Tim Watson and Phyllis Lye work for PricewaterhouseCoopers
in Phnom Penh.
They specialize in Cambodian Taxation.
ON June 11, 1999, the Government of Cambodia issued Sub-Decree No 53 amending various
aspects of Cambodia's Investment Law. As US Federal Reserve Chairman Alan Greenspan
might say, the changes herald a move towards a "tightening bias". In this
sense, however, it appears that Cambodia's sometimes generous investment concessions
are being tightened.
Cambodia's Investment Law of August 1994 and its initial Sub-Decree of 1 February
1998 have stood out in the past few years for two features. First, the attractiveness
of the tax and other investment concessions on offer. These include a 9% Profits
Tax rate, tax holidays of up to eight years and various import duty breaks. Second,
and perhaps less famously, the Investment Law is known for some of the uncertainty
surrounding the qualifying criteria, especially for the Profits Tax holiday. The
former of these features only is being addressed by Sub-Decree No 53.
Until the June 11 changes, the Investment Law required CDC licensed entities
to submit reports outlining:
- investment inflows into the project;
- the scheduling of imports;
- details of expected international remittances, including profits and interest;
- details of expected domestic remittances, including profits and interest; and
- any changes to the basis or details of the initial investment application.
Until the June 11 changes, the Investment Law required that this report be submitted
on a monthly basis. Under Sub-Decree No 53 the lodgement period has now been amended
to a less onerous quarterly basis. Copies of the quarterly report are to be sent
to the CDC, tax authorities and customs department.
More important, perhaps, than the reporting period itself, is that the changes may
indicate a renewed interest by the CDC (and other departments) in enforcing this
reporting obligation more strictly. CDC-licensed companies should note that failure
to comply with such obligations can lead to the withdrawal of CDC sanctioned tax
Exporters should note that the report must also now include information on export
9% Tax Rate - Entitlement
Cambodia's Investment Law allows for the CDC to grant a company a 9% Profits Tax
rate. The grant also currently has no sunset clause, meaning the rate applies for
the life of the company (unless of course the concession is withdrawn in accordance
with the Investment Law). This is a significant concession, and means CDC-licensed
companies with the 9% rate shown on their license enjoy one of the lowest corporate
tax rates in the Asean group.
However, under Sub-Decree No 53 access to the 9% concessional rate has been restricted
quite considerably. For instance, the investment capital necessary to qualify for
consideration of the 9% rate has been increased from $500,000 to $1 million for investments
in the following industries:
- apparel and textiles;
- furniture and fixtures;
- chemicals and allied products;
- fabricated metal products; and
- machinery and industrial equipment.
The rise in the necessary capital commitment is likely to have the most impact on
small-capital investments in the clothing and textile sector. Of course, this has
been one of Cambodia's must successful sectors to date in terms of attracting foreign
(and domestic) investment. These types of investments are also largely export oriented
and have received some special VAT concessions in recent times. The more aggressive
tax approach appears to be an attempt by the authorities to ensure this relatively
vibrant industry contributes more tax to the Government coffers.
On the incentive front, infrastructure projects, including those relating to the
generation of power and the production of clean water, are now included in the encouraged
or "suggested" investment list. Existing infrastructure investments have
typically been granted tax concessions and so this change is probably more a formalization
of what was occurring in practice. As would be expected, the incentive is likely
to be restricted to the infrastructure developing entity itself. Concessions should
not apply to contractors engaged in construction or operation of such projects. A
specific infrastructure matrix, by which a Profits Tax holiday period can be calculated,
Mineral exploitation, including that for oil and gas, as well as investment in the
telecommunications sector have either been removed from the suggested investment
list and/or placed on the list of investments which do not attract incentives. Natural
resources exploitation was already subject to a separate (and higher) 30% Profits
Tax rate while few tax incentives have been granted in the telecommunications sector
to date. Again therefore, these changes appear to be more a formalization of what
was occurring in practice.
Oil and gas activity has been both removed from the suggested investment list but
not added to the list of investments which do not attract incentives. Import duty
incentives also appear to have been added for exploration activities. The policy
behind these changes remains to be seen.
Most important perhaps is the removal of consumer products from the suggested investment
list. Many of the large multinational investments into Cambodia to date have been
in this sector. The change perhaps signals a view that Cambodia is no longer prepared
to offer specific concessions for investments interested in domestically focused
consumer manufacturing (although food and beverage manufacturing may still qualify
under separate provisions).
In all cases outlined above, we understand that Profits Tax incentives attached to
investments licensed prior to the June 11 changes will survive.
Finally, the list of goods entitled to import duty concessions has been amended to
specifically exclude petroleum. It is uncertain at this stage whether this prohibition
will extend to diesel and other oil products necessary for power generation.