Multi-dimensional Review of Lao PDR

Annex A. Recommendations for Lao PDR to strengthen its sustainable development finance

Table A A.1. Recommendations to be implemented in the short term

Objectives	Detailed recommendations	Chapter
Address the country’s fiscal challenges in order to break the vicious cycle of escalating debt, currency depreciation and high inflation.	Seek debt relief from the country’s primary lender (i.e. China) in order to free up fiscal space and alleviate short-term payment pressures. Co-ordinate and communicate transparently with development partners in order to avoid moral hazard concerns, ensuring that any new concessional financing results in additional investment in development. Gradually shift the emphasis of fiscal consolidation efforts from expenditure reduction to increased revenue generation and spending efficiency in order to ensure the sustainability and credibility of the fiscal adjustment.	3 3 4
Mitigate mounting fiscal risks arising from contingent liabilities associated with Public Private Partnerships (PPPs) and state-owned enterprises (SOEs).	Audit existing SOEs and PPPs in order to evaluate their fiscal risk profiles and identify urgent threats to macroeconomic stability. Define and enforce strict criteria for government guarantees in order to minimise fiscal exposure, ensuring that such guarantees are only issued when absolutely necessary. Identify and enact quick-win reforms (such as cost-cutting and operational efficiency improvements) in those SOEs that present the riskiest profiles in order to stabilise SOE finances. Communicate clearly with development partners and the public about the short-term fiscal risks identified in SOEs and PPPs, and about the measures being taken to address them.	3 3 3 3
Strengthen the buoyancy of the tax system in order to ensure that the tax-to-GDP ratio increases when the economy grows.	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.	4
Improve the design of the presumptive tax regime in order 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 social security contributions (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 of presumptive taxation. Increase the effective taxation of harmful products (health taxes) and develop a consistent tobacco tax strategy. Redesign tax incentives to be based on expenditure rather than income and to more actively advance social and environmental goals.	4 4 4 4 4 4 4 4 4
Define an initial core set of environmental data needed to activate climate financing aligned to the climate financing mechanisms that will be implemented.	Consider a guideline for prioritising data production for the subsectors where carbon finance has the most potential.	6
Map the key sectors and actors – including non-government actors - related to the immediate climate financing mechanisms that will be implemented.	Identify key producers and users of environment statistics and the role they can play in improving the production, dissemination, and use of environment statistics. The leading agency on climate financing should co-operate in identifying the data demands so Lao Statistics Bureau (LSB), the Ministry of Natural Resources and Environment (MONRE), the Ministry of Energy and Mines, and other agencies can identify the data sources available or required and start to harmonise information across the system.	6 6
Enhance the sharing and harmonisation of environment statistics across the national statistical system.	Set up a one-stop shop for environment statistics is crucial for building certification and verification systems to access climate financing. Introduce use of harmonised data templates for data sharing. Better data sharing and harmonisation on methodologies, data collection processes and definitions of variables.	6 6 6
Use existing co-ordination mechanisms to liaise with policy makers and data users in general.	Existing mechanisms can enable a space for dialogue and consultations with selected data users, particularly those in the most strategic climate financing sectors, to learn about their policy plans and existing monitoring frameworks. Such dialogue and consultations can also provide an opportunity to evaluate data demands and determine whether current data production is aligned with these demands.	6
Use the momentum of climate finance opportunities to advocate for statistics and mobilise funding for data infrastructure, core systems and capacity development.	A high demand for environment statistics provides an excellent opportunity to use these statistics as the key to unlocking climate financing and mobilising resources (internal and external) to strengthen the national statistics system (NSS) to better serve the emerging needs of data users, particularly those from policy makers.	6

Note: “China” refers to People’s Republic of China.

Table A A.2. Recommendations to be implemented in a medium-term

Objectives	Detailed recommendations	Chapter
Address the current fragmentation and lack of co‑ordination in the country’s sustainable development financing landscape.	Establish a shared and well-co-ordinated governance of the sustainable development financing agenda among the multiple government stakeholders involved, including the co‑chairing of key committees. Ensure adequate resourcing of, and institutional engagement in, the sector and subsector working groups of Lao PDR’s Round Table Process. Secure the active participation of, and garner contributions from, all relevant development partners in strategic development and aid co‑ordination mechanisms, including the Integrated National Financing Framework. Develop a clear and coherent governance framework for sovereign carbon finance in order to promote a co‑ordinated approach across the government, avoiding inefficiencies and reputational risks that could jeopardise this new financing source. Improve inter-institutional co‑ordination and alignment of strategic objectives and priorities among the different government entities involved in the design and implementation of investment policies. This could be achieved through the establishment of more formal channels for co‑ordination between the Ministry of Planning and Investment (MPI), the Ministry of Industry and Commerce, MONRE, and sectoral ministries. One possibility would be establishing an advisory board to the Investment promotion Department (IPD) that includes representatives both from these government entities and from the private sector. Improve public-private dialogue process at a high level could allow for more easily solving investors’ grievances and for better prioritising the reforms required in order to facilitate doing business in Lao PDR.	3 3 3 3 5 5
Take steps to safeguard the impact and effectiveness of development co‑operation.	Reinvigorate the multi-stakeholder dialogue around the Vientiane Declaration on Partnership for Effective Development Cooperation (2016-2025), as well as efforts to monitor the implementation of the Country Action Plan for the Implementation of the Vientiane Declaration on Partnership for Effective Development Cooperation (2016-2025). With a view to maximising international support for sustainable development, use existing aid co‑ordination platforms in order to consult partners on key governance and institutional issues constraining development co‑operation flows to Lao PDR.	3 3
Enhance spending efficiency and build greater capacity for revenue collection.	Explore opportunities with key development partners for enhanced support on public financial management and domestic resource mobilisation appropriate to Lao PDR’s fiscal context and challenges. Develop and implement a comprehensive action plan to increase government revenue, with clear and credible revenue targets. Review the current investment promotion framework in order to assess its costs and benefits, factoring in the effect of tax incentives on government revenue. Simplify Lao PDR’s institutional and regulatory framework for starting an investment project.	3 3 5
Create and strengthen a centralised public debt management function with authority over public debt issuance.	The legal framework should clarify which body has the authority to borrow and to issue new debt; to invest; and to undertake transactions on the government’s behalf. Credit risk assessment and validation should be centralised for all public debt issuance, including by SOEs.	3 3
Strengthen the buoyancy of the tax system to ensure the tax-to-GDP ratio increases when the economy grows.	Address concrete tax design flaws across all types of taxes and change the approach to designing, administering and evaluating the tax system. Change the approach followed to design, administer and evaluate the tax system.	4
Reconsider the suboptimal tax incentive strategy in SEZs and the corporate income tax (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 Ministry of Finance (MOF). Shift the focus away from profit-based tax incentives and towards expenditure-based ones. Move away from providing reduced corporate income tax (CIT) rates according to economic sector. Levy a “top-up tax” on certain businesses in Special Economic Zones (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.	4 4 4 4 4 4 4
Reform other features of the tax system that introduce distortions or contribute to low revenues and the limited equity of the tax system.	Ensure the well-functioning of the Value Added tax (VAT) aligned with the International VAT/ Goods and Services tax (GST) guidelines. Consider streamlining non-standard excise taxes into a uniform "luxury" rate or integrate these taxes into the VAT. Compile a revenue breakdown of excise taxes by product to weigh revenue generation against administrative cost.	4 4
Increase the role of the tax system as a tool to promote the formalisation of workers and businesses.	Abolish fees to register workers for social security. Make social security forward-looking in order 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 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”.	4 4 4 4 4 4 4
Overhaul the approach to designing, evaluating and administering the tax system.	Increase collaboration among ministries and other government institutions. 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. 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.	4 4 4 4 4 4 4 4
Improve the design of the presumptive tax regime to increase its effectiveness at encouraging formalisation and to limit tax revenue loss.	Lift the three-year eligibility limit. Remove the additional eligibility rule based on asset ownership. Include social security contributions into the scheme. Introduce a transition path between the presumptive and the standard tax system. Implement transfer pricing guidelines. Evaluate the introduction of sector-specific taxes on turnover. Offer a one-stop tax office. Limit abusive practices. Redesign tax incentives to be based on expenditure rather than income and to more actively advance social and environmental goals.	4 4 4 4 4 4 4 4 4, 5
Improving the enabling environment for investment and integrating environmental and social considerations into investment policies could allow Lao PDR to attract more sustainable investment. that advances environmental and social goals.	Improve co-ordination between the private sector, the government and educational institutions could help better align Lao PDR’s Lao PDR’s educational offer offering with those skills that are in demand in the labour market. Improve the availability of skilled labour in Lao PDR through in-house training in private enterprises and the provision of better information on those skills in demand in the labour market. Improve institutional capacity and inter-institutional co-ordination in land administration and management and accelerate the implementation of the 2019 Land Law. Enhance Lao PDR’s capacity for delivery of public private partnerships, strengthen infrastructure planning and improve the management of fiscal risks related to public private partnerships. Improve the predictability of the regulatory framework for investment and the effectiveness of the court system while introducing policy tools, which promote integrity among public officials.	5 5 5 5 5
Strengthen social and environmental safeguards for investment projects.	Strengthen the implementation of social and environmental safeguards for investment projects by strengthening monitoring and inspection of environmental obligations. Develop more sophisticated and better targeted policies, activities and tools for investment promotion, which should include a greater focus on environmental and social sustainability. Increase positive spillovers from SEZs to the local economy and improve SEZs’ social and environmental performance.	5
Intensify efforts aimed at promoting and implementing international responsible business conduct (RBC) and due diligence standards in the local context.	Develop an institutional and policy framework for RBC, including a special dedicated responsible business conduct (RBC) body or government focal point and a national RBC policy or action plan. Incorporate RBC efforts more systematically in investment promotion activities. Targeted RBC programmes at specific high-risk industries, such as the mining, hydropower and agricultural sectors, could be developed to raise awareness and to foster the implementation of due diligence in business practices. Better access to remedy and grievance mechanisms for addressing negative impacts of investment projects, in particular, environmental and social impacts. Stronger safeguards in concession agreements and render these agreements in public.	5 5 5 5 5
Develop statistical capacity holistically across the statistics system for climate financing.	Data systems needed for climate financing, such as carbon registries and MRV systems, require data, technical in all relevant institutions where climate financing initiatives will be established.	6
Identify opportunities for collaboration between governmental- and non-governmental actors.	Non-governmental actors such as the private sector, civil society, or academia can often be strategic partners to mobilise resources, advocate for using environmental data or leveraging innovative data sources and techniques to make current data collection processes more efficient through the use of technology.	6

Table A A.3. Recommendations to be implemented in a long-term

Objectives	Detailed recommendations	Chapter
Strengthen the business environment in order to encourage greater private sector development, reducing the strong reliance on public investment.	Carry out an in-depth review of the role, governance and performance of the country’s SOEs, which can help inform an action plan to tackle the negative implications of their dominant position in Lao PDR’s private sector development. Strengthen the local banking sector in order to reduce financial sector vulnerabilities and fiscal liabilities while promoting enhanced credit provision to the private sector. Identify new drivers for foreign private investment, and seek development partner support in order to design an integrated and cross-cutting investment promotion strategy that considers the impacts on various sectors of the economy and aligns with Lao PDR’s sustainable development objectives. Engage with South-South partners and regional platforms in order to exchange knowledge and experiences with regard to maximising the development impact of remittances, including through policies supporting increased human capital and productive investments.	3 3 5 3
Promote sustainable borrowing policies and practices, and design formal mechanisms for contingency planning	Continue the policy dialogue on debt management initiated with the main international financial institutions and identify key functions of government that require additional technical support. Seek technical support and capacity building from development partners in key areas of sustainable development finance, specifically in order to better harness finance opportunities and to design sound frameworks allowing Lao PDR to tap into innovative or nascent financing instruments in the future, including carbon and biodiversity finance. Explore and assess the benefits for Lao PDR of mechanisms to stabilise and sustainably manage future revenues from commodity exports such as hydropower and mining.	3 3 3
Develop a knowledge base and robust country systems in order to harness innovative financing sources	Strengthen the country’s statistical systems and data collection processes – especially with regard to environmental protection and climate adaptation and mitigation – in order to support Lao PDR’s efforts to harness innovative financing such as carbon credits. Keep abreast of developments and the experiences of regional peers with regard to green, social, sustainable and sustainability-linked bonds as possible instruments to consider in the future, once Lao PDR is back to sustainable debt levels.	6 6
Gradually work towards a consistent international taxation framework in order 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 in order to reduce the administrative burden linked to a worldwide business tax regime. Implement transfer pricing guidelines. Sign up for international tax information sharing in order 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 tax system for personal income). Analyse the tax revenue risk from other tax planning strategies that are potentially being employed by multinational enterprises (for example, through gaining access to country-by-country reports).	4 4 4 4 4
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, and increase the land tax. Consider an upward adjustment of the personal income tax and SSC maximum contribution thresholds and index the thresholds to inflation. Charge a higher land tax for holding empty residential property in urban areas, which is not owner-occupied and withheld from the rental market. 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 the same employer, but as a self-employed business. Analyse who earns capital income in the country 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 the transaction value. Make social security registration mandatory for the self-employed. Consider subsidising contributions of those self-employed with actual income below the minimum wage if a 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. Enhance customs procedures and border checks in Lao PDR in order 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. Co-ordinate with neighbouring countries in order to avoid or limit harmful tax competition. Refrain from pursuing further untargeted tax cuts; instead, prioritise improving the design and enforcement of the tax system in order to increase tax buoyancy.	4 4 4 4 4 4 4 4 4 4 4 4 4 4