Lao tax collection system overhauled

Henrik Konkel, a 56-year old Swedish tax professional, brought over 25 years working experience as a specialist and manager in the Swedish Tax Agency with him when he accepted an assignment to lead the Swedish side in a major overhaul of Lao PDR’s tax collection system.
     It is a foreign aid project, financed by the Swedish International Development Agency, Sida.
     But not the typical one.
     Contrary to many aid undertakings in Laos, often approaching a niche issue, this one aims for a broad and deep change in the way taxes are calculated and collected.
     Henrik Konkel’s know-how, from technical issues to human resources management and motivation of taxpayers, will be needed in all phases of the vast and complicated project.
     And the Swedish Tax Agency’s full institutional support, with access to all its collective capacity and experience, is put into the project which employs a team of around ten Swedish consultants.
     “Management training in Sweden’s state sector allows for a wide scope of competence development during your career. If you feel like it, and are capable, your career may take many different turns over the years,” explains Henrik Konkel.
     ”For me this has meant I have been able to work with various tasks in the tax agency. Still it came as a complete surprise for me when I was asked to take the job in Laos. My only foreign experience until then was from a few week long projects in Europe. But why not, I said to myself, and accepted the offer.”
     If this becomes a success, what will it mean for Laos?
     “This is a key project in the country’s attempt to cut donor dependency and create enough income on its own. Laos is one of the world’s poorest countries. It is very dependent on foreign aid. Sometimes donors’ ideas how funds shall be used as well as competition between foreign aid agencies complicate the picture further. Improved tax collection plays an important role if this situation shall be changed at all.”
     Most Lao companies negotiate tax rates in advance. Much more tax revenue could be collected if a change to a more transparent and foreseeable model takes place. When Laos introduced market reforms in the late 1980’s, many small corporations became subject to a ‘contract’ tax system. In this model the company manager negotiates next year’s taxes with the tax official and they agree on a flat tax rate for the coming year.
     “This has paved the way for widespread ‘irregularities’ as the Laotians prefer to call tax evasion and corruption,” says Henrik Konkel.
     Out of the approximately 63 000 registered companies in Laos, 38 500 pay tax according to this presumptive tax system, by the annual contract. It is assumed that businesses avoid the tax net by not being registered at all: non-filers, and by hiding in the presumptive tax systems: wrong-filers.
     Taxpayers are also slipping through the tax net by insufficient maintenance of present registers in the tax administration and poor sharing of information between separate governmental bodies in possession of information of businesses.
     It has been estimated that only 40 percent of all potential business taxes in Laos are collected because of these various abnormalities.
     An introduction of a value added tax has also been pending for some time. But a Lao VAT has been put on hold until the full picture of how revenue collection shall be designed is clear.
     A tax law revamp may also lead to changes in the way foreign investment is promoted.
     “Laos tries to attract foreign investment. For example by improving the legal systems, work with good governance and cut red tape. Laos is also offering tax holidays or reduced taxes for various periods of time. Is this good or bad in the long run? Tax holidays to foreigners may be disadvantageous for local Lao companies because they become less competitive. In Europe we believe it is better with a level playing field for everyone. A country may have overall low taxes but you cannot have one system that favour foreign investors and another that fully taxes domestic investors, according to this belief. So this must be factored in when Laos reforms the tax system.”
     Henrik Konkel does not like to mystify the Laotians or stress differences in looks and ways of living. His comparisons, when they are done, are hands-on and down to earth.
     “Some foreigners there overemphasize cultural and other differences instead of embracing all we have in common. I don’t buy that view. I have no difficulty at all discussing management problems and solutions on a professional basis with the Laotians. They like this approach, and are open and attentive. This project is about developing compentences and enables the Lao organisation to take over and run the new tax system when it is in place. We are only here as advisers. I stress that over and over again when we meet. This is your project; you are responsible for the success or failure. And my Lao colleagues have no problem with this. They understand and act accordingly.”
     Can you sum up the first year, how its has gone so far?
     ”Well, we started for real just eight months ago. I realised early on that this will be more time consuming than the first schedule suggested. We can not carry out and tick off sub projects, leave them, and go ahead with the next one all the time. Not if we shall succeed making the Laotians full and responsible participants who understand this is their project and their duty to take care of. We have received good understanding for this approach.”
     All issues have been targeted during the initial phase. Faster progress has been made within management of ICT and human resources, while areas regarding organization and tax policies are more time consuming.
     “We get along fine. One example is that we speak openly about corruption, why it is there and how we can get rid of it. Corruption in the tax agency occurs because tax officials are paid low salaries and have room to make some extra money on the sideline, for example in these contract negotiations before next year’s business taxes are set. We know motivation to pay taxes is low, by companies as well with individual citizens. They ask what do we get for our tax money? Many people have a misunderstanding that revenue collection is about controls and supervision. But 95 percent of the work is to motivate people to pay taxes. I have not reason to believe it is different in Laos, it is about attitudes, transparency and good governance.”
     What has been the largest challenge for you so far?
     “As I indicated earlier it is not differences between us, how we look, speak and behave but the factual professional challenges. In Sweden we collect 99.5 percent of all taxes. Laos lose 60 percent of all taxes. That is our shared challenge!”
     Motivating higher tax morale, increase transparency and openly debate corruption in Laos will require support from the highest political and government level.
     Does it help to be Swedish when you bring up such issues in the Lao Tax Department?
     “Yes. Swedes are viewed as not having a hidden agenda. We as tax professionals can only tell our hosts that they can increase state income by doing this and that, referring to our experience. That is a fiscal matter.”

Background – how the project came about

Lao PDR is one of the poorest nations on earth and heavily dependent on foreign aid to make ends meet.
     This problem is addressed in different ways by the government, which aims to pull Laos out the group of least developed countries by 2020.
Programs to attract more foreign investors and improve the tourism sector are examples of market oriented measures in Laos.
     But the real income potential lies in improved tax revenue collection.
     Currently are an estimated 40 percent of the nation’s taxes collected.
     The tax part of GDP in Laos has been hovering around 9 to 11 percent since 1994 while Vietnam, as a nearby example, manages to collect taxes worth 21.5 percent of GDP.
     A successful combination of income generation in the marketplace, and for individuals, and vastly improved tax collection is key to take Laos out of the donor trap
     A project to strengthen fiscal management in the tax sector was launched in November 2003. It is supported by the Swedish International Development Agency, Sida, with SEK 25 million and will run to the end of 2006, with options for extensions if needed.
     Sida’s Lao counterpart is the Ministry of Finance, Tax Department while the Swedish Tax Agency (Skatteverket) is hired by Sida as experts and consultants to do the practical work in Laos.
     Sweden has earlier given financial support to tax projects in Laos. This time a more comprehensive approach and support was suggested and accepted from both sides. The main issues identified in an inception report presented mid April 2004, were:
• The overarching problem for the Government of Laos in its ambition to eradicate poverty and ensuring sustainable economic growth is the budget situation, which on the revenue side has to do with …
• A narrow tax base
• Inefficient administrative procedures
• Human resources
• Organization and management
• ICT
• Strategies and prioritizations

     All these areas will be targeted during 2005 and 2006 with the overall objective to contribute to poverty alleviation by strengthening Lao PDR´s ability to improve revenue collection.

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