On 27 December 2006, the National Assembly approved Lao PDR’s first VAT law. Further implementing regulations still need to be drafted, but latest indications are that the existing Business Turnover Tax (BTT) will be replaced by a VAT at some stage in 2008.
Some of the key features of the new VAT law include:
- 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 lao (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:
- The exact implementation date remains unclear, but could well be within the next 12 - 18 months.
- 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
For more detailed information on the above issues, please contact: Richard J. Irwin at e-mail address: firstname.lastname@example.org or your regular PwC contact person on telephone number:+[856 21] 222718-9 or 222 734.