RECENTLY the National Assembly has passed the Finance Law for 1997 which contains
comprehensive changes to the taxation regime that currently exists in the Kingdom.
Modifications have been made to both the levels of taxes to be imposed and the systems
for their collection. His Excellency Keat Chhon, the Minister of Economy and Finance,
has explained this broad reaching revision as an effort to strengthen the revenue
potential of the domestic tax system and to reduce the reliance on trade taxes as
the primary source of revenue for the Kingdom. In drafting the new Finance Law, the
Ministry of Economy and Finance has examined the tax systems of the ASEAN countries
and has drawn from them elements which are believed to be suitable for the creation
of a basic and effective tax regime in Cambodia.
As taxation is always a major issue in the conduct and forward planning of any business
venture, changes in the basic system of taxation are rarely welcome by business people.
The object of the restructuring is, after all, to increase government revenue and
the collection of greater amounts of funds from private businesses and individuals.
In the case of Cambodia, however, most would acknowledge that the rates which have
been imposed until now have been extremely competitive compared to neighboring countries
and that the systems of collection used have been inconsistent and at times confusing.
Cambodia has been reliant primarily on import duties and other trade taxes for the
bulk of its national revenue. Without the ability of the government to increase their
domestic tax base, the Kingdom will have an extremely difficult time in meeting its
obligations on joining ASEAN and in reducing its dependence on foreign aid to meet
the national budget.
Below we have set out some of the basic elements of the new tax proposals based on
the final draft to go before the National Assembly. The focus here is on the impact
that the changes will have on businesses. The law also contains provisions to strengthen
the administration of the taxation system, protect the interests of taxpayers and
increase penalties on deliberate efforts at tax evasion. Although some changes may
have been made to the version that will eventually become law, the general schemes
proposed should be of interest to most business people.
The top rates for salary tax have not been changed but the rate brackets have been
modified to improve the effective rates and to remove the discrimination between
salary and individual business tax. Essentially what this means is that the bulk
of most employee salaries will be taxed at a higher rate than previously.
A major change in the salary tax system is found in the treatment of fringe benefits
and non-cash payments to employees. Under the current system, the value of these
benefits are calculated together with the cash salary paid to the employee in calculating
their taxable income. The new system separates fringe benefits from actual salary
income and taxes them differently. The employer will be required to calculate the
value of all fringe benefits supplied and will be liable for a separate tax on the
Proposed changes to the salary tax are:
Tax brackets (riel/month)
0 - 750,000
0 - 500,000
750,001 - 1,000,000
500,001 - 1,250,000
1,000,001 - 10,000,000
1,250,001 - 8,500,000
10,000,001 - 20,000,000
8,500,001 - 12,500,000
Until now Cambodia has been one of the only countries in the region that did not
impose some form of withholding tax on internal or international business transactions.
The new law introduces various forms of withholding taxes both for local transactions
and for the payment of certain forms of income abroad. New taxes are to be imposed
on payments to individual contractors, interest income, royalty payments, dividends
and rental payments. Withholding taxes on business income are generally creditable
against the final tax payment of the individual business or enterprise liable for
Proposed rates for withholding tax are:
5% (individual), 15% (company)
20% (advance tax)
The profit tax flat rate of 20 percent is to remain unchanged. Under the new system,
however, prepayments will be justified against profit tax liability at the end of
the fiscal year. This is a change from the previous non-refundable one percent of
turnover being paid as advance profit tax. This tax on 1 percent of turnover has
not disappeared, however, it has now been defined as the "minimum tax"
and is separate and distinct from the profit tax in that it is payable by all companies,
even those that have been granted profit tax exemption by the CDC. It will be payable
A Value Added Tax (VAT) will replace the current turnover tax as of January 1, 1998.
In the interim, the turnover tax will be modified so as to remove the exemption that
currently exists on the first sale of imported goods on which the consumption tax
has been paid. The Ministry of Finance explains that this is an equity issue that
will create greater parity between domestic manufacturers and those whose goods are
imported into Cambodia. Until now the consumption tax has acted as a substitute for
turnover tax when the selling party is overseas. The tax is only imposed on the CIF
value of the goods being imported, however, and the first resale of those goods has
been exempt from turnover tax. The result is that the importer is not taxed on the
profit margin that they take and therefore are in a more profitable position if they
are selling imported goods than domestically manufactured goods.
The tax on specific goods is being expanded to include a broader range of products,
including motor vehicles and certain services including international air travel,
international telecommunications and the supply of electricity.
Taken together with the new administrative rules and procedures being put into place
and the standardization of the methodology and terminology being used in tax calculation,
the changes in the tax system should hopefully allow the government to generate taxation
revenue in a just and consistent manner. The tax burden of businesses and individuals
remains lower than that imposed in most regional countries.
- Michael Popkin is a partner of Dirksen Flipse Doran & Le, an international
law firm with offices in Cambodia, Laos and Vietnam.