In Cambodia’s move to raise tax revenue, resident and non-resident digital businesses must register and pay tax. While it may put off some players, others might be unwittingly caught by the obscurity of the declaration

Less than six months after introducing a sub-decree to push non-resident e-commerce firms to register for value-added tax (VAT) with the Cambodian tax authority, the government has upped the ante.

The two new e-commerce policies – a November 30, 2021 deadline for the companies to register with the Ministry of Commerce (MoC) and a reverse charge VAT mechanism relating to business-to-business (B2B) transactions – signal the government’s seriousness in tightening tax measures.

For both policies, the penalties for failing to comply are severe, involving the termination of service and fines, demonstrating the authority’s frustration in trying to get the companies to obey the law.

A statement issued by MoC last week revealed how foreign companies or branches, sole proprietors and businesses that operate e-commerce platforms in Cambodia had yet to apply for e-commerce permit or license despite numerous workshops and training.

Going by the terse tone of the statement, these platforms are likely to see an end to their operation starting December 1 this year, said Ministry of Posts and Telecommunications secretary of state So Visothy.

“The firms who provide e-commerce business activities in Cambodia have to comply with the law and regulation. If they fail to comply or do not pay tax to the government, it is illegal for them to operate in Cambodia.

“[They] are subject to legal action by MoC or Ministry of Economy and Finance (MEF). We have the right to cooperate with the authorities to close down the illegal business operation,” he told The Post via a social messaging app.

The growth of the e-commerce market has been exponential reflecting the Kingdom’s economic growth and lower middle income status.

In addition, the number of e-commerce players, both big and small, have mushroomed in the past one year, with many taking to social media platforms to solicit for business and promote service.

This year, the World Bank forecasts gross domestic product per capita to be $1,606, rising 2.6 per cent after dipping last year. With that, disposable income has expanded to 464,000 riel ($113) in 2017, according to market and consumer data research firm Statista Inc.

If anything, the pandemic has only boosted the usefulness of digital business, prompted by the shift in consumer behaviour.

Data by Statista showed that e-commerce market in Cambodia is valued around $1.5 billion with sales expected to reach $251 million this year. Fashion retail was the largest segment, followed by electronics and media, and food and personal care. By 2025, sales is forecast to be $354 million.

However, it is not clear how the figure is calculated as the MoC does not have a database on e-commerce businesses, although it expects to set one up after December 1, assuming businesses comply with its deadline.

In fact, Penn Sovicheat, undersecretary of MoC, opined that the gross merchandise value in Cambodia is anyone’s guess, seeing that there are “tens of thousands” of e-commerce operators in Cambodia.

“You just have to look online, on Facebook, and you can tell that there should be tens of thousands operating on social media platforms and other marketplaces,” he said.

While some muscle-flexing is expected after December 1 to get the operators to cooperate, the two-prong strategy by MoC and MEF to register companies and for VAT, respectively, might hit a snag, given its uphill task of trying to apply 100 per cent control over the situation.

The government might also not go in strong “in the beginning”, particularly on Cambodian operators, as it feels obliged to weigh the social and economic well-being of local operators under current circumstances.

“On one hand, we have to take action because the state needs money to help the economy but on the other, we need to be compassionate because people’s livelihoods are affected,” Sovicheat said.

Since MoC’s initial announcement in May this year calling both resident and non-resident e-commerce operators to register, the ministry has only received enquiries, including request for advice over their eligibility.

“Many are not sure if they need to register or apply for a permit. These are the type of queries we are getting. But I can’t say how many have become legal operations or are paying tax. Our job is to register the operators while GDT will collect the tax,” Sovicheat said, likening MoC as the upstream enabler while MEF handles downstream activities.

He noted that small operators who make less than 250 million riel ($62,500) revenue per annum are exempted from the registration. The exemption also extends to six other areas, including seasonal agriculture or temporary family-owned businesses, online private tutoring, and booking services.

The government has made appeals through the international chambers of commerce in Cambodia to inform foreign e-commerce firms in the respective countries to register for VAT or risk being penalised.

Clarity and confusion

The issue of non-resident e-commerce operators, with MEF’s Sub-decree 65 in April and the recent Prakas 542 relating to the registration of VAT with the General Department of Taxation (GDT), might be coming to a head.

When it first came out, the sub-decree, provided for in the Law on Taxation, raised eyebrows given its broad definition of non-resident digital goods and service providers and its ambition to get the operators, global tech giants and smaller ones, to register for VAT.

The four categories consist of online purchases of tangible and intangible goods, software licensing and related services, online auctions or online services, and advertising or streaming, as described by legal, tax and investment firm DFDL Cambodia.

Some of the activities comprise purchasing, selling, leasing, or exchanging products or services including electronic commercial and civil commercial activities.

Common activities, like software upgrades and maintenance, digital product downloads, website hosting, advertising, online shopping and streamed web-based broadcasting on a real-time basis are also part of the pool that is subjected to VAT.

This segment could mean that tech giants like Netflix, Spotify, Microsoft, Taobao, and Google are expected to adhere to this regulation, given their massive exposure.

A few tech giants covering the Southeast Asian market, who were contacted, did not respond to questions.

Cambodia is not alone in its pursuit, seeing that the Organisation for Economic Co-operation and Development and G20 countries have been working progressively to combat base erosion and profit shifting, wrote legal, tax and investment firm DFDL Cambodia on its website.

It is among Thailand, Malaysia, Singapore, Indonesia, the Philippines and Vietnam that have drafted rules relating to e-commerce sales to Cambodian consumers by non-resident entities which are in accordance with OECD recommendations, it said.

So, going after multinational tech operators makes sense, especially when countries like Canada and France implemented tax laws to pressure them to pay a levy on the billions they make on its citizens.

However, clarity on the regulations is lacking, particularly on Prakas 542 which highlights a new feature, that is the VAT reverse charge mechanism for business-to-business (B2B) transactions.

Lack of clarity was previously observed in sub-decree 65 but was later resolved by Prakas 542. However, this prakas requires elaboration now, particularly in relation to a 30-day VAT registration deadline.

Why? Because of the determination in the document, which states that non-resident firms that fail to register by the deadline, presumably early October based on its prakas dated September 8, would be “unilaterally registered” by GDT.

The tax department would also issue a tax re-assessment of the taxes that they believe have not been paid – along with penalties and interest, said DFDL Cambodia partner and deputy managing director Clint O’Connell.

Questions to GDT director-general Kong Vibol were not answered.

Meanwhile, O’Connell said the new mechanism would need a degree of added compliance not experienced by Cambodian registered taxpayers that transact with non-resident e-commerce providers.

To be sure, this policy subjects non-resident taxpayers who supply digital goods or services or e-commerce activities with an annual turnover of 250 million or more, or expect a turnover of 60 million ($15,000) in three consecutive months in a calendar year to register for VAT.

These criteria bear similarities with the corporate tax threshold which could lead to confusion among taxpayers.

Reverse charge mechanism

The way the policy works in a B2B transaction is that the VAT registered non-resident e-commerce supplier would have to disclose the transactions in its monthly declaration to the GDT, although they would not have to pay tax.

The Cambodian taxpayer, who purchases the online goods or service, would have to account for the 10 per cent VAT of the supplier regardless of whether the supplier has registered for VAT or not.

Under the reverse charge mechanism, the Cambodian taxpayer needs to make that application with GDT no later than the 20th of the following month of which the supply was made.

“The registered taxpayer who pays the VAT to the GDT on behalf of the non-resident under the reverse charge mechanism can claim a VAT input credit, even if the non-resident is not registered for VAT in Cambodia,” O’Connell said in a webinar on this topic on September 29.

Slightly different in business to customer transactions, the registered taxpayer would issue the invoice with VAT to the customer. The registered taxpayer would calculate the VAT payable, make the payment and submit a VAT declaration before the 20th of the following month.

Based on the online transactions, that would probably be a large amount of tax that would be collected with respect to these services.

As it stands, VAT collection is among the larger components in Cambodia’s tax revenue that sees year-on-year growth.

Looking at the three-month revenue threshold set by the GDT, the bigger e-commerce players would likely fall under the criteria, making it compulsory for them to register for VAT.

`Unwitting consumer’

Though the ability of the tax department to unilaterally register taxpayers has been in existence even for normal taxpayers, it has not been rigidly implemented.

So, going forward, are these legilations just a threat for e-commerce operators to conform? In an analysis on Prakas 542, O’Connell wrote that it would be “interesting to see in the coming months how many of the large players in the e-commerce sector feel compelled to register for VAT in Cambodia under this new development”.

“Concerns still linger with respect to the interplay of the VAT registration requirement under Prakas 542 and the expansive definition of permanent establishment (PE) under Cambodia’s Tax on Income regulations which provide that a non-resident taxpayer who carries out e-commerce activities is considered to have a created a PE if the goods or services are supplied or used in Cambodia.

“By specifically stating that VAT registration is required for non-resident e-suppliers who do not have a PE in Cambodia, the new e-commerce regulations appear to have knocked back the wide expanse of the PE definition.

“If the tax authority wishes to encourage compliance and VAT registration by the large e-commerce players we suggest that it should clarify this issue which could be seen as a deal breaker for some when it comes to the registration obligation,” he said.

O’Connell also pointed out that the additional compliance obligation that was now placed on registered taxpayers, might be the “unwitting consumer” of an e-commerce activity that would be captured under the expansion list of e-commerce activities in sub-decree 65.

“Failure of a registered taxpayer to pay the VAT reverse charge from September 2021 is going to result in re-assessed tax, penalties and interest and the potential to be unable to obtain a corresponding VAT input credit.

“The stakes are quite high and it will be incumbent for tax advisors and internal finance teams alike to educate themselves on the types of transactions that will create a VAT reverse charge obligation for their clients and businesses respectively,” he stressed.