With all the hype surrounding Myanmar these days, investors could be forgiven for not paying as much attention to Thailand’s northeastern neighbour. A number of exciting developments took place in Laos in 2012 and more are in the pipeline this year. As a result, there is a strong argument for investment in this country of 7 million that is far from having reached its potential.
Laos is experiencing significant change in line with an advancing rate of economic growth. Among the 15 fastest growing economies in the world, Laos has been able to sustain expansion of more than 7% a year on average during the past 10 years. As well, foreign direct investment continues to flow into the hydropower, mining, and construction sectors, having increased from $25 million in 2002 to nearly $3 billion in 2011.
On top of that, the country also has its fiscal house in order with a relatively modest debt burden compared with many of its Asian counterpart. It is on track to meet its UN Millennium Development Goals by 2015, and will likely graduate from the United Nations’ list of Least Developed Countries by 2020.
One of the key drivers of this growth has been legal and economic policies, largely implemented in a bid for World Trade Organization membership, which have reinforced the country’s attractive investment climate.
INVESTMENT INCENTIVES
Exemptions on profit tax for certain periods are available for investments in eight sectors: production for export, agricultural and forestry activities, human resource development and health services, production of raw materials, development of tourism and transport services, infrastructure development, and the production of construction materials and equipment.
To promote investment in particular areas, the government has delineated three zones based on socio-economic development:
Zone 1: territories with insufficient socio-economic infrastructure to favourably facilitate investment (mainly mountainous, remote areas);
Zone 2: territories with infrastructure that can facilitate investment to some extent (less geographically isolated than Zone 1); and
Zone 3: territories where good infrastructure is sufficiently available to support investment.
In Zone 1, tax exemptions will be granted for between four and 10 years, in Zone 2 between two and six years, and in Zone 3 between one and four years.
To encourage particular activities, the government has designated three levels: top-level, medium-level, and low-level promotion. The level and zone of a particular investment thus will determine the relevant exemption period of profit tax obligations.
TAX LAW
Amended Tax Law: The first amendments to the country’s Tax Law contain significant benefits, both for individuals and companies, including a reduction in the corporate income tax (known as the “profit tax”) rate from 28% to 24% and the repeal of the minimum tax, meaning any company recording a loss in a particular tax period will not be required to pay tax.
The amendments have also repealed the Business Turnover Tax (BTT), which has been replaced with a simplified Value-Added Tax (VAT), to be levied as an indirect tax at 10% and broadened the scope of available deductions, which can now include travel expenses, and approved mineral prospecting, exploration and feasibility studies.
Double Taxation Agreements: These agreements with neighbouring nations seek to streamline the tax liability of entities doing business across borders and avoid the possibility of an entity being taxed twice, in two separate countries, for the same business operations.
Laos now has eight such agreements in force, the most recent being with Myanmar. Others are with Vietnam, Thailand, China, South Korea, North Korea, Brunei and Malaysia.
WTO MEMBERSHIP
On Feb 2 this year, Laos officially became a member of the World Trade Organization (WTO), the culmination of a 15-year process.
In order to obtain membership, the country has enacted approximately 90 laws and regulations in the past 15 years to open its markets and provide security for investors, including addressing trading rights, import licensing, customs valuation, investment, sanitary and phytosanitary measures, technical barriers to trade and intellectual property rights.
Among its specific commitments, Laos has agreed to cap tariffs on goods and enact measures to ensure market access for services in particular sectors. These include business services, telecommunications, construction, private education, environmental services, insurance, banking and other financial services, private hospitals, tourism and air transport.
In addition, Laos has provided for the right to appeal government administrative decisions as they relate to WTO matters and has committed to enact intellectual property protections, compliant with WTO standards, by 2016.
INFRASTRUCTURE
Laos is in the process of making significant upgrades to its infrastructure, with plans to establish a passenger and freight railway network and recent investments in air travel capacity.
At present, the country has only 3.5 kilometres of railway, running from Thanalaeng Station south of Vientiane to the Lao-Thai Friendship Bridge. In October 2012, the National Assembly approved a project to construct 420 kilometres of tracks between Vientiane and Boten, in the northern Luang Namtha province, which borders China. This line will then connect to Kunming, the capital of Yunnan province, via a track to be built by the Chinese government.
While the project was originally envisioned as a joint venture between Laos and a Chinese construction company, the Lao government has now assumed full ownership, with potential funding provided by a loan of around US$7.2 billion from the Chinese Exim Bank.
This railway project is the first of many major infrastructure projects aimed at converting the country from being “land-locked” to “land-linked.” With freight trains set to travel at 120 kph along the high-speed line and passenger trains at up to 160 kph, the project opens the nation to important trade and tourism opportunities with the expanding Chinese and AEC markets.
In November 2012, a Malaysian company was awarded a contract to construct and operate the 220-km rail line between Savannakhet (in the west near the Thai border) and Lao Bao (in the east near the Vietnamese border). This $5-billion project, which will provide a more direct overland link between Thailand, Laos and Vietnam, is to be completed by 2018.
Lao Airlines, the national carrier, has expanded markedly in the last two years, receiving its first order of two Airbus A320s in 2011. Other Asian carriers have added flights that provide regular shuttle flights to hubs such as Tokyo and Bangkok. In addition to new aircraft, airport infrastructure is being upgraded to accommodate the growing number of business and tourist travellers.
DISPUTE RESOLUTION
As present, Laos’s system of dispute resolution, particularly in relation to commercial matters, emphasises alternatives to formal court-issued judgements. This reflects a strong cultural heritage of alternative dispute resolution and is influenced by the movement away from the traditional court system.
Still, Laos has enabled parties to utilise its judicial resources to enforce an arbitration agreement through the ratification of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Moreover, commercial dispute mechanisms contained in the Law on the Resolution of Economic Disputes and Law on Contracts attempt to move parties toward mediation and arbitration where possible.
Laos has made real gains over the last few years in evolving its investment framework to be more attractive to foreign investors. The country’s steady growth and ever-increasing level of investor security make is a prudent choice for investment.
Kitchrat Kontain is the managing director of Southeast Asia Law Office, a correspondent law firm of Baker & McKenzie Ltd located in Vientiane.