Under Article 34 of the Amended Tax Law, general deductibility has been somewhat simplified, with the general rule now being that expenses that are deductible in calculating annual profit tax include expenses related to business operations that are not specifically non-deductible under the law.
Under the previous law, the 'general expenses relating to business operations' were quite specific, with the relevant article listing seven instances of deductible expenses – rather than a general rule on deductibility. This left a grey area open where some expenses could fall between specifically deductible and non-deductible, which obviously favoured the tax authorities.
Further to the general rule on deductibility in the Amended Tax Law, Article 34 allows deduction of depreciation of fixed assets calculated in accordance with the depreciation provisions of the same law. Notably, the same article places deduction caps on certain types of expenses:
- Telephone expenses are deductible up to 0.4% of total business revenue (TBR).
- Travel expenses for administrative activities are deductible up to 0.6% of TBR.
- Expenses for the entertainment of guests are deductible up to 0.4% of TBR.
- Donations and support payments are deductible up to 0.3% of TBR.
While not strictly expenses, items which may also be deducted from profit include income from dividends which have already been taxed, income from deferred tax, gains from the revaluation of assets and liabilities in foreign currency at period-end and bad debts with the appropriate supporting evidence (preferably certification from the relevant authorities).
Under Article 33 on non-deductible expenses, expenses that are specifically not deductible in calculating annual profit tax include:
- Payments of profit tax.
- VAT related to the purchase of fixed assets.
- Depreciation of fixed assets that are not registered as the enterprise's assets.
- Partners' salaries of a partnership enterprise, for partners who are not also managers or employees of such partnership.
- Salary of the owner of a sole-trader enterprise.
- Interest on loans used by a shareholder to pay for capital investment.
- Interest on loans taken outside the banking system and/or from shareholders.
- Interest on loans that are not related to the business operations.
- Expenses that are not directly related to business operations, including golf, dancing, entertainment, gifts and prizes.
- Personal expenses of the owner or shareholders of an enterprise.
- Expenses related to business operations but for which there is no official receipt or an improper receipt, or where the amount is deemed excessive.
- Expenses paid to third persons without any contract or supporting documents.
- Certain types of reserves made in accordance with accounting standards.
- Provisions for the impairment of assets made in accordance with accounting standards.
- Losses from the revaluation of assets and liabilities in foreign currencies at period-end.
- Deferred tax expenses.
- All penalties.
The new inclusion of "interest on loans taken outside the banking system and/or from shareholders" under the regulations is a contentious issue, and it is highly recommended that investors revisit their holding structures to ensure they still remain a tax-efficient means of financing their investments in Laos.
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