Republic of Bulgaria

Supplemental Letter No. 1

REPUBLIC OF BULGARIA

June 18, 2003

International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America

Re: Loan No. 4699 BUL (Revenue Administration Reform Project) Section 9.02 of the General Conditions - Financial and Economic Data

Dear Sirs:

In connection with the Loan Agreement of this date between the Republic of Bulgaria (the Member Country) and the International Bank for Reconstruction and Development (the Bank) for the above-captioned Project, I am writing on behalf of the Member Country to set forth the following:

1. We understand and agree that, for purposes of Section 9.02 of the General Conditions, the Member Country is required by the Bank to report “new loan commitments” (as defined in the World Bank’s Debtor Reporting System Manual, dated January 1989) not later than thirty days after the end of the quarter during which the debt is incurred, and to report “transactions under loans” (as so defined) not later than March 31 of the year following that for which the report is made.

2. We represent that no mortgages, pledges, charges, privileges, priorities, or other liens, other than those excluded pursuant to paragraph (c) of Section 9.03 of the General Conditions, exist on any public assets, as such term is defined in said Section, as security for any external debt. No defaults exist in respect of any external debt.

It is our understanding that, in making the Loan, the Bank may rely on the statements set forth or referred to in this letter.

Very truly yours,

By______Authorized Representative Supplemental Letter No. 2

June 18, 2003

International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America

Re: Loan No. 4699 BUL (Revenue Administration Reform Project) Performance Monitoring Indicators

Dear Sirs and Mesdames:

Referring to the provisions of Paragraph 1 (a) of Schedule 5 to the Loan Agreement of this date between the Republic of Bulgaria (the Borrower) and the International Bank for Reconstruction and Development (the Bank) for the above-captioned Project.

The Borrower hereby confirms to the Bank that the indicators set forth in the attachment to this letter shall serve as the basis for the Borrower to monitor and evaluate the progress of the Project and the achievement of the objectives thereof.

Very truly yours,

By ______Authorized Representative Attachment BULGARIA: Revenue Administration Reform Project

\ Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) An economically efficient Total revenues collected. CAS monitoring activities; Political stability. public revenue collection Type of revenue collected Government economic and Continued public pressure system that promotes macro- sector reports; for improved public sector economic stability, improves Revenue collected by sector performance. the climate for private sector  Annual NRA report; Share of gray economy development, and complies  NRA given sufficient IMF supervision activities. with requirements for EU independence to manage its accession. resources to meet project objectives. Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions (from Objective to Goal) Project Development Outcome / Impact Project reports: Objective: Indicators: Improve the level of taxpayer Number of tax declarations Government financial Continued government voluntary compliance with filed/number of registered statistics. commitment to reform of tax and social contribution active taxpayers. public institutions and private IMF Reports. obligations. sector development.  Number of active Project semiannual reports. taxpayers/contributors Maintenance of sound (companies, employees, self- Project-financed macro-economic and fiscal employed, etc.) (semiannual) surveys and policies. analytical work. Number and amount of tax Ability to adjust to external declarations filed/number of shocks. active taxpayers by type of  Continued political support revenues. for the modernization of the Number of tax declarations revenue collection system as received on time/total well as EU accession. number of tax declarations filed. Revenues paid on time/total revenues assessed. Number and amount of PIT declarations filed Percentage of disputes on hand in relation to total. Perception of taxpayers regarding the quality of service provided by the revenue administration, measured through periodic surveys. Promote administrative Revenue collected/revenue Government financial effectiveness and efficiency. targeted by category statistics. (annually) IMF Reports. Revenue collected/revenue Project semiannual projected (large taxpayers) progress reports. Cost of collection Project-financed Percentage of taxpayers (semiannual) surveys and filing electronically. analytical work. Number of complaints against the tax administration. Average number of days taken to process a tax declaration by type of revenue. Average number of days taken to identify and notify non-filers and/or non-payers. Average number of days taken to process a VAT refund request. Number of taxpayers / number of revenue administration employees. Number and amount of audit adjustments/number of audits. Performance against agreed standards for responding to telephone, written and personal inquiries. Average number of days taken to respond to requests for formal written rulings Annual number of additional forced VAT registrations/total VAT registrations Amount of arrears at year end/total revenues assessed Amount of arrears recovered during the year/total revenues collected Promote a professional Perception of taxpayers Periodic surveys of workforce and approach. and other stakeholders taxpayers and other regarding the level of stakeholders professionalism and integrity Periodic surveys of NRA of revenue administration managers and staff. staff, as measured through periodic surveys. Project semiannual progress reports. Perception of managers and staff regarding the level of professional skills in different functional areas, as measured through periodic surveys. Number of complaints over an anti-corruption hotline

Improve equity and fairness Number of additional Periodic surveys of in the administration of the forced VAT registrations taxpayers and other tax system. during the year/total number stakeholders of VAT registrations at year IMF reports. end. Project semiannual Amount of arrears at the progress reports. beginning of the year (o/w non-collectible) Percentage of disputes resolved during the period in relation to total. Percentage of appeals lost in court, by category of dispute Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Policy Support Appropriate changes in the Annual Strategic Plans Sustained commitment to legal and regulatory (ASPs). improvement in revenue framework made to support administration performance Annual Operational Plans the reforms introduced by the at the political, managerial, (AOPs). Project and accession to the professional and technical EU. Project Management levels. Reports (PMRs). Tax policy unit staffed and Continued involvement of made operational with World Bank Supervision high level officials of the capacity to analyze Reports. MOF, NRA, and local offices administrative performance, in oversight and Mid-Term Review (MTR). and economic efficiency and implementation of project effectiveness of the NRA. Taxpayer surveys. initiatives. Improved revenue Consultant Outputs. Project management of the forecasting models and caliber needed for effective methodologies implemented. change management to build ownership for the reforms Revised administrative and minimize resistance appeals system fully from managers, staff, functional, evaluated, and taxpayers, and other revised if necessary. stakeholders.  Capacity to analyze how Willingness of NRA well the NRA management and government implementation of the Tax to implement modern human Code achieves tax policy resource management objectives. policies and practices to establish a meritocratic, professional, performance oriented revenue service. Government commitment and fiscal ability to provide equitable pay and incentives to NRA staff, thus fostering improved integrity and increased ability to attract and retain requisite skills. Willingness of the MOF to give the NRA full managerial and technical control over its information technology environment. Willingness of the legislature to enact legal changes required for implementation of project activities in a timely manner. 2. Organization and Organizational structure at Management Development the headquarters and territorial levels rationalized along functional lines, but with a focus on large taxpayers. Territorial offices consolidated.

 Collection of local taxes transferred to local governments.

Strategic approach to the management of the agency established. Improved management systems relating to accountability and authority, monitoring and evaluation, internal control and integrity implemented. Standardized workflows, in accordance with well reengineered business processes implemented. Physical infrastructure of offices covered by the project improved. Regular consultation with key stakeholders implemented. Responsibility for collection of taxes and social contributions transferred to the NRA. New human resources management, staffing and pay policy -including efficient incentive systems- and training plan adopted. Code of Ethics implemented. Effective internal audit management and procedures implemented.

3. Operations Strengthening Core business procedures reengineered considering international best practice. Business processes streamlined and codified for uniform use throughout the country. IT capacity at the Central and territorial level enhanced, and computer systems to support business processes implemented. Communications network implemented making taxpayer information available throughout the administration.  Electronic filing system implemented. NRA Portals and websites implemented. Taxpayer advisory services improved. Taxpayer service standards developed and implemented. Taxpayer education campaigns implemented on specific topics. New audit support systems implemented, including assistance for desk audits, audit selection, and third party information collection. New arrears management system implemented. Long-term training strategy developed and implemented targeting continuous upgrading of skills. Improved policies and systems for recruitment, promotion, rotation, performance evaluation, discipline and professional development implemented. Legal database of court decisions implemented and available countrywide. 4. Outreach Services Community Participation and Services Department established, staff trained NRA Performance Feedback Surveys taken and results used to improve client service. Annual reports prepared and disseminated to Government and stakeholders. Private taxpayer advisory services actively promoted. Internet services available for filing tax returns and related internet-based tax and contributor services established. Public education campaign mounted. Internal communications plan developed and implemented. 5. Facilities Upgrading Plans for rehabilitation of NRA offices implemented, with the installation of networks, computers and completion of training. 6. Project management Quality assurance and change management methodologies are implemented. Good quality Annual Operational Plans prepared in time. Good quality, semiannual Project Management Reports (PMRs) prepared in advance of supervision missions. Procurement carried out in a timely manner and in accordance with World Bank Guidelines.

Project financial management carried out in accordance with World Bank Guidelines. Annual project audit conducted in a timely manner by independent auditors. An implementation completion report reflecting the NRA's evaluation of the project prepared before project closing. Project Components / Sub- Inputs: (budget for each Project reports: (from Components to components: component) Outputs) 1. Policy Support US$1.5 million (total cost) Semiannual Project Report Satisfactory institutional arrangements are found for Management Reports transfer of revenue functions (PMRs). to the new agency (NRA). Supervision missions. "Losers" in modernization Project audit reports. effort do not disrupt work. Key staff can be attracted to the new agency. Key staff and managers are not diverted to non-project tasks by crises. Counterpart funds for the project are made available on an on-going basis by the Bulgarian Government.

2. Organization and US$8.15 million (total cost) Management Development

3. Operations Strengthening US$19.1 million (total cost)

4. Outreach Services US$1.7 million (total cost) 5. Facilities Upgrading US$30.4 million (total cost) 6. Project Management US$1.8 million (total cost)