"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."
