With almost no restrictions on foreign company ownership, a minimum capital requirement of only $1,000, a relatively benign tax and labour regime, and a cheap and accessible labour pool, Cambodia has been seen as the land of opportunity for small and medium-sized foreign-owned businesses.
But over the last two years the paradigm has shifted dramatically with stricter enforcement of labour laws, a much more sophisticated and stricter tax regime, escalating labor costs as unemployment approaches zero percent, and what seem to be hyperactive regulators, all of which has increased the cost of doing business significantly.
The combination of new laws and regulations and stricter enforcement of existing ones has caused angst among foreign business owners and has also created a wake-up call for Cambodian-owned businesses as well. This year, the Law on Financial Management for 2016 mandated one of the most monumental changes in the Law on Taxation by abolishing the simplified and estimated tax regime, leaving only the real regime, restructured into three categories–small, medium, and large corporate taxpayers.
Previously, estimated regime taxpayers were thought to have had a huge competitive advantage over real regime taxpayers as their taxes were basically negotiated upfront, and were only a slight fraction of those of the real regime taxpayers.
The government finally realised that the estimated tax regime was a losing proposition, requiring 60 per cent of tax collectors to collect 1 per cent of tax revenue, and was basically a mechanism for tax avoidance.
The elimination of the estimated regime is good news for real regime tax payers as the playing field should now be level in terms of comparable tax obligations. Although this significantly impacts small and medium-sized Khmer businesses most, there was no shortage of foreign-owned businesses escaping the wider tax net as estimated taxpayers.
Among the most controversial new tax regulations was the General Department of Taxation (GDT) Instruction Letter (No. 1127) which dictated the requirements and formats for invoicing for real regime taxpayers. The gist of the instruction was that an invoice must be issued in the Khmer language or can be issued in two languages; invoices must contain all the information in the sample invoices provided by the GDT; customer and supplier should sign the invoice, and VAT paid cannot be claimed as an input credit and the expense itself cannot be deducted on the annual tax on profit return if the invoice is not compliant with the instruction.
For international companies with standard accounting and invoice systems, this created a nightmare as they needed to either process invoices manually or re-program their systems to comply. It also created a dilemma for real regime taxpayers with suppliers who were providing them with non-compliant invoices, as they bore the risk of losing the VAT credit and expense against profit if they accepted the invoice from the supplier.
The Ministry of Commerce (MOC) also joined the regulatory bandwagon with Prakas No. 300, requiring all existing companies registered before 4 January 2016 to be re-registered through their online system.
With a significant amount of companies still waiting for their 2015 Tax Patent and still reeling from Circular 286 dated 9 January 2015, which required taxpayers to update their registration before they can be issued the Tax Patent Certificate for 2015, the MOC decided that companies should also go through a re-registration exercise with their ministry.
As with the GDT’s “tax registration update” which has had a series of deadline extensions to complete the registration update, the MOC has also recently extended their deadline to June 30, 2016 for those companies that have not re-registered through their online system.
The strict enforcement of provisions of the 1997 Labor Law pertaining to employment of foreign employees created not only current compliance costs, but retroactive back payments as well. The previously unknown or ignored law states that a foreign worker must have a work permit and employment card issued by the Ministry of Labor (MOL).
With lax enforcement, most foreigners were under the impression that e-visas or a shareholding in their company were sufficient to work in Cambodia. With the MOL and immigration department now rigorously enforcing the law, being a foreign working business owner and employing foreigners comes with a significant increase in cost.
The proliferation of new laws and regulations may be doing wonders for government coffers, but if this trend continues, Cambodia may find that foreign-owned SMEs are priced out of the market and will look for greener pastures.
Taxation expert Anthony Galliano is Group CEO of Cambodian Investment Management and frequent contributor in the Post.