## _cr12199

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---

### Executive summary — main conclusions
- The State Tax Inspectorate (STI) implemented a Compliance Risk Model (CRM) aligned with OECD/EU compliance concepts and the Strategic Plan for 2011–15.
- A pilot test of the CRM in 2011 produced an estimated about 20 percent revenue increase in the targeted segments.
- The STI rolled out the CRM in full from January 1, 2012.
- Sustained CRM impact requires substantial improvements in: taxpayer services; audit capacity and training; tax fraud investigation and prosecution capacity; information technology systems (IT); the value-added tax (VAT) refund system.
- Major concern: current lack of prosecutions to deter tax fraud; no court convictions documented in the last three years.
- Continued technical assistance (TA) from the IMF and other providers over the next three–four years judged essential, with particularly large IT reform needs.

### Current situation and quantified issues
- Tax revenue in 2011 fell short of expectations; combined revenue shortfalls across tax types are estimated at 0.7 percent of GDP.
  - Breakdown of the 0.7 percent of GDP shortfall: social and health fund contributions -0.4 percent; personal income tax (PIT) -0.1 percent; foreign trade tax -0.1 percent; and VAT -0.1 percent.
- Pilot CRM 2011 approach: mix of engagement and audits; bulk of recovered revenue came from prompted voluntary compliance rather than audit.
- VAT performance: decline in VAT relative to GDP linked to increased share of supplies taxed at reduced 8 percent and zero rates (e.g., agricultural products and exports) rather than necessarily a decline in taxpayer compliance.
- Timeline and targets:
  - CRM pilot: 2011.
  - Full CRM roll-out: January 1, 2012.
  - HWIs and indirect audit methods expected to take effect in 2013.
  - LTO benchmark: accounting for 50 percent of the STI’s total collections.
  - Strategic Plan period: 2011–15.

### CRM assessment and operational implications
- Observed CRM strengths:
  - Alignment with international good practice.
  - Ability to change taxpayer behavior through sectoral targeting and staged use of compliance approaches (education → persuasion → audit).
- Operational dependencies and weaknesses:
  - CRM success relies on accurate intelligence from IT systems and high-quality, integrated data.
  - Current gaps in taxpayer services limit proactive compliance promotion.
  - Audit staff require strengthened skills to detect unreported income, hidden wages, serious evasion, and aggressive avoidance.
  - Anti-fraud system is fragmented; significant time is spent processing dossiers across agencies with no convictions in the last three years.
  - VAT refund system has accumulated large liabilities and current universal audit approach is staff-intensive and of doubtful effectiveness.

### Key recommendations (high-level)
- Strengthen taxpayer services and create a dedicated taxpayer services unit at STI headquarters to promote compliance via publicity, marketing, and closer engagement with tax professionals and business groups.
- Establish a Compliance Cooperation Council to foster constructive collaboration between the STI, tax professionals, and business groups on compliance and administrative simplification.
- Implement sustained, higher-level technical training for auditors, focusing on detecting hidden wages, unreported income, and aggressive tax avoidance.
- Re-evaluate and redesign anti-fraud arrangements to enable a small but well-selected set of prosecutions each year; clarify procedures and role definitions across STI and other agencies.
- Rationalize regional organization to better allocate staff against the STI’s risk portfolio; create dedicated units for HWI and indirect audit method initiatives.
- Continue evolution of the Large Taxpayer Office (LTO): group taxpayers into administrative units by economic sector, focus on the “top 40” businesses, and build core big-business taxation skills.
- Expedite IT reform using off-the-shelf software with minimal customization to improve data quality and integration underpinning the CRM.
- Move VAT control toward risk-based methods and accompany reforms with transition to a full-refund VAT system to reduce accumulated government liabilities and support businesses.

### Selected operational and policy priorities for implementation
- Prioritize TA and training over the next three–four years, with emphasis on:
  - audit methodology and progressive training strategies for audit staff;
  - capacity to investigate tax fraud and support prosecutions;
  - establishing and staffing a headquarters taxpayer services function;
  - IT modernization to deliver reliable intelligence for the CRM.
- Phase and sequence actions to ensure:
  - short-term CRM enforcement is supported by immediate taxpayer engagement and audit capability improvements;
  - medium-term structural changes (regional reorganization, LTO sector grouping, HWI program, indirect audit methods) are staffed and trained in advance of 2013 initiatives;
  - VAT refund system reforms proceed alongside improved VAT risk analysis and audit techniques.

### 2011 sectoral compliance campaign — activities and results
- Engagement and audit activity:
  - over 1,500 taxpayers engaged in three sectors.
  - about 500 cases: STI accepted explanations and did not audit.
  - over 1,000 taxpayers subjected to audit; some 600 produced, on average, modest tax recoveries.
- Aggregate financial outcomes:
  - MDL 108.8 million collected in total from the program.
  - MDL 11.5 million collected arose from audit.
  - increase in tax payments of 24 percent from the taxpayer population covered by the sectoral compliance program.
  - the STI’s total tax revenues increased by 7.7 percent in the same period.
- Detailed results (Table 2):
  - Cases reviewed: Public Catering 842; Wholesale 500; IT Services 214; Total 1,556.
  - Audited: Public Catering 653; Wholesale 302; IT Services 97; Total 1,052.
  - Paid audit settlement: Public Catering 378; Wholesale 175; IT Services 52; Total 605.
  - Cases paying extra tax including cases not audited: Public Catering 561; Wholesale 398; IT Services 126; Total 1,085.
  - Total amount recovered from audit (MDL millions): Public Catering 2.8; Wholesale 8.3; IT Services 0.4; Total 11.5.
  - Total increase in revenues from the program (MDL millions): Public Catering 16.3; Wholesale 87.3; IT Services 5.2; Total 108.8.
  - Note: MDL 19.5 million was assessed by auditors of which MDL 11.5 million was paid by December 31 and is included in the total increase of MDL 108.8 million.
- Lesson: audit recoveries represent roughly only 10 percent of the total tax increase from contacted taxpayers; marketing and engagement drove most compliance gains.

### 2012 compliance plan targets and sequenced approach
- STI plan for 2012: influence compliance behavior of 93,000 taxpayers by persuading voluntary compliance.
  - Target sectors: (1) wholesale and retail; (2) manufacturing; and (3) transport and communications.
  - These sectors estimated to cover 56 percent of the tax gap and number some 93,000 businesses (the 1,500 businesses contacted in 2011 are a subset).
- Recommended campaign sequencing:
  - first tranche contact by carefully crafted letter;
  - accompany letters with a media campaign;
  - monitor compliance electronically within the STI of the next 2,000 high-risk cases;
  - publicize first six months’ results then contact next 2,000 taxpayers inviting voluntary disclosures with offer of less penal settlement;
  - track compliance trends across all businesses in treated sectors for next year’s campaign design.
- Use of randomized control on 2011 cohort recommended: divide 1,500 cases at random into treatment and control groups and compare outcomes in final quarter of 2012.

### Strengthening personal income tax compliance — unreported cash wage payments
- 2011 collections and shares:
  - In 2011, PIT on wages, social security contributions, and health insurance contributions totaled MDL 9,9 billion and made up 34.4 percent of the overall collection of tax in Moldova.
- Table 3 (selected):
  - Personal income tax—wages: 2007: 1,322; 2008: 1,480; 2009: 1,465; 2010: 1,544; 2011: 1,769.
  - Social security contribution: 2007: 3,947; 2008: 5,398; 2009: 5,575; 2010: 5,987; 2011: 6,551.
  - Health insurance contribution: 2007: 760; 2008: 1,122; 2009: 1,339; 2010: 1,447; 2011: 1,578.
  - Total: 2007: 6,029; 2008: 8,000; 2009: 8,379; 2010: 8,978; 2011: 9,898.
- Employee count and wage data (Table 4):
  - Total employee count: 2009: 1,140,473; 2010: 1,110,021; Percent Change: -2.7.
  - Wages reported (MDL millions): 2009: 20,715; 2010: 21,906; Percent Change: 5.4.
  - Average wage per employee (MDL): 2009: 18,164; 2010: 19,735; Percent Change: 8.0.
- Issues and strategy:
  - Focus initially on unreported salary payments (“brown envelope” payments) with cross-agency strategy led by MOL and supported by STI.
  - Public-awareness campaigns, employer simplification, and focused audit training recommended.
  - In 2011 STI completed 797 LTO audits identifying MDL 3.6 million in additional employment tax.

### Building a High-Wealth-Individual (HWI) compliance program and Indirect Audit Methods (IAM)
- Legislation passed January 2012 requires filing a “Statement of Financial Assets” by December 31, 2012 where an individual has in excess of MDL 1 million in assets or MDL 300,000 in personal expenditures.
- Legislation allows use of indirect audit methods commencing in 2013 for PIT returns due for 2012; significant preparation required over the next 15 months.
- Organizational requirements:
  - Establish a dedicated permanent headquarters HWI unit; at least five people required at initiation.
  - Initial HWI population should be limited to approximately 200 taxpayers.
  - Draft HWI Compliance Strategy recommended within the next 60 days.
- IAM timing:
  - Approximate 15-month window to prepare for IAM.
  - First tax period subject to indirect audits: tax year 2012 (March 2013 filing).
  - It will be late-summer 2013 before first indirect audits could be initiated; 2014 before substantial results expected.
  - Strategic, procedural, tactical, staffing, and training planning should be completed within the next 180 days (October 2012 completion date).
  - Bulk of auditor training should be completed by May 2013.
- Recommended actions:
  - Designate a full-time project team/manager to coordinate IAM implementation.
  - Seek expert support to expedite implementation of HWI and IAM initiatives.

### Taxpayer services — findings and recommendations
- Current services mostly reactive; around 450 seminars provided nationwide to explain tax law implementation.
- No measurement of effectiveness of taxpayer services in influencing compliance behaviors.
- Recommendations:
  - Establish a dedicated unit in the STI Methodology Department responsible for program and product design, planning and coordination of taxpayer services.
  - Develop a comprehensive taxpayer services strategy linked to the STI’s compliance strategy.
  - Establish taxpayer “shop fronts” at field offices.
  - Utilize modern marketing techniques (“compliance marketing”) and publicize audit and enforcement results.
  - Ensure taxpayer satisfaction surveys are used to develop improvement initiatives and measure effectiveness.
  - Establish a Compliance Cooperation Council with senior STI officials and business community representatives.

### Audit activity, capacity gaps and training needs
- Shift toward focused, risk-based audits concentrated on highest compliance risk areas.
- Audit results (Not including Large Taxpayers) (MDL millions):
  - 2010 totals: Number of audits 31,123; Additional Tax 365.4.
  - 2011 totals: Number of audits 33,563; Additional Tax 344.2.
- Selected audit categories:
  - Registration checks: 2010 Number of Audits 294; Percent with Results 67; Additional Tax 4,1. 2011 Number of Audits 308; Percent with Results 71; Additional Tax 4.0.
  - VAT refund: 2010 Number of Audits 1,157; Percent with Results 53; Additional Tax 9.9. 2011 Number of Audits 1,344; Percent with Results 50; Additional Tax 8.9.
  - Single issue: 2010 Number of Audits 24,236; Percent with Results 66; Additional Tax 151.4. 2011 Number of Audits 27,190; Percent with Results 62; Additional Tax 93.0.
  - Comprehensive: 2010 Number of Audits 5,436; Percent with Results 84; Additional Tax 200.0. 2011 Number of Audits 4,721; Percent with Results 82; Additional Tax 238.3.
- Capacity gaps: need for better in-depth audit skills, progressive training strategy (Beginner, Intermediate, Advanced), removal of nontax related tasks from audit teams, and targeted auditors for high-risk sectors.
- Recommendations: continue and increase auditor skills development and implement targeted progressive training.

### Establishing capacity to investigate tax fraud — thresholds, referrals, and performance
- Criminal Code thresholds for STI referral of potential tax fraud:
  - MDL 30,000 in unreported taxes for legal entities.
  - MDL 20,000 for natural persons.
  - Until January 12, 2012, the threshold was MDL 50,000.
- 2011 referrals and outcomes:
  - Total cases referred in 2011: 437.
  - Investigations accepted: 134.
  - Prosecutions: 1.
- Historical pattern (2009–11) (In thousands of MDL):
  - 2009: Cases referred 365; Investigations 66; Prosecutions 2.
  - 2010: Cases referred 290; Investigations 134; Prosecutions 4.
  - 2011: Cases referred 437; Investigations 134; Prosecutions 1.
- Mission could not document any tax fraud convictions during the last three years based on provided statistics.
- Recommendation: MoF to initiate a joint working group (MoF, Ministry of Justice, POs, CCECC, judiciary, STI) to identify barriers preventing prosecution and to consider placing tax fraud investigation mandate with STI if appropriate safeguards and training are provided.

### Arrears management — scale, composition and recommendations
- Stock of tax arrears grew; total arrears (tax and social/health contributions) were 11 percent at the end of 2010:
  - Total arrears were MDL 1,639.3 million against total collections of MDL 14,790 million.
- Tax arrears by type (In millions of MDL; 1/ As at December 1, 2011):
  - Corporate income: 2009 Arrears 49; % of Total 3.5. 2010 Arrears 42; % of Total 2.6. 2011 Arrears 44; % of Total 3.2.
  - Personal income: 2009 Arrears 37; % of Total 2,5. 2010 Arrears 38; % of Total 2.3. 2011 Arrears 48; % of Total 3.5.
  - VAT: 2009 Arrears 246; % of Total 17.4. 2010 Arrears 256; % of Total 15.6. 2011 Arrears 300; % of Total 21.9.
  - Excises: 2009 Arrears 2; % of Total 0.1. 2010 Arrears 6; % of Total 0.3. 2011 Arrears 6; % of Total 0.4.
  - Social Fund: 2009 Arrears 618; % of Total 43.8. 2010 Arrears 684; % of Total 41.8. 2011 Arrears 249; % of Total 18.2.
  - Health Fund: 2009 Arrears 10; % of Total 0.7. 2010 Arrears 14; % of Total 0.8. 2011 Arrears 15; % of Total 1.1.
  - Fines and penalties: 2009 Arrears 363; % of Total 25,8. 2010 Arrears 493; % of Total 30.1. 2011 Arrears 616; % of Total 44.9.
  - Others: 2009 Arrears 88; % of Total 6.2. 2010 Arrears 106; % of Total 6.5. 2011 Arrears 94; % of Total 6.8.
  - Total: 2009 Total 1,413; 2010 Total 1,639; 2011 Total 1,372 (as at December 1, 2011).
- Largest components: accumulated fines and penalties, followed by VAT and social contributions.
- Recommendations:
  - Ensure strategic arrears measures are reflected in operational plans.
  - Authorize installment payment arrangements for all arrears where appropriate.
  - Extend write-off provisions to cover uncollectible debts and automate writing off small balances.
  - Consolidate arrears operations into fewer sites and ensure specialist trained staff are engaged.

### Value-Added Tax (VAT) refunds — scale, impacts and recommendations
- By end-Q3 2011, accumulated un-refunded VAT credits reached MDL 3.9 billion and continued to rise.
- Estimated reduction in net VAT for 2011: MDL 2.3 billion, or roughly 2.7 percent of GDP.
  - Composition of MDL 2.3 billion:
    - MDL 0.8 billion reduced VAT payable (or 0.9 percent of GDP).
    - MDL 1.5 billion resulted in increased refundable VAT or additional excess-credit carry-forward (1.8 percent of GDP).
- For 2010 combined impact on net VAT estimated MDL 1.1 billion, or around 1.6 percent of GDP.
- Refunds in 2011 were 10.6 percent (comparison reference in source).
- Key issues:
  - Legal restrictions on refunds and proliferation of reduced-rate supplies are primary drivers of accumulation.
  - Denial of refunds and exhaustive audits convert VAT toward a tax on production and hurt cash flows and investment.
- Recommendations on refunds:
  - Remove restrictions and allow all VAT payers to receive full refund of excess input credits arising in current and future tax periods, subject to risk-based audit controls (may require law changes).
  - Consider gradually raising the reduced rate and/or limiting the scope of reduced-rate supplies.
  - Develop a structured phased repayment program for accumulated credits.
  - Treat the tax return as the refund application and adopt a targeted risk-based audit program instead of universal prepayment audits.
  - Remove requirement that refunds be treated as budget expenditures; pay VAT refunds from gross VAT receipts.

### STI organization, field office rationalization and staffing
- STI total employees: 1,986.
  - Headquarters staff: 232.
  - Large taxpayer office: 59 staff.
  - Call center: 13 staff.
  - Network of 35 regional tax offices: 1,682 staff.
  - State enterprise "Fiscservinform" employs 117 staff, including 65 staff dealing with returns filing, data processing and payments.
- Recommendations:
  - Rationalize network of field offices into six–eight regional centers with satellite offices for remote areas.
  - Centralize processing tasks and consider centralizing all field activities except taxpayer services into regional centers.
  - Strengthen headquarters by reorganizing according to function with units for Planning and Reform, Risk Management Analysis, and a taxpayer services unit.
  - Centralize collections and specialist functions where feasible.

### Modernizing Information Technology Systems — procurement and governance
- Current IT system outdated and constrains reform.
- Authorities exploring World Bank support for major IT reform.
- Procurement approach: procure a Commercial Off-The-Shelf System (COTS) with minimal customization; redesign STI business processes to align with the COTS to limit customization.
- Project requirements: customization, hardware acquisition, network establishment, comprehensive business process re-engineering, and training.
- Governance recommendations:
  - Strengthen project governance and establish a central project office.
  - Maintain “business owner” roles for IT systems across STI business units.
  - Develop user requirements to minimize future customization.

### Preliminary revenue performance and VAT decomposition (2007–11)
- High-level observation: tax revenue, as a percent of GDP, declined approximately 3.5 percentage points of GDP from 2007 to 2011.
- VAT analysis (2009–11):
  - Decline in VAT relative to GDP occurred even as declared output increased relative to GDP (output-to-GDP ratio grew from 2.49 to 2.54).
  - Increased share of reduced rate supplies: average share grew from 8.4 percent to 14.5 percent; estimated reduction in potential output tax for 2011: MDL 1.3 billion; for 2010: MDL 1.0 billion.
  - Increased share of zero-rated supplies: average share grew from 12.9 percent to 15.3 percent; estimated reduction in potential output tax for 2011: MDL 1.1 billion; for 2010: MDL 0.5 billion.
  - Changes in input tax credits: estimated joint impact slight decrease in credits of MDL 0.1 billion for 2011; for 2010 impact MDL 0.4 billion decrease.
  - Combined resultant impact on net VAT for 2011 estimated MDL 2.3 billion, or roughly 2.7 percent of GDP.

### Appendices — selected operational illustrations and timelines
- Appendix 4: HWI Project Plan (Phase 1) key tasks and dates starting March/April 2012 with completion milestones through August 2012, including defining HWI, determining population, data gathering, analysis, and written summary.
- Appendix 5: Illustration of an Indirect Audit Training Schedule with milestones beginning March 2012 and estimated completion April 2013 to have examiners available by July/August 2013 for audits of 2012 PIT.
- Appendix 6: Roles and responsibilities of a business owner for IT systems covering system scope, changes, user access, training, data integrity, and acceptance testing.

*Source: IMF Fiscal Affairs Department mission report and State Tax Inspectorate content as provided in the supplied PDF excerpt.*

### 2012. The views expressed in this document are those of the staff team and do not necessarily reflect

### MOLDOVA — TAKING COMPLIANCE MANAGEMENT FURTHER

### Executive summary — main conclusions
- The State Tax Inspectorate (STI) has implemented a Compliance Risk Model (CRM) aligned with OECD/EU compliance concepts and the Strategic Plan for 2011–15.
- A pilot test of the CRM in 2011 produced an estimated about 20 percent revenue increase in the targeted segments.
- The STI rolled out the CRM in full from January 1, 2012.
- Effective and lasting CRM impact requires substantial improvements in:
  - taxpayer services;
  - audit capacity and training;
  - tax fraud investigation and prosecution capacity;
  - information technology systems (IT);
  - the value-added tax (VAT) refund system.
- Of major concern is the current lack of prosecutions to deter tax fraud; without improved anti-fraud arrangements this could undermine CRM gains.
- Continued technical assistance (TA) from the IMF and other providers over the next three–four years is judged essential, with particularly large IT reform needs.

### Current situation and quantified issues
- Tax revenue in 2011 fell short of expectations; combined revenue shortfalls across tax types are estimated at 0.7 percent of GDP.
  - Breakdown of the 0.7 percent of GDP shortfall: social and health fund contributions -0.4 percent; personal income tax (PIT) -0.1 percent; foreign trade tax -0.1 percent; and VAT -0.1 percent.
- The pilot CRM approach in 2011 used a mixture of engagement (meetings, persuasion) followed by audits of noncomplying businesses; the bulk of recovered revenue came from prompted voluntary compliance rather than audit.
- VAT performance: decline in VAT relative to GDP appears linked to increased share of supplies taxed at reduced 8 percent and zero rates (e.g., agricultural products and exports) rather than necessarily a decline in taxpayer compliance; the compliance plan includes verification activities for potential misuse of lower/zero rates.
- Timeline and targets cited in the report:
  - CRM pilot: 2011.
  - Full CRM roll-out: January 1, 2012.
  - Initiatives around High-Wealth Individuals (HWIs) and indirect audit methods expected to take effect in 2013.
  - LTO benchmark: accounting for 50 percent of the STI’s total collections (target benchmark level).
  - Strategic Plan period referenced: 2011–15.

### CRM assessment and operational implications
- CRM strengths observed:
  - Alignment with international good practice.
  - Ability to change taxpayer behavior through sectoral targeting and staged use of compliance approaches (education → persuasion → audit).
- CRM operational dependencies and weaknesses:
  - CRM success relies on accurate intelligence from IT systems and high-quality, integrated data.
  - Current gaps in taxpayer services limit proactive compliance promotion.
  - Audit staff require strengthened skills to detect unreported income, hidden wages, serious evasion, and aggressive avoidance.
  - Anti-fraud system is fragmented; significant time is spent processing dossiers across agencies with no court convictions in the last three years.
  - VAT refund system has accumulated large liabilities; large-scale VAT refund audits show little taxpayer wrongdoing but are staff-intensive compared with risk-based approaches used in peer countries.

### Key recommendations (high-level)
- Strengthen taxpayer services and create a dedicated taxpayer services unit at STI headquarters to promote compliance via publicity, marketing, and closer engagement with tax professionals and business groups.
- Establish a compliance cooperation council to foster constructive collaboration between the STI, tax professionals, and business groups on compliance and administrative simplification.
- Implement sustained, higher-level technical training for auditors, focusing on detecting hidden wages, unreported income, and aggressive tax avoidance.
- Re-evaluate and redesign anti-fraud arrangements to enable a small but well-selected set of prosecutions each year; clarify procedures and role definitions across STI and other agencies.
- Rationalize regional organization to better allocate staff against the STI’s risk portfolio; create dedicated units for HWI and indirect audit method initiatives.
- Continue evolution of the Large Taxpayer Office (LTO): group taxpayers into administrative units by economic sector, focus on the “top 40” businesses, and build core big-business taxation skills.
- Expedite IT reform using off-the-shelf software with minimal customization to improve data quality and integration that underpins the CRM.
- Move VAT control toward risk-based methods and accompany reforms with transition to a full-refund VAT system to reduce accumulated government liabilities and support businesses.

### Selected operational and policy priorities for implementation
- Prioritize TA and training over the next three–four years, with particular emphasis on:
  - audit methodology and progressive training strategies for audit staff;
  - building capacity to investigate tax fraud and to support prosecutions;
  - establishing and staffing a headquarters taxpayer services function;
  - IT modernization to deliver reliable intelligence for the CRM.
- Phase and sequence actions to ensure:
  - short-term CRM enforcement is supported by immediate taxpayer engagement and audit capability improvements;
  - medium-term structural changes (regional reorganization, LTO sector grouping, HWI program, indirect audit methods) are staffed and trained in advance of 2013 initiatives;
  - VAT refund system reforms proceed alongside improved VAT risk analysis and audit techniques.

*Source: IMF Fiscal Affairs Department mission report, April 2012.*

### 3.      It is expected that the State Tax Inspectorate intensifies its compliance efforts.

### 3.      It is expected that the State Tax Inspectorate intensifies its compliance efforts.

### Overview and mission objective
- Government requested the STI to step up compliance efforts to safeguard budget deficit targets.
- Mission focus: assist the STI to determine strategies and means to strengthen capacity to increase revenue in the short to medium term.

### Developing strategies to reduce the tax gap
- STI implemented a modern compliance management strategy during 2011; strategic plan for 2011–15 developed in 2010 with FAD advice.
- By April 2011 a compliance plan for 2011 was in place with IMF expert input.
- Analytical underpinnings of the 2011 plan:
  - analyzed the composition of tax revenues by taxpayer category (based on turnover ranges) and economic sector;
  - subjected the tax revenue analysis to a tax gap calculation identifying sectors contributing most to the gap: public catering, IT services and the wholesale trade;
  - selected from within the three sectors taxpayers presenting the greatest risks of tax evasion.
- STI structure in 2011 included a small risk analysis unit, a large taxpayer office, and a functional structure largely following previous FAD advice.

### Assessing the 2011 sectoral compliance campaign — activities and results
- Engagement statistics and audit activity in 2011:
  - over 1,500 taxpayers engaged in the three sectors.
  - about 500 cases: STI accepted explanations asserting compliance and did not audit.
  - over 1,000 taxpayers subjected to audit, some 600 of whom produced, on average, modest tax recoveries.
- Aggregate financial outcomes:
  - MDL 108.8 million collected in total from the program.
  - MDL 11.5 million collected arose from audit.
  - increase in tax payments of 24 percent from the taxpayer population covered by the sectoral compliance program.
  - the STI’s total tax revenues increased by 7.7 percent in the same period.
- Detailed results (Table 2: Results of the 2011 Sectoral Compliance Program):
  - Cases reviewed: Public Catering 842; Wholesale 500; IT Services 214; Total 1,556.
  - Audited: Public Catering 653; Wholesale 302; IT Services 97; Total 1,052.
  - Paid audit settlement: Public Catering 378; Wholesale 175; IT Services 52; Total 605.
  - Cases paying extra tax including cases not audited: Public Catering 561; Wholesale 398; IT Services 126; Total 1,085.
  - Total amount recovered from audit (in MDL millions): Public Catering 2.8; Wholesale 8.3; IT Services 0.4; Total 11.5.
  - Total increase in revenues from the program (in MDL millions): Public Catering 16.3; Wholesale 87.3; IT Services 5.2; Total 108.8.
  - Note: MDL 19.5 million was assessed by auditors of which MDL 11.5 million was paid by December 31 and is included in the total increase of MDL 108.8 million.

### Preliminary lessons and implications
- Strategic CRM approach improved STI effectiveness: audit recoveries represent roughly only 10 percent of the total tax increase from contacted taxpayers.
- National planning, publicity and taxpayer education appeared to change taxpayer behavior in targeted sectors, at least temporarily.
- The CRM logic: audit, combined with marketing techniques, provides leverage to raise compliance across a wider group; results from the 2011 pilot outperform audits based on local, unsupported decisions.
- Measurement limits in 2011:
  - compliance uplift observed was limited to taxpayers contacted directly;
  - statistics on spillover effects to untreated taxpayers in target sectors were not available.
- 2012 challenge: increase leverage of sectoral projects to influence a wider circle of businesses and measure campaign impact across entire sectors.

### 2012 compliance plan targets and approach
- STI plan for 2012: influence compliance behavior of 93,000 taxpayers by persuading voluntary compliance.
  - Target sectors: (1) wholesale and retail; (2) manufacturing; and (3) transport and communications.
  - Estimates suggest these sectors cover 56 percent of the tax gap and number some 93,000 businesses (the 1,500 businesses contacted in 2011 are a subset).
- Voluntary self-correction approach: contact taxpayers and ask them to voluntarily review and correct tax positions to avoid audit expense and intrusiveness.
- Recommended sequential campaign steps for scaling the 2012 effort:
  - first tranche contact by carefully crafted letter (non-typical tax agency letter);
  - accompany letters with a media campaign to alert the wider industry;
  - monitor compliance electronically within the STI of the next 2,000 high-risk cases to detect behavior change;
  - publicize first six months’ results and then contact the next 2,000 taxpayers inviting voluntary disclosures with offer of a less penal settlement for those who come forward;
  - track compliance trends across all businesses in treated sectors and analyze data to design the following year’s campaign.

### Using a randomized control approach on 2011 cohort
- Leverage 2011 cases under a simple control regime:
  - divide the 1,500 cases at random into treatment and control groups;
  - write to treatment group reminding them of examination and continued electronic observation;
  - do not write to control group but monitor them;
  - in final quarter of 2012 assess outcomes and compare using analytical statistics for statistical significance;
  - if significant, issue ‘under observation’ letter to control group and analyze outcomes after months.

### Evolution and scope of the CRM model
- CRM model recommended by OECD and EU; risk analysis should guide compliance work on taxpayer segments alongside improved service and taxpayer education.
- CRM applications beyond sectoral campaigns:
  - targeted project on untaxed wages paid in cash using publicity, contact, voluntary correction and audits; include training in detection techniques for payroll tax fraud.
  - targeted project on VAT taxpayers voluntarily registered below the turnover threshold to understand drivers and compliance.

### Key measures in the State Tax Inspectorate 2012 Compliance Plan (Box 1)
- Sectoral compliance campaign selectively covering 93,000 taxpayers in the wholesale and retail, manufacturing, transport and communications.
- Partially compliant taxpayers—educate and assist them to become fully compliant through seminars, publications and the STI web site.
- Publish a broad set of risk indicators so that business taxpayers can assess and correct their behavior voluntarily.
- Identify persistently noncompliant taxpayers and develop a graduated scale of response ranging from assistance to audit and finally to “permanent” control.
- Focus on tax evasion, international issues, corporate restructuring, and major transactions with regard to large businesses.
- Improve assistance to large business.
- Extend the scope of the large taxpayer office to cover at least 50 percent of tax revenue.
- Establish a unit focusing on the compliance of high-wealth-individuals.
- Build the High-Wealth-Individual program for operation in 2013 to include the use of indirect methods of assessment of income.
- Deliver training, better information, and promotion of voluntary compliance for small- and medium-sized enterprises.

### Other considerations and institution-building
- Professional analytical support is essential; current support includes a UNDP/EU-funded expert analyst working with a professional economist. STI should build similar in-house capacity.
- Legal constraints: existing law may forbid full audit of a taxpayer more frequently than every second year; clarification and law changes are needed to support CRM (demonstrable evidence of significant revenue risk is the normal audit trigger).
- Cooperative approaches:
  - potential for working with business groups via formal structures (horizontal monitoring or ‘cooperative compliance’) exists but trust and framework are not yet in place in Moldova.
  - proposal to create a tax compliance council composed of STI senior representatives, industrial groups, chambers of commerce and tax professionals with clear terms of reference, limited annual topics, a small secretariat and sub-groups for technical issues.
  - mission found willingness among business people and tax advisors to participate; STI co-hosted a business round table with the IMF at end-2011.
- Integration with Large Taxpayer Office (LTO):
  - compliance reforms must permeate the LTO; LTO taxpayer base differs but faces similar challenges;
  - LTO should identify distinct tax risk categories and apply tailored treatments;
  - more intensive scrutiny of the 40 biggest LTO cases is an emerging challenge;
  - potential economies of scale if LTO organizes based on sectoral distribution.
- LTO capacity targets and needs:
  - Government accepted target for LTO to secure and maintain 50 percent of STI collections.
  - Skills upgrading needed in audit skills, use of electronic tools for audit, management of de facto groups, international taxation including transfer pricing, and taxpayer profiling.
  - audit skills improvements needed particularly in VAT and payroll tax.
  - FAD expert on LTO issues provided interim report to LTO head; finalization scheduled for April 2012 when expert returns.
- Long-term vision and stakeholder consultation:
  - Deputy Head of STI with LTO responsibilities should formulate long-term vision covering aims, methods, skills and scope; consultation could begin with the compliance cooperation council.
- Pro-active taxpayer service:
  - service should support compliance and be used to market it (e.g., reminders for corporate income tax payment periods and installment due dates);
  - prevention through pro-active service and mass marketing (mail shots, posters, television, radio) is preferable to post-default recovery.
  - STI has already used some mass marketing techniques and should convey vigilance to deter non-compliance.

_ Source: State Tax Inspectorate._

### 27.      As a rule, marketing of compliance should include publicizing the results of

### _cr12199 - 27.      As a rule, marketing of compliance should include publicizing the results of

### Compliance marketing and integrated compliance strategy
- Marketing of compliance should include publicizing the results of sectoral campaigns and publishing the main features of the compliance plan.
- Audit is a means to an impact; compliance marketing leverages audit value to achieve "whole sector impact" extending far beyond audited taxpayers.
- The 2011 compliance plan incorporated some of these insights; publicity was used successfully and treatments of taxpayer groups were not confined to audit.
- The 2012 plan must integrate compliance marketing and pro-active service into a continuum of graduated responses to a wide range of compliance problems.
- Proposal: create a taxpayer services unit with a wide brief in the STI headquarters, achievable by redeployment of existing staff.

### STI managerial proposals, restructuring, and IT
- STI managers proposed various measures; the mission advised some proposals were not adequately linked to the core compliance strategy and risked distracting from a successful approach.
- STI is planning a major restructuring including its field offices and headquarters; restructuring is an opportunity to better align staff to pursue revenues, manage compliance risks, and serve the population (see Section IV for more detail).
- STI continues to plan improvements to its IT systems.
  - FAD advice has supported IT reform objectives in the past.
  - The World Bank is now considering offering financial support for IT reform.
  - Consensus reached that the solution should focus on acquiring industry standard off-the-shelf software to which STI processes could be retro-fitted.
  - Better IT is essential for improved compliance management (see Section IV for more detail).

### Procedural inflexibility and remedies
- Administrative procedures are set out in tax procedures codes that have statutory force, making internal procedural change difficult and time-consuming.
- Recommendation: operate under a less rigid set of administratively determined processes with safeguards:
  - A simple informal dispute resolution process relying on external reviewers working with an STI taxpayer champion, with possible further recourse to a tax ombudsman.
  - An internal audit unit to check documents, files, and computer systems that standardized nonstatutory procedures are applied consistently.
- Risk: If statutory procedures remain rigid, new IT systems may embed outdated processes, leading to extra development costs and preservation of inefficient methods. STI management is committed to seek statute changes where required.

### Noncore tasks and opportunity cost
- STI performs many tasks for other government agencies that divert resources from core compliance functions, including:
  - Collecting unpaid loans made by state agencies to businesses.
  - Collecting fines levied on unlicensed or illegal business activities.
  - Auditing payment of dividends due to the state from companies it owns.
  - Carrying out audits mandated by other state bodies.
  - Policing price controls on staple foods.
- Some nontax activities utilize core competencies and may be acceptable; many others are inappropriate and should be performed elsewhere (Appendix 2 lists examples).

### Political backing and managerial change
- Challenges ahead require strong political backing.
- Implementing a CRM (compliance risk management) strategy requires abandoning familiar but limited methods, adopting entrepreneurial management, flexibility in compliance tools and staff deployment.
- STI management has begun deploying a changed way of working in 2011 to reduce the tax gap and be less intrusive for most businesses.

### Training is key
- A major training program is urgently needed.
- Training and ongoing technical assistance required in areas such as:
  - Audit—including payroll tax audit.
  - VAT management.
  - Tax fraud investigation.
  - Pursuit of arrears.
- LTO training needs are more complex given the nature of its taxpayers.
- Emerging issues include taxation of HWIs and deployment of indirect audit methods.
- A medium term training plan should be devised immediately with assistance from the IMF and other donors; new skills can be acquired in sequence.

### Recommendations related to strategic compliance management
- Use a wide range of treatment methods to improve compliance of business sectors selected for compliance programs in 2012 and beyond, including:
  - “compliance marketing,” taxpayer education, taxpayer monitoring, behavioral experiments, and audit.
  - Note: The aim is to achieve “whole sector impact” extending far beyond the audited taxpayers.
- Maintain a focus in 2012 on businesses treated in the 2011 program to sustain their improved compliance rates.
- Ensure the STI risk unit has a small group of numerate analysts to make the compliance risk model work in collaboration with business experts from the STI.
- Identify and repeal any laws that prescribe or restrict the frequency of audit as the compliance risk model requires close control of risky businesses and light control of small or compliant businesses.
- Institute formal cooperation on compliance and administrative aspects of taxation between the STI, industry representatives, chambers of commerce and tax professionals.
- Develop a vision for the future aims, methods, skills and scope of the LTO more in line with the CRM model.
- Use compliance marketing as a tool to facilitate the reintroduction of corporate income tax.
- Carefully restructure the STI to better align resources to its risk portfolio and maximize the impact of new compliance approaches.
- Build the planned new IT system as quickly as possible with the minimum possible level of customization of “off-the-shelf” software.
- Move away from the statutory definition of internal STI administrative procedures.
- Seek Government support to release the STI from a number of tasks performed for other government agencies.
- Develop a strategic training plan to prioritize and implement the training requirements identified in the report.
- Obtain unambiguous political backing for these changes.

### Strengthening personal income tax compliance — Addressing unreported cash wage payments (current situation and issues)
- Collections and shares:
  - In 2011, PIT on wages, social security contributions, and health insurance contributions totaled MDL 9,9 billion and made up 34.4 percent of the overall collection of tax in Moldova.
- Table 3 (Moldova: Collection of Personal Income Tax and Social Contributions (MDL millions)) — figures as reported:
  - Personal income tax—wages: 2007: 1,322; 2008: 1,480; 2009: 1,465; 2010: 1,544; 2011: 1,769
  - Social security contribution: 2007: 3,947; 2008: 5,398; 2009: 5,575; 2010: 5,987; 2011: 6,551
  - Health insurance contribution: 2007: 760; 2008: 1,122; 2009: 1,339; 2010: 1,447; 2011: 1,578
  - Total: 2007: 6,029; 2008: 8,000; 2009: 8,379; 2010: 8,978; 2011: 9,898
- Employee count and wage data (Table 4: Moldova: Employee Count and Wage Reported Data):
  - Total employee count: 2009: 1,140,473; 2010: 1,110,021; Percent Change: -2.7
  - Wages reported (MDL millions): 2009: 20,715; 2010: 21,906; Percent Change: 5.4
  - Average wage per employee (MDL): 2009: 18,164; 2010: 19,735; Percent Change: 8.0
  - Note: The employee count totals employees reported by all companies; if an employee works for more than one company, that employee will be counted more than once.
- Issues and strategy:
  - The STI has committed to a compliance strategy announced in the “Taxpayer Compliance Program for 2012” to focus initially on unreported salary payments (“brown envelope” payments).
  - STI officials note many employees are reported as earning the minimum wage of MDL 766 per month when real wages are much higher; common in construction and catering/restaurant sectors.
  - A cross-agency compliance strategy is required with MOL leading and STI supporting; cooperation between STI and MOL is essential.
  - Classic compliance risk strategy phases recommended: articulate the risk, establish desired outcomes, design a strategy to achieve those outcomes, and measure outcomes (detailed further in Section II.B for HWIs).
  - Public-awareness measures: STI and MOL should mount media campaigns to publicize the problem and highlight pension and other benefits of registration and consequences of noncoverage.
  - Employer education: simplify registration, review the registration process, simplify declarations, and produce new leaflets for employers.
  - Audit capacity: STI auditors should receive focused training to identify and substantiate unreported cash wage payments; in 2011 STI completed 797 LTO audits identifying MDL 3.6 million in additional employment tax.
    - Low recovery may stem from poor audit planning, outdated audit techniques, weak audit skills, and ineffective training.
    - Employment tax training should be offered periodically during 2012 and 2013.
  - Expert assistance should be considered for compliance risk strategy development, updating audit procedures, and implementing new training emphasis.

### Building a High-Wealth-Individual (HWI) compliance program
- Current situation:
  - STI commenced development of an HWI compliance strategy announced in “The Development Plan for 2011–2015” and the “Taxpayer Compliance Program for 2012.”
  - Legislation passed January 2012 requires individuals to file a “Statement of Financial Assets” by December 31, 2012 where an individual has in excess of MDL 1 million in assets or MDL 300,000 in personal expenditures.
  - Legislation allows the use of indirect audit methods (IAM) commencing in 2013 for PIT returns due for 2012; significant preparation work is required over the next 15 months to implement IAM in 2013.
- Potential and issues:
  - Wages and dividends combined provided 90.2 percent of PIT reported for 2010 (Appendix 3).
  - Reporting and collection from other sources are weak, e.g., international income: .047 percent; capital gains: .347 percent.
  - HWI and IAM efforts provide new tactics to encourage compliance in those income streams with significant tax risks and benefits.
- Organizational requirements for HWI initiative:
  - Establish a dedicated and permanent headquarters unit or project office (current arrangement: a working group exists but a permanent unit is recommended).
  - The unit should have adequate knowledge, skills, authority, staffing, budget, equipment, workspace, approval processes, and cooperation to carry out activities such as:
    - Gather and analyze high income tax data.
    - Develop risk information for high-income taxpayers.
    - Design and recommend processes for approval of high-income projects, project teams, and/or specialized units to STI management.
    - Recruit project managers for specific projects/initiatives.
    - Recommend implementation to appropriate STI management regarding project teams, audit projects, and/or special high-income tax units.
    - Coordinate proposed changes in operating manuals and procedures with STI and the Ministry of Finance (MoF).
    - Implement recruitment and training to ensure adequate knowledge and skills among auditors, IT staff, managers, and others supporting a HWI income risk-based compliance approach.
    - Recommend procedures for selection and audit of project cases.
    - Coordinate joint approaches with STI units from operations, methodologies, support services, IT, and others with significant roles in HWI compliance and services.

*Italicized source attribution: IMF staff report content as provided in the supplied PDF excerpt.*

### 50.      The HWI unit would need to be staffed appropriately. At least five people will be

### The HWI unit would need to be staffed appropriately. At least five people will be

### Staffing, skills, and organization
- At least five people will be required at its initiation.
- Desired staff skills and attributes:
  - Well versed in the use of risk-based techniques and compliance strategy approaches.
  - Experienced compliance staff.
  - Project management skills.
  - Knowledge of data analysis techniques.
  - A close working relationship with IT is highly desirable.

### Formal HWI compliance strategy and timing
- A formal HWI compliance strategy is necessary to set parameters for quality efforts.
- Drafting should commence as soon as possible.
- If an HWI unit is established, the unit may be charged with drafting the strategy; otherwise appropriate officials should be charged.
- It is recommended that a HWI Compliance Strategy be drafted within the next 60 days.

### Four phases the strategy should address
- Phase 1: Articulate the compliance risks;
- Phase 2: Develop a listing of intended outcomes and a strategy to deliver these desired outcomes to address the compliance risks;
- Phase 3: Implement a business plan to support delivery of the strategy; and
- Phase 4: Create a system of measurement to determine actual outcomes and compare with projected outcomes.

### Five-step process to articulate HWI compliance risk
- (1) define what constitutes an HWI for project purposes;
- (2) determine the population of taxpayers that meet this definition;
- (3) gather available data on the HWI population;
- (4) analyze data and quantify the attributes and characteristics of this population; and
- (5) complete a review and summarize the pertinent information gathered with emphasis on HWI compliance behavior, characteristics, trends, tax gap projection, and a summary of the compliance risk and risk groups.
- Appendix 4 (in source) provides a suggested action plan outlining the steps to articulate the risks.

### Initial HWI population and definitional considerations
- The strategy would initially focus on a small number of taxpayers.
- The initial HWI population should be limited to approximately 200 taxpayers.
- Recent legislation establishes MDL 300,000 in personal expenditures and MDL 1 million in assets as benchmarks for indirect audits, but these benchmarks are too low in an HWI context for initial targeting.
- The number of taxpayers included in initial stages should not exceed 200; the HWI definition should identify the wealthiest citizens while keeping the initial population manageable.

### Desired outcomes and business planning
- Key strategic questions to determine outcomes:
  - What short-term and long-term outcomes are reasonably expected by addressing the compliance risk?
  - What treatment strategies will be required to deliver these outcomes?
- An HWI business plan is required to resource the strategy and cover staffing, facilities, IT needs, training, work plans, and supporting action plans.
- The business plan process commences once outcomes and strategy have been determined.

### Measurement and evaluation
- A measurement system is important to monitor achievement of desired outcomes established in the HWI strategy.
- Measurement justifies and administers program effectiveness, ensures alignment with objectives, and enables adjustments or identification of new treatments for noncompliance.

### Data availability and enhancement
- Current wealth data are limited; electronic data sources are lacking for identification, case building, research, selection, and support of compliance activities.
- Main tax data sources:
  - Third-party information providers of wage, interest, dividends, and real estate transactions.
  - Form CET08 (records entity information and information germane to computing personal income tax; no significant data on wealth or assets).
  - Corporate income tax (CIT) filing database by legal entities and registration database.
  - Ad hoc data on real estate, auto sales, high-end consumer goods, etc., which can be procured for project purposes.
- Data actions recommended:
  - “Data mine” current sources and correlate into a profile of HWI taxpayers.
  - Determine and procure additional data sources.
  - Gather and analyze a wider range of publicly available information.
  - Use the mandated statement of financial assets due at the end of 2012 to enhance understanding of the HWI population.

### Introducing Indirect Audit Methods (IAM) — issues and requirements
- STI is drafting additional fiscal procedures mandated by January 2012 legislation; these procedures are anticipated to be issued in April 2012.
- New law requires filing of a financial statement of assets by qualified individuals by December 31, 2012.
- Essential elements to develop for an IAM strategy:
  - Organizational procedures to augment legislative requirements.
  - Guidance on authorization for who and when to commence an indirect audit.
  - Selection process to pre-determine possible individual audits for indirect techniques.
  - Media and communication materials to educate taxpayers on indirect methods.
  - Monitoring and audit feedback processes to ensure proper use and track results.
  - Identification of information sources to support auditors.
  - Agreements with IT to build systems and support indirect audits.
  - Determination of indirect audit specialists, their locations, and numbers.
  - Issuance of guidance on application of indirect methods for identified compliance risk areas: (1) HWI; (2) rich owners of poor companies; and (3) high-income-individuals with no filing history.
  - Implement a training plan to build indirect audit skills among selected examiners.
  - Identification of resources, support, and mentoring available from EU partners, World Bank, IMF, and other organizations.

### Timing, project management, and staffing for IAM
- There is an approximate 15-month window of opportunity to prepare for application of indirect audit methods.
- The first individual tax period subject to indirect audits will be tax year 2012 (March 2013 filing).
- 2012 tax returns generally will not be fully processed until mid-summer 2013; thus:
  - It will be late-summer 2013 before the first indirect audits could be initiated.
  - It would likely be 2014 before any substantial results could be reasonably expected.
- To commence using indirect audit methods in 2013, strategic, procedural, tactical, staffing, and training planning should be completed within the next 180 days (October 2012 completion date).
- Bulk of auditor training should be completed by May 2013.
- A dedicated project must be established with a full-time project coordinator/manager and several project support members; at the time of the mission no official had been designated.

### Scope of IAM applications beyond HWI
- Indirect audit techniques are applicable beyond HWI and can address noncompliance by:
  - Individual taxpayers.
  - Individual owners of legal entities.
  - Individuals of moderate wealth who fail to report any source of income.
- These additional areas present high compliance risk and warrant projects under an Indirect Methods Compliance Plan.

### Technical assistance
- Experienced guidance and support will expedite and improve the introduction of HWI and IAM.
- Most recommendations aim at:
  - Establishing an HWI unit in 2012.
  - Having indirect methods in productive use by 2013.
- Recommended that STI seek additional expert assistance prior to roll out.

### Key recommendations (selected)
- Addressing unreported cash wage payments:
  - Coordinate a compliance strategy for unreported cash wages with the Ministry of Labor.
  - Develop a compliance risk strategy/plan to address wage-reporting concerns.
  - Utilize media and education tools to support the compliance strategy.
  - Update employment tax audit techniques and renew employment tax training efforts.
- Establish HWI compliance capacity:
  - Establish an HWI compliance unit.
  - Develop an HWI income tax compliance strategy.
  - Identify additional HWI income sources of information.
- Implementing indirect audit methods:
  - Designate a fulltime project team/manager to coordinate IAM implementation.
  - Develop a strategy on how IAM will be used.
  - Establish an implementation plan for IAM that includes a training plan.
- Technical assistance:
  - Seek expert support to expedite implementation of HWI and IAM initiatives.

### Taxpayer services (context for voluntary compliance)
- Taxpayer services are core to maximizing voluntary compliance by informing and assisting taxpayers.
- STI improvements since 2010 include:
  - An on-line database of frequently asked questions and answers, including a helpdesk (within Fiscservinform).
  - Expansion of the STI website to allow taxpayers access to personal tax information.
  - On-line self-generated assessment notices for property tax (taxpayers can choose electronic or paper notification).
- International trends and operational notes:
  - Balance enforcement and service to reduce the tax gap.
  - Tailored service delivery by taxpayer segment and risk.
  - Services staff should be highly qualified; client call centers and centralized service centers are common.
  - Taxpayer services typically consume about 10 percent of tax agencies’ human resources.
  - Aim to move customers to web and e-services and consult widely with taxpayers and representatives prior to changes.
  - Establish and monitor service delivery performance against standards and measure client satisfaction.

*Italicized source: _cr12199 - 50. The HWI unit would need to be staffed appropriately. At least five people will be — extracted from the provided document content.*

### 73.      Current taxpayer services activities are not designed well enough to effectively

### Current taxpayer services activities are not designed well enough to effectively

### Taxpayer services: findings and implications
- Current services are largely reactive to taxpayer-initiated contacts rather than targeted to key compliance risks.
- STI provides some proactive services (seminars to inform taxpayers about changes in tax laws).
  - Around 450 seminars to the taxpayers were organized throughout a country to explain various tax law implementation aspects.
- No evidence that taxpayer services focus on addressing key compliance risks either proactively or reactively.
- No measurement of the effectiveness of taxpayer services in influencing compliance behaviors.
- Well-designed taxpayer services can:
  - Maintain and encourage compliance by the majority of taxpayers, allowing STI to devote more compliance resources to unwilling taxpayers.
  - Potentially reduce reliance on costlier audit and enforcement options if targeted services change taxpayer behavior.
  - Influence behavior via “marketing techniques,” e.g., publicizing STI audit and enforcement successes to deter evasion and fraud.

### Taxpayer services: recommendations
- Establish a dedicated unit in the STI Methodology Department to be responsible for program and product design, planning and coordination of taxpayer services.
- Develop a comprehensive taxpayer services strategy linked to the STI’s taxpayer compliance strategy taking account of taxpayer demands and needs, geography, service channel options; and staffing requirements, etc.
- Establish taxpayer “shop fronts,” at field offices to provide quality services to taxpayers, taking account of (1) the conclusions of the taxpayer service strategy (once developed) and (2) the need to substantially reduce the number of field offices over time, as discussed in Section IV.
- Utilize modern marketing techniques (“compliance marketing”), including public relations, to influence on taxpayer behavior with the aim to mitigate key compliance risks identified by the STI’s compliance plan.
- Ensure results of taxpayer satisfaction surveys are used to develop satisfaction improvement initiatives and measure the effectiveness of those measures through subsequent surveys.
- Establish a Compliance Cooperation Council comprising senior STI officials and representatives of the business community as a means of seeking the business community's input into significant tax administration initiatives to improve compliance.

### Compliance costs and business cooperation: findings
- Compliance costs receive insufficient attention in business procedures and process design.
- Example: requirement to acquire a digital signature to e-file tax returns:
  - Service is free for individuals; businesses pay a fee to obtain the digital signature with VAT taxpayers even paying a higher rate.
  - The fee for businesses may deter compliance, particularly as e-filing is planned to be obligatory for all taxpayers.
- STI has conducted a taxpayer satisfaction survey and expressed desire to undertake regular surveys, but lacks a plan to use results to improve services.
- Best practice: establish close dialog with business community (e.g., a "Consultative Counsel" meeting quarterly with representatives such as Chamber of Commerce, large taxpayers, Banker's Association, Employers' Association, large accounting firms) to reduce compliance costs and improve acceptance of changes.

### Audit: findings and key statistics
- STI has shifted from comprehensive audits toward more focused, risk-based audit activities concentrated on highest compliance risk areas.
- Audit results (Not including Large Taxpayers) (MDL millions):
  - 2010 totals: Number of audits 31,123; Additional Tax 365.4
  - 2011 totals: Number of audits 33,563; Additional Tax 344.2
- Selected table entries:
  - Registration checks: 2010 — Number of Audits 294; Percent with Results 67; Additional Tax 4,1. 2011 — Number of Audits 308; Percent with Results 71; Additional Tax 4.0.
  - VAT refund: 2010 — Number of Audits 1,157; Percent with Results 53; Additional Tax 9.9. 2011 — Number of Audits 1,344; Percent with Results 50; Additional Tax 8.9.
  - Single issue: 2010 — Number of Audits 24,236; Percent with Results 66; Additional Tax 151.4. 2011 — Number of Audits 27,190; Percent with Results 62; Additional Tax 93.0.
  - Comprehensive: 2010 — Number of Audits 5,436; Percent with Results 84; Additional Tax 200.0. 2011 — Number of Audits 4,721; Percent with Results 82; Additional Tax 238.3.
- Audit management:
  - Audit Division in STI headquarters (Division for Organization of Tax Audit) comprises three sections: (1) Audit Methodology; (2) Planning and Analysis; and (3) Cash Registers.
  - Since Q2 2011, Planning and Analysis section has been engaged in implementation of the STI's compliance strategy, shifting focus toward a "partnership" approach and intensive compliance monitoring of 1,553 taxpayers chosen from three high-risk industry sectors (catering, telecommunications/IT, and wholesales).
  - Audits initiated only in cases of persistent noncompliance for these monitored taxpayers.

### Audit: issues and capacity gaps
- Significant potential remains to strengthen audit capabilities, particularly for in-depth tax audits and detection of complex abuses (e.g., tax avoidance arrangements).
- Recommended skills for auditors include: audit techniques; tax technical and legal issues; interviewing skills; report writing; litigation; court appearance techniques.
- Suggested progressive training strategy levels: Beginner, Intermediate, Advanced (elements listed in Box 3 of the source).
- Current audit activity is undermined by extensive nontax related audits (e.g., origin of goods, price control compliance, cash register registration checks) that consume resources but do not identify tax discrepancies; such inspections should be undertaken by other government agencies.
- Control over cash registers:
  - STI has some 79,000 cash machines logged nationally.
  - Certain taxpayers (currently some 1,600 exchange bureaus) have cash registers linked on-line to the STI receiving daily reports; information to date has been of little use to improve tax compliance.
  - Risks: taxpayers may circumvent controls; excessive compliance costs on small taxpayers may drive them into the shadow economy; micro-level controls should not substitute for a robust risk-based compliance program.

### Audit: recommendations
- Continue, and where possible increase, efforts to improve skills of auditors to undertake more in-depth tax audits.
- Implement a progressive training strategy to up skill auditors.
- Identify selected auditors to concentrate on the high-risk sectors identified in the compliance strategy and provide these auditors with targeted training to ensure their effectiveness.
- Focus the audit program on detection of noncompliance with tax obligations by removing all nontax related tasks.
- Maintain focus on implementing a risk-based compliance program rather than increasing reliance on micro-level controls such as on-line case registers.

### Establishing capacity to investigate tax fraud: legal thresholds and process
- Criminal Code thresholds for STI referral of potential tax fraud:
  - MDL 30,000 in unreported taxes for legal entities (companies).
  - MDL 20,000 for natural persons (individuals).
  - Until January 12, 2012, the threshold was MDL 50,000.
- Case handling:
  - Cases meeting thresholds are referred to local prosecutor office (PO) or Center for Combating Economic Crimes and Corruption (CCECC).
  - Local STI offices process cases under MDL 500,000 directly with local PO.
  - Cases of MDL 500,000 and above are referred to the CCECC by the STI’s anti-fraud unit.

### Tax fraud: findings and statistics
- 2011 referrals and outcomes:
  - Total cases referred in 2011: 437.
  - Investigations accepted: 134.
  - Prosecutions: 1.
- Historical pattern (Table 6: Tax Fraud Cases, 2009–11) (In thousands of MDL):
  - 2009: Cases referred 365; Investigations 66; Prosecutions 2.
  - 2010: Cases referred 290; Investigations 134; Prosecutions 4.
  - 2011: Cases referred 437; Investigations 134; Prosecutions 1.
- Mission could not document any tax fraud convictions during the last three years based on provided statistics.
- The current system for selecting, transferring, and investigating potential tax fraud appears not to produce prosecutions and convictions, undermining deterrence and the effectiveness of compliance strategies for large businesses, high-wealth individuals, and unreported payroll taxes.

### Tax fraud: issues and options
- Recommendation to consider a joint agency-working group (MoF, Ministry of Justice, POs, CCECC, judiciary, STI) to identify and fix barriers preventing prosecution and conviction of tax evaders; consider external moderator with experience in criminal tax fraud investigation and prosecution.
- STI does not currently investigate tax fraud; antifraud unit (established 2007) reviews and prepares case files for referral but does not investigate.
- Option: consider placing tax fraud investigation mandate with STI, provided appropriate oversight, technical facilities, and training of personnel.

### Tax fraud: recommendation
- MoF to initiate a joint working group of key agencies to identify barriers and find solutions to enable successful investigation, prosecution, and conviction of taxpayers who intentionally and materially evade tax laws. In this context consider placing the mandate for tax fraud investigations with the STI.

### Arrears collection: findings and key statistics
- The stock of tax arrears continues to grow; current level (when expressed as a percentage of total STI collections) does not present immediate alarm but shows an upward trend.
- The current stock of arrears still reflects effects of the 2007 tax amnesty rather than effective collection enforcement by STI.
- Total level of arrears (tax and social/health contributions) was 11 percent at the end of 2010:
  - Total arrears were MDL 1,639.3 million against total collections of MDL 14,790 million.
- Tax arrears by type (In millions of MDL; 1/ As at December 1, 2011):
  - Corporate income: 2009 Arrears 49; % of Total 3.5. 2010 Arrears 42; % of Total 2.6. 2011 Arrears 44; % of Total 3.2.
  - Personal income: 2009 Arrears 37; % of Total 2,5. 2010 Arrears 38; % of Total 2.3. 2011 Arrears 48; % of Total 3.5.
  - VAT: 2009 Arrears 246; % of Total 17.4. 2010 Arrears 256; % of Total 15.6. 2011 Arrears 300; % of Total 21.9.
  - Excises: 2009 Arrears 2; % of Total 0.1. 2010 Arrears 6; % of Total 0.3. 2011 Arrears 6; % of Total 0.4.
  - Social Fund: 2009 Arrears 618; % of Total 43.8. 2010 Arrears 684; % of Total 41.8. 2011 Arrears 249; % of Total 18.2.
  - Health Fund: 2009 Arrears 10; % of Total 0.7. 2010 Arrears 14; % of Total 0.8. 2011 Arrears 15; % of Total 1.1.
  - Fines and penalties: 2009 Arrears 363; % of Total 25,8. 2010 Arrears 493; % of Total 30.1. 2011 Arrears 616; % of Total 44.9.
  - Others: 2009 Arrears 88; % of Total 6.2. 2010 Arrears 106; % of Total 6.5. 2011 Arrears 94; % of Total 6.8.
  - Total: 2009 Total 1,413; 2010 Total 1,639; 2011 Total 1,372 (2011 total shown as at December 1, 2011).
- Largest components of arrears: accumulated fines and penalties, followed by VAT and social contributions.
- The imminent reinstatement of a positive rate of corporate income tax may further accelerate arrears growth, increasing priority of strengthening STI collections enforcement.

*Source: State Tax Inspectorate (content as provided in the IMF review).*

### 92.      Headquarters staff is responsible for the preparation of the annual arrears

### _cr12199 - 92.      Headquarters staff is responsible for the preparation of the annual arrears

### Arrears management and planning
- Headquarters staff is responsible for the preparation of the annual arrears collection plan.
- The first such plan was produced for 2011 and included an analysis of tax arrears at the start of the year and monitored collection results throughout the year.
- The main aim was to obtain better information for setting realistic collection targets for the field offices.
- The 2012 plan is described as still a skeletal plan in respect of which work is continuing.
- The STI's strategic plan contains initiatives to arrest the growth in tax arrears, but it is not clear how these initiatives are being built into operational plans for the debt management function.
- Tax arrears (taxes, social and health contributions, penalties, interest, etc.) totaling approximately MDL 4.4 billion by the end of 2006 were eliminated at large by a tax amnesty implemented in mid-2007. The amnesty applied to all pre-2007 state budget taxes that remained unpaid by the time of publication of the amnesty law (May 11, 2007), irrespective of the collectability of the arrears.

### Operational improvements in arrears recovery
- Implemented improvements:
  - Computerized identification of debtors.
  - Automated addition of penalties and interest.
  - Automated prioritization of arrears cases for action by collection officers.
- Arrears prioritization criteria:
  - Age and size — priority given to the largest debts and new cases with high probability of successful collection.
- These initiatives are characterized as good international practice.

### Collection methods and legal framework
- Collection procedures are generally sound; the law provides powers such as freezing bank accounts, arrest of assets, garnishing bank accounts, confiscating property.
- Counterproductive legal restrictions remain on the use of payment arrangements:
  - Law authorizes installment payment arrangements for tax arrears over periods up to two years.
  - Installment arrangements are not allowed for social security contributions, which are a significant component of total arrears (see Table 7).
- Write-off procedures:
  - Law provides for writing off uncollectible tax arrears only after the statutory period for collections has expired (presently six years), after which the STI is statutorily barred from collecting a debt.
  - Because the 2007 tax amnesty wiped all arrears existing at that time off the books, there are no arrears currently on the books older than six years; write-off provisions are effectively redundant until 2013 (when collection of arrears accrued for the 2008 tax year become statute barred).
  - Current write-off authority are considered too restrictive.
  - Many administrations routinely write off small arrears considered uneconomic to collect; given the large proportion of interest and penalties in Moldova’s arrears stock, many small balances may be better removed from debtor ledgers to allow effective use of collection resources.

### Resourcing of collections
- Collection of tax arrears in field offices is the responsibility of the Administration Division.
- Staffing arrangements:
  - In larger offices, work is performed by a separate collections enforcement section within the Division.
  - In smaller offices, collection work is part of a wider range of tasks performed by administration staff.
- Collection enforcement requires dedicated, specifically trained staff.
- Centralizing the collection effort in fewer tax offices may be more effective than allocating collection tasks to nonspecialist staff.

### Recommendations on arrears recoveries (as stated)
- Ensure measures for arresting the growth in tax arrears contained in the strategic plan are reflected in operational plans.
- Authorize the use of installment payment arrangements in respect of all types of arrears in cases where this is considered the most appropriate method for recovery.
- Extend the write-off provisions to cover all debts that are considered uncollectible.
- Implement an automated process for writing off small balances that are considered uneconomic to pursue.
- Consolidate tax arrears operations into significantly fewer sites and ensure dedicated and specialist trained staff are engaged on the recovery effort.

### Value-Added Tax (VAT) refunds — overview and key issues
- VAT refunds are described as a highly problematic issue with limited discernable progress despite numerous recommendations.
- Legal constraints:
  - Law requires excess input credits be carried forward for offsetting against future VAT liabilities.
  - Refunds are available only for exporters and investors in respect of the acquisition of capital goods other than vehicles and furnishings.
- Consequences:
  - Buildup of considerable amounts of excess VAT credits representing an involuntary loan by taxpayers to the Government.
  - For eligible taxpayers, the refund claims process remains cumbersome and subject to excessive and unproductive audit scrutiny, imposing significant administrative and compliance costs.

### Accumulation of VAT credits — scale and drivers
- By the end of the third quarter of 2011, accumulated un-refunded VAT credits had reached MDL 3.9 billion and continued to rise.
- The accumulation is described as a "fiscal time bomb."
- Contributing factors:
  - Legal restrictions on refunds.
  - Proliferation of reduced-rate supplies at 8 percent while input credit benefits from the standard rate of 20 percent.
- Possible policy options noted:
  - Gradually raise the reduced rate and/or limit the scope of supplies subject to the reduced rate to arrest accumulation and generate funds for gradual repayment.
- Regional comparison:
  - Table 8 indicates refunds as percent of gross VAT collections (averages referenced), with former Soviet Union countries at 29.6 percent on average.
  - Moldova refunds in 2011 were 10.6 percent.

### Economic and administrative impacts of denying refunds
- Denial of refunds can alter VAT from a tax on final consumption to a tax on production.
- Denial stems from concerns about fraudulent refund claims given Moldova's underdeveloped "tax culture" and relatively weak tax administration.
- Denial and overbearing audit scrutiny produce high administrative costs for STI and high compliance costs for taxpayers, with adverse effects on business cash flows, investment, and growth.
- Advanced administrations favor risk-based audit programs targeting high-risk taxpayers rather than universal restrictions.

### Refunds policy and transition considerations
- An efficient VAT system should facilitate prompt refunds to all taxpayers, subject to risk-based controls.
- Given the high accumulated credits, a structured transition program is needed:
  - First priority: arrest growth by allowing full refunding of excess input credits arising in current and future tax periods.
  - Then isolate accumulated stock of credits and develop an ordered, phased refunding program accommodatable within fiscal constraints.

### Claiming and auditing VAT refunds
- Simplification opportunities:
  - No separate claims should be necessary; taxpayers could indicate on the VAT return how refunds should be treated (paid to bank account, set off, etc.).
  - Retain ability to set refund entitlement against future liabilities on a voluntary basis, requiring taxpayer accounting functionality to track offsets across periods.
- Audit strategy:
  - Current universal audit approach is costly and of doubtful effectiveness.
  - VAT refund audits in 2010 and 2011 yielded MDL 12.2 million and MDL 13.5 million respectively (Table 9), despite purportedly high strike rates — outcomes inconsistent with the high fraud risks attributed to refunds.
  - Advanced administrations employ selective risk-based verification as part of broader audit programs.

### Budgeting and payment of refunds
- Payments of refunds are sometimes delayed due to budget constraints:
  - STI approves/disallows refund claims within 37 days; Ministry of Finance has 8 days to facilitate disbursement.
  - Disbursement can be delayed due to lack of funds because Moldova treats refunds as expenditure rather than a revenue item.
- Alternative approach recommended:
  - Pay VAT refunds from gross VAT receipts (method used by many countries) to avoid funding problems.
- Note on budgeting methods:
  - Two methods: (1) payments from gross VAT revenue; or (2) paying from budget expenditure appropriations. Paying from appropriations requires accurate refund forecasts and is prone to inability to meet claims when appropriations are exhausted.

### Recommendations on VAT refunds (as stated)
- Remove all restrictions on VAT refund entitlements by allowing all VAT payers to receive a full refund of excess input credits arising in the current and future tax periods, subject to risk-based audit controls (may require law changes).
- Consider gradually raising the reduced rate and/or limiting the scope of supplies subject to the reduced rate.
- Develop a structured program for repayment of accumulated credits arising in previous tax periods that allows the current stock to be depleted over a number of years within fiscal constraints.
- Once refund entitlement restrictions are removed, remove the need for taxpayers to make a separate application; treat the tax return as the application when excess input tax over output tax occurs.
- Remove the requirement that all VAT refunds are audited (before or after payment) in favor of a targeted risk-based audit program.
- Remove the requirement that VAT refunds are treated as an expenditure requiring a budget appropriation and pay VAT refunds from gross VAT receipts.

### STI organization — headquarters and field offices
- Historical recommendations reiterated:
  - Strengthen headquarters organized according to functions with key supporting departments.
  - Develop options for rationalization and merger of local tax offices into a consolidated regional delivery network.
- Current staffing and structure (as reported):
  - STI total employees: 1,986.
  - Headquarters staff: 232.
  - Large taxpayer office: 59 staff.
  - Call center: 13 staff.
  - Network of 35 regional tax offices: 1,682 staff.
  - State enterprise "Fiscservinform" to manage IT issues employs 117 staff, including 65 staff that deal with returns filing, data processing and payments operations.
- Headquarters organization remains a hybrid with features of functional organization and taxpayer segmentation plus remnants of "tax type" approaches.

### Field offices — consolidation rationale and proposals
- Number of offices unusually high relative to taxpayers.
- 2008 mission reported STI had developed models reducing offices to approximately eight; reorganization proposal was forwarded to Government but not approved.
- No progress; current network remains the same — a radical overhaul and slimming down is deemed necessary to improve efficiency and effectiveness.
- Recommended approaches:
  - Merge current 35 local tax offices into a much reduced number of modernized facilities — perhaps not more than six–eight regional offices.
  - Maintain limited presence in remote areas via small satellite offices or mobile offices reporting to regional tax offices.
  - Consolidation aims to achieve economies of scale, better specialization, and uniform implementation of tax laws.

*Source: _cr12199 - 92.      Headquarters staff is responsible for the preparation of the annual arrears (PDF chapter/section).*

### 112.     Centralization of tasks should also be considered. The STI has already achieved

### _cr12199 - 112.     Centralization of tasks should also be considered. The STI has already achieved

### Centralization of tasks and field structure
- The STI has centralized national processing of tax returns to exploit economies of scale over large volumes of processing.
- A centralized contact center has been established in Chisinau to facilitate taxpayers’ service needs.
- The STI should continue to explore areas of tax administration where efficiency gains can be achieved by concentrating work in either a single or a few places.
- Examples of concentration:
  - One specific task could be performed by one regional office on behalf of all regional offices.
  - Other tasks may be performed by 2-4 regional offices on behalf of all regional offices.
- Transitional proposal:
  - Centralize all field activities except taxpayer services into regional centers.
  - Determine the six–eight offices that will become the regional centers and centralize all activities except taxpayer services that require face-to-face contact with taxpayers into those regional centers.
  - Remaining centers become small satellite offices reporting to one of the regions; longer term viability of satellite offices to be assessed on cost viability.

### Headquarters organization and accountability
- Previous observations:
  - Headquarters appeared overly fragmented—multiple accountabilities for delivery functions spread across deputy heads.
  - Lack of clarity between organizational units concerning some key tax administration functions.
  - No clear delineation between headquarters and the field operation.
- Recommendation:
  - Consider amending the headquarters structure to conform to the organization chart set out in Figure 2 (proposed structure), incorporating units for Planning and Reform, Risk Management Analysis, and a unit dedicated to taxpayer services (program and product design).
- Constraints noted:
  - Government regulations allow the tax agency to employ three deputy directors only; otherwise the chart would have shown four deputy director positions (LTO would also be managed by a deputy director).
  - Importance of LTO to overall revenue collection and sensitivity/complexity justifies a short reporting line to the STI Head.
  - Urgent need to ease restrictions that limit STI in establishing its organization structure on the basis of business needs.
- Recommendations on organization structures (identical to previous missions):
  - Rationalize the network of field offices into six to eight regional centers.
  - Strengthen headquarters by implementing a headquarters structure organized according to function with key supporting departments.

### Modernizing Information Technology Systems — overview and rationale
- The STI’s IT system is outdated and does not adequately support core tax administration functions.
- Previous FAD missions: IT capabilities severely constrain ongoing reform efforts; many reform initiatives cannot be implemented in the current IT environment.
- Authorities are exploring with the World Bank possibilities for launching a major project to reform the IT system and streamline associated business processes.

### Procurement approach and implementation considerations
- Upgrading current IT system is not viable; a new system must be procured.
- Intention: acquire a Commercial Off-The-Shelf System (COTS)—a proven software package suite specifically designed for tax administration, with expert implementation staff.
- Project requirements:
  - Some customization of COTS software.
  - Acquisition of hardware.
  - Establishment of an appropriate network.
  - Comprehensive re-engineer of STI’s business processes to match capabilities of a modern IT system.
  - Training of STI personnel and the taxpayer community.
- Advantages of COTS vs major in-house development:
  - Cost is known prior to decision to proceed, reducing risk of underestimation of cost and time-to-market.
  - Implementation can adopt business processes inherent to the product, which can introduce best practice processes where current processes are far from best practice (as in Moldova).
- Caution:
  - Minimize customization of new software package; excessive customization defeats the purpose of COTS and increases cost and timeframes.
  - Redesign STI business processes (and possibly some laws) to align with the new system—“reverse re-engineering” of business processes—to reduce need for customization.

### COTS market and architectural notes
- Range of specialized COTS products available for:
  - tax accounting, rules/processing engines, document management, reporting, analysis, workflow, etc.
- Modern architecture can facilitate integration of these products with already custom-built items STI may wish to maintain.
- Use of commoditized products (e.g., document management, risk management, print/channel management) is common rather than custom development.
- Packaged suites of integration tools are generally used rather than reproducing functionality locally.

### Project governance and ownership
- Current project governance within STI needs significant strengthening for IT modernization.
- While the World Bank may undertake tendering, STI must manage implementation and business process modernization.
- Governance framework should:
  - Ensure optimal use of resources by assessing project risks and their impact on overall program.
  - Assign roles and responsibilities and demand accountability.
  - Balance and resolve conflicts between resource needs of current revenue operations and reform activities.
  - Assure program/project financiers of sound accountability mechanisms.
- Best practice: central project office to manage all projects; experienced project managers work across functions to avoid duplication.
- Business manager ownership:
  - Business managers must remain owners of their part of the IT system even if care and maintenance is outsourced to FiscServInform.
  - Examples:
    - Registration component owned by the manager responsible for service and registration processes.
    - Collections system owned by the director for collections.
    - Audit case selection system owned by the audit director.
  - Acceptance and performance of system-owner roles is critical for the introduction of a new IT system.

### IT reform recommendations
- Develop user requirements to a new system that will require minimal customization of the future selected COTS software.
- Ensure an adequate modernization program governance framework is in place.
- Maintain the “business owner” role for IT systems across all STI business units.

### Appendix 1 — Preliminary review of tax revenue performance (2007–11)
- High-level observation:
  - Tax revenue, as a percent of GDP, has been declining.
  - From 2007 to 2011 tax revenue has shown a decline of approximately 3.5 percentage points of GDP, or roughly 10 percent.
- Table 10 (Tax Revenue by Value and as a Percent of GDP, 2007–11) reported values (selected items preserved exactly as in source):
  - Tax revenue: 18.4 34.4 21.3 33.8 19.6 32.4 22.5 31.4 25.6 30.9
  - 1.1.1. Taxes on Income, Profits, and Capital Gains: 2.7 5.1 2.2 3.5 1.9 3.2 2.0 2.8 2.3 2.8
    - Profit tax: 1.4 2.6 0.7 1.1 0.4 0.7 0.5 0.7 0.6 0.7
    - Personal income tax: 1.3 2.5 1.5 2.4 1.5 2.4 1.5 2.1 1.8 2.1
  - 1.1.2. Taxes on Payroll and Workforce: 5.2 9.7 6.6 10.5 7.0 11.5 7.5 10.4 8.2 9.9
    - Social Fund contributions: 4.4 8.2 5.4 8.6 5.6 9.2 6.0 8.3 6.6 7.9
    - Health Fund contributions: 0.8 1.6 1.2 1.8 1.4 2.3 1.5 2.1 1.6 2.0
  - 1.1.3 Taxes on Property: 0.2 0.4 0.3 0.4 0.3 0.4 0.3 0.4 0.3 0.3
  - 1.1.4. Taxes on Goods and Services: 9.0 16.8 10.7 17.0 9.1 15.1 11.2 15.6 13.1 15.8
    - VAT: 7.6 14.2 9.1 14.5 7.6 12.6 9.1 12.7 10.5 12.6
    - Excises: 1.4 2.6 1.6 2.5 1.5 2.5 2.1 2.9 2.7 3.2
  - 1.1.5. Taxes on International Trade and Transactions: 0.9 1.7 1.2 1.8 0.9 1.5 1.1 1.5 1.2 1.4
  - 1.1.6. Other Taxes: 0.4 0.7 0.4 0.7 0.4 0.7 0.5 0.6 0.4 0.5
  - GDP 1/: 53.4 62.9 60.4 71.8 82.9
- Data notes:
  - Value for 2011 is a preliminary estimate.
  - Detailed breakdowns requested from authorities: customs collections of VAT, social fund contributions collections, and additional domestic VAT collections; as of submission only domestic VAT collections for 2008–11 were assembled.
  - Obtaining customs data proceeded slowly due to protocol requirements.
  - Social insurance data might not be available until June, as the due date for the 2011 detailed annual return is April 25.
  - Following receipt of the returns, it could take six to eight weeks to capture and verify the data in the system.

### Preliminary analysis of domestic VAT collections (2009–11)
- Key finding:
  - From 2009 to 2011, while VAT collections fell relative to GDP, the amount of output declared on VAT returns increased relative to GDP.
  - Total declared output (taxable, zero-rated, and exempt supplies) grew in relation to GDP from a ratio of 2.49 output to GDP to 2.54 output to GDP.
  - This suggests reduced revenue performance may be due more to the nature of output being declared than to undeclared output.
- Decomposition analysis and estimated impacts:
  - Increased proportion of reduced rate supplies:
    - Average share grew from 8.4 percent of total output to 14.5 percent.
    - Estimated reduction in potential output tax for 2011: MDL 1.3 billion (comparison of 2011 to 2009 by month and sector).
    - For 2010 the increased proportion reduced potential output tax by MDL 1.0 billion.
  - Increased proportion of zero-rated supplies:
    - Average share grew from 12.9 percent of total output to 15.3 percent.
    - Estimated reduction in potential output tax for 2011: MDL 1.1 billion.
    - For 2010 the increase reduced potential output tax by MDL 0.5 billion.
  - Changes in input tax credits:
    - Estimated joint impact: slight decrease in credits for input tax of MDL 0.1 billion for 2011.
    - For 2010 the impact on input tax credits would have been greater, resulting in a net decrease in input tax credits of MDL 0.4 billion.
    - Method: input tax credit to output ratio for 2009 (by tax period and sector) applied to 2011 returns data.
  - Electricity, gas, and water sector excluded from this analysis due to separate, lower, reduced rate supply for gas supplies.
- Combined resultant impact on net VAT for 2011 is estimated to be MDL (text ends before final figure in source).

*IMF staff report excerpt (Moldova).*

### 2.3 billion, or roughly 2.7 percent of GDP.

### _cr12199 - 2.3 billion, or roughly 2.7 percent of GDP.

### Impact on Value-Added Tax (VAT)
- Estimated reduction in net VAT for 2011: MDL 2.3 billion, or roughly 2.7 percent of GDP.
- Composition of the MDL 2.3 billion reduction:
  - MDL 0.8 billion reduced VAT payable (or 0.9 percent of GDP).
  - MDL 1.5 billion resulted in increased refundable VAT or additional excess-credit carry-forward (1.8 percent of GDP).
- For 2010 the combined impact on net VAT is estimated to have been MDL 1.1 billion, or around 1.6 percent of GDP.
- Observations on VAT refundable and credits:
  - No notable increase in the value of VAT refunds for 2011 (MDL 1.2 billion in 2009 and 2011).
  - Bulk of the impact for 2011 realized in accumulation of excess credits.
  - Stock of excess credits: declined in 2009, grew substantially through 2010 and 2011.
- Note on measurement: using the input tax credit to inputs ratio was considered preferable, but large anomalies were discovered in values reported for inputs, yielding highly inconsistent ratio values; a more thorough examination of these and other data issues will be provided in the final report on the revenue performance analysis.
- Explanation of components: the MDL 2.3 billion figure represents reduced output tax from the increased proportion of reduced rate supplies, plus reduced output tax from increased zero-rated supplies, minus the drop in input tax credits.

### Appendix 2 — Nontax Administration Tasks Handled by the State Tax Inspectorate
- Disposal of seized goods, goods retained as evidence of crime and other property that has fallen into state ownership.
- Collecting unpaid loans made by the State or its agencies to business borrowers.
- Collecting fines imposed on businesses or people who have carried out unlicensed or banned economic activities.
- Carrying out audits to ensure that dividends due from state-owned companies to the State have actually been paid.
- Checking the accuracy of settling state tax.
- Collecting a levy on the incomes of those opting for an alternative form of compulsory military service.
- Collecting a special levy on natural gas supplies from a gas company.
- Monitoring aspects of international trade or finance at individual company level where goods or funds end up in Moldova as a result of these trades.
- Collecting a levy on capital investment in the construction industry.
- Preventing and detecting specified illegal activity involving motor cars.
- Working with the Agriculture Ministry to police the sealing of containers used in production of alcohol.
- Carrying out tax audits as requested by other state bodies as well as at the request filed by the citizens.
- Certifying and auditing court-controlled bank accounts.
- Policing certain price controls on staple foods.
- Acting as a paying agent for certain State debts.
- Auditing businesses to determine the mark up rates and transport costs of imported goods.

### Appendix 3 — Personal Income Tax Reporting for 2010 (selected statistics)
- Data source: Income and tax figures provided by STI; STI withholding information program and CET08 (PIT return) information for 2010 combined to determine gross income and PIT totals.
- Summary table totals:
  - Total gross income reported (Total (D)): 27,994 (in MDL).
  - Total PIT reported (Total (E)): 2,010.25 (in MDL).
- Selected line items (Gross Income (D) / PIT Reported (E) / Percent of Gross Income (G) / Percent of Total PIT (H)):
  - Wages: 23,206 / 1,489.46 / 82.8967 / 74.0933
  - Dividends: 2,109 / 286.62 / 7.5371 / 14.2578
  - Rental and real estate income: 532 / 53.01 / 1.9009 / 2.6369
  - Interest: 405 / 35.07 / 1.4473 / 1.7446
  - Patent payments: 838 / 27.56 / 2.9945 / 1.3710
  - Royalties: 257 / 27.18 / .9167 / 1.2524
  - Capital gains: 97 / 14.55 / .3465 / .7238
  - Gambling and prizes: 36 / 6.63 / .1290 / .3298
  - Other noted categories with small totals and shares are listed in the source table.

### Appendix 4 — Illustration of a Potential High-Wealth Individuals (HWI) Project Plan (Phase 1)
- Objective: develop a working definition of a HWI taxpayer, identify taxpayers meeting this definition, and complete compliance risk assessment for identified HWI taxpayers. Responsibility: HWI Project Team.
- Phase 1 (Start date: April 2012) — key tasks, estimated start dates, accumulated calendar days, estimated completion dates:
  1) Define what constitutes a high-wealth individual (HWI): March 2012 / 30 days / April 2012.
  2) Determine the HWI population based on the HWI definition: April 2012 / 90 days / May 2012.
  3) Gather available data on the HWI population: March 2012 / 90 days / May 2012.
     - Subtasks include: identify data sources; complete compilation and description of each data source; determine IT capability to electronically access data; assess capacity to store HWI electronic data (e-data) and, if yes, create an e-file for each HWI taxpayer within a master database; data entry from identified data sources to be completed.
  4) Analyze data and quantify attributes and characteristics of this population: May 2012 / 150 days / June 2012.
     - Subtasks include: develop analytical process to review and summarize compiled data; complete analysis/review and compile into usable summary of HWI taxpayers.
  5) Complete a written summary highlighting: June 2012 / 210 days / August 2012.
     - Elements to include: HWI attributes and characteristics; HWI trends; HWI PIT contributions for 2008, 2009, & 2010; HWI tax gap projections; HWI risk compliance projections; identify likely HWI taxpayers that are high-risk for noncompliance.

### Appendix 5 — Illustration of a Potential Indirect Audit Training Schedule
- Overall approach:
  - Recommend a training development team: project lead, experienced auditor, a HQ person, and a training officer to coordinate necessary training of auditors to implement indirect audit methodologies within STI.
  - While preparing training materials, team to make recommendations on approvals, budget, location, facilities, number of participants, instructors, testing, and certification.
  - Establish planned delivery dates for training.
- Major projected actions and timeline to ensure delivery of indirect training in 2013 (Action / Timeline Estimate Calendar Days / Accumulated Time Calendar Days / Estimated Completion Date):
  1) Obtain necessary approvals for funding and development of indirect methods training. Include in 2012/2013 training plan. — 30 days / 30 days / March 2012.
  2) Establish training development team for approved course(s). — 30 days / 60 days / April 2012.
  3) Gather training guides, technical materials, and internal procedures for preparing the training materials. — 60 days / 120 days / June 2012.
  4) Draft training materials. — 60 days / 180 days / August 2012.
  5) Review and approve training materials. — 60 days / 240 days / October 2012.
  6) Schedule training and technical support/instructors. — 30 days / 270 days / November 2012.
  7) Start indirect training. — 120 days / 480 days / March 2013.
  8) Estimated Completion Date. — 30 days / 510 days / April 2013.
- Delivery timing note:
  - Completion of indirect training in the spring of 2013 would allow skilled examiners to be available for expected audits of 2012 PIT using indirect methods to start in July/August of 2013.

### Appendix 6 — Roles and Responsibilities of a Business Owner for Information Technology Systems
- General responsibilities:
  - Define scope and strategic objectives of the business system; establish objectives and plans for ongoing support, maintenance and enhancement of the application.
  - Learn and understand the overall purpose and sufficient details of the IT system to manage or direct day-to-day business operations for their unit.
  - Conduct periodic reviews of system operations with IT to ensure system works as intended.
  - Ensure appropriate root cause problem resolution when system issues arise and that issues are addressed and communicated.
  - Make final decisions when stored system data is inaccurate after appraising impact to system customers versus resources and time available to fix the problem.
  - Collaborate with IT to develop and maintain a system business continuity plan including business-operating procedures to support the IT disaster recovery plan.
- System changes and enhancements:
  - Define system requirements for new systems and system enhancements.
  - Review and prioritize requests for new systems and enhancements; consider options including business process reengineering prior to recommending IT system change.
  - For approved changes, coordinate with business analysts to ensure an appropriate test plan is prepared and executed; monitor testing and review during development.
  - Provide final approval for implementing changes to the production system and formally accept the system as complete and ready for production.
  - Ensure implementation of effective system roll-out plans covering user communications, quality of user training and related documents, and preparedness of help desk support.
  - Communicate planned and completed changes, improvements, and other important information about the system to users and support personnel as needed.
  - Participate in planning for enterprise system-wide upgrades.
- User access control:
  - Establish criteria for controlling user access to various features including prerequisites for read/write access.
  - Control access to personal identity information.
- User training and support:
  - Establish and maintain a training program for all staff updating data in the system and provide other training as needed for users accessing and reviewing system information.
  - Ensure availability and quality of user training and related materials, and preparedness of help desk and technical support processes and personnel.
- Data integrity:
  - Ensure availability, reliability and security of business data stored in the system.
  - Recommend improvements to maintain an efficient and accurate process for providing taxpayer-oriented information.
  - Oversee maintenance and reviews of data security, reliability, and integrity.
  - Conduct periodic reviews with IT to ensure data is accurate and secure.
  - Ensure data input controls are documented, effective, and tested periodically.
  - Review and, if acceptable, approve requests to use data in standard management reports or as inputs to other systems; participate in development and maintenance of standard management reports based on system data.

*Source: _cr12199 - 2.3 billion, or roughly 2.7 percent of GDP.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12199.pdf_