A fair and transparent taxation system will play a vital role in Cambodia’s economic growth as the country weans itself off donor dependence and moves toward an economy driven by trade and investment. The Post’s Kali Kotoski sat down with Clint O’Connell, head of Cambodia Tax Practice for foreign investment advisory and tax firm DFDL Cambodia, to discuss recent tax reforms and their impact on business and investment.
The government recently scrapped the so-called estimated tax regime that applied mainly to SMEs. What was the problem with this scheme, and how do you expect its elimination to improve tax collection?
There is little argument that previous estimated tax regime in Cambodia was poorly enforced and implemented. The estimated tax regime allowed businesses to negotiate their annual taxes upfront, which often amounted to a fraction of what similar businesses would be paying under the real regime of taxation. By scrapping this mechanism it is hoped that there will be more consistency and transparency as to how tax is assessed and collected.
The estimated tax regime was supposed to help bring small companies into the formal tax fold. Was it a misguided venture?
Ironically, even under the old registration requirements that governed tax regimes in Cambodia it was very clearly stated that all registered companies, regardless of turnover, were required to register in the real regime of taxation.
By law, only sole proprietorships that did not import or export and that had annual revenue of less than $125,000 from the sale of goods, or less than $62,500 from the provision of services, were able to fall under the estimated tax regime.
The reality, unfortunately, was that businesses whose revenue vastly exceeded these thresholds were still able to manipulate the system and remain within the estimated tax regime and pay ridiculously low amounts of taxes.
The estimated regime stifled tax collection and compliance in Cambodia as there was no incentive to enter into the real regime. Not many businesses would want to voluntarily pass on a 10-per cent VAT cost to their clients and have to deal with a number of indirect and direct taxes, tax compliance costs and difficult tax audits, if their competitor down the road avoided all of those issues by staying, even if illegally, under the estimated tax regime.
How does Prakas 496 on tax registration, issued earlier this month by the General Department of Taxation (GDT), help foreign-owned businesses and streamline registration?
Prakas 496 is in reality just a refined model of Prakas 1139, which was introduced by the GDT in late 2014 for the purpose of “improving the efficiency and transparency of the tax registration process, improving services to taxpayers, and better manage the data collected by the GDT to improve its ability to notify taxpayers and collect tax debt more efficiently”.
It is fair to say that there were some teething problems with respect to the tax registration experience and as a result Prakas 496 was required to deal with feedback from the private sector and to also address the changes to the tax regimes in Cambodia. For example, Prakas 496 has now removed the need for overseas based owners/chairpersons to have to physically present themselves to the GDT to have their photo taken and fingerprints scanned. It also tightened up the requirements regarding the registered address of taxpayers and provided clear guidelines on documentary requirements and processing timeframes.
What does the speedier timeframe for registration and tax dispute procedures show about the GDT’s efforts?
I think the GDT should be applauded for the progress they have made in recent times, particularly with respect to tax registration and other areas such as the tax dispute process. Looking back at how the GDT operated when I first arrived in Cambodia almost 10 years ago and now, it is incredible to see the transformation that has occurred. That is not to say that the job is done – I am sure that the GDT is well aware that there is a large amount of tax reform that still has to occur in Cambodia.
Overall, what is the current investment climate and how will a revamped tax regime help foreign investment?
I would say that the current investment climate in Cambodia is still very favourable and competitive when compared to other ASEAN members. Cambodia has an open and liberal foreign investment regime, which is currently being reviewed to ensure that it continues to compete with its neighbours. A revamped tax system will most definitely encourage FDI as investors want to operate in an environment where the tax regulations are applied with consistency and transparency, and fairly.
What should the government do to promote SME growth and transparency?
More has to be done to encourage locally-owned SMEs to grow and develop in Cambodia. Most countries provide tax incentives to encourage SMEs and I believe there is a real need for this to be further investigated in Cambodia. In particular, more government and community services need to be made available to local SMEs to teach them about running a business and complying with tax regulations. Educating SMEs on their tax obligations should be a key priority as many cannot afford professional assistance.
This article has been edited for length and clarity.