IFFs in Lao PDR: A Legal Perspective


In this post, Mr. Nalonglith Norasing, Senior Researcher in Law at the National Institute for Economic Research (NIER) in Lao PDR, presents the main findings of a study on the laws, regulations and practices to address trade misinvoicing and abusive transfer pricing in the context of Lao PDR. The study was conducted in collaboration with the Centre for Development and Environment at the University of Bern, Switzerland.

The study

This study contributes new insights into the scant legal literature on trade mispricing. It is the first study ever that assesses the extent to which existing laws in Lao People’s Democratic Republic (Lao PDR) address trade misinvoicing and abusive transfer pricing. The analysis considers current laws and regulations as applied in practice, and derives lessons for future regulatory intervention. The focus is on mispricing of commodity trade.

Key findings

The analysis suggests that a basic legal framework is in place to address mispricing, but that work still needs to be done to operationalize the legal framework. For example, the Customs Law prohibits and sanctions trade ‘mis-declaration’ (misinvoicing). Yet, it does not specify how customs authorities can detect misinvoicing practices. Likewise, the Tax Law provides some entry points to address abusive transfer pricing, for example, by allowing the tax authority to reject any expense that is ‘higher than market values without reasons’. It also embodies general anti-abuse rules and principles that could be broadly interpreted to empower the tax authority to strike down tax avoidance practices that misuse or abuse the law. However, the law does not provide guidance on how to prove that declared prices are distorted, ‘higher than market values’, or that profits have been diverted. More detailed rules and procedures are needed to enforce the law.

Our analysis singles out simplified approaches that tax, customs and anti-money laundering officers in Lao could follow to counter commodity trade mispricing practices. One of these approaches rely on the expanded regulatory use of reference prices for tax purposes, when assessing the tax value of commodity transactions. Laos has already tested the use of reference prices for specific tax purposes, in the context of royalty calculations in copper. The approach can be applied for other purposes as well, for example, for purposes of transfer pricing analysis, or for customs valuation purposes, or when computing sales revenues for income tax purposes. For example, tax and customs authorities may use reference prices to spot abnormally priced transactions between related or unrelated parties, potentially indicative of mispricing. One step further, they could use reference prices to adjust or directly set the tax value of commodity export sales for tax purposes. If used as ‘red flag indicators’ to spot suspicious transactions (risk assessment), only minor, standardized ‘comparability’ adjustments to reference prices are required to reflect local conditions and deviations from the standard reference contract upon which reference prices are based. If reference prices are instead used to directly adjust or set transaction prices (in the context of tax audits, or as part of an administrative pricing scheme), multiple adjustments would need to be made to reflect variations from standard contract specifications regarding quality, lot size and shape, delivery dates, settlement terms, and currencies, among other things. In this context, price formula based on reference prices can still be used, but they would need to be carefully designed and tested, in consultation and with the constructive involvement of the relevant trade and industry associations.

Challenges encountered

There is lack of awareness in Lao PDR on transfer pricing issues. There is no clear understanding of what related party transactions are. Transfer pricing law and constructs are ‘imported’ from Western legal systems and need to be integrated into the Lao legal culture and adjusted to local legal understanding. A second challenge concerns the legal instruments employed to implement the simplified schemes discussed above. This raises questions from a ‘Rule of Law’ perspective. What should be specified in laws issued by the National Assembly? What should instead be laid down in Decrees, Instructions, Decisions, and Guidance Notes issued by the Executive – the Prime Minister Office, the Ministry of Finance, Ministry of Mines and Energy, the Ministry of Agriculture, etc. How to strike a balance between legislation and administrative discretion? This question stands at the core of Lao transition towards a ‘Rule of Law’ system. On the one hand, enshrined in tax and customs law, simplified methodologies would provide greater certainty to taxpayers, but could not be easily adjusted. On the other hand, indicators and methodologies can be more flexibly adjusted if laid down in administrative decrees or lower-level decisions and guidance notes. A balance is needed.

Norasing, N., Musselli, I., & Bürgi Bonanomi, E (2019). Transfer Mispricing Laws in Context: The case of Lao PDR . R4D-IFF Working Paper Series, R4D-IFF-WP06-2019. Download here.

Photo from Pexels

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s