Value Added Tax in Laos – pilot implementation scheme

(2/2009)

We are writing with a further update on the introduction of Value Added Tax in Laos. The Ministry of Finance (MoF) has just issued Notification No. 2969/MoF, dated 31 December 2008, regarding the implementation of a pilot scheme for the VAT, from January 1, 2009. According to this Notification, there will be an initial pilot implementation of the VAT, under which enterprises earning annual revenues of or over LAK 5,000,000,000 (approx US$600,000), or which have registered capital of or over this amount, and enterprises conducting business involved with import and export of goods, must register for VAT, and file VAT returns from January 2009 onwards (the January return is due by 15 February).

We understand that this pilot scheme will only apply to selected companies , and they will be notified of this. A seminar will then be held for these companies, setting out how this will be implemented, and standard VAT forms will be provided.

The VAT law itself is brief and many issues remain to be clarified. The MoF is currently working on a VAT Instruction which should provide more detailed rules on implementation, and this is targetted to be issued by the end of this month.

The main features of the Lao VAT Law, passed by the National Assembly on 27 December 2006, are set out here for ease of reference:

• The standard rate is 10%. There is no 5% rate as there is for the existing BTT.
• Zero rating will apply to exported supplies – this apparently covers both goods and services, but it remains to be seen how “exported services” will be defined for qualification for zero rating.
• Various exemptions apply, eg. insurance, education, credit activities.
• There is a minimum threshold for VAT registration: annual turnover above approximately US$ 40,000.
• VAT will be payable on imports at the border gate along with import duty.
• VAT will be collected from foreign companies carrying on business in Laos (ie. foreign contractors) via a withholding tax mechanism. Thus VAT in this case will be collected under the same mechanism as is the existing BTT.

This represents a major change in the Lao tax system. Some of the key issues businesses will need to consider include:

• It is unclear whether any transitional provisions will apply – for example will existing contracts continue to be subject to BTT, and if not, how will the cut-off be determined?
• The replacement of BTT with a VAT could have important pricing implications, as will the potential difference in rates between BTT and VAT (eg. some supplies will in future be taxable at 10% instead of the existing 5%).
• Businesses will need to assess the implications of these changes on their revenue and cost structures. Where contracts assign taxes to the respective parties to a transaction, it will be important to determine which party will bear the new tax.
• The Lao foreign contractor withholding tax (FCWT) was introduced in 2005, and comprises both profits tax and BTT components. The latter will be replaced by a (potentially higher) VAT component. It is not clear whether this VAT component will be creditable by the Lao customer of the foreign contractor - whether it is or not will clearly have significant cost implications.