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Government clarifies exemptions for minimum tax

The building of the Ministry of Economy and Finance, which has issued a only those taxpayers that follow stringent accounting principles will be allowed to apply for a minimum tax exemption.
The building of the Ministry of Economy and Finance, which has issued a only those taxpayers that follow stringent accounting principles will be allowed to apply for a minimum tax exemption. Moeun Nhean

Government clarifies exemptions for minimum tax

Nearly a year after the government announced that it would consider scrapping the controversial and burdensome 1 percent minimum tax obligation that is paid on monthly revenue flows, the Ministry of Economy and Finance has provided guidelines on how taxpayers who satisfy its accounting guidelines can obtain an exemption.

According to a prakas signed by the finance minister on July 4 and obtained by The Post, the government has mandated that only those taxpayers that follow stringent accounting principles will be allowed to apply for the exemption.

“Taxpayers who obtain the evaluation as having proper accounting record will be exempted from the minimum tax,” the decree reads.

Actions that bar a taxpayer from qualifying for the exemption include those that do not issue proper invoices, commit serious negligence or who have been found to be engaging in tax evasion. In addition, taxpayers with an annual turnover exceeding $500,000, assets of $750,000 or over 100 employees are required to have an independent third-party audit of their financials to qualify for the exemption.

The monthly 1 percent minimum tax, which is distinct from the annual tax on profit, is a liability that is typically viewed as a burden on retailers and garment manufacturers that generate high amounts of revenue but operate with low margins.

Kimsroy Chivv, tax director at Deloitte (Cambodia), said that the prakas finally outlines how taxpayers can apply for the exemption by clarifying what the General Department of Taxation deems as “improper accounting records”.

“Now we can see that those who want to qualify need to be based on compliance to claim the minimum tax exemption,” she said. “This is good news because it will encourage investors and taxpayers to use proper accounting principles that before were not strongly enforced by the government.”

She added that the exemption requirements will increase transparency by encouraging medium and large businesses to undertake independent audits, something that they previously preferred to avoid.

Clint O’Connell, head of tax practice for foreign investment advisory and tax firm DFDL Cambodia, said the exemption has been available since last year, but without guidelines on how to implement it.

“By default, if a taxpayer was able to provide evidence that they maintained proper accounting records then they would be exempt [from the minimum tax],” he said.

However, he was quick to note that the actual economic benefits of the prakas are questionable as it reiterates the legal distinction between the minimum tax and the monthly 1 percent prepayment of tax on profit.

“This is a very important distinction to make and, practically speaking, puts the actual economic benefit of this update in perspective,” he said.

“A taxpayer who obtains an exemption from minimum tax would still be obliged to make the monthly payments of 1 percent on a profit basis.”

Anthony Galliano, CEO of Cambodian Investment Management, said the prakas only amounted to a “zero sum game” given that a taxpayer making the 1 percent monthly prepayment tax was simply using those credits at the end of the year to reduce their tax on profit burden.

“This is substantially a zero sum game as I understand it, as the monthly prepayment obligation remains, and only the minimum tax exemption is granted,” he said. “To date, it appears that mostly those already paying profit tax have been granted the exemption.”

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