The government is conducting an audit of NagaWorld in Phnom Penh to assess its tax liabilities on non-gaming operations after finding “discrepancies” last year that prompted the first-ever government probe of the landmark casino and entertainment complex’s finances.
“The audit is ongoing and we have yet to finalise how much NagaWorld owes for their non-gaming operations,” said Ros Phirun, deputy director of the finance industry department at the Ministry of Economy and Finance (MEF). “The reason why we are doing this is because we found last year that they needed to pay more [in taxes].”
NagaCorp Ltd, the Cayman Island-registered company that owns NagaWorld, has bolstered its profits over the past 20 years on a highly favourable tax arrangement with the government.
In addition to its 41-year monopoly on gambling within a 200-kilometre radius of Phnom Penh through 2035, the company since 2003 has paid an effective tax rate of less than 2 per cent on gaming revenue, in lieu of the Kingdom’s standard 20 per cent corporate profit tax.
The casino operator has also benefitted from a special exclusion on non-gaming revenues that exempts it from the standard profit tax, withholding tax, value-added tax and tax on unmoveable assets. Instead, NagaCorp pays a lump-sum tax on Cambodian non-gaming revenue, set at a base rate of $30,500 per month back in 2002, which is reviewed annually. The payment had grown to $214,338 per month as of last year.
NagaCorp paid just $6.9 million in taxes on $327.8 million gross profit last year, having generated a record $503.7 million in revenue, according to its 2015 year-end financial statement.
The government sent NagaCorp an additional tax bill for $9.4 million after what MEF officials say was the first-ever audit of the company’s non-gaming revenue, a category that includes earnings from its 700-room NagaWorld hotel, restaurants and various other activities.
“The reason why we did the audit in 2015 was because we found some discrepancies where they needed to pay more [tax],” Phirun said, while declining to elaborate on the nature of the discrepancies.
He said the government had previously relied solely on NagaCorp’s financial reports because it lacked the “capacity” to dig into the Hong Kong-listed company’s financials.
NagaCorp, however, has a different explanation. In its 2015 annual report, it claimed the company was exempted from any additional taxes by a 2006 agreement that granted it a seven-year grace period to complete construction of its flagship multi-storey hotel in Phnom Penh. It described the $9.4 million tax payment as a “one-off” payment.
Phirun admitted the government had given NagaCorp time to fully complete all construction work on its hotel and casino complex. While he could not explain why the company had been granted an extra two-year grace period, he said going forward NagaWorld would be audited annually and subject to extra tax payments, if necessary.
“We had to wait for the completion of NagaWorld, when the building was a fully functional physical facility,” he said. “However, it is now time for NagaWorld to respect our regulations, because they are a legal and publicly traded company.”
Phirun added that a similar tax scheme would apply to Naga 2, a massive $369 million development slated to open in 2017 that will include approximately 1,000 hotel rooms. He said once the mixed-use complex opens to the public, the government will audit and apply any additional taxes owing on non-gaming revenue.
According to Mey Chan Veasna, a statistics officer at the MEF’s finance industry department who is handling the current audit of NagaWorld, the casino operator is on the hook to pay more than $10 million in additional non-gaming taxes this year.
“The company has already agreed to pay,” he said, adding that the government could receive the payment as early as next month.
NagaCorp, however, has informed securities companies that it does not expect to pay any additional non-gaming taxes this year as a long-awaited casino bill remains stuck in parliament.
“Management guided [us] that it does not have any clarity on further additional taxes until the new gaming regulations are determined and this may not occur until the end of the year at the earliest,” a Hong Kong-based branch of CIMB Securities said in an investor note earlier this month.
Local NagaCorp representatives declined to comment on the company’s tax payments, and forwarded requests to the company’s Hong Kong headquarters, which did not respond as of press time.
Phirun said the government was not just targeting NagaWorld, but would apply additional non-gaming taxes to the Kingdom’s 62 other licensed casinos, which until now have been given a long leash.
“Most of the casinos around the border do not have adequate bookkeeping to figure out what their non-gaming profits are, or how much customers pay, so we just have them pay a lump sum,” he said. “But it is different for NagaWorld, because they have proper bookkeeping.”
According to Phirun, Cambodian casinos paid a total of $34.7 million in gaming and non-gaming taxes last year – a tiny fraction of the $2 billion in revenue they are believed to have raked in.
CNRP lawmaker Son Chhay yesterday blasted the government’s casino taxation methods. He said until a sweeping casino law is passed, which has been in the making for the past 15 years, the gaming industry will continue to benefit from legal loopholes, depriving the country of much needed revenue.
He said that NagaWorld’s tax payments were “just peanuts”, adding “they should be paying more like $50 million or more”.
“I don’t blame NagaWorld, but anybody that is buying shares into this company needs to understand that it is not operating honestly in Cambodia,” he said, adding that a serious government would ensure transparency in the tax rate.
“Without a casino law, these payments usually involve corruption,” he added.
Lorien Pilling, director at Global Betting and Gaming Consultants (GBGC), said it was not surprising that the government was seeking additional ways to extract money from the gambling sector, given its impressive growth. However, he warned that any changes could “jeopardise future growth”.
“Governments do need to be cautious in imposing new taxes, or tax rates which are too punitive,” he said.
“In the long run, governments might actually receive lower tax revenues if operators are forced to close or cannot invest as much in their businesses to attract new customers – particularly in the competitive Asian gaming sector.”
Additional reporting by Hor Kimsay