In what could be Cambodia’s biggest step forward into the ASEAN Economic Community (AEC) in terms of taxation deals and fiscal transparency, details on Cambodia’s first bilateral double taxation agreement (DTA) with Singapore have been released.
While the bilateral agreement has yet to become legally binding, analysts say that this sets the stage for increased economic integration as the country aims to up protection for multinational corporations.
Signed on May 20, the agreement between Cambodia’s Minister of Economy and Finance Aun Pornmoniroth, and Singapore’s Senior Minister of State for Law and Finance Indraness Rajah outlines a framework for the avoidance on double taxation and the prevention of fiscal evasion.
The 34-page document, uploaded on the website of the Inland Revenue Authority of Singapore, clarifies tax rights for both countries on all forms of income. According to the document, withholding tax on dividends, interest, and royalties would be subject to a maximum rate of 10 per cent – almost a third less than its current rate for non-residents at 14 per cent.
Mey Vann, director of financial industry at the Ministry of Economy and Finance, explained that the Cambodian government has long been pushing for DTA agreements, but until now had yet to complete a comprehensive framework.
“This is the start of engaging more countries in bilateral double tax agreements,” he said. “It shows the countries’ willingness to promote long-term trade and compliance with countries in the region.”
In order to avoid double taxation, a practice where income is taxed twice depending on a company’s primary residence and where it derives its income, entities will be given tax credits or deductions equal to the amount paid in the respective country. The DTA does not affect each country’s corporate tax structures.
As for stopping tax evasion, an exchange of information mechanism will be put in place in which respective governments can verify a corporation’s or individual’s tax filings.
Clint O’Connell, head of tax practice for foreign investment advisory and tax firm DFDL Cambodia, explained it is important to note that the DTA agreement does not create additional taxes.
“Profit repatriation from Singaporean companies operating in Cambodia typically takes the form of dividends, service fees, interest and royalties. Most companies who qualify under the DTA will benefit from a 14 to 10 per cent reduction in Cambodian withholding taxes on those transactions,” he said.
While he said that bilateral tax transparency has been scrutinised in the past, the information exchange provisions contained in the DTA will enable Cambodian tax authorities to request documentation from their Singaporean counterparts to combat tax evasion.
“In theory this information exchange and the withholding reductions will work both ways, but for now, and practically speaking, there are far more Singaporean companies operating in Cambodia than there are Cambodian companies operating in Singapore,” he said.
“This DTA should be viewed as a key stepping stone for Cambodian authorities who are working towards international compliance and recognition,” he said, adding that this DTA is in sync with the tax blueprint proposed under the ASEAN Economic Community which proposes a comprehensive DTA network.
Joseph Lovell, managing partner at BNG Legal, said that for the DTA to be effective it doesn’t really matter that Singapore and Cambodia are at different levels of taxation compliance.
“Cambodia doesn’t have to be on the same level with Singapore because the DTA is targeted at a corporate level,” he said.
While he added that Cambodia has lagged behind regional counterparts in forming DTAs, signing up with Singapore was a good sign due to its sophisticated market.
“If in the future we see DTAs with countries like India, that will be a big step forward.”