Tax professionals have hailed the government’s declared intention to scrap one of the most controversial elements of Cambodia’s tax system, eliminating the 1 percent minimum tax that increases the tax burden of companies and constricts their cash flows.

Speaking during a tax forum on Wednesday, Kong Vibol, director of the General Department of Taxation (GDT), announced that the government would consider abolishing the 1 percent minimum tax, a levy calculated on the basis of monthly turnover that is distinct from the annual tax on profit.

The monthly tax liability is typically viewed as a burden to retailers and manufacturers – especially in the garment sector – that generate high amounts of revenue, but operate with low margins.

“We are considering abolishing the 1 percent minimum tax,” Vibol said. “But this can only be done if you have adequate audited bookkeeping.”

While Vibol did not give a definitive timeline for eliminating the tax, he said the GDT was trying to work “quickly” with the Ministry of Economy and Finance to issue a prakas in the coming months.

However, while the government is still considering the amendment, it would not be applied as a free ride.

“If we do this, we have to be partners and you have to be transparent with the tax department,” Vibol said.

“If we find that you do not have audited bookkeeping, we would put you back on the 1 percent minimum tax.”

Clint O’Connell, head of Cambodia Tax Practice for foreign investment advisory and tax firm DFDL, said yesterday that the elimination of the 1 percent minimum tax would make a “big difference” to ease up cash flows for companies that operate at low margins.

“The minimum tax comes as an additional monthly cost when companies already pay tax on profit annually,” he said. He said if the amendment was finalised, it would likely start at the lower end of the corporate spectrum as a way to entice companies that previously operated under the estimated tax regime to become more tax compliant. However, this could prove problematic as these small companies lacked firm accounting principles.

While O’Connell noted that the tax code revision could diminish the government’s monthly contribution to state coffers, he expected it would be accompanied by better oversight.

“I think as a result, there would be a lot more scrutiny on Cambodian taxpayers that are operating as if on a tax-loss basis,” he said.

Meanwhile, the removal of the minimum tax could encourage more international companies to invest in Cambodia, as the tax has been cited as a hindrance to investors looking to enter the local market.

“Increased cash flows make a big difference, and a reduction of the minimum tax has already been applied to certain members in the garment industry,” O’Connell noted.

Anthony Galliano, chairman of the EuroCham tax committee, said that if the change is adopted, he hoped the government would also consider scrapping the monthly prepayment of tax on profit.

“The prepayment and minimum tax of 1 percent severely penalises international companies that have high revenues but with low margins,” he said. “It has accelerated companies that eventually were put out of business.”

He added that the private sector has been pushing for these revisions, and if adopted they would help new companies and manufacturers gain a foothold and create a steady flow of foreign direct investment.