From January 1, 1999, some companies are going to be required to
pay value added tax (VAT) instead of the existing turnover tax. Tax experts Tim
Watson and Phyllis Lye from Price Waterhouse Coopers explain what it is
and what it means.
Value added tax is a tax on consumption. Many countries have adopted it because,
among other reasons, it is seen as the most equitable way to get the rich to pay
tax. The logic being the more you spend, the more tax you pay.
At each stage of production VAT is paid, similar to the current turnover tax, however
businesses can claim back the VAT that they pay to their suppliers.
For example, a business that makes wooden ladders may buy $100 worth of timber. They
pay their supplier $110 ($10 VAT). They make their ladders and charge VAT on the
ladders they sell. They are entitled to claim the $10 VAT they paid through their
timber supplier back from the Government. But they cannot claim back the money their
customers pay in VAT on the actual cost of the ladder.
This is usually worked out as a credit on the business's VAT account with the balance
paid to the government.
Furthermore, exporters are often "zero-rated" meaning they are normal VAT
taxpayers but charge VAT at a 0% rate. This will mean they can be refunded on the
VAT they pay to their suppliers.
One of the main reasons for the popularity of the VAT is that it makes exports more
internationally competitive by making them cheaper.
Consider the difference in the operation of the turnover tax versus the VAT. On most
exports there will be a significant accumulation of unrecoverable tax built into
the purchases of the exporter, which raises the exporter's costs. In contrast, under
a VAT, all the tax paid throughout the distribution chain prior to the export is
refunded through the input credit mechanism. Hence, the VAT system permits exports
to be effectively free of tax, thereby making the exports as competitive as possible.
The Cambodian version of the VAT is a standard invoice-based VAT common in Europe,
Canada, New Zealand, and may other jurisdictions. Currently only the VAT Law is available,
although a detailed sub-decree will be issued shortly.
The VAT will initially only apply to real regime taxpayers, a detailed definition
of such is likely to be provided in the sub-decree. However, the VAT registration
form suggests all CDC-licensed and other foreign invested enterprises will qualify.
Other businesses may qualify according to turnover thresholds. Non-real regime taxpayers
will continue to be subject to turnover tax, albeit at the flat rate of 2%.
The Cambodian VAT will have two tax rates being a zero rate for exported goods, services
performed outside Cambodia and certain services of international transport; and a
standard rate of 10%.
Real regime taxpayers will be required to register and be issued with a "Taxpayer
Identification Number". Invoices and accounting records will need to be amended
to ensure certain VAT specific information is provided. The VAT will be due pursuant
to monthly returns with the provision of refund applications after three excess-credit
months. Input credits restrictions will apply to certain motor vehicle and entertainment
However, it appears credits may be allowed for the turnover tax inherent in 31 December
inventory and asset balances.
In VAT terminology, an exemption is the equivalent of a double edged sword. It relieves
the business of the requirement to charge and remit VAT on its sales.
However, it also denies the business the right to claim input credits for the VAT
it pays on its purchases. It is therefore, fundamentally different to zero-rating.
In some situations, an exemption is beneficial to a business while in others it results
in more rather than less tax.
The Cambodian VAT contains only seven exempting provisions, the most commercially
relevant being for insurance and "primary" financial services. Such exemptions
are common to other jurisdictions and are not overly problematic. For banks and others
however, making exempt and non-exempt supplies input credits will need to be pro-rataed.
There are additional "concessions" for diplomatic and international organizations,
and their personnel.
The implications of the VAT will need to be carefully examined and understood by
all businesses engaged in commercial operations in Cambodia. Primarily, the tax will
need to be understood by individuals responsible for the financial and accounting
functions of real regime taxpayers. These businesses must begin immediately to amend
their accounting and invoicing systems so that they can issue VAT compliant invoices,
and keep track of their own purchase invoices in order to claim credits.
Those involved with purchasing, pricing, and other contractual arrangements must
also be aware of the impact that the new tax will have. This applies not only for
taxpayers who will be registered for VAT but also foreign incorporated companies
and representative offices who may not be registered under the new system, but who
nonetheless will be subject to its effects.
The task of working through all the implications of the new tax is not at all straightforward
and must be undertaken carefully. The tax could have significant cash flow implications
particularly with regard to fixed capital or plant expansions, as well as impacting
pricing projections and negotiations with suppliers.
The implementation of the VAT marks a positive step towards the modernization of
the Cambodian tax system.
The authorities should be commended for their desire to replace the turnover tax
and, in particular, implement a relatively straightforward VAT model.