T he minimization of tax liability is a major part of doing business in any country
in the world. Before undertaking a cross-border investment, the tax implications
of the investment are, in most cases, thoroughly analyzed. However, existing and
new investors in the Cambodian market sometimes place this important aspect of investment
planning as a low priority.
The reasons for this lack of attention to taxation is a combination of two factors.
One, Cambodia is a fast moving market and some investors do not feel that they have
time (or wish to commit the resources) to thoroughly research the relevant tax issues.
They reason that they need to jump into the Cambodian market quickly to beat their
competition and will worry about tax when the issue directly arises. In addition,
many investors assume that Cambodia's overall lack of laws and failure to enforce
existing laws translate into no tax liability.
Audits and Investigations
As a practical matter, operating a business under this assumption has had little
negative result until the present. Implementation and enforcement of tax laws has
been poor since the re-opening of Cambodia to early 1996.
However, the situation appears to be changing. The Department of Taxation (DOT) of
the Ministry of Economics and Finance has recently stepped up efforts to recover
back taxes. 1996 has seen a spate of renewed activity, audits and investigations
by the tax authorities. This activity will probably increase in 1997 as past oversights
Part of the motivation for this increased activity is that the IMF and other international
organizations are strongly encouraging the government to clamp down on delinquent
taxpayers. The government must increase tax revenues to overcome its current dependency
on customs duties and international aid. It is rumored that the Finance and Budget
law for 1997 will contain strong new penalty, audit and enforcement provisions to
help ensure increased tax revenue.
A symbol of the DOT's increased activity in the review and enforcement areas is the
newly establish litigation office. A recent DOT notice establishes a litigation office,
under the authority of the DOT, which will hear and adjudicate disputes between the
DOT and the taxpayer.
Hurdles for Business
Keeping abreast of tax laws and regulations is not an easy task for investors.
Part of the difficulty is that most tax laws and regulations are included in the
general budget laws. The investor must sort through these laws and extract the provisions
applicable to taxation. As the tax system is evolving, the investor must also keep
track of modifications.
Another major difficulty is that many of the tax laws and regulations are officially
published only in Khmer and, sometimes, in French. Official English translations
are rare. Unofficial English translations usually appear months after the original
law was enacted, and are sometimes difficult to understand.
Finally, the effective date of the tax rules following promulgation is usually very
short. Thus, the new rules may be in force before the investor is aware of its existence.
Finding Tax Laws
Tax laws came from two main sources: the National Assembly and the Ministry of
Economics and Finance (MOEF). The National Assembly passes the main tax law, called
the Finance and Budget Law (sometimes translated as Law of Financial Management)
each year at the end of December. The law is usually enforceable immediately and
applies to the upcoming year. In the past, this law has been published by the MOEF
in a large, soft-back book form, in Khmer & French versions.
Most of this book contains budget allocation matters and rules for internal budget
affairs. However, the 1994 and 1995 and 1996 laws set out the major tax laws for
Cambodia and the 1997 Law is expected to do the same. The book can be purchased from
In addition to the year-end Finance and Budget Law, a "Revised Finance Law"
is usually passed by the National Assembly in September or October of each year.
As the title suggests, this law corrects and amends budgetary allocations based on
actual use and practice during the year. However, this law will also contain important
amendments and additions to the tax regime. For example, the 1995 Revised Finance
Law contains numerous provisions on penalties, and the audit, review and appeal procedures
through the DOT.
The other major source of tax rules is the MOEF, which publishes notices (i.e. "Prakas")
throughout the year. These notices interpret the laws and set detailed guidelines
for the application and implementation of the laws. Some of these notices are very
detailed in nature and contain substantive provisions that supplement the laws. Some
important notices may be issued by the DOT as well.
Now may be a good time for businesses operating in Cambodia for a number of years
to do an internal review of their tax positions. The DOT seems to be assessing back
taxes and penalties from 1994, the date that the first comprehensive tax law was
enacted. Accordingly, businesses should examine their tax position back to at least
the beginning of 1994.
Foreign companies operating in Cambodia through local agents or distributors should
also examine their structure. The terms of the contractual relationship between the
agent or distributor and the foreign company is of key importance in determining
tax liability. This also applies to foreign companies selling and/or performing services
in Cambodia on a full time or occasional basis.
If a letter arrives from the tax department, it is best to be responsive. Managers
should make sure that their accounting employees understand the significance of such
notices and do not ignore them. The laws do contain penalties for failure to respond
on time and the tax department will usually listen to reasonable arguments. It is
also important to file tax declarations as required by the law. Failure to file the
declaration is subject to penalty as well, which can be severe if such failure is
not done in "good faith".
- David Doran is the resident managing director of Dirksen Flipse Doran &
Le's Phnom Penh office. He has been writing and advising on Cambodian legal issues