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Daniel Harrison |
In what is undoubtedly an effort to promote the growth of Laos' first and only capital market, the regulators have introduced key tax incentives related to investment associated with the Lao Securities Exchange (LSX). While there are only two companies listed on the stock exchange, there is an expectation that a handful of other entities will list in the near future. The two companies listed are EDL-Generation Public Company (EDL-Gen), a subsidiary of the state-owned energy company, Electricite du Laos (EDL), and Banque Pour Le Commerce Exterieur Lao Public (BCEL), the largest bank in Laos.
As touched on in a previous article (December/January 2013), from January 1 2013 – transitional measures aside – Laos instated a general profit tax rate of 24% for domestic and foreign entities alike; a reduction from 28% previously, and 35% before that.
Additionally, in an effort to fast-track listings on the recently established LSX, companies floating on the exchange will enjoy a profit tax rate reduction of five percentage points (a tax rate of 19%) for a period of four years from the date of registration on the LSX, under article 29 of the Amended Tax Law (No. 05/NA, dated December 20 2011).
Further to the profit tax rate reduction of companies listing on the exchange, under article 46 of the Amended Tax Law, dividend distributions and profit derived from share sales of companies listed on the LSX are non-taxable income. Ordinarily, dividend distributions and profit on the sale of shares are both subject to income tax at the rate of 10%, for both domestic and foreign investors – with the tax collected via withholding.
These incentives sound great on paper, but what do they mean in real financial terms for investors? Below are two very simple comparisons between an investment in a listed and non-listed company, ceteris paribus.
Comparison A
Assuming an initial investment of $1,000, with a modest return on equity (ROE) of 15%, a dividend payout ratio of 100% and modest capital growth of 10%, the financial benefits of the tax incentives can be illustrated as shown in Table 1.
Table 1 |
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Non-listed |
Listed |
|||
Investment |
$ |
1,000 |
$ |
1,000 |
Net (operating) profit before tax |
$ |
150 |
$ |
150 |
Profit tax rate |
24% |
19% |
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Net (operating) profit after tax |
$ |
114 |
$ |
122 |
Dividend paid |
$ |
114 |
$ |
122 |
Income tax rate |
10% |
0% |
||
Net dividend after tax |
$ |
103 |
$ |
122 |
Proceeds from sale of investment |
$ |
1,100 |
$ |
1 ,100 |
Less: Initial investment |
$ |
-1,000 |
$ |
-1,000 |
Profit on sale of investment |
$ |
100 |
$ |
100 |
Income tax rate |
10% |
0% |
||
Profit on sale of investment after tax |
$ |
90 |
$ |
100 |
Total net income from investment |
||||
Dividend |
$ |
103 |
$ |
122 |
Capital growth |
$ |
90 |
$ |
100 |
$ |
193 |
$ |
222 |
|
Total after-tax return on initial invesment |
19.26% |
22.15% |
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Additional after-tax return on initial investment |
2.89% |
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Comparison B
For the same initial investment of $1,000, if the ROE is increased to 20%, the dividend payout ratio remains at 100% and capital growth is increased to 15%, the financial benefits of the tax incentives are compounded. See Table 2.
Table 2 |
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Non-listed |
Listed |
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Investment |
$ |
1,000 |
$ |
1,000 |
Net (operating) profit before tax |
$ |
200 |
$ |
200 |
Profit tax rate |
24% |
19% |
||
Net (operating) profit after tax |
$ |
152 |
$ |
162 |
Dividend paid |
$ |
152 |
$ |
162 |
Income tax rate |
10% |
0% |
||
Net dividend after tax |
$ |
137 |
$ |
162 |
Proceeds from sale of investment |
$ |
1,150 |
$ |
1,150 |
Less: Initial investment |
$ |
-1,000 |
$ |
-1,000 |
Profit on sale of investment |
$ |
150 |
$ |
150 |
Income tax rate |
10% |
0% |
||
Profit on sale of investment after tax |
$ |
135 |
$ |
150 |
Total net income from investment |
||||
Dividend |
$ |
137 |
$ |
162 |
Capital growth |
$ |
135 |
$ |
150 |
$ |
272 |
$ |
312 |
|
Total after-tax return on initial invesment |
27.18% |
31.20% |
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Additional after-tax return on initial investment |
4.02% |
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While equities trading is still a relatively new concept in Laos, these favourable tax breaks coupled with the efforts of the LSX and its registered brokers to educate potential investors, along with companies' growing demand for greater access to capital raising avenues, should ensure the rapid transformation of equities investment in Laos.
Daniel Harrison (daniel.harrison@vdb-loi.com)
VDB Loi
Tel: +85 62 145 4679
Website: www.vdb-loi.com
