FINAL REPORT USAID’S FISCAL SECTOR REFORM ACTIVITY IN BOSNIA AND HERZEGOVINA SEPTEMBER 2014 – MARCH 2020 USAID Contract No.: AID-168-C-14-0000 This document was produced for review by the United States Agency for International Development. It was prepared by Finit Consulting d.o.o.. The views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government. FAR Final Report 1 September 7, 2014 - March 7, 2020 April 2020 333ited States Agency for International Development. It was prepared by Deloitte Consulting USAID'S FISCAL SECTOR REFORM ACTIVITY FINAL REPORTAPRIL 1 – JUNE 30, 2015 SEPTEMBER 7, 2014 – MARCH 7, 2020 USAID Contract No.: AID-168-C-14-00001 Implemented by: Finit Consulting d.o.o. Sarajevo Company and project address: Maršala Tita 21/2 Sarajevo FAR Final Report 2 September 7, 2014 - March 7, 2020 1. Abbreviations BD Brcko District BIH Bosnia and Herzegovina BMIS Budget Management Information System CIT Corporate income tax EC European Commission E-FILING Electronic filing for tax declaration ELMO Enabling Labor Mobility Activity in Bosnia and Herzegovina EU European Union FAR Fiscal Sector Reform Activity in Bosnia and Herzegovina FBIH Federation of Bosnia and Herzegovina FIA Financial Information Agency FMoF Federal Ministry of Finance IMF International Monetary Fund IT Information technology MoF Ministry of Finance MoF BD Directorate of Finance of Brcko District of Bosnia and Herzegovina MoF RS Ministry of Finance of Republic of Srpska MoFT Ministry of Finance and Treasury of BiH MoU Memorandum of Understanding NGO Non-Government Organization PARCO Public Administration Reform PDM Public Debt Management PIO/MIO Pension Insurance Fund PIT Personal income tax PKI Public Key Infrastructure RS Republic of Srpska SOW Statement of Work SSC Social security contributions STATA Data Analysis and Statistical Software TA Tax Administration TA FBIH Tax Administration of the Federation of Bosnia and Herzegovina TA RS Tax Administration of the Republic of Srpska TAF Tax and Fiscal TAMP Tax (Administration) Modernization Project in Bosnia and Herzegovina TARA Tax Reform Activity in Bosnia and Herzegovina TS Treasury System UCS Unified Collection System UI User Interface UNCTAD United Nations Conference on Trade and Development USAID United States Agency for International Development VAT Value Added Tax WB World Bank WP Work Plan FAR Final Report 3 September 7, 2014 - March 7, 2020 Contents 1 1. ABBREVIATIONS ............................................................................................................................. 3 2. EXECUTIVE SUMMARY .................................................................................................................... 5 3. OVERALL DESCRIPTION OF ACTIVITIES AND ACCOMPLISHMENTS ................................ 9 4. PROBLEMS / OBSTACLES ENCOUNTERED DURING IMPLEMENTATION ........................ 33 5. LESSONS LEARNED, FINDINGS, COMMENTS AND RECOMMENDATIONS ..................... 36 6. OVERALL MONITORING AND EVALUATION SUCCESSES AND RESULTS (QUANTITATIVE EVALUATION) ............................................................................................... 38 FAR Final Report 4 September 7, 2014 - March 7, 2020 2. Executive Summary USAID designed the Fiscal Sector Reform Activity (FAR) to build upon the critical initiatives that have been implemented under previous USAID activities (TAMP, TARA, ELMO and TAF). FAR offers a comprehensive set of initiatives addressing better coordination between different levels of the BiH governments, strengthening treasury and IT systems. At the same time, the USAID FAR activity sought to reduce the compliance burden on taxpayers through targeted assistance, including: continued implementation of the online based payment and verification processes in the FBiH and RS; creating registers of fees in the FBiH, RS and BD, implementing a regulatory framework and the elimination, reduction and streamlining of “para-fiscal” fees; development of new business processes to diminish tax evasion through improvement of the gaming industry taxation and the establishment of the FBiH register of business bank accounts. IT lead intervention was also envisaged in the area of both external and internal debt management. Figure 1: Chief of Party Mark Campbell at the Celebration of FAR activities – February 2020 The main objectives, either from the outset or by evolution during implementation may be identified as follows: 1) Improve the business environment by regulation, streamlining, reduction and elimination of what are commonly referred to “nuisance taxes” – fees & para-fiscal fees and charges 2) Use of IT systems to boost fiscal transparency and reduce opportunities for malfeasance, corruption and misuse of public revenues 3) Use of IT systems to boost tax compliance and enforcement as well as modernization of internal institutional operations, by use of state-of-the-art e-services and operations 4) Provision of technical assistance to develop and embed fiscal expertise within Ministries of Finance in the areas of modelling and fiscal reporting Key Results at a Glance Regulation of fees and charges including parafiscal fees In Republika Srpska and the Brcko District, standardized and rationalized systems have been introduced for the introduction, amendment to and elimination of fees and charges. As a result of USAID FAR assistance: All fees and charges must be published in the official registers of tax and non-tax revenues of the RS and BD. If they are not included in these registers, they cannot be imposed on businesses and citizens. This is a major boost to transparency and the business environment. In the RS and BD, all taxes, fees and charges must be adopted by law only (i.e. cannot be imposed by government decision or decree). A comprehensive adoption and evaluation of process for introduction of all fees and charges must be followed. FAR Final Report 5 September 7, 2014 - March 7, 2020 In the FBiH, we constructed a comprehensive register of fees and charges and demonstrated that the introduction of a system for their regulation similar to those in the RS and BD is constitutionally feasible. We drafted the Law of the Register of Fees and Charges in the FBiH which was adopted by the FBiH Government and forwarded to the FBiH Parliament for adoption under shortened procedure. Interactive and available online web-based registers which include all fees and charges were developed for the RS, Brcko District and FBiH. IT Interventions with FBiH and RS Tax Administrations and FBiH Financial Information Agency (FIA) Our work with the FBiH Tax Administration and Financial Information Agency achieved many successes. In the FBiH, as a result of USAID FAR assistance: We developed the online statement, which gives citizens direct e-access to their employment contribution records and verification that employers correctly remit and pay contributions. This has concretely empowered citizens who do not need to wait until they visit their doctor or reach pensionable age to discover that their contributions have not been paid and entitlements denied! We boosted enforcement and compliance of gambling operators (games of chance) which includes real time data updates, cross checks and triangulation of data, introduced an early warning system of company non-compliance and failure of businesses to report taxes, tracking systems of appeals, law suits and seized assets. We designed, developed, and implemented the single register of business bank accounts so that all public revenue payments are conducted by each companies’ approved account and all accounts with common ownership are linked and acted upon when enforcement measures are required. This system provided a significant boost to old tax debts and forced collection procedures. Our work with the RS Tax Administration led to extensive positive results. As a result of USAID FAR assistance: All RS businesses now report and file all tax declarations online only. We enabled critical platforms for this including the Public Key Infrastructure (PKI) and Certification Authority (CA). The Tax Administration now has a two-way electronic mailbox which allows for interaction between taxpayer businesses and the administration in an efficient and user-friendly format. The RS Tax Administration now has an electronic archiving system. This removes the need for paper storage and boosts accessibility of documents. These IT interventions alone produced direct administrative cost savings of over US$10 million, which is more than double the amount USAID invested into this activity. IT System Interventions for boosting transparency and reducing malfeasance opportunities We worked with over seventy individual institutions (FBiH municipalities, all FBiH Cantons, RS entity level Health Institutions) to introduce IT based treasury and budget management systems. The results of USAID FAR’s assistance include: We enabled the introduction of IT based treasury systems into 42 FBiH municipalities. These track and provide transparency to the use of and allocation of public revenues and so that spending must follow what has been set in municipal budgets. We provided training on these systems to over 200 municipal officials. FAR Final Report 6 September 7, 2014 - March 7, 2020 IT based treasury systems were completely technically rolled out into all 20 RS entity level health institutions (hospitals and similar sized institutions) with close to one third of