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A transformative year for the tax regime in Cambodia

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The General Department of Taxation. Pha Lina

A transformative year for the tax regime in Cambodia

The Ministry of Economy and Finance (MEF) and the General Department of Taxation (GDT) were certainly actively engaged in 2016, issuing a series of new prakas and notifications, amending, clarifying and enhancing the Law of Taxation.

Although tax remains a highly distasteful topic, in general, it was an extremely progressive and positive year for which the MEF and GDT should both be commended for their reformist policies that have been overall constructive for enterprises and their employees.   

The year started with the most monumental revision in decades: the amendment of Article 4 of the Law of Taxation which discontinued the Simplified (STR) and Estimated Tax Regime (ETR). “The Law of Financial Management for 2016” divided taxpayers into three categories, all consolidated under the Real Regime.

Small taxpayers – sole proprietorships with annual turnover of $62.500 to $175.000; Medium Taxpayers – enterprises with annual turnover of $175,000 to $500,000; and large taxpayers – enterprises with annual turnover above $500,000 and those registered as a Qualified Investment Project. 

With this law, there were also changes in the Patent Tax payable: Small Taxpayers’ annual Patent Tax being $100; medium taxpayers’ annual Patent Tax being $300; and large taxpayers paying a minimum Patent Tax of $750 and a maximum of US$1,250.

To encourage the former ETR to register, the GDT provided incentives.  Rather than being liable for the 10 percent VAT, after deduction of the input credit, small taxpayers are only liable for paying 20 percent of the VAT collected, based on 10 percent of the sales.

Small taxpayers are only required to pay the 10 per cent withholding tax on rent, immune from the most contentious tax which requires taxpayers to withhold anywhere from 14 percent to 15 percent for services provided to them by unregistered taxpayers.  

Small taxpayers benefit from progressive tax bands for annual tax on profit, whereby medium and large taxpayers are generally subject to a flat 20 percent profit tax. To further persuade the former ETR to confirm, the GDT also announced it will visit all businesses in Phnom Penh specifically to request information of the enterprise relating to its identity and activities and to disseminate tax regulations.  

The elimination of the ETR was a great example of the GDT acknowledging unfair competition grievances from real regime taxpayers, while at the same time conceding total inefficiency of the system - some 60 percent of the resources were collecting less than 1 percent of the tax revenues.  

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Anthony Galliano. Photo supplied

Another example of the GDT addressing a tax that the market claimed was inequitable, His Excellency Kong Vibol, Director General of the GDT, announced during Eurocham Cambodia’s “Tax Forum 2016” that the GDT was considering amending Article 24 of the Law on Taxation, waiving the Pre-payment of Tax on Profit and Annual Minimum Tax obligation for those taxpayers who have externally audited financial statements from a licensed audit firm. 

This revision will be formalised in “The 2017 Law on Financial Management”, effective January 1.2016 may be most remembered as the year of employee tax benefits. With almost zero percent unemployment, absence of employee loyalty, and constant churn in the employment market, employers applauded recent tax reforms that modified the tax application of employee benefits from being taxable as fringe benefits to tax efficient.  In Circular 011, the GDT clarified that certain tax allowances provided to employees shall not be included in the tax on salary base and therefore no longer subject to fringe benefits tax, simply by expanding the application of the exemptions to not only factories, but to “enterprises”.  

Transportation allowances covering travel, housing allowance provided within the workplace, meal allowances provided to all employees and health or life insurance provided to all employee and infant allowances are now free of the 20 percent fringe benefit tax and are tax deductible expenses, provided that the enterprise submits its policy documents to the GDT for each determined period.

“The 2017 Law on Financial Management” will raise the ceilings on the first two tiers of the monthly Tax on Salary rates. The 0 percent band on Tax on Salary is raised from US$200 to US$250 and the 5 percent band from the current threshold of US$312 to US$375.  This news is welcomed by low-income workers and employers alike.   

On the international front, Cambodia signed a Double Taxation Agreement with Singapore on May 20 and with China on October 13. The treaties won’t be in force until the year after ratification by the Cambodia National Assembly and the respective country’s Parliaments.

Despite the extraordinary achievements and progress, among the remaining thorny issue is compliance with Instruction No 1127 on issuance of tax invoices.  This continues to be the largest unresolved issue, primarily due to the remnants of businesses who refuse to register - thus do not provide proper tax invoices, and the difficulty of adjusting existing systems to comply with the invoicing requirements, primarily in Khmer language.

In conclusion, it was a productive and fruitful year in which the MEF and GDT should be congratulated.

Anthony Galliano is Group CEO CIM Group and CEO of Cambodian Investment Management​

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