Tax Treaty between Indonesia and Lao People’s Democratic Republic (“Lao PDR”) was signed in Vientiane, Lao and ratified by government of Republic Indonesia through President Regulation Number 58 of 2016 concerning Agreement between Government of the Republic Indonesia and the Government of Lao PDR for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.
After each country completed their internal procedure for enacting tax treaty, under Article 29 of Tax Treaty Indonesia – Lao PDR, the treaty will be entry into force on 11 Oct 2016. Subsequently, Directorate General of Taxes (DGT) then issued circular letter number SE-05/PJ/2017 dated 3 March 2017 which stated that the treaty is applied starting from 1 January 2017 for withholding tax and 1 January 2018 for non-withholding taxes.
Key points in tax treaty Indonesia – Lao PDR are :
1. Withholding tax rate on dividend is 10% if the beneficial owner is a corporation (other than partnership) and has direct ownership at least 10% of the company. A tax rate of 15% will be applied for dividend other than that condition.
2. Withholding tax rate on interest is 10%.
3. Withholding tax rate on royalty is 10% .
4. Withholding tax on Branch Profit Tax (BPT) is 10%.
5. The BPT rate of 10% does not affect for Production Sharing Contract (PSC) or Contract of Work (CoW).
Apparently the withholding tax rate under tax treaty for dividend and interest are similar pursuant to tax rate in Lao PDR’s tax legislation, while withholding tax rate for royalty under the tax treaty is higher than Lao PDR’s legislation. For Indonesia, on the other hand, withholding tax rate under the tax treaty is lower than the rate pursuant to Indonesia’s legislation (20%). As usual , to enjoy tax treaty benefit, taxpayers have to provide Certificate of Domicile from Lao PDR or Indonesia.
Below is the summary of taxation in Lao PDR:
Description
|
Remark
| |
Corporate Income Tax rate
|
24 %
| |
VAT rate
|
10 %
| |
Withholding tax rate
|
Resident
|
Non- resident
|
- Dividend
|
10 %
|
10 %
|
- Interest
|
10 %
|
10 %
|
- Royalties
|
5%
|
5 %
|
Profits tax (PT)
All companies (including all forms of legal entities) that are registered under Lao PDR law are subject to PT on their worldwide income. Companies formed under foreign law, operating a business in Lao PDR, and conducting business in Lao PDR are subject to tax on their income derived in Lao PDR.
The standard rate of PT for companies in Lao PDR is 24% of net profit after adjustments for non-deductible expenses and others according to Lao Tax Law No.70/NA, dated 15 December 2015. The 24% rate applies to both domestic and foreign investors.
Tax holidays and reduced PT rates are applicable to companies whose investment activities qualify as promoted investment activities
Lump-sum tax
The lump-sum tax is imposed on small and medium business operators that are not registered in the value-added tax (VAT) system and companies that did not prepare Lao accounting books. The lump-sum tax is paid in lieu of the PT, based on an agreement with the tax office; consequently, the lump-sum tax is regarded as a tax within the PT category.
Local income taxes
There are no provincial or local income taxes in Lao PDR.
Comments
In my view, this new tax treaty does not automatically boost investment from Indonesia to Lao PDR or vice versa. The corporate income tax is almost similar between Indonesia (25%) and Lao PDR (24%). Both countries offer tax holiday as an incentive. The trade balance between Indonesia and Lao PDR is also not so significant as shown in below table.
As seen in the table, Indonesia exports more to Lao PDR rather than import. The tax treaty does not give benefit to Indonesian companies who plan to operate in Laos because they will pay tax (through withholding mechanism) which similar or higher than Lao PDR’s domestic tax law, while the corporate tax rate is almost the same. However, I do believe that the Government of Indonesia had considered many aspects in deciding to have tax treaty with Lao PDR.
In my view, perhaps the government should focus on countries that already have investment in Indonesia such as Iraq or Bahrain as shown in below graphic.
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| Source : http://databoks.katadata.co.id/datapublish/2017/02/27/berapa-investasi-arab-saudi-di-indonesia |
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