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.
