The government will scrap its poorly regulated and grossly inefficient estimated-tax regime, which covers mostly small enterprises, and bring all businesses in the Kingdom into the fold of its more-stringent “real” tax regime, leaked documents show.
In an unpublished addendum to the 2016 national budget obtained by the Post, the government acknowledged that the estimated-tax regime was a resource hog, requiring 60 per cent of the state’s tax collectors to collect less than 1 per cent of its total tax revenue.
“The estimated regime is the place for tax avoidance from the real regime,” the addendum said, noting that the estimated regime contributed just 0.5 per cent of total tax income in the first nine months of 2015.
According to the addendum, a decision to abolish the estimated-tax system – the timeframe for which is yet to be announced – was taken to ensure transparency in tax management, as well as “to lighten the burden of taxation on the citizen and farmers”.
The estimated-tax regime applies only to sole proprietorships that fall below a certain threshold on revenue from the sale of goods or services, whereas businesses above that threshold and larger corporations are taxed according to the formal regime.
The real regime slots businesses into three brackets – small, medium and large taxpayers – based on their annual turnover, with the tax rate for an incorporated entity set at 20 per cent.
Clint O’Connell, a partner at local law advisory firm VDB Loi, said that even with these criteria in place there were only a small number of mostly foreign-owned businesses that were taxed according to the real regime.
He added that there was hesitancy to enter the real regime because taxpayers would have to file monthly and annual tax returns, be open to tax audits and charge value added tax (VAT), which was not required in the estimated regime.
“You could very well have two businesses side-by-side, one that is compliant [in the real regime] and another that isn’t,” he said. “And the real-regime taxpayer will be at a disadvantage because they have to charge 10 per cent VAT.”
He said given that estimated-regime taxpayers are negotiating their taxes upfront, there are little or no compliance costs for these businesses, something that real-regime businesses have to pay for.
O’Connell said the high number of tax officials being used to collect estimated-regime taxes was because these taxpayers “greatly” outnumbered those in the real regime.
“So I would imagine a fair amount of the resources of the tax department are geared solely towards the estimated-regime taxpayers,” he said.
“However, if you put a lot of resources into an area with low returns it really is an inefficient use of resources.”
Joseph Lovell, senior partner at BNG Legal, said that though perceived as unfair to compliant businesses, the estimated-tax regime was designed as a means of bringing in some tax revenue from a largely untaxed business community. However, it lacked the capacity to implement this.
“There are a lot of loopholes for people to fall through from tax enforcement,” he said.
He said reforming the system was a welcome step given that the government’s revenue generation needs have risen significantly in recent years.
“A lot of government programs are underfunded and have difficulty with the budget,” Lovell said. “So being able to fairly and efficiently implement a tax-collection system is really good economically.”
Son Chhay, chief whip of the opposition Cambodia National Rescue Party, said that while reform was welcome, the government needs to ensure implementation of the new tax system if it hopes to fulfil its lofty promises, such as increasing the salaries of government and military officials.
He added that the tax-collection system was rife with corruption and that big businesses and tycoons were getting away with paying little or no taxes.
“Some [compliant] businesses are under pressure to pay more taxes than they can afford,” Chhay said. “But, at the same time, there are rich and powerful tycoons close to the government who do not have to pay tax.”
The government collected around $1 billion in taxes for the first nine months of this year, according to state news agency AKP.