Multi-dimensional Review of Lao PDR

Financing Sustainable Development

Report

OECD Development Pathways

6 June 2024

4. Generating sustainable fiscal revenue

Abstract

Lao People’s Democratic Republic (Lao PDR) faces the significant challenge of raising its tax-to-gross domestic product (GDP) ratio, which remains too low despite substantial growth in per capita incomes. As a result, and without reform, Lao PDR will miss its 2025 tax revenue target. While tax policy cannot be examined in isolation from the country’s challenging macroeconomic setting, Lao PDR needs to change its approach to designing, administering and evaluating the tax system. This requires reconsidering many tax design features, such as overly generous investment tax incentives. There is also a lack of tax policy coherence across the enacted policies, and overall tax compliance remains low. In the future, the tax system should play a larger role in promoting formalisation. High-quality tax policy analysis will also be necessary in order to enact tax reforms and raise sufficient tax revenues while also promoting sustainable economic development.

Lao PDR’s tax-to-GDP ratio remains stuck at a level that is too low to support development despite significant economic growth

Tax revenues are low and not “buoyant”

The tax system in Lao PDR mobilises too little revenue to support economic development; in fact, the country’s tax-to-GDP ratio has been declining, despite significant economic growth. Tax revenues were equal to 9.7% of GDP in 2021, lower than in 2010 (11.5%) and 2015 (12.6%). In fact, the tax-to-GDP ratio declined every year between 2015 and 2020, which suggests that the downward trend is not purely due to the COVID‑19 pandemic (OECD, 2023[1]).1 The decline in the tax-to-GDP ratio reflects a lack of tax revenue “buoyancy”. While Lao PDR recorded rapid economic growth over the past decade, with real per capita income growing by around 62% between 2010 and 2020, this economic growth did not result in an increase in the tax-to-GDP ratio. Tax revenue buoyancy refers to a state in which tax revenues grow faster than GDP on average, generating more resources and a higher tax-to-GDP ratio as a country develops (see Box 4.1).2

A low revenue buoyancy is the result of how the tax design, tax enforcement and tax policy in a country interact with the behaviour of taxpayers when the economy grows (or declines). For example, a well-enforced progressive tax system typically contributes to revenue buoyancy because taxpayers pay a higher marginal tax rate when incomes grow and a lower marginal rate when incomes decline. This chapter identifies a large number of features in the Lao PDR tax system that contribute both to low tax revenues and to the lack of tax buoyancy. Low revenue buoyancy can also be caused by revenue-reducing tax reforms that are positively correlated with economic growth. If a country tends to lower taxes discretionally in times of economic growth, as has been the case in Lao PDR, the buoyancy of tax revenue declines.

Revenue buoyancy has been sluggish in other countries in the Southeast Asian region as well, with the exception of Cambodia (Figure 4.1, Panel A). However, countries like Thailand and Viet Nam already mobilise a much higher tax-to-GDP ratio and enjoy a higher GDP per capita than Lao PDR. This leaves their governments with significantly more resources, although domestic resource mobilisation and re-establishing tax buoyancy are among those countries’ policy goals as well. Lao PDR stands out because it simultaneously exhibits a very low tax-to-GDP ratio and a low tax buoyancy (Figure 4.1, Panel B). Only three countries in the OECD Global Revenue Statistics Database recorded a lower tax-to-GDP ratio in 2020: the Democratic Republic of the Congo, Equatorial Guinea and Nigeria.

Without reform, Lao PDR will miss its 2025 tax revenue target

Lao PDR requires buoyant tax revenues if the country wants to meet its own 2025 revenue target. According to its 9th Five-Year National Socio-Economic Development Plan (2021-2025) (NSEDP) (Government of Lao PDR, 2021[2]), Lao PDR aims to increase its tax-to-GDP ratio from 11.05% in 20203 to 14.0% by 2025 (i.e. by 2.95 percentage points). Buoyant tax revenues can indicate that it may be sufficient for a developing country to maintain its current tax policy path because future GDP growth will result in a growing tax-to-GDP ratio. This is not the case in Lao PDR. On its current path, with a declining tax-to-GDP ratio despite economic growth, Lao PDR will fail to meet the revenue targets set in its NSEDP.

Projections by the World Bank suggest that Lao PDR may see a slight increase in its tax-to-GDP ratio until 2025 (World Bank, 2023[3]). The tax-to-GDP ratio also rebounded slightly in 2021 from its absolute low in 2020 (from 9.17% to 9.7%) (OECD, 2023[1]). However, without additional measures, the country will fall short of the goals stated in its NSEDP. In addition, the increase in its tax-to-GDP ratio predicted by the World Bank would result in a slow return to Lao PDR’s previous revenue ratio levels (which reached a peak of 12.9% in 2015) but would fall significantly short of the government’s tax revenue target, let alone sustainably raise the revenue ratio to levels observed in neighbouring countries.

Figure 4.1. Evolution of tax revenue and GDP in Lao PDR and peer countries until 2021

Peer countries raise more tax revenue in proportion to GDP

The Lao PDR government’s tax revenue target of 14% of GDP for 2025 (i.e. an increase by about three percentage points between 2020 and 2025) appears moderate compared with the revenue-raising capacity of peer countries. In 2021, the average tax-to-GDP ratio for the Asia-Pacific region (out of the 27 countries in the region that report to OECD Revenue Statistics) stood at 19.8%. With a tax-to-GDP ratio of 9.7% in 2021, Lao PDR’s tax-to-GDP ratio was more than ten percentage points below that average and was the lowest in the region. When Viet Nam had income per capita levels comparable to those of Lao PDR in 2022, its revenue ratio was significantly greater than Lao PDR’s. Cambodia, despite lower income levels, already mobilises a larger share of GDP in tax revenue than Lao PDR.

Box 4.1. Tax revenue buoyancy as a tool to evaluate the tax system’s response to growing incomes

Alongside tax revenue elasticity, tax revenue buoyancy is one of the key measures that captures the sensitivity of government revenue to economic activity. For instance, an overall tax revenue buoyancy of 1.2 suggests that when GDP grows by 1%, total tax revenues would be expected to grow by 1.2%. Buoyancy thus captures the total response of tax revenues to changes in GDP, including the impact of tax policy changes. In contrast, revenue elasticities control for tax policy reforms in order to isolate the impact of economic growth on tax revenue (i.e. in the absence of policy changes). If the tax revenue buoyancy is greater than 1, tax revenues in a country are “buoyant”, which implies that tax revenues tend to grow faster than GDP.

Buoyant tax revenues indicate that it could be sufficient for a developing country to maintain its current tax policy path because future GDP growth will likely result in a growing tax-to-GDP ratio. A tax revenue buoyancy between 0 and 1 suggests that tax revenues tend to increase when a country’s GDP grows, but revenues grow at a slower pace than GDP. Note that this results in a declining tax-to-GDP ratio, which is a particular problem in developing country contexts where tax-to-GDP ratios are already low. A negative tax buoyancy implies that tax revenues in absolute terms decline if a country grows its GDP.

The short- and long-term tax revenue buoyancy can be estimated empirically based on historical revenue and growth data (Cornevin, Corrales and Angel, 2023[6]; Belinga et al., 2014[7]). In addition to assessing the responsiveness of overall tax revenue, the analysis can also be conducted separately by tax type. For example, corporate income taxes are known to have a higher short-term tax buoyancy than other taxes, as profits are volatile and linked to the economic cycle. Tax buoyancy estimates can also be used to compare the actual responsiveness of tax revenues in one year with the expected change in tax revenues according to the historical tax revenue buoyancy (OECD, 2022[8]). A recent study finds a small difference between the tax revenue buoyancy and tax revenue elasticity for the average country, suggesting that tax revenue buoyancy estimates are mostly not driven by discretionary tax policy changes (Cornevin, Corrales and Angel, 2023[6]).

Another recent study estimated that the long-term tax revenue buoyancy in Lao PDR is 1.2 (Hill, Jinjarak and Park, 2022[9]). This is despite the fact that the tax-to-GDP ratio in Lao PDR was lower in 2022 than it was in 2010 (the earliest year for which tax revenue data are available in the OECD Global Revenue Statistics Database). Empirical tax revenue buoyancy estimates for developing countries can be misleading if they are based on historical tax data that date too far back in time. Using the relationship between economic growth and tax revenue as far back as the 1980s in order to estimate a tax buoyancy coefficient in a developing country with rapid economic growth in recent years results in estimates that need to be interpreted with care. A high tax buoyancy coefficient could also emerge if tax revenues and GDP fluctuate strongly from year to year – for example, due to changes in commodity prices (if the country is highly commodity dependent), due to a very low GDP and tax revenue (which magnify year-to-year percentage changes) or due to inaccuracies in measurement.

The lack of tax revenue buoyancy analysed in this chapter refers to the fact that the tax-to-GDP ratio in Lao PDR has not increased (and has actually declined recently) despite the country’s rapid economic growth.

Not only would increasing the buoyancy of the tax system in Lao PDR help the country achieve its 2025 revenue target but it would also establish a positive link between economic growth and government finances for the future. Countries with a higher income generally find it easier to increase tax revenue as a percentage of GDP, and a buoyant tax system generates extra tax resources exactly when income growth is rapid. It has also been suggested that once tax revenues as a share of GDP surpass a certain minimum tipping point – a sign of higher state capacity – a country can expect faster economic growth for several years (Gaspar, Jaramillo and Wingender, 2016[10]). The effect could be even stronger if the additional revenue is invested in initiatives that promote growth in the long term.

However, history also indicates that even with positive revenue buoyancy, raising the tax-to-GDP ratio by five percentage points over a decade is a challenging task but there are examples (Gaspar et al., 2019[11]) (Box 4.2). This is particularly true in Lao PDR, which needs to address a large number of other development challenges in addition to raising more tax revenue. Assuming a 4% real annual income growth rate, an absolute tax revenue increase of more than 50% would be necessary in order to increase the tax-to-GDP ratio from 11.05% to 14% within five years. It is important to ensure that raising more tax revenue does not unduly compromise progress towards other development goals.

Box 4.2. Colombia has increased its tax-to-GDP ratio through a number of tax reforms

Starting from a low tax-to-GDP ratio, Colombia has made considerable efforts to broaden its tax bases, raise tax rates and stimulate voluntary compliance. Between 2000 and 2022, Colombia’s tax-to-GDP ratio increased from 3.8% to 18.8% (Figure 4.2). In 2012, Colombia implemented a tax reform that reduced the tax burden on labour. The reform aimed to strengthen the formal economy by reducing SSCs in order to finance social expenditure from general tax revenues, including the National Alternative Minimum Tax (IMAN) and Alternative Simplified Mínimum Tax (IMAS). The tax reform reduced the number of VAT rates from 15 to 3 and introduced electronic invoicing. Simultaneously, the capital gains tax was lowered significantly, from 33% to 10%.

Figure 4.2. With economic development, Colombia managed to increase its capacity to collect taxes

In 2016, following recommendations from a group of experts, Colombia reformed its tax system in order to increase tax revenue. The revenues generated from the 2016 tax reform helped protect social spending while achieving the country’s structural deficit target. This reform involved raising the VAT rate from 16% to 19%, comprehensively streamlining the tax code, alleviating the high corporate tax burden and implementing measures to enhance formalisation and tax administration. The reform mandated electronic invoicing for real-time transaction monitoring and introduced general anti-avoidance rules.

Colombia undertook tax reforms in 2019, 2021 and 2022 with the aim of enhancing the progressivity of its tax system while also focusing on increasing tax transparency and information. Beneficial ownership rules were introduced, and the tax administration was strengthened in terms of both information technology and human resources. Improved tax audits, supported by information sources like ultimate beneficial data and electronic invoicing, aimed at building taxpayer confidence. Since 2022, the tax administration sends personalised emails to individuals who file personal income tax returns to explain how their taxes will be used.

Source: Authors’ elaboration based on OECD Mutual Learning Group meeting on 29 February 2024 and (IMF, 2023[13]), Article IV Consultation Report.

The link between economic growth and tax revenue generation is too weak in Lao PDR

The low tax revenues and low tax revenue buoyancy in Lao PDR can be traced back to how the tax system interacts with economic growth. Economic sectors that have experienced above-average growth over the last years, such as the construction or electricity generation sectors, are particularly prone to not raising adequate revenue (Figure 4.3). This is linked to the approach that Lao PDR has decided to follow in order to try to grow its economy and attract investment. Rather than working towards a consistent and reliable standard tax system, which would provide potential investors with a stable environment for investing and doing business, the country tends to further expand its web of tax incentives, special rules and untransparent agreements with individual investors.

For example, large-scale hydropower projects regularly benefit from project-specific agreements that exempt the enterprises carrying out the projects from corporate income taxes or withholding taxes for many years, among other tax concessions. In some instances, the payment of these taxes is replaced by a lump-sum amount that the developer can transfer to the government. Such arrangements not only reduce tax collection, but also dissociate the revenues generated in a given year from the economic activity in that same year. Signing multi-year concession agreements with project developers has significantly reduced the government’s leeway in future years: Tax policy changes that Lao PDR decides to enact now will only affect major enterprises in growth sectors after a considerable delay.4

Widespread informality in the sectors driving economic growth contributes to low revenues as well. The construction sector, a sector with one of the highest levels of informality in Lao PDR (94% informal employment), has increased its share of GDP by almost five percentage points between 2015 and 2022 (Figure 4.3). However, additional employment in the construction sector will generate little additional revenue for the government if new workers are predominantly hired in the informal economy. Other economic activities benefit from permanently reduced corporate income tax (CIT) rates. Sectors with reduced CIT rates are frequently those whose growth the government of Lao PDR wants to stimulate, such as businesses operating in the area of green technologies. In practice, these types of incentives imply that growth in these sectors will not translate into significant revenues for the government.

Figure 4.3. Change in GDP by sector between 2015 and 2022 in Lao PDR

Tax design challenges can be identified across all tax types and across types of economic activity. Table 4.1 provides a stylised overview of features characterising the Lao PDR tax system, which can explain why economic growth does not translate into adequate tax revenue growth. This chapter discusses these and other tax design challenges in more detail and provides concrete tax policy recommendations. However, tax reform in Lao PDR has to go beyond specific tax design changes, and major improvements to the country’s approach to designing, administering and evaluating the tax system are needed as well. Ultimately, Lao PDR needs to identify a set of reforms that gradually increase revenue buoyancy (and raise revenue), while also turning the tax system into a positive force that helps address other developing challenges, such as high inequality, inadequate social protection, high informality or the lack of investment.

Even if there is growth in Lao PDR in…	…it may not translate into much higher tax revenue because…	…which is a result of…
Domestic enterprises’ profits	Effective CIT rates are low	Reduced CIT rates being offered in growth sectors (such as green technologies)
Multinational enterprises’ profits	Profits can be easily stripped out of the country	The lack of a consistent international taxation framework
The profits of enterprises in Special Economic Zones (SEZs)	Profits are tax-exempt for many years	The availability of generous profit-based tax incentives in SEZs
Profits generated in the resource sector	Effective CIT rates are low or zero	Generous case-by-case tax incentives being granted to enterprises or consortia carrying out natural resource projects
Salaries	Average personal income tax (PIT)/SSC rates increase little with income	Only moderately progressive PIT and a low maximum SSC threshold
Capital incomes	Withholding tax rates are low	Low capital income taxes and a territorial PIT system
Self-employed business income	The self-employed are taxed more favourably than salaried workers, and their turnover is potentially under-reported	Special regimes (e.g. the freelancer regime) and suboptimally designed presumptive tax regimes
Real estate values	The land tax is not linked to real estate values	The lack of a mechanism to update land values, and no inclusion of the value of buildings and land improvements in the tax base
Consumption expenditure	The VAT efficiency and the standard VAT rate are low	The high share of informal businesses and a recent reduction in the standard VAT rate
Consumption of harmful products	Effective health taxes are low, despite increases in statutory rates	Non-compliance and no consistent health tax policy (e.g. the long-term stability contract with Lao PDR’s leading tobacco producer)
Imports	A significant share of imports are undeclared	Complex procedures and a different set of taxes (including a “deemed profits” tax)
Exports	Exporting businesses pay little CIT (and PIT/SSCs)	Exporting businesses’ tendency to be located in SEZs

Note: More details about these tax system design features and reform options are provided in the next section.

The tax policy in Lao PDR cannot be assessed in isolation from the country’s challenging macroeconomic setting and weak social protection system

Current tax revenues are insufficient to finance spending needs

Current levels of tax revenue are insufficient to finance the substantial spending needs that Lao PDR faces, even ignoring the additional revenue needed in order to service the high public debt. One key area requiring significant additional resources is social protection, but more tax revenue is also needed in order to provide quality education or further invest in the country’s infrastructure, which has been overly reliant on debt financing in recent years. Tax revenue mobilisation should be the preferred strategy for generating additional resources because debt financing has reached a limit in Lao PDR, and excessively cutting expenditure would harm the country’s growth trajectory. Only domestic government resources will provide the reliable stream of sizeable revenues that would be independent from other countries’ priorities and that are necessary in order to sustain and further expand public expenditure over the medium and long term. The goal of increasing tax revenue is therefore well-founded, and, in the medium term, tax revenues will likely have to exceed the 2025 target of 14% of GDP.

Financing needs are particularly significant if Lao PDR wants to achieve universal social protection by 2030 because the latest data suggest that the country currently only allocates 1.6% of its GDP to social protection (ILO, 2021[15]). On average, Lao PDR was therefore only able to spend less than LAK 40 000 (Lao kip) per person per month on social protection in 2022 (around EUR 2.0‑2.5 (euros) based on 2022 exchange rates). The Lao PDR National Social Protection Strategy includes the target to provide all Laotian people with access to basic social protection by 2030, including health insurance, social security and social welfare (Government of Lao PDR, 2020[16]). This 2030 target is consistent with the Sustainable Development Goals, but achieving it will require significantly more financial resources, especially if the benefits are adequate.5 The revenue generated from SSCs was equal to around 0.7‑0.8% of GDP in 2019 and 2020 (IMF, 2022[17]). This implies that general government revenues and donor funds had to contribute significantly to social protection expenditure, even at the low levels of such protection observed today.6

The tax system in Lao PDR has not managed to keep inequality in check

Economic inequality is on the rise in Lao PDR, and the tax system has so far been unsuccessful in stopping this trend. Evidence from private household expenditure data shows an increase in the Gini coefficient for Lao PDR from 0.31 in 1992 to 0.36 in 2012, indicating growing inequality in consumption expenditure (Warr, Rasphone and Menon, 2018[18]). More recent estimates point towards a continuation of this trend. Based on the latest edition of the Lao Expenditure and Consumption Survey (LECS), the country’s Gini coefficient regarding consumption expenditure reached 0.388 in 2018. At the same time, peer countries in the Southeast Asian region experienced a decline in economic inequality. As measured by the Gini coefficient, inequality in Lao PDR was higher than in Viet Nam (0.357), Thailand (0.364) and Indonesia (0.384) in 2018. New data also suggest a shift in the dominant type of economic inequality in Lao PDR: Inequalities inside provinces and geographical regions – rather than larger gaps between regions – have been the drivers of the latest increases in inequality (World Bank, 2020[19]).

As economic inequality grows and turns into a predominantly within-region phenomenon, the role of the tax and transfer system as a tool for mitigating inequality increases. Broad-scale redistribution from richer to poorer regions cannot address inequalities that exist between individuals within the same city or region. Individual taxes and transfers, on the other hand, have the potential to redistribute income in a targeted way from the rich to the poor regardless of location – but the current tax system in Lao PDR is not well placed to take up that role. In the average OECD member country, the tax and transfer system reduces the level of inequality as measured by the Gini coefficient by 0.1 points (OECD, 2023[20]). Such a large reduction in inequality requires a combination of progressive taxes and targeted benefits. Data on the difference in inequality before and after accounting for tax and transfers are not available in Lao PDR. However, Lao PDR mobilises less than 25% of its tax revenue from personal and corporate income taxes, while consumption taxes make up the majority of tax revenue. The low tax-to-GDP ratio also implies that the fiscal space for redistributive transfers is very limited. In addition, high levels of informality make it difficult for the state to tax those with higher incomes and reach those in need of income support. Other characteristics of the tax system (such as its limited progressivity) imply that high-income earners likely pay little tax. In such a setting, it is not surprising that the current tax and transfer system has not been able to stop the increase in inequality.

Reducing inequality is a target of the NSEDP, but would require significant changes in tax policy and process. Reduction of “inequality in income distribution and consumption” is a stated policy goal in the NSEDP (Government of Lao PDR, 2021[2]). Reducing inequality requires reversing the current trend over the next years, which cannot be expected to happen without tax policy changes. The impact of potential tax reforms on inequality would need to be systematically assessed when Lao PDR decides on future tax policy changes. At a minimum, additional tax revenue mobilisation and enforcement efforts should not come at the expense of the bottom of the income and wealth distribution. However, in a conversation with the United Nations (UN) Special Rapporteur on extreme poverty and human rights, officials from the Ministry of Finance (MOF) in Lao PDR stated that, as of 2019, inequality did not play any role in the tax policy and budgeting process (United Nations, 2019[21]).

Most workers and firms operate in the informal economy

Only 10‑20% of employment in Lao PDR occurs in the formal economy, and more than 70% of businesses in Lao PDR are not registered (ILO, 2023[22]). Informality is most prevalent in the sectors with the largest workforces, among which are agriculture (in which 98% of workers are informal), construction (94%), and retail and trade (92%). The services (66%) and manufacturing (77%) sectors record the lowest levels of informality. Apart from Cambodia, where informality is similarly high, Lao PDR’s neighbouring countries have managed to bring a larger share of their workforces into the formal labour market. In addition, in Lao PDR, working in the formal sector is not the same as being able to access the national social protection system. Fewer than two out of five formal sector workers (37%) contribute to social security, despite the fact that they (and their employers) are mandated by law to do so (ILO, 2023[22]).

The high level of informality limits the revenue-raising potential of taxes and reduces the reach of the social protection system in Lao PDR. Mobilising a significantly larger share of tax revenue from personal income taxes and SSCs will not be possible if almost 90% of workers remain out of the reach of the tax system. The same applies to business taxes and indirect taxes if most enterprises are not registered. Informality also complicates standard tax policy reasoning because a large number of workers and businesses in Lao PDR effectively operate under a “shadow tax” system in which some rules of the ordinary tax system apply, but not others. For example, informal enterprises do not levy VAT on their sales, but they do pay the tax on some of their inputs without being able to recover it. And as long as enterprises face competition from informal businesses in the same sector, the regular tax system creates incentives for enterprises to remain partially informal, to not register all their workers or to under-report turnover, for example under a presumptive tax regime (World Bank, 2018[23]).

The tax system in Lao PDR is not conducive to business and worker formalisation. Instead, the design of the current tax system contributes to a polarised economy that generates too little revenue for the government. Informal economy workers and enterprises face high uncertainty and no protection, but a low tax burden. Formal workers and enterprises should, in theory, generate tax revenue as per the standard rules of the tax system, but many have developed tools to navigate the system in a way that ensures that their tax burden remains low as well. Large formal enterprises know how to utilise the web of tax incentives, SEZs and discretionary agreements with the tax administration system in order to keep their effective tax burden low. The CIT gap in Lao PDR has been estimated at 90% (World Bank, 2023[3]).7

The current system particularly disadvantages informal enterprises (and their workers) that would like to transition to the formal economy but lack connections, knowledge of the complex rules and the capacity to optimally use tax incentives. There is also evidence that registered enterprises that attempt to pay all taxes according to the rules encounter more scrutiny and are more likely to face charges for minor tax non-compliance than enterprises that are completely informal and not visible to the tax administration system (World Bank, 2017[24]). The result has been described as an “impossible choice” that enterprises in Lao PDR are confronted with: (i) remaining at least partially informal despite the high uncertainty; or (ii) trying to follow the complex set of rules and pay all taxes in full, risking losing out to competitors that remain in the informal economy or that reduce their tax burden through other means (World Bank, 2017[24]).

Mobilising additional tax revenue in Lao PDR thus needs to happen in parallel with efforts to further encourage the formalisation of the economy. Well-designed presumptive tax regimes can be a tool to stimulate formalisation while also gradually increasing tax revenues (Mas-Montserrat et al., 2023[25]). Although Lao PDR has made progress in redesigning its presumptive tax regimes, there is scope for further improvement. Any other tax policy change under consideration in Lao PDR needs to be assessed with regard to its impact on informality as well. It is also crucial that the social protection system is functional and is seen as providing adequate benefits of sufficient quality to encourage workers and their employers to register. The aftermath of the COVID‑19 pandemic could be a good time to capitalise on the experiences of workers and businesses during the health crisis. Certain transfers during the COVID‑19 pandemic were only available to registered workers and enterprises, which may have increased the salience of the benefits delivered by the social protection system that were accessible only to formal workers and enterprises (UNESCAP, 2021[26]).

Lao PDR’s economy is in a vulnerable state, making tax policy changes both necessary and difficult to implement

Lao PDR faces a multitude of acute macroeconomic challenges that create additional challenges for tax policy. The Lao kip depreciated by around 50% against the United States dollar and more than 40% against the Thai baht between December 2021 and December 2022 (IMF, 2023[27]). Inflation averaged 23% in 2022, and year-on-year inflation stood at 28.6% in June 2023, according to official Lao PDR government statistics (Lao Statistics Bureau, 2023[14]). The debt-to-GDP ratio (including publicly guaranteed debt) stood at 112% at the end of 2022 (Lao PDR Ministry of Finance, 2023[28]), which is very high in international comparison given the low amount of tax revenues that the country raises. There is a lack of transparency on the total amount of debt and its creditors, and the country faces hurdles to borrow on the international capital market. The following macroeconomic challenges will further complicate tax policy in the coming years:

Addressing these acute debt-servicing challenges will bind tax revenue and require additional revenue if large spending cuts are to be avoided. A credible debt-servicing and repayment plan needs to be developed that will increase transparency and reduce government debt to a sustainable level.
Lao PDR’s large debt-servicing obligations could potentially make it more difficult for the country to pass revenue-raising tax reforms because taxpayers may be less willing to pay taxes if the revenue is used to service debt, which would otherwise be deferred.8 Ensuring that economic growth translates into higher tax revenues – not only in total amounts but also as a percentage of GDP – is a crucial element of a strategy that puts government debt on a sustainable downward trajectory.
Inflation has eroded the net income of a large share of the population, and there has likely been an uptick in poverty (World Bank, 2023[3]), which reduces the ability of lower- and middle-income taxpayers to pay for additional tax increases.
High inflation may prompt Lao PDR to consider indexing tax brackets and other key parameters for inflation, although less than full indexing for inflation would result in a gradual increase in tax revenues.
Due to its exceptionally low tax-to-GDP ratio, Lao PDR also requires a strategy to navigate the trend in the Southeast Asian region of reducing tax rates such as the VAT or CIT. Continuing to move along with these tax reductions would create considerable additional challenges for Lao PDR.

These acute macroeconomic challenges come in addition to already existing structural economic vulnerabilities with implications for tax policy. For example, human capital development has been weak in Lao PDR, and a large number of workers (both low and high skilled) have left to work in neighbouring countries (ILO, 2023[29]). Lao PDR must balance its need to increase revenue in order to invest in human capital development with ensuring that the tax burden on labour does not become so great that it encourages more skilled workers to leave the country. Lao PDR is surrounded by richer neighbours that offer higher-paid jobs and better social protection. Thailand’s minimum wage, for example, is three times higher than the minimum wage in Lao PDR (ILO, 2023[29]).9 It is estimated that almost 1.3 million Laotians have left the country (which has a population of 7.5 million) to live abroad. As of 2020, more than 70% of these migrants were living in Thailand (UN/DESA, 2020[30]). While remittances constitute an important source of income (around 1‑2% of GDP), Lao PDR will not be able to grow its economy sustainably without a skilled domestic workforce and without ensuring that skilled workers find good-quality jobs that pay well. Lao PDR’s young population has the potential to do this – around 50% of the population in Lao PDR is aged under 25 years – but investment in training and skills development for this population is essential (UN/DESA, 2022[31]).

Environmental degradation comes at a large economic and societal cost, and the tax system has a stronger role to play in safeguarding the environment and ensuring that economic growth is sustainable.10 Estimates suggest that forest loss alone caused annual damage to Lao PDR’s economy equal to 3% of its GDP (World Bank, 2021[32]). Often, these activities take place either illegally or within the informal sector, implying that both wider society and the government miss out on potential economic benefits. Industrial mining has also frequently failed to create employment opportunities for local communities. Large foreign investors have tended to bring their own workforces and expertise, while the local population remained reliant on agriculture and small-scale mining.11 Air pollution, lead exposure and water contamination have started to severely affect local communities and their economic prospects. A reduction in the levels of rainfall caused by climate change may threaten the revenue generated by hydropower dams (Spalding-Fecher, Joyce and Winkler, 2017[33]). In order to combat this, the government of Lao PDR introduced the National Green Growth Strategy of the Lao PDR until 2030 in 2018, aspiring to shift the country’s economic growth model away from environmentally detrimental activities. The tax system needs to play a central role in this shift by: (i) ensuring that society benefits in the form of tax revenue when natural resources are exploited; (ii) mitigating environmental damage; and (iii) steering the economy towards a more sustainable growth model.

Further economic growth will be necessary in order to finance Lao PDR’s spending requirements

Neither reprioritising expenditure nor mobilising a higher share of GDP through tax revenues will ultimately be sufficient to meet the spending needs that Lao PDR faces. In 2022, even a tax-to-GDP ratio of 50% would have resulted in tax resources of only around LAK 1.2 million per person per month (around EUR 60 based on 2022 exchange rates).12 This figure still seems insufficient to finance pensions, high-quality healthcare, education and infrastructure, as well as to meet the cost of all other government transfers and operations. Despite rapid economic growth over the last decades, it is clear that there is a need for Lao PDR and its tax system to stimulate further economic growth in order to be able to meet the country’s spending needs.

In addition to raising more revenue, the tax system must actively contribute to promoting economic development while also helping to reorient the economy towards a new economic growth model that is less dependent on natural resources. Lao PDR wants to expand its economy through growth in the transportation, tourism, electricity generation, higher-value agricultural and manufacturing sectors, along with deepening its integration into the ASEAN community (Government of Lao PDR, 2021[2]). Currently, Lao PDR attempts to attract investment primarily through very generous tax incentives in order to compensate for a suboptimally designed and enforced standard tax treatment. Although the country’s economy has been growing rapidly, this chapter identifies ways in which the tax system could play a more active and efficient role in strengthening sustainable investment in particular.

Lao PDR relies heavily on indirect taxes

VAT and excise duties play an outsized role in the tax mix, while revenue raised through personal and corporate income taxes is particularly low

Lao PDR currently relies heavily on revenues from taxes on goods and services, with scope for improvement. Notable revenue sources are the VAT (33% of tax revenue), excise duties (24% of tax revenue) and import duties (7% of tax revenue). In every year between 2011 and 2021, taxes on goods and services made up 70‑80% of total tax revenue in Lao PDR, with a peak of 78.1% in 2020. It is not unusual for indirect taxes to play a significant role in developing countries, but the combined contribution of personal and corporate income taxes is particularly low in Lao PDR. Revenues from SSCs, which are directly paid to the social security fund, are systematically excluded from tax revenue statistics in Lao PDR. However, even if these revenues were included in the tax mix, the combined share of personal income taxes, SSCs and corporate income taxes would increase only slightly (Figure 4.4). There is scope to improve the functioning of the VAT in Lao PDR, notwithstanding its large contribution to tax revenues. The VAT should be aligned with the International VAT/GST Guidelines (OECD, 2017[34]).

The government also collects significant non-tax revenues, notably through grants and property income. Property income predominantly includes income streams linked to the resource sector, such as government royalties (Figure 4.5). However, property income as a share of GDP is rather low, at around 1‑2%. Lao PDR does plan to reduce its resource dependence, which will ultimately also reduce resource-related government revenues. Lao PDR should make good use of resource-related revenues and ensure fiscal gains from resource rents, but the resources required to satisfy its spending needs will ultimately have to be delivered by the regular tax system. Revenue sourced from grants may eventually decline when Lao PDR graduates from the UN’s list of least developed countries (LDCs) and as its per capita income continues to grow.

Figure 4.4. Tax revenue mix in Lao PDR and peer countries in 2021

Figure 4.5. Non-tax revenue in Lao PDR between 2010 and 2021

A large number of tax design features contribute to low tax revenues and to the lack of tax buoyancy and progressivity

Tax incentives in SEZs are overly generous and not optimally designed

The growing presence of SEZs in Lao PDR means that the government collects little tax revenue from large formal enterprises whose activities would be the easiest to monitor and tax. Tax benefits granted in SEZs in Lao PDR are extremely generous, their design does not conform to best practice and they excessively undermine revenue mobilisation. While there is a strong rationale to have SEZs in Lao PDR, in particular because of the broader governance challenges in the country’s main economy, the government should avoid the use of overly generous tax incentives in SEZs. For example, the duration of the CIT exemption in SEZs in Lao PDR (6‑17 years) is longer than the average in other emerging and developing economies (Figure 4.6).

Lao PDR has designated a total of 21 SEZs in 7 provinces over the last 20 years, and these provide investors with multiple tax reductions. The types of economic activities that can be performed in SEZs, and which therefore benefit from preferential tax treatment, are very broad and not limited to manufacturing or industrial work. Indeed, there are SEZs that target investment in office buildings, residential complexes, hospitals, schools, golf courses, hotels, shopping centres and logistics centres. A prime example is the That Luang Lake SEZ, an upscale urban development project located in the heart of Vientiane, Lao PDR’s capital city, in which all buildings and operations fall under the SEZ designation. Outside Vientiane, SEZs are typically located near the border with neighbouring countries such as Cambodia, the People’s Republic of China (hereafter “China”), Myanmar or Thailand.13

Although the exact incentives provided can vary by SEZ and type of business, tax incentives available to investors in SEZs can include:

exemption from CIT for 6‑17 years and, for example, a 65% reduction in CIT payments for the 5 years following that exemption period14
a VAT rate of 0% on the import of materials for developing the SEZ and a VAT rate of 0% on other imports into the SEZ, which could include construction materials, machinery, raw materials or minerals (from abroad or from businesses registered in the domestic economy)15
exemption from land and property sales tax
a minimum 50% reduction in VAT paid on electricity and water supply
a cap on the marginal PIT rate at 5%.

Tax incentives must be well designed and combine investment attraction with minimal tax revenue loss, safeguarding public financial resources. Tax incentives often play a role in attracting foreign investment, they are usually not the primary determinant for businesses deciding whether to invest in a developing country (Blomstrom and Kokko, 2003[36]). Other factors – such as the stability of the political and economic environment, the quality of the infrastructure, access to local and regional markets, the availability of skilled labour, and regulatory clarity – often weigh more heavily in the decision-making process. These elements contribute to the overall investment climate and are vital in ensuring that an enterprise can operate efficiently and profitably. Although tax incentives can lower the cost of doing business, they do not necessarily offset weaknesses in these other areas. To the contrary, by reducing tax revenues, incentives can undermine the ability to invest in improving them. Tax incentives therefore need to be targeted and properly designed in order to be effective at attracting investment while minimising tax revenue losses.

Figure 4.6. Duration of CIT reductions according to the OECD Investment Tax Incentives Database

Lao PDR needs to rethink its tax incentive strategy in SEZs, shifting its focus away from profit-based incentives and towards expenditure-based ones. This would better target incentives while minimising revenue loss. Profit-based tax incentives, such as an exemption from CIT, provide tax benefits as a function of business profits. These types of incentives are heavily used in developing countries, in particular in SEZs (Celani, Dressler and Wermelinger, 2022[37]). Expenditure-based tax incentives, on the other hand, are tied to the amount of investment that businesses make in Lao PDR. They can come in various forms, including investment tax allowances, investment tax credits, or methods of quicker cost recovery, such as accelerated depreciation or immediate expensing.

Expenditure-based tax incentives offer several advantages compared with profit-based incentives, as follows:

Profit-based incentives contribute to a low revenue buoyancy. This is because even highly profitable enterprises that contribute to economic growth do not generate any (or only generate very little) tax revenue. Expenditure-based incentives ensure that tax revenues increase when profits grow. Under expenditure-based incentives, profitable enterprises also start paying tax earlier than those that are not profitable.
Expenditure-based incentives limit tax revenue loss because the government can set a maximum for an investment credit or allowance. Strategies such as accelerated depreciation or immediate expensing merely delay tax collection to the future, maintaining the actual tax payment. They only provide enterprises with the net present value difference that comes from making a deferred tax payment. In contrast, profit-based incentives lack such a built-in limit to potential tax revenue loss because the size of the tax reduction depends entirely on the profitability of the enterprises benefiting from the incentive.
Profit-based incentives disproportionately favour enterprises that generate tax-free returns with minimal real activity in Lao PDR. Enterprises making large long-term investments in tangible assets, which may initially yield lower returns, benefit comparatively less from such incentives. Expenditure-based incentives avoid this imbalance by providing tax relief as a function of actual investment in Lao PDR’s economy.
Expenditure-based incentives provide a continuous incentive for already existing enterprises to invest further, unlike the current system where investment incentives disappear for these enterprises once the tax exemption period ends. This property of profit-based incentives can also prompt enterprises to create new entities or threaten to move to another SEZ at the end of the exemption period in order to continue profiting from the tax exemption. Expenditure-based incentives do not tie tax benefits strictly to the number of years a business has existed.
Profit-based incentives can induce businesses with activity both within and outside the SEZ to artificially shift profits into the SEZ subsidiary, where profits are untaxed and reporting requirements are more limited (OECD, 2015[39]).
Profit-based incentives reduce the effective tax rate of businesses, which may trigger a “top-up tax” levied in another jurisdiction under the Global Anti-Base Erosion (GloBE) rules (OECD, 2021[40]). If the effective tax rate of a multinational business within the scope of the GloBE rules is below 15%, a foreign jurisdiction may decide to collect a top-up tax in order to bring the business’s effective tax rate to 15%. In such a scenario, Lao PDR forgoes tax revenue, and the profit-based tax incentive is less effective because the tax-exempt business pays tax elsewhere. Certain types of expenditure-based incentives, including immediate expensing or accelerated depreciation, do not affect the effective tax rate calculated under the GloBE rules, so these incentives avoid the risk of a top-up tax being levied in other jurisdictions (OECD, 2022[41]).

There exists a strong rationale for Lao PDR to levy a top-up tax on certain businesses in SEZs, bringing their effective tax rate up to the new global minimum tax rate of 15%. Large multinational enterprises (MNEs) with revenue exceeding EUR 750 million and with a subsidiary in a Lao PDR SEZ could soon face tax obligations in their headquarter country or other countries in which they conduct business if their effective tax rate in Lao PDR is below 15%. This is a result of the GloBE rules agreed by a large number of countries in 2021.16 It is important for Lao PDR to assess how many and what type of MNEs with revenues exceeding the threshold operate in the country’s SEZs. This would help in formulating a strategy to reform Lao PDR’s SEZs, as well as its wider tax incentive regime in the context of the newly established global minimum tax rate. The implications of the GloBE rules should also be taken into account when Lao PDR considers extending the tax exemption status of some SEZs. If the officially recorded payroll and tangible assets of these businesses are significantl, there could be a potential to maintain an effective tax rate below 15%, according to substance-based carve-outs provided for in the GloBE rules.

In the future, tax benefits granted within SEZs could be even more contingent on the employment or training of local workers. This would strengthen the positive spillovers between SEZs and the domestic economy. Currently, foreign workers make up over 50% of the employees in SEZs (IOM, 2019[42]). About 50% of the workforce in SEZs are foreign workers, most of whom work in the construction sector. Laotian workers predominantly work in the manufacturing and services sectors within the SEZs. If a significant portion of activity within SEZs involves foreign enterprises that utilise foreign workers and foreign equipment for export production, all while being tax-exempt and benefiting from subsidised electricity, this arrangement might not be the most advantageous for Laotian taxpayers. The strategic placement of many SEZs right on the border with neighbouring countries suggests that a large share of input materials into SEZs might be imported. If this scenario holds true, it highlights the need to target the tax benefits more effectively in order to ensure that the domestic (and local) economy profits sufficiently from SEZ activities. Lao PDR has introduced rules that mandate investors to staff at least 30% of their workforce with Laotian workers, but it remains unclear whether these rules are enforced (OECD, 2017[43]). More targeted tax benefits could also ensure that enterprises do not use SEZs as a strategy to undermine the tax base in the broader Southeast Asian region. This risk emerges if enterprises are able to relocate their domestic production and workforce just a few kilometres away into a SEZ right across the border in a neighbouring country and thereby avoid paying any significant amount of tax for multiple years.

The tax revenue loss from SEZs can multiply if countries do not properly design and monitor rules on how SEZ businesses interact with the national economy. Trade between SEZs and the national economy appears limited in Lao PDR right now, but additional challenges could emerge if Lao PDR becomes successful in attracting businesses that operate from within SEZs in order to service the domestic market. For example, until recently, the supply of goods from a SEZ-located enterprise to the national economy was not subject to VAT in Lao PDR, which could prompt businesses to route goods through SEZs before making them available to domestic consumers (as businesses can issue a 0% VAT invoice and recover input VAT when they sell goods and services to SEZ businesses). While this particular loophole has been addressed, Lao PDR needs to properly monitor the flow of goods in order to ensure that VAT is levied on these goods in practice. In 2022, the Lao PDR government decided to introduce check-points in order to supervise the entry and exit of goods between SEZs and the rest of the country (JETRO, 2023[44]).

One potential strategy to reduce abuse if SEZ businesses start servicing the domestic economy could be to reconsider the VAT rate of 0% applied to sales to SEZs and to imports into the SEZs, because some of the goods purchased by SEZ businesses may find their way back into the domestic economy. In theory, there is no need to zero-rate products sold to SEZs because the input VAT could have been recovered by SEZ businesses in any case when these businesses export (or resell) the final good. One reason why the 0% VAT rate may be in place is in order to reduce the administrative burden for businesses in SEZs. When considering a reform, it would therefore be crucial to ensure that SEZ businesses are refunded the input VAT quickly upon presentation of the export or sales certificate. If leakages from the suspension of import tariffs are believed to be large (imports could be purchased by a SEZ business but then brought to the domestic market), the exemption from tariffs could be replaced by a drawback mechanism under which SEZ businesses can claim a refund for import tariffs only when they present an export certificate (Zee, Stotsky and Ley, 2002[45]).

In order to avoid additional and ineffective tax revenue loss, future investment incentives in SEZs should only be granted according to predetermined, uniform and clearly declared criteria. The authority to grant tax benefits should lie exclusively within the MOF. The benefits should be codified in the standard income tax law rather than in separate investment promotion laws. As suggested in the latest OECD Investment Policy Review of Lao PDR, negotiations on a case-by-case basis involving multiple government bodies can increase the bargaining power of investors and lead to rent-seeking behaviour (OECD, 2017[43]). The enforcement of existing rules and regulations within SEZs needs to be strengthened as well, and the government has recently announced steps to do so (JETRO, 2023[44]). As enterprises in SEZs are highly observable, it is unclear why a large share of workers in some SEZs are not registered with the social security administration (Gerin, 2022[46]). Tax benefits should be contingent on compliance with other legal obligations, and it needs to be made clear to potential investors that these obligations are enforced.

A thorough cost-benefit evaluation of the SEZ regime’s impact on investment since its introduction in 2003 is required as well. This investigation should centre around determining whether the tax incentives achieved “additionality”, i.e. whether they led to investments that would not have occurred without the incentives. The expiration of the CIT exemption for the first round of investment projects made in SEZs in 2003 (in case these exemptions are not extended) could provide a useful case study to examine how investors behave once the tax benefits fade out and whether the incentive has attracted long-term investment. It could also be a good time to assess the profitability that enterprises in SEZs have reached multiple years after their initial investment. Finally, the assessment should establish whether SEZs have contributed to the artificial growth of certain sectors that are not conducive to the long-term development of Lao PDR but have grown merely as a result of large tax incentives and speculative investor behaviour (such as, potentially, certain projects in the real estate sector). In addition to monitoring the profits that SEZ businesses earn and the taxes they pay, attention should also be given to the profits earned and taxes paid by the SEZ developers (i.e. the businesses that oversee the operations within the SEZs). Even if enterprises are not liable for CIT in SEZs, it is good practice for the tax administration to monitor the economic activity of those businesses.

It is worth mentioning that enterprises in neighbouring countries also enjoy generous profit-based tax incentives from SEZs. A study published in 2015 estimated that there were more than 1 000 SEZs in ASEAN Member States in 2015, and the number of SEZs has continued to grow since then (UNIDO, 2015[47]). In order to protect tax revenues from being undermined by an overuse of tax incentives, excessive competition and the artificial shifting of profits between each country’s SEZs, further regional collaboration on the design of SEZs would be beneficial.

Lao PDR also grants additional investment incentives with slightly different rules for investment projects in less developed areas of the country. For example, businesses that invest in poor remote areas can be eligible for a ten-year exemption from CIT (upon meeting certain other criteria). These incentives generally suffer from the same disadvantages as those available in SEZs. One advantage over SEZs is that the eligibility rules for these incentives are explicitly stated in the 2016 Law on Investment Promotion. They also require a minimum number of Laotian workers to be employed by the investor.

The CIT gap is large

Lao PDR exhibits a large gap between potential and actual CIT revenue, which weakens the link between growth in profits and tax revenue. A recent World Bank estimate puts the CIT gap at nearly 90%, which suggests that Lao PDR loses significant tax revenue from non-compliance and from granting generous tax reductions, such as the exemptions granted for businesses operating in SEZs or reduced rates for specific sectors of the economy (World Bank, 2023[3]). The CIT gap is calculated as the difference between potential and actual CIT revenue. A large CIT gap contributes not only to a low level of tax revenues, but also to low tax buoyancy. If non-compliance is high and if many businesses are exempt from paying CIT (i.e. the CIT gap is large), growing corporate profits do not translate into additional tax revenue for the government. The reverse is true in countries with a smaller CIT gap, where the CIT is often considered the most buoyant tax type because business profits fluctuate strongly over the economic cycle.

Lao PDR has a CIT system based on differentiated rates by economic sector, which comes with similar disadvantages as the profit-based tax incentives in SEZs. For example, businesses operating in the area of green technologies only pay a CIT rate of 7% instead of the 20% standard rate. Several other sectors also have reduced CIT rates (Figure 4.7), If Lao PDR’s growth strategy aims at growing the economy primarily in the sectors that enjoy reduced CIT rates (e.g. green technologies), and if Lao PDR is successful in implementing this strategy, the country’s CIT revenue will structurally decline in line with economic growth. This is because a larger share of businesses will be taxed under the reduced CIT rate. In addition to the overly generous tax incentives (such as those mentioned in the previous section), the standard CIT system therefore also contributes to the large CIT gap and low tax buoyancy in Lao PDR.

Lao PDR could consider transitioning towards expenditure-based tax incentives and gradually move away from providing reduced CIT rates with little targeting. The tax system should incentivise the transition to new technologies, which could be achieved through more generous tax deduction rules instead of profit-based tax incentives or the use of sector-specific reduced CIT rates. Once businesses in the new technology sector have reached profitability, these profits should be taxed at the standard CIT rate.

Figure 4.7. Tax rates on corporate income by activity in Lao PDR since 2020, and standard CIT rates in peer countries in 2023

Scope exists to increase revenue mobilisation from the mining and hydropower sectors

Opportunities exist to boost revenue generation from the natural resource sector in Lao PDR. Estimates indicate stable non-tax government revenues of approximately 1.2% of GDP from natural resource royalties (75% from mining and 25% from hydropower) and 0.6% of GDP from dividends. However, Lao PDR loses out on tax revenue by repeatedly entering into generous investment agreements with natural resource developers, particularly for major ventures like hydropower projects. These agreements (which are usually undisclosed and negotiated on a case-by-case basis) grant substantial tax reductions, including full CIT exemptions for a specified number of years after the first profitable year. These types of incentives are particularly unsuited for natural resource projects that only run for a limited number of years (like mining projects). In the near term, Lao PDR should (at a minimum) ensure transparency by publicly disclosing the terms granted to investors. Incentives offered by the Ministry of Energy and Mines in the past have also included provisions that exempt the investor from paying a withholding tax on repatriated profits (Netherlands Enterprise Agency, 2017[50]).

The increased CIT for the natural resource sector could be maintained, but it is an ineffective tool for capturing natural resource rents as long as generous tax exemptions continue to be granted on a project-by-project basis. The CIT surcharge can also only be effective if the tax administration is able to monitor how businesses in the natural resource sector declare costs and avoid profits being stripped out of the country. Instead, Lao PDR should prioritise and increase the role of royalties, as they are easier to enforce and collect and are less susceptible to profit manipulation.

The profits of foreign firms are taxed under a deemed profits tax

With the “deemed profits tax”, Lao PDR follows a peculiar approach to taxing the profits of foreign businesses that do not have any registered entities in the country.17 When a Laotian business purchases goods and services from a foreign supplier, the Laotian business needs to withhold a tax on the “deemed profits” of the foreign supplier.18 The tax is calculated by multiplying: (i) the amount of the purchase; (ii) a deemed profit margin specified by the tax administration for each sector; and (iii) the CIT rate. For example, the deemed profit rate in the manufacturing sector is 7%, so any purchase of manufactured goods from foreign suppliers is subject to an additional effective tax rate of 1.4% (7% profit rate × 20% CIT rate).

This deemed profits tax is incompatible with international model tax conventions and would likely have to be reformed were Lao PDR to strive for tax agreements with other countries. In international model tax treaties (such as the UN or OECD model tax conventions), a country’s taxing rights are limited to businesses that have a permanent establishment within the country. That is, only income from businesses that have a permanent establishment in Lao PDR would be taxable in Lao PDR under model tax treaties, and the mere fact of selling goods or services to an enterprise resident in Lao PDR does not trigger a permanent establishment. Other countries may not be willing to sign a tax agreement with Lao PDR as long as the domestic tax system includes a tax that is incompatible with model tax treaty rules.

Lao PDR has already entered into a small number of tax agreements based on model tax treaty templates (with countries such as Singapore and Thailand) despite the treaty rules being incompatible with its deemed profits tax. As per the rules of the tax treaties, suppliers located in either of these two treaty countries should be exempt from the deemed profits tax as long as they do not maintain a permanent establishment in Lao PDR (e.g. in the case of a Thai company selling machinery to a Laotian business).19 If Lao PDR plans to expand its tax treaty network over time, a larger and larger share of foreign suppliers would be exempt from the deemed profits tax, so it would no longer raise meaningful revenue.

The deemed profits tax is also ineffective at taxing the profits of foreign suppliers because, in practice, the deemed profits tax will often simply amount to an additional tax on imports to be paid by Laotian businesses.20 There are many inputs that Laotian businesses can only purchase from foreign suppliers, and purchases from Lao PDR likely constitute only a small fraction of total sales for large multinational businesses. In such a setting, the incidence of the deemed profits tax can be expected to largely fall on the Laotian businesses that purchase goods and services from abroad.

The deemed profits tax complicates the administrative procedures that Laotian businesses have to follow when purchasing inputs from abroad. Aside from the deemed profits tax and the import VAT, businesses often also have to pay an import tariff and an excise tax. Even if the combined tax burden created by these three or four distinct levies is not excessively high, such a system is complex for the government to administer and for the taxpayer to comply with. Businesses also have to consider the different tax implications for each of these taxes: A business can recover the VAT paid on its imports from abroad and it can deduct the excise taxes and import tariffs from its CIT, but the deemed profits tax is not deductible. Lao PDR could consider integrating the deemed profits tax into the VAT or into the import tariff system in order to reduce the number of different taxes importing businesses have to pay.

Without any transfer pricing rules, it is also difficult for the tax administration system to monitor if the prices charged and reported for the purposes of the deemed profits tax rate are correct. Taxing transactions with foreign enterprises based on a deemed profits tax that applies to the foreign enterprise’s domestic turnover creates incentives to manipulate the amount of economic activity and turnover reported in Lao PDR. Businesses could have an incentive to under-report the value of purchases made from foreign suppliers. If a multinational business regularly records transactions with its own subsidiaries outside Lao PDR, the business could have an incentive to reduce the price it charges to itself for the goods and services purchased by its Lao PDR subsidiaries.

The lack of a consistent international taxation framework results in revenue leakages

Lao PDR currently lacks a strong international tax framework, which is necessary in order to limit the taxable economic activity that enterprises and individuals can artificially shift abroad:

Individuals are not taxed on their foreign-sourced capital income because Lao PDR follows a purely territorial principle in its PIT system.
Lao PDR does not participate in international tax information sharing under the Automatic Exchange of Information (AEOI) or Exchange of Information on Request (EOIR) standards. As a result, the country lacks information on the foreign income and assets held by its residents.
There are no codified transfer pricing, controlled foreign company (CFC) or thin capitalisation rules. In addition, the country is not part of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS). This, in combination with the low withholding tax rates on payments to non-resident enterprises, can enable businesses to shift taxable profits outside the country.
Lao PDR only has a limited number of tax treaties, and the existing treaties foresee low withholding rates.

Under Lao PDR’s present system, individuals are taxed only on income earned within its borders. For example, capital income earned by residents from assets managed in foreign accounts (like those in countries with low capital income taxes, such as Singapore) remains untaxed in Lao PDR. A territorial approach to personal income taxation can prevent double taxation of foreign-earned income, especially as Lao PDR has few double taxation treaties. However, this is an uncommon approach, and it allows high net wealth individuals to avoid Lao PDR taxes by keeping their savings in low-tax jurisdictions.

Lao PDR could consider transitioning to a worldwide tax regime for personal income in order to tax the foreign-sourced income of individuals who are Lao PDR tax residents. Lao PDR would need to define clear rules that stipulate when an individual is considered a tax resident (for example, if residing in the country for more than 183 days per year) in order to ensure that foreign workers pay tax on their salaries and do not claim tax residency status in neighbouring countries. Currently, Lao PDR employs a worldwide approach for corporate income but a territorial system for personal income. In practice, reversing this system, taxing personal income on a worldwide basis, and partially transitioning to a territorial system for corporate income could better serve Lao PDR.

Participating in the international exchange of taxpayer information, could help Lao PDR raise additional tax revenue. If the country decides to switch to a worldwide tax system for personal income, participating in the information exchange between tax administrations (currently Lao PDR does not participate) could help raise additional tax revenue from undeclared income and assets held abroad by Lao PDR tax residents. Under the EOIR standard, a country’s tax authorities can make specific requests to the tax authorities of other countries for information that will allow them to progress their tax investigations. The AEOI standard organises the automatised annual transmission of detailed information about financial accounts held by non-residents to the resident country. Neighbouring countries such as Viet Nam have started the implementation process, and others (such as China and Thailand) are already sharing taxpayer information. Important regional financial centres, like Hong Kong, China and Singapore, have been sharing information under this mechanism for several years as well.

Through the automatic exchange of information between tax administrations, Lao PDR could gain access to information about financial accounts held by Lao PDR residents in foreign jurisdictions. Collecting tax on these capital income streams would generate additional revenue and strengthen the fairness of the tax system. Among the eight Asian nations that have tracked their increase in tax revenue generated from using the AEOI standard, the average revenue gain since participating in this information sharing was equal to approximately EUR 1.3 billion over the 2020‑22 period (OECD, 2023[51]). These statistics highlight the potential fiscal significance of participating in this information exchange system. While setting up the technical capabilities required in order to participate in the EOIR and AEOI involves upfront investment on the part of the tax administration, technical assistance would be available from international organisations.

Without transfer pricing rules, the tax administration system lacks the tools to verify that goods and services are sold at the correct “arm’s length” price between domestic and foreign enterprises – and taxed correctly under the CIT or deemed profits tax. Businesses may have an incentive to understate the price of intra-group purchases from abroad in order to pay a lower deemed profits tax. However, purchases from SEZ subsidiaries are prone to being overstated in value because these purchases enable businesses to shift more activity into the tax-exempt zone. As a first step, Lao PDR should assess the number of multinational businesses not located in SEZs and the number of Laotian businesses with subsidiaries both within and outside SEZs. These would be the two types of businesses for which the tax revenue loss from transfer mispricing could be the largest.

Despite capacity constraints, the tax administration should develop a set of transfer pricing guidelines for businesses to follow. The tax administration has stated that it does not have the capacity at this point to introduce and enforce full-scale transfer pricing rules (JETRO, 2022[52]). Nevertheless, it should develop guidelines to overcome current shortcomings. Lao PDR does provide some guidance stating that transactions should be recorded at “market value” or “fair value”, but how this price should be determined in the absence of a market transaction (i.e. if the transaction takes place within a group) is unclear. This creates uncertainty for businesses because, at the same time, tax inspectors have the discretion to determine whether or not a particular transaction was recorded at the appropriate price and retroactively adjust its value. As a result, some international businesses prepare transfer pricing compliant documentation even though it is not required. At the same time, the tax administration encounters difficulties in determining the taxable profits of subsidiaries of foreign MNEs that operate in SEZs.

Gaining access to country-by-country (CbC) reports could help Lao PDR carry out transfer pricing assessments on transactions between linked enterprises, and also analyse the tax revenue risk from other tax planning strategies potentially employed by MNEs. Today, as a non-member of the OECD/G20 Inclusive Framework on BEPS, Lao PDR does not have access to CbC reports prepared under the BEPS Action 13 standard. CbC reports include aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which an MNE operates. More than 100 jurisdictions have laws in place introducing a CbC reporting obligation for MNEs. In addition, more than 3 000 relationships were in place for the exchange of CbC reports between jurisdictions in 2022 (OECD, 2022[53]). This means that every MNE with consolidated group revenue of at least MULTINATIONEUR 750 million is already required to file a CbC report – very likely including most MNEs that are active in Lao PDR. For example, China and Thailand (the headquarter countries of several major investors in Lao PDR) require MNEs to compile a CbC report.

The revenue loss from undeclared imports into Lao PDR is substantial

There is a need to enhance customs procedures and border checks in Lao PDR in order to reduce the high levels of fraudulent behaviour. Evidence suggests that Lao PDR may lose up to 1% of its GDP in revenue from import tariffs, excise taxes and import VAT through undeclared imports flowing into the country without being reported to the customs administration (AMRO, 2022[54]). These estimates have been calculated by comparing the value of exports recorded by Lao PDR’s trading partners with the imports recorded by Lao PDR, and then applying the relevant statutory tariffs, excise taxes and import VAT (Table 4.2).

Lao PDR trading partner	Discrepancy between import and export statistics	Major products
China	15%	Office/data machines, vehicles, furniture
Thailand	28%	Perfumes/cosmetics, miscellaneous food, telecommunications
Viet Nam	41%	Petroleum and related products, beverages, miscellaneous food products

Source: (AMRO, 2022[54]), Annual Consultation Report on Lao PDR, based on WITS.

Import procedures should also be simplified and made more efficient so that Laotian businesses do not face excessive administration costs, which can contribute to lower tax compliance. One factor contributing to the complexity of import formalities is that businesses often have to pay several different taxes and levies (including the import tariff, import VAT, an excise tax and the deemed profits tax) on foreign supplies. Some of these taxes, such as the deemed profits tax and the large number of excise taxes, are uncommon in an international context and come with many disadvantages; they should likely be reformed (see the specific section on these taxes). Imports into Lao PDR have become significantly more expensive for Laotian businesses in recent years for reasons that are unrelated to the tax system, but rather due to the depreciation in the value of the Lao kip. In this context, the tax system should not add any additional unnecessary burden that further increases the effective cost of imports. Initiatives like the Lao National Single Window, a one-stop portal to submit all trade-related documents, should be continued and reinforced.

The PIT is only moderately progressive, and inflation has pushed taxpayers into higher tax brackets

A progressive tax system can contribute to tax revenue buoyancy because taxpayers get pushed into higher tax brackets and pay a higher average tax rate as their incomes grow. Lao PDR has a progressive PIT, but its top marginal rate of 25% is relatively low compared with those of peer countries. In addition, tax brackets in Lao PDR are wide, especially at the top. This implies that only very large incomes (relative to the exempt income tax bracket) pay higher marginal tax rates. For example, the top marginal PIT rate applies only to incomes that exceed 50 times the minimum wage, while a taxpayer with income equal to the maximum contribution ceiling for social security still falls within the lowest income tax bracket. Top marginal rates in other countries in the Southeast Asian region stand at 35% (the Philippines, Thailand and Viet Nam), 30% (Malaysia), 25% (Myanmar) and 20% (Cambodia). The fact that workers in some SEZs pay a maximum marginal PIT rate of 5% also undermines the progressivity and revenue buoyancy of the PIT.

Higher-paying jobs (and not the tax system) are the key reason why Laotians move abroad (ILO, 2023[29]). However, Lao PDR needs to ensure that the PIT burden does not outgrow the productivity of its labour force, which could soon become a concern for lower-skilled and medium-skilled employment. High inflation has effectively neutralised the tax-lowering effect of the PIT tax reform that Lao PDR implemented in the beginning of 2020, which lowered the tax burden by increasing the income thresholds of tax brackets.21 However, overall prices increased by 34% between 2020 and 2022, and by 31% in 2023. When the tax schedule prior to 2020 is adjusted for inflation until the end of 2022, the pre-2020 tax burden closely resembles the post-2020 tax burden (see Figure 4.8). This suggests that the tax reduction has been almost completely offset by inflation over the last three years.

While the 2020 tax reform has shielded taxpayers from inflation-induced “bracket creep” over the last three years, the actual tax reduction has now been neutralised. Under the new tax schedule, taxpayers paid a similar amount of tax in 2022 as they would have paid under the old tax schedule if it was adjusted for inflation. An adjustment of income tax brackets would be warranted if Lao PDR wants to avoid “bracket creep” in the future and restore the tax-lowering effect of the 2020 tax reform. With inflation around 25% during the first trimester of 2024 (Bank of the Lao PDR, 2024[55]) Lao PDR might consider an upward adjustment of the PIT thresholds. In the future, tax brackets could be indexed to inflation.

Such an adjustment would not have to be uniform across all tax brackets, and higher brackets could be adjusted more slowly than lower brackets, increasing the progressivity of the PIT. A differentiated adjustment could also be used in order to narrow the markedly wide tax brackets in real terms, particularly at the top of the income tax schedule (e.g. the top marginal tax rate only applies to incomes that exceed 50 times the minimum wage). An increase in the PIT exemption threshold will also be necessary if Lao PDR wants to avoid the fact that minimum income earners will have to pay PIT in the future. After its latest increase, the minimum wage coincides with the threshold of the first income tax bracket, so minimum wage earners would have to start paying PIT once the next increase in the minimum wage is implemented.

The Lao PDR PIT schedule and SSC system create a large increase in the marginal tax burden on labour around the minimum wage when workers start paying PIT (5%) and SSCs (a 6% employer contribution and a 5.5% employee contribution). On the other hand, workers earning incomes in the second PIT bracket already surpass the maximum contribution threshold for social security. In addition to a more progressive PIT schedule with more brackets, a progressive SSC schedule could be envisaged under which the government subsidises the contributions of low-income workers in order to encourage registration.

Figure 4.8. Average and marginal personal income tax rates in Lao PDR

SSC maximum contribution thresholds kick in at relatively low incomes

Low maximum SSC contribution thresholds reduce the buoyancy of a tax system because taxpayers whose earnings have reached the threshold do not pay any additional contributions when their income grows. The maximum combined employer and employee contribution to social security is low, at LAK 517 500 per month (around EUR 25). The income necessary to reach the maximum contribution threshold in Lao PDR is equivalent to around five times the minimum wage and still falls into the first PIT bracket, which has a marginal rate of 5%. In Colombia, the maximum contribution threshold is set at 25 times the minimum wage, and in Viet Nam it is equal to 20 times the (much higher) minimum wage. It is unlikely that Lao PDR can generate enough resources to finance adequate social protection from such a narrow SSC base. The maximum contribution threshold should also grow in line with inflation.

Self-employed individuals can register voluntarily for social security and pay a total rate of 9% on an income amount they select themselves. The voluntary insurance of self-employed individuals comes with the risk that high-income earners will avoid the social security system. An alternative approach could be to make registration mandatory for the self-employed. If a minimum SSC threshold were to be introduced, the Lao PDR government could subsidise the contributions of self-employed individuals whose actual income is below the minimum wage.

Suboptimally designed taxes can promote tax arbitrage

Tax revenue loss can also occur if the tax system incentivises taxpayers to conduct their work as a self-employed individual instead of as a salaried worker. The special income tax regimes for microenterprises and freelancers that are available in Lao PDR create a strong incentive for high-income workers to turn their labour income into business income. Ideally, the tax system should be neutral so that individuals choose their employment form according to the nature of the activity they perform and not due to tax considerations.

This is a particular problem for the freelancer regime that was introduced in 2020, which offers an uncapped flat 5% gross income tax rate for consultancy income and a 2% rate on construction and repair services income. These rates are considerably lower than the average PIT rates for higher incomes. The microenterprise regime is capped at LAK 400 million and offers a presumptive tax rate on turnover of 1% (agriculture), 2% (trade) or 3% (services). These turnover taxes could be attractive as an alternative to employment income in sectors that are less cost-intensive, such as the services sector. In comparison, a salaried worker with an annual income of LAK 400 million would pay an average PIT rate of 13%. Lao PDR could consider capping the freelancer regime in order to avoid revenue loss from tax arbitrage. It would also be advisable to deny former employees access to the presumptive tax regime if they continue working for their previous employer as a self-employed business.

Capital income is taxed at low rates

The tax rates applied to capital income are generally low, especially when compared with OECD member countries (Table 4.3). However, capital taxes are more in line with what can be observed in other countries in the Southeast Asian region. It would be important for Lao PDR to analyse who earns capital income in the country in order to make an assessment as to whether the capital income tax rates could be increased. It would also be key to analyse who benefits from exemptions from withholding taxes (such as those granted to some investment projects in the hydropower sector). The tax treatment applied to the sale of shares and to the sale of immovable property should be based on the realised capital gain rather than the transaction value.

	Type of income	Tax rate in Lao PDR	Tax rate in other countries
Capital income	Dividend income	10%	OECD member countries: 20% Viet Nam: 0% Thailand: 10% Singapore: 0%
	Interest income	10%	OECD member countries: 16% Viet Nam: 5% Thailand: 15% Singapore: 15%
	Royalty income	5%	OECD member countries: 19% Viet Nam: 10% Thailand: 15% Singapore: 10%
	Income from the sale of shares	2% transaction tax
	Income from the sale of immovable property	2% transaction tax
	Income from leases (land, buildings, machinery, etc.)	10%
Other types of income	Income from brokerage fees	10%
	Lottery prizes	5%
	Pensions received by civil servants	0%

Note: Some OECD member countries have in place a full or partial dividend imputation system, but rates in Lao PDR are low in comparison even if the total effective tax rate on distributions is considered (taking into account the CIT and integration).

Source: (OECD, 2023[57]), Corporate Tax Statistics (database), https://www.oecd.org/tax/beps/corporate-tax-statistics-database.htm; (IBFD, 2023[56]), Tax Research Platform (database) https://research.ibfd.org/ (accessed on 23 November 2023).

The land tax does not reflect increases in market prices

Recurrent taxes on immovable property are generally viewed as a reliable and progressive revenue source, causing limited harm to investment and economic growth (Brys et al., 2016[58]). However, the tax revenue collected from the land tax22 in Lao PDR is low and has not been increasing as a share of GDP in recent years, despite a boom in real estate prices. The reason is that Lao PDR has not adjusted the land tax in line with higher land values, and that enforcement of this tax remains low (particularly outside the capital city of Vientiane). If market prices increase and the amount of tax to be paid per unit of land remains the same, the effective tax burden on land declines over time, contributing to low tax revenues and a low tax revenue buoyancy.

Revenue from land and property taxes in Lao PDR is extremely low. The land tax for a 1 000 square metre residential area in the most urbanised zone of Vientiane would be equal to LAK 80 000 per year (around EUR 4 based on 2023 exchange rates).23 The total revenue raised from recurrent taxes on immovable property in Lao PDR only accounts for around 1% of tax revenue or 0.1% of GDP. Low taxes on land may have also contributed to real estate speculation. Foreign investors are reported to purchase land usage rights in Lao PDR in order to build apartments for speculative purposes, but do not make them available to the Laotian housing market because the cost of holding empty property is very low.

Lao PDR could increase the land tax in order to generate additional revenue and better reflect the increases in land values over the last years. The country should also devise a mechanism to link the land tax to the evolution of land prices in order to ensure that tax revenues will grow in line with future price increases.24 In order to discourage real estate speculation, the country could also consider charging a higher land tax for holding empty residential property that is not owner-occupied and is being withheld from the rental market in urban areas. Lao PDR already charges a higher land tax on undeveloped land, and these higher taxes could be applied to empty residential property as well.

Lao PDR’s land tax is calculated as a function of the land area and location. For example, land in the capital city of Vientiane is taxed more heavily than land in rural areas, and land used for industrial purposes and commerce is subject to a higher tax than residential land. The design of the land tax is atypical in that it does not use an approximation of the value of the land as the tax base (i.e. the value to which a tax rate is applied), but instead directly specifies the amount of tax to be paid per square metre or per hectare of land. Buildings and land improvements do not enter the calculation of the final tax liability. A recent OECD analysis of property taxation in the Asia-Pacific region suggests that, apart from the land use tax in China, Lao PDR is the only country relying on such a purely “area-based” approach (OECD, 2023[1]).

Moving from a purely land-based tax to a recurrent tax on immovable property (i.e. also accounting for the value of buildings and land improvements) would increase the fairness of the land tax. This requires a new approach to determining the value of land and buildings because the current tax design only stipulates the final amount of tax to be paid per square metre. What would be advisable in any case would be to split the tax amount levied per square metre into a tax base (the value of the property) and a tax rate that is applied to the tax base. This would allow Lao PDR to separate discussions about changes to the tax rate from discussions about adjusting property values.

One realistic approach to determining the value of immovable property for tax purposes, at least in the short term, could be to maintain the area-based approach but introduce adjustment factors that attempt to incorporate the value of buildings and land improvement (such as the construction date or the type of building). The base amount could be adjusted regularly in line with the evolution of prices observed in local housing markets. Accurately valuing property for tax purposes is not straightforward, especially in a developing country where a comprehensive and reliable cadastre is unavailable (particularly in rural areas). In 2021, only around 40% of land parcels in Lao PDR had been registered and titled (World Bank, 2021[59]). Frequently re-estimating actual property values on a granular level based on actual market transactions would either require significant resources or it would not be possible at all if transactions are not sufficiently observable by the government. Nevertheless, a system of immovable property taxes levied according to market prices should remain the objective in the medium term, following good practices in some other ASEAN Member States.

Lao PDR also loses tax revenue because it exempts firms (such as large real estate developers) in SEZs from paying the land tax. For example, the That Luang Lake SEZ in Vientiane offers investors 99‑year leases paired with a combination of tax incentives, among which is a complete exemption from the land tax for investments above USD 100 000 (United States dollars). The tax benefit also carries over to individual foreign residents purchasing units in already developed apartment complexes located in SEZs. Real estate in SEZs often corresponds to luxury apartments in the most sought-after areas of Vientiane, and the real estate is mostly developed by large domestic or foreign developers and investors. As a case in point, one SEZ benefiting from a land tax exemption has been advertised by the government of Lao PDR as hosting “one of the best golf facilities in the country” (SEZO, 2024[60]).

By exempting property in SEZs from the land tax, Lao PDR exempts property that is located in areas where the land tax could most easily be enforced and would likely generate the most revenue. In OECD member countries, taxes on immovable property finance local services that the property owners receive. Owners of immovable property profit from government services irrespective of whether the property is located within or outside a SEZ and, as a result, there are strong arguments to ask SEZ businesses to pay the land tax (businesses in SEZs arguably benefit from even more government services than those located outside of SEZs, as they have access to a one-stop service office, for example). Scaling back the land tax exemption in SEZs would also contribute to the progressivity of the tax system, as it currently exempts large businesses and owners of luxury real estate from paying this tax.

Enforcement of the land tax also needs to be strengthened across the country. Despite the significant penalties for tax non-compliance, such as the risk of losing land usage rights after three years of non-payment, the overall tax compliance rate in Lao PDR remains low. An official land tax register and better-defined land property rights would also be necessary in order to improve the administration of the land tax.

Recent reforms have resulted in reduced tax rates

The recent trend of reducing tax rates in Lao PDR also contributes to the country’s low tax revenue buoyancy. Starting in 2020, the country has implemented a series of tax reforms that resulted in lower rates for both the CIT and the VAT. Specifically, the standard CIT rate has been reduced from 24% to 20%, and certain CIT rates applicable to specific sectors (such as mining) have been lowered as well. Moreover, the standard VAT rate was cut by three percentage points (from 10% to 7%) in 2022. It has recently been brought back up to 10% in March 2024 (Figure 4.9).

Lao PDR’s ability to implement tax reductions is severely limited given its very low tax revenues and high public debt. In order to restore tax revenue buoyancy, it would be advisable for Lao PDR to abstain from further tax cuts and instead prioritise improving the design and enforcement of the tax system in order to increase its buoyancy. A challenge lies in the fact that some of the tax reductions were part of a regional trend, with similar tax reductions also happening in neighbouring countries (Figure 4.9). A co‑ordinated policy initiative within ASEAN Member States could be one strategy to prevent further undermining the VAT and CIT as tax revenue sources. It would also be key for Lao PDR to evaluate whether the tax reforms have achieved their intended policy goals. For example, the reduction in VAT rates was carried out in order to promote formalisation; however, the extent to which this objective has been realised is yet to be determined.

Figure 4.9. Standard VAT rate in Lao PDR and peer countries in 2023 and 2024

There is a larger role for the tax system in promoting formalisation and sustainable growth

Presumptive tax regimes could be redesigned

Presumptive or simplified tax regimes can be an important tool that is used to gradually increase the formalisation of previously informal businesses and their workers while at the same time raising some tax revenue (Mas-Montserrat et al., 2023[25]). Presumptive tax regimes aim to encourage tax compliance by reducing tax compliance costs and levying lower tax rates compared with the standard tax system (Loeprick, 2009[61]). If it is well-designed, a presumptive tax regime can contribute to positive tax revenue buoyancy because the growth in economic activity will move businesses from the presumptive tax system to the standard tax system (rather than businesses remaining informal and not paying any tax at all).

However, tax regimes of this nature need to be well-adapted to each individual country’s context in order to avoid unintended consequences. Badly designed presumptive tax regimes not only fail to encourage formalisation but can also result in excessive tax revenue loss (if the eligibility criteria are too broad), prevent businesses from growing (if the transition between the presumptive and the standard tax regime is not well-designed) or encourage self-employment (if salaried workers can easily transform their employment income into business income taxed under the presumptive regime).

Like many other countries, Lao PDR has introduced a set of presumptive tax regimes for microenterprises and small businesses. For example, a flat turnover tax of 1‑3% is available for microenterprises with turnover of less than LAK 400 million. Larger businesses with turnover of up to LAK 6 000 million and up to 99 employees can benefit from a temporarily reduced CIT rate of 3‑5% (Table 4.4).

These presumptive tax regimes do provide considerable tax benefits relative to the standard tax treatment, but the design of the regime in Lao PDR could be improved in order to increase its effectiveness and limit tax revenue loss through the following measures:

Transitioning towards a presumptive tax base: The lower CIT rates available to small and medium-sized businesses do not reduce the tax compliance costs for these businesses, which should be a key feature of a successful presumptive tax regime. However, the reduced CIT rate may incentivise businesses to grow into the regular tax regime. The specific tax design could be evaluated using microenterprises’ tax return data.
Evaluating the alignment of the VAT registration threshold and the design of the presumptive tax regime: Businesses that have a turnover of more than LAK 400 million have to register for VAT in order to qualify for the presumptive tax regime. There is scope for re-evaluating the design of the VAT registration threshold and the extent to which it is aligned with the design (and possible reform) of the presumptive tax regime.
Lifting the three-year eligibility limit: Limiting the eligibility for the presumptive tax regime to three years could deter informal businesses from entering the regime if they expect their business to grow more slowly. Instead, eligibility to enter the presumptive regime could be granted until a business has surpassed the turnover threshold (regardless of how many years it takes). Fixed time periods can also prompt a business to re-establish itself as a new legal entity in order to continue benefiting from the regime. In order to avoid the misreporting of turnover by businesses that want to remain in the presumptive tax regime indefinitely despite growth in their economic activity, a comprehensive audit could be conducted at a predetermined frequency (e.g. every three years).
Removing the additional eligibility rule based on asset ownership: The threshold for the maximum value of assets a business is allowed to own in order to qualify for the presumptive tax regime could be removed. Businesses may fail to qualify for the presumptive regime from the very beginning of their operations if meaningful capital investment is required for the type of activity they perform. For example, under the current rules, a microenterprise with 1‑5 employees can no longer benefit from the presumptive regime if it owns assets worth more than LAK 200 million (around EUR 9 500). These additional criteria also increase tax compliance costs for businesses, and they are difficult for the tax administration to verify.
Including SSCs in the scheme: The presumptive tax regime could include SSCs for self-employed workers and small businesses by levying a low presumptive amount. This would ensure that enterprises (and their workers) are not only brought into the tax system through the presumptive regime but also register with the social security administration.
Evaluating and, possibly, introducing sector-specific turnover rates under the presumptive tax regime: The tax rates applied to turnover could be stratified by sector and gradually increase in such a way that the tax liabilities under the presumptive and standard tax regimes converge close to the eligibility threshold (for enterprises with average profitability).
Offering a one-stop tax office: In order to further reduce tax compliance costs, businesses taxed under a presumptive regime could be made eligible to use a centralised one-stop shop for all administrative requests on tax issues, similar to the system available to businesses located in SEZs.
Limiting abuse: Lao PDR should be rigorous in monitoring which types of businesses use the presumptive tax regime and whether they are businesses that belong to the target group. Special rules should be put in place in order to prevent salaried workers from transitioning to the microenterprise regime. Lao PDR should also monitor potential under-reporting of turnover under the presumptive tax regime – for example, by cross-validating the declared turnover with information collected for VAT administration purposes.

Type of business	Eligibility criteria	Tax treatment
Microenterprises (not VAT-registered)¹	1‑5 employees Assets owned: <LAK 200 million25 Turnover: <LAK 400 million	1% turnover tax (manufacturing sector) 2% turnover tax (trade sector) 3% turnover tax (services sector) Tax exemption (turnover <LAK 50 million)
Microenterprises (voluntarily VAT-registered)	1‑5 employees Assets owned: <LAK 200 million Turnover: <LAK 400 million	0.1% CIT
Small businesses	6‑50 employees Assets owned: <LAK 1.5 billion Turnover: <LAK 3 billion	3% CIT for three years
Medium-sized businesses	51‑99 employees Assets owned: <LAK 6 billion Turnover: <LAK 6 billion	5% CIT for three years

Note: The standard CIT rate is 20%. Businesses that have a turnover of more than LAK 400 million must register for VAT in order to qualify for the presumptive tax regime. LAK 100 million is equivalent to around EUR 4 700 at 2023 exchange rates. The VAT registration threshold is LAK 400 million.

Source: VDB Loi (2023[49]) ; (IBFD, 2023[56]), Tax Research Platform (Database), https://research.ibfd.org (accessed on 23 September 2023).

The tax system could play a more effective role in promoting formalisation

The relationship between the tax system and formalisation is complex. More nuanced perspectives have prevailed in recent years, highlighting that the tax burden is not the only determinant of whether a business or worker becomes formalised. However, a well-designed tax system can facilitate registration and formalisation, and the tax system in Lao PDR could perform more effectively in that regard. Currently, only about 300 000 workers are registered for social security in Lao PDR.

The following measures could increase the formalisation incentives provided by the Lao PDR tax system:

Where fees exist to register workers for social security, these should be abolished.
The tax system should be forward-looking in order to help ensure that enterprises do not have to pay SSCs retroactively if they register workers.
Enterprises should only be allowed to deduct the labour cost of workers as a business expense if the workers are registered with the social security administration.
Tax benefits (such as the tax exemptions in SEZs) should be conditional on complying with other legal obligations, including registering workers for social security.
The government of Lao PDR could advertise that future “insurance-type” government benefits (such as support for businesses and workers during the COVID‑19 pandemic) are conditional on registration as a formal worker or business and having contributed to social security.
Lao PDR could consider introducing a progressive SSC schedule with reduced rates for lower-income workers that are matched by government contributions.
Registered workers should be able to view the SSCs they have made and their accumulated pension rights online or by using a mobile application. Under such a system, workers would receive information about the benefits associated with their contributions and not be left with the impression that their contributions are “lost”.

Health and environmental taxes are underused

Health taxes have been increased, but non-compliance is high

There is a significant gap between how health taxes in Lao PDR function on paper and in practice. Health taxes are generally not low in Lao PDR, and many rates have been increased in the last decade (Figure 4.10). The country levies substantial excise taxes on alcohol, tobacco and sugar-sweetened beverages (SSBs), but the policy goal of raising revenue and reducing consumption of these harmful products is often not achieved (for example, as of 2015, 32% of people aged 15 years or over in Lao PDR were using tobacco products, one of the highest rates in the Southeast Asia region (Xangsayarath et al., 2019[62]). The reason is a mix of non-compliance with the excise taxes and the fact that Lao PDR has pursued contradictory policies, such as the long-term stability contract, which guarantees low excise tax rates to the country’s leading tobacco producer.

Figure 4.10. Ad-valorem health tax rates in Lao PDR, 2023

The stability contract with Lao PDR’s largest tobacco producer constrains tobacco tax policy

The Lao PDR government has entered into a 25‑year investment agreement with what has become the leading tobacco producer in the country (holding more than 75% market share), which limits the government’s capacity to increase excise taxes until 2026 (Tan and Dorotheo, 2021[63]).26 In the meantime, Lao PDR has increased excise taxes on tobacco products to 57% of the wholesale price, but the contract with the partly government-owned tobacco producer guarantees that products covered by the agreement are only taxed at 15% or 30% of the production cost. There is also an additional excise tax of LAK 500‑600 (EUR 0.02‑0.03) per pack of cigarettes, but a recent report indicates that tobacco companies are not complying with this tax (UNDP, 2022[64]). According to the same report, tobacco producers are also refusing to pay the 2% CIT surcharge and an additional per-pack levy, which they are required to pay into the country’s Tobacco Control Fund. At the same time, local tobacco producers are shielded from international competition through an import tariff of USD 0.40 per pack.

A coherent tobacco tax strategy needs to be implemented from 2026 onwards

Addressing Lao PDR’s high rate of tobacco use will require a tobacco tax strategy from 2026 onwards. Increased and better-designed health taxes on tobacco products could help to gradually reduce tobacco use in Lao PDR, and the extra revenue generated could be used to fund public health initiatives or other government expenditure. Adhering to the World Health Organization (WHO) recommendation to tax tobacco products at a rate of at least 75% of their retail price by 2023 would mean a fourfold increase in cigarette prices in Lao PDR if the entire cost of the tax increase were shifted to consumers (UNDP, 2022[64]). In order to increase the effective taxation of tobacco products, it would be a key priority for Lao PDR to make the largest tobacco producers comply with the existing tax rules and ensure that the special tax treatment of one company ends in 2026. Estimates suggest that Lao PDR has lost almost USD 150 million in tax revenue over the last years as a result of the investment contract (Tan and Dorotheo, 2021[63]). In addition to the forgone tobacco tax revenue, the high number of smokers generates significant costs for the healthcare system, creates wider social and economic problems, and reduces well-being. Tobacco tax reform is urgent and should be treated as a priority.

Lao PDR could consider replacing the current ad-valorem excise taxes with specific excise taxes per pack of cigarettes. The lack of compliance with excise taxes is proof that the current mixed model has not been successful. The government also lacks information about the pricing strategy and true production costs of the country’s largest tobacco producer (despite the government’s involvement in the business), which means that it has difficulty enforcing the ad-valorem tax. Specific excise taxes are easier to enforce and, if adjusted for inflation, guarantee a minimum level of tax per package of cigarettes. Increases in health taxes do not necessarily need to be regressive (i.e. harm poorer households more than richer households). Box 4.3 expands on these and other common arguments which often prevent effective tobacco tax policies from being adopted.

There is also a wider inconsistency in Lao PDR’s tobacco control policy that needs to be addressed. The country combines stringent measures like a complete ban on e‑cigarettes with the provision of generous investment contracts to the tobacco industry. This is likely due to the government’s involvement in the tobacco industry. In the Global Tobacco Industry Interference Index 2021, Lao PDR found itself ranked 62nd out of 80 assessed countries (Assunta, 2021[65]). Also in 2021, Lao PDR joined 30 other countries in imposing a complete ban on e‑cigarettes and other new nicotine products.

Any increases in health taxes in Lao PDR should go hand-in-hand with stronger enforcement in order to limit smuggling and tax evasion. Evidence shows that the pass-through of tobacco tax hikes on the retail price of tobacco products is lower in border regions, as illegal imports can replace domestic products when prices increase (Harding, Leibtag and Lovenheim, 2012[66]). As a landlocked country surrounded by five neighbouring countries, this issue is particularly relevant for Lao PDR. Better enforcement may require a co‑ordinated, ASEAN-wide approach to tobacco policy. Such an initiative could help to prevent illegal trade and ensure that efforts to raise health taxes are not undermined by smuggled products imported from neighbouring countries. Lao PDR could also assess whether tobacco producers pay adequate taxes on their profits. Low competition and very favourable tax treatment should produce large profits for tobacco producers. If the tax administration concludes that these producers are paying only a small amount of tax relative to their profits, it could indicate that profits are being artificially shifted out of the country.

There is also potential to improve the system used for alcohol taxation. The current alcohol tax structure is ad-valorem based, with differentiated rates both by product category and alcohol content. Transitioning to a specific tax solely based on alcohol content could make the system easier to manage and remove incentives for the under-reporting of sales prices. It would also ensure that high-alcohol, ultra-low-cost spirits are subject to a sufficient amount of tax.27 The tax rate could be higher per unit of alcohol for products with a higher alcohol content. Beverages could be categorised into three broad groups, with cut-offs at 5% and 20% alcohol content, as recommended by the Asia-Pacific Tax Forum (APTF)-ASEAN Excise Tax Study Group (APTF ASEAN Excise Tax Study Group, 2013[67]). In order to ensure its long-term effectiveness, the specific tax applied would have to be regularly adjusted for inflation.

Explicit carbon taxes are difficult to implement in the context of high energy prices

Currently, scope for introducing carbon taxation with the aim of raising fuel prices appears to be limited. Fuel prices have more than doubled since 2020, which corresponds to a stronger pricing signal than any explicit carbon tax would have realistically achieved (Figure 4.11). Lao PDR currently does not levy an explicit carbon tax.28 Emissions are implicitly taxed through the fuel excise tax, with differentiated rates for gasoline (31‑40%), diesel (21%) and jet fuel (8%). In May 2022, the government of Lao PDR temporarily reduced the excise tax on oil products for three months.

Figure 4.11. Carbon emissions per capita and fuel prices over time in Lao PDR

Lao PDR has committed itself to reducing emissions by 60% until 2030 relative to a business-as-usual scenario (Government of Lao PDR, 2021[69]). The country plans to achieve this goal through reforestation, the expansion of hydropower capacity and a 10% reduction in energy consumption (relative to the business-as-usual scenario). Emissions per capita had been increasing in Lao PDR, but they have plateaued since 2017. Emissions also remain low compared with OECD member countries and with neighbouring countries like China, Thailand and Viet Nam (Figure 4.11).

Box 4.3. Additional arguments to consider when discussing tobacco taxation in Lao PDR

Tackling tobacco use through more effective policy measures should be a priority for Lao PDR. As of 2015, 32% of people aged 15 years or over were using tobacco products, one of the highest rates in the Southeast Asian region (Xangsayarath et al., 2019[62]). Tobacco use is a leading risk factor for non-communicable diseases (NCDs) such as heart disease, stroke and lung cancer. The WHO describes the global prevalence of tobacco use as an “epidemic” due to its extensive health impacts (WHO, 2021[70]). A recent report suggests that tobacco use may account for up to 15% of all deaths in Lao PDR (UNDP, 2022[64]). Alongside the negative health effects of tobacco use, the treatment of tobacco-related illnesses places additional stress on the healthcare system and uses resources that could be devoted to other health and development issues. Furthermore, extensive tobacco consumption leads to additional indirect economic costs that are linked to reduced productivity due to illnesses or premature deaths caused by tobacco use (Goodchild, Nargis and Tursan d’Espaignet, 2017[71]). Increasing the rate at which tobacco products are taxed in Lao PDR would be an essential step for improving both public health and economic development.

The argument is frequently made that higher health taxes are regressive (DeCicca, Kenkel and Lovenheim, 2022[72]), but the elasticity of low-income earners is higher, so they would be the first to stop smoking and no longer pay the tax. If a substantial portion of these individuals came to prefer not smoking once they have been induced to quit, the welfare-enhancing impact of the tax could be considerable and progressive. In this scenario, the tax no longer prevents a behaviour that people would desire in the absence of the tax, but instead has aided them in achieving a healthier lifestyle. Health taxes differ in this regard from environmental excise taxes. For health taxes, it can be argued that some low-income taxpayers (who are more likely than those with higher incomes to respond to higher prices) may eventually prefer the lifestyle changes they have had to make in response to the tax due to the direct personal health benefits they experience. This argument, which rests on the addictive and health-damaging effects of tobacco consumption, is less straightforward to make on the individual level for environmental taxes, where taxpayers may be forced to abandon a consumption behaviour that has delivered limited personal harm but meaningful welfare gains.

Not raising tobacco taxes also does not automatically keep prices low for lower-income consumers in developing countries. The tobacco industry is often not competitive, and due to the addictive nature of tobacco, users display a lower elasticity in demand than they do for other products. This means that even in the absence of higher taxes, the industry can gradually increase prices without losing a significant number of customers. Yet, this approach results in the additional revenue going to the tobacco industry rather than the government. At the same time, the industry is unlikely to raise prices to a level that would discourage consumption. Instead, price increases by the tobacco industry would aim to extract each consumer’s maximum willingness to pay. This might be achieved by, for example, offering a broad range of brands at varying price points in order to keep consumers of different income levels smoking despite higher prices. This mechanism could be at work in Lao PDR. The country’s tobacco industry has lobbied for a “minimum price” on tobacco products while strongly objecting to meaningful tax increases. And while the tax burden in Lao PDR is significantly lower than in other ASEAN Member States, the price per pack of cigarettes is above average if measured as a share of GDP per capita.

Lao PDR could monetise its natural resources through carbon certificates

One innovative opportunity for Lao PDR to raise additional revenue while limiting environmentally harmful behaviour could be to monetise its forests through carbon credits. This has become a topic of increasing interest in recent years, especially as part of discussions around the Conference of the Parties (COP) on climate change. The discussions have recently explored new mechanisms for sovereign nations to purchase and sell carbon rights. Historically, enterprises have been the main purchasers of carbon credits, including those tied to forest conservation projects.29 These credits, however, have been criticised due to insufficient monitoring, leading to questions about their actual environmental benefit. The involvement of governments and the creation of internationally transferred mitigation outcomes (ITMOs) under Article 6.2 of the Paris Agreement offers a new opportunity to participate in more credible international carbon credit markets. Countries can use these new types of credits to meet their nationally determined contributions (NDCs) under the Paris Agreement. There are significant opportunities for countries like Lao PDR to explore converting their carbon sinks into natural capital that yields a return on investment while preserving these natural resources. This is particularly the case for Lao PDR, which has included the goal of increasing its forest cover to 70% of its land area in its NDC at an estimated cost of USD 1.7 billion (Government of Lao PDR, 2021[69]).

In practice, other governments would be able to buy carbon credits that would ensure that forests in Lao PDR are not destroyed. The revenue generated could be reinvested into the local economy by employing local people, providing municipalities with an incentive to maintain their forests. Thus, a strong link can be established between carbon credits and financing below the central government level. To seize this opportunity, however, several preconditions need to be met. These include improving governance, keeping a detailed record of land use across the country and establishing a geographic information system (GIS)-based cadastre. Fulfilling these preconditions will ensure that carbon credits and forest preservation efforts are effective, sustainable and properly monitored. Lao PDR could also benefit from creating bilateral agreements with countries that are willing to both offer technical support for monitoring forest preservation activities and to purchase carbon credits.

There would also be opportunities to link existing taxes with a new such initiative. If forests are converted into agricultural land, a recurrent land tax could be levied on the non-forest use of the land. This tax could be equivalent to the return that Lao PDR would have earned through carbon credits if the land had been maintained as a forest, establishing a new role for recurrent taxes on immovable property.

Lao PDR needs to radically change its approach to designing, administering and evaluating the tax system

There is a lack of coherence across enacted tax policies

There is too little dialogue and co‑ordination on tax matters among ministries and government institutions in Lao PDR. This has contributed to a lack of coherence within the tax system in areas such as investment incentives, health taxes or SSCs. More dialogue across government bodies would lead to an improved understanding of the functioning of the tax system as a system. The role of the MOF as the central institution in formulating tax policy needs to be strengthened. It does not correspond to best practice that ministries other than the MOF have the power to introduce tax incentives or other tax provisions with direct effects on tax revenues without the involvement or agreement of the MOF. For example, the excessive use of tax incentives by the Ministry of Planning and Investment induces the MOF to levy taxes that are suboptimal.

Coherence would also increase if Lao PDR were to unify all tax provisions pertaining to one type of tax into a single tax law (e.g. the income tax law) instead of allowing for the coexistence of multiple pieces of legislation that change the original tax law for certain taxpayers. For example, tax incentives should be granted through provisions in the standard income tax law rather than through separate investment promotion laws. The power to introduce tax incentives should lie solely with the MOF, which would also be closely involved in any change in the social security rates.

The government of Lao PDR must limit the use of tax incentives as policy tools. While it is recognised that Lao PDR’s economy faces many challenges and that finding solutions might be difficult, government officials seem to “automatically” turn to the possibility of introducing yet another tax incentive in order to achieve an identified policy objective. This approach does not necessarily result in good policy, as the tax system is not necessarily the best tool to tackle economic problems that have their source outside of the tax system.

Tax transparency and certainty need to improve

Tax transparency and certainty about the precise tax rules applied and enforced at any given point are often absent in Lao PDR, which makes it difficult for taxpayers to comply with the tax rules because they face the risk that the rules will be applied selectively by tax administration officials. Depending on the business sector, the tax administration interprets certain tax rules in ways that are not aligned with the tax code. As a result, some businesses prefer to remain in the informal economy or to not invest in Lao PDR at all.

Lao PDR lacks a single place (e.g. a dedicated website) to access all tax laws and regulations that are in effect on a given date in both Lao and English. If translations are available, they are unofficial and do not always include the latest changes made to the laws and regulations. Lao PDR should make these documents readily available and, ideally, produce a set of interpretive guidelines that make it easier for the taxpayer (and tax officials) to determine with certainty how the tax law applies in any given situation.

The lack of transparency will lead to tax disputes between taxpayers and the tax administration, but Lao PDR also lacks a transparent process to resolve these disagreements. Businesses cannot go to court to resolve tax disputes, as there are no tax courts in Lao PDR. Instead, the taxpayer needs to bring their dispute to political institutions (whether that is an individual at the provincial level, the Minister of Finance, the Prime Minister or, if the case cannot be resolved by any of these, to the highest political institution in the country). In the future, a dispute resolution mechanism should be established that is distanced as much as possible from political institutions.

The recent tax administration reforms are a step in the right direction, but many challenges remain

Lao PDR has made progress in terms of digitalising the administration of the tax system in the last years. For example, the country has introduced a Tax Revenue Information System (TaxRIS), which issues taxpayer identification numbers to firms and enables them to file and pay taxes online. According to the MOF, more than 75% of (formal) businesses were using TaxRIS in 2022. In August 2023, the MOF announced that businesses will no longer be allowed to settle their tax liabilities in cash but will need to use TaxRIS and the banking system instead. Businesses are also asked to use TaxRIS to declare VAT. A recent amendment to the tax law states that businesses will only be allowed to deduct input VAT from the VAT they collect on their sales if the purchases were facilitated by the banking system (in other words, there is no deduction for inputs paid in cash) and if receipts are provided. Digital tax payments have also been introduced in other areas; for example, to pay the road tax or the land tax. Individual filing for PIT will become compulsory once the national Tax identification number has been fully implemented; currently, only the employer has to declare taxes for its salaried workers.

These initiatives should be strengthened and accelerated because efficient and effective tax administration and enforcement continue to be major challenges in Lao PDR. Close monitoring is required so that unintended consequences can be limited as much as possible. For example, foreign investors have reported that they are denied the deduction of input VAT if they purchase goods and services from a Lao PDR supplier that fails to produce a valid VAT invoice (European Chamber of Commerce and Industry in Lao PDR, 2020[73]). Although this mechanism is, in theory, appropriate in order to encourage purchases from formal businesses, it should not prevent foreign investors from participating in the domestic economy. One potential transitory solution could be to offer foreign investors the option to withhold and transmit the VAT when they make a purchase from a Laotian business (which will receive an invoice stating that VAT has been paid on its behalf).30

There are a number of additional tax administration challenges linked to the VAT that need to be addressed urgently. If the tax administration aims to increase the share of formal businesses that withhold and pay VAT according to the law, it has to ensure that it can properly administer the VAT system. Reducing the general VAT rate with the goal of bringing more businesses into the VAT system (as Lao PDR has done recently) will likely not be effective as long as businesses that attempt to comply with the rules are put at an additional disadvantage. For example, businesses report that VAT refunds are not properly processed by the tax administration and that enforcement is not uniform across the country (e.g. TaxRIS has only been introduced in large cities).While a gradual introduction of new systems can be reasonable, the national roll-out should follow without much delay in order to avoid creating unintended distortions between workers and enterprises located in different parts of the country due to differences in the enforcement of taxes.

The large degree of discretion exercised by individual tax officials contributes to unpredictable and unfair decisions. There are reports that, tax bills are frequently settled on an ad hoc and negotiated basis. In 2018, more than one-third of enterprises felt like they were expected to give gifts when meeting with tax officials, according to the World Bank Enterprise Survey of 2018. Lao PDR could consider establishing an independent tax administration agency with its own financial, organisational and human resources. Additional measures will likely be necessary in order to reduce the over-dependency on individual discretion. Further training and skill development for tax officials would be part of such a strategy.

Ensuring a more efficient and transparent tax administration would, over time, likely also contribute to higher tax morale (i.e. the intrinsic motivation to pay taxes) and initiate a virtuous cycle of higher revenues and higher tax morale. Although tax audits, fines and third-party reporting play a major part in ensuring compliance with tax rules, tax administration resources remain limited, especially in developing countries like Lao PDR. This implies that tax systems generally have to rely to some extent on the voluntary compliance of taxpayers (OECD, 2019[74]; OECD, 2022[75]) (Box 4.4). Improving tax morale can play a key role in achieving additional revenue mobilisation. Work by the OECD also shows that higher tax morale can typically be linked to taxpayers believing that tax revenue is spent more effectively.

Box 4.4. Improved tax morale through building trust and value management in the Swedish Tax Agency

Tax morale – or the intrinsic willingness to pay tax – is a vital part of all tax systems, as they rely on the voluntary compliance of taxpayers. This holds particular significance for developing countries like Lao PDR, where revenue generation remains low, the scope and quality of public services are under-developed, and the resources of the tax administration are limited. Improving tax morale offers governments the potential to increase revenues spontaneously while they target their enforcement efforts to activities and taxpayers that are less inclined to voluntarily comply with the tax system through reduced enforcement efforts, thereby optimising the use of limited enforcement resources. Improving tax morale requires that tax rules are clear and transparent for both taxpayers and tax officials, who need to be trained so they can facilitate a culture of tax compliance.

However, where levels of trust are low, building trust will take time and requires sustained efforts. Developing a coherent strategy through collaboration between the tax administration, enterprises and other relevant stakeholders can build support for tax reform that leads to a positive cycle of revenues, public service provision and tax morale. It will strengthen tax certainty and transparency, which are crucial for implementing a tax environment that is growth friendly.

Strengthening tax compliance is thus not only about improving tax enforcement and “enforced compliance” but also about pursuing “quasi-voluntary compliance” through building trust and facilitating payments – all of which are underpinned by a credible, fair and equitable system of enforcement.

For example, adopting a service-oriented approach rather than solely increasing enforcement measures has proven successful for the Swedish tax authorities to increase citizens’ trust in the government, tax morale and, thus, tax compliance. Through value management and determined work to improve individuals’ attitudes towards the tax system, the Swedish Tax Agency was able to transform from a feared tax collector into an accepted service agency that is trusted by the public. In addition, enhanced transparency and the introduction of more simplified procedures for paying taxes have also been successful in enhancing tax morale and compliance. By applying an approach that encourages openness, transparency and dialogue, the Swedish Tax Agency managed to change its emphasis from collecting the maximum amount of tax to ensuring that corporations pay the right amount of tax, promoting equality under the law and thus encouraging improved tax morale. Today, the Swedish Tax Agency is one of the highest valued public authorities in Sweden.

Source: (OECD, 2019[74]), Tax Morale: What Drives People and Businesses to Pay Tax?; (OECD, 2022[75]), Tax Morale II: Building Trust between Tax Administrations and Large Businesses; (Stridh and Wittberg, 2015[76]), From Feared Tax Collector to Popular Service Agency.

The worldwide tax regime for corporations makes the tax system in Lao PDR resource-intensive to administer

Lao PDR should also reconsider tax design features that make the tax system more resource-intensive to administer, but that likely generate little additional revenue. Lao PDR has a pure worldwide system of taxation in which income earned abroad by resident corporations is integrated into the domestic CIT base. Such systems create a heavy administrative burden for the economies implementing them. In practice, income earned abroad will have been taxed in the host economy where the income was earned under that economy’s CIT and/or withholding tax. The Lao PDR tax administration then has to assess the difference between taxes paid abroad and the remaining domestic tax liability (if the host economy has a lower tax rate), granting a tax credit as a relief against double taxation. This administrative burden has to be balanced against the potential revenue from foreign-sourced income in order to assess whether a worldwide system of taxation offers a net benefit.

In theory, there are two models for the taxation of cross-border business income: (i) worldwide taxation systems that tax corporations on their worldwide income; and (ii) territorial tax systems that only tax income that has its source in the economy in question. In recent decades, most OECD member countries have adopted territorial tax systems, although in practice most apply a combination of both systems. OECD member countries with territorial tax systems commonly exempt most active earnings from tax if they are repatriated from subsidiaries that are incorporated in the host countries.

Lao PDR is unlikely to raise enough revenue from the taxation of foreign-sourced income (generated by resident corporations) to justify the high administrative costs of a pure worldwide tax system. Potential revenues are limited by the low CIT rate in Lao PDR, meaning that the taxes paid at the source on foreign income are very likely to be higher than those payable in Lao PDR. The country should conduct a cost-benefit analysis of the merits of its worldwide system of taxation. Moreover, businesses may deduct the costs they incur in order to earn foreign-sourced income, which would put tax revenues under further pressure. Under a territorial tax system, these costs would not be deductible to the extent that the foreign-sourced income is not taxable in Lao PDR.

Excise taxes could be streamlined in order to reduce administrative costs

Lao PDR’s taxation system includes a large number of non-traditional, product-specific excise taxes (Table 4.5). These excise taxes contribute to the complexity of the tax system and complicate tax enforcement in the country. Excise taxes are levied on many goods and services outside the usual realm of health- and environment-related products (such as alcohol, tobacco and fuel). Instead, excise taxes in Lao PDR can be levied on technical products (such as phones or cameras), products used for leisure activities (such as golf carts or bowling) or “luxury goods” (such as perfumes or gem stones). While such non-traditional excise taxes are common in the Southeast Asian region, Lao PDR’s approach stands out due to its long list of products and varied rates. Tax rates have also changed frequently over the last years. Levying many product-specific excise taxes adds layers of complexity and administrative burden to the tax system because the excise tax must be paid in addition to the VAT. It also makes enforcement burdensome, as similar goods and services can face different tax treatments under the excise tax. For example, beauty salons face an excise levy, whereas hairdressers do not.

Streamlining these excise taxes into a uniform “luxury” rate might be a sensible move if Lao PDR wishes to retain higher taxation on these goods and services. A revenue breakdown for each product-specific excise duty would be useful in order to weigh the revenue potential against the administrative cost of tax collection. It is likely that excises on fuel and vehicle sales make up the large majority of non-health-related excise tax revenue and that certain product-specific excises generate little revenue. Eventually, integrating these taxes into the VAT system – and, possibly, into a luxury excise tax – would help reduce the administrative burden and improve the efficiency and equity of the tax system. Businesses cannot recover excise taxes that were paid on products they purchased as an input. It is also worth mentioning that the tax system effectively amplifies excise taxes by 7%, as these taxes are calculated before the application of VAT.

Product or service	Excise tax rate
Golf carts and vehicles used on golf courses	15%
Sightseeing passenger cars	5%
All-terrain vehicles and go-karts	25%
Sound systems for vehicles	25%
Decorative accessories for vehicles	20%
Carpets made from wool and animal parts	20%
Perfumes and cosmetics	25%
Traditional rockets, fireworks and firecrackers	85%
Playing cards and gambling materials	100%
Satellite television signal receivers	15%
Audio-video players, cameras, telephones, audio-video recorders and musical instruments	15%
Aerial drones, aerial cameras, parachutes and paragliders, and small jet engines	25%
Billiard tables, snooker tables, bowling equipment and football playing tables	35%
Nightclubs, discotheques and karaoke	40%
Bowling services	24%
Beauty services	13%
Golfing services	25%
Motor racing, horse racing and cockfighting	30%

Source: VDB Loi (2023[49])

It appears that through this complex excise tax system, Lao PDR also tries to tap into the revenue potential of foreign tourists. If generating revenue from tourist activities is a primary policy goal, a per-person per-night tourist tax could be a more straightforward alternative to excise taxes levied on activities that are popular among tourists.

Tax policy analysis remains under-developed

Tax policy should be evaluated regularly by a dedicated analytical unit within the MOF. Proper evaluation ensures that tax policies are effective and efficient, and that policy errors are not repeated over time. Tax policy analysis can also reveal additional areas where the current tax system is malfunctioning, indicating potential areas for reform. It is best practice that the tax policy analysis functions as a data hub to which different entities inside and outside the MOF deliver tax-related data. The analytical unit would also maintain different microsimulation models (adapted to the needs and capabilities of the unit) in order to quickly respond to demands to evaluate tax policy reform proposals.

Examples of areas where additional tax policy analysis by a dedicated analytical unit would be crucial include the following:

Tax expenditure analysis: Tax expenditure reporting is under-developed in Lao PDR even though the tax system provides a substantial number of tax expenditures (reduced rates, tax exemptions, non-standard tax deductions, etc.). The analytical unit could be made responsible for compiling a comprehensive list of all tax expenditures, which should be updated annually.31 This requires that Lao PDR first defines a benchmark tax system against which the actual system can be compared. Such an exercise usually involves different experts from the MOF, but the process could be led by the analytical unit. The analytical unit would then quantify as many tax expenditures as possible on an item-by-item basis in terms of the forgone tax revenue. Initially, the focus could be on large tax expenditures (such as the SEZ regime or VAT reductions), and a move towards a cost-benefit analysis should be considered for the largest tax expenditures. Where possible, distributional analysis should be integrated gradually as well, because many tax expenditures are likely regressive and deliver larger benefits to higher-income and wealthier individuals.
VAT registration: It would be important to evaluate whether the reduced VAT rate has resulted in an increased number of businesses registering for VAT. Business formalisation has been stated as the goal of reducing the VAT rate, and an analysis would show whether this goal has been achieved.
Behaviour of enterprises as a result of the presumptive tax regime: The analysis would establish how enterprises with reported turnover around the eligibility threshold behave and whether there is evidence that the presumptive tax regime prevents enterprises from growing. The analysis could also focus on enterprises that are approaching the three-year eligibility threshold and study the behaviour of these enterprises.
Taxes paid by MNEs: Lao PDR needs to be prepared for the international adoption of the GloBE rules, and it also needs to assess to what extent MNEs are taking advantage of the lack of an international taxation framework in the country. For example, the analysis would calculate the effective tax rate paid by MNEs in Lao PDR according to the GloBE rules, and would also determine the drivers behind the (potentially) lower effective tax rate paid by these businesses.
SEZs: The set of investment tax incentives provided to investors in SEZs would require the increased attention of the analytical unit because of their generosity and their impact on a large number of taxes. Preliminary analysis should focus on assessing what types of enterprises benefit from the SEZ regime and how these enterprises behave once tax benefits are phased out. A cost-benefit analysis that integrates the different cost and benefit components created by the SEZ regime could be developed over time.
Social security registration: The analysis would establish which enterprises register their workers with the social security administration and how workers behave once they have been registered for the first time (for example, whether workers continue to be registered when they switch employers). The assessment would also focus on gaining a better understanding of the determinants for non-registration.
Distributional analysis: Inequality in Lao PDR is high, and taxes could play a larger role in reducing inequality. Analysis should be conducted in the tax policy unit in order to better understand the distributional impact of taxes, with a focus on the VAT and PIT.

Box 4.5. Key recommendations

Strengthen the buoyancy of the tax system in order to ensure that the tax-to-GDP ratio increases when the economy grows:
- Address concrete tax design flaws across all types of taxes.
- Change the approach to designing, administering and evaluating the tax system.
- Identify a set of reforms that gradually increase tax revenue buoyancy (and raise tax revenue) while also turning the tax system into a positive force that helps address other developing challenges, such as high inequality, inadequate social protection, high informality or the lack of investment.
Reconsider the suboptimal tax incentive strategy in SEZs and the CIT system based on differentiated rates by sector:
- Grant tax incentives according to predetermined, uniform and clearly declared criteria; the authority to grant tax benefits should lie exclusively with the MOF.
- Shift the focus away from profit-based tax incentives and towards expenditure-based ones.
- Move away from providing reduced CIT rates according to economic sector.
- Levy a top-up tax on certain businesses in SEZs, bringing their effective tax rate to the new global minimum tax rate of 15%.
- Make tax benefits in SEZs more conditional on the employment or training of local workers and on complying with other laws, such as registering workers for social security.
- Assess the tax revenue impact of interactions between SEZs and the national economy.
- Launch a thorough cost-benefit evaluation of the SEZ regime’s impact on investment.
Gradually work towards a consistent international taxation framework to reduce revenue leakages:
- Consider transitioning to a worldwide tax regime for personal income in order to tax the foreign-sourced income of individuals who are Lao PDR tax residents.
- Conversely, consider switching to a territorial tax system for business income to reduce the administrative burden linked to a worldwide business tax regime.
- Implement transfer pricing guidelines.
- Sign up for international tax information sharing to gain access to information about financial accounts held by Lao PDR residents in foreign jurisdictions (which will be relevant if the country decides to switch to a worldwide system of taxation for personal income).
- Analyse the tax revenue risk from other tax planning strategies that are potentially being employed by MNEs (for example, through gaining access to CbC reports).
Reform other features of the tax system that introduce distortions or that contribute to low revenues and the limited equity of the tax system:
- Introduce an official land register and better-defined land property rights. Devise a mechanism to link property taxes to the evolution of land prices. Increase the land tax, and charge a higher land tax for holding empty residential property that is not owner-occupied and is being withheld from the rental market in urban areas. Move from a purely land-based tax to a recurrent tax on immovable property (accounting for the value of buildings and land improvements).
- Cap the freelancer regime for self-employed workers to avoid revenue loss from tax arbitrage.
- Deny former employees access to the presumptive tax regime if they continue working for their previous employer as a self-employed business.
- Analyse who earns capital income in Lao PDR in order to make an assessment as to whether the withholding rates levied on different forms of capital income could be increased.
- Base the tax applied to the sale of shares and to the sale of immovable property on the capital gain rather than on the transaction value.
- Consider an upward adjustment of the PIT and SSC maximum contribution thresholds and index the thresholds to inflation. Consider adjusting higher tax brackets downward to increase the progressivity of the PIT.
- Make social security registration mandatory for the self-employed. Consider subsidising the contributions of self-employed individuals whose actual income would be below the minimum wage if the minimum level of contribution were to be levied.
- Maintain the increased CIT rate for the natural resource sector, but evaluate whether it is effective at taxing resource rents or entirely undermined by tax incentives or profit shifting. Prioritise and increase the role of royalties if the CIT surcharge fails to deliver significant revenues.
- Enhance customs procedures and border checks in Lao PDR to reduce high levels of fraudulent behaviour and reduce the administrative cost faced by importers. Reduce the number of different taxes and levies to be paid when importing goods and services.
- Reform the deemed profits tax and consider integrating it into the VAT or import tariff system.
- Ensure the proper functioning of the VAT aligned with the International VAT/GST Guidelines.
- Increase the effective taxation of harmful products (health taxes) and develop a consistent tobacco tax strategy. Evaluate the design of health taxes.
- Explore innovative strategies to raise revenue and reduce environmentally harmful behaviour, such as carbon credits.
- Consider streamlining non-standard excise taxes into a uniform “luxury” rate or integrating these taxes into the VAT. Compile a revenue breakdown of excise taxes by product in order to weigh the revenue generated against the administrative cost.
- Refrain from pursuing further untargeted tax cuts and instead prioritise improving the design and enforcement of the tax system to increase tax buoyancy. Co‑ordinate with neighbouring countries to avoid or limit harmful tax competition.
Improve the design of the presumptive tax regime to increase its effectiveness at encouraging formalisation and to limit tax revenue loss:
- Lift the presumptive tax regime’s three-year eligibility limit.
- Remove the additional eligibility rule based on asset ownership.
- Include SSCs in the scheme.
- Introduce a transition path between the presumptive and the standard tax system.
- Evaluate the introduction of sector-specific taxes on turnover.
- Offer a one-stop tax office.
- Limit abusive practices related to the presumptive tax regime.
Increase the role of the tax system as a tool to promote the formalisation of workers and businesses:
- Abolish fees to register workers with the social security system.
- Make social security forward-looking to help ensure that enterprises do not have to pay SSCs retroactively if they register workers.
- Disallow enterprises from deducting the labour cost of workers as a business expense if the workers are not registered with the social security administration.
- Make investment tax incentives conditional on compliance with other legal obligations, including registering workers for social security.
- Advertise that future “insurance-type” government benefits (such as support for businesses and workers during the COVID‑19 pandemic) are conditional on registration as a formal worker or business and having contributed to social security.
- Consider introducing a progressive SSC schedule with reduced rates for lower-income workers that are matched by government contributions.
- Allow workers to view the contributions that they have made to social security and their accumulated pension rights (e.g. through an online portal) in order to counter the perception that these contributions are “lost”.
Overhaul the approach to designing, evaluating and administering the tax system:
- Increase collaboration among ministries and other government institutions.
- Stop misusing the tax system in order to try to solve problems (e.g. introducing new layers of tax incentives in order to support investment in certain sectors) that could be better addressed in different ways.
- Strengthen the MOF’s position as the key actor in tax policy making and make the MOF’s consent mandatory for any tax policy change (including changes to SSCs and investment tax incentives).
- Unify all legal provisions pertaining to one type of tax in one tax law that is made available online for taxpayers to consult.
- Consider establishing an independent tax revenue agency that would be responsible for revenue collection.
- Devise a formal dispute resolution mechanism in order to resolve tax disputes.
- Increase efforts to prioritise non-cash payments in order to settle tax bills.
- Maintain and strengthen recent initiatives to modernise and digitalise the tax administration.
- Establish and strengthen a stand-alone tax policy analysis unit within the MOF that evaluates and assesses tax policy (including potential tax reforms, tax expenditures, the distributional impact of taxes, etc.).

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Annex 4.A. Special Economic Zones

SEZ (year established)	Location details	Developer	Type of activity
Savan-Seno SEZ (2003)	Border with Thailand	Government (Lao PDR)	Industrial
Boten Beautiful Land SEZ (2003)	Border with China	Government (Lao PDR and China)	Trade and logistics
Golden Triangle SEZ (2007)	Borders with Myanmar and Thailand	Government (Lao PDR) and private (China)	Tourism and urban centre
Saysettha Development Zone (2010)	Vientiane	Government (Lao PDR and China)	Industrial
Phoukhyo Specific Economic Zone (2010)	Border with Thailand	Private (Lao PDR)	Industrial
Vientiane Industrial and Trade Area (2011)	Vientiane	Government (Lao PDR) and private (Taiwan)	Industrial
That Luang Lake SEZ (2011)	Vientiane	Private (China)	Tourism and urban centre
Longthanh – Vientiane Specific Economic Zone (2012)	Vientiane	Private (Viet Nam)	Tourism and urban centre
Dongphosy Specific Economic Zone (2012)	Vientiane	Private (Malaysia)	Trade and logistics
Thakhek SEZ (2012)	Border with Thailand	Government (Lao PDR)	Trade and logistics
Luangprabang SEZ (2015)	United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage Site city, Luang Prabang	Private (Lao PDR)	Tourism and urban centre
Champasak SEZ (2015)	Borders with Cambodia and Thailand	Private (China, Japan and Lao PDR)	Mixed

Note: Lao PDR’s capital city, Vientiane, is located on the border with Thailand.

Source: (Ministry of Planning and Investment, 2021[77]), Special Economic Zones in Lao PDR, https://laosez.gov.la/pdf/SEZ_PCL_2021_en.pdf (accessed on 23 November 2023).

Notes

← 1. Tax revenue includes the revenues raised through social security contributions (SSCs) according to Organisation for Economic Co‑operation and Development (OECD) definitions. However, the tax revenue data for Lao PDR in the OECD Global Revenue Statistics Database does not include SSC revenue.

← 2. The long-term buoyancy should eventually converge towards unity once a country has reached a sufficiently high tax-to-GDP ratio.

← 3. There are differences between the 2021 tax-to-GDP ratio recorded in the OECD Global Revenue Statistics Database (9.7%), by the World Bank (10.1%) and by the Association of Southeast Asian Nations (ASEAN)+3 Macroeconomic Research Office (9.5%). The national development plan records a higher tax-to-GDP ratio for the year 2020 (11.05%) than the other sources. These discrepancies suggest that there is scope to improve the reporting of government finances, as highlighted by a recent International Monetary Fund (IMF) technical assistance report (IMF, 2022[17]). However, the recent decline in Lao PDR’s tax-to-GDP ratio is robust across sources (OECD, 2022[4]; Government of Lao PDR, 2021[2]; World Bank, 2023[3]; AMRO, 2022[54]).

← 4. Concession agreements in growth sectors are also draining government resources through more indirect channels. A case in point is the state-owned electricity production company Électricité du Laos (EDL), which purchases electricity from project operators and co‑operates on a large number of hydropower facilities. Rather than supporting public finances, the company is heavily indebted and in need of financial support from the general government budget. This is because EDL pays higher prices when purchasing electricity from the project operators than it is allowed to charge domestic customers (AMRO, 2022[54]). Electricity exported to the People’s Republic of China (hereafter: China) or Thailand has also been sold at a loss.

← 5. The costing in the National Social Protection Strategy suggests that the cost of providing “core” social protection schemes would be 0.1% of GDP in (Government of Lao PDR, 2020[16]). However, these estimates are based on a means-tested cash transfer of LAK 100 000 per month, which would be equal to 8% of the minimum wage at the time of introduction in 2019 (or around EUR 10 per month based on 2019 exchange rates).

← 6. The OECD has developed a joint assessment tool for healthcare financing that aims to assist countries that plan to graduate from donor financing in the area of public health provision. The tool could be made available to Lao PDR.

← 7. The CIT gap refers to the difference between potential and actual revenues. Tax non-compliance and tax incentives can widen the CIT gap.

← 8. Earmarking of tax revenue, although generally not recommended, could be reconsidered if evidence for such a moral hazard problem were found in Lao PDR. This applies in particular to SSCs, health taxes and environmentally related taxes.

← 9. The gap is smaller if values are adjusted for purchasing power parity.

← 10. The National Green Growth Strategy of the Lao PDR till 2030 states that “socio-economic development and poverty reduction in the past period were achieved through significant, inefficient, wasteful and unstainable use of natural resources” (Secretariat for Formulation of National Green Growth Strategy of the Lao PDR, 2018[78]).

← 11. Agriculture still accounted for almost 60% of total employment in 2021 according to the International Labour Organization (ILO).

← 12. The average tax-to-GDP ratio in OECD member countries is around 34% (OECD, 2022[4]).

← 13. SEZs are developed either by the government or by foreign or domestic private developers that frequently come from the country neighbouring the SEZ. Individual businesses therefore have the option to invest in a SEZ that a developer has created.

← 14. Different tax rates apply in the different SEZs after the CIT exemption period has expired. It is also worth noting that the first SEZ was established in 2003, and as a result, Lao PDR may soon face requests to extend the tax exemption period.

← 15. Businesses have indicated that the current process for administering the VAT exemption is not well suited to their needs. For example, businesses must submit a “master list” detailing everything that they will import over the coming 12 months, which does not leave room for additional needs that may arise during the year.

← 16. The GloBE rules, agreed in October 2021 by 137 countries, will introduce a global minimum corporate tax rate of 15%. The rules create the possibility of a top-up tax whenever the effective tax rate of the multinational enterprise, determined on a jurisdictional basis, is below the global minimum rate. While Lao PDR is not a part of the OECD/Group of 20 (G20) Inclusive Framework on base erosion and profit shifting (BEPS), businesses operating subsidiaries in Lao PDR could be liable for a top-up tax on profits generated in Lao PDR under GloBE rules if their effective tax rate in Lao PDR remains under 15% and if Lao PDR does not implement a top-up tax.

← 17. The Lao PDR tax system does not use the concept of a “permanent establishment” as is commonly used in international tax treaties, although some of the tax treaties signed by Lao PDR are based on this concept.

← 18. In Lao PDR’s tax terminology, this tax is referred to as the “foreign withholding tax”.

← 19. However, this type of treaty relief is, in practice, not granted in Lao PDR.

← 20. Even though the tax seeks to tax the profit of foreign suppliers, (i) they do not transmit the tax; (ii) they cannot deduct the tax from their CIT liability; and (iii) the tax does not depend on the foreign suppliers’ actual profitability. The deemed profits tax is not completely identical to an import tariff because it only applies to imports facilitated by Laotian businesses and not individuals. This could put Lao retailers in border regions at a disadvantage, as individuals would prefer to order products directly from foreign retailers. Note also that even if the tax burden of the deemed profits tax were to fall on the foreign supplier, the tax would be regressive with respect to the profitability of the supplier (as the effective tax rate is lower for businesses that have a higher profit margin than the deemed profit rate).

← 21. The first income tax bracket of 5% was temporarily abolished for a period of three months in 2021 as part of the COVID‑19 relief measures. During that period, taxpayers were only liable for PIT if their monthly income exceeded the threshold for the 10% tax bracket.

← 22. Private land ownership is not permitted in Lao PDR because all land is public property. However, Laotian individuals can own permanent land use rights, which include transfer and inheritance rights. In practice, permanent land use rights are thus similar to land ownership. Buildings and structures erected can be privately owned.

← 23. Land sold in 2022 in the vicinity of the new train station in Vientiane has been valued at THB 2 500 (Thai baht), or LAK 1.4 million per square metre, according to news reports (https://www.rfa.org/english/news/laos/land-07062022143130.html).

← 24. A draft law on a land tax reform was presented by the Lao MOF in July 2023 https://laotiantimes.com/2023/07/10/lao-minister-of-finance-proposes-new-draft-law-on-land-tax/). It seeks to ensure that the land tax increases in line with GDP growth and inflation in the future.

← 25. LAK 100 million is equivalent to around EUR 4 700 at 2023 exchange rates.

← 26. In fact, the enterprise benefiting from the agreement operates as a joint venture between a leading international tobacco producer and the Lao PDR government, making the government of Lao PDR a shareholder in the tobacco business.

← 27. Laotian rice whiskey is considered “the cheapest alcohol in the world” (Wade, 2010[79]), with prices below USD 1 per bottle.

← 28. There are reports that the government of Lao PDR is considering introducing a carbon tax in the near future. However, the design of such a potential tax is unclear.

← 29. One example is the REDD+ (reducing emissions from deforestation and forest degradation in developing countries) framework. In 2021, Lao PDR and the World Bank’s Forest Carbon Partnership Facility (FCPF) signed an agreement under which the World Bank provides up to USD 42 million between 2021 and 2025 to support Lao PDR’s efforts to reduce emissions from deforestation and forest degradation.

← 30. This procedure has been recommended to some taxpayers, according to some sources, but no provision is included in the formal VAT law (JETRO, 2022[52]).

← 31. Classifying tax provisions as tax expenditures does not necessarily mean that these tax expenditures need to be reformed or abolished. Certain tax expenditures may be justified, but transparency should be improved regarding which provisions exist and how much they cost.

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