This document outlines a proposed revenue sharing system and formula for Laos. It discusses pooling governmental revenues and apportioning them between the national and sub-national levels. Four revenue streams are identified for sharing: taxes on value-added, excise, profits, and minimum taxes as well as state-owned enterprise dividends. The objectives of the system are to correct spending imbalances, accelerate growth in poorer provinces, and incentivize efficient tax collection. The proposed formula allocates funds based on population, land area, and poverty indicators weighted at 45%, 10%, and 45% respectively. Issues that need consideration include varying own-revenue capacities across provinces and uneven international investment. The plan is to implement the shared revenue system in 2008

1. Outline of a Revenue Sharing System
and
Revenue Sharing Formula
Jean-Marc Lepain
Public Finance Specialist
Intergovernmental Fiscal Advisor
Ministry of Finance, Vientiane, Lao PDR
jlepain@yahoo.fr

2. What is a Revenue Sharing System
• A Revenue Sharing System is the process whereby
governmental incomes are pooled and subsequently
apportioned between the national and sub-national
(provinces and municipalities) level of Government.
• The Revised Budget Law identifies four streams of
revenues to be shared: Turnover or Value-added Tax,
Excise Tax, Profit Tax and Minimum Tax, Dividends
from SOEs.

3. New Structure of Provincial
Budgets
• Taxes and revenues assigned to the provinces
• Grants from shared revenues
• Grants from the Central Government Budget

4. Objectives of Revenue Sharing
• Correcting horizontal imbalance that measures disparities in
expenditure assignments and fund allocations by the central
Government across provinces;
• Accelerating economic growth in the poorest provinces by
providing additional resources;
• Providing incentive for good public finance management by
linking revenue transfer to efficient tax collection.

5. Objectives of the New Formula
• The formula should represent a fair and equitable allocation of resources
between all Government’s entities based on quantitative and objective
criteria
• The Formula should trend to correct gradually disparities between
provinces over a several year period of time.
• The formula should trend to correct development disparities between
provinces.
• The Formula should not increase significantly the budget deficit and not
reduce transfers made to any province under the previous budget law.
• The System should be both stable and flexible, excluding large year to year
variations in revenue allocation, but flexible enough to allow from time to
time small revisions without change in the formula structure.

6. Revenue Sharing Formula Structure
TSR= Total Shared Revenue
TPA = Total Provincial Appropriation
PA = Provincial Appropriation
3 budget indicators (x, y, z) representing 3 streams of
revenue (transfers based on population, land area and
poverty level)
TPA = 0.5 x TSR
Provincial Allocation = (Population Based Transfer) + (Land
Area Based Transfer) + (Poverty Based Transfer)
PA = x(TPA) + y(TPA) +z(TPA)

7. Budget Indicators
1. The Population indicator is based on the province
population compared to national population
2. The Land Area indicator is based on the province
land area compared to the national territory
3. The Poverty Transfer Ratio (p.t.r) is based on the
poverty index
PA = pop.ind.(PTA) + l.a. ind. (PTA) + p.t.r.(PTA)

8. Indicators Weight
• Population based transfers = 45%
• Land Area based transfers= 10%
• Poverty based transfers = 45%
PA = (Pop. Ind. x 45% TPA) + (LA ind. x 10% TPA)
+ (p.tr. x 45% TPA)

9. Indicators
1) Land Area:
(TSR / Total Land area)
2) Population
(TSR / Total Population)
Yearly increase : 2.24%
3) Poverty
See poverty Index

10. Human Poverty Index
The HPI is based on three components which are:
1) Longevity - measured by the proportion of the population not
expected to survive to the age of 40 years.
2) Knowledge - measured by the adult illiteracy rate.
3) Standard of living - a composite value measured by the
proportion of the population without access to clean water,
health services, and the proportion of children under the age
of 5 years who are underweight.

12. Poverty Indicator Leverage
POVERTY INDICATOR LEVERAGE
SARAVAN
Poverty Poverty Total Transfer Poverty Trans./ Total Trans./
Indicator Transfer Transfer Differencial Dom. Exp. Dom. Exp.
0,2 5 447,72 23 853,43 5,56% 24,33%
0,5 13 619,29 32 025,00 34,26% 13,89% 32,67%
9,66 26 312,47 44 719,69 87,48% 26,84% 45,61%
XIENGKHUANG
Poverty Poverty Total Transfer Poverty Trans./ Total Trans./
Indicator Transfer Transfer Differencial Dom. Exp. Dom. Exp.
0,2 5 447,72 22 942,81 4,24% 17,85%
0,5 13 619,29 31 114,38 35,62% 10,60% 24,21%
0,08 21 790,86 39 079,17 70,33% 16,95% 30,40%

13. Average Structure of Provincial
Budgets
Province Own Revenue
20%
Transfers from Shared Operating
Revenues Expenditures
25% 73%
Conditional and
Unconditional Grants
55% Domestic
Investments
23%

14. Issues to Be Taken into
Consideration
• Province Own Revenues vary from province to province from 3.3%
(Houphan) to 63% (Savannakhet) of domestic expenditures.
• 11 provinces are below the average of 20% and will need to rely heavily on
grant transfers
• International investment is an important component of provincial budgets
but is unevenly spread across the country
• Horizontal imbalance can only be corrected over a long period of time.
• In the medium term, internal migrations should be taken into
consideration
• Data on province economy must be collected systematically and their
quality improved to allow MoF to prepare realistic projections of
provincial revenues and expenditures

15. The Way Forward
• Implementing Shared Revenue system in
budget plan 2008-2009
• Implementing grant transfer policy in budget
plan 2009-2010
• Implementing macro budget norms in budget
plan 2009-2010
• Implementing sector budget norms in budget
plan 2010-2011

16. THANK YOU