It is a generally accepted economic tenet that small businesses are the backbone of an economy. Statistical facts have supported this creed and governments across the globe encourage growth of small businesses through supportive legislation, monetary grants, paid research and most importantly, tax incentives.
Small businesses are the economic powerhouse in terms of job creation, returning money back to local communities and creativity, and they are the building blocks of the most of the world’s largest corporations. In the United States, small businesses represents around 99 percent of all employer companies, contribute over 64 percent of all new employment, and account for 44 percent of the total private payroll. Over half of America’s workers own or work for a small business.
Small businesses play and even more critical role in developing economies. In Indonesia, small and mediumenterprises (SMEs) contribute close to 60 percent of total GDP and 96 percent of total employment. In Malaysia, SMEs contribute about 30 percent towards GDP and employ more than 50 percent of the labour force.
Here in Cambodia, small businesses have historically been the anchor of the economy, and several have transformed into the Kingdom’s largest companies. Prior to 2016, most small businesses benefitted from the inefficiencies of the estimated tax regime, paying a paltry amount of monthly tax, dwarfing the taxes comparably paid by medium and large enterprises.
The Law of Financial Management for 2016 justifiably abolished the estimated regime and created three categories of taxpayers under the real, or self-assessed, regime; small, medium and large. The most meaningful change was the addition of the small taxpayer category, which covers annual revenues of 250 million riel ($62, 500) to 700 million riel ($175,000).
The motivation behind the introduction of the small taxpayer category was to create fair competition, increase the national tax revenue, and to encourage small businesses to register and comply with tax regulations. To gradually assimilate former estimated regime taxpayers and non-registered small businesses into the self-assessed regime, the General Department of Taxation (GDT) provided special tax incentives for small taxpayers to soften the adverse financial consequences of registration and compliance.
The substantive incentives were an exemption on payment of withholding tax unless for movable and immovable properties, tiered tax on profit rather than a straight 20 percent profit tax, and a simplified one-page tax form rather than the four-page document required from medium and large taxpayers. It also offered small businesses a tax patent cost of $100 per annum rather than $300, and credit of 80 percent of VAT input to offset VAT output, meaning a small taxpayer collects 10 percent VAT and pays only 2 percent, keeping 8 percent.
However, from the beginning and until now, there remains confusion and difficulties for Small Taxpayers. At first there was uncertainty whether a Small Taxpayer could claim VAT paid to other taxpayers. Some medium and large taxpayers refused to pay VAT to small taxpayers as a result. There was also confusion whether a Small Taxpayer would receive a VAT certificate. Under the estimated regime they did not, and the message from the branch network on this has been inconsistent.
In addition, there was an initial requirement for payment of $100 from Small Taxpayers to the Department of Commerce for a certificate to display US dollar prices, but this was later scrapped and therefore those registering during that period incurred additional costs.
Initially, some branches required the Small Taxpayer to file taxes as soon as the payment was made for the patent, although not received, and most did not. This was finally standardised late last year when all branches consistently asked Small Taxpayers to start filing upon payment of the patent, a different process from Medium and Large Taxpayers, who file on receipt of the patent.
While most of the issues have been ironed out, the most prominent and discouraging one remains: the registration process. Although there is no definitive list of which business activities are permitted under the Small Taxpayer category, almost every tax branch prohibits a “consultancy” business from registering under it. Other activities rejected include photographer, translator and various small business service activities.
More puzzling is the fact that virgin businesses with no history of revenues are being asked to register immediately as a Medium Taxpayer simply because the branch believes the business will turn over the excess of $175,000 a year.
Previously, small taxpayers could immediately pay for the patent and receive a tax ID number, now most branches are demanding inspection of premises, delaying the process for weeks, and unfortunately the result is usually requiring the business to register as a Medium Taxpayer. While Medium and Large Taxpayers have their patents delivered to their registered business address, Small Taxpayers need to check if the patent is issued by visiting the tax branch frequently as there is no delivery system in place.
Finally, there is the process of ultimately being granted the patent, which may successfully or unsuccessfully involve many debates on qualification as a Small Taxpayer, despite fitting in perfectly with the requirement of the law.
Cambodia’s future economic growth, and continued track record of annual increases in tax collection, may very well depend upon the growth and prosperity of the small business sector. The GDT has had a stellar five years of positive transformative tax change in compliance, regulation, and enforcement. Supporting small businesses through a simplified tax registration and administration process, and providing further tax incentives available on an international level, may be its next challenge in maintaining this five-year record of success.