## _cr10340 ## Source details **Canonical URL:** [_cr10340](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10340.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10340.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10340.pdf.json) --- ### Executive summary — overview and main findings - Assessment basis: IMF Code of Good Practices on Fiscal Transparency and IMF Manual on Fiscal Transparency (2007). - Major strengths and reforms: - Transparent and sustainable framework for petroleum sector governance; Petroleum Fund is well-managed, supervised, and regularly audited. - Relatively well-structured basic budget process. - Adequate reporting of annual donor–funded commitments and expenditures in the budget. - Use of a modern integrated financial management information system (FreeBalance). - Efficient treasury single account (TSA) executing almost all budgetary transactions. - Budget documentation comprehensive; quarterly and annual fiscal reports on general government (GG) and the Petroleum Fund available in a timely fashion. - New legislation on budget/financial management, procurement, civil service, and petroleum sector; institutional developments include MOF restructuring, a Public Service Commission, and an Anti-Corruption Commission. - Key remaining weaknesses: - Independent State Auditor required by constitution not yet in place; internal audit very weak. - Tax administration and procurement lack transparency, integrity, process control and appeal options. - Planning and budgeting largely unconnected; medium-term perspective embryonic; strategic planning largely absent. - Budget preparation is input-based and incremental; capital and current budgets are split with inadequate linkages. - MOF budget review capacity is limited, especially on capital side. - Payroll integrity concerns; arrears minimal but not monitored. - Budget reporting omits fiscal risks, quasi-fiscal expenditures, and tax expenditures. - Short-term (up to 2 years) recommendations summary: - Ensure fiscal decentralization does not compromise budget execution and procurement controls; implement under MOF supervision. - Establish State Audit function promptly with foreign/commercial audit support. - Improve petroleum and domestic revenue administration functioning. - Regularly reconcile and update payroll databases. - Fully include fiscal information on autonomous bodies and corporations in the budget. - Medium-term (3–5 years) reform options summary: - Develop a multiyear Public Investment Program (PIP). - Strengthen internal audit and expenditure review capacity. - Extend IFMIS functionality and connectivity. - Introduce program classification of the budget. - Develop baseline methodology to improve fiscal envelope setting. - Broad capacity building across PFM areas. *Source: _cr10340 - EXECUTIVE SUMMARY* ### Taxation, tax administration, and petroleum taxation specifics - Legal and dissemination aspects: - Tax legislation for petroleum companies and service companies available on Petroleum Revenue Directorate website; Directorate advises taxpayers monthly. - Taxes and Duties Act (TDA) passed in 2008 provides a single framework for imposition of tax; old UN regulations still govern collection, recovery, tax offenses and sanctions. - Portuguese and English versions of many laws contain critical differences. - Petroleum fiscal regime: - TLS uses PSCs and direct taxation of petroleum companies; model PSC and taxation legislation published. - Contracts awarded in JPDA are not made public; contracts in TLS exclusive area are published. - No government-published estimate of overall "government take"; Johnston (2007) estimated about 73 percent. - Administration capacity and audit issues: - Self-assessment is prominent; Petroleum Revenue Directorate lacks staff/capacity to fully review self-assessments. - Since 2007 tax audits have not been possible due to a sovereignty dispute with Australia. - Timorese tax authorities reportedly prevented from performing audits on premises of companies based in Australia; Timorese authorities should be able to obtain necessary documents in TLS itself. - Tax administration not authorized under BPA legislation to investigate taxpayers’ bank accounts; banks’ position hampers tax audits. - Tax exemptions, tax expenditures, and reporting: - Numerous tax exemptions; costs not assessed and tax expenditures not reported in budget. - National Investment Law creates exemptions not reflected in tax law. - Example: a firm investing in TLS enjoys during 5 years a tax credit on taxable profit of USD 300 per Timorese worker employed. - Modernization and integrity: - Modernization underway (e.g., unique TIN); TIN not yet linked to other databases. - No Code of Conduct specifically for Customs and Domestic Tax administrations. - Tax officers subject to general Ethics and Disciplinary Codes in Civil Service Act; codes not widely circulated. - Limited training and international support increases risk of corruption. - Taxpayers’ legal rights and appeals: - Taxpayers’ rights (confidentiality, notice, explanation, representation) not well defined. - UNTAET Regulation No. 2000/18 establishes administrative appeals but HATAC not established; administrative appeals system does not function properly. - Lack of comprehensive and efficient tax appeals mechanism for petroleum taxes raises complaints. *Source: _cr10340 - 21. The tax legislation that applies to petroleum companies and service companies is* ### Budget process, fiscal framework, and medium-term budgeting - Budget calendar and preparation: - Budget calendar defined by budget circular; BFML prescribes draft budget submission due date: October 15. - Circular issued in January and May; recurrent budget calendar generally followed, capital budget calendar less observed. - Line ministries typically submit requests above fiscal envelopes; in 2009 requests on average 35 percent higher. - Capital vs recurrent budget issues (exact figures and totals): - Capital and recurrent budgets developed separately; capital process lacks multiyear perspective and disciplined priority setting. - For 2010 capital expenditure in the budget amounted to USD 239.6 million, of which USD 22.8 million was from donors. - Total Combined Sources Budget amounted to USD 858.9 of which USD 176.1 was from donors. - No cost-benefit analysis and no scrutiny of capital projects; decision making on capital projects largely political. - Medium-term estimates and ESI: - Budget documents provide medium-term estimates for revenues, expenditures, and GG balance for budget year plus three forward years; methodology for forward estimates not clearly defined and not linked to macro projections. - Petroleum revenue forecasts provided for a longer period (most recently for 2002–24); ESI concept defines fiscal framework. - ESI rule: Petroleum Fund Law states ESI shall be 3 percent of the Petroleum Fund estimated wealth (includes financial assets and value of petroleum reserves in production). - Transfers from Petroleum Fund calculated on basis of ESI; transfers can only be made to TSA after parliament approves budget law; transfers can exceed ESI only with specified parliamentary information and independent auditor certification. - Macroeconomic assumptions and forecasting: - Macroeconomic framework developed with IMF using basic financial programming approach; not based on econometric models. - National accounts (GDP) not produced since 2003; DNE capacity constrained. - Oil price and production assumptions for revenue forecasts disclosed; sensitivity analysis provided but limited discussion of results and uncertainties. - Donor funding and extrabudgetary execution: - Donor funding reflected in Combined Sources Budget by line ministries but not approved by parliament as part of appropriation. - Donor execution often through separate banking arrangements; treasury cannot track donor-funded expenditures during the year because they are outside the TSA. - National Directorate of Aid Effectiveness collects donor input and quarterly disbursement data but donor multiyear estimates not consistently provided. *Source: _cr10340 - 39. The economic and financial analysis presented in the budget documents includes* ### Public financial management systems, TSA, payroll, accounting, and FreeBalance IFMIS - IFMIS and accounts: - FreeBalance implemented from 2004; configured to prevent commitments/expenditures beyond parliament-approved appropriations in principle; connectivity and full implementation remain challenges. - FreeBalance registers GG budgetary expenditure transactions; accounting and payment subsystems operational; no cash planning; no financial statement of GG assets and liabilities prepared. - FreeBalance accessible for budget execution in MOF; MOF aimed to connect first level spending units to direct execution in 2010. - TSA and cash operations: - Almost all government transactions flow over the TSA (Consolidated Fund) at the BPA. - Payments and revenue reconciliations performed between treasury and BPA. - Ministries collecting non-tax revenues can open bank accounts for deposit and transfer daily to Consolidated Fund; some unapproved accounts discovered. - Outside Dili many transactions in cash due to limited bank presence; 2010 requirement for civil servants in Dili to open bank accounts for salary electronic transfer. - Payroll and payroll integrity: - Central payroll managed by treasury; almost all government employees paid through payroll; integrity depends on up-to-date personnel databases and reconciliations which reportedly do not occur systematically. - Short-term ministry employees often paid outside payroll. - Payroll department prepares pension payments to veterans and the elderly twice a year. - Arrears and accounts payable: - Treasury does not monitor accounts payable nor is there a system to monitor arrears; arrears not defined in regulation. - Virements, contingency, and supplementary budgets (exact figures): - Virements: 2010 reforms increase line ministry freedom to reallocate funds up to the divisional level but restrict movement between main economic categories; FreeBalance to ensure appropriations not exceeded. - Supplementary budgets: usually one major supplementary; 2009 no supplementary; 2008 supplementary much higher than original due to USD 240 million Economic Stabilization Fund (ESF). - Contingency reserves: - For 2009, contingency amounted to USD 18.2 million, about 2.7 percent of state budget expenditures. - For 2010, contingency amounted to USD 9.6 million and 1.5 percent. - BFML allows contingency up to 5 percent; size below 3 percent seen as good practice. *Source: _cr10340 - 39. The economic and financial analysis presented in the budget documents includes* ### Auditing, internal control, procurement, and oversight - Auditing and oversight arrangements: - Constitution prescribes an independent High Administrative, Tax, and Audit Court (HATAC); HATAC not established. - In absence of HATAC, commercial external auditors contracted by MOF perform financial audits (Deloitte and Touche Tohmatsu contracted for three years). - External audit reports submitted to parliament within legal limits; management letters not shared with parliament. - BPA’s Internal Auditor audits Petroleum Fund every six months; external audit appendix published with Petroleum Fund annual report. - ANP audited by external auditor as Designated Authority under Timor Sea Treaty; ANP activities in TLS exclusive areas not included in that audit. - Internal audit and procurement weaknesses: - Internal audit ineffective; annual audit plan not prepared; IGO limited staff and capacity. - Procurement framework largely in line with international standards but discretion and noncompliance increased; corruption persistent. - Direct procurement quote thresholds: contracts up to USD 100 thousand required three quotes; recently increased to USD 250 thousand. - In 2009, USD 72 million was exempted from normal procurement procedures; exemption formalized ex post by decree law. - Procurement Directorate to be replaced by Technical Secretariat under vice prime minister; transition risks inadequate monitoring and oversight; FreeBalance procurement module not yet active. - Tax audits and fraud investigations: - Very limited tax audit activity; only two auditors in audit section for domestic taxes. - Plans to create audit units in each of the three National Directorates (Petroleum Revenue, Customs, Domestic Tax). - National statistics: - DNE publishes monthly consumer price indicator and quarterly imports/exports; last national accounts estimate prepared for 2003; DNE constrained by insufficient capacity. *Source: _cr10340 - 76. Differences between originally budgeted and actual outturn of main fiscal and related sections* ### Detailed short-term recommendations (time horizon: up to 2 years) - Procurement: - Activate FreeBalance procurement module and train MOF, line ministry staff, and new Procurement Technical Secretariat and Monitoring body. (4.2.3 paragraph 84) - Maintain MOF oversight of procurement despite operational transfer to vice prime minister. - Include MOF expenditure review division or budget directorate on tender panels for projects > USD 1 million. - Give treasury audit unit investigatory powers on a sample basis, including procurements. - Require commercial external auditor to audit tenders on sample and risk-analysis basis. (4.2.3 paragraph 84) - Publish all procurements and contract awards on the internet and publish an annual procurement report with key process indicators. (4.2.3 paragraph 85) - Fiscal decentralization: - Require municipal financial regulations be approved by MOF; MOF retain accounting standards and chart of accounts; require municipal monthly/quarterly/annual accounts submission for GG consolidation. (1.1.3 paragraph 15) - Use MOF accounting/budgeting software at municipal level; municipal finance functions to be conducted by MOF staff initially. - MOF to issue internal control regulations for decentralized budget execution in line ministries. (4.2.3 paragraph 84) - Budget process and transparency: - Identify and cost new government initiatives (expenditure and revenue side) and recurring costs of public investment for medium term. (2.1.3 paragraph 40) - Require donors to provide multiyear estimates of planned expenditure volumes and include in multiyear fiscal presentation. (2.1.5 paragraph 47) - Build capacity in costing and analytic review of capital projects and program expenditure. (2.1.1 paragraph 34) - Include analysis of revenue and expenditure outturns for three prior years in budget documents. (3.1.2 paragraph 63) - Publish a clear, simple budget summary in Tetum and Portuguese for the public. (3.2.1 paragraph 72) - Specify access conditions to contingency reserve in financial regulations. (2.2.3 paragraph 55) - Involve parliament and NGOs earlier in budget priority discussions. (3.2.4 paragraph 75) - Publish the budget immediately after parliamentary approval. (3.1.1 paragraph 61) - Include all autonomous entities and public corporations in budget and final accounts; prepare legislation on their management, supervision, reporting, and synchronize report publication with budget cycle. (1.1.4 paragraphs 2 and 6) - Tax system: - Define cooperation, coordination, and information sharing rules between ANP and MOF Petroleum Revenue Directorate (e.g., exchange audit information, joint audits). (1.2.2 paragraph 20) - Publish MOF Petroleum Revenue Directorate rulings and decisions online. (1.2.2 paragraph 21) - Regulate provision of documents/evidence by petroleum companies necessary for tax audits in TLS. (1.2.2 paragraph 20) - Resolve tax authority access to taxpayer bank account information through discussion with banks or legal action. (1.2.1 paragraph 24) - Complete legal framework for tax and non-tax revenue collection; establish coherent procedures, sanctions, and appeals under law. (1.2.2 paragraph 27) - Strengthen Petroleum Revenue Directorate capacity for tax audits; hire experienced external tax auditor to support and train staff. (1.2.2 paragraph 25) - Include a measure of overall “government take” for petroleum sector in budget documents. (3.2.3 paragraph 74) - Financial management and payroll: - Define legal framework for dividend payments by autonomous entities and public corporations, including ANP. (1.1.4 paragraph 4) - Define and report quasi-fiscal expenditures by petroleum companies in the budget. (3.1.3 paragraph 68) - Verify payroll integrity quarterly and institute formal pension verification for veterans and elders. (2.2.1 paragraph 49) - Institute formal procedures for collection of non-tax revenues with specified deposit and daily credit rules. (2.2.1 paragraph 50) - Review virement reforms and set accountability procedures for line ministry virements. (2.2.1 paragraph 51) - Prioritize DNE preparation of national accounts (GDP). (4.3.4 paragraph 92) - Ensure adequate resources and coordination for anti-corruption initiatives. *Source: _cr10340 - 95. To improve transparency in each of the mentioned dimensions, we present below — Short-term Recommendations* ### Detailed medium-term recommendations (time horizon: within the next three to five years) - Budget process and planning: - Strengthen macrofiscal forecasting capacity and document macroeconomic framework; publish basic macroeconomic assumptions early in budget cycle. (2.1.2 paragraphs 36 and 37) - Develop a medium-term PIP with principles for evaluation, prioritization, and approval; build capacity for cost-benefit analysis for multiyear projects. (2.1.1 paragraph 34) - Extend program classification of expenditure and link to line ministry policies; use for planning and presentation. (3.2.2 paragraph 73) - Strengthen strategic planning in PM office, MOF, and line ministries; link to AAPs and budgets. (3.2.4 paragraph 74) - Cost existing policies and present baseline expenditures distinct from new policies; develop methodology for medium-term baseline and budget estimates. - Decide line ministry expenditure ceilings in COM at budget cycle start based on baseline, new initiatives, and savings targets. - Develop budget presentations on fiscal risks, quasi-fiscal activities, and contingent liabilities. (3.1.3 paragraph 66) - Produce occasional reports on long-term expenditure and revenue trends to inform Vision 2020 updates. (3.2.4 paragraph 74) - Tax administration and audit: - Three Directorates of GDRC to prepare annual activity and process performance reports. (1.2.2 paragraph 25) - Define cooperation framework between MOF Petroleum Revenue Directorate and Australian Taxation Office for information sharing and audits. (1.2.2 paragraph 19) - Create a single, adequately staffed tax audit unit reporting to the DG of Revenue and Customs. (4.2.6 paragraph 86) - Strengthen human and technical resources and set specialized career path for tax officials; adopt Code of Conduct and provide special legal status. (1.2.2 paragraph 25) - Develop taxpayer rights statute and rationalize/limit tax incentives (use expiration clauses). - Financial management, quasi-fiscal and state-owned entities: - Exclude quasi-fiscal expenditure requirements by petroleum companies in new exploration contracts. (3.1.3 paragraph 67) - Issue public debt management regulation specifying borrowing conditions, types, limits and repayment modalities prior to any borrowing. (3.1.5 paragraph 68) - Define governance and fiscal role of National Resource Company and National Development Bank before establishment; ensure integration of quasi-fiscal expenditure into budget. (1.1.4 paragraph 10) - Strengthen IGO and internal audit units; ideally integrate internal audit units within IGO. (4.2.5 paragraph 85) *Source: _cr10340 - 95. To improve transparency in each of the mentioned dimensions, we present below — Medium-term Recommendations* ### Key statistics and exact figures (selected) - Petroleum Fund financial assets at end-2009: USD 5.3 billion. - Petroleum Fund external BIS investment: USD 1 billion. - Approximately 80 percent of the fund invested by BPA in US government bonds. - BIS portfolio includes approximately 10 percent denominated in other currencies. - IAB recommended allocations: 3-5 percent global equity; 12-18 percent fixed income benchmarked by composite index. - 2010 budget authorized expenditure: USD 682.8 million. - Almost 89 percent of 2010 required funding drawn from Petroleum Fund. - 2010 capital expenditure in budget: USD 239.6 million; USD 22.8 million from donors. - Total Combined Sources Budget: USD 858.9; USD 176.1 from donors. - Estimated petroleum wealth as of 2010: USD 16.72 billion (excludes Kitan field). - Petroleum production for current fields projected to finish in 2024. - Contingency appropriation 2009: USD 18.2 million = 2.7 percent of state budget expenditures. - Contingency appropriation 2010: USD 9.6 million = 1.5 percent. - BFML ESI specification: ESI shall be 3 percent of the Petroleum Fund estimated wealth. - Example tax incentive: tax credit of USD 300 per Timorese worker for 5 years. - Box 1: General Government composition (Percent of GNI, 2008): - Executive, legislative, judiciary and related central government units: 19.5 - Four autonomous entities and one nonfinancial public corporation: 0.2 - National Petroleum Authority (ANP): 0.05 - Banking and Payment Authority (BPA): 0.1 - The Petroleum Fund (Extrabudgetary fund): 92.7 *Source: _cr10340 and extracted sections as provided in the content unit* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overview and main findings - The report assesses fiscal transparency practices in the Democratic Republic of Timor-Leste (TLS) against the IMF Code of Good Practices on Fiscal Transparency, based on discussions with authorities and other organizations, the authorities’ response to the IMF fiscal transparency questionnaire, and other sources of information. - The IMF Manual on Fiscal Transparency (2007) should be consulted for further explanation of the terms and concepts discussed in this report. - TLS has made significant progress on fiscal transparency as a result of a wide range of reforms in line with international good practice, including: - a transparent and sustainable framework for the governance of the petroleum sector, with a well-managed, supervised, and regularly audited Petroleum Fund; - a relatively, well-structured, basic budget process; - adequate reporting of annual donor–funded commitments and expenditures in the budget; - use of a modern integrated financial management information system; and - an efficient treasury single account (TSA) that executes almost all budgetary transactions. - Budget documentation is comprehensive, and quarterly and annual fiscal reports on general government (GG) and the Petroleum Fund are available to both executive and parliament in a timely fashion. - New legislation on budget and financial management, procurement, civil service, and the petroleum sector has supported these reforms. - Institutional developments include restructuring of the ministry of finance (MOF), establishment of a new Public Service Commission, and establishment of an Anti-Corruption Commission. ### Remaining weaknesses and divergences from good practice - Many areas still diverge from good practice, partly due to TLS’s status as a young nation with limited capacity in public financial management (PFM). Key weaknesses identified include: - An independent State Auditor, while required by the constitution, is still lacking and internal audit is very weak. - Basic state processes such as tax administration and procurement suffer from a lack of transparency, integrity, process control and appeal options. - Planning and budgeting are largely unconnected; a medium-term perspective is just starting and strategic planning is largely absent. - Budget preparation is input-based and incremental, split between a current and capital side with disregard for their linkages. - Budget review in MOF has very little assessment capacity, especially on the capital side, which is mostly determined politically. - Planning and implementation capacity in line ministries remains weak despite recent improvements. - Payroll integrity is a concern, and arrears, while minimal, are not monitored. - Budget reporting should be extended to cover fiscal risks, quasi fiscal expenditures (which occur in the petroleum sector), and tax expenditures. - Specific institutional and coverage issues: - The State budget covers GG almost entirely consistent with Government Finance Statistics (GFS) principles, but application is not fully consistent with BFML of 2009 (inclusion of autonomous services and funds). - The Petroleum Fund is the only extra-budgetary fund and is not part of the budget; only resources withdrawn from the Petroleum Fund are considered budget revenues, though information on the Petroleum Fund is extensively available in budget documents. - Public entities not included in the budget include: Autonomous Service for Drugs and Health Equipment (SAMES); Microfinance Institution (IMfTL); National Petroleum Authority (ANP); the Banking and Payment Authority (BPA); and a state lottery service that does not deposit its revenues in the consolidated fund. - Several autonomous agencies established by decree laws still operate in practice as departments of line ministries. - Arrangements regulating profit transfers from public corporations and autonomous entities to the budget are not well-defined: - BPA has a legal provision to keep its capital at a level of USD 20 million; the remaining financial result is transferred annually to the budget. - There is no provision for transferring surpluses of the ANP to the Petroleum Fund or to the budget. - The IMfTL operates with initial capital of USD 8 million granted by the World Bank (WB) and Asian Development Bank (ADB) and carries out quasi-fiscal activities; implicit financial subsidy and information on contingent liabilities and fiscal risks are not available in the budget documents. - Box 1: General Government composition and key figures (Percent of GNI, 2008): - Executive, legislative, and judiciary systems and related central government units: 19.5 - Four autonomous entities and one nonfinancial public corporation (Electricity of Timor-Leste, Port Authority (APORTIL), National Authority for Aviation, Institute of Equipment Management, and Radio and Television of Timor-Leste (RTTL)): 0.2 - National Petroleum Authority (ANP) (central government unit not included in the budget): 0.05 - Banking and Payment Authority (BPA): 0.1 - The Petroleum Fund (Extrabudgetary fund): 92.7 - Notes: GDP figures are not available. GNI is estimated by the IMF. n.a. = not available. ### Short-term recommendations (main recommendations highlighted in the executive summary) - Ensure planned fiscal decentralization to line ministries, and subsequently to local government, does not compromise budget execution and procurement processes, and is implemented with MOF systems and under its supervision. - Set up a State Audit function as soon as possible, with foreign, commercial audit support. - Take steps to improve the functioning of the petroleum and domestic revenue administration directorates. - Regularly reconcile and update payroll databases. - Fully include fiscal information on autonomous bodies and corporations in the budget. ### Medium-term recommendations and reform options - Prioritize a range of reform options in the upcoming Public Expenditure and Financial Accountability (PEFA) assessment and PFM Reform Action Plan, including: - development of a multiyear Public Investment Program (PIP); - substantial strengthening of internal audit and expenditure review capacity; - further extension of IFMIS functionality and connectivity; - introduction of a program classification of the budget; and - development of baseline methodology to improve setting of fiscal envelopes. - Capacity building is needed in all areas to realize the reforms. ### Procedural and publication notes - Reports on the Observance of Standards and Codes (ROSCs) are undertaken on a voluntary basis by Fund Member countries. Publication of the ROSC occurs with the member’s agreement and after prior notification to the Executive Board of the IMF. - This preliminary draft has been prepared for consideration by the TLS authorities. Any issues arising from the draft can be discussed during follow-up TA mission of the Fiscal Affairs Department or through Article IV discussions. A revised draft will be prepared taking account of any comments from the authorities and further review in Washington, DC; the revised draft will be sent to the authorities for further comment and the authorities’ agreement will be sought for the final draft to be published on the IMF’s website. *Source: _cr10340 - EXECUTIVE SUMMARY* ### 7. In recent years, oil and gas have become by far the major export earner and ### _cr10340 - 7. In recent years, oil and gas have become by far the major export earner and ### Overview - In recent years, oil and gas have become by far the major export earner and revenue source for the budget. - Given the small size of the non-oil economy, petroleum revenues make up approximately 200 percent of non-oil GDP. - To smooth the flow of resource revenues to the budget and avoid overloading domestic absorptive capacity, TLS has a Petroleum Fund. ### Legal and institutional framework for petroleum resources - Ownership - The ownership of petroleum resources within TLS’s territory is clearly established in the constitution and in the Petroleum Act of 2005. - The Act states that "the resources of the soil, the subsoil, the territorial waters, the continental shelf and the exclusive economic zone are owned by the State and shall be used in a fair and equitable manner in accordance with national interests." - Regulatory authority - The Petroleum Act empowers authorization of petroleum companies to explore and develop petroleum resources. - Since 2008, this authorization function has been delegated to the ANP by a decree law. - ANP is TLS’s public institution responsible for managing and regulating petroleum activities in TLS’s exclusive continental shelf and in the continental shelf shared with Australia known as the JPDA. - TLS has no final maritime boundary with Australia in the Timor Sea; extracted petroleum is split between Australia and TLS according to international treaties. - Government participation - At present, there is no government involvement in the petroleum resource sector through equity participation or a national resource company. - The Petroleum Act and the model product sharing contract (PSC) give TLS the right to participate in all licenses within the TLS exclusive area. - There is a cap on maximum government equity of 20 percent. - The government has plans to establish a National Oil Company; a final draft for establishment is soon to be submitted to the COM, with a public consultation planned. ### Petroleum sector details (Box 2 summary) - Current and past production - The Bayu-Undan field is the only petroleum producing field in the Timor Sea; it is located in the JPDA. - JPDA is regulated by the Timor Sea Treaty of 2002 and is a joint jurisdiction between TLS and Australia. - 90 percent of the petroleum produced within JPDA belongs to TLS and 10 percent to Australia. - EKKN-field produced from 1998 but was closed down in 2007. - Known reserves and future production - Other known reserves within the JPDA: Kitan and Greater Sunrise. - Production in Kitan is expected to start in 2011. - There is ongoing debate on where natural gas from Greater Sunrise should be brought ashore. - According to the Treaty on Certain Maritime Areas of the Timor Sea, future petroleum revenue from Greater Sunrise will be shared equally between Australia and TLS. - Exploration onshore and exclusive continental shelf - TLS has petroleum resources within its exclusive continental shelf and on shore. - There are no ongoing onshore explorations; prior to 1975 onshore wells were drilled. - On the TLS exclusive continental shelf there are exploration operations in 6 blocks. - Licenses for exploration were awarded in 2006 after an open bid tendering process. ### Petroleum Fund: structure, governance, and investments - Purpose and legal basis - The Petroleum Fund was established by the Petroleum Fund Law of 2005 to contribute to wise management of petroleum resources and to a sound fiscal policy. - The fund was established as a saving mechanism to benefit both current and future generations and to contribute to sound fiscal policy in TLS. - Roles and responsibilities - Roles and responsibilities regarding the Petroleum Fund are divided between the parliament, the government (MOF), and the operational manager (BPA) and are stated in the law. - The MOF has the power to issue investment mandates to the operational manager; an Investment Advisory Board (IAB) advises the MOF and must be consulted before investment mandates change. - A Consultative Council advises the parliament on Petroleum Fund matters. - Operational features and transparency - BPA manages the fund under close supervision of the MOF and executes investment mandates. - The fund has no authority to spend or borrow and is subject to regular auditing by an independent external auditor (currently Deloitte and Touche). - The Petroleum Fund Law requires management to be carried out with the highest standard of transparency; there are quarterly and annual reports and both external and internal audits, which are sent to the COM, parliament, and published. - Fund size and investment composition (exact figures) - The financial assets in the fund amounted to USD 5.3 billion at the end of 2009. - Approximately 80 percent of the fund is invested by BPA in US government bonds. - USD 1 billion is invested through an external manager – the Bank for International Settlements (BIS). - A separate BIS mandate defines a portfolio of sovereign and supranational bonds including approximately 10 percent denominated in other currencies. - IAB recently recommended further diversification: 3-5 percent of the fund in a global equity mandate and 12-18 percent of the fund in a fixed income mandate benchmarked by a composite index. - BPA is in the process of selecting external managers to carry out such investment mandates. - Revenue flows - All petroleum revenue of TLS is credited to the Petroleum Fund. - Royalties and revenues from profit oil are paid by the companies to the ANP; for JPDA the revenue is split between Australia and TLS per treaties. - ANP forwards TLS revenues from PSCs into the fund on a monthly basis. - Taxes are paid directly into the fund by the liable companies; taxation of the petroleum sector is performed by the Petroleum Revenue Directorate in the MOF. - 2010 budget context (exact figures) - The 2010 budget authorized USD 682.8 million of expenditure. - Almost 89 percent of the required funding was drawn from the Petroleum Fund. ### Fiscal regime and taxation - Structure and transparency - TLS uses both product sharing contracts (PSCs) and direct taxation of petroleum companies. - Taxation legislation and a model PSC under the Petroleum Act are published and available. - Bidding rounds are regulated by a government decree from 2005 and conducted as open tenders; final protocols for the tendering process and a summary of terms of granted authorizations are published in the State Gazette, the Jornal da República. - Contracts awarded in JPDA are not made public. - Tax rates and government take - The rate of income tax is higher for contractor companies in the petroleum sector than for domestic companies. - There is an additional profits tax for the most profitable petroleum projects. - The government does not publish an estimate for the overall "government take" for petroleum production in TLS; it has been estimated to be about 73 percent by Johnston (2007). - Tax collection process and administration - Taxation of income from petroleum-related activities is based on self assessment. - The Petroleum Revenue Directorate is responsible for reviewing and, if necessary, amending self assessments and for conducting tax audits. - The Directorate lacks adequate staff and capacity to fully review and verify received tax assessments. - Since 2007 tax audits have not been possible due to a dispute over sovereignty rights with Australia. - Terms in PSCs in the JPDA are audited on a regular basis, providing some reassurance for assessment of costs incurred under these licenses. ### Government relations with the non-petroleum private sector and anti-corruption measures - Government holdings and privatization - Government holdings in private corporations are small and payment of dividends is reported in public documents. - Government has participation only in one private company: TLS Telecom. Dividends received are accounted as budget revenues. - There is no privatization program. - Business environment and legal access - Laws regulating the nonfinancial private sector are relatively simple but not always easily accessible to the public. - Tax and other legislation are available on the internet in Portuguese and in most cases also in Tetum. - Efforts exist to provide legislation in English and Bahasa, but quality and availability are uneven. - Businessmen claim difficulty in starting and closing a business, receiving credit, enforcing contracts, and report that payment of "incentives" to officials is becoming day-to-day practice. - The World Bank Doing Business Report 2010 evaluates TLS among the less friendly countries in the region to do business. - The International Transparency Corruption Perception Index 2009 for TLS is 2.2 (in a 1.0 to 10.0 scale). - Anti-corruption and public service controls - In 2009 the Anti-Corruption Commission Law was enacted to provide a specialized and independent agency with investigative powers; the Anti-Corruption Commission is presently being established. - A Public Service Commission has been created to set standards and impose controls over civil service actions (hiring, promotion, misuse of power). - A long-standing Inspector General Office (IGO) conducts review and examination of central government actions, including suspected corruption. - MOF and other ministries are in an early stage of setting up internal audit units. - The constitution prescribes creation of a High Administrative, Tax, and Audit Court (HATAC) as an independent, supreme audit office; HATAC has not yet been set up. - Lack of coordination and sufficient funding for these institutions could weaken overall public administration controls. ### Fiscal management relationships and decentralization - Separation of branches and audit arrangements - Fiscal roles of executive, legislative, and judicial branches are clearly defined in law. - The state audit function (HATAC) is still absent. - The Court of Appeals is from 2010 onwards to stand in for the HATAC, but there is uncertainty if it is willing or able to fulfill this role. - A commercial external auditor is contracted by the MOF to audit government accounts. - The judiciary is independent but treated as an entity of government for financial purposes. - From 2010 the accounts of the parliament will not be part of the annual accounts of the government and will be subject to a separate audit. - Subnational government and decentralization planning - Currently only one level of government exists; subnational governments have not yet been established. - There is a proposal to establish municipalities (provinces); a draft legal framework for local government has been drawn up and draft municipal government financial regulations are under development. - MOF needs to lay down a framework for responsible fiscal decentralization with central government financial management standards, systems, monitoring, and control to avoid later reversals of decentralization strategies. - Examples of good practice in fiscal decentralization (selected provisions) - Local government should have a Chief Finance Officer deputed by the treasury to the local government. - The Chief Finance Officer will establish a municipal finance department responsible for treasury and budget matters, accountable in accordance with MOF regulation. - MOF will establish classification systems for budget and accounting records aligned with national government. - Reporting on budget execution should take place to the head of local government, the assembly and national government including MOF. - Similar operating systems at national and local levels to ensure compatibility in budget, payment and accounting systems. - MOF will regulate local government finances, transfer of funds, and may withhold or stop transfers. - Local governments should not have a deficit budget. - Local government budgets should follow the MOF budget circular. - Bank account details of local government must be conveyed to MOF annually and included in budget documents. - Local governments will not be permitted to enter into borrowings. - Local governments should have an internal auditor. - National government or the State Auditor will commission and undertake external audit of all local governments. *Source: _cr10340* ### 21. The tax legislation that applies to petroleum companies and service companies is ### 21. The tax legislation that applies to petroleum companies and service companies is ### Tax legislation and dissemination for petroleum sector - The tax legislation that applies to petroleum companies and service companies is available on the website of the Petroleum Revenue Directorate. - The Directorate advises tax payers on their tax liability on a monthly basis. - Other information about tax rules or decisions is not published by the Directorate, but a frequently asked questions section of the website is currently under preparation. - The companies liable to the special petroleum taxation are mainly international companies with experience in operating under different fiscal regimes, and there have been no complaints on the complexity in the tax legislation. - The complexity places especially high requirement on specialized and qualified staff that might not be met with the current staffing of the Petroleum Revenue Directorate. ### Domestic tax and customs administration: legislative basis and availability - The legislative basis for tax collection was recently reformed and simplified but this modernization process has not yet covered tax administration where old United Nations (UN) regulations still apply. - In 2008, the parliament passed the Taxes and Duties Act (TDA). It provides a single framework for the imposition of tax in TLS, but has not changed the legal regime applicable for the collection and recovery of tax, for tax offenses and for sanctions. - The old UN regulations provide a basic legal framework, but in its current form, it does not meet international standards or the needs of a modern revenue administration. - Except for Customs, most of the legislation is available on the MOF website. - Dissemination campaigns are conducted through the media and targeted campaigns. - Tax information brochures have been posted on the MOF website in four languages: English, Tetum, Portuguese, and Indonesian. - There is a critical difference between the Portuguese and English versions of many laws and regulations. - Self-assessment is a prominent feature of the tax system but for customs and domestic taxes there is room for discretionary interpretation by officials. ### Cross-border audit and access issues - Reportedly, the Timorese tax authorities are not allowed by their Australian counterparts to perform tax audits on the premises of companies based in Australia for tax purposes. - Irrespective of whether this issue can be resolved the Timorese authorities should be able to impose access of all necessary documents in TLS itself for tax audit purposes. - Tax assessment audits are hampered by the position of the three commercial banks in TLS that the tax administration is not authorized under the BPA legislation to investigate taxpayers’ bank accounts. ### Revenue composition and collections outside tax - Non tax revenues like user fees, charges, and interest represent around 8 percent of domestic revenue. - Land and Property administration, APORTIL, Civil Aviation, and other autonomous agencies collect these fees. - These fees are regulated under the statutes and laws creating each of the autonomous agencies. ### Tax exemptions and tax expenditures - Tax exemptions are numerous but their cost is not assessed; tax expenditures are not reported. - There are a number of exemptions defined in the TDA for income tax and for a sales tax exemption process. - The National Investment Law also creates a number of exemptions which are not reflected in the tax law. - These exemptions favor companies hiring Timorese nationals, and exporting or investing in specific geographical areas. - Example: an firm investing in TLS enjoys during 5 years a tax credit on taxable profit of USD 300 per Timorese worker employed by the firm as an incentive to hire local manpower. - The exemptions also concern customs duties. - There is no overall evaluation of the cost of such exemptions and they are not reported on in the budget documentation. ### Modernization of tax and customs administration - Tax and customs administration is undergoing a program of modernization to address low tax compliance, weak capacity, and inadequate processes; initial reforms such as a unique Taxpayer Identification Number (TIN) have been introduced. - Tax administration generally lacks process documentation and procedure manuals, and relies on poor filing systems, missing archives and incomplete financial records. - Integrity of records is not sufficiently developed to provide reliable information for taxation purposes. - The taxpayer registration system that has been introduced is fairly efficient. Each taxpayer is given a TIN which is shared within revenue administration. - The TIN is not yet linked with other databases, such as for business registration. - The revenue directorates prepare a very minimal annual performance report, included in the annual report of the MOF. It contains little information on the quality of processes. ### Integrity, codes of conduct, and staff status - There is currently no Code of Conduct specifically for the Customs and Domestic Tax administrations. Such a Code is generally regarded as a key element of a sound integrity strategy. - Tax officers are subject to the general Ethics and Disciplinary Codes within the Civil Service Act, which have, however, not been widely circulated. - Customs and Tax administration also have no internal integrity assessment or investigations mechanism in place. - Tax and customs administration officials have not been granted a specific legal status. - As a result they do not benefit from a specific career or salary regime, nor from enhanced accountabilities and administrative penalties. - They are generally insufficiently trained and do not benefit from enough support from international organizations like the World Customs Organization. - This increases the risk for corruption and inadequate practices. ### Taxpayers’ legal rights and appeals - Taxpayers’ legal rights are not well defined and there is no functioning appeals system for tax and nontax obligations. - Tax laws and United Nations Transitional Administration of East Timor (UNTAET) regulations do not provide taxpayers with rights of confidentiality, notice, explanation, and representation. - UNTAET Regulation No. 2000/18 establishes a tax appeals mechanism at the administrative level but not at the judiciary level, as the High Administrative, Tax and Audit Court (HATAC) has not yet been set up. - The administrative appeals, involving the Appeals Division of the tax administration, does not seem to function properly. - Taxpayers willing to contest decisions and assessments made by the tax administration often need to make use of personal relationships or political intervention. - The lack of a comprehensive and efficient tax appeals mechanism for petroleum taxes also raises complaints from petroleum companies subject to Timorese tax laws. ### Public consultation and stakeholder engagement - Public opinion is only occasionally sought concerning proposed laws, regulatory changes and broader policy changes. - There is no legal provision establishing that new laws, regulatory and broader fiscal policy changes should be subject to public consultation. - Some Non-Governmental Organizations (NGOs) have had active participation in the development of laws in the parliament. - The BPA adopts the practice of sharing draft of regulations with the banking sector except for some prudential and anti-money laundering issues. ### Contractual arrangements and transparency - Contractual arrangements between the government and public or private entities are clear but in general, contracts are not publicly accessible. - The contracts with the petroleum companies to exploit oil in the JPDA are not public but the contracts in the Timorese exclusive area are. - Only a summary of the contracts between the government and private suppliers of goods and services are published in the State Gazette. - The contracts are neither available to the public nor to the parliamentarians. ### Legal framework for asset and liability management - Legislation governs liability and asset management, including the granting of rights to use or exploit public assets. - The central role of the Minister of Finance in any debt issuance of the State is prescribed by the BFML. - At present TLS does not have any public debt. - Concessional and other borrowing is being discussed by the government but no debt management strategy has been developed. - The MOF Directorate of Asset Management controls mobile assets such as vehicles, computers and equipment, and line ministries are expected to keep records of stores. - Disposal of mobile assets is done through public auction and the revenues reverted to the budget. - There is no financial statements on the assets and liabilities of the GG. Such a statement is prepared for the Petroleum Fund, however. ### Petroleum Fund investment framework - The overall investment framework for the petroleum fund is clearly stated in the Petroleum Fund Law. - The Management agreement between the MOF and the BPA specifies investment mandates more in detail for the portfolio invested by BPA and for the portfolio invested by BIS. - The relationship to BIS is however solely handled by BPA. - The investment mandates are also summarized in the annual and quarterly reports on the fund, but are not reported on in the budget documents. ### Budget preparation process: clarity and timing - The annual budget process is clearly defined by a budget calendar in the budget circular, and in general followed as planned. - The BFML prescribes the due date for submission of the draft budget by the government to the parliament: October 15. - Additional dates are prescribed through a budget timetable and budget circular every year, which are issued respectively in January and May. - The budget calendar included in the budget circular is generally followed for the formulation of the recurrent budget, but not fully observed for the capital budget. - The budget cycle has mostly followed a regular timetable beginning in March of each year, with preparation of a macroeconomic framework and National Priorities that are approved by the COM. - Line ministries generally submit budget requests above the provided fiscal envelopes; in 2009, the requests were on average 35 percent higher. ### Capital vs recurrent budget processes and shortcomings - The capital and recurrent budgets are developed separately; the capital budget process lacks a multiyear perspective and an assessment-based and disciplined priority setting mechanism. - For 2010 capital expenditure in the budget amounted to USD 239.6 million, of which USD 22.8 million was from donors. - The total Combined Sources Budget amounted to USD 858.9 of which USD 176.1 was from donors. - The capital budget formulation process is not closely linked with the recurrent budget formulation. - No scrutiny or evaluation of capital projects is conducted and there is no assessment of the future recurrent costs of capital projects. - There is no cost-benefit analysis for the multiyear capital projects. - Decision making and prioritization of capital projects is mainly led by the prime minister. - Preparation time for the capital budget submissions (two weeks) is considered overly tight; some submitted capital proposals have only minimal descriptions of characteristics, costing and linkage to government priorities. ### Budget review, parliamentary consideration, and stakeholder input - The three-week period planned for the MOF to conduct analysis of budget submissions and prepare materials for the Budget Review Committee (BRC) is somewhat short, and in practice is even more compressed. - Budget requests are discussed with ministers and senior department heads at the BRC led by the prime minister; no earlier bilateral negotiations take place between the MOF and line ministries. - In September the finalized draft budget is approved by the COM, and submitted to the parliament by October 15 followed by the discussion first in the Budget Committee for a month and then in the Plenary meeting. - The 2.5-month period for the parliament to analyze the budget proposal is adequate. - Neither parliament, nor NGOs are invited to give input to the budget process at an earlier stage, leading to complaints about limited input from society. ### Medium-term framework, macro assumptions, and petroleum revenue forecasts - Aggregate fiscal information and underlying macroeconomic assumptions for the petroleum sector over the medium term are presented in the budget documents; quality of data and projections needs further development. - The macroeconomic framework has been jointly developed with the IMF and uses the IMF’s basic financial programming approach; it is not based on econometric models. - Projections are prepared by the MOF and have been subject to regular discussions with and monitoring by the IMF. - No other external scrutiny of macroeconomic assumptions or systematic midyear review is undertaken. - National accounts statistics such as GDP have not been produced since 2003. - The main macroeconomic assumptions, like real GDP growth rate and inflation rate, are presented in the budget for three years prior to the budget year and for the budget year, but not for the future three years. - Petroleum revenue forecasts are provided for a longer period: most recently for the period 2002–24. - Petroleum revenue forecasts are based on current and expected production, past and projected international oil prices, and projections of various revenue categories (royalties, income tax, profit oil, etc.). - Savings and earnings of the Petroleum Fund are calculated with clear identification of assumptions (oil prices, production, discount rate, etc.). - There are only limited explanations on how the macroeconomic forecasting framework is used in determining fiscal forecasts, how assumptions compare with alternative projections or actual outturns, or what uncertainties are involved. - Some macroeconomic indicators, like wages components, commodity price forecasts, export and import growth, are not explicit and not published in the budget documentation. - Annual forecasts for the macroeconomic and fiscal data which form the basis for the calculations of fiscal envelopes and budget guidelines are prepared in February-March, but are not published. ### Fiscal framework and the Estimated Sustainable Income (ESI) - The fiscal framework for the budget is defined by the Estimated Sustainable Income (ESI) calculation. - The ESI is a benchmark indicating the sustainable level of withdrawal from the Petroleum Fund that does not reduce the real value of TLS’s total petroleum wealth in the long term. - According to the Petroleum Fund Law the ESI shall be 3 percent of the Petroleum Fund estimated wealth (which for this calculation includes both its financial assets as well the value of petroleum reserves in production). - There are no other fiscal rules specified such as general borrowing limits or balanced budget requirements. *Source: _cr10340 - 21. The tax legislation that applies to petroleum companies and service companies is* ### 39. The economic and financial analysis presented in the budget documents includes ### _cr10340 - 39. The economic and financial analysis presented in the budget documents includes ### Medium-term budgeting and forward estimates - Budget documents provide medium-term estimates for revenues (including donor funding), expenditures, and the balance of GG for the budget year plus three forward years. - Methodological shortcomings: - No clearly defined methodology for forward estimates. - No relation to the macroeconomic projections. - Not based on fully costed expenditure proposals. - Practical approach: - Medium-term projections are formulated using a bottom-up and largely incremental approach. - Incremental approach is applied inconsistently across line ministries. - Coordination gap: - Existing framework lacks an effective coordinating mechanism to link resource allocations with sectoral policy priorities. - Specific numeric item: - The 2010 budget indicates that the petroleum production for the current fields will finish in 2024. As of 2010 an estimated wealth of USD 16.72 billion is estimated. This estimate does not include the new Kitan field which is not yet operational. ### Costing of new initiatives and ongoing expenditures - Presentation issues: - Estimates of the budgetary cost of new initiatives and ongoing costs of government policies are not clearly distinguished in the budget documents. - Content of budget documents: - Book 1 and the budget speech identify main government priorities and major spending areas, including new initiatives which are only partially costed. - AAPs contain important and detailed information on planned activities of the budget year. - Missing quantification: - Budget documents do not provide a quantification of the costs of new government spending programs nor clearly distinguish them from the cost of ongoing government activities. ### Petroleum Fund, resource revenue forecasting, and ESI - Presentation and legal framework: - The Petroleum Fund’s contribution to fiscal sustainability is not explicitly discussed in the budget, but it is enshrined in the Petroleum Fund Law. - Forecast production and price assumptions: - The 2010 budget presents forecasts for resource revenues for 2009–13, and actual revenue for 2008. - Revenue forecasts are produced by the MOF and are based on the Operator’s Low Production Case provided by the operator on the Bayu-Undan-field (ConocoPhillips). - Oil prices are based on the US government’s Energy Information Administration’s estimates for long-term oil prices in the low-price-case. - Sensitivity analysis: - A sensitivity analysis under different assumptions for all relevant variables is provided in the budget, but the presentation does not provide an evaluation of the results from this analysis. - Coordination mechanisms: - Mechanisms for coordinating the operations of the petroleum fund with other fiscal activities are clearly specified. - The fund aims at maintaining the net wealth of TLS and retaining a sustainable source of income for the budget. - The Petroleum Fund does not undertake domestic expenditure directly; risks of the extrabudgetary fund generating a “dual budget” are therefore minimal. - Transfers and ESI: - Transfers from the petroleum fund are calculated at the start of the budget process on the basis of the ESI concept. - Transfers can only be made to the TSA, and only after parliament has approved the budget law; the budget law decides the maximum transfer in the budget year. - Transfers are contingent on the government providing parliament with a report specifying the ESI and a certification of the calculation of the ESI by an independent auditor. - In a fiscal year, transfers can only exceed the ESI if parliament is provided with estimates for the effect on ESI for coming years and a detailed explanation of long-term benefits of increased spending. - ESI calculation practice: - Only non-extracted resources which are part of an approved field development plan and subject to a final production decision are included in the calculation. - The method for calculating the ESI is objective, has been used consistently over the last three years, and is well discussed and described in the budget document. - The ESI smooths public spending over time, but considerable oil price volatility remains because a large part of total wealth is still non-extracted. - The system allows a recalculation of ESI for a supplementary budget; practice has been to recalculate ESI only when oil prices are higher than expected in the original budget document. ### Fiscal sustainability and sensitivity analysis - Coverage: - Budget documents include a sustainability analysis of petroleum revenues and an illustrative graph for sensitivity analysis of ESI. - Limitations: - There is only limited discussion in the budget documents on the sensitivity of budget estimates to changes in economic variables. - No analysis of other fiscal aggregates to changes in economic parameters or other uncertainties is provided. ### Donor funding and coordination with extrabudgetary activities - Reflection in budget: - Donor funding is generally reflected in the Combined Sources Budget by recurrent and capital expenditures of line ministries, but is not approved by parliament as part of the budget year appropriation. - Execution arrangements: - Execution of donor funding is mostly done through separate banking arrangements because most donors are unwilling at this stage to use the domestic systems; procurement is viewed as non-transparent. - The treasury cannot track donor funded expenditures during the year, since they are undertaken outside the TSA. - Multiyear estimates: - Donors do not provide multiyear estimates of planned project volume. - The National Directorate of Aid Effectiveness collects and publishes donor input data for budget formulation and reports on disbursement data on a quarterly basis; data collection is complicated as donors do not always provide information as requested. - Multiyear projections are based on current and approved activities of development partners and do not include the aggregate of planned projects over the medium term, producing an apparent reduction in development partners’ funding from 2010 onwards that mainly reflects planned activities not yet fully committed. ### Accounting, internal control, payroll, and TSA operations - Accounting and systems: - Accounts of the government are maintained by the treasury in accordance with international accounting standards. - The treasury has been using the FreeBalance payment and accounting software since 2001. - FreeBalance is configured to in principle prevent commitments and expenditures beyond appropriations approved by parliament; effectiveness depends in part on data entry by line ministries. - Payments effected by government and revenues collected through commercial banks are reconciled regularly between treasury accounts and those in the BPA. - The treasury does not monitor accounts payable nor is there a system in place to monitor arrears in payments; arrears have not been defined in regulation. - Regulations for internal controls have yet to be issued by the treasury; FreeBalance has provided manuals outlining controls. - Payroll management: - The treasury manages a central payroll; almost all government employees including temporary ones are paid through the centrally managed payroll system. - Integrity of the payroll depends on personnel databases of line ministries, Civil Service Commission and treasury being kept up to date and reconciled; reportedly neither takes place systematically. - Short-term employees in ministries do not form part of the payroll. - The payroll department prepares pension payments to veterans and the elderly twice a year. - Treasury Single Account and cash operations: - Almost all government transactions flow over the TSA (the Consolidated Fund) at the BPA. - For expenditures, commitments and payment requests must be entered in FreeBalance by line ministries and agencies; payments are made through electronic transfer, cheque or to a limited extent cash transfer. - Ministries collecting non-tax revenues can open bank accounts for deposit and transfer daily to the consolidated fund; opening requires treasury approval though unapproved accounts have been discovered. - Outside Dili many government transactions take place in cash due to limited bank presence and many civil servants without private bank accounts. - For 2010 the government required civil servants in Dili to open bank accounts for receiving salary electronically; district offices receive advances in cash to effect payments. ### Virements, contingency reserve, and supplementary budgets - Virements: - Virements are regulated by the treasury. For 2010 freedom for line ministries to affect virements without MOF approval is to be greatly increased. - Ministries will be given full powers to reallocate funds up to the divisional level (the second administrative level within ministries) but cannot move funds between main economic categories. - Expansion of virement includes movement of funds between divisions; ministries expected to maintain records of ministerial approval justifying reallocations. - FreeBalance will ensure approved appropriations at ministry and category level are not exceeded and will track actual expenditures up to the item level. - Formal procedures for the revised virement process are to be drawn up by the MOF. - Supplementary budgets: - Supplementary revenue and expenditure proposals during the fiscal year are presented to the legislature in a similar manner to the original budget. - There is usually one major supplementary budget during the year; in 2009 there was no supplementary budget. - In 2008 the supplementary budget was much higher than the original budget: the main additional expenditure item (USD 240 million) was the establishment of the Economic Stabilization Fund (ESF) used for emergency purchases of rice and other commodities for subsidized resale. - Supplemental budget proposals have the same classification as the budget and are published on the MOF’s website. - If supplementary budget requires additional funding from the petroleum fund, it can either recalculate the ESI (if assumptions have changed significantly), or withdraw money above the ESI with justification of long-term benefits presented to parliament. - Contingency reserve: - The budget includes a contingency appropriation meant primarily to finance unforeseen and urgent expenses. - For 2009, the contingency amounted to USD 18.2 million, about 2.7 percent of state budget expenditures. - For 2010, the contingency amounted to USD 9.6 million and 1.5 percent. - A size of the contingency fund below 3 percent of the budget is seen as good practice; BFML allows for a contingency fund up to 5 percent. - Used contingency funds are accounted for appropriately, but decision-making for utilization is not specified; utilization is proposed by the MOF and requires the prime minister’s approval. - Allocations from the contingency reserve are tracked by the treasury and reported by usual administrative and economic classifications; use of funds seems in part for budgetary items not adequately planned for. ### Reporting, audits, and parliament oversight - In-year reporting and midyear review: - The legislature receives quarterly in-year reports on budget outturn and undertakes a midyear review. - Quarterly reports must be presented to parliament two months after the end of each quarter except the fourth quarter which can be submitted within three months of the close of the financial year. - The second quarter report is the midyear report, reviewed in parliament and discussed with ministers before submission of the budget. - The fourth quarter report is an un-audited final account and is also discussed by parliament. - The annual audited statement of accounts is required to be submitted within nine months of the close of the financial year. - Reports are submitted to parliament within stipulated dates and are published on the MOF’s website. - Quarterly report provides information of actual expenditure up to the division level against amounts approved at that level; analysis evaluating progress in implementing AAPs is sent to the prime minister but not to the legislature. - Audits and final accounts: - Audited final accounts have been provided to parliament in a timely fashion. - While no formal State Audit institution has been set up, the MOF has had final accounts audited by foreign, commercial external auditors. - Deloitte and Touche Tohmatsu have been contracted to perform this function for a three year period. - The audit report for 2008 was transmitted to the parliament in August 2009. - The Management Letter containing a more detailed analysis of the audit and describing the auditor’s main recommendations to improve PFM processes is not shared with parliament. - The new BFML requires that from 2010 the report will have to be sent to parliament within a time limit of six months. ### Box: FreeBalance Integrated Financial Management Information System - Implementation and scope: - FreeBalance development began in 2002 and implementation in January 2004. - FreeBalance is currently accessible for budget execution only in the MOF, with MOF aiming to connect first level spending units to direct execution of the budget in 2010. - Major challenge is communication connectivity. - Functional capabilities: - System registers all GG budgetary expenditure transactions. - Accounting and payment subsystems are fully operational, with modules that register commitments, payments, purchases, inventory of goods, and produce reports. - Treasury developed interface with the budget preparation system and the payroll system. - No cash planning is yet provided and no financial statement of assets and liabilities is prepared. - Transparency and integration: - FreeBalance has provided considerable transparency to fiscal management and control but needs full implementation and integration before becoming an effective tool. - If available to executing entities, internal auditors, external auditor, parliament (in full) and society (through a simplified website version) it would provide means of better monitoring and controlling budget execution. *IMF staff report excerpt: “Resource Revenues, Fiscal Policy, and the Budget” and related sections as provided in the source content.* ### Box 7. The Extractive Industry Transparency Initiative (EITI) ### Box 7. The Extractive Industry Transparency Initiative (EITI) ### Overview of EITI - EITI is an organization for resource rich countries, supporting countries, resource companies, and civil society. - EITI provides a global standard that promotes revenue transparency in resource rich countries. - Implementation of EITI requires the country to meet six criteria that, in short: - require regular publication of all payments by companies to governments and all revenues received by governments from oil, gas, and mining companies; - require publications to be publicly accessible, comprehensive, and comprehensible; - require payments and revenues to be the subject of a credible, independent audit applying international auditing standards. ### Membership, support, and status - Supporters include 46 of the largest oil, gas, and mining companies in the world and several organizations from civil society. - There are 17 supporting countries, providing political, technical, and financial support to EITI. - There are 27 Candidate Countries. - Only Azerbaijan and Liberia have reached the status of Compliant Countries. ### Requirements, candidacy, and validation - To become a Candidate Country, the government, the companies, and civil society must commit to a work plan describing how the country intends to meet the EITI Criteria. - To achieve EITI Compliant status—or to extend Candidate status beyond two years—the country must complete an EITI validation. - The validation provides an independent assessment of progress achieved and identifies measures needed to strengthen the EITI process. - The validation is carried out by an independent validator. ### Timor-Leste (TLS) implementation and findings - In January 2010 TLS was undergoing a validation process and on the way to become only the third EITI Compliant Country. - In 2003, the government of TLS was one of the first countries in the world to commit to EITI. - In late 2006, the government invited civil society and industry to form the TLS EITI Working Group. - The first TLS EITI-report was launched in December 2009 for the year 2008. - The TLS EITI-report: - gives a comprehensive overview of all payments of royalties, profit oil, taxes and fees made by the petroleum sector, and all such revenue received by the TLS government; - is audited by an independent auditor; - found no discrepancies between payments and revenues received. - The EITI-report for TLS for 2008 showed that the Timorese share of certain development fees were forwarded to the Petroleum Fund (footnote in source). ### Related fiscal transparency and accounting notes - International petroleum companies working in TLS comply with internationally accepted standards for accounting, auditing, and publication of accounts. - The petroleum companies that have activities in the JPDA are international companies located in Australia or other developed countries. - The Timorese Tax and Duties Act states that for the petroleum sector gross income from business activities shall be determined by net profit for financial accounting prepared in accordance with the IFRS. - The National Petroleum Authority (ANP) activity is financed by a contract service fee that amounted to approximately USD 1 million in 2008. - The auditor statement in the annual report for the Designated Authority indicates that development fees of approximately USD 3 million collected under PSCs in the JPDA also stayed within ANP in 2007. *Source: The EITI-website www.eiti.org and TLS EITI for the year ending December 31, 2008.* ### 76. Differences between originally budgeted and actual outturn of main fiscal ### _cr10340 - 76. Differences between originally budgeted and actual outturn of main fiscal ### Fiscal reporting and accounting basis - Finding: "Differences between originally budgeted and actual outturn of main fiscal aggregates are disclosed to the public." (4.1.1) - Budget execution reporting: - Quarterly and annual fiscal reports present budget execution compared with the original and updated budget. - If the original budget is amended, only in the final accounts is it possible to compare outturns with the original budget. - Accounting basis transition: (4.1.2) - The government is gradually adopting the cash basis of accounting according to IFAC’s international public sector accounting standards; a statement on the accounting basis is included in the final accounts. - FreeBalance software has been configured in accordance with the International Public Sector Accounting Standard Financial Reporting under the Cash Basis of Accounting. - Since 2008 the government has been moving from modified cash basis accounting to a full cash accounting system. - The current modified cash basis allows expenditure to be incurred until a date defined by the government: - Budget execution against the budget of 2008 for goods and services received in the country before December 31, 2008 was allowed until May 2009. - The 2009 execution will be allowed until end-February 2010. - The government plans to move to a pure cash basis of accounting by 2011. - Information on both accounting standards is available in the final annual accounts with an explanation of the criteria used. - Transparency: The audited annual accounts, audit report, and accounting rules are available on the MOF’s webpage. ### Reconciliation practices - Finding: "The process of accounting reconciliation is still manual but is improving." (4.1.3) - Status and plans: - Accounting reconciliation was brought up to date from 2005 onwards in 2009. - MOF plans to implement the FreeBalance reconciliation module in 2010. - A monthly reconciliation is done by the BPA in relation to the Petroleum Fund. - Historical revisions and classification changes: - Major revisions to historical fiscal data and any changes to data classification are explained. - 2007 annual budget calendar moved from beginning in July 1 to January 1; explained in fiscal reports with comparative information. - Change from modified cash basis to full cash basis explained in fiscal reports. - Petroleum Fund Law still establishes fiscal year begins in July 1; this has not been changed yet. ### Internal oversight: civil service and employment procedures - Code of conduct: - Public servants are subject to a well-defined code of behavior but its application is at an early stage. (4.2.1) - Civil Service Act of 2004, revised in 2009, defines principles: impartiality, integrity, equality, and confidentiality; defines Code of Ethics and procedures. - Public Service Commission created in 2009 by Law No. 7/2009; responsible for application of Code of Ethics and disciplinary measures; some administrative actions have resulted in dismissal of public servants. - Recruitment and staffing: (4.2.2) - New recruitment process is open and competitive: curriculum analysis, written test, professional interview. - Public Service Commission recruits all civil servants up to the position of Director (Director General excluded). - Commission composition: five members: two appointed by parliament and three by government; government appoints the president; Commissioners have a mandate of five years. - Budget documents present number of permanent and temporary civil servants in each ministry; hiring new staff depends on availability of resources under budget limits. - Control over civil service procedures is at initial stages; no civil service census; number of temporary positions is high. ### Procurement - General assessment: - Procurement legislation largely in line with international standards, but more discretion has been introduced in recent years; procurement processes are not always followed. (4.2.3) - Corruption is reportedly a persistent problem; government initiatives include restructuring procurement and establishing a new Anti-Corruption Commission. - Legislative and operational shortcomings: - Framework composed of six decree laws; framework is complex and line ministries may be ill-equipped to carry out tender processes. - Direct quote thresholds: - For contracts up to USD 100 thousand only three quotes are necessary; this has recently been increased to USD 250 thousand. - Quality considerations allowed in bid rating to avoid underbidding and nondelivery; may create opportunities for preferential treatment and overpayment. - Institutional changes and delegation of authority: - Procurement history: decentralization ↔ centralization ↔ decentralization. - 2008: MOF centralized procurement to ensure capital budget execution; decentralization resumed based on accreditation of line ministry capacities. - Larger procurements above USD 250 thousand still carried out by MOF’s Procurement Directorate with sign-off by minister, or prime minister above USD 1 million. - Latest reforms: role of finance minister to be substituted by a vice prime minister; sign-off boundaries raised to USD 1 million (vice prime minister) and USD 3 million (prime minister). - All procurements up to USD 1 million are to be carried out by line ministries. - Procurement Directorate to be replaced by a Technical Secretariat under the vice prime minister’s office and a Procurement Commission comprised of civil servants, business representatives and NGOs. - New structure only partly codified in legislation. - Risks during transition: - Transition hurried, risks inadequate monitoring and oversight. - Capacity for two new entities under vice prime minister’s office must be built from scratch as Procurement Directorate disbanded. - Linkage to MOF’s budget execution system tenuous during transition; procurement module of FreeBalance still needs installation and adaptation; training of line ministry staff not yet taken place. - Neither MOF, nor Technical Secretariat or Commission will be able to monitor procurement processes through FreeBalance until module implemented. - Reporting on procurement processes by MOF has been absent; hope that new FreeBalance module will enable process monitoring and reporting. - Transparency and exemptions: - Procurement processes are not always transparent and not audited by internal or external auditors; large discretionary procurements have occurred and only been formalized after the fact. - Tenders published in local newspapers, but not always on the internet; limited reporting on tender awards. - Individual tenders are not routinely audited by audit unit in the treasury or external auditor contracted by MOF. - In 2009, an amount of USD 72 million was exempted from normal procurement procedures; these resources were funds for capital projects that faced implementation delays. The exemption was formalized ex post by decree law. ### Internal Audit and tax audit - Internal audit: - Internal audit is ineffective and audit plans and procedures are not in place. (4.2.5) - IGO created in 2000; responsibilities expanded by Decree-Law No. 22/2009 (mandate of four years for Inspector General; IGO may undertake inspections and audit in all public entities; full access to documents). - Inspector General reports to prime minister. - An annual audit plan has not been prepared; staff limited and capacity weak. - Some internal audit units exist in ministries that respond technically to but are not subordinate to the IGO. - Anti-Corruption Commission created in 2009 but unit not operating because commissioner not appointed and unit not staffed. - Tax audits and fraud investigations: (4.2.6) - Conducted on a very limited basis. - Basic audit checklists and technical reference manuals are maintained, but insufficient tax, administrative, and audit expertise in MOF General Directorate of Revenue and Customs (GDRC). - No comprehensive and documented audit plan; audits not conducted according to clear risk criteria. - Some sector-based audit plans exist for small or large businesses. - Currently only two auditors in the audit section for domestic taxes. - GDRC plans to create an audit unit in each of the three National Directorates (Petroleum Revenue, Customs, and Domestic Tax). ### Independent external oversight - Establishment and mandate: - An external audit body is yet to be established; the constitution defines it will be independent of the executive branch; exact mandate to be determined by new legislation. (4.3.1) - Constitution provides for an independent High Administrative, Tax, and Audit Court (HATAC). - In absence of HATAC, government appointed a private external audit firm to conduct financial audits of annual statements and accounts. - New BFML of 2009 stipulates temporarily until Audit Court established, the Court of Appeals will receive annual audited financial statements and accounts from the minister of finance and present them to parliament. - Scope and limitations of commercial external audit: (4.3.1) - Commercial firm performs a financial audit; only limited compliance, system and performance aspects are taken into account. - Areas such as payroll and individual procurement should be covered more materially, on a sample basis. - Presently mainly the paper trail is audited. - Example limitation: for budget year 2008 the independent auditor could not validate salaries and pensions payments due to lack of civil servant contracts in many cases and extensive payment in cash without proper documentation. - Independent external auditor prepares a management letter to MOF with recommendations; management letters used to be available on MOF’s webpage but those for 2007 and 2008 have not been published yet. - Submission, publication, and follow-up of audit reports: (4.3.2) - External audit reports have been submitted to parliament within legal limits of 8 months of the end of the budget year. - New BFML for the 2010 budget year established a new deadline for submission to the Court of Appeals within 6 months (interim before HATAC established). - Submission deadline for parliament remains at 9 months. - Audit reports are published and available on MOF website. - Recommendations from previous audit reports have generally been acted upon. - A detailed management letter on the annual statements of 2008 was received by MOF in mid December 2009; a plan of action has been drawn up to prioritize implementation of recommendations. - Parliament does not receive follow up reports on the audit report, and does not receive the management letter. - Budget Committee does not discuss government accounts or audit reports explicitly but they inform discussion on the next year’s budget. ### Oversight of the Petroleum Sector - Auditing arrangements: - Petroleum Fund and ANP are subject to internal and external auditing procedures. - BPA’s Internal Auditor performs an audit of the fund every six months; auditor’s reports are disclosed in the following quarterly report on the fund. - All transactions of the Petroleum Fund are audited by an external auditor; auditor’s report is made public as an appendix to the Petroleum Fund annual report. - In ANP a Single Auditor is appointed jointly by the Secretary of State for Natural Resources and the minister of finance for a three-year term; Single Auditor responsible for internal monitoring of legality, regularity, and financial management of ANP. - An external auditor performs a financial audit on ANP’s activities as the Designated Authority under the Timor Sea Treaty; ANP’s activities in TLS exclusive areas are not included in this audit. Auditor’s report is an appendix to annual report for the Timor Sea Designated Authority. ### National statistics - National Statistics Directorate (DNE): (4.3.4) - DNE has technical independence under Decree-law No. 17/2003; part of MOF. - DNE publishes a monthly consumer price indicator and quarterly import and export statistics. - Last national accounts estimate was prepared for the year 2003. - Annual data on public sector employment and wages are available. - No official data compiled regularly on private sector employment and wages, except partial data from household surveys conducted jointly by UNDP, ADB, and the WB. - Compilation of revenue and expenditure follows economic classification of the GFSM 1986 and the COFOG functional classification. - No data are currently reported for the IMF publication GFS Yearbook and International Financial Statistics. - Main constraint: insufficient capacity of the unit. ### IMF staff commentary — overall assessment - Progress and strengths: - Since independence TLS has made significant progress with improving fiscal transparency. - Authorities adopted a transparent, fiscally sustainable governance framework for the petroleum sector: - Petroleum Fund manages petroleum wealth at arm’s length, regulates annual transfer of resources to the budget, professionally managed, well-supervised and fully audited. - TLS developed a relatively well-structured annual budget process (with ongoing substantial foreign consultancy support). - Improved coordination with development partners to plan and track donor projects and better align them with national priorities. - Implemented a comprehensive integrated financial management information system enabling comprehensive, timely, and accurate fiscal reporting within the executive and towards parliament. - Expenditures and revenues are almost all transacted through a TSA, the Consolidated Fund; except for the Petroleum Fund, there are no other extrabudgetary mechanisms. - Budget documentation is basic but quite comprehensive and adequate for review and approval by parliament. - Quarterly and annual fiscal reports of the GG and of the Petroleum Fund are available in a timely fashion. - Important legal and institutional reforms have supported developments: new budget and financial management, procurement, civil service, and petroleum laws; restructuring of MOF; establishment of a Civil Service Commission and a new Anti-Corruption Commission. *Italic: Extracted from IMF country report text provided in the content unit.* ### 94. Nonetheless, there are still many areas in which TLS diverges from the good ### _cr10340 - 94. Nonetheless, there are still many areas in which TLS diverges from the good ### Overview - TLS diverges from the good practices set out in the IMF Code of Good Practices on Fiscal Transparency. - Weaknesses often stem from lack of capacity in MOF and line ministries and an incomplete regulatory framework, aggravated by very recent legislation that is in the first stages of implementation. ### Clarity of roles and responsibilities - Main weaknesses: - Lack of an operational, independent State Audit institution (the HATAC as defined in the constitution). - Lack of a uniform regulatory framework defining and managing autonomous entities and public corporations. - Lack of a well-equipped and transparent tax and customs administration. ### Openness of the budget process - Main issues: - Weak linkage between planning and budgeting. - No fully-developed functional or program classification. - Macro-fiscal forecasting capacity is limited. - Planned resource provision by donors is not collected for the medium term. - Capital and recurrent budget are largely developed separately. - Expenditure review, especially of capital projects, needs substantial strengthening. - Medium-term planning and budgeting process are embryonic for both capital and recurrent expenditure. - Strategic planning needs further development. - FreeBalance system limitations: - Does not record accounts payable and there is no monitoring of arrears. - Interconnectivity needs to be improved. - Procurement module is not activated. ### Public availability of information - Weaknesses: - No information in the budget documents on quasi-fiscal expenditures, contingent liabilities, fiscal risks, and tax expenditures. - Budget documents could contain more descriptive and analytic information. - A budget in brief for the general public is not provided. ### Guarantees of integrity - Overall weakness in this area, with particular concern given reported prevalence of misuse and misappropriation of funds. - Specific shortcomings: - Internal audit in TLS is almost nonexistent. - Internal controls and monitoring on important processes like payroll and procurement are deficient and could be further aggravated by planned decentralization to line ministries and local government. - The present commercial, external auditor performs only financial audits. - The entity in charge of the national statistics is not capable of producing the national accounts. - National accounts data issues (footnote content preserved): - "Under a WB-financed project, national accounts data for 2000 (both sector and expenditure basis) were estimated by the Boston Institute for Developing Economies (BIDE). In late 2004, BIDE, under a follow-up WB project, produced GDP estimates for 2001–03 that suffer from limited source data and substantial extrapolation. DNE has not been able to replicate the BIDE estimation exercise." *Source: _cr10340 - 94. Nonetheless, there are still many areas in which TLS diverges from the good* ### 95. To improve transparency in each of the mentioned dimensions, we present below ### _cr10340 - 95. To improve transparency in each of the mentioned dimensions, we present below ### Short-term Recommendations (time horizon: up to 2 years) - General: sequence and prioritization to be developed during the PEFA assessment with support from the IMF’s Fiscal Affairs Department. Major risks: decentralization of budget execution and procurement to line ministries and districts; pay particular attention to systems consolidating fiscal information and enabling MOF’s fiduciary responsibilities. Procurement - Activate the FreeBalance procurement module as soon as possible and train MOF and line ministry staff, as well as the new Procurement Technical Secretariat and Monitoring body under the vice prime minister. (4.2.3 paragraph 84) - Keep MOF oversight over the procurement process despite transfer of primary operational responsibility to the vice prime minister. - On investment projects larger than USD1 million, include MOF’s expenditure review division or the budget directorate on tender panels. - Give the treasury’s audit unit powers to investigate transactions on a sample basis, including procurements. - Require the commercial external auditor to audit tenders on a sample and risk-analysis basis. (4.2.3 paragraph 84) - Publish all procurements and contract awards on the internet, and publish an annual report on government procurement including key process indicators. (4.2.3 paragraph 85) Fiscal Decentralization - Include in the draft Financial Regulations for Municipal Governments that they should be approved by the MOF, that accounting standards and the chart of accounts remain MOF responsibility, and that monthly, quarterly, and annual municipal accounts be submitted to MOF for consolidated GG accounts. (1.1.3 paragraph 15) - Use the same accounting and budgeting software in municipal governments as in the MOF; municipal finance and accounting functions should be conducted by MOF staff given low financial management capacities. - MOF should issue regulations on internal controls of payments and accounting to guide decentralized budget execution in line ministries. (4.2.3 paragraph 84) Budget process - Initiate identification and costing of new government initiatives in the budget, both expenditure and revenue side, and identify recurring costs of public investment for the medium term. (2.1.3 paragraph 40) - Require donors to provide estimates of planned expenditure volumes on a multiyear basis (but not on individual projects) and include these in the multiyear fiscal presentation and expenditure projections in the budget. (2.1.5 paragraph 47) - Start building capacity in costing and analytic review of capital projects and program expenditure. (2.1.1 paragraph 34) - Include in the budget documents analysis of revenue and expenditure outturns compared to plan for the three prior years to the budget year. (3.1.2 paragraph 63) - Publish a clear and simple summary guide to the budget in Tetum and Portuguese to inform the population. (3.2.1 paragraph 72) - Specify in the financial regulations the process and conditions for access to contingency reserve funds to prevent use for other purposes. (2.2.3 paragraph 55) - Involve parliament and NGOs at an early stage to discuss priorities in the budget process. (3.2.4 paragraph 75) - Publish the budget immediately after approval by the parliament. (3.1.1 paragraph 61) - Include all autonomous entities and public corporations (such as the lottery, ANP, and the Microfinance Institute) in the budget and final account documents, prepare legislation covering their management, supervision and reporting, and synchronize publication of their reports with the budget cycle. (1.1.4 paragraphs 2 and 6) Tax system - Define rules for cooperation, coordination, and information sharing between the ANP and the MOF Petroleum Revenue Directorate to improve tax collection from the oil sector (for example, initiate exchange of audit information, perform joint audits, and promote MOF staff participation in relevant ANP training). (1.2.2 paragraph 20) - Publish rulings and decisions of the MOF Petroleum Revenue Directorate on the internet. (1.2.2 paragraph 21) - Regulate how petroleum companies should provide MOF’s Petroleum Revenue Directorate with all documents and evidence necessary to perform tax audits in TLS. (1.2.2 paragraph 20) - Resolve access of the tax authorities to taxpayer commercial bank account information through discussion with banks, or legal action. (1.2.1 paragraph 24) - Complete the legal system for tax and non-tax revenue collections, and put in place coherent procedures, sanctions, and an appeals system under law. (1.2.2 paragraph 27) - Strengthen capacity of the Petroleum Revenue Directorate to perform tax audits. (1.2.2 paragraph 25) - Include a measure of the overall “government take” in the petroleum sector (i.e., the overall tax burden as percentage of production) in the budget documents. (3.2.3 paragraph 74) Financial management - Define the legal framework governing the payment of dividends by autonomous entities and public corporations, inclusive of ANP. (1.1.4 paragraph 4) - Define more clearly the type and scope of quasi-fiscal expenditure allowed to be provided by petroleum companies, and report on these expenditures in the budget. (3.1.3 paragraph 68) - Verify the integrity of the payroll every quarter and initiate a formal procedure for verification of pensions to veterans and elders. (2.2.1 paragraph 49) - Put in place a formal procedure for collection of non-tax revenues, including specifications such as deposit of such revenues in designated accounts in commercial banks and daily credit to government account with the BPA. (2.2.1 paragraph 50) - Review recent virement reforms and put in place proper accountability procedures for effecting virements by line ministries; formulate virement rules balancing flexibility and accountability. (2.2.1 paragraph 51) - Prioritize in the DNE the preparation of national accounts (GDP). (4.3.4 paragraph 92) - Ensure adequate resources, coordination and political backing for various anti-corruption initiatives. ### Medium-term Recommendations (time horizon: within the next three to five years; some recommendations may require more time) - Sequencing dependent on PEFA analysis and PFM strategy development. Budget process - Strengthen capacity in basic macrofiscal forecasting and use of the financial programming model; document the macroeconomic framework. Publish basic macroeconomic assumptions underlying the budget estimates at an early stage of the budget cycle. Extend the macrofiscal framework towards the medium term by estimating main revenue and expenditure flows and develop a medium-term fiscal framework. (2.1.2 paragraphs 36 and 37) - Develop a medium-term PIP with clear principles for evaluation, prioritization, and approval of investment projects; capacity building and/or buying in cost-benefit analysis for multiyear investment projects is essential. (2.1.1 paragraph 34) - Include an extended period in the budget timeline for line ministries to prepare and for MOF to analyze and discuss rationale and costing; provide additional MOF review capacity to verify costing and challenge recurrent and capital project submissions. (2.1.1 paragraph 35) - Review and further develop program classification of expenditure and better link it to line ministry policies; use initially for budget planning and presentation; extend functional classification to include subfunctions and items. (3.2.2 paragraph 73) - Strengthen strategic planning capacity in the prime minister’s office, MOF, and line ministries; establish clear links to the AAPs and line ministries’ budgets and include additional analysis on government priorities, programs, and targets in budget documents. (3.2.4 paragraph 74) - Cost existing policies and clearly separate them from new policies in preparation of budget and forward estimates to enable presentation of “baseline” expenditures. (2.1.3 paragraph 39) - Develop a more robust methodology to expand production of baseline and budget estimates over the medium term. - Decide on line ministry expenditure ceilings in the COM at the start of the budget cycle on the basis of baseline estimates, new expenditure initiatives and possible savings targets; provide these ceilings in the budget circular and cover both recurrent and capital expenditure. - Develop budget presentations on fiscal risks, quasi-fiscal activities (including by petroleum companies), and contingent liabilities. (3.1.3 paragraph 66) - Develop an overview of existing and new tax expenditures in the budget. (1.2.1 paragraph 22) - MOF should develop or commission occasional reports on long term expenditure and revenue trends to address structural issues and inform Vision 2020 plan update. (3.2.4 paragraph 74) Tax system - The three Directorates of the GDRC should prepare annual reports on activities and process performance. (1.2.2 paragraph 25) - Define a framework for cooperation between MOF Petroleum Revenue Directorate and the Australian Taxation Office on information sharing and tax audit. (1.2.2 paragraph 19) - Hire an experienced external tax auditor to support and provide staff training in tax assessment audits for the Petroleum Revenue Directorate. (1.2.2 paragraph 25) - Improve tax administration by strengthening human and technical resources of the Tax and Customs Directorates, and set a specialized career path for tax administration officials. (1.2.2 paragraph 25) - Create a single tax audit unit adequately staffed and trained reporting directly to the DG of Revenue and Customs. (4.2.6 paragraph 86) - Adopt a Code of Conduct for tax officers and train staff to apply it; provide a special legal status for tax officials. (1.2.2 paragraph 24) - Develop a taxpayer rights statute to strengthen position of individual taxpayers versus tax and customs authorities. - Rationalize and limit the use of tax incentives, for example by standard use of expiration clauses. Financial management - Exclude requirements for quasi-fiscal expenditures by petroleum companies in new exploration contracts as they deter from the budget process and channel resources away from the Petroleum Fund. (3.1.3 paragraph 67) - Issue a separate public debt management regulation specifying conditions under which public borrowings can occur, including types and limits of borrowing and modalities for repayment; do this before any borrowing occurs. (3.1.5 paragraph 68) - Define governance structure and fiscal role (if any) of the National Resource Company and the National Development Bank before TLS establishes such corporations; distinguish commercial responsibilities from policy, regulatory, and social obligations; ensure integration of quasi-fiscal expenditure in the budget. (1.1.4 paragraph 10) - Strengthen capacity of the IGO and other internal audit units to perform internal audit responsibilities; ideally integrate all internal audit units within the IGO. (4.2.5 paragraph 85) ### Key summary findings and practice assessments (selected) - The time horizon definitions: short-term = up to 2 years; medium-term = within the next three to five years (with some recommendations requiring more time). - Major risks: decentralization of budget execution and procurement to line ministries and districts; need to improve consolidation systems for fiscal information to enable MOF fiduciary responsibilities. - Procurement transition has been hurried and bears risks for inadequate monitoring and oversight; procurement processes are not always transparent and not audited by internal or external auditors. - The petroleum sector: Petroleum Fund exists; tax and fiscal regime is comprehensive but complex; tax expenditures numerous but cost not assessed; petroleum companies undertake social and environmental expenditures not clearly defined or described. - Fiscal reporting: Budget documents cover GG fiscal activities comprehensively but lack quantification/discussion of fiscal risks, contingent liabilities, tax expenditures, and quasi-fiscal activities. - Audit and oversight: External audit reports are submitted and published; an independent national audit body is constitutionally required but legislation and mandate remain to be determined; internal audit is ineffective and plans/procedures are not in place. - Statistical capacity: DNE has technical independence but has not produced national accounts since 2003 due to insufficient capacity. *Document: _cr10340 - 95. To improve transparency in each of the mentioned dimensions, we present below* ### 8. GG QFAs ### 8. GG QFAs ### QFAs / General Government (GG) coverage - No - Para.66, 67 - Code ref: 3.1.3 ### Macroeconomic assumptions - Partially, in the budget documents - On the website of the MOF: www.mof.gov.tl - Para.35-38 - Code ref: 2.1.2 ### Analysis of fiscal risks / sensitivity analysis - Sensitivity analysis is partially included in the budget documents. No analysis of fiscal risks. - On the website of the MOF: www.mof.gov.tl - Para.44 - Code ref: 2.1.4, 3.1.3 ### GG Debt - No borrowing so far - Not applicable - Para.29, 68 - Code ref: 3.1.5 ### GG Financial Assets - Petroleum Fund financial investment information available - On the website of the BPA: www.bpa.gov.tl - Para.29, 30 - Code ref: 3.1.5 ### Sustainability Analysis - For petroleum revenues in the budget documents - On the website of the MOF: www.mof.gov.tl - Para.40-43 - Code ref: 2.1.2 ### GG budget estimates - Everything is included under central government - On the website of the MOF: www.mof.gov.tl - Para. - Code ref: 2.1.2, 3.1.2 ### GG Monthly/quarterly reports on fiscal outturn - Quarterly and annual reports - On the website of the MOF: www.mof.gov.tl - Para.61 - Code ref: 3.1.1, 3.1.4 ### GG Monthly/quarterly reports on fiscal outturn (coverage) - Everything is included under central government - On the website of the MOF: www.mof.gov.tl - Para.61 - Code ref: 3.1.1, 3.1.4 ### GG Final Accounts - Everything is included under central government. - On the website of the MOF: www.mof.gov.tl - Para.61 - Code ref: 3.1.1, 3.1.4 ### Consolidated GG Final Accounts - Everything is included under central government - On the website of the MOF: www.mof.gov.tl - Para.61 - Code ref: 3.1.1, 3.1.4 *Source: _cr10340 - 8. GG QFAs* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10340.pdf_