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Sliding scale to soften tax blow

Motorists travel past the General Department of Taxation headquarters on Russian and Mao Tse-Tung boulevards in Phnom Penh.
Motorists travel past the General Department of Taxation headquarters on Russian and Mao Tse-Tung boulevards in Phnom Penh. Pha Lina

Sliding scale to soften tax blow

The government is planning a series of tax reforms, including the first-ever progressive tax, which aims at reducing the burden and increasing the compliance of small- and medium-sized enterprises that recently entered the real tax regime, according to an unpublished draft obtained by the Post.

Government spokesman Phay Siphan confirmed the authenticity of the document yesterday, and said the changes had already been rubberstamped by the Council of Ministers and incorporated into the 2017 budget law that was submitted to the National Assembly last week for approval. The amendments are expected to pass and take effect in January.

If approved, the progressive tax would replace the current flat tax of 20 percent on company profit with a sliding scale and five tax brackets.

No tax would be imposed on small businesses reporting $3,000 or less annual net profit. Businesses with profit of $3,001 to $4,400 would be taxed at 5 percent, while the next bracket of up to $25,000 would be taxed at 10 percent, and at 15 percent for profit up to $37,000. The full 20 percent corporate tax rate would apply only to businesses whose annual profit exceeds this level.

Kong Vibol, general-director of the General Department of Taxation (GDT), was unavailable for comment yesterday.

However, Mey Vann, director of the financial industry department at the Ministry of Economy and Finance (MEF), which oversees the GDT, said the progressive tax and other reforms outlined in the draft aim at encouraging businesses to operate legally by creating a fair and effective tax regime.

“We want to provide motivation for creating more SMEs and to increase average incomes in order to reduce the gap between rich and poor,” he said.

Clint O’Connell, head of Cambodia Tax Practice for foreign investment advisory and tax firm DFDL, said the government was striving for better tax compliance, especially after scrapping the estimated tax regime earlier this year that allowed many companies to avoid paying their due taxes by underreporting revenue or simply not registering.

“The tax authorities have not completely thrown SMEs into the complexities and entire tax burden of the formalised tax system in Cambodia,” he said.

O’Connell said the five brackets introduced by the progressive tax were designed to distribute the burden of taxes more heavily to large companies better equipped to absorb it.

“By utilising the annual progressive tax on profit rates from 2017 a small taxpayer stands to pay approximately $3,975 profit tax on profit of $37,500, as opposed to a large taxpayer, who would have to pay approximately $7,500 on their first $37,500 of profit applying the flat profit tax rate of 20 percent,” he explained.

Sujeet Karkala, a local associate for the regional law firm Zico Law, said the sliding scale would allow SMEs, which typically have limited investment capital, to slide up the taxable earnings brackets as they grow.

“With a progressive taxation, SMEs will not unnecessarily be heavily taxed,” he said.

However, the implementation could prove problematic as it requires SMEs to prepare their own tax filings and maintain professional bookkeeping – something that the majority of businesses appear reluctant to do.

“At present, it seems to be difficult, but the government needs to introduce a mechanism and act as watchdog to implement this policy by conducting awareness [campaigns] and taking the necessary steps,” said Karkala.

“Introduction of new policies for the growth of economy is always difficult to implement, but is a welcome step to attract more and more investment.”

O’Connell took a harder line, saying that for those small businesses that paid little or no tax at all under the estimated regime, “when it comes to tax compliance you can expect that there will be a certain level of resentment and resistance from most affected businesses”.

While he warned that some businesses may just think that these reforms are a passing phase, he noted that with the GDT’s continual advancement in tax procedures, business owners should not “simply put their heads in the sand”.

“The unfortunate news for these businesses is that the recent changes to the tax system are here to stay and the tax authorities appear to be very serious this time,” he said.

Michael Gordon, a partner at tax firm KPMG Cambodia, said the effectiveness of the new tax scheme will depend on how it is implemented.

“Specifically we would want to see a consistency of the application of tax on profit between companies with similar taxable income levels – whether they be SME or large taxpayers,” he said.

He noted, however, that studies have shown reducing tax rates and simplifying compliance procedures typically results in more compliance and higher levels of taxes paid.

The tax department reported yesterday that it collected a total of $1.3 billion in the first 10 months of this year, a 21 percent increase compared to the previous period last year. The GDT has steadily increased tax collection annually by around 20 percent since enacting comprehensive reforms starting in 2013.

In addition to introducing a progressive corporate tax, the draft law also raises the minimum monthly income tax threshold on salary from $200 to $250 – a move geared towards relieving a tax burden on Cambodia’s lowest earners.

The reforms could result in GDT losing revenue in the short term, but legal analysts claim the improved tax regime would bring long-term benefits for government coffers.

“The goal should always be to look at the big picture,” said O’Connell. “Reforms should try to nurture SMEs, not suffocate them with taxes and compliance costs, in the hope that they will grow and contribute more to the tax revenue take in the long term.”

Ngoun Meng Tech, director of the Cambodia Chamber of Commerce, said while the reforms were beneficial for the state, the real problem in Cambodia is that individuals and business owners inherently distrust the tax authorities and either feel that they are overpaying or that the money is misappropriated.

“Reforming the tax code is good, but government policy should be to show the benefits of paying tax transparently in order to encourage people to be compliant,” he said.

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