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Logo of Phnom Penh Post newspaper Phnom Penh Post - What to do when the tax man cometh...

What to do when the tax man cometh...

T he minimization of tax liability is a major part of doing business in any country

in the world. Before undertaking a cross-border investment, the tax implications

of the investment are, in most cases, thoroughly analyzed. However, existing and

new investors in the Cambodian market sometimes place this important aspect of investment

planning as a low priority.

The reasons for this lack of attention to taxation is a combination of two factors.

One, Cambodia is a fast moving market and some investors do not feel that they have

time (or wish to commit the resources) to thoroughly research the relevant tax issues.

They reason that they need to jump into the Cambodian market quickly to beat their

competition and will worry about tax when the issue directly arises. In addition,

many investors assume that Cambodia's overall lack of laws and failure to enforce

existing laws translate into no tax liability.

Audits and Investigations

As a practical matter, operating a business under this assumption has had little

negative result until the present. Implementation and enforcement of tax laws has

been poor since the re-opening of Cambodia to early 1996.

However, the situation appears to be changing. The Department of Taxation (DOT) of

the Ministry of Economics and Finance has recently stepped up efforts to recover

back taxes. 1996 has seen a spate of renewed activity, audits and investigations

by the tax authorities. This activity will probably increase in 1997 as past oversights

are corrected.

Part of the motivation for this increased activity is that the IMF and other international

organizations are strongly encouraging the government to clamp down on delinquent

taxpayers. The government must increase tax revenues to overcome its current dependency

on customs duties and international aid. It is rumored that the Finance and Budget

law for 1997 will contain strong new penalty, audit and enforcement provisions to

help ensure increased tax revenue.

A symbol of the DOT's increased activity in the review and enforcement areas is the

newly establish litigation office. A recent DOT notice establishes a litigation office,

under the authority of the DOT, which will hear and adjudicate disputes between the

DOT and the taxpayer.

Hurdles for Business

Keeping abreast of tax laws and regulations is not an easy task for investors.

Part of the difficulty is that most tax laws and regulations are included in the

general budget laws. The investor must sort through these laws and extract the provisions

applicable to taxation. As the tax system is evolving, the investor must also keep

track of modifications.

Another major difficulty is that many of the tax laws and regulations are officially

published only in Khmer and, sometimes, in French. Official English translations

are rare. Unofficial English translations usually appear months after the original

law was enacted, and are sometimes difficult to understand.

Finally, the effective date of the tax rules following promulgation is usually very

short. Thus, the new rules may be in force before the investor is aware of its existence.

Finding Tax Laws

Tax laws came from two main sources: the National Assembly and the Ministry of

Economics and Finance (MOEF). The National Assembly passes the main tax law, called

the Finance and Budget Law (sometimes translated as Law of Financial Management)

each year at the end of December. The law is usually enforceable immediately and

applies to the upcoming year. In the past, this law has been published by the MOEF

in a large, soft-back book form, in Khmer & French versions.

Most of this book contains budget allocation matters and rules for internal budget

affairs. However, the 1994 and 1995 and 1996 laws set out the major tax laws for

Cambodia and the 1997 Law is expected to do the same. The book can be purchased from

the MOEF.

In addition to the year-end Finance and Budget Law, a "Revised Finance Law"

is usually passed by the National Assembly in September or October of each year.

As the title suggests, this law corrects and amends budgetary allocations based on

actual use and practice during the year. However, this law will also contain important

amendments and additions to the tax regime. For example, the 1995 Revised Finance

Law contains numerous provisions on penalties, and the audit, review and appeal procedures

through the DOT.

The other major source of tax rules is the MOEF, which publishes notices (i.e. "Prakas")

throughout the year. These notices interpret the laws and set detailed guidelines

for the application and implementation of the laws. Some of these notices are very

detailed in nature and contain substantive provisions that supplement the laws. Some

important notices may be issued by the DOT as well.

Avoiding Penalties

Now may be a good time for businesses operating in Cambodia for a number of years

to do an internal review of their tax positions. The DOT seems to be assessing back

taxes and penalties from 1994, the date that the first comprehensive tax law was

enacted. Accordingly, businesses should examine their tax position back to at least

the beginning of 1994.

Foreign companies operating in Cambodia through local agents or distributors should

also examine their structure. The terms of the contractual relationship between the

agent or distributor and the foreign company is of key importance in determining

tax liability. This also applies to foreign companies selling and/or performing services

in Cambodia on a full time or occasional basis.

If a letter arrives from the tax department, it is best to be responsive. Managers

should make sure that their accounting employees understand the significance of such

notices and do not ignore them. The laws do contain penalties for failure to respond

on time and the tax department will usually listen to reasonable arguments. It is

also important to file tax declarations as required by the law. Failure to file the

declaration is subject to penalty as well, which can be severe if such failure is

not done in "good faith".

- David Doran is the resident managing director of Dirksen Flipse Doran &

Le's Phnom Penh office. He has been writing and advising on Cambodian legal issues

since 1992.



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