Logo of Phnom Penh Post newspaper Phnom Penh Post - Small taxpayers will be the engine for future economic growth

Small taxpayers will be the engine for future economic growth

Traffic moves in front of the headquarters of the General Deparment of Taxation in Phnom Penh.
Traffic moves in front of the headquarters of the General Deparment of Taxation in Phnom Penh. Hong Menea

Small taxpayers will be the engine for future economic growth

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.

Anthony Galliano is the Group CEO of Cambodian Investment Management Group.
Anthony Galliano is the Group CEO of Cambodian Investment Management Group.

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.

MOST VIEWED

  • Ministry requests school opening

    The Ministry of Education, Youth and Sport on Thursday said it would request a decision from Prime Minister Hun Sen to allow a small number of schools to reopen next month. Ministry spokesman Ros Soveacha said if the request is granted, higher-standard schools will reopen

  • Kingdom eyes India FTA, China deal set for August

    Cambodia is studying the possibility of establishing a bilateral free trade agreement (FTA) with India to open a new market with the second-largest regional economy. This comes as an FTA with China is scheduled to be signed next month while similar negotiations with South Korea

  • Judge lands in court after crashing into alleged thief

    Sen Sok district police on Thursday sent a Koh Kong Provincial Court judge to the Phnom Penh Municipal Court on manslaughter charges after he crashed his car into a woman riding a motorbike on Wednesday, killing her. District police chief Hour Meng Vang told The

  • Preah Vihear court drops charges against villagers

    The Preah Vihear Provincial Court has dropped all charges against eight ethnic Kuoy villagers who were in a land dispute with the Hengfu Group Sugar Industry Co Ltd since 2014. Wednesday’s decision was made by the judge who tried the case on June 10. The eight

  • Gov’t to boost Siem Reap tourism

    The Ministry of Tourism released the results of an inter-ministerial committee meeting concerning Siem Reap province’s Tourism Development Master Plan for 2020-2035 on Wednesday, revealing the government’s plan to improve the overall tourist landscape there. The meeting was attended by Minister of Tourism

  • Residents ordered to remove structures on Phnom Penh’s canal

    Phnom Penh municipal governor Khuong Sreng has ordered authorities to act against the perpetrators who built houses along the Luo 5 canal in Meanchey district. The municipal administration plans to create a committee to solve the matter. The order was given on Wednesday while Sreng led

  • ‘On the offensive’: Cambodia to load up on loans to stimulate economy

    As the dust settles on the economy, Cambodia comes to grips with what needs to be done to turn the economy around, starting with a big shopping list for credit ‘We are going on the offensive,” Vongsey Vissoth, Ministry of Economy and Finance permanent secretary

  • Eighty replacement peacekeepers set for Mali mission despite Covid

    Eighty Cambodian blue helmet soldiers who completed the peacekeeping mission under the UN umbrella in Mali will return to Cambodia on Friday, said the Centre for Peacekeeping Forces spokeswoman Kosal Malida. “To protect their families and communities from the Covid-19 pandemic, the 80 are required to

  • Government set to make up for cancelled April holiday

    The government is set to make up for a five-day Khmer New Year holiday late this month or early next month. The holiday was earlier cancelled due to the onset of Covid-19. The announcement is expected on Friday as the government is studying a range

  • Families told to register for cash handouts

    The government has called on poor families to apply to commune authorities for evaluation to receive financial support during the Covid-19 crisis. A $300 million budget has been planned for implementation within a year. Ministry of Economy and Finance secretary of state Vongsey Visoth said this