New and existing companies listed on the Cambodia Securities Exchange (CSX) will have their taxes halved by the Cambodian government, a move that is being labelled as a generous attempt to boost activity on the bourse.
The sub-decree, which was signed off by Prime Minister Hun Sen on January 8 and released last week, states that current and future publicly listed companies will be granted a 50 per cent reduction on all corporate income taxes for a period of three years from the General Department of Taxation (GDT).
“The sub-decree aims to encourage and give incentives to develop the stock exchange sector in Cambodia,” the document states.
To be eligible for a three-year tax break, companies must list on the CSX before January 8, 2018.
“Public companies/industries issuing stocks or bonds … have to apply to the GDT via the SECC [Securities and Exchange Commission of Cambodia] in order to get the 50 per cent reduction on income tax for three years.”
The sub-decree states that all companies already listed on the CSX will have the 50 per cent discount applied retrospectively from the date of their initial public offering (IPO).
Additionally, for those companies that have an existing corporate income tax debt and list on the CSX within the next five years, they will receive an exemption on the amount of dues owing to the GDT, although the announcement did not reveal to what extent this break would be.
The standard corporate income tax rate – known as Tax on Profit – is 20 per cent for all general business, 5 per cent for insurance firms and 30 per cent for oil, gas and natural resources firms.
Companies that already receive tax incentives from the government, such as large-scale investments that qualify for the Council for Development of Cambodia’s profit tax exemptions, will not be eligible for the new 50 per cent tax break. Indirect taxes such as the 10 per cent Value Added Tax are also exempt from the discount.
“The GDT will make the request to the Ministry of Economy & Finance via the SECC to terminate the incentive and any other tax exemptions in the case that any public company/enterprise does not submit their tax declaration letters monthly and pay their tax monthly,” the sub- decree warned.
But it is not just the listed trading companies that will directly benefit from the government’s tax incentives.
Investors buying or selling stock on the CSX will also benefit from a 50 per cent discount on the taxes they incur from their dividends for the next three years.
Douglas Clayton, CEO of Leopard Capital, a frontier market investment firm, said similar tax breaks are common in other emerging markets.
“However a 50 per cent reduction is more generous than most,” he said.
Clayton added that with Cambodia’s 20 per cent income tax rate already comparatively low to other countries, any reduction had to be large in order to attract new companies to the bourse, which currently has just two firms listed.
“This is a welcomed measure, but whether it will prove sufficient to drive private companies into the CSX remains to be seen.”
Between 2004 and 2006, Vietnam applied a similar 50 per cent reduction on corporate income tax, according to taxation law firm DFDL. Meanwhile, Thailand currently grants publicly listed firms a reduced corporate income tax rate for a three-year period.
“It will change the psychology of the stock market step by step. Investors will be more optimistic,” said Luke Wang, vice general manager of Phnom Penh Securities’ brokerage department.
“Maybe there won’t be an immediate response to the tax incentives, but it will certainly shorten the time of the CSX’s evolution,” he said.
Svay Hay, CEO of Acleda Securities said the government’s move was a generous attempt at luring more local companies to start the IPO process.
“It gives these firms more leverage room to launch an IPO,” Hay said.
“The tax exemption should attract more investors in the medium term, but from what we hear, many still intend to wait for new IPOs and market diversification.”