Michael Kennedy, senior associate with Australian law firm Coors Chambers Westgarth, details
wide changes to the Cambodian tax laws.
THE Financial Law passed last
December - and now effective after a two month moratorium - affects all people
working in Cambodia as well as Cambodian citizens living abroad.
The law
imposes income taxes on individuals and clarifies the impact of profits taxes,
which were first introduced by former Finance Minister Sam Rainsy in March
1994.
The tax base has been substantially widened, which is important
given the historic reliance on import duties as the government's biggest revenue
earner - now threatened by widespread smuggling.
However to its credit
and consistent with the philosophy of the Investment law which offers very
competitive incentives, the scales of taxes are not at all onerous when compared
with those in Thailand and Vietnam. There is no disincentive to pay taxes on
this score alone.
On the other hand, the new law extends the obligation
to pay taxes not just to the tax debtor, but also those who deal with the debtor
in certain ways, such as transferring land.
More unusually, the tax
authorities can also recover tax debts and penalties from third parties who hold
the moneys of the tax debtor, such as banks or trustees or investment companies.
These third parties are personally liable for the tax debts. Likewise, senior
executives who are involved in tax evasion activities on behalf of their
companies are financially responsible for those company tax debts and
penalties.
This article is not exhaustive on the tax law and does not
attempt to deal in depth with the issues discussed. Readers who wish to take
action in relation to such issues should seek legal advice before so acting.
Income tax:
Personal income taxes are levied monthly on total
income, which arises from activities in Cambodia, regardless of the form of
income and includes benefits in kind, which are valued at their net present
value. It also purports to cover the activities of residents of Cambodia who are
working abroad (Articles 10-11).
Tax is levied on the taxable income of
foreigners, unless exempted by international conventions or the Investment Law
(Article 13). The total income liable to tax includes payments made abroad for
the benefit of employees and loans or advances made by employers (Article
15).
The income tax threshold starts at a monthly remuneration of 750,000
Riels (currently around $300 a month), with a tax rate of 5% for incomes between
750,001 to 1 million Riels: 10% for incomes between 1,000,001 to 10 million
Riels; 15% for incomes between 10,000,001 to 20 million Riels and a top tax rate
of 20% for incomes which exceed 20 million Riels ($8000 a month). A tax
deduction of 75,000 Riels applies for each dependent child. An expatriate
resident who receives a salary outside Cambodia and has paid tax on that salary,
will be allowed a tax credit for the amount of tax paid (Article
16).
Apart from setting the tax rate scales, Article 16 also stipulates
that employers and employees are collectively responsible for the payments of
income tax in Cambodia. To compliment this, Article 19 requires the deduction of
income taxes by the employer on each pay day, while Article 20 requires the
payment of tax so deducted within 15 days.
Article 21 requires an
employer to maintain a register or ledger which records salaries paid and taxes
deducted. It requires receipts to be kept for three years.
Profits tax:
Profits tax is payable monthly, by a pre-payment
based on 2% of monthly turnover (Article 25). The actual Profits tax payable at
the year end is calculated at the rates set out in Directive 012 issued by the
Minister of Economics and Finance on 9 March 1994. This set tax rates of 10% of
profits below 1 million Riels, of 15% of profits between 1 to 10 million Riels,
of 20% of profits between 10-20 million Riels and 30% of profits exceeding 20
million Riels.
If the amount of monthly (provisional) tax payments
exceeds at the end of the financial year the actual amount payable when the
profit of the enterprise is calculated, a credit will be allowed against the
monthly payments in the following year. Likewise, additional payments will be
required if the sum of the monthly provisional payments were insufficient to
meet the amount of profits tax due. However in either event, a minimum of 0.5%
of the monthly turnover payments will be retained by the Treasury, whether or
not a profit has been earned by the enterprise (Article 25.2)
Undeveloped Land tax:
A tax on undeveloped land has been
created (Article 26). It extends to urban areas on which buildings are
undeveloped or abandoned. The basis of the tax will be set by an Assessment
Committee, with land areas of less than 1200 square meters to be exempted, and a
market value to be assessed within each financial year (Article 30). The tax
rate is 2% of the assessed market value of the land, payable by September
30.
Turnover (Sales) tax:
A flat rate of 10% of turnover has been
set, by Article 37, on the turnover of hotels and related services, rented
rooms, massage premises, nightclubs and resorts, restaurants and drink shops.
All other turnover tax has been abolished.
Patent fees:
A new sliding
scale of patent fees has been prescribed for trading and industrial activities,
with the threshold being 15,000 Riels for annual turnover up to 7.5 million
Riels, while the same threshold applies to the services sector (excluding hotels
and restaurants) for annual turnovers up to 3 million Riels.
Registration tax:
A range of transactions will now incur a
registration tax of 4% of the declared value. By Article 40.1 these include
transfers of land or fixed assets, whether by sale, gift or purchase of shares
in a company. The same ad valorem tax is levied on the transfer of motor
vehicles and vessels.
The registration of various documents will now
incur a fixed fee of 100,000 Riels ($40) under Article 40.3. These include
company registrations, mergers and liquidations and contracts for the supply of
goods and services to public enterprises. The tax is payable within 3 months and
a100% penalty applies if the tax is paid out of time (Article 42). Perhaps more
importantly, a new certificate of title or evidence of ownership cannot be
issued unless the new owner has paid the registration tax (Article 43).
Stamp duties:
By Articles 46-48 a range of minor stamp duties are levied on administrative
directives of the government and court orders, as well as public announcements.
The directives and orders cannot be issued unless the stamps are attached.
Tax identification:
By Article 50 each business which is liable to tax shall be allocated an
identity number by the Tax Department. Article 51 requires the identity number
to be placed on all business documents such as invoices, receipts and bid
documents. If receipts are issued without the identity number, the receipt
cannot be used for the calculation of profits tax.
Cash transactions:
All small business enterprises which operate on a cash basis with the public
with sales exceeding 10 million Riels in 1994 are required to keep income
accounts and issue receipts to record all daily transactions (Article
54).
Trading firms are also required to keep accounts of all purchases
with receipts or other documentary proof attached. By Article 54.3 all accounts
are required to be produced to the tax authorities on demand; failure to do so
makes the business liable to unilateral determination of tax liability by the
tax authorities.
Tax collections:
By Article 54 the tax authorities are responsible for both determining the
tax base, computing taxes payable and collecting the assessed tax. A tax
assessment letter is to be sent to the taxpayer (Article 57) and if the assessed
taxes have not been paid within one month, a reminder letter is sent which
requires payment within 15 days together with a penalty of 10% (Article
58).
Article 60 prescribes two "tough measures" to collect unpaid taxes.
The first invoices the confiscation of assets and the closure of the
enterprise's offices, factories or workshops. The second involves the sale of
the assets. By Article 61 the debt collection division is required to record the
specific measure to be taken. By Article 63 the sale of assets can proceed one
month after the record is made. Under Article 64 the lodging of a protest by the
tax debtor does not prevent the implementation of the specific measures and
anyone who acts violently or with contempt against the tax collectors will be
liable to criminal charges.
The tax collector can recover unpaid taxes
and penalties from third parties who hold the tax debtor's money. This appears
to apply to banks or trustees who, as a "third person who is entrusted with
debtor's money" is obliged by Article 66 to pay the taxes, duties and penalties
on behalf of the debtor from the money in his possession. By Article 68 such a
third person who fails to pay taxes as requested by the tax authorities is
personally liable to pay such taxes from his own assets.
Article 71 puts
a purchaser of an enterprise or real estate at risk as both the buyer and seller
are collectively held responsible for the payment of taxes and penalties payable
by the seller at the time and up to the value of the sale.
- (Michael Kennedy is currently advising the Ministry of Industry, Energy and
Mines on the preparation of a new Electricity Act and the establishment of
Electricite du Cambodge as a legal entity. He also acted as Legal Advisor to the
previous Minister of Economics and Finance in the period March to October
1994.)
