Tim Watson and Phyllis Lye examine the obligations and provisions of

Withholding Tax under Cambodian Law.

ONE of the presumptions that has been followed in the past is that Cambodian taxation,

Salary Tax aside, was only an issue if an operating presence was established in Cambodia.

This necessary presence usually translated into a Cambodian subsidiary or, at very

least, a Ministry of Commerce ("MoC") registered branch. However, investors

need to bear in mind that under Cambodian tax law a representative office, or even

more transient business trips can create tax exposures. Some of these possible exposures,

for Tax on Profit and Value Added Tax, are outlined below.

Tax on Profit ("ToP")

Cambodia's ToP rules vary according to the tax residency of the taxpayer. Cambodian

incorporated (i.e MoC licensed) companies will almost always constitute tax residents.

As such they will be directly exposed to ToP at 20% or 9% of profits, and other taxes

such as the 1% Minimum Tax. However, the 1997 Law on Taxation also includes as resident

companies, those companies organised, managed or with their headquarters in Cambodia.

More importantly, a foreign incorporated company with a fixed place of business,

branch or agent in Cambodia can also be taxed where that presence gives rise to a

permanent establishment ("PE") in Cambodia.

A PE is an internationally accepted basis upon which foreign companies operating

in a host jurisdiction, can be taxed in the host jurisdiction. Cambodia is therefore

not unique in pursuing this approach. However, internationally a PE definition will

generally exclude from its scope activities which are of a "preparatory"

or "auxiliary" nature. This usually means a representative office will

be excluded from a PE definition.

We await detailed regulations on Cambodia's PE definition. At this stage however,

all that is required to create a PE is the existence of a branch, office or agent

in Cambodia. Other tax rules found in the 1997 Law on Taxation mean a percentage

of head-office profits could be allocated to the Cambodian PE/office, even if that

Cambodian office earns no income in Cambodia itself. This means greater corporate

care may need to be taken before opening something even as humble as a representative

office. This is particularly if that local office supports an existing business such

as in-country procurement or export activities.

Where a foreign company does not have a PE, Cambodia can still seek to levy ToP on

the foreign company's income, under Cambodia's withholding tax provisions. Withholding

tax will generally be levied at 15% of gross revenue. Foreign companies, particularly

those operating in Cambodia on a project related basis, should therefore, look at

whether it is more attractive to be taxed on a 20% of profits basis (via a PE) or

a 15% of gross income basis. A PE may in some cases be the better option.

Value Added Tax ("VAT")

Under the VAT rules a "real regime" taxpayer making "taxable

supplies" in Cambodia is required to register for VAT purposes and add VAT at

the rate of (generally) 10% to its invoices. The definition of real regime is quite

extensive and can easily extend to a foreign incorporated company. The more significant

issue is under what circumstances will a foreign company be viewed as making taxable

supplies in Cambodia?

In this regard, the VAT Law and Prakas are of little assistance. The only useful

guidance is found in the VAT instructional booklets. These indicate a VAT liability

will exist if the foreign company has a business premises in Cambodia. Again this

suggests the existence of a physical office can create an exposure, this time to

VAT. There is also no requirement for the foreign company to have established a subsidiary

or branch as part of creating the exposure.

Again however, the VAT rules also offer the opportunity for tax planning. The VAT

charged by a foreign company with an office in Cambodia will be fully creditable

to the Cambodian client, where that client is itself VAT registered. Further, VAT

registration by the foreign company will mean the foreign company will be entitled

to a VAT credit for VAT charged to its Cambodian office, and for any VAT paid on

import. In these circumstances it may therefore be more attractive to seek VAT registration.