VDB Loi Laos Alert – Watch out for VAT applicability on banking activities

The applicability of value added tax (“VAT”) on banking activities has shifted from a broad exemption regime under VAT Law No. 04/NA dated 26 December 2006 – “operations relating to banking services, financial institutions” – to a limited exemption scope under VAT Law No. 52/NA dated 23 July 2014 – “deposit interest, loan interest from the transactions of commercial banks or financial institutions authorized by the Bank of Lao PDR”.

In practice, even prior to the issuance of the most recent VAT law, the Ministry of Finance has been taking a progressively more restrictive interpretation of the exemption scope through its Instruction No. 3111/MOF dated 27 November 2009 in favor of six kinds of transactions, themselves restricted in their definitions: (1) granting of credit and guaranteeing of debts resulting from the granting of credit; (2) financial deposits and account operations; (3) exchange of currency and provision of cash; (4) supply of securities; (5) intermediation in financial transactions; and (6) management of investment funds.

Recently, the Tax Department has conducted a series of VAT audits targeting banking and financial services. Assessments have been made and penalties levied for the financial years subject to audit, i.e. FY2015 and onwards.

Some of the services that may be targeted in a VAT audit are:

• Financial leasing fees
• Investment or transaction fees
• Administration service fees
• Advisory service fees
• Telegraphic transfer fees
• Banking instrument issuance fees
• Other service fees, excluding deposit and loan interest transactions

The Tax Department has identified the following as the main areas of VAT non-compliance by banks and financial institutions:

• Failure to identify taxable and exempted fees in their operations and accounting
• Failure to invoice VATable services
• Failure to declare monthly VAT

The main penalties are:

• 0.1% of the VAT due for the late submission of VAT
• LAK1 million plus 50% of the VAT due for not issuing a VAT invoice

Should you have any questions regarding this, please do not hesitate to contact Daodeuane Duangdara ([email protected]) or Anthony Assassa ([email protected]).

Did you know that VDB Loi Laos is licensed to provide compliance accounting services to complement our tax compliance services?

VDB Loi is a network of leading law and advisory member firms and affiliated companies that comprises nine partners and over 100 lawyers and advisors, with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam and representatives in Singapore and Tokyo. We provide the highest quality solutions for transactions and taxation.

You can find more information on our Laos office here.