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World Bank encourages local tax reforms

A WORLD Bank economist called for reform to the Kingdom’s tax system yesterday, as a new report highlighted that government revenues as a share of gross domestic product were lower than in neighbouring countries.

Some 11.5 percent of domestic GDP was collected as government revenues last year, compared with 15.5 percent for Indonesia, 16.6 percent for Thailand, along with high rates for resource-rich countries, such as 28.3 percent for Papua New Guinea and 32.9 percent for Mongolia, according to the World Bank’s October 2010 East Asia and Pacific Economic Update.

Though World Bank economist Chea Huot said that the Cambodian government was doing well at increasing its revenues, he suggested a number of steps yesterday to improve collection.

Chea Huot said some firms – particularly small and medium-sized enterprises – did business outside the formal system, resulting in lost revenues that could be destined for state coffers.

“There should be some reform,” he said at the report unveiling in Phnom Penh yesterday.

“Make it simpler for business to pay tax, so they don’t feel uncomfortable.”

There should be some reform ... make it simpler for businesses to pay tax, so they don’t feel uncomfortable.

Revenues increased by 17.5 percent for the first half of 2010 year on year, led by value-added taxes, as well as excise and import duties, while state expenditures had declined 3 percent, according to the report.
The introduction of a property tax, a doubling of the road tax on vehicles, and anti-smuggling efforts could all contribute to state revenues, it added, which were expected to rise to 13.3 percent of GDP in 2010 and 13.6 percent in 2011.

But Cambodia has also granted exemptions, such as the suspension of the 1 percent Advance Profit Tax for members of Garment Manufacturers Association in Cambodia until 2012, which meant less revenue for the state.

In some cases, revenue exemptions were “overly generous”, Chea Huot said.

The report was released days after the Council of Ministers approved 2011’s draft budget, with expenditures set at US$2.4 billion. Minister of Economy and Finance Keat Chhon said the government would “educate people about their obligation to pay tax” at the budget announcement, according to media reports.

Din Virak, official at the Economic, Social, and Culture Council of the Council of Ministers, said yesterday the government was enacting laws to boost investor confidence as well as taking measures to increase state revenues.

“We expect [the anti-corruption institute] will reduce corruption and increase the tax revenue”, he said.

The World Bank’s estimate for the Kingdom’s 2010 GDP growth stayed steady at its previous 4.9 percent estimate, near the 5.0 percent the Asian Development Bank pegged last month.

Although World Bank senior country economist Stephane Guimbert did not comment directly on the budget, he said there was a consensus among the government and observers over the need to unwind fiscal stimulus in the Kingdom.

Regionally, the report said that East Asia was leading the global recovery, but its success has attracted a surge of capital that has inflated currencies, posing a risk to exports and future growth.

But Guimbert said the World Bank was keeping an eye on a potential surge in investment to Cambodia, adding excessive capital inflow was not yet a major issue.

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