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Cambodian withholding tax costly if you get it wrong

Cambodian withholding tax costly if you get it wrong

Tim Watson and Phyllis Lye from PricewaterhouseCoopers examine the

obligations and provisions of Withholding Tax under Cambodian Law.

THE Value Added Tax (VAT) is not the major tax development in recent times. The tax

withholding provisions also have the potential to generate significant tax costs

if not managed carefully. Audits of taxpayer compliance on withholding taxes are

also due to commence this year. The following are some commonly asked questions:

What is withholding tax?

In Cambodia's case the withholding tax is not a separate tax. It is instead merely

an obligation placed on the makers of certain payments to withhold tax from those

payments. The tax is then remitted to the Tax Department.

Although it may appear to be the payer's tax, the tax withheld is actually the tax

liability of the recipient rather than the payer. Note that this also means that

the payer will not be exempted from a withholding obligation simply because, for

instance, the payer is exempt from various taxes (as tax exemptions generally only

cover payer's taxes). However, should the payer fail to withhold tax and the recipient

defaults on payment, the payer becomes liable to pay the tax.

When did the withholding obligations commence?

There are presently two taxes where withholding obligations exist. The monthly Salary

Tax withholding by employers was introduced in the 1995 Financial Law, while the

Tax on Profit (ToP) withholding provisions were part of the watershed 1997 Law on

Taxation.

Under the provisions of Official Notification No. 6 issued on March 20, 1997, ToP

withholding obligations were meant to operate from April 1, 1997.

However the Tax Department ToP withholding tax remittance form was not made available

until June 8, 1998. The Tax Department has, in practice at least, tended to treat

the ToP withholding provisions as being operative with respect to payments made from

June 8, 1998. The exception is where tax has been withheld and not remitted prior

to this date; in this case, the withheld tax should be remitted to the Tax Department

from June 8, 1998.

What payments attract withholding obligations?

Salary tax withholding obligations arise on the payment of salary and fringe benefits.

ToP withholding obligations apply to certain payments of interest, rental, royalty,

insurance premiums and consultancy fees at rates ranging from 5% to 15%. Full details

are set out in pages 8 and 9 of the current edition of the PricewaterhouseCoopers

Cambodia Pocket Tax Book.

How is withholding tax calculated?

For residents, Salary Tax withholding on cash salary is computed on monthly taxable

cash salary at progressive rates 0% to 20%. While for non-residents it is a flat

rate of 15%. The amount to be withheld on fringe benefits is computed at the flat

rate of 20% of the market value of the benefit.

ToP withholding is due on the gross value of the payment before withholding. This

means that in arrangements where the payment recipient is paid on a net-of-tax or

tax-protected basis, the payment will need to be grossed up. For example, if the

cash payment is 100 and the withholding tax rate is 15% the amount of tax due to

be remitted will be 17.65 (i.e. 100/0.85 x 0.15).

Does the ToP withholding only affect cross border payments?

No. A number of domestic (i.e. resident to resident) payments are also subject to

ToP withholding. These include payments to resident consultants who do not operate

through a company. Rental payments made to resident landlords should also be subject

to ToP withholding. Most domestic interest payments, other than to banks, are subject

to a 15% withholding, meaning inter-company lending arrangements should be monitored.

A 15% withholding also applies to interest payments made by banks to their corporate

customers.

If the payment is cross-border can a double tax treaty minimize ToP withholding?

At the moment the answer is no, as Cambodia has not entered into any double tax treaties

(although a number are being worked on). Moving forward, once double tax treaties

do exist they will typically only place a ceiling on tax that can be levied on payments

for, say, intellectual property (i.e. royalties), interest, dividend and perhaps

insurance premiums. Consequently, a double tax treaty is only likely to limit withholding

tax to a certain level, say 10% instead of 15%.

More important, perhaps, is that double tax treaties will often restrict the taxation

of business profits to situations where a foreign company has some type of permanent

presence (or permanent establishment) in the country which wants to tax those profits.

A double tax treaty will typically also require that permanent establishments be

taxed on actual profits, rather than on a percentage of turnover, as is the case

with Cambodia's withholding taxes.

Consequently, the ability of Cambodia to levy withholding tax on, say, cross-border

service payments may be eroded once a treaty has application (although direct taxation

may still apply).

Is there a withholding tax on dividends?

There is a provision in the 1997 Law on Taxation which levies a dividend withholding

tax. However, dividend payments are also subject to an advance payment of its own

ToP. That is, the tax due is that of the payer as opposed to the payment recipient.

This is, of course, opposite to the case for withholding taxes. Dividends upon which

the advance tax has been paid are then exempt from withholding tax. As a result,

dividend payments are not generally subject to a withholding tax.

Tim Watson and Phyllis Lye work for the Tax and Consulting Department of Pricewaterhouse

Coopers in Phnom Penh. Please contact them should you require any clarification on

this article or if there are any tax issues you would like more information on.

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