Breaking news! Finally released, instructions on the implementation of the Income Tax Law!February 18, 2021
On 10 February 2021, the Minister of Finance issued Instruction No. 0819/MoF (the “Instruction”) to implement the Income Tax Law No. 67/NA dated 18 June 2019. There are a number of interesting developments; we highlight below some of the key points.
- Per the Taxation Administration Law No. 66/NA dated 17 June 2019, profit tax (“PT”) is payable on an annual basis, with two prepayments on 20 July and 20 January (of the following year) using one of three options ((i) the actual profit generated during the period; (ii) an annual business plan; or (iii) the previous year’s PT amount). The actual annual PT amount is based on the financial statements that are submitted by 31 March. A new penalty has been introduced under the Instruction. If the outstanding annual PT amount due at submission of the financial statements is greater than 10% of the prepaid PT, the excess will be subject to a 50% penalty. The timing of when this will become effective (whether for FY2020 or from FY2021 onwards) needs to be clarified with the Ministry of Finance.
- It is now clear that PT will apply on goods supplied in the Lao PDR by non-residents, non-Lao-registered entities, and non-tax-registered entities either at importation or within 15 working days from the date payment is made.
- PT at the deemed rate will apply on salaries that are paid to foreign employees overseas but are reverse charged to the Lao entity.
Personal income tax
- The sample personal income tax (“PIT”) calculation in the Instruction uses 30 for the number of monthly working days rather than the 26 working days specified in the labor law – this inconsistency needs to be clarified with the Ministry of Finance.
- Individuals receiving salaries from different sources must now prepare and submit a monthly PIT declaration and recalculation summary of all salaries to the tax authority where they reside or where they submitted their last PIT calculation within 25 working days from the date of salary payment. However, the Instruction does not clearly specify:
- whether any difference in the amount of PIT based on the PIT recalculation summary must be paid with the submission.
- which salary payment date is to be used for the 25 working days deadline if there are different salary payment dates for the various salaries paid.
- Annual PIT audits will begin for FY2020 by 31 March this year. In a separate notice (No. 0831/MOF dated 10 February 2021 on Registration by Individuals for Taxpayer Identification Numbers), individuals are required to register for a taxpayer number, which in theory means they could then be responsible for their own PIT audits. However, the Instruction states that the employer is required to do the annual PIT calculation and deduct the family support allowance based on the supporting documents provided by the employee. The annual PIT calculation and supporting documents must then be submitted to the tax authority where it is registered.
- Foreign employees are not entitled to the family support allowance. However, the Instruction does not state whether they are also subject to the PIT audit.
- The Instruction states that freelancers must pay 5% income tax without any deduction, but does not mention whether they are subject to an annual tax audit.
- Dividends payable to a corporate shareholder are now subject to 10% income tax, the same as the previous tax law. Any gain of a Lao-registered holding company will not be treated as revenue and will be exempt from dividend tax.
- Annual retained earnings must be specified in a shareholders’ resolution or sole shareholder decision or declared to the tax authority in order to defer payment of the dividend tax.
- Legal reserves set aside at a percentage greater than that required by the enterprise law will be subject to dividend tax.
Income tax on share transfers
- The Instruction does not clearly provide the income tax rate for share transfers by foreign shareholders, but there is an income tax calculation example that uses 2% of the share price.
- If the share transfer price is lower than the original value, the share transfer price will be based on the revaluation of the enterprise’s assets done by a committee appointed by the tax authority.
Income tax on royalties
- All royalty fees paid in Laos, to both individuals and legal entities, regardless of their residence status, will be subject to 5% income tax.
Income tax on loan interest
- Loan interest payable to non-resident and non-registered banks will be subject to PT at the deemed rate.
- Loan interest payable to resident or non-resident or non-registered individuals or legal entities that are not banks will be subject to 10% income tax.
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