The entire Cambodian Law on Taxation is about as long as the preamble to Australia's
This brevity, most experts agree, leads to legal ambiguity.
"The law adopts a lot of international norms, but the looseness of the words
leaves things open to interpretation and negotiation," said one financial consultant,
who, like many interviewed requested anonymity for fear of jeopardizing professional
relationships. "Taxes should not be negotiable."
But in Cambodia, where much of the taxation process still hinges on opaque assessments
and face-to-face bargaining, official subjectivity and the corruption it inspires
To combat this situation, Prime Minister Hun Sen called for change in the tax department
December 16 with the public firing of director Hong Tha. Making the former director
stand before an audience of top government officials, he alleged that Tha's "saliva
was not salty," and that he was unable to control the unlawful actions of his
In the following weeks, members of the financial and business communities were cautiously
optimistic about the change in guard.
"Changing the tax director is the starting point of fighting corruption, which
is like a cancer in the department," said Yim Sovann, a Sam Rainsy parliamentarian.
"The last director caused decay."
At the same time, many expressed concern that the reform was only cosmetic.
"The move by the prime minister was very dramatic because it was a direct intervention
into a department that often operates like a fiefdom," said one foreign legal
expert. "But if you fire one person and everyone stays the same, does it mean
you just reshuffle the deck? That everyone changes chairs but there's no real change?"
Such questions are particularly significant considering the role taxation plays in
Economists and politicians may fight over how much progress the department has made,
but most agree that taxes should contribute more to national revenues. When Hun Sen
dismissed Tha, he admonished the tax department, saying that taxes made up only around
7.5 percent of the government's budget, whereas they account for 8.6 percent in neighboring
Yet, Oum Sothea, a researcher with the Economic Institute of Cambodia, said the department
had made more progress than it's given credit for.
"If you look at yearly trends, you see that the tax revenues have continued
to go up," he said. "There has been good performance by the department,
even if it's not up to the standard of all people."
Sothea admitted the department suffered from corruption and a lack of transparency,
but noted that the informality of Cambodia's business community also makes taxes
difficult to collect.
Nonetheless, calculations in the government budget for 2005 estimated that total
taxes collected would make up 64.5 percent of national revenue, with the bulk coming
from customs charges and 14.9 percent falling under the jurisdiction of the tax department.
Of the latter category, the biggest domestic money-makers were Tax on Profit (5.6
percent) and Value Added Tax (4.9 percent). (See inset)
The fiscal importance of the tax department makes it a prime destination for dollar-hunting
officials. That's where the real resistance to change comes in.
"The tax department is a huge money-spinner," said one financial consultant.
"If you work in the right job you can make a lot of money because so much passes
under the table."
This monetary drive manifests itself throughout the department - from monthly bills
to structural stagnation.
Rules governing different categories of taxation are often subject to abuse. The
tax law and subsequent prakas define three "regimes" of taxation: the "real
regime," "estimated regime" and "simplified regime."
The real regime is a complicated set of taxes applied to larger businesses, while
the estimated regime is generally a simple tax levied on smaller businesses, determined
by estimated profit. The simplified regime's distinguishing characteristic is that
it applies to businesses that use only a cash-based method of accounting.
"The law sets out three regimes, but now we only have two - real and estimated,"
said Muth Noch, secretary of the tax department. "So far we forget about the
He said most officials in the department didn't understand the need for a third regime,
and added that it was only in the law because of the influence of foreign advisors.
"We don't have any plans to create a simplified regime," he said.
Although different conditions for the two existing regimes are outlined in tax law,
Noch admitted that this determination was generally left up to individual collectors.
Not surprisingly, they often cut deals with business owners.
Moving from the estimated to real regime means a significant increase in taxes, and
members of the business community claim proprietors seldom mind giving officials
a little extra money to keep them in the estimated classification.
Higher officials generally allow such behavior, said opposition leader Sam Rainsy
- who was Cambodia's Finance Minister from 1992 to 1994 - because money gets passed
up the line.
"People at the highest level encourage the system so money goes in their pockets,"
he said. "We need to break the system."
Even when businesses are being categorized accurately, problems arise related to
the assessment process.
Because of subjective legal interpretation and lack of training, "the outcome
of an audit often results in a negotiated settlement between companies and tax auditors,"
according to an open letter sent to the government in August by a network of Cambodian
businesses. This "is an impediment to the establishment of legal precedent that
would lead to a common and consistent interpretation of the law."
Both large and small business owners said they often didn't understand the rates
they were charged.
An owner of a small restaurant on Street 63 said that he was charged under the estimated
regime, but that the tax collector didn't seem to follow any official assessment
rules. Instead of guessing a rate based on estimation of profits, the collector's
prices fluctuated depending on individual need, he said.
"They change a little bit every month, and I don't know why," he said.
"It's up to the tax official. If they have enough money, they don't take so
Pich Dom, owner of Best Friends Coffee, said he thought the $70 monthly he pays under
the estimated regime was fair for his 24-hour establishment. But, he noted, he had
no idea how the tax collector determined that figure.
"This money is for what?" he said. "We cannot ask."
While some tax officials distort the law for profit, others just don't explain it
very well. In Cambodia, a country without a strong culture of taxation, that means
businessmen have a hard time distinguishing between bribes and legitimate taxes.
"They should publicize the law, publicize amendments to the law and educate
the public," said one legal expert. "Because of the lack of publicity,
taxpayers don't understand the law, the need to pay taxes - they don't understand
the need for tax revenue."
Further complicating the taxation process is the lack of a clear dispute resolution
system. When businesses disagree with an assessment, they have little recourse.
Those under the estimated regime generally aren't powerful enough to protest decisions,
but even larger, "real regime" companies find themselves in an unworkable
situation. As part of the real regime, the Bureau of Verification Enterprise does
audits and issues assessments. If there's an objection, the complaint (under law)
should go to tax litigation to be resolved by an arbitration committee.
The problem: there is no arbitration committee.
"The dispute gets to the final stage and without an arbitration committee it's
just stuck," said one legal expert. He hypothesized that the tax department
had yet to establish a committee because lending some power to an independent body
would cause the organization to lose authority.
At a November meeting of the working group on Law, Tax and Good Governance, Minister
of Finance Keat Chhon admitted that a sub-decree for the arbitration committee has
been sitting at the Council of Ministers for years with little action.
If a committee was established, members of the business community said they hoped
the department would also work to improve internal coordination.
"A better liaison would make departments more efficient," said a financial
consultant. "For example, the debt collection people might be unaware of an
issue being resolved relating to an objection."
Some companies take issue not only with interpretation of laws, but with the generalities
of the tax law itself.
"The problem is the tax law is very broad and when it comes to specific industries
like freight forwarding and the garment industry, there aren't specific laws,"
said a consultant. "So, people take advantage."
Ken Loo, secretary general of the Garment Manufacturers Association in Cambodia,
said that members of the garment industry had brought their concerns before the tax
department many times, so far with little response. As a top priority, factory owners
want all items produced for export to be exempt from domestic value added tax, or
To illustrate, Loo used the example of a local button company selling to garment
factories. While the factories don't have to pay a domestic VAT, the button company
would because it was selling inside Cambodia. Yet, the buttons - just like the garments
- are ultimately going to be sent abroad.
This distinction works to thwart backward linkages in the production process, he
While most of the garment manufacturers' concerns are inherent to the tax law, they
still encounter implementation problems.
"We hope to have a clearer picture of who is responsible for what in the department,
so factories can be clear on what taxes they have to pay and in what amount,"
Loo said. "It's ambiguous. Assessment is not transparent."
Tempest in a TCAP
Despite the numerous problems with taxation in Cambodia, most admit the department
has made some - if meager - progress.
"We are currently working to implement reforms," Noch said, though he would
not give any specifics. The department also refused numerous requests for a vision
statement or any comments on reforms already accomplished.
In 2000, the department split companies under the real regime into two groups - large
taxpayer units and medium taxpayer units. Businessmen say this has helped streamline
their dealings with the department.
The IMF's component of the 2001 Technical Cooperation Action Plan set forth specific
objectives for the tax department, including reforming the organizational structure,
strengthening collection enforcement and improving audit policy and methods.
But insiders say that the department has only worked to implement the most superficial
"The department has been very resistant to change in any substantive way,"
said one legal expert.
This also holds true for supposed improvements to the monthly tax collection process.
Submitting payments to the national bank instead of the department itself was supposed
to cut down on "unofficial fees".
Before, business owners complained that taxpayers could stand at the department all
day, and if they didn't pay a small bribe, workers wouldn't process their money.
Now workers just charge a fee for the receipt of payment already filed at the national
bank, said a legal expert.
"Taxpayers want to pay tax - why make it difficult to do?" she said. "We
have to pay tax to pay tax."
But petty fees are symptoms of wider ills in the system, says Sam Rainsy.
"If the official can't even buy gas to put in their moto to go collect tax,
how can we expect them not to take some extra money?" Rainsy said. "We
need to pay lower-ranking civil servants decent salaries and deal very strongly with
those at the top responsible for predatory corruption."
It's not yet clear, however, whether one dismissal can greatly affect a system in
which corruption is endemic and regulations malleable.
"I hope this will have a positive impact on the discipline of officials - that
they'll learn if they don't behave well, they can be fired at any time," Oum
Sothea said. "We'll have to see how far the message reaches."
Most taxes on businesses are collected through an "estimated regime", based
on the taxman guessing your income and assigning a monthly charge. However, larger
companies are governed by the more complicated "real regime", which includes:
Tax on Profit
A general tax of 20 percent on a company's annual profit rate. It's one of the largest
sources of tax department earnings, providing for 5.6 percent of national revenue.
Prepayment of Tax on Profit
Because the government may need revenue before the annual collection of the Tax on
Profit, companies are subject to a 1 percent tax calculated by examining monthly
turnovers. The amount paid through this tax is subtracted from the final Tax on Profit.
If a company loses money instead of making a profit, the Prepayment Tax on Profit
becomes the Minimum Tax, which goes to the department. The company is not subject
to the year-end Tax on Profit.
Value Added Tax
Companies that meet a minimum turnover threshold set by the department are subject
to a 10 percent tax on goods and services. If a business makes a purchase that aids
in the manufacturing of a product, it pays VAT on that item. Then, when the product
is sold, the consumer pays VAT, which is included in the price. Domestic VAT contributes
to around 4.9 percent of national revenues.
Companies are liable to withhold tax from payments to individuals not under the real
regime system and various payments between regime taxpayers. Rates can vary from
4 to 15 percent depending on the services rendered.
Tax on Salary
Employees are subject to a Tax on Salary, which is calculated on a sliding scale.
Because employers and employees are jointly responsible for making the payment on
a monthly basis, employers often simply withhold the tax from their workers' salaries.