Value Added Tax in Lao PDR: Agenda for the Future

Transcription

1 Value Added Tax in Lao PDR: Agenda for the Future Duangchay KEOMIXAY 1 Visiting Scholar Policy Research Institute, Ministry of Finance, Japan 1 The views expressed are those of the author and do not represent the views of the Policy Research Institute.

2 Contents Abbreviations Introduction Literature Review Definition of the Value Added Tax Characteristics Methods of calculating VAT The necessity to introduce value added tax instead of turnover tax The conditions for using value added tax Overview of the Value Added Tax in Lao PDR Persons subject to payment, collection and contribution of VAT The obligations and option for registering into the VAT system in Lao PDR Goods and services subject to VAT Goods and services that are not subject to VAT Calculation of the value added tax in Lao PDR VAT Deduction and Refund Revenue performance of value added tax in Lao PDR Figure 1: Performance of VAT (Billion LAK, %) Figure 2: The comparison of VAT revenue to other tax revenues (Million LAK) Table 1: Summary of tax revenue from FY2010/ /16 (million kip) The experience of the VAT or consumption tax in Japan Table 2: A comparison between VAT implementation in Japan and Laos Lesson learned by Lao PDR Analysis and Discussion of the Value Added Tax in Lao PDR Laos should broaden its VAT base Small businesses lack adequate bookkeeping Develop a more extensive ICT system Table 3 Population, tax authorities and taxpayers Tax education and tax consultation Reduce exemptions as much as possible Conclusion... 26

3 Figure 1: Performance of VAT (Billion LAK, %) Figure 2: The comparison of VAT revenue to other tax revenues (Million LAK) Table 1: Summary of tax revenue from FY2010/ /16 (million kip) Table 2: A comparison between VAT implementation in Japan and Laos Table 3 Population, tax authorities and taxpayers

4 Abbreviations ASEAN GST ICT Lao PDR NTA NTC OECD SMEs VAT WTO - Association of Southeast Asian Nations - Goods and Services Tax - Information and Communications Technology - Lao People Democratic Republic - National Tax Agency - National Tax College - The Organization for Economic Co-operation and Development - Small and Medium Enterprises - Value Added Tax - World Trade Organization

5 Abstract This study assesses VAT policy and administration in Lao PDR. The main objective of the research is to assess and identify problems related to VAT administration in Lao PDR and to propose an agenda for the future. To fulfill this objective, secondary data were used. Secondary data comes from sources such as official documents, the internet and other relevant materials. The Value Added Tax (VAT) has been implemented in Lao PDR since October 2010, when it replaced the turnover tax, which is inherently troublesome in terms of both revenue leakage and the fact that it is imposed on every stage of the production-distribution chain. The tax base at any single stage includes the sales value of the goods plus the tax charged accumulatively in previous stages. A serious problem with this tax is the cascading effect, literally understood as the tax-on-tax effect. VAT eliminates the cascading problem; it is generally more broad-based and entails a trail of invoices that helps improve tax compliance and enforcement. Even after implementation of VAT in Lao PDR, there are still many issues related to VAT administration, particularly for small and medium enterprises that don t have any experience on VAT systems and for some local tax authorities that don t clearly understand the procedures for collecting the tax. Ultimately, these obstacles make VAT revenue collection not as efficient as it should be. To overcome these identified challenges, constructive recommendations will be made in order to help alleviate the problems.

6 1. Introduction Taxes play a very important role for every state. Taxes are not only a basis for the State to mobilize funding resources for regular activities but also an important tool for the State to achieve macroeconomic objectives. A good and reasonable tax system will have a positive impact on the process of economic growth, encouraging investment in all economic sectors and moving the economy in a positive direction. The rise of the value added tax (VAT) around the world has been one of the most important tax developments in the recent century (Bird, 2007). Like many countries, Lao PDR introduced a VAT in However, the start date was postponed because of the lack of implementation guidelines. The value added tax finally came into effect in October 2010 and replaced the turnover tax 2 after Lao PDR was integrated into several international organizations, including ASEAN and WTO. Lao PDR needs to harmonize the regional economy. When the ASEAN Economic Community was formed in 2015, member countries shifted from earning income from tariffs to VAT as a way to maintain national revenue; therefore, implementation of the VAT has had to replace the turnover tax and import duties levied by custom authorities with an aim of mobilizing internal revenue collection and bringing transparency to an indirect tax system. At present, VAT is a significant source of tax revenue in Lao PDR, with more than 27% of tax revenue being collected through VAT. More importantly, it contributes to the day by day increase in total revenue (Department of Fiscal Policy, 2016). However, while revenue from VAT has increased, revenue collection is not as efficient as it should be. This is due to the implementation of VAT in Lao PDR still encountering troubles, such as some small and medium enterprises that don t have any experience with VAT systems, the matter on accounting rule, and bookkeeping at small and medium enterprises (SMEs). In fact, there are some enterprises still not yet registered in the VAT system, especially among small and medium enterprises. Moreover, some tax authorities still don t clearly understand the VAT system. In this research, I want to examine VAT policy as well as explore how to implement the VAT more efficiently so that there is an increase in tax revenue in Lao PD. I will consider this issue by describing the practice of VAT implementation in Japan and 2 A turnover tax is the tax imposed on every stage of the production-distribution chain. The tax base at any single stage includes the sales value of the goods plus the tax charged accumulatively in previous stages. A serious problem with this tax is the cascading effect, literally understood as the tax-on-tax effect. 1

7 summarizing the important lessons Lao PDR can learn from their VAT system. This research considers this problem in the sense of state management and with a focus on policy mechanisms, especially regarding the official introduction of VAT in 2010 up to the present. The methods used in this research include methods of comparing statistics, analysis and synthesis. I will assess administration of the VAT in Lao PDR by considering the following major questions: What is the problem in the implementation of VAT in Lao PDR? How is the VAT being implemented in Lao PDR? How can the VAT be implemented more efficiently in order to raise tax revenue in Lao PDR? 2. Literature Review 2.1. Definition of the Value Added Tax The value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of general consumption tax that is collected incrementally, based on the surplus value, and added to the price of a good at each stage of production. It is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. As of 2016, there are 166 countries operating a VAT, including all OECD members except for the United States, which uses a sales tax system instead (OECD, 2016). The Value Added Tax Law in Laos, named No. 52/NA and dated 23 July 2014, mentions that Value Added Tax (VAT) is an indirect tax payable by individuals, entities and organizations that are the end users of goods and services in the Lao PDR. 2.2 Characteristics The value added tax is a method of taxing, by installments or in stages, final consumer spending in the economy. The method consists of levying a tax on value added to a product or service at each stage of the production and distribution process. For this purpose, "value added" is taken simply as the difference between a business s sales and purchases. Thus, if a firm buys some equipment worth $100 and then sells the product or service it produces for $150, its value added is $50. As will be seen presently, the sum of revenues collected from a tax on value added at different stages of production and trade is equivalent to a tax 2

8 on the aggregate of value added, or the price of the product in question at the final or retail point of sale. To put it differently, the VAT is a multi-stage tax, similar to the turnover tax except that it is levied on the value added at each stage of production and trade and not on the gross turnover of the dealer. This difference is crucial in that it ensures that each input going into a final consumer output is taxed once and only once and not cumulatively as under a cascading turnover tax. Although under a VAT, the tax is realized from producers and sellers of capital goods, the base turns out to be only the final consumption, and business firms are allowed to recover the tax paid on capital goods in the same manner as on other business inputs. This is the form in which the tax is levied in most countries. When the base is comprehensive and includes all final goods and services consumed, in the aggregate it is equivalent to the total consumer spending in the economy. This is called the consumption type VAT. Commonly, the base of the consumption type VAT comprises all domestically produced goods and services minus government services and exports, plus imports. An alternative form of VAT is the "income type." Yet another rare form of VAT is the gross product type. In the income type, VAT is initially levied on both consumption and capital goods, but the tax on capital goods is then credited over the economic life of the goods, in accordance with a depreciation schedule similar to the one used for income tax purposes. It is called income type because its base is equivalent to the total income generated during a given period. When no deduction is allowed for purchase or depreciation of capital goods, the base becomes even broader and the tax is called gross product VAT. (National Economic Development Office, U.K. (1971) 2.3. Methods of calculating VAT There are two main methods for calculating VAT: the credit-invoice or invoice-based method and the subtraction or accounts-based method. Using the credit-invoice method, sale transactions are taxed, with the customer informed of the VAT on the transaction, and businesses may receive a credit for VAT paid on input materials and services. The creditinvoice method is the most widely employed method, used by all national VATs except for in Japan. Under the subtraction method, at the end of a reporting period, a business calculates the value of all taxable sales and then subtracts the sum of all taxable purchases; the VAT rate is applied to the difference. The subtraction method is currently only used by 3

9 Japan, although subtraction method VATs often use the name "flat tax." With both methods, there are exceptions in the calculation method for certain goods and transactions, created for either pragmatic collection reasons or to counter tax fraud and evasion. How the two methods operate is demonstrated in the examples given in table below. Methods of Calculating a Value Added Tax Primary producer (cotton) Clothes maker Wholesale dealer Retailer Total A. Subtraction Method - Sales Purchases Net receipts (value added) - VAT rate 10% B. Tax-Credit or Invoice Method VAT due on sales Less: VAT paid on purchases VAT rate 10% Under the subtraction method, the tax for a given accounting period is calculated by multiplying the total value of sales minus the total value of purchases by the tax rate. Under the tax-credit or invoice method, the tax is calculated separately for each purchase or sale; it is included in the sale price at each stage of production and distribution and shown separately on all invoices (except in the case of retail sales to final consumers). In determining the tax payable for a given tax period, say a month or quarter, the dealer has only to deduct the total amount of VAT paid from the tax charged by him on his sales. The difference represents the VAT payable to the government for the period. 4

10 2.4. The necessity to introduce value added tax instead of turnover tax Many countries have introduced the VAT to replace the turnover tax or some type of single-stage sales tax. The replaced taxes are inherently troublesome in terms of revenue leakage, economic inefficiency, or both. The relative advantages of the VAT are illustrated below. The turnover tax is imposed on every stage of the production-distribution chain. The tax base at any single stage includes the sales value of the goods plus the tax charged accumulatively in previous stages. A serious problem with this tax is the cascading effect, literally understood as the tax-on-tax effect. The tax generates a trail of accumulated distortions carried from the first stage of production to the last stage of retail sales distribution. To gauge how bad the cascading effect is, one may simply imagine a situation in which a smart enterprise negotiates with his partners to vertically integrate; by colluding, they can avoid a large part of the tax burden. VAT is a tax on consumption, which is widely collected on all organizations and individuals consuming goods and services, and it allows for an increased state budget. The deduction of VAT paid at the input stage also has the effect of encouraging the modernization of production and investment in reducing production costs. For the tax office, VAT satisfies efforts to prevent tax evasion. Tax authorities can very easily check for cases where a declaration is incorrect. For taxpayers, VAT is an advanced tax measure that improves the self-discipline and obligation of taxpayers. Although VAT is still new to Lao PDR, the tax system is not new to other countries. The modern concept of VAT was first introduced in France in In Lao PDR, VAT was introduced on October 1st, 2010 and designed to replace the turnover tax, which was a staple of taxation in Laos for many decades. A turnover tax is applied at every stage in the supply chain, without any deduction for the tax paid at earlier stages; this created what we call a cascading tax problem. On the other hand, when implementing economic integration, the principles of international relations must be adhered to, or the revenue of some taxes such as import duties and income taxes will be affected. To that point, VAT comes with a wide range of adjustment and stability that will be used by the country to meet the need for greater revenue to support the state budget. 5

11 2.5. The conditions for using value added tax Enterprises and tax authorities need to have technology and systems All enterprises have to enhance their accounting system and should have point of sale terminals, invoice and information technology systems, and management reporting systems. On the other hand, tax authorities also need modern technical equipment for the management of tax collection; comprehensive and modern computer systems will facilitate the management of tax collection. Value added tax is a tax that, when taxed at the next stage, is closely related to the tax in the previous stage; thus, tax collection management must closely control the sales and purchases of business establishments. Accordingly, tax authorities need to have a completely modern computer system to serve the work of management, synthesis, inspection and collection of data and documents required for calculating tax quickly and accurately. Qualification of tax officials The application of VAT to its own characteristics and to the calculation of all stages of the business process requires that the tax officer have sufficient qualifications and capacity to carry out technical procedures as well as to properly calculate and manage the collection of taxes in accordance with the law and the State and to combat tax evasion. State management by the legal system Organized implementation and management of taxes in general and VAT in particular is essential for a country to ensure the effectiveness, feasibility and utilization, exploitation of VAT and to contribute significantly to the state budget. Therefore, state management of VAT is should be at the core of VAT application for each country; the State should issue a proper VAT policy to promote the implementation. The State must promulgate tax laws to ensure the effectiveness and to combat the negative status of tax evasion. In order to achieve the above objectives, the State must have a VAT law and guiding documents suitable to reality. This is the first condition for the implementation of VAT in a country. The effective implementation of tax law, ensuring the equality in tax obligations, and the prevention of revenue loss is very important. In order to create favorable conditions, management should coordinate with the VAT Law and the guiding documents. Management of tax collection It is important to determine accurately the amount of tax payable, and it is also important for taxpayers to pay taxes in a timely and adequate manner. Tax offices must 6

12 take measures to urge taxpayers to fulfill their obligations and strictly comply with sanctions for handling of late tax payment and shortfall payment. In order to implement the above mentioned management contents, it is necessary to meet some basic conditions as follows: + High-efficiency tax administration apparatus with a strong and qualified staff who are always enthusiastic, dedicated and highly responsible in their work. + Clear and efficient tax administration process, facilitating taxpayers in fulfilling their tax obligations. + Strong sanctions in the management of tax collection to prevent and handle in time any negative acts that may occur. + An effective coordination between tax authorities and concerned agencies in the process of tax collection management. Tax inspection and supervision Tax inspection and supervision is one of the most important components of tax administration; it is important in order to detect and promptly handle cases of tax fraud and tax loss limitation, especially in the self-calculation mechanism, self-declaration, selfpayment, and the role of inspection and supervision. Contents of tax inspection and supervision include: inspecting and supervising the observance of regulations on tax registration, declaration and payment, and observance of regimes on books, accounting, invoices and vouchers. The stable development of the economy Value added tax depends on market fluctuations and prices of goods and services on the market. If the market and prices fluctuate significantly between the prices of goods and services purchased and sold, there is a big change. This fluctuation will either result in a sudden increase in the amount of state taxes (as the output price rises) or in the government being unable to collect more taxes and having to pay a large amount of tax (when the output prices fall sharply). This is both detrimental for the State and the taxpayers, as well as the related parties. Thus, the stability of the economy as well as a good implementation of monetary policy are important conditions for economic development and the application of policies regarding VAT policy. 7

13 3. Overview of the Value Added Tax in Lao PDR 3.1. Persons subject to payment, collection and contribution of VAT According to the instruction of the Minister of Finance on the implementation of the Law No. 0077/MOF on Value Added Tax, from the date January 11, 2017 persons subject to VAT payment are Lao and foreign individuals, entities and organizations that import, purchase or consume goods and services in the territory of the Lao PDR. Persons subject to collection and contribution of VAT includes business operators registered in the VAT system with the tax authority as follows: a. Business operators registered in the Lao PDR and who supply goods and services whether as the primary or secondary businesses, with profit or not. b. All governmental organizations that operate business the same as or similar to the business of the VAT payer, or in any following activities shall be considered as VAT payers: - Providing telecommunication and post services; - Selling water, gas, electricity and heat energy; - Transporting services of goods via seaport and airport; - Passenger transportation; - Sale of goods produced for sale; - Sale of agricultural products produced for sale; - Organizing products fair and exhibition; - Warehousing services; - Conducting business advertising campaign; - Conducting activities in tourism; - Operating store, cooperatives and restaurants. Governmental organizations shall be considered as operators of businesses the same as or similar to businesses of VAT payer when they operate their businesses with an unfair competition with the VAT payer (in a comparable situation). c. Non-resident individuals, legal entities and organizations in the Lao PDR that supply goods and services in the Lao PDR either by themselves or through a main contractor, an agent or a sub-contractor are obliged to register in the VAT system regardless of amount of annual business turnover. 8

14 3.2. The obligations and option for registering into the VAT system in Lao PDR Lao PDR-based businesses with an annual turnover of at least 400 million kip (approximately US $50,000) are obliged to register for VAT and comply with the VAT Law. This is also the case for businesses not based in Lao PDR that supply goods or services in the country, regardless of their annual turnover. Moreover, Lao PDR-based businesses with annual turnover below 400 million kip can be voluntarily registered as a VAT Taxpayer. Businesses and organizations of the government mentioned above are obligated to be registered in the VAT system if their annual business turnover is LAK 400,000,000 or over. On the other hand, businesses and organizations of the government mentioned above that are not obliged to be registered in the VAT system (those with annual business turnovers less than LAK 400,000,000), can be voluntarily registered in the VAT system provided that they hold valid enterprise registration certificates or concession licenses, maintain account in accordance with the accounting standard of the Lao PDR, and use VAT invoice in compliance with relevant laws and regulations Goods and services subject to VAT Goods and services subject to VAT include goods imported into the territory of the Lao PDR, and goods and services as well as fixed assets supplied, self-consumption or given to others in the Lao PDR by the VAT payers, whether receive financial consideration or other benefits. Such goods and services also include those supplied by non-residents who are not registered or incorporated in Lao PDR. The details are as follows: 1. Goods imported into Lao PDR. Goods imported into the Lao PDR, including goods imported from a special or specific economic zone by individuals, legal entities and organizations, shall be considered as goods subject to VAT regardless of tax payer status; except from this are the list of goods determined in Article 12 of the VAT Law as well as goods subject to VAT exemption in accordance with a contract, treaty, or resolution approved by the National Assembly. 2. Supply goods (sale) in the Lao PDR by VAT payer. - Goods or assets of enterprise supplied (sold), consumed or used for other purposes by the VAT payers. - Goods or assets of an enterprise used by VAT payers for a particular purpose at no cost. 9

15 - Goods supplied or granted to others by VAT payers, whether receive consideration or not and whether it is one-time or several-time payment, including the supply by VAT payers that operate business subject to VAT exemption such as: a commercial bank, micro financial institute and so others. - Goods or assets of enterprises kept by VAT payers or their successors at the time of winding up the operation of business subject to VAT. - Goods sold by VAT payers in the Lao PDR prior to the declaration of import duty of the Lao PDR, whether sold within or outside the territory of the Lao PDR, shall be considered as goods subject to VAT. 3. Services subject to VAT. - VAT payers operating service business consumes or grant to others its own assets and goods, whether generating income or not. - Services supplied by VAT payers to themselves, their employees or others for fee. - Natural resources excavating and transporting service by other persons than a concessionaire Goods and services that are not subject to VAT - Goods distributed as company sample products or for market entry to buyers or potential buyers for free or in an appropriate price. - Personal properties of VAT payers (not enterprise properties) that the VAT payers supply to others such as: personal vehicles sold by the VAT payers operating computer trading business. - Goods and services that VAT payers supplied to victims of disasters or natural disasters in a non-profit manner. - Goods and services supplied by individuals, legal entities and organizations which are not VAT payers in the Lao PDR. There are additional goods and services subject to VAT exemption, as mentioned in Article 12 of the VAT Law. They are as follows: 1) Importation and domestic supply of agricultural plants by individuals, legal entities or organizations, for either professional or personal use. 2) Domestic sale of animals: the sale of animals subject to VAT exemption refers to the sale of all kinds of non-processed or initially processed, fresh or non-spoiled, alive or dead animals in whole or in part. 10

16 3) Forestation service, planting of industrial trees, fruit trees and medical trees planted by individuals, legal entities, or other organizations. 4) Importation and sale of plant varieties, breeding animals, animal feed, and other raw materials for production of animal feed by individuals, legal entities or organizations, for either professional or personal use. 5) Importation and sale of pesticides, animal medicines, bio fertilizer, chemical fertilizer and raw materials for producing the aforementioned products. 6) Importation and sale of machines or equipment for agricultural production by individuals, legal entities, or other organizations, for either professional or personal use. 7) Importation of chemical substances: chemical imports are exempted from the VAT if they are to be used for searching, testing, or scientific research by a government organization and VAT payer. 8) Importation of airplanes and equipment for domestic and international air transport. 9) Importation of fuel and other oils for plane gasoline, engine oil, lubricant, brake oil, hydraulic oil, or to serve the international air transport service. 10) And etc., with mention in instruction of the Minister of Finance on the Implementation of the Law on Value-Added Tax Calculation of the value added tax in Lao PDR 1. Rate of Value Added Tax - The ten percent (10%) rate is applied to goods and services that are imported, produced and consumed in the Lao PDR and that are subject to VAT, including the export of non-finished products from natural resources. - The zero percent (0%) rate applies to raw materials, chemical substances, equipment, machinery for production of domestic goods, and imports from foreign countries that could not be produced domestically or for which domestic production does not meet the demand. It also applies to investments that are registered as fixed assets and the exportation of finished goods and natural resources overseas or to special economic zones. 2. Calculation of the value added tax in Lao PDR 11

17 The calculation of VAT shall be made during these three processes: importation of goods from overseas or from special economic zones, supply (sale) of goods and services domestically, and purchase of services from non-residents and unincorporated entities in the Lao PDR. The details are as follows: 1) Importation of Goods. An example of when the imported goods are subject to import duty: an import-export company, as a VAT payer, imports 50 washing machines with value of LAK 50,000,000 for domestic distribution. Such importation is subject to 15% import duty, 10% excise tax and 10% VAT. Method for calculating VAT for such imports: - Cost, Insurance, Freight (CIF) = LAK 50,000,000 - Import duty 50,000,000 x 15% = LAK 7,500,000 - Excise tax (50,000, ,500,000) x 10% = LAK 5,750,000 - VAT taxable amount (50,000, ,500, ,750,000) = LAK 63,250,000 - Value-added tax 63,250,000 x 10% = LAK 6,325,000 Import duty and taxes payable by the importer are: - Import duty = LAK 7,500,000 - Excise tax = LAK 5,750,000 - Value-added tax = LAK 6,325,000 Total payable import duty and taxes = LAK 19,575,000 2) Calculation of VAT from domestic supply (sale) of goods and services: a. Calculation of VAT from the supply of goods: 1. The supply of goods is subject to a 10% VAT: Example: A roofing tile manufacturing factory, as a VAT payer, sells roofing tiles in the Lao PDR with a value, excluding VAT, of LAK 50,000,000. VAT that the factory calculates and collects from its clients is: - Basis of VAT calculation = LAK 50,000,000 - Value-added tax 50,000,000 x 10% = LAK 5,000, The supply of goods subject to excise tax and VAT: Example: A VAT payer sells 10 air conditioners to a company with a value, excluding VAT, of LAK 60,000,000, which is subject to 15% excise tax and 10% VAT. VAT calculation method shall be as follows: 12

18 - Excise tax 60,000,000 x 15% = LAK 9,000,000 - Basis of VAT calculation (60,000, ,000,000) = LAK 69,000,000 - Value-added tax 69,000,000 x 10% = LAK 6,900, VAT Deduction and Refund The most significant characteristics of the VAT system are the mechanisms of VAT deductions and refunds, which aim to minimize difficulties for business operators difficulties, prevent double taxation, and support exportation. 1. VAT deduction A VAT deduction is the amount of VAT allowed by law for VAT payers to compensate their VAT payment made when importing goods, buying goods and services in the country. VAT input comprises of deductible VAT and nondeductible VAT based on conditions and actual use as below: - VAT input related to imported goods, goods and services bought domestically with official supporting documents and to be directly used in business is all deductible. - VAT input related to goods and services with official supporting documents and they are directly to be used in business and other purposes (indirect business or not related to business) is deductible only for the VAT input directly related to business operation. Therefore, VAT payers must separate the VAT input directly related to business operation by recording in its special accounting. If fail to separate all VAT input, the VAT input will be deductible. 2. VAT Refund The refunding of VAT is the compensation of VAT paid by VAT payers in cash or by bank transfer which is the amount of VAT when importing or buying goods and services in the country; 1) The VAT payers who have the rights to get VAT refund comprises of: a. VAT payers who have: - Goods exportation subject to 0% VAT; - Domestic supply of goods and services subject to 0% VAT; - Supply of goods and services subject to VAT of the Lao PDR incurred in foreign countries or in the special and specific economic zones; b. Embassies, consulates; 13

19 c. Governmental and nongovernmental organizations; d. Foreign passengers, tourists; e. Individuals, legal entities, and organizations pay VAT exceeds the amount stipulated in the law. 2). VAT refund for those who pay VAT exceed the limited amount stipulated in the law, such as those who wind up business, merge business, separate business, and whose business is bankrupt in accordance with the law. 3). VAT refundable or nonrefundable to the embassies and consulates. There have some recommendation in the instruction of VAT law no date January 11, ). VAT refund to international organizations and nongovernmental organizations. 5). VAT refundable or nonrefundable to travelers, tourists Revenue performance of value added tax in Lao PDR Value added tax is an indirect tax that is collected on the promotion of value added to goods and services occurring in all processes; it is also collected on the value of goods and services imported into Laos. After changing from a turnover tax to VAT in 2010, revenue has increased year by year since FY 2010/11 to FY 2015/16, with a record average of 14.2%. The total VAT revenue generated was 36% from imported goods and services and 64% from domestic products. In FY2015/16, VAT amounted to 4,530 billion LAK, equal to 4.4% of GDP, and it accounted for 84.2% of the revised budget plan, or under the plan 15.8%, which increased by only 1.1% compared to the previous year. The value of VAT collected was 1,619 billion LAK from imported goods and services, a figure that increased by 3.8% compared to the previous year; on the other hand, 2,911 billion LAK was collected from domestic goods and services, a figure that decreased by 0.3% compared to the previous year (Figure 1). 14

20 Figure 1: Performance of VAT (Billion LAK, %) 3,500 3,000 2,500 2,000 1, % 3.4% 4.0% 4.0% 4.4% 4.2% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1, % % 0.5% - 0.0% VAT from import (left axis) Domestic VAT (left axis) VAT to GDP (right axis) Data: Fiscal Policy Department, Ministry of Finance, Lao PDR Figure 2: The comparison of VAT revenue to other tax revenues (Million LAK) 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Profit tax Income tax VAT Excise taxes Import duties Other tax Royalty of Resource Royalty of electricity Data: Fiscal Policy Department, Ministry of Finance (final report) 15

21 Table 1: Summary of tax revenue from FY2010/ /16 (million kip) Profit tax 1,592,150 2,196,034 2,187,842 1,784,857 2,129,155 1,753,176 Income tax 543, , , ,898 1,099,810 1,592,690 VAT 2,403,139 2,416,205 3,221,092 3,596,663 4,480,683 4,529,692 Excise taxes 1,947,594 2,344,314 2,733,712 3,269,504 3,363,018 3,634,852 Import duties 964,627 1,047,329 1,204,919 1,336,384 1,356,531 1,981,084 Other tax 842,725 1,203,969 1,429,521 1,990,189 1,907,609 1,748,138 Royalty of Resource 619, , ,046 1,212,249 1,127, ,604 Royalty of electricity 195, , , , , ,636 Total tax revenue 9,108,636 10,914,851 12,651,893 14,547,496 15,818,886 16,250,871 The proportion of taxes to the total tax revenue (%) Profit tax 17.5% 20.1% 17.3% 12.3% 13.5% 10.8% Income tax 6.0% 6.8% 6.8% 6.8% 7.0% 9.8% VAT 26.4% 22.1% 25.5% 24.7% 28.3% 27.9% Excise taxes 21.4% 21.5% 21.6% 22.5% 21.3% 22.4% Import duties 10.6% 9.6% 9.5% 9.2% 8.6% 12.2% Other tax 9.3% 11.0% 11.3% 13.7% 12.1% 10.8% Royalty of Resource 6.8% 7.2% 6.4% 8.3% 7.1% 4.0% Royalty of electricity 2.1% 1.6% 1.7% 2.5% 2.2% 2.3% Tax revenue 100% 100% 100% 100% 100% 100% Data: Fiscal Policy Department, Ministry of Finance, Lao PDR As shown in Table 1 and Figure 2, since the introduction of VAT as a replacement for the turnover tax in 2010, the proportion of VAT has become larger than all other tax revenue. Therefore, VAT is an important source of tax revenue for the state budget The experience of the VAT or consumption tax in Japan Japan has reformed its tax system many times, such as during the tax reform of 1994, which was intended to help the nation cope with structural changes to the economy and in society. Another tax reform in Japan was the consumption tax, for which necessary reviews were made on special measures for medium-and small sized enterprises so that their tax burden might be more widely shared by the members of society. The tax rate also was raised to substantiate the consumption tax system, and local consumption tax was established. 16

22 In FY2003, the government reexamined the whole taxation system to ensure a sustainable tax system, taking into consideration the current economic and fiscal conditions. Consumption tax will surely play an important role in the future due to the fact that Japan will face an aging society with fewer children. To improve reliability and transparency in the consumption tax scheme, the government drastically reformed the tax exemption system applicable to small and medium enterprises. This consumption tax reform included a decrease in the upper limits of taxable income eligible for tax exemption and also introduced a new partial tax payment by interim tax return. The revised Consumption Tax Law took effect on April 1, 2004 and now requires price indication inclusive of consumption tax. Outline of the consumption tax or VAT Consumption tax is levied on the sale/lease of assets and the provision of services (asset transfers, etc.) rendered in exchange for compensation as business activity by business enterprises in Japan. The consumption tax is also levied on foreign goods received from bonded areas. With regard to domestic transactions, business enterprises are liable to pay consumption tax. As for importation, those who receive goods from bonded areas also need to pay consumption tax. Domestic and import transactions, except for certain transactions deemed non-taxable, are subject to the consumption tax. The consumption tax rate is 8% (inclusive of the local consumption tax rate of 1.7%). Although the consumption tax rate is scheduled to increase to 10% (inclusive of the local consumption tax rate of 2.2%), this will not take effect until October Moreover, the consumption tax rate will remain at 8% for food and beverages, except for alcoholic drinks and dining out, as well as for newspapers published more than twice a week (and based on a subscription contract). 1. Domestic transactions: the transfer or rental/lease of assets or the provision of services as a business in Japan by an enterprise for consideration. 2. Import transactions: cargo retrieved from a bonded zone. Financial transactions, capital transactions and certain transactions in the areas of medical care, welfare and education are deemed non-taxable. Export transactions and export-like transactions such as international communications and international transport are exempt from the consumption tax. Self-assessment and payment Japan applies the mechanism of self-assessment and tax calculation, in which taxpayers declare and pay tax obligations in combination with the tax deduction mechanism. In order 17

23 for this mechanism to operate effectively, Japan maintains an effective system of examination and collection of information, providing a favorable environment for taxpayers and assuring strict and reliable collection management system. Enterprises engaged in domestic transactions (excluding enterprises that are exempt from consumption tax) and parties engaged in import transactions must file and pay consumption tax on their taxable bases by the methods and procedures provided for them. If the amount of consumption tax on the taxable base of an enterprise (not including a taxexempt enterprise) is less than the amount of consumption tax on purchases calculated as being deductible by the prescribed method, the shortfall is refunded by filing. In the case of the prescribed cross-border supplies of electronic commerce by foreign enterprises, Japanese enterprises who receive the provision of services or foreign enterprises who provide the services are responsible for tax filing. To ensure that double taxation does not occur at the production and distribution stages, a scheme has been adopted allowing the deduction of consumption tax on purchasing from consumption tax on sales. Deduction of purchase tax Consumption tax on purchasing (receipt of the transfer or rental/lease of assets or the provision of services from another party) may be deducted from consumption tax on the taxable base when calculating the amount of consumption tax to be paid. The amount of this deduction is limited, however, depending on the percentage of taxable sales. In order for the consumption tax on the purchase to be deducted, both account ledgers and invoices that describe certain matters have to be retained. For the prescribed cross-border supplies of electronic commerce by foreign enterprises, only the consumption tax on the purchases that are subject to the reverse charge system and the purchases that are received from the registered foreign enterprises can be deducted. If taxable sales during the base period amounted to 50 million yen or less, the product of consumption tax on the taxable base multiplied by a given percentage determined by industry may be considered the consumption tax on purchasing for the current taxable year and allowed as a deduction if the prescribed notification is submitted to the director of the tax office. It should be noted that documents to be retained in order for the consumption tax on purchases to be deducted will change with the introduction of the reduced consumption tax rate on April 1, Between April 1, 2017 and March 31, 2021, in addition to the account ledgers and invoices that describe certain matters as before, account ledgers and invoices indicating tax rate categories for separate accounting and the items of which are subject to the reduced consumption tax rate have to be retained. After the introduction of a so-called 18

24 invoice system on April 1, 2021, qualified invoices issued by registered taxable enterprises need to be retained. Tax exempt enterprises Enterprises whose taxable sales are 10 million yen or less for the base period (excepting enterprises that have opted to be taxable) and that meet certain conditions are exempt from consumption tax filing/liability for the current year. However, enterprises can elect to be taxable enterprises if the prescribed notification is submitted to the director of the tax office. A company that has no base period, such as a newly established company, and whose capital at the start of the taxable year is 10 million yen or more cannot be a tax-exempt enterprise in that taxable year. Computerization systems Technological innovation has been an important matter in tax and revenue collection. The advent of new instruments to help businesses work more efficiently affects the way taxes and revenues are collected. Japan is actively using the advances in ICT in recent years to provide taxpayer services, such as enabling individuals to file taxes from home. By using ICT such as filing assistance on the internet and e-tax, taxpayers can file tax returns conveniently without visiting tax offices, at any time and without calculation errors. E-taxes enable users to perform procedures for filing consumption tax, income tax, corporation tax and other taxes. Use of tax and accounting software compatible with e-tax enables taxpayers to digitally carry out the set of work, including accounts processing and reporting, from data preparation to filing, which will reduce paperwork. E-tax also reduces administration work, such as receiving tax returns at the counter, as well as document management costs for tax authorities, thereby promoting efficiency in the tax administration. Tax consultation Tax consultations are provided as part of taxpayer services so that taxpayers can do proper self-assessment and tax payment themselves. These consultations provide information on taxation and answer general questions on taxation. General tax consultations are handled at centralized phone consultation centers. Phone consultation centers at the Regional Taxation Bureaus provide centralized handing of general tax questions and consultations from taxpayers. Also, the NTA website provides answers to many common tax-related questions. This is very important and necessary for 19

25 the taxpayers to help solve problems that may occur, and the website is also an effective and efficient way to collect tax revenue. Tax Education Japan considers tax education to be a very important matter, and the NTA provides various training programs, including training sessions for new hires, in order to enhance capabilities of the NTA staff. As the central organization for staff training, the NTA is furnished with a National Tax College (NTC), which has a Central Institute and 12 additional branches around the country. Taxpayer education programs are provided by the Japan Federation of Certified Public Tax Accountants' Associations (JFCPTAA) and the National Tax Agency (NTA) to help teachers and to foster student citizenship in elementary schools, junior high schools, high schools and universities. Teachers can integrate the program into normal classes. Tax education also enhances a variety of services for taxpayers to help them correctly file and pay taxes by themselves. These include (1) public relations activities and tax education relating to the significance and function of taxes and knowledge about the tax law, (2) clarification of legal interpretation and of practices and procedures, (3) centralization of taxpayer contact points, and (4) efforts to improve taxpayer convenience in tax consultation and filing returns. Table 2: A comparison between VAT implementation in Japan and Laos Japan Lao PDR VAT issues: Date introduced 1 April October 2010 Thresholds Registration 10 million yen or nearly $ of taxable transactions. 400 million kip or = $ of taxable transactions. Standard rate (%) 8%; a rate increase to 10% is expected to take effect from 1 October VAT collection compared to tax revenue Education for taxpayers and tax officers Electronic invoicing allowed? Approximately 20% of Tax revenue. Always implementation, especially in local tax offices. Yes 10%; a special 0% rate applies to raw materials, chemicals, and some other exempt goods and services % of tax revenue Only tax officers, but not always. Not yet 20

26 Related issues: Tax Education Provided by JFCPTAA (*) & NTA. Not yet implemented for taxpayers. Tax consultation Computerization system (E-tax) Enterprise's Bookkeeping 2016 there are 311 Cases for VAT consultation. Almost fully computerized. Almost all enterprises use bookkeeping. Not yet in usual. (*) JFCPTAA= Japan Federation of Certified Public Tax Accountants' Associations. Not yet computerized in rural areas. Lack of bookkeeping for SMEs. In Japan, to alleviate the burden for low income earners, when the consumption tax rate is raised to 10% on 1 October 2019, the current rate of 8% (6.24% national tax and 1.76% local tax) will be retained for certain goods. The lower rate will be applied to purchases of food and drinks (fresh and processed), excluding alcoholic beverages and dining out, as well as to newspaper subscriptions. In general, the multiple rate structure is inherently complex, yet many argue for it on both efficiency and equity grounds. On the other hand, supporters of a multiple rate structure on the equity ground would argue that tax rate differentiation is needed to mitigate the regressivity of a tax: lower rates must be applied to the goods and services consumed primarily by the poor. In practice, however, a multiple rate structure poses a great challenge to tax compliance and administration. A VAT with a multiple rate structure requires firms to keep separate records for different purchases. This is, in turn, costly for auditing (more records to be checked; more incentives and opportunities for firms to misclassify goods) and is cumbersome for application of the self-assessment (complex for taxpayers to comply; hard for the tax administration to detect fraud). In general, a more complex VAT would require the tax administration to collect more information to determine tax liabilities and refunds Lesson learned by Lao PDR. Computerization and ICT systems Technological innovation has been an important matter in tax and revenue collection. Today, Lao PDR still lacks a computerization system at the province and district level to collect tax data and link it to the central level; therefore, Laos should develop an ICT system to boost the tax collection and using e-tax system. E-tax can reduce administrative work and reduce document management costs for tax authorities, thereby promoting the 21

27 efficiency of tax administration. Although there are high costs for developing the computerization system, but it is worth the government investment in long term. Tax education Tax education provides several advantages to the government; more specifically, it create better informed citizens, the potential for increased compliance by taxpayers, the potential for reducing the rate of noncompliance and associated cost of effecting compliance, increased support, if not better understanding and appreciation of government initiatives, better chances of tax collection, and increased tax revenue. The strengthening of tax education is very important in shaping tax knowledge and increasing tax compliance. In this case, tax socialization efforts can be done through the dissemination of information about the types of taxes, tax rates, tax payment mechanisms and tax benefits. Tax consultation Tax consultation is very important and necessary for the taxpayers to solve problems that may occur, and it also will result in more effective and efficient tax collection. Bookkeeping matter Bookkeeping is also important for tax inspection and auditing to collect the full amount of tax payment owed and protect against tax evasion. 4. Analysis and Discussion of the Value Added Tax in Lao PDR 4.1. Laos should broaden its VAT base The number of units doing business but not registering for VAT is still quite high, especially for small and medium households. Tax registration for new businesses in many cases involves the local government, so tax authorities need to pass through the local management to get more units registered. Therefore, all business units must fully comply with the tax registration regime. To mobilize more tax revenue, Laos should examine the enterprises who get a yearly turnover of more than 400 million kip and strictly require them to register in the VAT system. Data from the Laos tax department showed that the total tax revenue base in 2016 was 93,987 enterprises, of which only 11,239 enterprises registered in the VAT system (12% of the total). Therefore, to guard against revenue losses from under-reporting, tax authorities should classify more enterprises by auditing companies near the 400 million kip threshold so that they have to register for the VAT system. The 22

28 Ministry of Finance has a plan under consideration for continuing to monitor and expand value-added tax payments to hotels, restaurants, and large shops. To encourage businesses to register in the VAT system, there is the VAT Incentive Scheme. The main objective of the VAT Incentive Scheme is to encourage businesses that are not registered for VAT to come forward and register by offering them a one-off incentive. The most significant characteristic of the VAT system is the mechanism of VAT deductions and refunds, which helps businesses minimize operators difficulties, avoid double taxation, and support exportation. This is an important incentive for businesses to register in the VAT system because businesses that are not registered in the system cannot deduct or refund VAT when they import goods or materials for commercial use. However, when looking at the incentives that tax authorities provide for VAT system registration, it is apparent that there is often a time delay in providing the actual VAT deduction or refund. An IMF technical report in 2017 stated that there are serious problems of delay in dealing with requests for refunds from businesses with excess credits, such as exporters and businesses who have been exempted from output VAT as part of a concession agreement. So, tax authorities should consider improving the VAT refund process to avoid the cost falling to businesses and creating a drag on economic growth Small businesses lack adequate bookkeeping Most businesses in Laos are small scale enterprises. As a result, tax collection is not reaching its target. Up to now, there have been a number of enterprises that have been inactive in business and service activities, and some of them have stopped temporarily, particularly in fields such as timber, construction, and importation-exportation. Currently, about 60-70% of enterprises in the VAT system do not use account bookkeeping. Under such conditions, it is difficult to comply with VAT, and there is often lower business efficiency. The issue of account bookkeeping and billing invoices is one of the first conditions that arose when introducing the VAT. Value added tax is also called the invoice method: if it is not well implemented, VAT becomes easy to evade. As mentioned, the significant issues in small businesses are a lack of resources and a lack of familiarity with VAT, and a lack of relatively basic accounting skills. Some small businesses do not keep any formal business records, and thus the transition to transactional accounting required by VAT may be challenging for some of those entities. Likewise, small businesses unfamiliar with bookkeeping may incur increased accounting costs for 23

29 collecting the tax, which are not reimbursed by the taxing authority. For example, wholesale companies now have to hire staff and accountants to handle the VAT paperwork, which would not be required if they were collecting sales tax instead. It is essential that the people carrying out the VAT functions are fully aware about their role in achieving this objective. Regular VAT training and conducting acceptance tests before going for registering VAT will enhance users understanding of the VAT system and encourage better compliance. On the other hand, VAT law and instruction on VAT implementation have already issued, but in term of dissemination is still not yet widely available. Thus, the Ministry of Finance should disseminate relevant legislation documents faster and further to small and medium enterprises Develop a more extensive ICT system SMEs at the province and district level still commonly pay tax in cash, which can be attributed to many factors, including low living standards and habit. With such widespread and frequent use of cash, it is difficult for the government to check and monitor all the activities of a business. Likewise, it is difficult for tax authorities to accurately carry out the examination, declaration, calculation and collection of VAT from small, local enterprises. Tax administration in Lao PDR still lacks an electronic system, especially in localities at the provinces and districts level; this underdevelopment of a computerized system impacts the effectiveness of tax administration as well as the application of VAT. Therefore, Laos should develop a better ICT system in order to boost tax collection. As the data in Table 3 shows, Laos uses almost 30 tax officers per 1,000 registered taxpayers to collect tax revenue, whereas other countries like Vietnam use 3 tax officers per 1,000 registered taxpayers. This mean that the IT infrastructure situation is still low compared to other countries in the region. Laos has the most-costly administration in terms of staff per taxpayer in relation to the tax ratio. So, reorganization would seem beneficial. One way to improve the computerized system would be to increase the mobilization of bills by electronic and POS systems. At the present, the installation record sales (POS) set up 346 units of public events that collect revenue from the sale of businesses and the balance figure income information to calculate tax. The Ministry of Finance has plans to expand such events to large provinces such as Champasak, Savannakhet and Luang Prabang provinces with assistance from Japan. 24

30 Table 3 Population, tax authorities and taxpayers Data source: IMF Tax education and tax consultation Tax education is every important matter. With that in mind, the NTA of Japan provides various training programs in elementary schools, junior high schools, high schools and universities to enhance the knowledge of taxation to the citizens and build the capacity of the tax authorities. Tax consultation enhances a variety of services for taxpayers to help them correctly file and pay taxes by themselves. Laos should develop more resources for tax consultation, such as establishing phone consultation centers in each province to answer taxpayer questions and provide consultation on taxes and developing a tax website with answers to many questions from taxpayers. The government has to expand publicity for people's awareness and understanding of tax obligations to become more clear. In addition, the government has to monitor and check the legal documents issued to adjust the content that is not appropriate and add necessary information Reduce exemptions as much as possible Exemptions tends to erode the revenue base, reducing revenue collection, breaking up the VAT chain and thereby inducing a cascading problem. Even worse, exemptions are 25