International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Laos: New depreciation method introduced: Activity depreciation

harrison.jpg

Daniel Harrison

As part of the recent amendment to the tax regulations (the Amended Tax Law No. 05/NA, dated December 20 2011), the Lao legislators have introduced a new depreciation method: Activity depreciation. The less commonly used (for tax purposes) method brings the total number of statutory depreciation options to three; the other two being the pre-existing straight-line and declining-balance methods (although the declining-balance method described in the regulations more closely resembles the sum-of-years-digits method).

Under the new activity depreciation method, taxpayers are able to write off fixed assets based on the actual level of activity in a given period, rather than on the traditional time basis. It is more commonly used in management accounting to better match the economic reality of an asset's life – making it a surprise inclusion in the Amended Tax Law.

Explained

Activity depreciation is based on the level of activity of an asset. This could be kilometers driven for a vehicle, hours of operation for a machine, or the number of units produced in a factory.

When the asset is acquired, its useful life is estimated in terms of the level of activity (for example for a vehicle, 500,000 km). Depreciation is calculated by multiplying the asset's cost by the annual use (in activity units) as a percentage of the total activity units of its useful life:

Cost × Annual use in activity units ÷ Useful life in activity units = Depreciation

Example

According to its technical specifications, a truck may cover 500,000 kilometers over its useful life. It costs $25,000 and runs annually as shown in Table 1.

Table 1


Distance travelled

Calculation

Depreciation

Year 1

200,000 km

$25,000 × (200,000 km ÷ 500,000 km)

$10,000

Year 2

150,000 km

$25,000 × (150,000 km ÷ 500,000 km)

$7,500

Year 3

80,000 km

$25,000 × (80,000 km ÷ 500,000 km)

$4,000

Year 4

70,000 km

$25,000 × (70,000 km ÷ 500,000 km)

$3,500

Total

500,000 km


$25,000

Comparison

When comparing the example to depreciation using the straight-line method, the activity method results in higher depreciation in the first two years:

Table 2


Activity

Straight-line

Difference

Year 1

$10,000

$5,000

$5,000

Year 2

$7,500

$5,000

$2,500

Year 3

$4,000

$5,000

($1,000)

Year 4

$3,500

$5,000

($1,500)

Year 5


$5,000

($5,000)

Total

$25,000

$25,000


The tax saving in the first year is $1,200 ($5,000 in additional depreciation × the profit tax rate of 24%).

There are no additional incentives, as total depreciation does not change, only the timing of the deductions, making it possible to increase depreciation in the initial years to produce tax savings and subsequently improve cash flow.

The method is clearly beneficial where an asset will be used excessively in the initial years or for the full life of the asset where it is not expected to outlive the statutory useful life.

The depreciation method used for an asset need only be indicated in the depreciation schedule at the first year-end, meaning the taxpayer can calculate the depreciation under the three methods in the first year and elect that which provides the greatest benefit.

With supplementary regulations still pending, one area that remains unclear is how to determine useful life in activity units. Thus, taxpayers using this method should document in as much detail as possible how the useful life has been determined, until it is seen in practice how the tax authorities will approach it.

Daniel Harrison (daniel.harrison@vdb-loi.com)

VDB Loi

Tel: +85 62 145 4679

Website: www.vdb-loi.com

more across site & bottom lb ros

More from across our site

A steady stream of countries has announced steps towards implementing pillar two, but Korea has got there first. Ralph Cunningham finds out what tax executives should do next.
The BEPS Monitoring Group has found a rare point of agreement with business bodies advocating an EU-wide one-stop-shop for compliance under BEFIT.
Former PwC partner Peter-John Collins has been banned from serving as a tax agent in Australia, while Brazil reports its best-ever year of tax collection on record.
Industry groups are concerned about the shift away from the ALP towards formulary apportionment as part of a common consolidated corporate tax base across the EU.
The former tax official in Italy will take up her post in April.
With marked economic disruption matched by a frenetic rate of regulatory upheaval, ITR partnered with Asia’s leading legal minds to navigate the continent’s growing complexity.
Lawmakers seem more reticent than ever to make ambitious tax proposals since the disastrous ‘mini-budget’ last September, but the country needs serious change.
The panel, the only one dedicated to tax at the World Economic Forum, comprised government ministers and other officials.
Colombian Finance Minister José Antonio Ocampo announced preparations for a Latin American tax summit, while the potentially ‘dangerous’ Inflation Reduction Act has come under fire.
The OECD’s two-pillar solution may increase global tax revenue gains by more than $200 billion a year, but pillar one is the key to such gains due to its fundamental changes to taxing rights.