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Cambodia's VAT attack: More pain than gain?

Cambodia's VAT attack: More pain than gain?

hourn.jpg
hourn.jpg

"THE government needs money," Kao Kim Hourn, Executive Director of the

Cambodian Institute for Cooperation and Peace (CICP) says with a sigh. "This

government is broke."

On January 1, 1999, the Cambodian government took a decisive step toward addressing

the perpetual revenue woes that Kim Hourn bemoans by implementing a 10% Value Added

Tax (VAT) to goods and services sold in the kingdom.

For the Ministry of Finance and Economy, the implementation of VAT is a crucial opening

shot in its battle to wean the Kingdom from its seemingly intractable reliance on

foreign budgetary donors.

"VAT is the first part of a wider tax system that will [eventually] include

land tax and personal income tax," Kim Hourn explains.

The new VAT is an ambitious project for a government that has until recently scrupulously

limited or avoided entirely the implementation of the kinds of taxes taken for granted

in most other countries.

"It's a new phenomenon," Kim Hourn says of VAT. "Taxes were imposed

in French colonial times, but during the past twenty years more or less nobody paid

tax."

The government's decision to transform Cambodians into a population of dutiful taxpayers

through the implementation of VAT hinges on more than merely the Kingdom's chronic

cash-flow crisis.

Currently the Cambodian government raises only 60% of its annual national budget

of US$600 million-US$700 million through a combination of taxes - the majority import

duties - along with non-tax revenues from the sale of state property and natural

resources.

The remaining 40% of the nation's annual budget is contributed by foreign donors,

who have served notice to the Cambodian government that such largesse will not continue

in perpetuity.

"There was donor pressure to the point that the government had to move toward

[budgetary] sustainability," Kim Hourn says.

Although VAT originated as part of the Fiscal Law passed in 1997, VAT's implementation

on January 1, 1999 took many people in Cambodia's business community by surprise.

While stressing that he "fully support[s] a fair and equitable tax system",

Simon Parr of the Australian Business Council of Cambodia admits that "there

has been a lot of confusion over who has to pay and who's exempt...education about

the VAT is still needed."

Kim Hourn at the CICP concedes that VAT was implemented without a clear understanding

on the part of the public regarding their new tax obligations.

"It's unfair to say that there's been no publicity about VAT, [but] the government

should have tried to reach more people and publicize it longer so no-one would have

been unsure [about VAT]."

Craig Martin of Cambodia's British Business Council echoes Kim Hourn's and Parr's

concerns about public ignorrance of the tax. "Normally if (countries implement)

VAT there's a long period of public and consumer education," Martin says. "That

hasn't happened here, it's been a bit hasty."

David Doran, the ex-officio Chairman of the Corporate Club, a grouping of Cambodia's

largest foreign companies, offers a more explicit critique of government education

efforts regarding VAT.

"There's an incredible vaccum of understanding [about VAT]," Doran says.

"Just looking around the streets of Phnom Penh you can see that no-one's paying

VAT...the system isn't working."

Questions have also been raised regarding the wisdom of the 10% figure the government

has set as the VAT rate. "The rate may be a bit high," Martin says. "Most

other countries in ASEAN started [VAT] at a lower rate and built [the rate] up over

time."

The effect on ordinary Cambodians now expected by their government to pay an additional

ten percent on purchases of goods and services is not lost on Kim Hourn at CICP.

"It's going to become an increasing burden for people," he predicts.

Worries about the height of Cambodia's VAT rate involve more than just the momentary

pain an additional 10% on the cost of goods or service induces at the time of purchase.

Martin expresses the fear that VAT may in turn produce new economic problems rather

than address current ones. "The 10 percent rate may have inflationary pressure."

Increasing the trepidation about VAT is the very real possibility that companies

which comply with VAT implementation will be put at a competitive disadvantage to

less scrupulous businessmen who disregard the tax.

"Another concern [about VAT] is that not enough people are going to be taxed,"

Martin says, adding that only 400 "key companies" have so far been targeted

by the government to implement the tax. "Those [companies] who don't pay [VAT]

in effect have preferential pricing," Martin says.

VAT could even prove to be an inadvertent boon to Cambodia's already booming smuggling

economy, as companies seek to avoid paying and charging VAT by relying on goods not

legally imported into the country.

Speaking in his capacity as legal advisor for DFDL Legal Advisors in Phnom Penh,

Doran suggests that the economic feasibility of VAT-compliant companies is under

direct threat from smuggling. "Before VAT smuggling was a problem [to tax-paying

companies]," Doran says. "VAT increases the problem."

The "preferential pricing" afforded to VAT-dodging companies has already

been noted as the prime culprit in the near-bankruptcy of one foreign-owned business

in Phnom Penh.

Concerns about the govern-ment's committment to universal VAT compliance have been

deepened by an official exemption from VAT compliance granted to the kingdom's powerful

garment industry.

However, Minister of Finance and Economy Keat Chhon, who in press reports in early

January dismissed complaints from the business community about VAT as "the inevitable

cry of a baby soon after birth" does not seem anxious to reassure local companies

that VAT implementation might be fine-tuned to address their concerns.

According to Doran, a letter sent to the government in December outlining the concerns

of the Corporate Club regarding VAT has yet to evoke a response. Similarly, requests

by the Post for clarification by the Ministry of Finance and Economy regarding VAT

have so far gone unanswered.

However, Kim Hourn describes the problems with VAT as a real but temporary phenomenon

that will eventually be rectified. "This is like a pilot project," he says.

"Let's see how it evolves."

According to Kim Hourn, the most serious challenge raised by VAT's implementation

still lies ahead.

"We want to institute a tax system and build a culture of citizen responsibility

in paying their dues," he explains.

"But it will be the responsibility of government to see that all that money

goes back to the people, otherwise people will be very angry."

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