In line with the Government's commitment to attracting inward investment, the 1994 Foreign Investment Law simplified the tax system for foreign investors. This law has since been updated by a number of presidential decrees.
The Foreign Investment Law abolished an established system of tax incentives for foreign direct investment projects. However, a reduction is given when the investment is large or considered of national importance. In these cases, tax-free or investment promotion zones are created. Natural resources and energy generation projects have been subject to favourable treatment.
The Government imposes taxes on all persons or legal entities consuming goods or services, conducting business, performing independent professions and generating income in the Lao PDR.
There are several broad categories of tax, which are described in the promulgation of the Tax Law. These are:
• Turnover Tax;
• Personal Income Tax (PIT);
• Profit Tax (also called Company Income Tax);
• Social Security (to be implemented gradually);
• Minimum Tax;
• Charges and service fees;
• Other taxes.
In 1998, the Prime Minister’s Office issued decrees modifying the turnover tax, excise tax, minimum tax and income tax from leasing.
Enterprises pay one of the following two taxes, whichever produces the higher tax return:
• Minimum Tax, at a flat rate of 1% of gross profits;
• Profit Tax, based on net profit. The tax rate for all Lao business enterprises is fixed by the Tax Law at 35%; under the Foreign Investment Law, the rate for all foreign business enterprises is set at 20%. Joint venture companies need to negotiate with the FIMC to benefit from the foreign currency rte. (These rates may be modified according to the Company's business licence).
Most import duty rates are set at 5% or 10%. The full list of goods subject to import tax rates is in the first amendment of the Decree of the Prime Minister's Office dated 28 September 1998.
Administrative fees are at a rate of 5% ad valorem on equipment and materials.
Turnover tax is collected on imports and the sale of general imported or locally produced goods. In addition, general services, constituting the supply of labour to others against a service fee as compensation, are also subject to turnover tax.
Rates of turnover tax are 5% or 10%. The relevant legislation is currently:
• Decree 1 of the Ministry of Finance, dated 4 January 1999;
• Article 4 of the Decree of the President of the Lao PDR, dated 28 September 1998;
• Tax Law No. 01/PDR.
These items of legislation set out which goods and services are subject to the 5% tax rate, which are subject to the 10% rate, and which are exempt from turnover tax.
Payment is made to the relevant tax authorities on a monthly basis, before the 10th day of the following month. Deductions are made from these monthly turnover taxes if the importer has already paid at the port of entry. Paid taxes are carried forward to the next month if necessary. Goods, whether imported or locally produced, constructions or services that are used by the operator are also subject to turnover tax.
Importers of goods for re-export to third countries, export oriented producers or providers of services which have been subjected to turnover taxes at the port of entry are entitled to deduct these payments from the taxes payable at the next import of goods, raw materials etc.
Imports on equipment, means of production, spare parts and other materials used in the operation of foreign investors' projects or in their productive enterprises are taxed at a uniform flat rate of 1% of the imported value. Raw materials and intermediate components, imported for the purpose of processing and then exported, are exempt from such import duties.
Excise tax is an indirect tax collected from certain types of goods. These goods include fuel (5-23%), alcohol (50-60%), tobacco products (50%) and cosmetics (20%). The full list of goods subject to Excise Tax and the tax rates are listed in Article 4 of the Decree of the Prime Minister of the Lao PDR No. 241/PM, dated 25 December 1998. For imported goods, excise tax is payable at the time of import; taxes must be remitted in full before goods leave the customs post. For domestic production, producers must produce a monthly excise tax return every month before the fifteenth day of the following month.
Personal Income Tax
This is a direct tax collected from income generated in the Lao PDR. Taxable income includes:
• income from salaries such as wages, bonuses, position bonuses, and other material benefits, including benefits-in-kind;
• income from movable assets, such as dividends or other benefits for shareholders of a company, loan interest and guarantee fees or other liens;
• income from the lease of assets;
• income from patents or other rights, including lease of rights, production formulae, trade marks and copyrights.
Certain types of income are exempt from tax. These include social insurance and salaries of foreign experts performing projects in the Lao PDR.
Salary tax on earnings of foreign personnel is levied at a flat rate of 10% on gross income, including most benefits-in-kind. It is paid on a monthly basis through withholding at payment. Foreign personnel receiving salaries abroad are liable to pay income tax in the Lao PDR when they reside there for over 180 days in a given tax year.
Salary tax is levied at a progressive rate of up to 40% on gross income of Lao personnel.
Salary and wage earners are entitled to deduct 200,000 kip from their monthly salary in the computation of tax payable. This deduction is an allowance for "expenses for living costs".
A July 2001 amendment to the Tax Law created a new maximum bracket of 45% for Lao personnel. It also established a similar progressive scale of taxation for sole traders - previously they were treated as businesses, subject to Profit Tax and Minimum Tax. It waits to be seen when this amendment will come into force.
Taxes on profits are set at 35% on net profits for all Lao business enterprises, under the Tax Law, and 20% on net profits for all foreign business enterprises, under the Foreign Investment Law. Taxable profit includes:
• profit from business generated from agri-forestry, industrial and handicraft production, the exploitation of natural resources, import/export, wholesale or retail trade and general services;
• profit from independent professionals.
Certain expenses can be deducted when determining annual profit. These include:
• general expenses in business activities, including utility costs, travel and entertainment, advertising, salaries, lease costs, and insurance;
• expenses on travel and entertainment – these are only deductible up to a limit of 0.2% of turnover;
• expenses on gifts, allowances, presents and prizes – these are only deductible up to a limit of 0.15% of turnover;
• depreciation, which can be claimed on a straight line or cost reduction method. In the year of acquisition or disposal, depreciation can be claimed for the portion of the year the asset was owned;
• reserves for unexpected expenses and risks relating to items such as valuation of inventory or receivables.
Profit taxes, income taxes on salaries, salaries paid to partners in partnerships, luxury expenses and interest payments to shareholders are examples of non-deductible expenses.
Individuals receiving income from business profits are entitled to an annual deduction of 1,200,000 kip.
Tax is remitted on a quarterly basis, based on estimated profit or prior year's profit. Tax returns are made to the tax authorities prior to the fifteenth day of the month following the end of each quarter. The balance of the Profit or Minimum Tax due should be remitted before 15 April of the following year. If the quarterly profit tax is overpaid, the amount is not refunded in cash but can be deducted from future profit tax calculations. Tax can also be payable on a lump-sum basis.
The Social Security Decree came into force in June 2001 and is being introduced gradually. It will apply to:
• employees of state-owned enterprises, private enterprises and joint enterprises;
• enterprises that employ 10 or more employees;
• an enterprise that has less than 10 employees, but is a branch of a larger enterprise.
If an enterprise is subject to the Social Security Decree, but later reduces its number of employees to less than the minimum requirement, it must still maintain its application of the Social Security Decree.
The Social Security Decree does not apply to:
• civil servants, military personnel and police personnel;
• employees of embassies, diplomatic missions or international organisations recognised in the Lao PDR;
• foreign persons working with a multinational company that is established in the Lao PDR for a period not exceeding 12 months;
• Lao employees who work for multinational companies and who are sent to work abroad for 12 months or more;
• elementary, high school and university students, practicing medical interns and other trainees who do not receive wages from employers.
The decree requires a deduction from gross salary as follows:
• 5.0% to be paid by the employer;
• 4.5% to be paid by the employee.
However, the Government has set a ceiling where the deductions will cease to apply. Salaries above 1 million kip per month will be ignored for Social Security. As a result, the maximum charge will be 50,000 kip per month from employers and 45,000 kip per month from employees. No indication has been given as to whether this ceiling is temporary or not.
The employer is responsible for ensuring that the payments are made, by withholding the employee's contribution from wages.
The benefits covered under the Social Security Decree include:
• funeral benefits;
• medical care benefits;
• sickness benefits;
• maternity benefits;
• employment injury or occupational disease benefits;
• invalidity/permanent disability benefits;
• retirement pension;
• surviving family benefits;
• child allowance;
• unemployment benefits.
There are, however, no detailed guidelines as to how these benefits will be distributed or assessed.
Businesses and independent professionals have a minimum tax obligation.
Investors, foreign and domestic, are exempt from this obligation during any income tax exemption period.
The minimum income tax is 1% of the total annual revenues. Businesses calculate their liability on annual revenue excluding turnover tax.
Loss Carry Forward
Businesses and independent professionals who suffer a loss acknowledged by the tax authorities may carry forward these losses for the following three years. After three years, any losses still unutilised are no longer available.
Businesses which make initial losses in their start-up phase may be able to capitalise these losses and carry them forward as pre-operating costs. Once the business does start operating, it will have to depreciate these expenses over two years.
If a company has a tax exemption period, it is only able to carry forward losses incurred in the last year of that period. These losses may be carried forward for three years.
The Government provides tax incentives to encourage investors to reinvest in the Lao PDR. An investor may reinvest profits in the Lao PDR without incurring any tax liability.
If the enterprise suffers losses in the initial tax exemption period of two to four years, it may be permitted to carry the losses forward. The losses may then be deducted from taxes levied on profits in the following year, or be spread over a period of up to five years.
Charges & Service Fees
Under the Tax Law, the Government can collect fees for issuing fiscal licences, business licences, permits, visas, advertisement boards, broadcasting rights and other services. The charges and service fee rates are set periodically by presidential decree.
These will include:
• dividends tax at a rate of 10% of gross dividend declared;
• document registration fees at variable ad valorem rates on the registration of legal documents
• annual tax registration fees at variable rates, based on turnover or estimated turnover;
• land taxes at variable rates on any land "held or used";
• resource exploitation taxes at variable rates per cubic metre on wood and construction materials of Lao origin;
• annual road taxes at variable rates on all vehicles to be used in the Lao PDR;
• tax on renting property. These are set at 25-30% if the lessee is Lao. If the lessor is foreign, the tax set at 30% for rents of up to $2,000 per month; for other properties, the tax is fixed according to the size of the property.