of mitigation measures are included in the PAP. 2. E&S benefits of the Program. Green taxes will reduce greenhouse emission, including by discouraging tobacco consumption, thus reducing carbon footprint and environmental damage such as deforestation and water pollution. Social benefits include increased revenue that enhances government spending on economic development and poverty reduction. Reduced spending on harmful goods will improve health. 3. E&S Risks & Impacts. The E-waste risk will be mitigated through implementation of electronic waste management procedures. Introduction of pro-health taxes and green excise could attract resistance and effort to scuttle the process from interest groups — especially economic and political elites. Mitigation measures and the competitive nature of certain industries are expected to buffer the adverse effects and keep the Program's overall positive impact on society. 4. Aligned with the applicable Core Principles 1, 5, and 6 of the ESSA, which pertain to Social Impact Assessment and Management, Vulnerable Groups, and Social Conflict, respectively, building awareness on the importance of mobilizing revenues is critical to addressing the lack of trust in the government. Building trust between taxpayers and revenue-generating agencies will also contribute to mobilizing revenues. Discussions with MDAs and Non-Governmental Organizations determined that there are areas for improvement, particularly in communication between the sector agencies and taxpayers. Awareness about the fact that Nigeria has one of the lowest revenues to GDP ratio should be increased. Moreover, communicating the fact that not all taxes have a uniform adverse impact on taxpayers is needed. Improving the capacity of FIRS and NCS to organize transparent and inclusive consultations is also necessary. Consultations with traders before operationalization of the compliant trader program will be critical for its success. With support from the World Bank, FMF will institute a specific communication package to effectively communicate tax reform to the citizens and strengthen their social contract. This will reduce the tension and potential discontent that accompany increases in taxes, and thus facilitate voluntary compliance. Hiring a communication specialist and E&S specialist within the PCU will strengthen capacity to deliver communication and environmental remedies around the reforms. 5. Stakeholder consultations were integral to the ESSA process and were done in line with the principles and objectives of similar World Bank operations. ESSA consultations were held on February 7 and 18, 2022 for government stakeholders and on February 8, 2022, for private institutions and Civil Society Organizations (CSOs). The aim was to present the ARMOR PforR and the draft ESSA to them and solicit input regarding the program, the findings of the ESSA, recommendations, and PAP. The key output of the consultation with government stakeholders was that the key implementing agencies understood the PAP requirements. Meanwhile, private sector organizations and CSOs welcomed the project as it would facilitate revenue generation and enhance economic development in Nigeria. They stressed the need to involve CSOs in the strategic communications so they can help spread the message of the importance of DRM for development in Nigeria. The final ESSA, reflecting the comments presented at the consultations, was publicly disclosed on the World Bank external website on 24 April 2024, and in-country by the Ministry of Finance on 22 April, 2024. 59The detailed Environmental and Social Assessment is disclosed on https://finance.gov.ng/mdas/documents/document-details/143fbaf0-466b- 11ee-bd19-ad6d4ee66afc and http://documents1.worldbank.org/curated/en/099042424180524901/P1773081128a0d0c1a0b81a24244d94a28.docx Page 47 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 5. PROGRAM ACTION PLAN @#&OPS~Doctype~OPS^dynamics@padpfrannexprogramactionplan#doctemplate Action Completion Description Source DLI# Responsibility Timing Measurement Dedicate E&S Environmental NA FMF and PCU Other 3 months YES/NO officials and Social Systems Develop e- Environmental NA FMF and PCU Other 1 year after YES/NO waste and Social effectiveness management Systems strategy Develop Environmental NA FMF and PCU Other 4 months YES/NO reform citizens and Social after engagement Systems effectiveness Prepare Environmental NA FMF and PCU Other Six months YES/NO modified and Social after taxpayers Systems program complaints Effectiveness redressal system Submit PEF Fiduciary NA PCU, NCS, FIRS Other Recurrent YES/NO based Systems semi-Annual Program (after financial & IPF effectiveness) Interim Financial reports Fiduciary Fiduciary NA PCU, NCS and Other Within 90 Yes/No training to the Systems FIRS days of PCU, NCS & effectiveness FIRS staff Dedicate Fiduciary NA PCU, FIRS, NCS Other Within one Yes/No Program Systems month of fiduciary staff effectiveness Finalise FY22 Fiduciary NA NCS Other 6 months YES/NO audited Systems after financial effectivenes statement Page 48 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Submit Fiduciary NA FRS, NCS, FMF Other 18 months YES/NO internal audit Systems after reports to PCU effectiveness DLR 5.1E- Technical NA FIRS Due Date 01-Jun-2026 YES/NO Invoice System launched for VAT Traders, as per verification protocol DLR 5.2: E - Technical NA FIRS Recurrent Continuous up to 30 percent Invoice system of VAT registered adopted by traders adopt e- traders, as per invoice verification protocol Page 49 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 6. IMPLEMENTATION SUPPORT PLAN 1. The Implementation Support Plan is designed based on the residual risks identified in the SORT assessment in addition to other technical, fiduciary, environmental, and social gaps noted by the World Bank team. Implementation support will cover all facets of the Program (Table 6) and World Bank team roles and inputs are proposed in Table 7. Advisory and TA activities, critical for the achievement of DLIs, identified in the PAP (Annex 5) will be implemented with the support of the World Bank team. The World Bank will also continue to provide World Bank-Executed TA on revenue mobilization through the FRED programmatic advisory and analytical services (P181272). Table 6: Implementation Support Plan Time Focus Skills Needed Partner Role Advise Results Teams to develop Program management, tax administration, First 12 workplans and begin implementation; tax policy (VAT and Excise), customs n.a. months determine if any advisory support is administration, & program fiduciary issues. needed to achieve the DLIs and DLRs. Play an active role in Results Teams to Program management, tax administration, 12–48 continue implementing the work plans; tax policy (VAT and Excise), customs n.a. months ensure regular monitoring of progress to administration, audit and compliance, ensure continued achievement of DLRs. fiduciary, E&S, climate change. 2. Continued donor coordination will also be valuable in ensuring the success of ARMOR. The IMF through the Fiscal Affairs Department is supporting tax policy and revenue administration reforms and has deployed a resident tax policy and administration advisor at the Federal Ministry of Finance up to 2026.60 Under the Global Public Finance Partnership program, a new four-year capacity development program has been approved by IMF. The Foreign, Commonwealth and Development Office is currently in discussions with the authorities regarding potential areas for support on tax policy and tax administration. The World Customs Organization is actively supporting the Nigeria Customs Services. Collaboration modalities between the IMF, World Customs Organization and World Bank have been agreed. Table 7: World Bank Task Team Skills Mix Requirements for Implementation Support Staff Weeks Skills Needed Number of Trips (per year) Comments (per year) Task team leaders (2) 88 - Country based Tax, Customs administration, &Tax Policy experts 40 - Country Based Fiduciary (Procurement & FM) specialists 10 - Country based Communications Specialist & taxpayer Headquarters / Country 8 2 survey/research (2) Based M&E specialist 4 2 Country/regional based Environmental & social safeguards specialist (2) 8 1 Country based 60The reports prepared by the IMF include: “Accelerating Collections from VAT, Excises, and the Rationalization of Tax Expenditures” (2017); “Mobilizing Tax Revenues in Nigeria, Selected Issues Paper” (2018) ; “Priorities for Revenue Administration Reforms in Difficult Times” (2021). Page 50 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 7. INVESTMENT PROJECT FINANCING COMPONENT 1. Under the IPF component, US$20 million has been set aside for the procurement of technical services and software necessary to support the implementing agencies in achieving the DLRs. TA to the FIRS; budgeted at US$5 million. 2. FIRS needs to develop and implement a robust third-party data sharing platform and administrative control programs. Currently, NCS and FIRS data sharing is based on a rudimentary exchange of data on storage devices. The Program shall support FIRS and NCS achieve an interoperable to systematically exchange data. In addition, FIRS shall be supported to receive gender specific information from the Corporate Affairs Commission on directorships of companies. A feasibility study, to establish requirements for an enterprise data sharing protocol and a system for interoperability and data governance shall be financed. Further, any professional and consulting charges required to finance design, building and implementing the data sharing shall be financed by the Program. Finally, enhancements of the existing systems TAXPROMAX and NCS NICSII to ensure data exchange shall be undertaken as required. Further, FIRS will design compliance and training control programs for the administration of VAT, CIT, and other taxes. 3. The e-invoicing system will depend heavily upon software and an extensive communications plan. The IPF component will cover the costs of consultancy services who will develop, design, and implement the e-invoicing system. In addition, communications experts, will be provided through the Program to ensure take-up of the new initiatives to raise VAT taxpayer registration and improve accuracy of VAT declarations. The program will also finance costs required to amend the TAXPROMAX system, enabling it to automatically receive e-invoicing data. 4. The TA program will work with the FIRS to develop a risk-based audit assessment program for VAT and CIT audits. TA to ensure the risk-based audit selection processes is fully integrated into the TAXPROMAX system will be provided, and off the shelf risk risk-assessment modules for the system will be procured. FIRS operational staff will be trained in risk- based management and audit; the cost of trainers may be covered by the IPF component. TA to the NCS; budgeted at US$5 million 5. The NCS will design and implement administrative processes including sanctions for noncompliance with the excise rules. To securely transfer production data to NCS the IPF will be used to procure goods, equipment, software, and consulting services. The TA, will design the specifications, gather feedback from stakeholders and provide solutions that enhance physical controls and real-time monitoring. 6. Centralized control room systems with backup and disaster recovery capacity to undertake monitoring of premises, movement of goods, control points etc. will need to be implemented. While CCTV and other monitoring devices can usually be required to be purchased by the manufacturer or owner of the relevant premises, there will be a need to set up the control center at NCS. Costs (consulting, equipment, and goods) to ensure NCS capacity to monitor excisable firms may be covered by the IPF component. 7. Capacity building. The IPF shall be used to support NCS skills enhancement activities including peer learning, geared at improving capacities of staff in the post clearance control, excise management, risk management, plus monitoring and evaluation functions. The funding may also support automation of inspection, post clearance audit management process Page 51 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) and data gathering, data conversion or data cleansing activities to ensure the reform implementation is successful. Where relevant for the achievement of the Program objectives, the (IPF) may also assist the NCS comply with requirements of the National Single Window or integrate customs systems into the National Single Window. Project management, tax policy capacity building and other expenses; budgeted at US$10 million 8. Independent Verification of Program Results. The IPF will be used to procure the consultancy services of an IVA responsible for the implementation of the verification protocol and reporting to the PCU on the Program results. 9. Support Technical Services Directorate as the PCU and tax policy capacity building. Specialists will be hired within the PCU, in addition to seconded FMF staff, on specific areas of Program management. See implementation arrangements on page 13. Capacity building TA to the tax policy unit of the Ministry will be provided under the IPF component in so far as it contributes to the overall PDO of the ARMOR Program. 10. Communications and outreach. The PCU will work to coordinate the strategic communications activities to be implemented by the revenue-relevant agencies including the FMF. The Program will implement activities with all stakeholders to enable regular dialogue and information sharing - throughout its lifecycle. A taxpayer survey to understand drivers for non-compliance including gender aspects will be funded. The results of the stakeholder engagement and taxpayer survey will be used to generate a communications strategy to bolster tax morale over the medium-term. 11. Program Monitoring and Evaluation: The PCU will put in place a robust Program M&E system to: (i) select the right tools to monitor Program activities and ensure a comprehensive data collection of all results and DLIs and DLRs including doing internal checks and balances and verification of sources of data; and (ii) provide a consistent series of checks, feedback, and technical support during implementation of activities prior to assessment of results by the IVA. The Program’s Operations Manual will include definition and descriptions of DLIs, DLRs, results from the Results Framework, milestones and define for each the performance management arrangements to provide clarity on the roles and responsibilities of the various stakeholders, a calendar for spot-checks to track program implementation as well as a transparent and acceptable mechanism for public disclosure of information. The M&E Specialist in the PCU will assist the Program Manager to implement and coordinate these activities. Page 52 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 8. POVERTY ASSESSMENT 1. The pro-health taxes proposed affect a relatively small share of the population, with a minimal effect on the poorest. Data from the 2018-19 Nigeria Living Standards Survey (NLSS) show that only 5.7 percent of the population consumes cigarettes or tobacco, with only 3.7 percent of the poorest decile having reported to consume these goods (Figure 6). Similarly, the effect of an increase in prices on non-alcoholic beverages, which excludes raw sugar itself, is likely to affect more richer household given that only 5 percent of households in the poorest decile consume chocolate and sugary drinks as opposed to 80 percent of the richest decile. Finally, richer households are more likely to consume and spend a larger share of their consumption basket to purchase alcoholic beverages.61 While about 11 percent of the population consumes alcoholic beverages, only 3 percent of the poorest group in the population lives in a household that consumes any alcoholic beverage, against 18 percent in the richest group. Figure 6: Pro-health taxes are largely progressive as they impact mainly the rich households which consume these products the most Source: World Bank staff calculations. Note: Estimates exclude Borno. Data are from the non-food consumption expenditure module (Section 7) of the NLSS 2018/19. Item code(s): 101-Cigarettes or tobacco. Sugary drinks are the sum of the annualized value of sugary drinks consumed by the household. Item code(s): 121- Chocolate drinks (including Milo); 153- Soft drinks (Coca Cola, Mirinda, etc.). Total Alcoholic beverages is the sum of the value of items listed in the Alcoholic Drinks (bottle and can) section of the questionnaire consumed by the household. Item code(s): 160-Beer (local and imported); 161-Palm wine; 162-Pito; 163-Gin; 164-Other alcoholic beverages. 2. Similarly, the green excise on vehicles is not expected to have a major impact on poverty, as it is designed to protect the poor and most vulnerable households. Considering that the Nigerian poor primarily rely on small motorbikes and scarcely on cars (Figure 7 and Figure 8), the green excise is structured to exempt vehicles and automobiles with an engine capacity of under 2000 cc (i.e., motorbikes, small cars, and medium-sized cars) as well as mass-transit vehicles for public transport capable of carrying more than 10 passengers. To enhance the tax's progressivity, the excise will be applied and will increase from 2 percent for vehicles with an engine size of 2000-3999 cc (i.e., large sedans) to 4 percent for vehicles with an engine size greater than 4000 cc (i.e., 4x4 vehicles). 61 Alcoholic beverages include beer, pito, palm wine, gin, and other alcoholic products. Page 53 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) Figure 7: The poor rely mainly on motorbikes which are Figure 8: Moreover, the poor barely own cars, hence they exempted from the green excise will not likely be affect by the green excise Source: World Bank staff calculations based on the NLSS 2018/19. Page 54 The World Bank NG Accelerating Resource Mobilization Reforms PforR (P177308) ANNEX 9. METHODOLOGY FOR DISBUSING AGAINST DLR ACHIEVEMENT 3. The primary principles for determining disbursement allocations related to the DLRs are : (i) expected revenue gains from policy actions, and (ii) the critical importance of reforms in terms of enhancing transparency and promoting good governance. There are two types of DLRs: qualitative DLRs, which are achieved on a yes/no basis and can only be met once, and quantitative DLRs, which have a specific baseline and a target that must be achieved by the end of the program. The latter are scalable; that is, they have a set target and associated disbursement if the target is fully met. However, if the target is only partially met, the disbursement amount will be adjusted accordingly using the following pro-rating formula, applied at each verification stage: ( − ) = {[ −1 − ] × [ ]} ( − ) To illustrate this, we use the example of DLR 1.1 regarding VAT collection as a ratio of non-oil revenues. Assuming the total disbursement is US$100 million, the base value is 1.3% of non-oil GDP, the target value is 1.8% of non-oil GDP, and the value in 2024 is 1.4% of non-oil GDP the disbursement for the first period would be: (1.4−1.3) 1 = {[100 − 0] × [ ]} = US$20 million (1.8−1.3) This process is repeated at each of the 5 verification periods. In the case, the result in period +1 is lower than in , then the World Bank will not disburse funds and instead wait for the verification in +2 and compare the result to and in case the result is higher, then the World Bank will disburse funds as per the above formula. Below is an overal example regarding DLR 1.1 on VAT collection to illustrate how the disbursment would work: Remaining PforR VAT resultt Disbursmentt Disbursmentt Baseline (Period 0) 1.30 100.0 Period 1 1.40 20.0 80.0 Period 2 1.30 0.0 80.0 Period 3 1.60 40.0 40.0 Period 4 1.70 20.0 20.0 Period 5 1.75 10.0 10.0 Target (End period) 1.80 Page 55