Document of The World Bank FOR OFFICIAL USE ONLY TN.3 2 9-A/l7/ Report No. P-5357-TH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALEN-t TO US$32.0 MILLION TO THE KINGDOM OF THAILAND FOR A TAX COMPUTERIZATION PROJECT JANUARY 7, 1991 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. CURRENCY BOUIVALENTS (as of June 1990) Currency Unit - Baht (g) V1 - US$0.0388 US$1 - l 25.8 ABBREVIATIONS AND ACRONYMS MOF Ministry of Finance NCS New Computer System p.a. per annum RD Revenue Department VAT Value-Added Tax FISCAL YEAR October 1 to September 30 FOR OFFICIAL USE ONLY THAILAND TAX COMPUTERIZATION PROJECT LOAN AND PROJECT SUMMARY Borrower: Kingdom of Thailand Amount: US$32 million equivalent Terms: 17 years, including 5 years of grace, at the standard variable interest rate. Financing Plan: USS million World Bank 32.0 Government 41.2 TOTAL 73.2 Economic Rate of Return: N.A. Staff Appraisal Report: Report No. 8931-TH Map: IBRD No. 22473 This document has a restricted distribution and may be used by recipients only in the pertormance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF THATLAND FOR A TAX COMPUTERIZATION PROJECT 1. The following memorandum and recommendation on a proposed loan to the Kingdom of Thailand for US$32 million equivalent is submitted for approval. The proposed loan would help finance a Tax Computerization Project and would be for a term of 17 years, including a five-year grace period, at the Bank's standard variable interest rate. 2. Background. Taxation is the main source of government revenues in Thailand, accounting in 1989 for almost 90% of total revenues and 16.61 of GDP. Largely due to the country's rapid economic development and improvements being made in the tax administration system (para. 4), Thailand's tax revenues have been increasing rapidly, rising from $ 142 billion in 1985 to $ 280 billion in 1989. The increases have been particularly large for the Revenue Departmer't (RD) in the Ministry of Finance (MOF), which collects the business tax and corporate and personal income taxes. In 1988 and 1989, RD's tax revenues grew by 25X p.a., compared with an inflation rate of about 5% and a 5.5% increase in the number of taxpayers. Tax revenues are expected to continue to grow at high rates due to the continuation of the country's strong economic performance. 3. The existing tax processing system is not able to handle the current, much less the future, volume of work. The computer now in place is too small to be used for routine activities like mathematical verifications, matching of information, issuance of arrears notices, etc. for taxes other the-n the personal income tax. Outside of Bangkok, the computer is used only to print pre-addressed labels and prepare tax payment statistics. Currently, only about 381 of the country's 6.5 million tax returns and only 601 of the returns for personal and corporate income taxes are computer-processed. The remainder are dealt with manually, delaying completion of processing well beyond the three-month period prescribed by law. This affects tax compliance, collection of statistics and management of the tax system. Even if the existing system were able to double the number of computer-processed returns by 1991, about 2.2 million returns would still need to be processed manually each year and 10 million other documents would remain unprocessed. 4. Recognizing that an efficient, equitable tax administration system is basic to successful economic development and social stability, in 1988 the Government adopted a policy for tax system restructuring and placed new fiscal prioritv on improving tax collection management and revenues. The objective was to introduce an improved, decentralized tax administration system. Approval has been given to the general principles for restructuring the Kingdom's tax system, in particular, its legislation, staffing, budgeting, communications and computerization. The proposed project would support these reforms by providing RD with a new computer system (NCS) for the establishment of an integrated computerized system of tax administration. 5. The RD, although constrained by its lack of adequate computer facilities, has shown greatly increased efficiency and effectiveness over the - 2 - last few years. Between 1986 and 1989, the amount of taxes collected by RD increased by an average of 27% p.a. and the ratio of the revenue collected to its collection cost increased from about 110 to 185. Overdue tax receivables were reduced from about 21% of tax collections to about 121 and, while the number of taxpayers increased by more than 20X, the number of overdue taxpayers was reduced by 5%. During this period, the tax collected per RD employee doubled from P 6.5 million to P 12.5 million. 6. Rationale for Bank Involvement. The proposed project would support the establishment of a modern tax administration system which would, in line with the Bank's lending strategy for Thailand, increase government revenues, support improved fiscal policies, and ensure efficient and fair tax collection, so that all taxpayers contribute equitably to the country's development. During project preparation, the Bank provided technical advice in the design of a computer-based tax collection system based on the experiences of other countries. During implementation RD would benefit from the Bank's experience in the procurement of computer hardware, software and technical assistance, which is technically complex for a system of this size, as well as from the Bank's use of transparent evaluation methodologies. Bank assistance to the project would also ensure that attention is paid not only to the commissioning of hardware but also to implementation of the overall tax administration system, including institutional development, technology transfer and staff development to sustain system operations. 7. Proiect Obiectives. The project's main objective is to improve the overall tax administration in Thailand through the provision of appropriate hardware, software and systems for tax processing and analysis. The project would assist RD to establish a comprehensive, integrated database management and processing system for all taxes it administers. This will result in faster and more efficient processing and collection of revenues needed by the country. The proposed computerization of RD's tax administration would also facilitate Government's plans for the replacement of the present business tax with a value- added tax (VAT) under the overall tax reform. 8. Proiect Description. The project includes all hardware and related data- entry processing equipment, software, training and technical assistance required by RD to establish an advanced tax collection and processing system throughout the country. The project components are as follows: (a) hL:dware to process and audit all major taxes, comprising: two large mainframes, disk and tape systems for Bangkok; 9 medium-sized mainframes at the regional level; 48 smaller computers at the provincial level; and about 1,300 microcomputers at the district level; (b) development and implementation of all software for an integrated tax system, including personal income tax, corporate income tax, withholding tax, business tax and VAT, as well as general software and management information systems; (c) technical assistance to RD for: (i) a study to improve its organization and procedures, as needed, to operate the new computerized tax administration system; (ii) support for a comprehensive training program for all RD staff, particularly those responsible for computer operations; and (iii) project implementation and supervision; and (d) provision of complementary facilities and services, including buildings, air conditioning, and communications. - 3 - i. The proposed project would be carried out by MOF. The computer system would be supplied under a turn-key contract, which includes hardware, software, training and operational support. RD's existing and already quite substantial training programs would be continued and expanded throughout the project period. The project cost is estimated at US$67.9 million equivalent, with a foreign exchange component of US$51.8 million equivalent (76%) and taxes and duties estimated at about US$12 million equivalent. The total financing required, including interest during construction, is US$73.2 million, of which the Bank would finance US$32 million (56% of the foreign exchange and 44% of the total) and the Government would finance the remaining US$41.2 million. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in the Kingdom of Thailand are given in Schedules C and D, respectively. The Staff Appraisal Report, No. 8931-TH, dated January 7, 1991, is being distributed separately. 10. Agreed Actions. Since early completion of implementation arrangements is critical for this technically complex project, as conditions of effectiveness of the Bank loan, RD will: (a) appoint one high-level computer specialist for the Project Office; and (b) appoint consultants for project implementation. Assurances were obtained from Government during negotiations on: (a) an Action Plan for project implementation; (b) submission to the Bank for comments by April 30, 1991 of a summary three-year RD Staff Development Plan to ensure adequate expansion and training of RD staff; (c) RD's engagement by July 31, 1991 of a training consultant to assist in preparing a staff training plan and of two local specialists to assist in preparing and implementing training programs under the plan; (d) completion by October 31, 1992 of a study to adapt RD's organization and procedures to the new computerized tax administration sy_tem being introduced; and (e) appointment of additional staff for the Project Office by May 1, 1992. 11. Benefits. The proposed project would help improve Thailand's overall tax collection system, increasing its efficiency, effectiveness and equity. Specifically, the project would increase RD's efficiency in processing the growing number of tax returns as well as decentralize the processing of tax returns, improve access to tax records, promote auditability at each level, provide adequate customer records, and facilitate the introduction of a VAT to replace and improve upon the current business tax. The computerized tax system is also expected to reduce tax evasion, improve the equity of the system, and increase the country's tax revenues. The reduced tax evasion is expected to result from system capabilities like cross-checking, faster processing of tax return.s, selective and random auditing, and full integration of all taxpayer records, as well as improved voluntary compliance with tax laws and more accurate reporting due to the taxpayers' perception of RD's improved capability to audit and verify data with the new system. Since the project would mainly improve the efficiency of tax collection and result in a transfer of tax revenues, it is not possible to estimate its economic rate of return. The project's financial costs and benefits can, however, be calculated. The NCS has a benefit-to-cost ratio of 18, at a 10% discount rate, indicating an extremely high financial rate of return of 541%. Moreover, the full project cost will be recovered by an increase in tax revenues of just 0.7% in a single year. 12. Risks. The main project risk is associated with the procurement process. In general, the award of large contracts for computer hardware and software is technically complex, controversial and subject to political pressures. This risk has been minimized in the proposed project by establishing a clear, transparent system for procurement of the new computer system, under a turn-key contract. While there is little risk related to overall project implementation, given the rigorous qualifications proposed for the turn-key contractor, there is a risk that RD may not be able to retain adequately trained and qualified staff for the operation and development of its much-expanded computerized tax administration system. This risk is lessened by the massive training programs included in the project (which have provisions for expected staff attrition), the initial operation of the system by the supplier, and the potential to prolong this assistance, if needed. 13. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. January 7, 1991 -5- Schedule A THAILAkND TAX COMPUTERIZATION PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Project Cost: Local Foreign Total - - (US$ million) - - Hardware and equipment 0.3 34.7 35.0 Software and implementation management 4.4 6.6 11.0 Other computer costs 2.0 2.6 4.6 Subtotal hardware and software 6.7 43.9 50.6 Training of RD staff 1.2 0.0 1.2 Communications and utilities 1.6 0.4 2.0 Buildings and facilities 3.3 0.9 4.2 Project implementation support 0.3 l.i 1.4 Institutional strengthening 0.3 0.3 0.6 Base Cost (December 1990) 13.4 46.6 60.0 Physical contingencies 1.5 1.6 3.1 Price contingencies 1.2 3.6 4.8 Total Proiect Cost A/ 16.1 51.8 67.9 Interest during construction 0.0 5.3 5.3 Total Financing Required _161 5 1 -2 Financins Plan: World Bank - 32.0 32.0 Government 16.1 25.1 41.2 TOTAL 16.1 5.171 73.2 a/ Including taxes and duties equivalent to US$12 million. -6- Schedule B THAILAND TAX COMPUTERIZATION PROJECT PROCUREMENT METHOD AND DISBURSEMENTS Procurement Method Project Components ICB LCB Other Total Cost ------------ US$ MillionrL ----------- Hardware and Software 57.1 0.0 0.0 57.1 (32.0) (0.0) 0.0 (32.0) Training, Communications 0.0 0.0 3.9 2/ 3.9 (0.0) (0.0) (0.0) (0.0) Building and Facilities 0.0 4.6 0.0 4.6 (0.0) (0.0) (0.0) (0.0) Technical Assistance 2.3 2.3 (0.0) (0.0) TOTAL 57.1 4.6 6.2 67.9 (32.0) (0.0) (0.0) (32.0) M Figures in parentheses are amounts financed by the Bank. kL Local services and local training cost. Disbursements Category Amount X (US$ Million) Computer hardware, software, and training 32.0 65% of total expenditures Estimated IBRD Disbursements Bank Fiscal Year FY91 FY92 FY93 FY94 FY95 - - - - - - -(US$ million) - - - - - Annual 2.0 7.0 11.0 10.0 2.0 Cumulative 2.0 9.0 20.0 30.0 32.0 -7- Schedule C THAILAND TAX COMPUTERIZATION PROJECT Timetable of KeX Project Processing Steps (a) Time Taken to Prepare the Project: 18 months (b) Prepared by: HOF with the assistance of consultants, IMF and the Bank (c) First Bank Mission: February 1989 (d) Appraisal Mission Departure: June 9, 1990 (e) Negotiations: September 24-27, 1990 (f) Planned Date of Effectiveness: April 1991 (g) List of Relevant PCRs and PPARs: None Schedule D Page 1 of 2 THE STATUS OF RANK GROUP OPERATIONS IN THAILAND A. STATEMENT OF BANK LOANS AND IDA CREDIT? a/ (As of September 30, 1990) Loan or Amount (S million' Credit Fiscal less cancellations Number Year Borrower Purpose Bank IDA Undisbursed4 Seventy-five loans and six credits fully disbursed 2,936.55 115.42 - Of which SECALs, SALs, and Program Loans 2097 1982 Kingdom of Thailand SAL I 1l0.00 2256 1983 Kindgom of Thailand SAL 1I 175.00 Sub-Total 325.00 1922 1981 Kingdom of Thailand Agriculture Research 29.95 4.39 2311 1983 Kingdom of Thailand Provincial Roads 95.25 1 Xs 2407 1984 Elec. Gen. Auth. of Thl. Mae Moh Lignite II 15.00 '.73 2440 1984 Kingdom of Thailand Land Titling 35.00 9.3' 2520 1985 Kingdom of Thailand Regional Cities 20.33 7.72 2548 1985 Bangchak Petroleum Co. Refinery I (Bangchak) 85.00 75.23 2795 1987 National Housing Auth. Third Shelter 21.00 1S.'9 2872 1988 State Railway of Thl. Railway Efficiency 13.00 12.02 2894 1988 Kingdom of Thailand Highway Sector 50.00 33.5- 2915 1988 Elec. Gen. Auth. of Thl. Power Transmission 110.00 22.82. 3008 1989 Kingdom of Thl. Second Highway Sector 87.00 6387- 3220 1989 Elec. Gen. Auth. of Thl. Power System Dev. 90.00 3.02 3138 1990 Elec. Gen. Auth. of Thl. Second Power System Dev. 94.00 62.49 3229 1990 Kingdom of Thailand Highway Sector III 50.00 50.0C 3254 1991 Kingdom of Thailand Land Titling II 30.00 3C.C^ Total 3,762.08 115.42 399.'2 of which has been repaid 1,590.57 6.36 Total now held by Bank and IDA 2,171.51 109.05 Amount sold /b 193.91 of which repaid 133.29 Total undisbursed 399.12 - 399.12 /a The status of the prcjects listed in Part A is described in a separate report on a:l BankJlDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. /b Of which $43.3 million sold to the Bank of Thailand. Schedule D Page 2 of 2 B. STATEMENT OF IFC INVESTMENT (As of September 30, 1990) Investment Fiscal Company Type of Business Loan Equity TotaL number Year -- (USS million) -- 19 1959 Concrete Products & Cement & construction 0.3 - Aggregate Co. Ltd. materials 71/185 1964/1971 Industrial Finance Co. Development finance Co. - Q 4 of Thalland (IFCT) 147j321!1969/19761 5 . Cement Group CemenL & Construction 23.3 4.1 2.. 419/475 1918/1983) materials 477/719 '985 368^2380 1977/90 MYutual Fund Co. Ltd. Money & capital market - C. . 373 1977 Jni ed Sugar Food & food processing 2.5 0.2 _.- Terminal Ltd. 401 1978 Sian Commercial Bank Small- & medium.-scale. 2.0 - 2.^ industries -.5,'534/1979,19801 2ang.kok Glass G' ass centainers 9.9 0.4 _: 65. l983 Industrial Co. Lti. 425:55211979!1981/ Siam City Cement Cemnet & const-uction 3e8. 6.. 879/736 1935 Co. Ltd. iaterials 433 1979 Th3i Orien. Leasing Capital market - 0.. Co. Ltd. i21 183 FMc P1lymez- hem.i`als & petrochem. 25.3 1 _ _ '1 S -Xinr.erals d . Min :ng - - '?9 i 93<,3 , .. a: Pet-cz'.et~. emica' & petrcchem. 35.3 3.5 :' si.83 P-ansrlvtvat Co >d. Cil paLm estate 3.6 48a3 alna a n z.- a' l, J'Ding L ..S 3 W:i' ACUa:'ulture F fc & food prncessing 3.2 2 .: ^.' - _ -9S- 50 s- .sIa lenti-e Mc-ney & capita'. matket 8E tc T M_ S . . T limited Zi. :g - - 190 S33-A. Mapy & capital marKet - i;5 r,,' '986 Oh: "al I HealLh care 4. , ' 9, ;.>7 i9su;c I L. . A_> Tcmaro paste (Food and 1.6 3.5 food processing 9 5, _037 1987 The T"ail;nd Furnd Mone) & capital market - 26 3 -95 1989 Tha. Prime Money & capital market - 1_.9 1. 9 'l04 l989 Peroxytha Chemicals & petrochem. 13.7 - 1166 l99C TFB-AL Development finance - 5.3 5.r 3235 1990 Asahi Siam General manuf. (G6ass) - 9.1 Toi:al gross commitments 298.9 93.0 39 .9 Less cancellations, terminations, repayments and sales 232.8 55.2 288.3 Total commitment now held by IFC 66.1 37.8 103.9 Total undisbursed (including participant's portion) 3.6 26.1 29.7 /a US$45,969 18RD 224 9 THAILAND -20- f7TAX COMPUTERIZATION PROJECT C g0 Reg,on Heodquaoe s 6 -a , Co) a.- Chiong Mai { t Reg-on Narbers- -eaa _zą. <_5 jX ~~~~~~~~~~~~~~~~Reg-on Bowndro,es UdonThmon; LAO PEOPLE'S MYANMAR Phdonujo DEMOCRATIC MYANMAR t @ (.>Tj ~~~~~~~~~REPUBLIC Nokhon ,Rochosimr C) 1~~~~~~~~~~~~~~~~~~~~~~~~(. < '1' *Pohom BANGKOK Chon Bunr DEMOCRATIC KAMPUCHEA ( V I E~~~~~~~~~~~~~~~~IT NAM ;DtT8 1;< MALAYSLA OSINGAPIAE Sijrot ThaA d1 *> s: XX t5 S t ffi ~~~~~~~~~~ % ) F MIA'r9AA'W,, O X lZ tY X00 t / \~~~~~~~~~~~~~ .NApO f ___ P M^tAYSIA . ^; D O N E ~~~~~~~~~~~~~~~~~~~~~,IASJA AUGUST 199Q