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Definition, Measurement, and Drivers of Trade-related IFFs

Trade-Related Illicit Financial Flows in Southeast Asia: Evidence from Extractive and Agricultural Commodities in Laos

Flux financiers illicites liés au commerce en Asie du Sud-Est : Données sur les matières premières extractives et agricoles au Laos
Flujos financieros ilícitos relacionados con el comercio en el Sudeste Asiático: Datos sobre productos extractivos y agrícolas en Laos
Viriyasack Sisouphanthong, Latdaphone Banchongphanith, Sthabandith Insisienmay and Latdavanh Songvilay

Abstracts

The Association of Southeast Asian Nations (ASEAN) has emerged as one of the fastest growing collective economies in Asia. This fast growth is, however, accompanied by various challenges, including the trade-related illicit financial flows (IFFs) that deplete the tax revenues of the Association’s Member States. This chapter aims to shed light on the status of the trade-related IFFs present in the scale of trade mispricing that occurs between the ASEAN community and its global trade partners. To better interpret its findings, the chapter provides a legal framework analysis that highlights gaps in efforts to address these financial challenges in the region. Notwithstanding these gaps, certain Member States with substantial non-tax revenue streams have reduced reliance on conventional taxation, allowing for unique fiscal strategies. A comparative analysis of readiness among ASEAN Member States, meanwhile, reveals disparities, with advanced economies demonstrating robust legal systems while developing countries face challenges in implementing complex tax regulation.

The chapter also examines the vulnerability of countries that lack robust legal frameworks, using the Lao People’s Democratic Republic (PDR), a landlocked, least-developed country dependent on extractive resources and agricultural exports, as a case study. By estimating the magnitude of trade mispricing of selected mineral and agricultural product exports, the chapter tries to present the consequential impact on potential tax revenue erosion and the economy. Its findings underscore the critical role of legal foundations in addressing the issue of IFFs, including the importance of transfer pricing rules in preventing trade mispricing. Based on these findings, this study encourages less economically developed, tax-revenue-reliant nations like Lao PDR to continue developing a transparent legal system, improve current trade databases, and enhance cooperation with international bodies. This study also suggests such countries explore alternative methods, such as simplified approaches, of estimating tax liabilities and curbing trade mispricing.

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1. Introduction

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1The Association of Southeast Asian Nations (ASEAN) is one of the fastest growing collective economies in the world. With an average GDP growth rate of 8.6 per cent for the period 2013–2021 and a total GDP of USD 3.3 trillion in 2021, ASEAN has become the fifth largest economy in the world and the third largest in Asia (World Economics, 2024). Despite being hit by a global economic recession caused by the COVID-19 pandemic during 2020–2022, ASEAN remains an attractive destination for foreign direct investment. Member States such as Singapore, Indonesia and Vietnam are attracting significant foreign investment, driven by competitive advantage, improved regulation, infrastructure and growing domestic demand. ASEAN’s inward direct foreign investment grew from USD 116 trillion in 2012 to USD 179 trillion in 2021 (The ASEAN Secretariat, 2022) and its exports have grown rapidly in recent years, accounting for almost 8 per cent1 of global exports in the same year. Such a development in international trade facilitates the promotion of production and wealth. However, many emerging nations are not fully reaping the expected benefits of this process due to the phenomenon of trade-related illicit financial flows (IFFs), including practices of tax avoidance through which taxpayers attempt to minimise their income tax liability within the bounds of the law. For instance, multinational corporations (MNCs) may try to shift their profits from high-tax countries to low-tax countries to avoid taxation of their net income and maximise their global net profit. Given that many ASEAN Member States have attracted large inflows of export-oriented foreign direct investment—including much from MNCs—this could increase the risks of trade-related IFFs in the region. The trade-related IFFs are often expressed in terms of trade mispricing or trade misinvoicing, which is further subdivided into illicit financial outflows and illicit financial inflows. Under this concept, estimates from Global Financial Integrity (GFI) (2019) suggest that ASEAN Member States have a large average value of trade mispricing compared to the world, with 9 per cent of illicit financial inflows and 10.1 percent2 of comparable outflows as proportions of their total value in trade (GFI, 2019).

2Although trade-related IFFs have been widely studied in terms of advanced economies and the African continent, there are only a very limited number of studies on the issue for ASEAN, and in particular with regard to many of its newer Member States, such as Lao People’s Democratic Republic (PDR), Cambodia, Myanmar and Vietnam, which have relatively lower levels of socio-economic development compared to those of the founding Member States. Naya and Morgan authored one of the pioneering studies on IFFs in the ASEAN region, reaching the conclusion that trade mispricing is of a much larger magnitude among inter-Asian economies than among industrialised countries (Naya and Morgan, 1969). Another, more recent study conducted by Mehrotra, Nolintha and Sayavong provides evidence of trade mispricing, specifically in coffee and copper (Mehrotra, Nolintha and Sayavong, 2022).

3With the aim of expanding IFF-related research with regard to the region, this chapter has certain main objectives. Firstly, we look at the status of trade-related IFFs in ASEAN by examining estimates of the trade mispricing magnitudes of each ASEAN Member State seen from various dimensions, and conduct a gap analysis of the general legal frameworks that have been used to address trade-related IFFs. This helps us to understand at what stage each ASEAN Member State is in its efforts to identify and combat IFFs. Secondly, we conduct a case study of Lao PDR to better understand how a country with less effective legal frameworks via which to address IFFs could be vulnerable to tax base erosion. The case study involves estimating the trade mispricing of Laos’s exports of selected mineral and agricultural products. We also review the legal framework of Laos’s readiness to address trade-related IFFs, before providing policy recommendations regarding the short- and long-term measures that the Lao PDR government might consider implementing, including ‘simplified methods’ to tackle trade mispricing in the export of certain products.

4For our assessment of IFFs in ASEAN, we extracted estimated trade mispricing figures from a report by GFI (2019) and from a working paper by Sisouphanthong, Phimavong and Insisienmay (2022). The figures thus compiled show that there are excessive levels of IFFs in resource exporting ASEAN Member States such as Malaysia, Thailand, Vietnam and Indonesia. Other Member States show minor level of IFFs in the form of either inflows or outflows. Our legal framework review, meanwhile, reveals that the ASEAN community does not have an ‘official’ framework via which to combat IFFs and related concerns, although certain advanced Member States have already collaborated with international organisations and adhere to international tax practice guidelines. The Asian Development Bank’s Comprehensive Assessment of Tax Capacity in Southeast Asia (Chongvilaivan and Chooi, 2021) compares the readiness of ASEAN Member States to address trade-related IFFs. It does so by examining what it considers key aspects of that readiness, including the presence of effective anti-avoidance rules, regulations on thin capitalisation and controlled foreign corporations, the evaluation of harmful tax practices, the monitoring of high-net-worth individuals and professions, and how each country deals with its shadow economy. This comparison reveals uneven implementation across ASEAN. Member States with advanced levels of economic development and trade openness are more likely to possess robust legal systems that protect their tax bases; developing Member States, meanwhile, may take longer to realise the need to develop such complicated tax regulations to combat trade-related IFFs due to their limited administrative capacity. It is worthy of note that the governments of Brunei and Singapore possess substantial non-tax revenue streams, including in the form of earnings from the sale of oil, minerals and property, and of investment income. This unique financial landscape significantly reduces these economies’ dependence on tax revenues to. sustain government programmes and services. The availability of substantial non-tax revenues allows these nations to fund public initiatives and services while reducing the conventional burden on taxpayers.

5For the case study of Laos—a developing country with abundant natural resources but less effective legal frameworks for tackling IFFs—we estimate the magnitude of trade mispricing in mineral exports, in the form of gold and copper, and agricultural products, in the form of coffee and rubber, using a price filter methodology that incorporates transaction-level data pertaining to a specific commodity originating from a single country. The estimation results show that the mispricing amount for gold and copper exports for the time period 2012–2017 was USD 396.6 million, with an annual average overvaluation of USD 43.7 million and undervaluation of USD 22.4 million. In the case of coffee and rubber, the mispricing figure was USD 522.3 million, with an annual average overvaluation of USD 12.4 million and undervaluation of USD 68.5 million between 2014 and 2020. It is worth noting that the total value of goods traded by Lao PDR in 2017 was almost USD 10 billion (The ASEAN Secretariat, 2022); overvaluation and undervaluation of these four commodities alone account for an annual average of USD 147 million, or 1.47 per cent of the country’s total value of goods traded in that year. The results of our legal framework review show that compared to other ASEAN Member States Lao PDR still has no concrete legal foundations for assisting the tax authority and relevant line agencies in their efforts to ensure efficient tax collection, including tax collection from exporters and importers of goods and services.

6In general, the study upon which this chapter is based provides evidence that without a proper legal framework, ASEAN Member States, and especially those that do not have sources of revenue other than tax revenue, are likely to suffer from moderate tax revenue loss. Without a transparent legal system to address the tax obligations of taxpayers in a more complicated trade environment, Lao PDR is vulnerable to tax base erosion.

7Given that many developing countries have numerous constrains on their ability to construct a complex regulatory framework aligned with international standards for tackling IFFs, the adoption of transfer pricing rules as a practical measure to address tax avoidance still plays a vital role. Our study provides policy recommendations, including the building of a trade database and expanding cooperation with international bodies, and suggests certain alternatives, such as ‘simplified methods’ that a tax authority can apply to estimate the tax obligation of exporters by using a reference price from an open source such as an international trade market to determine whether declared prices are reasonable. In sum, it is hoped that this comprehensive examination will contribute to a better understanding of trade-related IFFs in ASEAN, and provide valuable insights for policymakers, academics and practitioners involved in economic development and financial regulation.

2. Trade Mispricing Values in ASEAN

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8Table 3.1 presents figures on 2015 trade mispricing in ASEAN nations. Illicit financial outflows are defined as the sum of export underpricing and import overpricing. Conversely, illicit financial inflows are defined as the sum of export overpricing and import underpricing. The figures show trade mispricing calculated using the International Monetary Fund’s Direction of Trade Statistics database and the United Nations’ Comtrade database.3

9Malaysia has the greatest levels of trade mispricing in the ASEAN region—as shown by its illegal financial inflows of USD 16,122,400,000 and outflows of USD 22,889,400,000—followed by Thailand, Indonesia and Vietnam. Lao PDR, Brunei and Myanmar have the lowest values of inflows and outflows. With the exception of Malaysia, Thailand and Myanmar, all nations have a greater inflows relative to outflows.

Table 3.1 Trade mispricing in ASEAN countries, 2015 (USD millions).

Export

Import

 

Under

pricing

Over

pricing

Under

pricing

Over

pricing

Inflow

Outflow

Brunei Darussalam

74.5

273.9

152.6

95.7

426.5

170.2

Cambodia

448.9

545.6

177.5

229.7

723.1

678.6

Indonesia

6,106.0

5,011.0

5,070.4

3,474.4

10,081.5

9,580.4

Lao PDR

33.1

16.0

26.4

7.2

42.4

40.2

Malaysia

18,247.0

5,302.5

10,819.9

4,642.4

16,122.4

22,889.4

Myanmar

143.2

111.3

142.7

235.9

253.9

379.1

Philippines

1,899.2

2,072.2

4,170.3

2,688.6

6,242.6

4,587.8

Thailand

8,726.7

6,380.8

6,587.8

7,224.5

12,968.6

15,951.2

Vietnam

6,626.2

6,010.0

3,645.9

2,519.5

9,655.9

9,145.7

Source: GFI (2019).

10The values of outflows and inflows as proportions of overall trade volume are shown in Figure 3.1. The average proportions for inflows and for outflows are 8.8 per cent and 8.9 per cent, respectively. Across nations, inflows vary between 6.6 per cent and 14.3 per cent, whereas outflows range from 3.1 per cent to 13.3 per cent. Malaysia exhibits the biggest figure for outflows, at 13.3 per cent of overall trade volume. The Philippines, meanwhile, exhibits the biggest figure for inflows, at 14.3 per cent of total trade volume. Certain nations, like Lao PDR and Cambodia, have a low incidence of trade mispricing; However, the proportion of trade mispricing is not significantly different.

Figure 3.1 Financial flows as proportions of trade volumes in ASEAN countries.

Figure 3.1 Financial flows as proportions of trade volumes in ASEAN countries.

Source: the authors, based on GFI (2019).

11The levels and proportions of trade overpricing and underpricing differ notably between ASEAN countries and developing countries (excluding ASEAN) as shown in Figures 3.2 and 3.3, ASEAN countries exhibiting a comparatively larger average value of trade mispricing. In terms of exports, ASEAN exhibits slightly higher average overpricing, at USD 2,858,100,000, than do developing countries, at USD 2,752,500,000. When it comes to underpricing, however, ASEAN demonstrates a much larger average, of USD 4,700,500,000, than do developing countries, at USD 2,330,800,000—a twofold difference. ASEAN nations exhibit a greater prevalence of both overpricing and underpricing in the context of imports, with average import overpricing of USD 2,324,600,000, which is 1.4 times greater than the value of the developing countries. They also experience import underpricing amounting to USD 3,421,700,000—1.7 times the value of developing countries

Figure 3.2 Trade mispricing in developing and ASEAN countries (USD millions).

Figure 3.2 Trade mispricing in developing and ASEAN countries (USD millions).

Source: the authors, based on GFI (2019).

12As we see from Figure 3.3, ASEAN countries’ figure for inflows as a proportion of total trade, at 9.0 per cent, is slightly lower than that for the developing countries, at 9.7 per cent. In contrast, we see that ASEAN exhibits a notably greater figure for outflows as a proportion of overall trade, at 10.1 per cent, than does the developing countries, at 8.2 per cent.

Figure 3.3 Financial flows as proportions of trade volume in developing and ASEAN countries.

Figure 3.3 Financial flows as proportions of trade volume in developing and ASEAN countries.

Source: the authors, based on GFI (2019).

13GFI (2019) states that trade misinvoicing activities pose a global challenge for customs and tax authorities around the world, particularly in developing countries. Not only does trade misinvoicing result in the loss of billions of dollars in uncollected trade-related tax revenues each year, it also facilitates trade mispricing throughout the global economy (GFI, 2019). Many ASEAN Member States inevitably need to review their current regulatory frameworks to tackle this problem.

3. Laws and Regulatory Frameworks Combating IFFs in ASEAN

3.1. The General Legal Environment for Addressing Trade-Related IFFs in ASEAN

14The ASEAN community has not yet developed an official framework for combating IFFs and their subcomponents. Cooperation with international organisations and endorsement of compliance with international tax practice guidelines are, however, observed in some advanced Member States. Many ASEAN Member States have made efforts to, and some advanced Member States have even been able to, achieve administrative and legal development milestones with regard to combating IFFs, particularly those related to commercial IFFs. These efforts include states’ decision to comply with the international multilateral exchange of information in tax matters related to international trade, and some states have also strengthened their legal basis for curbing tax-motivated IFFs.

15Our study draws on Chongvilaivan and Chooi’s Asian Development Bank study, A Comprehensive Assessment of Tax Capacity in Southeast Asia (2021), to establish the current status of each ASEAN Member State with regard to its readiness and potential to curb trade-related IFFs. This readiness and potential are expressed by (i) the existence of effective anti-avoidance rules that are in line with international practice; (ii) the existence of thin capitalisation and controlled foreign corporation rules (businesses may be inclined to understate their taxable profits in order to avoid being taxed); (iii) the existence of harmful tax practices, where the focus is on assessing whether a targeted regime may facilitate based erosion and profit shifting, and thus have the potential to unfairly affect the tax base of other jurisdictions; (iv) the presence of a focus on high-net-worth individuals (HNWIs) and ‘professions’ with the aim of monitoring the lawful income sources of such individuals and businesses in order to ensure their compliance with existing tax regulations and rules; and (v) the existence of regulations for dealing with the activities of the shadow economy, which can affect the efficiency of VAT collection and means that better tools and systems are needed if the government is to better manage unreported transactions and identify unregistered businesses.

16Table 3.2 provides a summary of the status of the legal framework. It should be noted that as there is only very limited information available regarding Myanmar, discussion of IFFs in Myanmar is excluded from this section. This summary shows us that ASEAN has uneven levels of implementation in the development of legal frameworks to combat tax avoidance and evasion, and that this unevenness is caused by variations in trade volumes and trade openness. Not all Member States have fully developed legal frameworks that could address even the most common tax avoidance and evasion practices in the region. This may be due to some Member States having access to significant non-tax revenues. For instance, Brunei and Indonesia rely heavily on oil and natural gas exports. Lao PDR, meanwhile, draws significant revenue from hydro power generation and the mining sector. It is clear, however, that those states with relatively advanced levels of economic development and trade openness are more likely to ensure that their tax base is better protected by appropriate legal systems.

17There follows a brief summary of the implementation status of Member States with respect to various measures to combat tax-related IFFs:

  • In terms of effective anti-avoidance rules, Member States with relatively advanced economic development, including most of the founding members—namely, Malaysia, the Philippines, Thailand and Singapore—have at least adopted transfer pricing rules, and some, Indonesia being an exception, also have effective anti-avoidance rules. Certain later arrivals, including Vietnam, also have both general anti-avoidance rules and transfer pricing rules.

  • As regards thin capitalisation and the controlled foreign company rule, most Member States do not have formal rules, but rather use various measures to detect the understatement of taxable profits by taxpayers.

  • On the identification of harmful tax practices, and based on the report of the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices (OECD, 2019), with the exception of the Philippines all Member States are reported to have no harmful tax practices.

  • On monitoring the legitimacy of the source of income of HNWIs and professions, among all Member States only Indonesia has regulations to monitor wealthy nationals, and these were launched in 2019 as part of the country’s medium-term revenue strategy.

  • In terms of regulations to address the informal/shadow economy, each Member State uses a variety of regulations and incentives to encourage business registration in informal sectors. Only Singapore and Vietnam perform relatively well, having the smallest shadow economies as a percentage of GDP among all Member States.

Table 3.2 The development of legal frameworks for countering tax avoidance and tax evasion across ASEAN Member States in 2019.

Table 3.2 The development of legal frameworks for countering tax avoidance and tax evasion across ASEAN Member States in 2019.

Source: the authors, drawing from Chongvilaivan and Chooi (2021).

3.2 The Implementation of Transfer Pricing Rules in ASEAN

18Transfer pricing refers to the pricing of goods, services and intangibles traded between related parties such as a parent company and its subsidiaries. Transfer pricing rules are regulations put in place by tax authorities to ensure that transactions between related parties are conducted according to arm’s-length rules, or, at a market value as though the parties were unrelated. These rules are important for preventing trade mispricing, which occurs when MNCs manipulate prices by setting the transfer prices for their intra-company transactions at lower levels than the prices charged for similar transactions between unrelated parties, the aim being to shift profits from high-tax jurisdictions to low-tax jurisdictions or to avoid paying taxes altogether. By setting the prices for goods or services exchanged between different parts of their global operations, MNCs can manipulate their profit levels and avoid paying taxes in countries in which they operate (United Nations, 2021). In order to prevent MNCs from intentionally shifting profits to lower-tax jurisdictions and thereby avoiding taxes in the higher-tax jurisdictions in which their business is actually conducted, which is done with the aim of maximising the aggregate profits of their parent or controlling company, transfer pricing rules are implemented. Thus, these rules are an important tool in the battle to protect the revenue collection activities of exporting countries and to ensure that MNCs pay their fair share of taxes (United Nations, 2021).

19A growing number of ASEAN Member States have begun to implement transfer pricing rules, although currently such rules’ adoption varies across states, with some countries having more established frameworks than others (see the summary in Table 3.3). According to various reports on the current tax regime status of ASEAN Member States, published by leading international auditors such as KPMG (2023), Ernst & Young (2014), Deloitte (2020a and 2020b) and Grant Thornton (2022a and 2022b), nine of ASEAN’s ten Member States—Brunei, Cambodia, Indonesia, Malaysia, Myanma, the Philippines, Singapore, Thailand and Vietnam—have transfer pricing regulations. Six of these—Indonesia, Singapore, Malaysia, Thailand, Vietnam and Brunei—are members of the Base Erosion and Profit Shifting (BEPS) Inclusive Framework initiative of the OECD and the G20, which was launched in an effort to solve non-taxation issues related to multinational enterprises (MNEs). The measures introduced in BEPS include the following: Action 5, Countering Harmful Tax Practices; Action 6, Preventing Treaty Abuse; Action 13, Transfer Pricing Documentation; and Action 14, Enhancing Dispute Resolution (OECD, n.d.). There is a trend toward the adoption of these rules as countries seek to protect their tax bases. MNEs contribute to domestic economies, but are still expected to pay their fair share of taxes.

Table 3.3 A summary of the transfer pricing rules establishment in ASEAN.

Brunei:

Brunei has concluded around ten income tax treaties that contain an article that resembles Article 9 (Associated Enterprises) of OECD Model Tax Convention (Ernst & Young, 2014). There are no local transfer pricing regulations in Brunei (Deloitte, 2020b).

Cambodia:

The earliest transfer pricing rules are the Prakas No. 986/MEF effective from October 2017 governing transfer pricing compliance requirements. Instruction No. 11946 released in August 2018 specifically requires taxpayers to apply the arm’s-length principle in setting interest rates on related-party loans. Intra-group interest-free loans will likely be challenged under the new regime (Deloitte, 2020a).

Indonesia:

Regulation No. 213/PMK.03/2016 regulates the application of the BEPS Action 13, under which both Master File and Local Files are required to be made available no later than four (4) months after the fiscal year and are to be submitted upon request within a very short time frame of seven (7) days (PWC, 2017).

Malaysia:

The Transfer Pricing Rules 2023 are active for the year of assessment 2023 and the subsequent year of assessment. It is believed that the newly published rules will significantly enhance and strengthen the position of Malaysia’s revenue collection authority on transfer pricing enforcement (KPMG, 2023).

Philippines:

The transfer pricing regulations are largely based on the OECD Guidelines and refer to them for further guidance and examples. The country initially published its first Transfer Pricing Guidelines in January 2013 followed by the issuance of Transfer Pricing Audit Guidelines in 2019 (Grant Thornton, 2022a).

Singapore:

The country has mandatory transfer pricing documentation requirements apply for companies which include the introduction of country-by-country reporting requirement. Penalties are imposed for noncompliance as under the Income Tax (Transfer Pricing Documentation) Rules 2018 and Transfer Pricing Guidelines published in February 2018, a general fine of SGD [Singapore dollar] 10,000 for non-compliance and an additional 5 per cent surcharge on any transfer pricing adjustments made during an audit or review have been introduced (Deloitte, 2020b).

Thailand:

The Transfer Pricing Act was announced in September 2018 and came into force with effect from 1 January 2019. It Requires taxpayer to report related party transactions in a report which request the disclosure of information on the relationship between entities and the inter-company transaction values (Deloitte, 2020b). The documentation is to be prepared in a specified format and submitted to the tax authorities within one hundred fifty (150) days from the financial year-end (Deloitte, 2020b).

Vietnam:

The first Transfer pricing rules were introduced in 2005 through the Circular 117/2005/TT-BTC , In 2020 Vietnam’s tax authority issued Decree No. 132/2020/ND-CP that stipulate principles, methods, process and procedures for determines prices of related-party transactions. The transfer pricing rules apply to Vietnamese taxpayer and Vietnamese branches of foreign companies (Grant Thornton, 2022b).

Sources: see in the table; Banchongphanith (2024).

20From Table 3.3, we notice that not all ASEAN Member States are reaching the same level in terms of transfer pricing rule development given their different stages of socio-economic development. For those who have already started to develop legal frameworks for implementing transfer pricing rules, trade volumes, the nature of exports and imports and even their major trade partners all play an important role, significantly influencing each Member State’s decision as to the scope of suitable transfer pricing rule frameworks. Those who have the incentive of significant trade values with OECD countries are more likely to have initiated or even developed certain levels of legal frameworks for implementing transfer pricing rules in order to expand their taxation base, particularly if MNEs reside in the country.

4. Production of Extractive and Agricultural Commodities in Lao PDR: Measuring Export Mispricing

4.1. The Extractive and Agricultural Sectors

4.1.1 Gold and Copper

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21A total of 12 gold mining companies working in the country in 2021, many of which have attracted major levels of foreign investment (see Sisouphanthong, Phimavong and Insisienmay, 2022). These companies collectively control 34,056 hectares (ha) of concession land spread over ten districts. Several businesses export their gold production to the international market. According to the findings of our key informant interviews,4, the density of gold ore ranges from 6 g/t (grams per ton) to 20 g/t. The exportation of gold mostly takes the form of doré bars, which are semi-pure alloys of gold and silver. The ratio of gold to silver in these bars ranges from 50:50 to 80:20. Additionally, gold concentrate is also included in the exportation process. The primary export markets are China, Australia, Japan, India and Vietnam. Between 2003 and the first half of 2021, the 12 gold mining firms collectively extracted over 3.2 million ounces of gold. Of this amount, around 3.19 million ounces were exported, for a monetary value of USD 15.4 billion. The pricing of exported doré bars is determined by the London Metal Exchange (LME). These prices are contingent on the proportion of gold in the bars and are established via agreements between exporters and their international customers. The value of gold exported from Lao PDR has seen fluctuations due to the oscillation in gold prices in international markets and to variations in the gold production capacity of the country. Total exports of gold have increased, from around USD 138 million in 2014 to USD 457 million in 2020 (see Sisouphanthong, Phimavong and Insisienmay, 2022).

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22Copper is one of the primary export commodities in Laos and a significant generator of government income. Laos primarily produces and sells copper concentrates and cathodes. During the period from 2010–2017, the yearly production of copper cathodes remained relatively constant at around 64,000 tons. The annual output of copper concentrates, meanwhile, rose slightly, from 298,700 tons to 398,800 tons in the same time frame5. In a similar time frame Laos’s copper export figures rose notably, from USD 886 million in 2012 to USD 1,183 million in 2018. This growth in value accounted for roughly 90 per cent of total mineral exports from the country in this time frame. According to the Department of Export and Import, in 2018 Thailand, China, Vietnam, the Republic of Korea and Malaysia were identified as the primary export markets for Lao copper.

4.1.2 Rubber and Coffee

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23There was a significant increase in both coffee production and the area harvested between 2010 and 2017. The latter increased from 50.6 thousand ha in 2010 to 93.3 thousand ha in 2017; the former from 46,300 tons to 150,800 tons in the same time period6. Laos produces and exports two types of coffee: robusta and arabica. The proportion of arabica in the country’s coffee exports increased from 19 per cent in 2006 to 67 per cent in 2017 (Phimmavong et al., 2022). A substantial portion of Laos’s coffee exports are in the form of unroasted, green coffee beans, which are subsequently roasted in other countries, and accounted for more than 90 per cent of total exports in 2017. There are several stakeholders of various sizes in the Lao coffee industry, including numerous producer collectives. The list of the largest planters is comprised of international corporations, with the exception of a single domestic enterprise.

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24The Lao rubber industry has seen significant growth in the last few decades. In 2021, 294,123 ha were under cultivation, comprising 131,610 ha designated as concession land, 59,758 ha allocated for contract farming, and 102,755 ha designated for smallholder cultivation. Annual rubber output grew significantly and rapidly, from 50,000 tons in 2014 to 300,000 tons in 2020. The rubber is almost exclusively shipped to China and Vietnam, with around 70 per cent of all rubber production going to the former and around 30 per cent going to the latter. The value of these exports has also increased notably, growing from around USD 11 million in 2012 to around USD 50 million in 2014. There followed further surges in export values, which reached USD 153.4 million in 20177 and USD 230 million in 2020. The determination of rubber pricing in domestic rubber markets is contingent upon agreements reached between farmers and intermediaries (see Sisouphanthong, Phimavong and Insisienmay, 2022).

4.2 Measuring Export Mispricing in Lao PDR

25Sisouphanthong, Phimavong and Insisienmay (2022) and Mehrotra, Nolintha and Sayavong (2022) present findings on the mispricing value associated with extractive and agricultural exports in Lao PDR. The researchers use the price filter methodology, which utilises transaction-level data pertaining to a specific commodity originating from a single nation. The methodology involves comparing the declared unit price of a certain commodity to the arm’s-length contemporaneous free-market price in the same period. The unit price is calculated from an export value divided by an export quantity, and the arm’s-length contemporaneous free-market price could be plus–minus reasonable filter conditions such as quality of product, exportation cost, or logistics cost.

26Export mispricing involves overvaluation when the declared price is higher than the higher length of the contemporaneous free-market price, as shown in Equation (1), and undervaluation when the declared price is lower than the lower length of the contemporaneous free-market price, as shown in Equation (2).

27Overvalue = q*max(0, p – ph); (1)

28Undervalue = q*max(0, pl – p); (2)

29Where q is the export volume, p is the declared price, and ph and pl are the higher and lower length of the contemporaneous free-market price, respectively.

30The data is sourced from the Lao Customs Department, which falls under the purview of the Ministry of Finance. Commodities are classified and distinguished using an 8-digit Harmonized System code. The calculation of mispricing for gold spans from 2013 to 2020, for copper cathodes from 2012 to 2017, for rubber from 2014 to 2020, and for coffee from 2012 to 2017.

4.2.1 Export Mispricing of Extractive Commodities

31Table 3.4 presents the anticipated value of export mispricing pertaining to gold and copper for the period 2012–2020. The anticipated values of gold exports between 2014 and 2020 are USD 5.1 million for exports that are overvalued and USD 106.5 million for exports that are undervalued. The data indicates that the aggregate value of export mispricing is estimated to be USD 111.6 million. The yearly aveareg export overvaluation amounts to USD 0.7 million, while the figure for undervaluation is USD 15.2 million. According to the data collected for 2012 to 2017, the entire overvaluation of copper amounts to USD 262.2 million, while the total undervaluation is estimated to be USD 134.4 million. Aggregate mispricing amounts to USD 396.6 million, with an annual average overvaluation of USD 43.7 million and an undervaluation of USD 22.4 million.

Table 3.4 Export mispricing of extractive commodities (USD millions).

Gold

Copper

Year

Export

Over-

valued

Under-

valued

Export

Over-

valued

Under-

valued

2012

734

0.07

3.6

2013

678.8

0.34

0.88

2014

138

0.6

8.2

965

23.2

103.16

2015

152.3

0.2

5.5

763

40.54

10.48

2016

130

1.3

5.8

754

145

2.5

2017

161.9

2.5

8.6

893

53

13.79

2018

142

0

6.1

2019

187.4

0.2

4.8

2020

457.1

0.3

67.6

Average

195.5

0.7

15.2

798.0

43.7

22.4

Total

1,564.2

5.1

106.6

 4,788.0

262.2

134.4

Source: the authors, summarised from the results of Sisouphanthong, Phimavong and Insisienmay (2022) and Mehrotra, Nolintha and Sayavong (2022).

32Figure 3.4 displays export mispricing as a proportion of overall volumes of exports. The proportion of gold exports that are overvalued is a mere 0.3 per cent, but the figure for exports that are undervalued is far higher, at 6.8 per cent. For copper, the proportion of exports that are considered overvalued is 5.5 per cent, while the proportion of exports that are considered undervalued is 2.8 per cent. We observe that the degree of undervaluation in gold is much higher than the degree of overvaluation. In copper, meanwhile, the degree of undervaluation is lower than the degree of overvaluation.

Figure 3.4 Export mispricing as a proportion of total exports of extractive commodities.

Figure 3.4 Export mispricing as a proportion of total exports of extractive commodities.

Source: the authors, summarised from the results of Sisouphanthong, Phimavong and Insisienmay (2022) and Mehrotra, Nolintha and Sayavong (2022).

4.2.2 Export Mispricing of Agricultural Commodities

33The phenomenon of export mispricing has also been observed in the case of coffee and rubber. Table 3.5 presents the anticipated value of export mispricing pertaining to coffee and rubber for the period 2012–2020. The coffee export sector sees a total overvaluation of USD 2.2 million and an undervaluation of USD 260 million, resulting in cumulative mispricing of USD 262.2 million. Yearly average overvaluation amounts to USD 0.3 million, while average undervaluation is USD 43.4 million. Rubber is overvalued to the tune of USD 84.5 million and undervalued to the tune of USD 175.6 million for the period 2014–2020. Annual average overvaluation is USD 12.1 million; the figure for undervaluation is USD 25.1 million.

Table 3.5 Export mispricing of agricultural commodities (USD millions).

Coffee

Rubber

Year

Export

Over-

valued

Under-

valued

Export

Over-

valued

Under-

valued

2012

50

0.8

6.7

2013

68

0.6

9.1

2014

61

0.1

27.3

35.2

2.1

4.5

2015

52

0.1

196.0

54.3

8.3

6.7

2016

32

0.1

11.0

77.7

3.9

13.2

2017

75

0.5

10.4

89.8

10.9

30.0

2018

169.4

28.1

13.1

2019

248.5

18.7

35.0

2020

628.4

12.5

73.1

Average

56

0.3

43.4

186.2

12.1

25.1

Total

338

2.2

260

1,489.3

84.5

175.6

Source: the authors, summarised from the results of Sisouphanthong, Phimavong and Insisienmay (2022) and Mehrotra, Nolintha and Sayavong (2022).

34Figure 3.5 displays export mispricing as a proportion of the overall exports of agricultural goods. The proportion of overvalued coffee exports is minimal, accounting for just 0.7 per cent of the overall figure, while the proportion of undervalued exports is far higher, at 76.9 per cent. There is more undervaluation than overvaluation of rubber, but the difference appears minimal, with 5.7 per cent of exports deemed overvalued and 11.8 per cent considered undervalued.

Figure 3.5 Export mispricing as a proportion of total exports of agricultural commodities.

Figure 3.5 Export mispricing as a proportion of total exports of agricultural commodities.

Source: the authors, summarised from the results of Sisouphanthong, Phimavong and Insisienmay (2022) and Mehrotra, Nolintha and Sayavong (2022).

5. Legal Infrastructure in Lao PDR and Policy Recommendations for Addressing Trade-Related IFFs

5.1 Legal Infrastructure for Addressing Trade-Related IFFs in Lao PDR

35Norasing, Musselli and Bürgi Bonanomi (2020) mentioned that trade mispricing is a multidimensional problem and that combating it requires collaborative efforts involving customs enforcement, corporate accounting, tax calculation methods and anti-corruption and anti-money laundering (AML) regulation. Hence, combating mispricing or trade-related IFFs calls for consistency across various laws, including customs law, tax law, company law, anti-corruption law and AML regimes. These authors suggest that the challenge is to disentangle this complex thread of laws and regulations, by assessing overlaps and loopholes. Their study establishes the foundation for an initial legal framework review, which seeks to define gaps in efforts to address trade-related financial flows by scrutinising the laws and regulations that are considered relevant to measures to address commodity trade mispricing. The laws and regulations reviewed with respect to Lao PDR are summarised in Table 3.6.

Table 3.6 Lao PDR laws and regulations relevant to efforts to combat mispricing (1 of 2).

Name of law

References

1. Law on Tax (amended in 2019)

(The Government of Lao PDR, 2019c)

2. Law on Income Tax (amended in 2019)

(The Government of Lao PDR, 2019b)

3. Law on Excise Tax (amended in 2019)

(The Government of Lao PDR, 2019a)

4. Law on Value Added Tax (amended in 2018)

(The Government of Lao PDR, 2018c)

5. Law on Customs (amended in 2011)

(The Government of Lao PDR, 2011)

Law on Accounting (amended in 2019)

(The Government of Lao PDR, 2013)

7. Law on Commercial Banks (amended in 2018)

(The Government of Lao PDR, 2018a)

8. Law on Anti-money Laundering

and Counter-Financing of Terrorism (amended in 2014)

(The Government of Lao PDR, 2014)

9. Presidential Ordinance on Fees

and Charges for Services (amended in 2012)

(The Government of Lao PDR, 2012)

10. Law on Investment Promotion (amended in 2016)

(The Government of Lao PDR, 2016)

11. Law Economic Dispute Resolution (amended in 2018)

(The Government of Lao PDR, 2018b)

Sources: Ministry of Justice of Lao PDR, Lao Official Gazette, various dates.

36These authors’ findings suggest that Lao PDR generally has a basic legal framework in place to address trade mispricing, but that the government needs to further improve the legal infrastructure to ensure that laws and regulations are effective. Areas requiring improvement include guidance with regard to the detection of mispricing/misinvoicing practices and to proving that declared prices are distorted or that profits have been diverted. The tax authority also needs more detailed rules and procedures to enable the effective adjustment of transaction prices to tackle mispricing/misinvoicing. It is worth mentioning that these authors’ study states that the then amended Customs Law provides the basis for the valuation of export prices and prohibits and sanctions trade mispricing by prohibiting customs officers and declarants from falsifying customs documents and mis-declaring the information therein. Unfortunately, the Tax Law, amended in 2019, neither regulates or legalizes a formal term and definition for trade mispricing practices as it did not regulate transfer mispricing. It neither embodied the ‘arm’s-length principle’ with regard to assessing transactions between associated enterprises nor specified any alternative method to assess and adjust ‘related-party’ profits.

37This was also later confirmed by Mehrotra, Nolintha and Sayavong’s (2022) study of trade mispricing evidence for mining products and agricultural products. In this paper, the authors further review some of the above-mentioned laws and their recent amendments, alongside other regulations that are not covered by Norasing, Musselli and Bürgi Bonanomi (2020), which are listed in Table 3.7. In this way they were able to capture some notable progress made by the government, which could contribute to efforts to protect the country’s tax base from trade-related illicit financial-like transaction practices.

Table 3.7 Lao PDR laws and regulations relevant to efforts to combat mispricing (2 of 2).

Name of law

References

1. Law on Tax (amended in 2023)

(The Government of Lao PDR, 2023a)

2. Law on Customs (amended in 2020)

(The Government of Lao PDR, 2020b)

3. Instruction on Implementing the Law on Customs

(The Government of Lao PDR, 2021)

4. Presidential Ordinance on Natural Resources Fees

(The Government of Lao PDR, 2023b)

5. Decree on Responsibilities Against Money Laundering and Terrorism Financing

(The Government of Lao PDR, 2020a)

Sources: Ministry of Justice of Lao PDR, Lao Official Gazette, various dates.

38The recent amendments to Lao PDR’s Law on Customs and its Implementation Instructions signify a proactive approach to addressing trade-related IFFs. The key provisions include:

  • Data facilitation. The amendments emphasise legal and internationally standardised data and information, promoting transparency in customs operations.

  • Modern customs database. The establishment of a modern, transparent, auditable customs database enhances efficiency and accountability in customs operations, aligning with global best practices.

  • Citizen involvement. Encouraging citizens to report illegal tax evasion or avoidance practices fosters public cooperation, adding an extra layer of vigilance and compliance.

  • International collaboration. The exchange of customs information, technology, training, and tax authority capacity building and measures to enhance participation in tax- and customs-related international treaties demonstrate a commitment to global cooperation.

  • Guidelines for document inspections. Implementation Instructions offer simple guidelines for tax authorities conducting document and goods inspections of exporters or importers, streamlining compliance processes.

39The recent Presidential Decree on Natural Resource Fees (The Government of Lao PDR, 2023b) lists the percentages of resource royalties or fees that extractive companies should pay to the government. This list includes resources such as minerals, forest products, soil, sand and rock, and natural resources used in hydropower projects. The Decree also provides guidelines for the calculation of natural resource royalties. It is worth mentioning that it clearly stipulates that exporters should use reference prices from international, regional, or even local markets to calculate royalties due on mineral products such as gold and copper. This is probably one of the reasons the estimated export mispricing values for gold and copper are much lower than those for coffee and rubber, as there are no precise guidelines yet for agricultural exports.

40Further progress paving the way to measures to combat trade-related IFFs has been made in the areas of AML and anti-terrorist financing laws and regulations. The most recent regulation in this area is the Decree on Responsibilities Against Money Laundering and Terrorism Financing (The Government of Lao PDR, 2020a). This Decree stipulates that 15 key central agencies—including some ministries and bodies considered to be directly involved in curbing trade-related IFFs, such as the central bank, the Ministry of Industry and Commerce, the Ministry of Planning and Investment, the Ministry of Foreign Affairs, the Ministry of Justice, the Ministry of Natural Resources and Environment, the Ministry of Finance, the Ministry of Energy and Mines, the Ministry of Agriculture and Forestry and the Ministry of Public Security—shall cooperate, share information and data on investors and their major shareholders and funding sources, and issue necessary laws and regulations for combating money laundering and terrorist financing.

41Despite these advances, notable gaps persist: 1) specific guidelines or manuals to enable tax authorities to inspect trade information through data exchange with international organisations, especially concerning transactions involving MNEs and their affiliates overseas, are lacking; 2) there is still no precise legal definition of trade-related IFFs in the above-mentioned amended and newly promulgated laws to ensure coverage and impose specific legal action against movements resulting from tax evasion and tax avoidance; 3) the fact that ASEAN is a major trading partner of Lao PDR and that Laos’s major commodity exports are dominated by foreign investors, as mentioned in Section 4, highlights the importance of Laos considering introducing transfer pricing rules into its domestic legal framework, as other ASEAN Member States have done. This is vital for minimising, up front, the revenue loss that cross-agency collaboration in laws and regulations between line government agencies is attempting to recover.

5.2 Policy Suggestions for Addressing Trade-Related IFFs in the Short and the Long Run

5.2.1 Adoption of ‘Simplified Methods’ of Addressing Trade Mispricing as Part of the Short-Term Strategy

42Like many developing countries, Lao PDR is encountering numerous challenges as it seeks to address IFFs, including trade mispricing and the difficulty of implementing transfer pricing rules. Firstly, crafting comprehensive laws and regulations to combat such flows is a complex task that takes time and expertise, and the Lao government does not possess the immediate capacity to enforce existing and future legal frameworks effectively. Further, inadequate human resources and limited government budgets further hinder these efforts, and a lack of awareness among taxpayers regarding their tax obligations exacerbates the problem. Given these challenges, the government must explore alternative strategies to tackle IFFs without requiring the deployment of extensive resources in the short term.

43Many international organisations have proposed that developing countries seek international cooperation and assistance, engage in information-sharing agreements, and collaborate with organisations such as the OECD, the United Nations Office on Drugs and Crime (UNODC) and the United Nations Conference on Trade and Development (UNCTAD). In the case of resource-rich developing countries, however, Musselli and Bürgi Bonanomi (2022) proposed the use of simplified methods or formulaic, rule-based pricing methods to counter tax avoidance and harmful thin capitalisation tax practice. Their study considers one approach called ‘the sixth method’ under transfer pricing law. The sixth method authorises or requires taxpayers (when filing a tax return) and tax administrations (when auditing a taxpayer’s position) to use reference prices when determining the tax value of commodity sales, particularly in the context of related-party sales. If this policy is to be effectively implemented, there is an urgent need to develop guidelines on quality measurement and valuation for traded commodities (e.g. coffee) and assign a specific authority to certify the quality of each commodity in the country. This measure would help address the problem of trade mispricing when it is driven by the distortion of the commodity quality reported. Armed with such guidelines, customs authorities could more closely scrutinise export transactions that deviate significantly from the reference price or price range.

44Musselli and Bürgi Bonanomi’s study (2022) provides an example of the use of the reference price of copper and copper ore exports in Lao PDR, in which the Ministry of Energy and Mines (MEM) assesses copper royalties using a price formula that refers to the LME Official Price for copper to account for the hidden costs, such as transport and insurance costs, contract terms, and other adjustments, associated with export costs. For example, the MEM uses the LME reference price (the spot price on the date of calculation) multiplied by the regulated royalty rate to validate the royalty payments declared by exporters of refined copper; for copper ores and concentrates, the LME price is multiplied by the copper content (the copper content is approved by the Mining Department of the MEM) in the concentrate to validate the royalty payments declared by exporters of copper ore. Given this example, the Lao tax authority may wish to further explore more simplified methods of validating tax payments in a manner that is neither too time consuming nor beyond its current capacities.

5.2.2 Policy Suggestions as to How to Address Trade Mispricing in Long-Term Planning

45Trade mispricing is a multidimensional problem, and addressing it requires a coherent combination of laws, resolutions, decrees, ordinances, and administrative orders, as well as institutions equipped to implement such a legal framework (Norasing, Musselli and Bürgi Bonanomi, 2020). To consistently combat IFFs in the long run, Lao PDR needs to establish a legal framework that is robust and that embodies comprehensive coordination of all agencies concerned. In its efforts to establish such a framework, the government will face numerous challenges, includeing the following:

  • The domestic legal framework must enable the establishment of mechanisms for mutual information exchange with trading partner countries to address data discrepancies regarding exportation and importation of goods between Lao PDR and its trading partners.

  • Investment is needed to improve and maintain the trade, customs, and tax statistical recording practices of the customs and tax branches of the Ministry of Finance. This will require working with the private sector to establish the technological systems that will enable this data to be shared with other agencies such as the central bank, the National Statistical Office, and other relevant agencies. Such systems may include a detailed foreign trade database for all commodities at all exporting ports, containing transaction-level customs data (including on product quality (grading), transport and insurance costs, the records of importers and exporters and the final destination of the export). This would also prepare the country for participation in international data exchange protocols.

  • While the government must continue to develop the laws and regulations necessary for it to address trade-related IFFs, the enforcement of existing tax and customs laws and regulations must be strengthened. This includes training tax officials, conducting audits, and using technology to analyse data and identify potential transfer pricing issues. This will require, at least, closer cooperation between the Ministry of Finance, the Ministry of Foreign Affairs, the Ministry of Public Security and the Bank of Lao PDR.

  • Provided that Lao PDR relies heavily on its natural resource exports to generate revenue, rather than allocating its limited financial resources to all areas that require improvement it may be more realistic and reasonable to start strengthening the capacity of tax, customs and trade officials with regard to natural resource exports, price hedging, and valuation, so that the relevant authorities acquire sufficient knowledge and skills in managing the natural resource sector. This will require the involvement of the Ministry of Finance, the Ministry of Planning and Investment, the MEM, the Ministry of Agriculture and Forestry, the Ministry of Industry and Commerce, the Ministry of Foreign Affairs, the Ministry of Public Security, the Bank of Lao PDR and enterprises and foreign investors.

  • In order to prevent tax losses to low-tax jurisdictions, it is crucial to prevent the tax base erosion caused by MNEs. The government may consider studying the OECD Transfer Pricing Guidelines and exploring the possibility of establishing a simplified method specific to Lao conditions before adopting the full guidelines and thus aligning the country with international practices. This will require cooperation between, at least, the Ministry of Finance, the Ministry of Industry and Commerce, the Ministry of Foreign Affairs, the Ministry of Public Security, the Bank of Lao PDR and multinational investors.

6. Conclusions

46Trade-related IFFs pose complex challenges. Addressing them requires a comprehensive and sustained effort that mobilises multiple laws, regulations, and institutional frameworks. Focusing on ASEAN Member States, this chapter has outlined occurrences of trade mispricing and set out the existing legal framework for addressing trade-related IFFs across the bloc. Our legal framework analysis has shown that each Member State is at a different stage of development regarding the implementation of laws and regulations for curbing trade-related IFFs, and that these stages depend largely on each nation’s degree of dependence on tax revenues and on the legislative capacity of each government. In general, lessons from ASEAN Member States suggest that preventing tax base erosion is vital, as countries can use the revenue thus safeguarded in their socio-economic development and poverty reduction programmes. For Lao PDR to sustainably combat IFFs in the long run, the government should focus on following areas and foster collaboration among key stakeholders:

  • Establish a robust legal framework. Addressing trade-related-IFF issues such as trade mispricing and profit shifting by MNEs requires a domestic legal framework that enables mutual information exchange between Laos and its trading partners. The Decree on Responsibilities Against Money Laundering and Terrorism Financing is an exemplary contribution to such a framework, as it involves the coordination of 15 key agencies, including the Ministry of Finance, the Bank of Lao PDR, the Ministry of Industry and Commerce, the Ministry of Planning and Investment, the Ministry of Foreign Affairs, the Ministry of Justice, the Ministry of Natural Resources and Environment, the MEM, the Ministry of Agriculture and Forestry and the Ministry of Public Security.

  • Invest in technological infrastructure. Investment is vital to enhance the trade, customs, and tax statistical recording practices of the Lao authorities. The Ministry of Finance should collaborate with the private sector and work closely with exporters and importers to establish technological systems that support the creation and maintenance of detailed foreign trade databases that capture transaction-level customs data and other critical information. This infrastructure would not only improve current practice, it would also position the country for future participation in international data exchange protocols.

  • Strengthen enforcement mechanisms. The effective enforcement of existing tax and customs laws requires continuous development and training. Collaboration between the Ministry of Finance, Ministry of Foreign Affairs, Ministry of Public Security and the Bank of Lao PDR is essential. Such collaboration would enable audits, technology-driven data analysis, and the identification of potential tax evasion, tax avoidance, and transfer pricing, bolstering the fight against trade-related IFFs.

  • Targeted capacity building in the area of natural resource exports. Given Lao PDR’s reliance on natural resource exports for revenue, it would be pragmatic to prioritise tax authority capacity building in this sector. Strengthening the expertise of tax, customs, and trade officials with regard to natural resource exports, price hedging, and valuation is essential. Involving multiple ministries, agencies, and industry stakeholders would ensure a holistic approach to the challenges specific to the sector. Close cooperation is required between the Ministry of Finance, the MEM, the Ministry of Natural Resources and Environment, the Ministry of Industry and Commerce and the Ministry of Planning and Investment.

  • Prevent tax base erosion by MNEs. To prevent tax losses to low-tax jurisdictions, Lao PDR should explore simplified methods aligned with OECD Transfer Pricing Guidelines (OECD, 2022). Cooperation between the Ministry of Finance, Ministry of Industry and Commerce, Ministry of Foreign Affairs, Ministry of Public Security, the Bank of Lao PDR and multinational investors is crucial in this regard. Studying and adopting international best practices will fortify the country against the tax base erosion caused by MNEs.

47In addition to the above-mentioned measures, and with regard to ASEAN more generally, it is vital that those low-income Member States without proper legal frameworks urgently develop administrative capacity and relevant legal structures tailored to their priorities and adopt international best practices. They should also, however, continue diversifying their income sources and leveraging alternative revenue streams until their legal frameworks are capable of combating complex IFF practices, thus following a logical sequence of reforms.

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References

Banchongphanith, L. (2024) Lao PDR’s Transfer Pricing Challenges and Lessons from ASEAN Member States R4D-IFF Working Paper Series, R4D-IFF-WP02-2024, https://curbing-iffs.org/wp-content/uploads/2024/04/r4d-iff-wp02-2024.pdf (accessed on 16 April 2024).

Chongvilaivan, A., and A. Chooi (2021) A Comprehensive Tax Assessment of Tax Capacity in South East Asia (Manila: Asian Development Bank) https://www.adb.org/sites/default/files/publication/751846/assessment-tax-capacity-southeast-asia.pdf (accessed on 13 August 2023).

Deloitte (2020a) Global Tax Reset-Transfer Pricing Documentation Summary, (London: Deloitte), https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-global-tp-control-framework.pdf (accessed on 13 August 2023).

Deloitte (2020b) Guide to Taxation in Southeast Asia 2020 (Phnom Penh: Deloitte), https://www2.deloitte.com/sg/en/pages/tax/articles/guide-to-taxation-in-sea-2020.html (accessed on 10 August 2023).

Ernst & Young (2014) Worldwide Transfer Pricing Reference Guide 2014 (London: Ernst & Young), https://www.ey.com/en_gl/tax-guides/tax-guide-library-archive (accessed on 13 August 2023).

GFI (Global Financial Integrity) (2019) Illicit Financial Flows to and from 148 Developing Countries: 2006-2015 (Washington D.C.: GFI) https://gfintegrity.org/report/2019-iff-update/ (accessed on 12 February 2024).

Grant Thornton (2022a) Transfer Pricing-Philippines (London: Grant Thornton), https://www.grantthornton.global/en/insights/articles/transfer-pricing-guide/transfer-pricing---Philippines/ (accessed on 1 September 2023).

Grant Thornton (2022b) Transfer Pricing-Vietnam (London: Grant Thornton), https://www.grantthornton.global/en/insights/articles/transfer-pricing-guide/transfer-pricing---Vietnam/ (accessed on 1 September 2023).

KPMG (2023). Malaysia: Transfer Pricing and Advance Pricing Arrangement Rules 2023. (Amstelveen: KPMG), https://kpmg.com/us/en/home/insights/2023/06/tnf-malaysia-transfer-pricing-and-advance-pricing-arrangement-rules-2023.html (accessed on 13 August 2023).

Mehrotra, R., V. Nolintha and V. Sayavong, V (2022) 'Commodity Trade Mispricing: Evidence from Lao P.D.R.', The International Trade Journal, 37(4), pp. 1-25, DOI: 10.1080/08853908.2022.2108170

Ministry of Justice of Lao PDR (n.d.) Official Lao Gazette, https://www.laoofficialgazette.gov.la/ (The Government of Lao PDR: Vientiane) (accessed on 1 June 2023).

Musselli, I., and E. Bürgi Bonanomi (2022) 'Countering Commodity Trade Mispricing in Low-Income Countries: A Prescriptive Approach', Journal of International Economic Law, 25(3), pp. 447-463, DOI: 10.1093/jiel/jgac030

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Notes

1

Computed based on data from ASEAN Statistical Yearbook 2022 (The ASEAN Secretariat, 2022) and from the World Bank’s World Integrated Trade Solution, available at https://wits.worldbank.org/CountryProfile/en/Country/WLD/Year/2021 (accessed on 19 February 2024).

2

Computed based on data from GFI (2019) (accessed on 20 July 2023).

3

Available at https://data.imf.org and https://comtradeplus.un.org/ (accessed on 19 February 2024).

4

Sources: 1) Finance Manager, Phu Bia Mining Co. Ltd. (interviewed on October 28, 2021). 2) Khamkeut Saen Oudom Gold Mining Co. Ltd. (interviewed on October 10, 2021).3) Lane Xang Minerals Limited (LXML) (interviewed on October 26, 2021).

5

See the Lao Statistics Bureau, Ministry of Planning and Investment, Statistical Yearbooks 2011; 2012; 2013; 2014; 2015; 2016; 2017, https://laosis.lsb.gov.la/ (accessed on 11 March 2024).

6

See the Lao Statistics Bureau, Ministry of Planning and Investment, Statistical Yearbooks 2011; 2012; 2013; 2014; 2015; 2016; 2017, https://laosis.lsb.gov.la/ (accessed on 11 March 2024).

7

Trade statistics from https://www.trademap.org/ (accessed on 12 February 2024).

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List of illustrations

Title Figure 3.1 Financial flows as proportions of trade volumes in ASEAN countries.
Credits Source: the authors, based on GFI (2019).
URL http://journals.openedition.org/poldev/docannexe/image/6435/img-1.png
File image/png, 27k
Title Figure 3.2 Trade mispricing in developing and ASEAN countries (USD millions).
Credits Source: the authors, based on GFI (2019).
URL http://journals.openedition.org/poldev/docannexe/image/6435/img-2.png
File image/png, 21k
Title Figure 3.3 Financial flows as proportions of trade volume in developing and ASEAN countries.
Credits Source: the authors, based on GFI (2019).
URL http://journals.openedition.org/poldev/docannexe/image/6435/img-3.png
File image/png, 23k
Title Table 3.2 The development of legal frameworks for countering tax avoidance and tax evasion across ASEAN Member States in 2019.
Credits Source: the authors, drawing from Chongvilaivan and Chooi (2021).
URL http://journals.openedition.org/poldev/docannexe/image/6435/img-4.png
File image/png, 1.7M
Title Figure 3.4 Export mispricing as a proportion of total exports of extractive commodities.
Credits Source: the authors, summarised from the results of Sisouphanthong, Phimavong and Insisienmay (2022) and Mehrotra, Nolintha and Sayavong (2022).
URL http://journals.openedition.org/poldev/docannexe/image/6435/img-5.png
File image/png, 17k
Title Figure 3.5 Export mispricing as a proportion of total exports of agricultural commodities.
Credits Source: the authors, summarised from the results of Sisouphanthong, Phimavong and Insisienmay (2022) and Mehrotra, Nolintha and Sayavong (2022).
URL http://journals.openedition.org/poldev/docannexe/image/6435/img-6.png
File image/png, 18k
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Cite this article

Electronic reference

Viriyasack Sisouphanthong, Latdaphone Banchongphanith, Sthabandith Insisienmay and Latdavanh Songvilay, Trade-Related Illicit Financial Flows in Southeast Asia: Evidence from Extractive and Agricultural Commodities in LaosInternational Development Policy | Revue internationale de politique de développement [Online], 17 | 2024, Online since 27 May 2024, connection on 16 June 2024. URL: http://journals.openedition.org/poldev/6435; DOI: https://doi.org/10.4000/11q9a

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About the authors

Viriyasack Sisouphanthong

Viriyasack Sisouphanthong is an associate professor in Economics and his research focuses includes public finance and budgetary analysis. He is head of the Applied Economics Unit at the Faculty of Economics and Business Management at the National University of Laos, where he teaches a range of disciplines including econometrics, research methods and budgetary economics. His body of work encompasses government expenditure analysis, budgetary policy and benefit incidence analysis. He collaborates extensively with the Ministries of Finance, Health, and Education and Sports on matters pertaining to policy and budgetary concerns. He regularly acts as a consultant for international organisations, including the World Bank, Asian Development Bank, United Nations Development Programme (UNDP), European Commission and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ).

Latdaphone Banchongphanith

Latdaphone Banchongphanith is a freelance consultant with many years of experience in environmental management. She received her PhD in Development Science from the Graduate School of International Development and Cooperation, Hiroshima University, Japan in 2010. She has worked for the Lao National Mekong Committee of the Ministry of Natural Resources and Environment and on projects managed by the Mekong River Commission, the World Bank and the private sector. In September 2021 she joined the R4D project team and is responsible for research on the legal framework related to illicit financial flows in Lao PDR.

Sthabandith Insisienmay

Sthabandith Insisienmay is vice minister of the Lao PDR Ministry of Planning and Investment (MPI), where he supervises investment promotion, real estate development and research. Previously, he worked for the then MPI’s National Economic Research Institute (NERI), now the Lao Academy of Social and Economic Science. While at the NIER, he supervised and engaged in macroeconomic monitoring and forecasting and research related to enterprise development, regional connectivity, the quantitative analysis of the Lao economy and poverty dynamics. He holds a PhD in Economics from Kyoto University, Japan and a Master’s in the Economics of Development from the Australian National University. His direct research projects include the R4D project on curbing illicit financial flows from resource-rich developing countries.

Latdavanh Songvilay

Latdavanh Songvilay is director general at the Macroeconomic Research Institute of the Lao Academy of Social and Economic Sciences (LASES). She has been involved in a number of research projects on economic and social issues, including macroeconomic management, financial development, poverty reduction, economic restructuring and the development of economic indicators, as well as in an R4D project on curbing illicit financial flows from resource-rich developing countries.

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