O NE of the changes to the current taxation system in Cambodia that has been set
out by the 1997 Finance Law is the eventual replacement of the current business turnover
tax with a value added tax (VAT). The transition is scheduled to take place on January
1, 1998. Many people will be familiar with the concept of VAT from its use in other
countries. In essence, the substance of a change from the turnover tax to a VAT is
a replacement of the current tax base of "business turnover", or all of
an enterprise's revenue, by the more moderate tax base of the value that an enterprise
adds to its products. This means that the primary beneficiaries of the change will
be those enterprises which have high raw material costs. As the VAT will be substantially
higher than the current turnover tax rates, service industries and enterprises that
do not rely on the refining or assembly of raw materials will find that their tax
burden will increase. The Finance Law states that the VAT rate shall be 10 percent
of the "taxable value" of all "taxable goods and services"; both
of these terms are defined in the law and these definitions are explained below.
Goods sold or services provided outside of Cambodia are exempt from VAT.
Goods and services that will not be subject to VAT include:
- Public postal services;
- Hospitals, clinics, medical and dental services and the sale of medical and dental
goods incidental to the performance of such services;
- The service of transportation of passengers by a wholly state owned public transportation
- Insurance services;
- Primary financial services as will be defined in future regulations;
- The import of articles for personal use that are exempt from customs duties and
that are within a value limit to be defined in future regulations;
- Non profit activities in the public interest that have been recognized by the
Minister of Economy and Finance.
Goods and services that will be subject to VAT include:
- All goods or services supplied by a taxable person (defined as a limited liability
company or other entities subject to the real regime of taxation as well as some
taxpayers subject to the simplified regime of taxation as to be determined by future
- All goods purchased by a taxable person;
- All gifts made by a taxable person at below cost;
- All goods imported into Cambodia (with the exception of goods imported for personal
use as defined above).
The taxable value of the goods or services is defined as the sum of the sale price
of the goods or services including any charges for transportation or additional services
provided at the time of the sale (assessed at their fair market value) and any applicable
taxes on specific goods and services. Imported goods are assessed at their customs
value including insurance, freight, customs duties and specific tax. Used goods are
assessed a taxable value of the difference between their selling price and their
As the VAT is meant to be applicable only to that portion of the sale price which
represents the "value added" to goods or services provided by the seller,
credits are given for supplies or raw materials which are purchased by the seller.
These are "input credits". Entertainment and recreation expenses, and the
purchase of automobiles and certain petroleum products are not allowed to be used
as input credits. To claim input credits a taxable person must produce either a value
added tax invoice or a certified customs Bill of Entry for Import.
In determining the total VAT due to the taxation department a taxable person must
calculate ten percent of the taxable value of goods sold by them and then subtract
from that figure the total input tax credit available to them.
VAT declarations will have to be filed with the taxation department of the Ministry
of Economy and Finance monthly on or before the 20th day of the month. If the input
tax credits available to a taxable person in any month exceed their VAT liability
the excess shall be used as a tax credit against any outstanding VAT liability or
towards the tax liability of the succeeding month. Exporters, diplomatic missions,
international organizations and those taxable persons showing input tax credits greater
than their tax liability for more than three consecutive months may apply to the
taxation department for VAT refunds.
Those enterprises that will be subject to VAT on its implementation will have to
register with the taxation department of the Ministry of Economy and Finance once
registration procedures have been determined. At that time they will be issued a
VAT registration number which must appear on all subsequent invoices issued by the
enterprise. If the VAT is indeed to be commenced from January 1, 1998 this registration
system will have to be put into place in the near future.
( - This column is provided solely for informational purposes by the Mekong
Law Group, affiliated with the law firm of Dirksen Flipse Doran & Le. This week's
column was written by Michael Popkin.)