30 Forging Ahead: Restoring Stability and Boosting Prosperity

Forging Ahead
Restoring Stability & Boosting Prosperity

2. Revenue Mobilization

Lao PDR 2023

 31

2. Revenue Mobilization
Improving domestic revenue collection is fundamental to restoring macroeconomic stability and boosting
growth-enhancing spending. Revenue performance was a concern even before COVID-19, as total revenue
declined from 22 to 16 percent of GDP during 2014–2019, owing to declines in tax collection and foreign grants. Tax
revenue fell from 14 to 11 percent of GDP in that period. Low tax rates, a narrow tax base, and weak compliance and
enforcement have undermined tax collection. In particular, generous tax exemptions have deprived the budget of
vital fiscal revenues and even foreign exchange. Revenue collection has heavily relied on indirect (consumption)
taxes and is very low by international standards. In 2019, revenue-to-GDP and tax-to-GDP ratios ranked in the
bottom 15 percent of the world, and these have deteriorated further since then. At 11 percent in 2022, the tax-
to-GDP ratio is significantly below the recommended minimum international benchmark of 15 percent. Tax rates
are among the lowest in the region, while tax administration inefficiencies also undermine performance. Tax
collection is only reaching about 60 percent of its potential (due to suboptimal tax policy and administration),
implying that there is vast scope for revenue-enhancing reforms that need not undermine economic growth or
living standards. However, recent measures have further hampered revenue mobilization (e.g., tax rate cuts and
growing fragmentation in the management of large taxpayers). Poor revenue performance jeopardizes fiscal and
debt sustainability, as well as broader macroeconomic stability. Improving tax policy and tax administration is
critical for boosting revenue mobilization, which would help increase fiscal space for growth-enhancing spending
and meet growing debt service obligations.

Main recommendations: (i) restore the value-added tax rate to 10 percent; (ii) revise the Law on Investment
Promotion to curb tax incentives; (iii) reform excise tax structures and increase rates, particularly on beverages,
tobacco, and fuel; (iv) reform the land tax and prepare for the introduction of a property tax; and (v) strengthen
compliance risk management by focusing on the administration of large taxpayers.

Chapter structure: The chapter starts by providing a brief overview of the tax system, after which it assesses key
revenue trends and performance. It then presents a more in-depth assessment of major taxes, supported by key
metrics and benchmarking to regional and income peers. The chapter also covers tax administration issues before
concluding with recommendations for enhancing tax policy (including widening the tax base) and strengthening
tax administration.

2.1 Background
There is an urgent need to revisit the current revenue mobilization strategy, especially due to mounting
macroeconomic challenges. Rising public debt service obligations have sharply increased financing needs, despite
significant deferrals in 2020–2022. Coupled with limited access to international capital markets and low foreign
exchange reserves, this has contributed to a severe exchange rate depreciation and thus high inflation, jeopardizing
macroeconomic stability and economic growth. Poor revenue performance has intensified these pressures, despite
strong curbs on public spending. Generous corporate tax exemptions and tax rate reductions have undermined
fiscal sustainability and macroeconomic stability. The erosion of fiscal space increases the country’s vulnerability
to economic, health, and environmental shocks, while threatening economic growth prospects through under-
investments in education, health, and infrastructure.

The stated policy objective is to achieve a domestic revenue level of about 16 percent of GDP by 2025, but this
will require major reforms. Collecting adequate levels of fiscal revenue is key to supporting the implementation
of national development priorities. The Ninth National Socio-Economic Development Plan (NSEDP), which
covers the period 2021–2025, sets targets for total revenue (at least 17 percent of GDP) and domestic revenue
(at least 15.8 percent of GDP). Proactive reforms are required to meet these targets. In 2022, total and domestic
revenue reached 15.0 and 13.3 percent of GDP, respectively. Tax revenue collection averaged only 10 percent of
GDP since 2018, while research suggests that a minimum tax-to-GDP ratio of 15 percent is necessary to support
economic growth. Below that threshold, economic activity is likely impacted by poor financing of basic public
services crucial for growth, such as education, health, and infrastructure (including maintenance). Broadening
the tax base, setting tax rates at reasonable levels, and improving the efficiency of revenue collection are key to
enhancing domestic revenue mobilization.
32 Forging Ahead: Restoring Stability and Boosting Prosperity

The state budget is funded by multiple sources of finance, but the tax framework is the ultimate foundation.
Public spending is mainly financed through government revenues and borrowing, and to a lesser extent, asset sales
and capital returns. Revenues are typically classified by the nature of the source. Tax revenue is by far the main
source, followed by non-tax revenues and foreign grants. Direct taxes are levied on incomes, profits, and capital
gains on both individuals and corporations, together with the land tax (Figure 2.1). Indirect taxes are levied on the
consumption of goods and services (value-added tax and excises), as well as on international trade. Natural resource
taxes and royalties (e.g., from timber and hydropower) are also indirect taxes. Non-tax revenues mainly relate to
fees, user charges, fines, and interest. Grants are provided by a range of development partners, such as bilateral and
multilateral institutions. In the Lao PDR, social contributions are not considered to be part of government revenue.

Figure 2.1: Classification of government revenues

Total revenue

Non-tax
Tax revenues Grants
revenues

Direct taxes Indirect taxes

Taxes on income,
Taxes on goods Taxes on Natural resource taxes
profits and Land tax Other fees
and services international trade and royalties
capital gains

Personal Corporate Value Natural Hydro-

Import Export Timber
income income added Excises resource power
duties duties royalties
tax tax tax taxes royalties

Source: World Bank staff.

Notes: The sum of tax and non-tax revenues is often referred to as domestic revenue.

A well-functioning tax system should fulfill certain attributes, such as adequacy, efficiency, and equity. Some
of the desired features of a tax system include revenue adequacy (to fund basic public services), efficiency (in revenue
collection), equity (through income redistribution), simplicity (of the tax system), and stability (to avoid economic
instability). However, trade-offs require careful attention and may need complementary policies. For example,
reducing tax rates may benefit some consumers and businesses in the short-term, but can eventually undermine
living standards and the business environment by weakening the provision of basic public services (e.g., education
and infrastructure). Some reforms can efficiently collect a significant amount of revenue (e.g., VAT rate increase) but
may need to be accompanied by measures to protect the most vulnerable households. Evaluating and balancing
different priorities will be critical.

2.2 Trends and composition

Revenue collection has deteriorated considerably in the past decade and is low by regional and income
standards. Total revenue fell from 22 to 16 percent of GDP during 2014–2019, owing to declines in tax collection
and foreign grants. It subsequently dropped to 13 percent of GDP in 2020, but it recovered to 15 percent in 2022
(Figure 2.2). In 2022, about three-quarters of government revenue was collected through taxes. Tax revenue steadily
declined from 14 to 11 percent of GDP in 2013–2019, falling further to 9 percent of GDP in 2020 due to the impacts of
the COVID-19 pandemic. While tax revenue bounced back to 11 percent in 2022, this was largely aided by inflation
(and despite some tax rate cuts). Non-tax revenue averaged 2 percent of GDP during 2010–2022. Grants showed
considerable volatility before falling significantly in 2016, partly due to the country’s graduation to lower-middle-
income status. Total revenue is very low when compared to regional and income peers (Figure 2.3).

Tax revenue has relied heavily on indirect taxes, particularly the value-added tax and excises. Indirect taxes
accounted for most tax revenue, with the value-added tax (VAT) and excises representing 29 and 25 percent of total
tax revenue in 2018–2022, respectively. These are consumption-based taxes levied on the purchase of goods and
services. Direct taxes averaged 23 percent of tax revenue in the same period and were almost exclusively derived
from the corporate income tax (CIT) and the personal income tax (PIT).
 2. Revenue Mobilization 33

Figure 2.2: Revenue (Lao kip and % GDP) Figure 2.3: Revenue (% GDP, 2016–21)
30 26 60

25 24
LAK trillion (2020 prices)

Revenue (% GDP)
22

Percent of GDP
20 40
20
15
18
10 20
16
5 14
Lao PDR
0 12 0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
100 1,000 10,000 100,000
GDP per capita (USD, 2021)–log scale
n Tax n Non-tax n Grants
Total (right axis) Source: International Monetary Fund and World Bank staff calculations.
Source: Ministry of Finance and World Bank staff calculations. Note: Blue dots represent ASEAN countries.

The relative decline in tax revenue is mostly accounted by the underperformance of the CIT and VAT. The
poor performance of revenue collection has been observed across most types of tax (Figure 2.4 and Figure 2.5).
The CIT declined considerably since 2011, owing to steady reductions in the standard rate and widespread
profit tax exemptions. The VAT has declined since 2015, likely also affected by tax exemptions. COVID-19 had a
considerable impact on economic activity and, thus, tax revenue. In 2020, revenue collection declined for most
taxes, especially excises, although ‘other fees’ partly offset this trend. Since then, a recovery in consumption
and imports has underpinned tax collection improvements, although this is also linked to the exchange rate
depreciation and higher (domestic and import) prices. Nonetheless, VAT collection declined in 2022, largely due
to the VAT rate reduction from 10 to 7 percent.

Figure 2.4: Tax revenue (% of GDP) Figure 2.5: Tax revenue (% of GDP)
16 5
14
n Other fees 4 VAT
12
n Resource Excise
10 3
n Trade CIT
8
n Excise Resource
6 2
n VAT Trade
4 n Land 1
PIT
2 n PIT Other fees
0 n CIT 0 Land
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

2010 2012 2014 2016 2018 2020 2022

Source: Ministry of Finance and World Bank staff calculations. Source: Ministry of Finance and World Bank staff calculations.

Tax revenue collection is considerably lower than regional and income averages. The tax-to-GDP ratio is
significantly lower than most regional and income peers (Figure 2.6). While the EAP region is generally known to
have low tax rates (and thus tax collection) compared to other regions in the world, tax revenue in the Lao PDR
is not only lower by international standards but also by regional standards. Moreover, tax revenue collection has
been deteriorating in contrast to many countries in the region. Before 2016, tax revenue was at the lower end of the
interquartile range in the EAP region, and it dropped significantly since then (Figure 2.7).

The tax system relies heavily on consumption taxes, with limited income tax collection accounting for most of
the gap to international benchmarks. Taxes on (corporate and individual) income account for most of the shortfall
in revenue relative to other countries in the region (Figure 2.8). CIT collection amounted to 1.4 percent of GDP in
2018, less than half the average collected in EAP countries and LMICs (Figure 2.9). Despite large foreign investments,
CIT revenue is low because of generous profit tax exemptions. PIT collection is also relatively small due to lower
average incomes and higher informality (i.e., low share of wage and salaried workers in total employment). VAT
 34 Forging Ahead: Restoring Stability and Boosting Prosperity

revenues are sizable, but still low by international standards. Taxes from international trade are also much lower
than peer countries, likely due to exemptions for large investment projects. Among the main taxes, only excises
perform comparatively better.

Figure 2.6: Tax revenue (% GDP, 2016–21) Figure 2.7: Tax revenue (% GDP)
40
40 25
25
30
GDP)

30 20
GDP)

20
(%(%

20 15
revenue

20 15
revenue

n IQR
10 10 n IQR
EAP-HIC
Tax

10 10 EAP-HIC
EAP-EME
Tax

Lao PDR EAP-EME

0 5 Lao PDR
Lao PDR Lao PDR
0 5
100 1,000 10,000 100,000 2011 2013 2015 2017 2019 2021
100 1,000 10,000 100,000 2011 2013 2015 2017 2019 2021
GDP per capita (USD, 2021) – log scale Source: International Monetary Fund and World Bank staff calculations.
GDP per capita (USD, 2021) – log scale
Note: IQR: interquartile range, EAP-HIC: East Asia and Pacific, high-income countries,
Source: International Monetary Fund and World Bank staff calculations. EAP-EME: East Asia and Pacific, emerging market economies.

Figure 2.8: Tax revenue (% GDP, 2016–21) Figure 2.9: Revenue by type of tax (% GDP, 2016–20)
18 7

15 6

5
12
n Others 4
9
n Trade 3
6 n Excise
2
n VAT
3 1
n PIT
0 n CIT 0
CIT PIT VAT Excise Trade
Vietnam

Malaysia

Thailand

Cambodia

Lao PDR

Indonesia

Philippines
Myanmar

n Lao PDR EAP LMIC World

Source: International Monetary Fund and World Bank staff calculations. Source: International Monetary Fund and World Bank staff calculations.

Non-tax revenue collection is sizable, but it remains below regional standards. Non-tax revenue mainly
relates to fees, user charges, fines, interest, and dividends. For instance, this includes administration fees (e.g.,
registration and document processing), dividends from corporations where the government holds equity, interest
from on-lending to SOEs, and charges relating to the use of Lao PDR’s airspace (overflight rights).65 Non-tax revenue
averaged 2.3 percent of GDP during 2010–2022 (Figure 2.10). Forest Preservation Funds significantly increased to
0.4 percent of GDP since 2018, while concessions rose to 0.4 percent of GDP in 2022. In ASEAN countries, the Lao
PDR’s non-tax revenue was higher only than the Philippines and Indonesia (Figure 2.11).

While economic growth has been predominantly driven by natural resources, government revenues accruing
from the resource sector have been limited. Resource-related revenues, such as taxes, royalties, and preservation
funds, are relatively small. Their combined (tax and non-tax) revenue averaged about 8 percent of total domestic
revenue in the period 2010–2022 (or 1 percent of GDP), which is much lower than the combined share of forestry
& logging, mining & quarrying, and electricity in total gross value added (about 20 percent).66 These revenues have
been undermined by tax incentives, volatile international commodity prices, and depleting reserves (e.g., copper).

65 Asset sales and capital returns (e.g., loan repayments from SOEs) are not reported under revenue as they are included in net financing in GFS-
compatible fiscal accounts.
66 Resource exploitation is also taxed through CIT, trade taxes, and VAT, but these likely yield limited revenue due to generous exemptions.
 2. Revenue Mobilization 35

Figure 2.10: Non-tax revenue (% GDP) Figure 2.11: Non-tax revenue (% GDP, 2016–21)
3.5
16
3.0 n Other 14
n Forest funds 12
2.5
n Overflight 10
2.0 n Interest 8
n Dividends 6 Average
1.5
4
n Administration
1.0 2
n Fines
0
0.5 n Concessions

Myanmar

Vietnam

Malaysia

Thailand

Cambodia

Lao PDR

Indonesia

Philippines
0.0 n Leasing fees
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Source: IMF and World Bank staff calculations.

Note: Non-tax revenues (mainly from SOEs in the energy
Source: Ministry of Finance and World Bank staff calculations. sector) account for most revenue In Myanmar.

Tax buoyancy

Tax revenue collection has not kept pace with economic activity, with poor performance mainly driven by
the CIT. Tax buoyancy (or tax elasticity) assesses whether growth in tax collection has been keeping pace with
economic growth over time. A buoyancy coefficient of 1 would suggest that a 1 percent increase in GDP leads to an
average rise of 1 percent in revenue collection, implying that revenues grow at the same pace as economic activity.
The buoyancy for the period 2010–2019 for all combined tax revenues stood at 0.69, meaning that tax collection
performance has been low in relation to economic growth (Table 2.1). Tax buoyancy is above 1 for PIT and excises,
while for the VAT, it is nearly 1. However, the buoyancy for CIT, trade taxes, and natural resource taxes & royalties
is low or even negative. This is mainly due to the impact of tax exemptions for large projects (including those in
mining, electricity, and transport), along with the reduction of the CIT rate, trade liberalization, and volatility of
commodity prices. Strong reforms are needed to mobilize adequate revenues since these need to increase much
faster than economic growth to reach stated policy objectives, as well as regional and international benchmarks.

Table 2.1: Revenue responsiveness to GDP

growth (2010–2019)

Tax Bouyancy
Tax revenue 0.69
Personal income tax (PIT) 1.51
Corporate income tax (CIT) -0.03
Land tax 0.74
Value-added tax (VAT) 0.98
Excises 0.10
Trade taxes -0.47
Import duties -0.36
Export duties -2.34
Other fees 0.67
Natural resource taxes & royalties -0.15
Source: World Bank staff calculations.

Distributional impact

Taxes levied on consumption impose a larger burden on better-off households, which implies that they are
progressive. Although the standard VAT rate was 10 percent in 2018, poorer households faced much lower effective
VAT rates due to large shares of informal consumption (e.g., self-produced food or services provided by unregistered
 36 Forging Ahead: Restoring Stability and Boosting Prosperity

vendors). For poorer households, a large part of VAT payments is the VAT component hidden in VAT-exempted
and informal goods and services that use inputs subject to VAT (e.g., fuel). In total, VAT payments represent
only 0.8 percent of the income of the poorest households, compared to 5.9 percent for the richest households,
suggesting that the VAT is a progressive tax (Figure 2.12). Therefore, the VAT rate reduction introduced in 2022 has
had a negative redistributive effect. Excise taxes are found to be slightly more progressive than VAT, as better-off
households spend more on goods and services subject to excise taxes. Spending on alcoholic beverages, tobacco,
fuel, large vehicles, luxury goods, and recreation together constitute 23.5 percent of income for households in
the richest decile, compared to 3.4 percent in the poorest decile. The amount of excise taxes paid represents 1.1
percent of the income of the poorest decile and 8.2 percent of the income of the richest decile.

The PIT is progressive and imposes a relatively small burden on households. PIT progressive rates and the
minimum income threshold, combined with high rates of informality among poorer households, mean that the
PIT is structurally progressive. The amount of PIT paid increases with household income. The richest households
account for 67 percent of total PIT payments, more than double their share in total household income, while the
contribution of the poorest households is less than 0.1 percent (Figure 2.13). However, overall PIT revenue collection
and its burden on households are relatively small due to the high prevalence of informality. Among PIT taxpayers,
PIT payments represent around 2–5 percent of their income. Broadening the tax base through formalization and
increasing PIT rates (especially for the top income brackets) could support revenue collection without placing a
heavy burden on low-income households.

Figure 2.12: Incidence of taxes Figure 2.13: Concentration share of taxes

16 0.6
Share of pre-fiscal income (%)

14
Concentration share

12
0.4
10
8
6
0.2
4
2
0 0.0
2 3 4 5 6 7 8 9 2 3 4 5 6 7 8 9
Richest

Richest
Poorest

Poorest

Income decile Income decile

n VAT n Excise tax n PIT n Pre-fiscal income PIT VAT Excise tax

Source: World Bank staff calculations. Source: World Bank staff calculations.

Tax revenue potential

There are several methods to estimate a country’s domestic revenue mobilization potential. There are various
factors affecting domestic revenue collection, pertaining to both tax policy and administration. Domestic revenue
can be considerably below its potential due to suboptimal tax rates and the proliferation of exemptions (which relate
to tax policy), as well as low compliance and limited capacity to collect revenue (which relate to tax administration).
It is therefore crucial to identify the most binding constraints to prioritize reforms. A simple method of estimating the
amount of additional tax revenue that could be potentially collected is to compare a country’s tax-to-GDP ratio with
that of other countries with similar characteristics, such as the level of economic and institutional development.
This can be undertaken through a simple benchmarking exercise, including tax productivity, VAT c-efficiency, or
through an empirical exercise.67

‘Tax effort’ measures a country’s effort to raise tax revenues, while the ‘tax gap’ is often driven by both
policy and administration weaknesses. Tax potential (or taxable capacity) provides a reference point for the
maximum amount of revenue that could be collected through tax policy changes or improvements in the efficiency

67 Tax productivity (or tax collection efficiency) is calculated as the ratio of tax revenue as a share of GDP to the standard tax rate. This measures
efficiency in both tax policy and administration, and it is often computed for the CIT, PIT, and VAT. VAT c-efficiency is measured as the ratio of
actual VAT revenues to the product of the standard rate and final consumption.
 2. Revenue Mobilization 37

of collection given a country’s socioeconomic factors (e.g., a country’s specific macroeconomic, demographic,
and institutional features). Tax effort is the ratio between actual tax collection and tax potential, which measures
a country’s effort to raise tax revenues. The tax gap is the difference between tax potential and actual tax
collection, and it comprises the ‘policy gap’ and ‘compliance gap’. The policy gap quantifies the extent to which
tax collection is affected by policies that reduce the tax base and tax rates. Examples include tax exemptions and
reduced rates, which reduce tax liabilities and thus revenue. The compliance gap conveys the extent to which
poor tax administrative capacity and active tax avoidance may explain the gap between potential revenues and
actual collection.

Tax collection is only reaching about 60 percent of its full potential, implying that there is ample scope for
tax policy and administration reforms. Tax effort was estimated at about 0.6 during 2010–2016, meaning that tax
collection was lower than the average tax yield for countries with similar characteristics. Hence, there is considerable
potential to mobilize additional domestic revenues. Tax effort is affected by the tax structure (e.g., tax rates and tax
base), as well as tax administration and compliance. Tax effort can be increased by raising tax rates, expanding the
tax base, and improving tax compliance and enforcement. When compared to taxation levels and (structural and
institutional) determinants in peer countries, Lao PDR had an average tax potential of 21 percent of GDP, with the
corresponding total tax gap at 8 percent of GDP – as tax revenue averaged just over 13 percent of GDP in 2010–2016.68
The tax gap has likely increased in recent years due to tax rate cuts.

Tax rates are low when compared to regional and income peers, which considerably undermines revenue
collection. The standard CIT rate (20 percent) is low in international terms (Table 2.2). This rate already represents
a significant tax incentive, but tax exemptions further hamper the effective tax rate. The PIT top marginal tax rate
(25 percent) is also below most regional and income peers. The VAT rate of 7 percent places the Lao PDR among
the countries with the lowest VAT rates in the region and the world. Recent trends suggest that countries in the
region are raising VAT rates. For instance, Indonesia raised its rate to 11 percent in April 2022.

Table 2.2: Statutory tax rates (%, 2022)

CIT PIT VAT

(standard) (top rate) (statutory)
Cambodia 20 20 10
Indonesia 25 30 10
Lao PDR 20 25 7
Malaysia 24 30 6-10
Myanmar 25 25 5
Philippines 30 35 12
Thailand 20 35 7
Vietnam 20 35 10
Asia 21 28 12
Latin America 27 32 14
Africa 27 33 16
OECD 23 42 19
World 24 31 15
Source: International Monetary Fund, PwC, and KPMG.

Note: In Myanmar, a 5 percent rate on certain goods and services is considered

turnover tax rather than VAT. Malaysia levies a 10 percent sales tax and a 6 percent
services tax.

68 See the World Bank's Tax Revenue Dashboard.

38 Forging Ahead: Restoring Stability and Boosting Prosperity

2.3 Assessment of major taxes

2.3.1 Income taxes

Corporate income tax

The CIT rate has been progressively reduced, while additional tax incentives have been provided across several
sectors. Companies registered in the Lao PDR (including foreign companies operating in the country) are taxed at
a standard rate of 20 percent, with some exceptions. The profit tax rate is 35 percent for mining companies and 22
percent for tobacco companies. Training and research centers are taxed at 5 percent, while activities using innovative
or green technologies face a 7 percent tax rate. Companies listed on the Lao Stock Exchange pay 13 percent in the
first four years. Microenterprises voluntarily registered in the VAT system only pay 0.1 percent, while small- and
medium-scale entities newly registered in the VAT system pay 3 and 5 percent in the first 3 years, respectively. The
standard profit tax rate was cut from 35 to 28 percent in 2012, then to 24 percent in 2015, and finally to 20 percent in
2020. Meanwhile, the Law on Investment Promotion provides tax incentives depending on the business activity and
location, while concessions negotiated on a case-by-case basis provide even more generous tax benefits.69

CIT revenue collection and CIT productivity ratio are the lowest in the region. CIT revenue steadily dropped
from 2.7 to 1.0 percent of GDP during 2011–2020, although it recovered to 1.5 percent in 2021 (Figure 2.14). It has
increased to 1.8 percent of GDP in 2022, but it remains one of the lowest levels in the world. Very low CIT revenue
collection is due to a combination of tax rate cuts and the widespread use of tax incentives. CIT productivity,
measured as the ratio of actual CIT collection (as a percentage of GDP) to the highest statutory marginal rate, was
also very low at 0.05 (Figure 2.15). This ratio is significantly lower than the averages observed in the EAP (0.15)
and other regions.

Figure 2.14: CIT collection (% GDP) Figure 2.15: CIT productivity ratio (2016–21)
8 7 0.25
CIT revenue (% GDP)

Productivity ratio
7 0.20
6 5
4 0.15
5 3 0.10
4 2
0.05
3 n IQR 1
2 EAP-HIC 0 0.00
Malaysia

Thailand

Cambodia

Philippines

Vietnam

Indonesia

Myanmar

Lao PDR

1 EAP-EME
0 Lao PDR

2011 2013 2015 2017 2019 2021

CIT revenue (% GDP)
n Productivity (right axis) Productivity average (right axis)
Source: International Monetary Fund and World Bank staff calculations.
Note: IQR: interquartile range, EAP-HIC: East Asia and Pacific, high-income countries,
EAP-EME: East Asia and Pacific, emerging market economies. Source: International Monetary Fund and World Bank staff calculations.

CIT gaps are estimated to be very high, indicating a very large amount of foregone revenues. The
estimation of tax gaps is crucial for policy making since it provides a measure of the revenue gains that can be
achieved with tax policy and administration reforms.70 Estimates suggest that the overall CIT gap amounts to
87 percent of potential revenue, which implies that only 13 percent of potential revenue is being collected.71
This is due to both tax policy (e.g., exemptions that reduce the tax base) and tax administration issues (e.g.,
weak compliance and enforcement). The CIT gap is very high across most economic sectors, including
those dominated by large companies operating in the formal economy. Agriculture and accommodation &

69 Additional benefits are often granted to individual companies as part of concession agreements.
70 It is not possible to estimate the CIT gap with microdata because of the limited scope of the CIT return form. This report uses income data from
the national accounts following the IMF’s RA-GAP methodology. The tax base is derived using 2020 value-added by sector, adjusting for the
share of value-added that is earned by labor, land, and capital, as well as other deductible expenses (e.g., depreciation). Therefore, these CIT
gap estimates are merely indicative.
71 This exceeds the CIT gap estimated in an earlier analysis by the IMF, which found foregone revenues ranging 78–82 percent when excluding the
agriculture and natural resource sectors.
 2. Revenue Mobilization 39

food services, which are overwhelmingly informal, have CIT gaps above 95 percent. Mining, electricity,
manufacturing, and transport & storage have CIT gaps ranging between 75 and 90 percent. At the other end of
the spectrum, information & communication and financial & insurance services have CIT gaps below 40 percent.
While informality may explain some of the gaps observed (by narrowing the tax base), measures of informality
suggest that this does not account for most of the gaps. Hence, a large portion of the tax gap is likely caused by
generous tax incentives and potentially base erosion and profit shifting (BEPS).

Poor CIT performance has its roots in the extensive use of profit tax holidays to incentivize foreign investment.
The Law on Income Tax allows the use of tax holidays, with the targeting criteria specified in the Law on Investment
Promotion and the decree on its implementation.72 The duration of profit tax holidays varies by type of business
activity and location, ranging between 4–15 years. The length of tax holidays for investments in concession activities
and special economic zones (SEZs) is not detailed in the legislation. In practice, profit tax holidays (including their
duration) are negotiated on a case-by-case basis.73 While these tax incentives are aimed at attracting investment,
there has been no cost-benefit analysis to evaluate value for money.

Evidence suggests that firms do not rank tax incentives as the primary reason for choosing where to invest.
The effectiveness of incentives largely depends on the investor’s motivation for undertaking the investment.
Surveys and empirical research often find that political stability, macroeconomic stability, the legal environment,
and labor skills are the key determinants of FDI.74 Incentives can be more effective for attracting investors in
traditional export-oriented sectors (efficiency-seeking) since these are largely driven by competitive cost
advantages in the host country. By comparison, investors are less responsive to incentives when mainly serving
the domestic market (market-seeking) or drawing on natural resources (asset-seeking). In the case of the Lao
PDR, many large investment projects are location-based, as they rely on the presence of natural resources (e.g.,
minerals and rivers) or the country’s geographic position in Southeast Asia (e.g., for transport and logistics services).
Therefore, addressing barriers to investment should focus on regulatory issues (e.g., licenses, permits, and
immigration requirements), infrastructure (e.g., utilities and roads), and the quality of the labor force (e.g., skills).

Profit tax exemptions should be phased out and replaced by cost-based incentives. International evidence
suggests that profit tax exemptions are highly inefficient. This is because tax holidays do not explicitly target
investment, with the amount of tax relief often being disproportionate to the investment. In fact, firms can benefit
even when they are not investing. The incentive heavily favors firms with high profits, which least need government
support. This contributes to high redundancy of expenditure on incentives since an investor anticipating high
profits would likely have proceeded in any case. Also, host governments face the risk of losing substantial revenue
when a firm earns extraordinary profits. In addition, CIT holidays facilitate aggressive tax avoidance, as profit from
investments that do not qualify for exemption may be artificially transferred through related party transactions.
Profit-based incentives should be replaced by cost-based tax measures (e.g., accelerated depreciation and investment
tax allowances or additional deductions), which reward companies only if they invest. The tax relief provided is
often set as a percentage of investment expenditure. Following good international practice, tax incentives should be
consolidated in tax laws, with clear and transparent eligibility criteria under the purview of the Ministry of Finance.

The need to reform tax incentives is high, given the upcoming global minimum corporate tax. More than 130
countries have agreed to start implementing a global minimum tax (GMT) rate in 2024.75 The agreement aims to
achieve a global minimum effective tax rate of 15 percent for multinational enterprises (MNEs) with a global turnover
above 750 million euro.76 The GMT does not directly obligate countries to adopt this rate, but it creates a strong
incentive to raise CIT rates.77 Countries that continue employing tax holidays and reduced rates are effectively giving

72 The 2009 Law on Investment Promotion introduced a range of tax incentives (e.g., profit tax holidays, reduced royalty rates, and import duty
waivers on machinery, equipment, and raw materials) in selected sectors (e.g., mining and power generation). The duration of tax holidays in
special economic zones (SEZ) is negotiable. The law was revised in 2017 to reduce the degree of discretion, but it is not clear how strictly this
is being implemented. The law is currently under review.
73 The Law on Investment Promotion allows for incentives beyond those stipulated by the law, which require approval of the National Assembly.
74 See World Bank Global Investment Competitiveness Report 2020.
75 These countries are members of the of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The G20 has endorsed this
agreement.
76 Even a small company operating in the Lao PDR that is a part of an MNE with a global turnover above the threshold will be subject to GMT.
77 The first rule allows countries where the parent company of an MNE is taxable to impose a top-up tax on the profits of any foreign subsidiaries
paying an effective tax rate of less than 15 percent. If the home country of the parent company chooses to impose a CIT rate of less than 15 percent,
then the second rule allows the host country where the MNE subsidiary carries out its business activities to charge top-up taxes on the subsidiary.
40 Forging Ahead: Restoring Stability and Boosting Prosperity

away their taxing rights to FDI exporting countries or countries where MNE subsidiaries operate. Moreover, MNEs
will no longer benefit from these tax incentives because there will be one or several countries that will bring their
effective tax rate to 15 percent. Countries that provide generous tax incentives and do not act upon the GMT could
lose out when other countries introduce domestic tax rules to top up under-taxed profits. Several countries in the
region are advancing implementation (e.g., Australia, Japan, Korea, Malaysia, and New Zealand). Thailand and
Vietnam are also considering the adoption of GMT for effectiveness in 2024.

The Income Tax Law does not provide a legal foundation for international taxation. There are no ‘transfer
pricing’ rules or ‘thin capitalization’ rules in the 2019 Law on Income Tax, and there is no definition of a
‘permanent establishment’ (Box 3). There is no legal provision to require taxpayers to use arm’s length pricing,
or provide the authority for the MoF’s tax department to audit the transfer pricing of MNEs or impose penalties
to deter taxpayers from non-compliance. MNEs tend to shift profits more easily out of countries without transfer
pricing legislation. Currently, all ASEAN countries have adopted transfer pricing legislation, except for the Lao
PDR and Myanmar. As a result, Lao PDR is facing the risk of CIT tax base erosion due to non-arm’s length (i.e.,
artificial) prices charged on transactions between related parties or excessive interest deductions.78 There is
also no provision for direct taxation of digital businesses operating outside the country but generating profit
from the country’s market.

Box 3: Definitions

Transfer pricing refers to the prices and other conditions used in transactions between related parties (e.g.,
goods, services, and capital). Although it is a legitimate practice for MNEs, it can be used to artificially shift
profits between the members of an MNE (toward low tax jurisdictions) to lower overall tax obligations.

Thin capitalization is when a company is financed through a very high level of debt (compared to equity),
which significantly lowers taxable profits because debt usually creates an interest expense that is deductible.
Many countries have taken steps to counter this practice.

Permanent establishment is a term used in tax treaties between countries to define tax liabilities in each
jurisdiction.

Arm’s length pricing refers to the pricing of transactions between unrelated persons subject to normal market
forces. Transfer pricing rules typically substitute ‘arm’s length pricing’ for the actual pricing in transactions
between related persons, for the purpose of computing taxable profit.

Personal income tax

The PIT regime has the feature of a dual income tax system, which includes a progressive tax schedule for
labor income and a flat rate tax for capital income. Personal incomes are subject to a progressive PIT regime
with rates ranging from 0 to 25 percent. The PIT is applied to all income earned in the Lao PDR from salary, wage,
benefits in kind, and other remuneration, both for Lao nationals and expatriates, regardless of the length of their
employment and stay in the country. The basic exemption for an employee earning a salary or wage income is
15.6 million kip. In 2021, the PIT exemption was higher than Myanmar’s but lower than other regional peers in
US dollar terms (Table 2.3). The threshold of the top PIT rate of 25 percent is 780 million kip, with a ratio of 32 (to
GDP per capita). Domestic-source income from dividends, interest, capital gains, rent, and royalties is subject to
withholding at different flat rates. Foreign-source capital income is currently exempt from taxation.

78 While there is no data to quantify the tax erosion risk to revenues, some research indicates that this can be high. For instance, a study found
a significant trade mispricing in Lao exports of copper concentrate and coffee beans during the period 2012–2017 (see "Commodity Trade
Mispricing: Evidence from Lao PDR").
 2. Revenue Mobilization 41

Table 2.3: PIT basic exemption (2021)

Country PIT GDP pc Exchange Exemption threshold Highest threshold
(%) (USD) rate
LCU (‘000) USD Ratio LCU (‘000) USD Ratio
(avg.)
Cambodia 20 1,625 4,099 15,600 3,806 2.3 150,000 36,597 22.5
Indonesia 30 4.333 14,308 - - - 5,000,000 349,451 80.7
Lao PDR 25 2,536 9,698 15,600 1,609 0.6 780,000 80,430 31.7
Malaysia 30 11,109 4 20 4,827 0.4 2,000 482,707 43.5
Myanmar 25 1,210 1,614 2,000 1,239 1.0 30,000 18,587 15.4
Philippines 35 2,70 49 250 5,076 1.5 8,000 162,421 46.9
Thailand 35 7,006 232 150 4,691 0.7 5,000 156,362 22.1
Vietnam 35 3,756 23,160 - - - 960,000 41,451 11.0
Source: PwC and World Bank staff calculations.
Note: PIT is the statutory top rate. The hyphen (-) indicates there is no zero percent tax bracket.

PIT collection is lower than most peer countries, while the PIT productivity ratio is also low. PIT collection
steadily increased from 0.8 to 1.3 percent of GDP in 2010–2016 but gradually declined to 0.8 percent of GDP in 2021
(Figure 2.16). Despite increasing to 1.0 percent of GDP in 2021, it remains one of the lowest levels in the region. PIT
productivity, calculated as the ratio of actual PIT collection (as a percentage of GDP) to the highest statutory marginal
rate, provides a measure of tax efficiency. PIT productivity is estimated at 0.035, which is low when compared to peer
countries (Figure 2.17). This suggests that PIT collection efficiency is low. This is partly due to a narrow tax base (due
to a focus on payroll rather than income, profits, and capital gains) and high levels of informality.

Figure 2.16: PIT collection (% GDP) Figure 2.17: PIT productivity ratio (2016 – 21)
7 2.5 0.09
0.08
PIT revenue (% GDP)

6 2.0

Productivity ratio
0.07
5 0.06
1.5 0.05
4 0.04
1.0
0.03
3
n IQR 0.5 0.02
2 EAP-HIC 0.01
0.0 0.00
1 EAP-EME
Malaysia

Thailand
Philippines

Cambodia

Lao PDR

Vietnam

Indonesia

Myanmar

0 Lao PDR

2011 2013 2015 2017 2019 2021

PIT revenue (% GDP)

Source: International Monetary Fund and World Bank staff calculations. n Productivity (right axis) Productivity average (right axis)
Note: IQR: interquartile range, EAP-HIC: East Asia and Pacific, high-income
countries, EAP-EME: East Asia and Pacific, emerging market economies. Source: International Monetary Fund and World Bank staff calculations.

The 2019 Law on Income Tax has addressed several weaknesses of the PIT regime, but further improvements
are needed. Taxes on labor income are now paid on a monthly basis but only reconciled annually. This helps
deal with the volatility of monthly income and the risk that taxpayers artificially smooth their income to avoid
the higher tax rate (e.g., year-end bonuses). The new law also simplified the tax rate schedule from six to five tax
brackets, which can help improve compliance. However, tax brackets are not indexed to inflation. This may result
in ‘bracket creeping’, as inflation erodes real wages and wage earners are subject to higher tax rates. Given low
average incomes and higher informality when compared to other countries in the region, reforms should focus
on enhancing efficiency and fairness. For instance, the PIT system could be simplified through a further reduction
of the number of tax brackets (from five to four), which could help improve the efficiency of the PIT regime. In
addition, tax brackets should be indexed to inflation to avoid bracket creeping.
42 Forging Ahead: Restoring Stability and Boosting Prosperity

2.3.2 Consumption taxes

Value-added tax

The statutory VAT rate was reduced from 10 to 7 percent in 2022, significantly undermining tax collection.
The VAT was introduced in 2010 with a 10 percent rate, with some products being zero-rated. The 2021 amendment
of the Tax Law introduced several changes to the VAT regime. The applicable VAT rate on the import of goods and
services, supply of goods and services in the Lao PDR, and export of services was reduced from 10 to 7 percent from
January 2022. The supply of goods outside a special economic zone (SEZ) by an enterprise registered for operation
in the SEZ became subject to VAT.79 Activities currently exempted from VAT include electricity imports, electricity
supplied to any electricity enterprise within the country, and electricity and minerals exported overseas or to SEZs.

The VAT regime includes numerous exemptions, which pose several drawbacks. VAT exemptions create
economic distortions by benefiting some sectors more than others.80 Businesses unable to credit input VAT because
they buy inputs from exempt businesses experience increased costs. On the other hand, if the exemption is applied
at the end of the supply chain, it reduces VAT revenues. These negative effects of VAT exemptions make it important
to examine the rationale for all exemptions.

VAT collection is relatively low compared to most regional peers, and so is VAT productivity and c-efficiency.
VAT revenue dropped from 4.3 to 2.7 percent of GDP between 2015–2020, before recovering to 3.1 percent of GDP
in 2021 (Figure 2.18). This was partly due to the economic slowdown (including COVID-19) but also VAT exemptions
on imports of capital goods related to some investment projects. VAT collection declined to 2.7 percent of GDP in
2022, owing to the reduction in the VAT rate from 10 to 7 percent, which more than offset higher consumer prices.
Although the VAT accounts for a significant share of domestic tax revenues, VAT collection is comparatively lower
than in most ASEAN countries. In fact, it was the lowest revenue among peers with the same VAT rate, implying that
it is underperforming considerably (Figure 2.19). Thailand collected 3.4 percent of GDP from VAT, even with a rate of 7
percent. Moreover, VAT productivity and c-efficiency have also been relatively low (Figure 2.20 and Figure 2.21). VAT
productivity (0.35) and c-efficiency (0.64) were lower than the EAP average (0.44 and 0.67, respectively).

The recent reduction of the VAT rate has already had a negative impact on tax collection. The government
reduced the VAT rate from 10 to 7 percent in January 2022, with the declared aim of expanding the tax base (by
providing a stronger incentive for tax registration) and providing temporary relief to ease the impact of COVID-19.
Meanwhile, the authorities tried to balance this cut with excise rate increases for selected products. However,
since the rate increases were small, applied on a very narrow tax base, and subject to exemptions, the revenue
gains are not sufficient to compensate for the VAT reduction of 3 percentage points on most goods and services.
The VAT revenue loss is estimated at about 1 percent of GDP in 2022, while there is little evidence of an impact on
consumer prices.81 The 2021 revision of the Law on Income Tax aims to promote formality by encouraging SMEs
to register for VAT through a favorable income tax regime. However, revenue increases through formalization
will not be significant (as the experience of other countries suggests), since most VAT revenue comes from large
(formal) taxpayers. Moreover, tax cuts may not necessarily lead to greater VAT registration due to other factors
(e.g., additional costs such as bookkeeping).

Several VAT exemptions should be reviewed for elimination, particularly those that are costly. While some
VAT exemptions for public services (such as health care and education) could be retained, other exemptions
should be removed. For example, agriculture and forestry are common exemptions in developing countries,
mainly because of the small scale of most agricultural activities and the low income of most people engaged in
them. However, there are large agribusinesses and forestry operations in the Lao PDR that generate substantial
revenues. Subjecting these sectors to the standard VAT regime is highly advisable. Small farmers will not be
affected by this change, as they would be under the VAT registration threshold of 400 million kip. Subjecting these
goods to VAT could allow producers and traders to claim credit for input VAT, improving efficiency.

79 Previously, only the supply of services outside a SEZ by a SEZ registered enterprise was subject to VAT.
80 It is challenging to estimate foregone VAT revenues. For instance, VAT paid by businesses at importation (to customs department) is deducted from
output VAT collected (by tax department), so there is a need to combine different data sources. Also, not all VAT exempted at the importation is
revenue foregone. For example, large infrastructure projects are entitled to VAT refunds, since input VAT will be accumulated while output VAT is
zero (in the development phase), so the VAT exemption at importation is merely to support cash flows and avoid VAT refund claims.
81 There was no discernible impact on the consumer price index. Even if the VAT rate reduction was fully passed on to consumers, consumer
prices would only be reduced by 3 percent, while VAT revenues are immediately cut by 30 percent. Limited revenue contributes to depreciation
pressures, which are much more impactful on consumption.
 2. Revenue Mobilization 43

The management of VAT refunds needs to be improved to avoid negative impacts on businesses. The cost
of VAT falls on businesses when refunds are not processed in a timely manner. A significant improvement in the
amended 2018 Law on VAT was that all VAT taxpayers with a net credit could claim a VAT refund. Previously, only
exporters and large-scale investors were entitled to VAT refunds, and all other taxpayers had to carry forward the
excess input credits. However, there are challenges with the administration of VAT refunds. All refunds are subject
to examination prior to the VAT refund decision. Businesses have experienced substantial delays in obtaining
refunds, sometimes of more than one year. The VAT refund process could be improved through the adoption of
a risk-based approach, improvements in the TaxRIS system to support VAT management, and adequate budget
allocations for VAT refunds.

Figure 2.18: VAT collection (% GDP) Figure 2.19: VAT rate and collection (2016–21)
8 6 15

Statutory VAT rate (%)

VAT revenue (% GDP)
7 5
4 10
6
3
5 2 5
4 1
3 n IQR 0 0

Thailand

Malaysia
Cambodia

Vietnam

Indonesia

Lao PDR

Philippines
2 EAP-HIC
1 EAP-EME
0 Lao PDR

2011 2013 2015 2017 2019 2021 n VAT revenue VAT rate (right axis)

Source: International Monetary Fund and World Bank staff calculations. Source: International Monetary Fund and World Bank staff calculations.

Figure 2.20: VAT revenue, productivity, and c-efficiency Figure 2.21: VAT productivity and c-efficiency
(2016 – 21)
Productivity ratio and c-efficiency

1.0
5 0.9
0.8
VAT revenue (% GDP)

0.8
4 0.7 0.6
0.6
3 0.5 0.4
2 0.4
0.3 0.2
1 0.2
0.1 0.0
0 0.0
EAP average
2010 – 2017
Thailand

Malaysia

Vietnam

Lao PDR
Cambodia

Indonesia

Philippines
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

n VAT revenue (% GDP)

c-efficiency (right axis) Productivity (right axis) n Productivity n c-efficiency
Productivity average c-efficiency average

Source: Ministry of Finance and World Bank staff calculations. Source: Ministry of Finance, USAID, and World Bank staff calculations.

Excise tax

Excises are levied on several products and services, mainly through ad valorem taxes. Excise taxes are
applied to a wide range of domestic and imported goods and services, which are paid at importation and by
domestic producers before releasing the products for distribution. Most excises use an ad valorem rather than a
specific tax structure, with rates ranging from 3 to 110 percent. Some tax rates have fluctuated considerably over
time, through both increases and reductions (Table 2.4). Fuel excise rates have gradually increased through time,
despite some volatility, although they have been recently cut as a response to higher international fuel prices and
exchange rate depreciation. Excise rates on vehicles (e.g., motorcycles and transport vehicles) vary significantly
according to their engine volume. Alcoholic and non-alcoholic excise rates have increased marginally in the past
10 years. Tobacco has a mixed tax structure, with both ad valorem and specific taxes. However, some of these
taxes are subject to reduced rates or exemptions under investment agreements. Moreover, some rates are levied
at the early stages of the supply chain, which results in low effective tax rates.
 44 Forging Ahead: Restoring Stability and Boosting Prosperity

Table 2.4: Selected excise rates (%)

Product 2012 2019 2022

Fuels Gasoline (super) 25 35 40
Gasoline (normal) 20 30 31*
Diesel 10 20 21*
Kerosene (for aircraft) 10 8 8
Vehicles Motorcycles (depending on engine volume) 10–25 25–100 28–110
Transport vehicles (depending on engine volume) - 25–90 26–102
Speed boats, yachts, motorboats 15 20 25
Beverages Alcoholic beverages (depending on alcohol content) 60–70 50–70 62–70–80
Beer (depending on alcohol content) 50 50 20–60
Non-alcoholic beverages (e.g., soft drinks, sodas, fruit juices, etc.) 5 5 7
Non-alcoholic beverages (energy drinks) 10 10 12
Tobacco Cigarettes 60 50 57**
Tobacco (shredded) 60 35 42
Source: Ministry of Finance, DFDL Co. Ltd. and VDB-Loi Co. Ltd.
Note: * Rates were significantly reduced in mid-2022 to 16 percent for normal gasoline and 0 percent for diesel. ** The rate can be reduced to 15 or 30 percent under
an investment agreement. Some of these products are also subject to a specific tax per unit (e.g., cigarettes).

In most countries, excises are limited to a narrow set of goods with inelastic demand or negative internalities
and externalities. Inelastic demand for a good makes its taxation convenient because the increase in consumer
prices caused by the excise does not reduce demand to a significant degree.82 Moreover, the negative internalities
and externalities of some goods mean that their consumption has negative effects on the consumer and society.
For example, fuel consumption creates pollution, tobacco creates health problems, and alcohol creates both health
problems and anti-social behavior.83 Taxing these goods more heavily than normal goods discourages their use
(increasing overall social welfare) while also generating sizable revenues. However, the current tax level and tax
structure are not sufficient to reduce the negative effects of these products and support revenue mobilization.

Excises comprise an important share of tax revenue, and collection is relatively high compared to regional
peers. Excise revenue collection averaged 3 percent of GDP during 2010–2019, although it declined to 2.1 percent of
GDP in 2020, partly due to the COVID-19 pandemic. This is reasonably high by regional standards (Figure 2.22). In 2022,
revenue collection benefited from higher domestic and international prices, but this was partly offset by fuel excise
rate reductions in mid-2022. Excises accounted for 23 percent of total tax revenues in 2021–2022. It is thought that
most of the excise revenue accrues from vehicles and fuel, and thus collected from imports (Figure 2.23). The relative
contribution of excises is high because the overall tax system generates relatively small revenue.

Figure 2.22: Excise collection (% GDP) Figure 2.23: Excise collection by source (2016–21)
4 4

3 3

2 2 Imports Imports
57% 57%
n IQR n IQR Domestic Domestic
1 1 EAP-HIC EAP-HIC 43% 43%
EAP-EME EAP-EME
0 0 Lao PDR Lao PDR

2011 2013201120152013201720152019201720212019 2021

Source: International Monetary Fund and World Bank staff calculations. Source: Ministry of Finance and World Bank staff calculations.

82 Nonetheless, raising taxes too much could lead to lower revenue collection, due to a higher incentive to evade tax.
83 ‘Health taxes’ are excises applied to products such as tobacco, alcohol, and sugar-sweetened beverages that cause health-related problems
to individuals and society more broadly. These are one of the most cost-effective ways to reduce consumption of unhealthy products while
raising much-needed revenue.
 2. Revenue Mobilization 45

Recent reductions in fuel excise rates have produced large foregone revenues, while the tax structure could
also be improved. An ad valorem excise is levied on several fuel types. It is estimated that recent rate cuts have
generated losses (i.e., foregone revenues) of over $160 million between mid-2022 and mid-2023. While these
measures were introduced to protect consumers from inflation, these cuts have predominantly benefited wealthier
households. In addition, fuel imports reported by the Lao PDR are much lower than that reported by trading partners
(e.g., Thailand and Vietnam). This suggests that a significant amount of fuel is not being taxed, which generates
considerable revenue losses. Finally, as the price of fuels fluctuates frequently, the resulting excise revenue may not
correspond to the externalities produced by fuel consumption. An alternative is to apply a specific tax system on
fuel, whereby the specific tax considers the costs of air pollution, carbon emissions, vehicle accidents, congestion,
and road damage, among others.

The Lao PDR has among the lowest tobacco taxes and prices in the region. The excise tax on tobacco accounts for
11 percent of the retail price of the most sold brand in 2020, the lowest in the region. This is much lower than the WHO’s
recommendation that excise taxes on tobacco should account for at least 70 percent of retail prices. Furthermore,
the Lao PDR has the second-lowest retail prices in both US dollar and PPP-adjusted terms. Concerningly, cigarettes
have become considerably more affordable in recent years. The most sold brand is nearly twice as affordable in 2020
when compared to 2010. Data for alcohol and non-alcoholic beverages were not available to conduct a similar analysis.

The tax structures for tobacco, alcohol, and non-alcoholic beverages can be improved. Tobacco has a mixed
tax structure with a specific tax of 600 kip per pack of 20 cigarettes and an ad valorem rate of 57 percent of ex-
factory prices (for domestic production) or the cost, insurance, and freight (CIF) price (for imports).84 However, most
cigarettes qualify for a 15 percent tax rate due to an investment agreement. Alcohol and non-alcoholic beverage
excises are ad valorem applied to the ex-factory price for domestically produced goods and the CIF price for imported
goods. Alcohol taxes are based on alcohol content, with tiers employed for beer with alcohol content above or below
5 percent. The most recent rates for other alcoholic beverages employ tiers with alcohol content below 10 percent,
between 10 and 23 percent, and greater than 23 percent. Ad valorem taxes are considered less effective than specific
taxes. From a fiscal perspective, they are more difficult to collect, more prone to tax avoidance and evasion, and
result in less stable and lower revenue streams. From a health perspective, they result in lower prices on cheaper
brands, which promotes consumption and makes products more accessible to vulnerable populations (e.g., youth,
poor, and people with alcohol use disorders). Furthermore, tax increases are less effective since they provide greater
opportunities for users to trade down to cheaper products to avoid the tax increase. The global trend indicates that
modern tax administrations are leaning toward a simplified specific excise tax structure with indexation to maintain
the value in real terms for all three products.85

The weakness of ad valorem taxes is compounded by applying them early in the supply chain. Using
wholesale/ex-factory price or CIF as a tax base invites tax avoidance and evasion, since this information is provided
by manufacturers and importers that have an incentive to lower their tax liability. Using retail price as the tax base
is preferable because these can be verified independently by the authorities. However, this is still a less effective
policy option compared to higher uniform specific taxes.

The current tax administration of the excise regime could be strengthened, especially for the cigarette
market. A 25-year Investment License Agreement (ILA) signed in 2001 between the government and two tobacco
companies established a joint-venture cigarette manufacturer. Under the ILA, the joint venture benefits from a
reduced excise tax rate on tobacco products (15 percent of production costs if less than 1,500 kip per pack, and
30 percent if greater than 1,500 kip per pack) and exemptions from other taxes. Local tobacco companies are not
complying with the mandatory contribution to the Tobacco Control Fund established in 2013.86 The government
should seek legal support to revoke or not renew the ILA. Furthermore, additional improvements would help to
manage or mitigate potential losses associated with the lack of compliance (e.g., strengthened audits, enhanced
data inputs and analytics, and a revised system of physical excise stamps leveraging digital technology).

The list of goods and services subject to excise taxes could be reviewed for rationalization. While many
goods are subject to excise taxation, their rationale is not always clear since many do not produce significant

84 Since the ad valorem tax is levied early in the supply chain, the excise collection as a share of retail prices is significantly lower. In 2022, the tax
stamp fee was increased from 5 kip to 500 kip, but it appears to be collected unevenly.
85 The indexation of specific unit taxes averts revenue erosion when the prices of excise goods increase. Unit rates can be indexed to inflation.
86 The fund is supposed to receive 2 percent of the profit of tobacco companies and an additional 200 kip levied on each cigarette pack.
46 Forging Ahead: Restoring Stability and Boosting Prosperity

internalities or externalities. It is important to ensure that all goods and services in the excise list are worth the
administrative and compliance costs that their collection entails. Excises can only be justified if they raise a reasonable
amount of revenue and correct internalities or externalities.

2.3.3 Other taxes

International trade taxes

Revenues from trade taxes have been on a declining trend over the last ten years. Most trade taxes are derived
from import duties. Revenue from trade taxes averaged 1.5 percent of GDP between 2010 and 2016 and sharply
declined to about 0.7 percent of GDP since 2017 (Figure 2.24). This value increased to 1.2 percent of GDP in 2022, owing
to rising imports (driven by higher prices), but it remains one of the lowest in the region. Trade tax rates have been
reduced trough time. The average tariff rate applied (weighted mean) declined from 14 to 1 percent between 2000–
2020, partly due to growing regional integration (particularly in ASEAN) and the World Trade Organization accession
in 2013. However, this does not explain the performance gap to other countries in the region. Instead, generous tax
incentives for large investments have significantly undermined trade tax collection.

Figure 2.24: Trade taxes collection (% GDP) Figure 2.25: Property tax collection (% GDP)
5 6
Property tax revenue (% GDP)

5
4
4
3
3
2
n IQR 2
EAP-HIC
1 1 Lao PDR
EAP-EME
0 Lao PDR 0
2011 2013 2015 2017 2019 2021 100 1,000 10,000 100,000
GDP per capita (USD, 2021) - log scale

Source: IMF and World Bank staff calculations.

Source: International Monetary Fund and World Bank staff calculations. Note: Blue dots represent ASEAN countries.

Land and property taxes

Effective land tax rates are low, which considerably undermines revenue collection. The land tax exhibits
low non-buoyant revenues, as tax amounts are determined by land type and size rather than land value. This is
accompanied by rising tax inequity across land tax parcels and high economic and administrative inefficiencies.
The unit tax rates are very low and have not been updated since 2007. Considering that land prices are rising
rapidly, especially in urban areas, the effective tax rate for commercial and industrial land is estimated to range
from about 0.005 to 0.01 percent. For instance, commercial land parcels in the Saysettha District (in Vientiane
Capital) are estimated to pay an effective tax rate of 0.01 percent (maximum of 300 kip/m2 on land valued at 3
million kip/m2), while industrial land has an effective tax rate of 0.006 percent. In the same area, residential land
owners pay an effective tax rate of 0.003 percent (80 kip/m2).87

The revenue collected through the land tax is very low, but there is potential to enhance revenue mobilization.
The land tax generated revenue equivalent to about 0.1 percent of GDP in 2021. This is very low by international
standards, as similar taxes have generated 0.3–0.6 percent of GDP in low- and middle-income countries and up
to 2–3 percent of GDP in several advanced economies (Figure 2.25). In 2016–2019, land tax collection ranked the
second-lowest in the region (only behind Vietnam, where land tax rates are very low) and much lower than the
average for the EAP region. These benchmarks suggest there is considerable potential to increase land tax revenues.88

87 An analysis of land taxpayers in one village in Saysettha District shows they were paying a median land tax of 100,000 kip per year, with
individual land tax bills ranging from 12,000–1,664,000 kip per year.
88 Revenue could possibly double to 0.16 percent of GDP within 3–5 years, and perhaps double again to over 0.3 percent of GDP within 10–12 years.
 2. Revenue Mobilization 47

To improve revenue mobilization, the unit rates should be revised and subsequently adjusted on a regular basis.
Based on international norms, the effective tax rate should range between 0.1–0.2 percent for residential constructed
land and between 0.3–0.5 percent for non-commercial/industrial constructed land. This would require a revision of
the current unit rates, followed by adjustments on a periodic basis (e.g., every 3–5 years). These unit rates should be
calibrated to the underlying absolute real land values. Capturing the absolute and relative changes in the underlying
real land values would improve revenue buoyancy and the yield of land taxes. It would also improve taxpayer equity
across land parcels and the cost efficiency of the land tax administration. Developing and implementing an adequate
land valuation system will be key to supporting tax collection.

Natural resource taxes & royalties

Revenue from natural resources has recently increased, but it remains low considering the weight of the sector
in overall economic activity. Natural resource taxes & royalties declined from 1.4 to 0.5 percent of GDP during 2010–
2020, but they have subsequently risen strongly to 1.5 percent of GDP in 2022 (Figure 2.26). Natural resource taxes
mainly relate to mining activities. These revenues have increased partly due to a sharp exchange rate depreciation,
since they are mainly collected in foreign currency, as well as higher production. Timber royalties were sizable in the
mid-2010s, peaking at about 0.5 percent of GDP in 2015, but have recently become negligible.89 Hydropower royalties
have been relatively stable, at about 0.3 percent of GDP. However, this is very small compared to the level of investment
and revenue generated by the hydropower sector. Overall, revenue collection has not kept pace with the exploitation of
natural resources (e.g., mining and hydropower) and their contribution to economic growth, largely due to widespread
and generous tax incentives (Figure 2.27).

Figure 2.26: Natural resource taxes & royalties (% GDP) Figure 2.27: Resource and non-resource
revenue (% GVA)
1.5 20

15
1.0
n Hydro-power 10
royalties Non-resource
0.5 n Timber revenue
royalties 5 (% non-resource GVA)
n Natural Resource
resource revenue
0.0 taxes 0 (% resource GVA)
2010

2012

2014

2016

2018

2020

2022

2010 2014 2018 2022

Source: Ministry of Finance and World Bank staff calculations.

Source: Ministry of Finance and World Bank staff calculations. Note: Resources include forestry, mining, and electricity.

There is a need to undertake a comprehensive review of the regimes for natural resource revenues. The
weak performance of natural resource revenues can be explained by the volatility of commodity prices, the
complexity of tax arrangements, and the generous tax incentives provided by investment promotion policies or
negotiated concession agreements. Domestic revenue improved significantly in the period 2003–2014, partly
as strong commodity prices (e.g., copper and gold) led to significant investments in mining. Lower commodity
prices and dwindling production have undermined revenues in recent years. Moreover, it is difficult to conduct a
detailed assessment in the absence of relevant data on tax incentives. Given the importance of the sector to the
economy, a comprehensive review of the legal framework and implementation arrangements of natural resource
revenues is warranted to inform a reform agenda.90

89 This decline might be related to the rise in Forest Preservation Funds. Despite new legislation, policies, and plans to promote economic
development through socially and environmentally sustainable forest management, illegal logging remains a challenge. There remain risks
associated with the land allocation process (i.e., granting concessions).
90 The government was expecting to collect significant revenues from cryptocurrency mining and trading, but these have not materialized.
48 Forging Ahead: Restoring Stability and Boosting Prosperity

2.4 Tax administration

Domestic revenue is collected by several departments of the Ministry of Finance, but transparency has
declined. Budget transparency has deteriorated in recent years, as the amount of information published in the state
budget implementation reports has been considerably reduced, particularly for revenue. Detailed information on
revenue collection ceased to be published in 2017 (e.g., disaggregation by province and department). Data for 2016
suggests that the MoF’s tax and customs departments collect most of the revenue, although the state asset and SOE
departments still collect important amounts (Figure 2.28). The tax department collects most income taxes (i.e., CIT
and PIT) and administrative fees, as well as part of VAT and excises (Figure 2.29). The customs department collects
VAT and excises at the border (levied on imports), as well as import duties. The state asset department receives
natural resource revenues and overflight fees, while the SOE department collects dividends and interest from
corporations with state equity. More granular information would be critical to evaluate tax performance over time.

Figure 2.28: Domestic revenue by department (2016, Figure 2.29: Domestic revenue (2016, % GDP)
% GDP)
Other non-tax
Other Overflight
Administration
SOEs Dividend & interest
Other tax
State Asset Natural resources
n Other
PIT
CIT n SOEs
Customs
Import n State asset
n Tax Excise n Customs
Tax
n Non-tax VAT n Tax

0 2 4 6 8 0 1 2 3 4

Source: MoF and World Bank staff calculations. Source: MoF and World Bank staff calculations.

A significant amount of revenue is collected at the sub-national level, but further decentralization may create
challenges. Most domestic revenue is collected at the central level, but local authorities have been collecting
considerable amounts (Figure 2.30). There have been different waves of decentralization and recentralization of
revenue collection over the past few decades. Local authorities collected significant amounts of PIT and VAT in 2016
(Figure 2.31). There has been a recent move to place many large taxpayers under the responsibility of provinces,
with a view to support self-sufficiency. However, this can create inefficiencies and weaken existing controls.

Figure 2.30: Domestic revenue (% GDP) Figure 2.31: Domestic revenue (2016, % GDP)
18
Other non-tax
16 Overflight
14 Administration
12 Dividend & interest
10 Other tax
Natural resources
8
PIT
6 CIT
4 Import
2 n Local Excise n Local
0 n Central VAT n Central
2017

2018

2019

2020
2015

2016

0 1 2 3 4

Source: MoF and World Bank staff calculations.

Note: Data includes asset sales and capital return. Source: MoF and World Bank staff calculations.

The administration of taxes has generally improved in recent years, but there remains considerable room
to further enhance performance. The implementation of the Tax Revenue Information System (TaxRIS) provides
a good platform to modernize the tax administration, particularly with the aim of improving the efficiency of tax
 2. Revenue Mobilization 49

collection, reducing leakages, and increasing revenue. Nonetheless, the current system lacks critical features (e.g.,
automated late filing/payment notice, automated risk analysis, and data analysis capabilities) and staff are not
using all functionalities. The approval of the Tax Administration Law has strengthened the legal framework, but it
is crucial to ensure that the law is adequately implemented. Efforts to build the capacity of tax officials are aimed
at increasing operational efficiency. However, developing a modern, efficient, and effective tax administration
requires further improvements in processes, technology uptake, staff capacity, and transparency.91

There is no strategic planning function at the central level, which likely undermines tax performance.
Strategic plans should cover all aspects of the tax administration and must be revisited regularly, since the
operating environment is not static. There is a division in the MoF’s tax department responsible for planning, but it
has not yet performed activities typically performed by a modern tax administration. Effective strategic planning
would enhance operational performance and facilitate the allocation of scarce resources to areas that pose greater
compliance risks. This should cover all core business activities and take into consideration the environment in
which the tax administration operates.

The tax department has not yet adopted a comprehensive risk management framework. A risk-based audit
approach has been piloted in the past several years. A risk-based analysis unit has been established, but the
concept of risk management is limited to the audit function at headquarters and the Vientiane Capital tax office,
although there is a plan to expand implementation to other provinces. There is a need to develop and implement a
comprehensive compliance improvement strategy and the related annual compliance improvement plans across
tax administration functions.

Recent changes are likely undermining compliance risk management, particularly for large taxpayers. It is
critical to adequately manage the special risks that large taxpayers pose (e.g., by ensuring consistency of treatment
for a corporation that has subsidiaries and branches in different provinces). Centralizing the management of large
taxpayers in a single unit would significantly improve tax compliance and efficiency. International evidence shows
that, on average, large taxpayer offices or programs employ less than 10 percent of total revenue staff and collect
over 50 percent of revenue.92 Most tax administrations in advanced economies and the EAP region have dedicated
large taxpayer offices (LTOs).93 However, current arrangements are limited in the Lao PDR. The MoF’s revenue
management division at headquarters previously assumed the management responsibility of about 400 large
taxpayers, but this has been undermined by the reallocation of responsibilities for many taxpayers to provinces.
Recent organizational changes (e.g., the split of the revenue management division) represent a further deviation
from good international practices.

Tax audits can increase compliance, but there is a significant gap between current and good international
practices. Tax audits are undertaken for several reasons, such as detecting and redressing individual cases of non-
compliance. They also promote voluntary compliance by increasing the probability of detection and penalties
for non-compliant taxpayers. Moreover, they enable the gathering of information on the performance of the tax
system and the evasion techniques used by taxpayers. Finally, audits provide an opportunity to educate taxpayers
on their legal obligations and bookkeeping requirements, thereby improving future compliance. However, there is
currently a significant gap between current audit processes and good international practices. For instance, there is
no structured approach to audit planning and implementation, and no systematic cross-checking using third-party
information (e.g., customs data). Moreover, tax inspectors are routinely rotated from and to non-audit functions,
which is not efficient.

Audit strategies need to be developed within the context of compliance risk management. Compliance risk
management is a structural process for the systematic identification, assessment, ranking, and treatment of tax
compliance risks. The tax administration should seek to maximize voluntary compliance (e.g., through taxpayer
assistance and education programs), but it must also have effective enforcement strategies to deter, detect, and
address non-compliance. The level of scrutiny and intensity of audit activity should depend on the level of risk
to revenue, which is related to the segment where the risks occur. Segments may be based on business size (e.g.,
large taxpayers), industry (e.g., mining), or the type of tax (e.g., corporate income tax). Different types of audits
are appropriate for different objectives, aiming to focus tax audits on taxpayers that pose a higher risk to revenue.

91 Using the World Bank’s Tax Administration Index tool would provide a brief assessment of the revenue administration.
92 IMF Revenue Administration Fiscal Information Tool (RA-FIT).
93 See the OECD report “Tax Administration 2015” and the ADB report “A Comparative Analysis of Tax Administration in Asia and the Pacific”.
50 Forging Ahead: Restoring Stability and Boosting Prosperity

Modern tax administrations are increasingly using technology to support audit operations. Tax administrations
are leveraging new technologies to combine automated audits with comprehensive ones (e.g., to detect fraud).
This allows increases in audit coverage and risk perceptions, as well as a better allocation of resources. Higher
compliance rates are often achieved when information from third-party sources is systematically matched with
the information contained in tax returns. Tax administrations are increasingly using big data to effectively monitor
compliance with tax obligations. Recent advances in artificial intelligence are already being deployed in this area.

Taxpayer services can improve tax compliance, but there is currently no dedicated unit or strategy to deliver
these services. Taxpayer services can be defined as a set of strategic initiatives to assist taxpayers in complying
with their tax obligations. These often comprise outreach and tax education programs. Taxpayer services and
information can be tailored by taxpayer segments, based on attitudes and the underlying factors of non-compliance.
Tax administrations often set service delivery standards and measure performance (e.g., time to answer taxpayer
inquiries, process tax refunds, and resolve disputes). While some services are currently provided to support the
rollout of TaxRIS (e.g., e-filing and e-payment), there is no dedicated unit or strategy to provide services in support
of voluntary compliance.

The collection of taxpayer data is insufficient, and there is limited access to third-party information. Tax
returns provide limited information for compliance and analytical purposes. For instance, the CIT return form is
one-page long and only includes eight data fields. It does not provide information on financial performance (e.g.,
turnover, investment, and depreciation) or relevant information to estimate the cost of tax incentives (e.g., income
subject to CIT and exempted income). In comparison, the CIT return form in Cambodia is 20 pages long and has
over 100 data fields. The absence of relevant information precludes assessments of tax policy (e.g., estimation of
tax expenditures). Moreover, the MoF’s tax department does not have access to third-party information, except
for customs data. Even then, customs data is rarely used for systematic cross-checking. Therefore, it is crucial to
improve data collection, integration, and analysis to strengthen evidence-based policy making.

Adequate staff levels and capacity are critical to perform the different functions of a modern tax system.
An efficient and effective tax administration requires a solid regulatory framework, clear processes, suitable
technologies, and adequate staffing. While capacities are low, the transition to electronic filing and payment
provides an opportunity to reallocate staff resources. The staff levels needed in return processing will decline with
the increasing uptake of electronic processing. With appropriate training programs, staff can be re-trained to work
in other functions currently under-resourced, such as taxpayer services, debt management, or even audit.

The tax administration places a significant burden on business, while corruption is a major concern. Only a
small proportion of firms identified tax rates or tax administration as a major constraint to their business (Figure
2.32). The former is not surprising, owing to low statutory tax rates and the widespread granting of reduced rates
and exemptions. However, complementary evidence suggests that businesses need to make a significant number
of tax payments per year, which require a considerable amount of time to prepare, file, and pay (Figure 2.33).
The total tax and contribution rate is relatively low as a share of profits, but the post-filing score is also low,

Figure 2.32: Firms identifying tax as a constraint (%) Figure 2.33: Burden of paying taxes
80 1,600
Tax administration (%)

70 1,400
Time (hours per year)

60 1,200
50 1,000
40 800
30 Lao PDR 600 Lao PDR
20 400
10 200
0 0

0 20 40 60 80 100 0 10 20 30 40 50 60
Tax rate (%) Payments (number per year)

Source: World Bank Enterprise Surveys. Source: 2020 Paying Taxes.

Note: Blue dots represent ASEAN countries. Note: Horizontal axis restricted to 60 to improve readability.
 2. Revenue Mobilization 51

suggesting challenges with VAT refunds and CIT corrections (Figure 2.34). Most firms (85 percent) were visited or
required to meet with tax officials, with an average of three visits per year, which is higher than regional and income
averages. Concerningly, a significant proportion of firms (35 percent) were expected to give gifts in such meetings,
the eighth largest value of 155 countries (Figure 2.35). Accelerating the modernization of the tax administration
(e.g., through further digitization and adoption of a risk-based approach) would help reduce bureaucracy, as well
as mitigate corruption and tax fraud.

Figure 2.34: Tax burden and post-filing Figure 2.35: Corruption in tax collection
100 70

Firms expected to give gifts (%)

60
Post-filing index (0 -100)

80
50
Lao PDR
60 40

40 30
20
20 Lao PDR
10
0 0
0 20 40 60 80 0 20 40 60 80 100
Total tax and contribution rate (% of profit) Firms visited (%)
Source: 2020 Paying Taxes.
Note: Horizontal axis restricted to 80 to improve readability. Source: World Bank Enterprise Surveys.

2.5 Conclusion and recommendations

Revenue collection has deteriorated considerably in the past decade, constraining fiscal space and
undermining fiscal sustainability. Revenue performance was a concern even before COVID-19, as total revenue
declined from 22 to 16 percent of GDP during 2014–2019, owing to declines in tax collection and foreign grants. Tax
revenue fell from 14 to 11 percent of GDP in that period. Low tax rates, a narrow tax base, and weak compliance
and enforcement have undermined tax collection. In particular, generous tax exemptions have deprived the budget
from vital fiscal revenues and foreign exchange. Total revenue declined further to 13 percent of GDP in 2020, mostly
because of the COVID-19 pandemic, although it recovered to 15 percent in 2022, partly supported by inflation.
Revenue levels remain very low by regional and income standards. In 2019, revenue-to-GDP and tax-to-GDP ratios
ranked in the bottom 15 percent of the world, and these have deteriorated further since then. Recent measures,
such as tax rate cuts and growing fragmentation in the management of large taxpayers, have further hampered
revenue mobilization. At 11 percent in 2022, the tax-to-GDP ratio is significantly below the recommended minimum
international benchmark of 15 percent. These trends have reduced fiscal space for critical public spending, while
threatening fiscal sustainability.

Revenue collection has relied heavily on consumption-related taxes, while limited income tax collection
accounts for most of the performance gap. In 2022, about three-quarters of government revenue was collected
through taxes. Indirect taxes accounted for most tax revenue, with the VAT and excises representing 29 and
25 percent of total tax revenue in 2018–2022, respectively. These are consumption-based taxes levied on the
purchase of goods and services. Direct taxes averaged 23 percent of tax revenue in the same period and were
almost exclusively derived from the corporate income tax (CIT) and the personal income tax (PIT). Tax revenue
collection has not kept pace with economic activity, with poor performance mainly driven by the CIT. The revenue
generated by the CIT declined from 2.7 to 1.4 percent of GDP during 2011–2019, albeit recovering to 1.8 percent
in 2022. This remains among the lowest levels in the world. Generous tax incentives have been granted to attract
foreign investment, but international evidence suggests that profit tax exemptions are highly inefficient. While
economic growth has been predominantly driven by natural resources, government revenues accruing from the
resource sector have been limited. Resource-related revenues, such as taxes, royalties, and preservation funds,
account for a small share of total domestic revenue (averaging 8 percent in 2010-2022).

Tax rates are relatively low and significant tax incentives have been granted, which undermines revenue
collection. The CIT rate has been progressively reduced to attract foreign investment. The rate was cut from 35
to 28 percent in 2012, then to 24 percent in 2013, and finally to 20 percent in 2020. This rate is relatively low in
52 Forging Ahead: Restoring Stability and Boosting Prosperity

international terms, which is a significant tax incentive by itself. Nonetheless, the Law on Investment Promotion
provides several tax incentives (e.g., CIT holidays and reduced rates) ranging between 4–15 years, depending on
the business activity and location. Concessions negotiated on a case-by-case basis provide even more generous
terms. This approach to investment promotion is highly inefficient and creates large foregone revenues. The PIT top
marginal tax rate (25 percent) is also lower than most regional and income peers. The VAT rate of 7 percent is one
of the lowest in the world, while some excise rates are also low by global benchmarks. Moreover, taxes levied on
household consumption (e.g., VAT and excises) are found to be progressive, in the sense that they impose a larger
burden on wealthier households.

Tax collection is only reaching about 60 percent of its full potential, implying that there is ample scope for
policy and administration reforms. Tax effort was measured at about 0.6 during 2010–2016, meaning that tax
collection was lower than the average tax yield for countries with similar characteristics. Hence, there is considerable
potential to mobilize additional domestic revenues. Tax effort is affected by tax structure (e.g., tax rates and tax base)
as well as tax administration and compliance. Tax effort can be increased by raising tax rates, expanding the tax
base, enhancing tax compliance, and improving tax enforcement. When compared to taxation levels and (structural
and institutional) determinants in peer countries during 2010–2016, the Lao PDR had an average tax potential of 21
percent of GDP, with the corresponding total tax gap at 8 percent of GDP. Estimates also suggest that only 13 percent
of potential CIT revenue is being collected, largely due to tax exemptions that considerably reduce the tax base.

The administration of taxes has generally improved in recent years, but there remains considerable room
to further enhance performance. The implementation of the Tax Revenue Information System (TaxRIS) provides
a good platform to modernize the tax administration, particularly with the aim of improving the efficiency of tax
collection, reducing leakages, and increasing revenue. Nonetheless, the current system lacks critical features
(e.g., automated late filing/payment notice, automated risk analysis, and data analysis capabilities), and staff are
not using all functionalities. The approval of the Tax Administration Law has strengthened the legal framework,
but it is crucial to ensure that the law is adequately implemented. Efforts to build the capacity of tax officials
are also bearing some fruit. However, developing a modern, efficient, and effective tax administration requires
further improvements in processes (which should be standardized and transparent), technology uptake (e.g.,
automation), and staff capacity. This would also help build confidence in the tax administration (e.g., by reducing
corruption risks).

Bold tax reforms are needed to ensure that revenue levels are adequate to sustainably finance growth-
enhancing public spending and debt service obligations. Poor revenue performance significantly impacts
fiscal space and the availability of foreign exchange, thus jeopardizing fiscal and debt sustainability, as well as
broader macroeconomic stability. Moreover, a modern tax system should raise revenues efficiently and equitably.
A prioritized and sequenced set of tax reforms (relating to both policy and administration) should be pursued in
the coming years. Measures to expand the tax base, diversify revenue sources, and improve compliance are key to
generating sufficient domestic resources to meet large financing needs (e.g., social spending and debt servicing).94
However, strong political commitment and ownership is needed.

Restoring the VAT rate to 10 percent would immediately and efficiently raise considerable revenue. The
current rate of 7 percent (introduced in 2022) is one of the lowest in the world, which severely undermines revenue
mobilization. Restoring the rate to 10 percent could generate at least 1 percent of GDP in additional VAT revenue
while having a limited impact on inflation or inequality.95 Part of the additional revenue should be earmarked
to support the most vulnerable households through targeted cash-transfer programs.96 Even at this level (10
percent), the standard VAT rate would remain very low by international standards. Moreover, VAT exemptions
should be reviewed and streamlined, since they distort economic activity and can cause tax cascading. For
instance, exemptions for large-scale agricultural and forestry activities (e.g., businesses larger than 400 million

94 Research shows that large tax revenue increases are associated with reforms of indirect taxes and exemptions, often supported by tax
administration reforms, with sustainability hinging on reforms in the key compliance areas (risk-based audits, registration, filing, payment, and
reporting). There is also evidence that tax reforms require major political consensus and that these tend to occur following major economic
crises. Successful reforms tend to broaden the tax bases by significantly curbing exemptions and other special treatments.
95 Even if this increase would fully translate into higher consumer prices (leading to a 3 percent increase, albeit in a context of high inflation), this
would need to be set against a counterfactual of limited revenue mobilization that fuels further exchange rate depreciation pressures and
thus domestic inflation. Moreover, the VAT is a progressive tax, from a distributional perspective.
96 Even if only 10 percent of the additional revenue was allocated to a cash-transfer program, the budget for social assistance could be doubled
from the current 0.1 percent of GDP.
 2. Revenue Mobilization 53

kip) should be eliminated. Finally, adopting and implementing legislation to extend the scope of VAT to cover
cross-border digital services could generate additional revenue. In the medium-term, VAT compliance can be
improved through the full implementation of the Tax Revenue Information System (TaxRIS), the improvement of
tax services, and the enhancement of institutional and technical capacities.

Revising the Law on Investment Promotion would help curb tax incentives and broaden the tax base. The
current tax incentive system is predominantly based on tax holidays and reduced rates (relating to corporate
income, value-added, import duties, and royalties), which are a costly and inefficient means of encouraging
investment. Profit-based tax incentives should be phased out and replaced by cost-based measures, such as
investment tax credits and accelerated depreciation. Other tax incentives should also be restricted. The Minister
of Finance should be the sole authority issuing tax incentives (in line with international best practice), particularly
with a view to rationalizing the incentive regime and reducing discretion. While special incentives currently need
to be approved by the National Assembly, stricter requirements should be adopted (e.g., ex-ante cost-benefit
analysis). These reforms would require a revision of the Law on Investment Promotion. In addition, improving the
monitoring of tax incentives would support improved scrutiny of compliance and enable an assessment of their
effectiveness. The creation of a centralized tax incentive database/repository in the Ministry of Finance would
enable the authorities to estimate foregone tax revenues and undertake cost-benefit analyses. The corporate
tax return form should include relevant information to better monitor and assess tax incentives, while exempt
businesses should still submit CIT returns. Meanwhile, undertaking an assessment of the largest concession
agreements would provide a tentative estimate of foregone revenues and an evaluation of the legal scope for
revision. Finally, the introduction of anti-avoidance rules against profit shifting (i.e., transfer pricing rules) and
other international taxation frameworks should also be considered to protect the tax base. This should also
include provisions for direct taxation of the digital economy to embrace this growing component of the economy.

Reforming excise tax structures and increasing rates, particularly on beverages, tobacco, and fuel, could
provide additional revenue while supporting health, environmental, and social outcomes. Reversing the recent
fuel excise cuts would generate considerable revenue while incentivizing a transition to green energy. Reviewing
the tax structure of alcoholic and non-alcoholic beverages, with specific taxes replacing or being added to the ad
valorem tax and moving the base to retail prices, could raise revenue and benefit health outcomes. Reviewing the
scope of products included under the non-alcoholic beverage category to make it a true sugar-sweetened beverages
tax would be advisable. Removing exemptions on the tobacco excise and raising the tax rate could produce similar
results, while changing the base of the ad valorem tax from ex-factory to retail prices would facilitate monitoring and
enforcement. Furthermore, all specific taxes should be indexed to inflation and income growth. Overall, reforming
structures and raising excise rates on products with negative (health, environmental, and social) internalities
and externalities could generate several positive outcomes.97 These tax policy reforms ought to be accompanied
by improvements in tax administration to avoid leakages (e.g., tax evasion). This can be achieved by accelerating
digital transformation (e.g., introducing a track and trace system) and other reform opportunities (e.g., audit). Given
existing knowledge gaps (e.g., market size, prevalence, price dispersion, price/income elasticities), it is imperative to
improve data collection and analysis to support evidence-based policy reforms.

Reforming the land tax and preparing for the introduction of a property tax would be key to boosting
revenue collection. Property tax reform should follow a phased approach. First, land tax rates should be increased
significantly to ensure the land tax becomes meaningful. The additional revenue should then be invested in
enhancing the administration of land and land taxes, including the digital transformation of land and land tax
management. Once tax administration has been improved, the land tax could be transformed into a property tax
by including the value of improvements in the tax base. The National Assembly has recently approved the new
Land Tax Law, which changes the tax base from size to value of the land. This will help raise effective tax rates and
thus improve the fairness of the property tax regime. Developing and implementing an adequate land valuation
system will be key to supporting tax collection.

Strengthening compliance risk management by focusing on the administration of large taxpayers would
increase revenue and enhance efficiency. Improving tax administration is crucial to increase revenues and
efficiency. Strengthening compliance risk management should start with the management of large taxpayers,
given their importance to revenue collection and the scarcity of skilled staff within the tax administration.

97 Some of these goods can be considered luxury or non-essential. Taxing goods typically consumed by the wealthy can generate
considerablerevenue and promote equity (which could strengthen social cohesion), particularly given the difficulty of taxing high incomes
and assets.
54 Forging Ahead: Restoring Stability and Boosting Prosperity

It is therefore critical to re-establish a dedicated large taxpayer office (LTO) and recentralize large taxpayer
management. There is also a need to improve capacities in key functions (e.g., audit, taxpayer services, and
data management and analysis) and then expand to other areas. This program should take into account the
implementation of the TaxRIS and the issue of staff redundancy associated with automation. Moreover, it
would be important to broaden e-services offerings through an integrated ICT solution, which could be done by
expanding TaxRIS to include more sophisticated tax administration features. A modern IT system would allow the
tax administration to adopt efficient and effective business processes and facilitate business continuity. The use
of big data and artificial intelligence can play a key role in modernizing tax administration.
The World Bank Lao PDR Country Office,
East Asia and Pacific Region
Xieng Ngeun Village, Chao Fa Ngum Road,
Chantabouly District, Vientiane, Lao PDR
Tel: (856-21) 266 200
Fax: (202) 266 299
www.worldbank.org/lao

The World Bank

1818 H Street, NW Washington, D.C.
20433, USA
Tel: (202) 4731000
Fax: (202) 4776391

www.worldbank.org