Tim Watson and Phyllis Lye work for PriceWaterhouseCoopers
in Phnom Penh. They specialize in Cambodian taxation, with a particular emphasis
on infrastructure investment.
T HE recent political settlements in Cambodia have opened the door to renewed foreign
A lot of this new investment is targeting infrastructure development, particularly
power generation, water treatment and transportation. In many cases Cambodia appears
as if it will seek to retain residual control over infrastructure assets via Build-Operate-Transfer
(BOT) or similar arrangements.
For potential investors in this area Cambodia's investment environment does offer
attractions. This is particularly in regard to the openness of the investment environment,
the relatively low taxation levels, and the availability of foreign currency.
However, there are still some real issues for investors to consider and many of these
relate to tax and accounting.
The financial viability of a project could very well turn on how well these issues
are managed. Some of these issues, and possible strategies for dealing with them,
are discussed below.
For a fixed term investment, such as an infrastructure company licensed on a BOT
basis, at the end of the project (with physical assets fully depreciated or transferred
at zero value, and with profits having been fully repatriated) the infrastructure
company will have a cash balance, equivalent to its equity.
This arises because distributable profits are calculated after allowing for depreciation
on the company's initial assets, and depreciation is not a cash outflow.
The ability to get this residual cash into the hands of investors, lenders etc before
having to wait for, say, liquidation can make a significant difference to project
So what can be done? Clearly investors would be looking at means by which equity
can be reduced and/or minimised. Possibilities include reductions of capital during
the life of a project, perhaps via the use of redeemable shares with priority distribution
Maximizing the use of debt in the first place is another approach. So too is some
type of upstream lending of idle cash in advance of dividend or capital returns,
although lender conditions would need to be considered.
Cambodia's company laws are in their infancy
However, draft corporate regulations appear to accommodate the use of redeemable
equity arrangements, at least to the extent registered capital is preserved. This
option therefore presents possibilities.
In regard to debt maximization it needs to be noted that Council for the Development
of Cambodia (CDC) licenced entities are restricted by a 3:1 maximum debt/equity ratio
as outlined in the Investment Law. However, the Investment Law does appear to allow
for greater debt levels for "priority projects". Investors should therefore
be looking to explore this special concession.
A more practical restraint is the debt servicing capability (ie cash-flow) of the
project itself. Further, the recently introduced 15% interest withholding tax will
make profit repatriation via interest unattractive where the profits tax rate is
the concessional 9%, which will almost always be the case for infrastructure projects.
In this regard, investors may need to weigh the benefit of an earlier return of funds
against a greater absolute tax cost.
Speed of Repatriation
Many large infrastructure projects are particularly sensitive to the speed by which
cash generated from operations can be remitted to investors and lenders.
In many jurisdictions the desirable strategy is to align more closely distributable
profits with cash-flow, often by delaying depreciation or adopting the lowest possible
Cambodia's tax laws, however, impose mandatory depreciation rates meaning profit
for tax purposes cannot be easily altered. Cambodia's Chart of Accounts (CCA), which
in theory should be adopted by all Cambodian incorporated companies, arguably imposes
similar restrictions from an accounting point of view.
Even if the CCA does not impose a restriction dividend payments may still need to
be reduced for profits tax in order to ensure there is funding for profits tax payments
when those liabilities arise.
This will be a particular concern if the tax and accounting depreciation differences
reverse outside a tax holiday period. Consequently, dividend levels could well be
effectively controlled by the tax depreciation rates.
Loaning funds upstream prior to profits tax payment represents one possible solution.
Again however, lender terms or conditions will need to be taken into account.
Another possibility is to seek early dividend payments possibly via interim dividends.
In this regard, Cambodia benefits from having no significant tax or foreign currency
clearance requirements when making dividend payments. However, given Cambodia's limited
company regulations, over the life of a large infrastructure project it is quite
feasible greater restrictions will arise. Investors should therefore be looking to
lock-in desired dividend payment entitlements at the time of project implementation.
The following issues may also be relevant:
Tax holidays: Cambodia's Investment Law allows for tax holidays of up to 8 years.
However, Cambodia also imposes a minimum tax, equal to 1% of turnover, irrespective
of any tax holidays.
The minimum tax can be offset against the ordinary profits tax, which for a CDC licensed
company will generally be at 9% of profit.
The existence of the minimum tax means that the holiday is of no value to the extent
the project generates a return of around 10% or less. This is because the profits
tax otherwise payable would be no more than the minimum tax liability. Investors
could make this point with the authorities when negotiating investment conditions.
Impact of Cambodian Accounting System: As mentioned, Cambodian companies are, currently
at least, required to adopt the CCA. (There is recent evidence of this being enforced).
Investors should look carefully at how the use of this system will impact profit
calculations (and so dividend payments).
VAT on import: VAT is payable at the rate of 10% on the import of goods. This value
notionally includes import duty if the import duty is exempted. The VAT should be
refunded monthly while in a pre-operating stage.
While this all sounds reasonable the value of plant and other equipment involved
in infrastructure projects can be large and meeting VAT payments, even for a short
period of time, can pose a significant financing issue.
Investors should be looking at negotiating exemptions on VAT, perhaps similar to
those recently granted to exporters, or having VAT payments secured by, say, letters
of credit. At the moment however, such concessions are not possible under the VAT
VAT on in-country supplies: With the possible exception of hospital services, the
likely activities of an infrastructure company would not be exempt from VAT. With
the possible exception of airports, the likely activities would also not be zero
rated. This leads to the conclusion that an infrastructure company would generally
be charging VAT at the rate of 10%.
However, consumer services such as power and water will typically be supplied by
an infrastructure company to a public utility, for onward sale to consumers. As these
supplies can be particularly price sensitive, investors should monitor whether political
factors could ultimately force a change in the VAT treatment.
In particular, investors should note that a VAT exemption at either the infrastructure
company or public utility level would have a significant cost impact. This is because
accumulated VAT would need to be absorbed by the exempted entity. As an indication
of possible developments in this area, it should be noted that the recent VAT Prakas
No. 1031 indicated that specific rules will apply to the supply of electricity and
water. To date, no such rules have been issued.