A development in the value-added tax (VAT) sphere of Laos has caused quite a stir on social media recently, following the issuance of a Decision by the Ministry of Finance and its subsequent reporting in the media (click to read the article). Given the ‘hoo-hah’ surrounding the development, we thought we’d weigh in with some commentary on it.
One simple, direct (and valid) question – which is the kind we like – posed by a (valued) client was: “is this legal?” Our response was: “most definitely”. In fact, this is not even a new rule or imposition, it’s just enforcement of the current VAT provisions – and these provisions even existed under the former VAT Law (2006).
From the current VAT Law (2014):
Article 11. (Revised) Value-Added Tax-Liable Goods and Services
Goods and services liable to value-added tax include goods imported into the Lao PDR [emphasis added], goods and services provided within the country, the services of non-residents, legal entities and organizations unincorporated in the Lao PDR; except for the goods and services stipulated in article 12 and 16 of this law.
Article 12 refers to a list of goods and services which are exempt from VAT and Article 16 refers to goods for which VAT applies but the rate is 0% (instead of 10%).
A couple more relevant articles from the VAT Law (2014):
Article 7. (Revised) Value-Added Tax Obligations of Individuals, Legal Entities and Organizations
Individuals, legal entities and organizations that consume goods and services in the Lao PDR have the obligation to pay value-added tax to the State in accordance with this law.
Article 8. (Revised) Scope of Application of the Law on Value-Added Tax
This law is applicable to both domestic and foreign individuals, legal entities and organizations operating businesses, working and living in the Lao PDR that consume goods and services.
It’s actually very common for countries to levy their own VAT/GST on goods imported from elsewhere; it’s just that often VAT/GST did not apply in the country of origin (e.g. as usually is the case when online shopping) because it’s considered an export of goods and subject to a VAT/GST rate of 0% (which is also the case in Laos).
The issue here, for the most part, is people physically entering Thailand to purchase goods. While we are not experts in Thai taxation, we understand that Thailand also applies a 0% VAT rate to exported goods – so if you were to buy Thai goods online and have them shipped across to Laos, you would effectively ‘not be charged’ Thai VAT.
We also understand that the Thai tax system has a VAT-refund mechanism in place (the ‘Tourist Refund Scheme’), but that it’s only available via international airport departure points and limited to ‘luxury items’ – so even if the Tourist Refund Scheme was available at the Nong Khai border, your ‘grocery shopping’ (which is quite common amongst residents of Vientiane) would be excluded anyway.
Early reports on social media by those who have crossed-over into Thailand for grocery shopping since the Decision was issued have suggested that it’s not yet being enforced, with somewhat of a ‘grace period’, but that there is an expectation of enforcement very soon.
In light of this, we note that Article 6 of the Decision (issued by the Ministry of Finance) essentially assigns the responsibility for implementing it to the Customs Department. This responsibility includes developing the procedures, forms and payment mechanisms of the measure, which will no doubt take time to implement and place a substantial strain on the country’s tax administration system.
Businesses Importing Goods (Sorry General Consumers)
Fortunately, there is a silver lining in the cloud of this Decision: generally speaking, businesses registered for VAT in Laos should be eligible for a VAT deduction/credit/offset for any VAT paid at the time of importation if those goods are (directly) used to produce goods and/or services on which VAT must be charged; subject to any deduction limitations within the VAT regulations.
Therefore it is extremely important that businesses obtain the proper documentation upon importing goods (and paying the VAT), to facilitate this deduction.
Author: Daniel Harrison CPA, Senior Tax Advisor