“Tax Administration Reform Project” Grant No. H810-TJ The project financial statements for the year ended December 31, 2018 and independent auditors’ report “TAX ADMINISTRATION REFORM PROJECT” GRANT NO. H810-TJ TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 2 INDEPENDENT AUDITORS’ REPORT 3-4 THE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018: Summary of funds received and expenditures paid 5 Summary of expenditures paid by project components 6 Notes to the project financial statements 7-12 65 Stefan cel Mare şi Sfânt Blvd 5th Floor, Office 507 2001 Chisinau Moldova T: +373 22 233003 F: +373 22 234044 info@bakertilly.md www.bakertilly.md INDEPENDENT AUDITORS’ REPORT To the management of the Project “Tax Administration Reform Project” under the Tax Committee of the Government of the Republic of Tajikistan and the State Committee on Investments and Government Property Management of the Republic of Tajikistan: Report on the project financial statements Opinion [1] We have audited the project financial statements of the Project “Tax Administration Reform Project” (the “Project”) which comprise the summary of funds received and expenditures paid and the summary of expenditures paid by project components for the year ended December 31, 2018, and a summary of significant accounting policies and other explanatory information (the “project financial statements”). [2] In our opinion, the accompanying project financial statements present fairly, in all material respects, the summary of funds received and expenditures paid and the summary of expenditures paid by project components of the Project for the year ended December 31, 2018 in accordance with International Public Sector Accounting Standard “Financial Reporting Under the Cash Basis of Accounting” (the “IPSAS”) issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants, and the World Bank’s Financial Management Sector Board’s “Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities” (the “WB Guidelines”). Basis for opinion [3] We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the project financial statements section of our report. We are independent of the Project in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of matter [4] Without qualifying our opinion, we draw attention to Note 2 to the project financial statements which describe the basis of accounting. These project financial statements were prepared for complying with the appropriate World Bank Guidelines and Financing agreement requirements. Other matter [5] The project financial statements are prepared to assist the Project to comply with the requirements of the World Bank. As a result the project financial statements may not be suitable for another purpose. ADVISORY  ASSURANCE  TAX ICS Baker Tilly Klitou & Partners SRL trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. 3 “TAX ADMINISTRATION REFORM PROJECT” GRANT NO. H810-TJ NOTES TO THE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2018 (in US dollars) 1. GENERAL INFORMATION According to the Financing Agreement between the Republic of Tajikistan and International Development Association (the “IDA”) dated November 14, 2012, the IDA provided a Grant No. H810-TJ in the amount of 11,900,000 Special Drawing Rights to the Republic of Tajikistan. The Grant was provided for the implementation of the Project “Tax Administration Reform Project” (the “Project”). Effective date of the Project is February 7, 2013. Project completion date is December 31, 2019. Project purpose The objective of the “Tax Administration Reform Project” (the “Project”) is to reform the tax administration in order to (i) enhance the level of voluntary compliance; (ii) strengthen the effectiveness of the Tax Committee to fight tax evasion, (iii) strengthen the institutional and human capacity in order to improve the professionalism of tax officials and reduce the avenues for corruption; and (iv) modernize the processes that would help reduce administrative cost for the government and compliance burden for taxpayers. The Project comprises the following components: Component 1: Institutional development; Component 2: Operational development; Component 3: ICT Infrastructure and system modernization; Component 4: Project management and change management. Component 1. Institutional development Institutional development enables the Tax Committee to develop and implement clear strategic plan, as well as to restructure provincial tax authorities subdivisions to increase the efficiency of the new automated environment. To achieve more efficient human resource management, Employees Information Database (the “EID”) will be purchased, which will contain information about all employees, including the position, qualifications, place of employment, salary level, work period and attendance, performance measurement, additional payments and benefits, reports, recruitment, training, and will also have a self-service portal for employees and the ability to generate special messages or reports. Human resources development will be supported by strengthening the potential of the Institution of Advanced Training for tax inspectors, located in Dushanbe, formation of four regional accounting offices equipped by modern facilities and teaching aids, which will be able to provide distance learning, e-learning and e- testing. As a part of the Project, trainings programs will be developed to conduct regular courses for newcomers and officials with continuous record of service. Moreover, monitoring system for management will be developed that will allow evaluating the efficiency of the whole tax management system. Component 2. Operational development Strengthening the system related to execution of tax compliance is the cornerstone of effective tax management. This component will be based on modernization of business processes to increase efficiency of self-estimation system. As a part of this component, the capacity of Ministry of Finance as related to tax policy analysis will be increased; the skills of Tax Committee inspectors, especially the personnel of Large Taxpayers Inspection (the “LTI”), will be developed in the sphere of audit and detection of tax fraud, mostly among large taxpayers; the potential of personnel as related to tax enforcement will be strengthened; internal controls and internal audit systems will be improved; taxpayers servicing system will be modernized by establishment of modern call processing center and help will be rendered in establishment of independent tax issues request system, as well as the database to track appeals. 7 Component 3. Infrastructure and system modernization As a part of this component, information and communication technologies will be improved in Tax Committee to automate the process of daily tax declarations processing, calculation of taxes and desk check; implement automated risk management system and purchase Integrated Tax Management System (the “ITMS”) that will support all business functions including: user interaction management system, processing of tax declarations, accounting, processing of payment documents, enforcement to meet the requirements (including tax enforcement and registration avoidance), objection and appeals, audit, risk evaluation, reporting preparation, document management, data and intellectual properties storage devices, electronic document management system and portal interface. One of the mandatory requirements is an ability to create new screen contents, generate reports and modify parameters used in the course of taxation and preparation of statements. In the course of implementation of this component, assistance will also be provided in creation of the center for processing and storage of primary and continuous data, which will be furnished with equipment, which is able to support such functions as ITMS, Integrated Management System (the “IMS”) and EID. These events will enable to distribute information posted on the web site, provide the tax payers with an electronic access to tax information and promote voluntary tax compliance. Component 4. Project management and change management Implementation of this component will enable to improve the potential of the Tax Committee, which is necessary to ensure timely and quality implementation of the Project in accordance with the requirements of the governing documents of the World Bank. As a part of this component, finances will be allocated to hire several national consultants who will assist in procurements, management of the Project finances and technical implementation of other three components of the Project. The finances of this component will also be assigned to cover the current expenses associated with implementation of the Project. Project management The Management is implemented by the Project Implementation Unit (the “PIU”) within the scope of the Tax Committee under the Government of the Republic of Tajikistan. Duration of the Project is from February 7, 2013 till December 31, 2017. During 2017 the Project was extended till December 31, 2019. 2. PRESENTATION OF THE PROJECT FINANCIAL STATEMENTS Basis of preparation These project financial statements have been prepared in accordance with the International Public Sector Accounting Standard (the “IPSAS”) “Financial Reporting under the Cash Basis of Accounting” issued by the Public Sector Committee of the International Federation of Accountants, and incorporate the following principal accounting policies, which have been consistently followed in all material respects and comply with the World Bank’s Financial Management Sector Board’s “Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities” (the “WB Guidelines”). Under the cash basis approach income (or expenditure) is recognized when cash is received (or paid) irrespective of when goods or services are received or provided. The Project’s approved budget disclosed by categories of expenses is not publicly available and as such comparison of budget and actual amounts is not presented. These project financial statements consist of: • Summary of funds received and expenditures paid; • Summary of expenditures paid by project components; • Notes to the project financial statements, including short description of main statements of accounting policy and other descriptive notes. The reporting currency of these project financial statements is US dollars (the “USD”). 8 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash basis of accounting The project financial statements are prepared on a cash basis of accounting. The cash basis of accounting recognizes transactions and events only when cash (including cash equivalents) is received or paid by the Project. The project financial statements prepared under the cash basis provide readers with information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date. The measurement focus in the project financial statements is balances of cash and changes therein. Foreign currency Operations in foreign currency initially are counted in functional currency by the currency exchange rate settled by the the National Bank of Tajikistan (the “NBT”) on a date of operation. Funds received are translated into US dollars at official exchange rate of Special Drawing Rights (the “SDR”) at the date of funds receipt. All payments made in local currency are translated into US dollars at the official exchange rate defined by the NBT, at the date of transaction. Monetary assets and liabilities expressed in foreign currency are converted to functional currency at official exchange rate on a date settled by the NBT. All foreign exchange differences resulted from maturity or recounting are included in the summary of funds received and expenditures paid. Non-monetary items are valued according to their historic cost in foreign currency, which are recalculated on rates of the initial operation date. Cash and cash equivalents Cash and cash equivalents include cash on hand and due from banks, which can be converted to the corresponding amount of cash in the short term. Balances of advances paid to employees at the end of the period are also part of closing cash position. Taxes Calculation and payment of personal income tax and social security contributions from income of staff and consultants is made in accordance with the requirements and rates of the Tax Code of the Republic of Tajikistan and relevant legislation of the Republic of Tajikistan. Project expenses The expenses are recorded in the period when they were actually paid. Sources of funds The funds were provided by the World Bank to the Project by advance, replenishment of designated account or through direct payment to the end supplier of goods and/or services. 4. CASH AND CASH EQUIVALENTS Cash and cash equivalents as at December 31, 2018 and 2017 comprise: Currency December 31, December 31, 2018 2017 Designated account USD 110,574 635,233 Tender account USD 7,405 7,405 Transit account TJS 586,653 446 Tender account TJS 236 2,403 Advances paid to employees USD - 3,793 Cash on hand USD 692 - 705,560 649,280 9 5. FUNDS RECEIVED The fund received are presented by the following financing methods: For the year For the year Cumulative ended ended December 31, December 31, 2018 2017 Reimbursement of expenses 386,854 575,977 5,036,668 Advance 758,400 - 2,640,350 Direct payment 787,873 - 2,590,264 1,933,127 575,977 10,267,282 6. PROJECT EXPENSES The Project expenses on major categories are presented in the statement of cash proceeds and disbursements. The Project expenses by components are presented in the statement of funds by project components. Breakdown of project expenses by nature is presented as follows: For the year For the year Cumulative ended ended December 31, December 31, 2018 2017 Goods 1,664,228 547,598 5,924,082 Consultants’ services 73,392 540,237 2,767,147 Payroll and related taxes 45,945 65,138 464,379 Trainings 70,854 13,514 282,717 Audit 8,824 6,000 34,512 Translation services 3,049 439 29,746 Business trip 571 8,416 21,654 Communication 6,370 - 14,085 Advertising expenses 162 1,021 8,576 Bank fees 761 1,341 7,575 Stationery 486 223 5,627 Postal services - - 1,663 Other - 403 5,788 1,874,642 1,184,330 9,567,551 7. FINANCIAL POSITION Financial position as at December 31, 2018 and 2017 comprise: December 31, December 31, 2018 2017 ASSETS AND EXPENDITURES Cash and cash equivalents 705,560 649,280 Cumulative expenses 9,567,551 7,692,909 Foreign exchange loss 1,836 1,645 Other expenses 2,205 - TOTAL ASSETS AND EXPENDITURES 10,277,152 8,343,834 FINANCING Funds received 10,267,282 8,334,155 Other income 9,870 9,679 TOTAL FINANCING 10,277,152 8,343,834 10 8. WITHDRAWAL APPLICATIONS Withdrawal applications for the year ended December 31, 2018 comprise: Applicatio Value Date Advance Direct Goods, works, Total n payment payment non-consulting services, consultants’ services, training and incremental operating costs 29 January 19, 2018 - - 386,854 386,854 30 November 29, 2018 758,400 - - 758,400 31 December 28, 2018 - 787,873 - 787,873 758,400 787,873 386,854 1,933,127 9. STATEMENT OF DESIGNATED ACCOUNT Statement of designated accounts for the year ended December 31, 2018 comprise: Bank National Bank of Tajikistan Currency US Dollars Bank account 22696840500068 Bank’s location 27/2 Rudaki str., Dushanbe, the Republic of Tajikistan Balance as at January 1, 2018 635,233 Advance 758,400 Reimbursement of expenses 386,854 Transfer between accounts 5,350 Total funds received to the designated account 1,150,604 Expenses paid 1,650,805 Transfer between accounts 24,458 Balance as at December 31, 2018 110,574 10. UNDRAWN FUNDS As at December 31, 2018 undrawn funds are presented as follows: Grant No. H810-TJ in SDR Approved financing amount 11,900,000 Disbursed during the period from July 13, 2011 to December 31, 2018 7,305,642 Undrawn financing amount 4,594,358 Financing received as at January 1, 2018 5,923,553 Disbursed in 2018 1,382,089 Financing received as at December 31, 2018 7,305,642 11 11. COMMITMENTS In the normal course of activities, the Project concludes agreements with suppliers of goods and services in accordance with the established budget and procurement plan. Contract value of obligations valid as at December 31, 2018 was as follows: Counterparty Contract No. Currency Contract Paid up to Remaining value December 31, amount to 2018 be paid IUnetworks (Armenia) TJTARP/G/ICB-09 USD 4,675,953 1,255,469 3,420,484 FG Group Ltd TJTARP/G/NCB-07 USD 648,918 64,886 584,032 Vostok Ltd TJTARP/G/NCB-06 USD 272,885 264,001 8,884 12. LEGAL CASES There were no any legal claims related to the Project. 13. EVENTS AFTER THE REPORTING DATE During 2019 until the date of issue of these project financial statements the World Bank provided financing to the Project as follows: Financing method Value Date Application Grant No. H810-TJ Direct payment March 29, 2019 32A 635,290 Reimbursment of expenses April 18, 2019 33 845,443 1,480,733 As at the date of issue of the project financial statements no other significant events or transactions occurred, except for the events or transactions described above. 12