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Logo of Phnom Penh Post newspaper Phnom Penh Post - Businesses find it's cheaper to be illegal

Businesses find it's cheaper to be illegal

Most businesses do not formally register in Cambodia because it's cheaper, easier

and more profitable to stay informal (or illegal).

A bulletin issued by the World Bank says that as of late 2003, only some 9,000 companies

were registered while about 27,000 "other industrial enterprises" chose

to remain unregistered.

All merchants engaging in commercial activities are required to register with the

Ministry of Commerce. In addition, a company must also secure patent tax and value

added tax (VAT) identification numbers from the Ministry of Economy and Finance and

approval from the Ministry of Labor before it can be considered legally registered.

The total cost of this process if carried out by an enterpreneur acting alone is

about $1,500, and the total time required is 94 days. The cost (which includes unofficial

fees) is very high for an economy where per capita income is less than $300.

Compared with Thailand, in Cambodia the cost is 76 times higher and the process of

starting up a business takes 52 days longer.

"Thailand, Laos and Vietnam are Cambodia's closest competitors for foreign direct

investment (FDI) and the high fees and long delays in registering could be major

deterrents to investors," the report says.

An investment climate survey last year found that formally registered firms spent

more time dealing with public officials (i.e. the garment sector) while in food processing

(where most businesses are not registered) they spent much less time than other sectors

and compared with other countries.

Registered firms in urban areas paid three times more informal fees than unregistered

firms. "It appears that the more visible a business in, the more administrative

scrutiny it faces and the more likely it is to pay kickbacks."

The level of informal fees was a strong incentive to remain small and informal. The

low number of registered businesses reflected ambiguities in the process allowing

room for bureaucratic discretion and corruption by the agencies involved in registration,

and thus made the costs of registration unpredictable.

"An even greater deterrent to registering may be the costs companies incur after

registration. Paying at least 5.5 percent of annual revenues in unofficial fees could

be just too high for many."

The report recommended the following reforms to the government:

* Reduce steps to register to be more competitive with other countries

* Publish clear guidelines on registration requirements

* Create a "one stop service" office, similar to that available to large

investors at the Council for Development of Cambodia (CDC) office, but ensure staff

adequately trained and monitored

* Reduce unofficial fees post-registration

* Reduce official visits and inspections

"Visits by government authorities to companies should be restricted to only

those agencies that have genuine reasons to visit. Visits should not be, as they

are now, at the discretion of an individual who may simply be looking to extract

a bribe."

The bulletin document included supporting examples from business directors and others.

However the secretary general of the Ministry of Commerce Mao Thora challenged some

of the statements:

"It is untrue that it takes 94 days to register; you have to be clear whether

you are talking about an investment company or non-investment company." The

former took only 28 days to register, through the CDC. For non-investment companies

it took only seven to10 days through the MoC if all paperwork was correct, he said.

Thora said the official fee for registering at MoC was $30, another $30 was to include

the name in the official business bulletin published by MoC. Other costs were not

associated with the MoC; for example $300 for preparing a Memorandum of Association

was for a service provided by the person who wrote the memorandum.

Another recent publication by the World Bank (based on a comprehensive business survey)

noted that low-income countries such as Bangalesh, Ghana, India, often achieved registration

within 30 days. This report recommended a simplified procedure for Cambodia, suited

to automation and online registration:

* Remove the requirement to incorporate with the Commercial Register, which is maintained

at the Office of the Clerk of the Commercial Court and cost $650 and 30 days to complete.

* Remove the requirement to send a notification to the Ministry of Labor to start

hiring employees, costing $250 and 30 days.

* Automatically register the company for VAT using the same form.

* Waive the minimum capital requirement as it did not in practice serve any function

other than to make entry more expensive.



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