Tax regulations in Cambodia are increasing in number and gaining in complexity, while also being enforced more rigorously. Steadily, the tax collecting system in the Kingdom is transforming from a benign, if not lax, regime to a stricter regulatory system.
2016 is proving to be a year key in this transition. In the first few months of the year, we have seen the release of a number of regulations aimed at overhauling the system, including the abolishment of the estimated tax regime as decreed in the recent Law on Financial Management.
However, much remains to be done to make the taxation system both truly efficient and user-friendly. “While the Law on Taxation is quite simple, dealing with the tax branches and the General Department of Taxation can at times be challenging,” points out Anthony Galliano, CEO at Cambodian Investment Management. “Standard and fair application of the laws, helpful and attentive staff, and weeding out any remnants of facilitation fees are certainly areas where improvements can be made.”
The move towards automatisation
The current drive of the General Department of Taxation (GDT) is to automatise tax collection. “By taking individual officials out of the equation, by limiting personal contact with taxpayers, the system will become more transparent and accountable,” acknowledges Bretton Sciaroni, Senior Partner at Sciaroni & Associates. As part of this drive, in 2014 the GDT launched a new online tax registration portal, https://cambodia.tax.gov.kh/reg/.
The governmental push for automatisation can also be seen in other areas of business regulation. For example, last December the Ministry of Commerce launched a new online company registration system. According to Prakas No 300, all existing companies registered before January 5, 2016, must re-register through the new system, with an original deadline of March 31 that was recently extended to May 31 of the present year.
Experts agree the new online registration system will make the whole process more transparent and efficient. Blaise Kilian, Advocacy Manager at the European Chamber of Commerce in Cambodia (EuroCham) believes the new system represents a bold reform: “It should help to further formalise the economy and reduce non-transparent practices.”
However, the number of businesses that have used the online system so far has fallen short of expectations, prompting the government to extend the re-registration deadline. Different practical difficulties have been reported by users of the new system, which have led to delays and even deadlocks in the completion of re-registrations.
Law on Financial Management 2016
The Law on Financial Management 2016, promulgated on December 17, 2015, abolished Cambodia’s former two-tier tax system, dropping the more informal Estimated Regime. As such, the country is left with a unified, one-regime system that should widen the taxpayer base. Additionally, the remaining tax regime (known as the Real Regime) has been restructured, with taxpayers now divided into three categories according to income: small, medium and large taxpayers.
“This is probably one of the most significant pieces of tax reform to have been passed in Cambodia in the last decade,” says Clint O’Connell, Senior Tax Director and Head of Cambodia Tax Practice at DFDL. “Practically speaking, it may take some time for the transition to be fully implemented.”
Tax experts agree that the revised system will bring more tax revenue to the government, which, in theory, means more money for schools, hospitals and public infrastructure. “It is expected to enfold more businesses into the formal tax structure, including VAT, monthly and annual returns, withholding, and potentially auditing,” says Joseph Lovell, Managing Partner at BNG Legal. DFDL’s O’Connell also points out that thanks to the new system there should be more of a “level playing field and greater transparency and objectivity with the manner in how taxes are applied.”
New invoicing requirements
One of the most controversial new tax regulations passed recently is Instruction No 1127, which dictates new requirements for invoicing for taxpayers. According to the regulation, invoices must be issued in the Khmer language, or, alternatively, in both Khmer and English. Additionally, invoices must include other information specified by sample invoices provided by the GDT, and must be signed by the customer and the supplier. If invoices fail to comply with the instruction, VAT paid cannot be deducted as an input, nor can the amount be claimed as an expense against tax on profit.
“While the business community does not have a problem with the requirement,” says Sciaroni, “the burden was that it was to be implemented immediately.” According to the American lawyer, this is a problem as businesses need time to adopt a Khmer font and get accurate translations. However, he points out that, according to H.E. Kong Vibol, who is in charge of the GDT, the private sector will have a six month grace period to create the new forms.
“The tax law reforms create a need for processes to change,” says chartered accountant and Founder of Xlconsulting David Benaim.” According to Benaim, the new requirements could make off-the-shelf accounting software systems – such as QuickBooks, Xero, and Peachtree – a lot harder to work with, as the system defaults for invoicing don’t have Khmer script, and, at first glace, the time taken to manage invoicing could increase tenfold. “Most of the aforementioned accounting systems have the ability to fix this problem, and once set up is simple, but the set up may require digging into features not previously used.”
The road to a more business-friendly ecosystem
Other pro-business developments have occurred in recent months, pointing to an increasingly business-friendly stance by the GDT. Sciaroni acknowledges that Prakas 1139 has just been replaced by Prakas 496, “making registration at GDT much easier and business-friendly.” The original prakas was heavily criticised for a provision stipulating that in order for a company to be registered with the Ministry of Commerce , the chairperson or owner must be present at the tax administration, even if he/she does not reside in Cambodia. Under Prakas 496, this condition is abolished.
However, legal experts claim there are a number of long-standing issues that still need to be resolved to make Cambodia more investment-friendly. Sciaroni believes that the creation of a tax arbitration committee would be helpful in bringing closure to a number of tax disputes between the GDT and the taxpayers. Likewise, bringing more discipline to the limited tax audit is also a priority, as it has expanded in scope and now resembles a comprehensive tax audit, increasing the administrative burden on businesses.
According to Sujeet Karkala, Legal Counsel at BNG Legal, a revision of the corporate tax rate and of the VAT system should also be on the GDT’s to-do-list, as well as more tax incentives for Qualified Investment Projects. A Double Taxation Avoidance Agreement with neighbouring countries, such as Singapore, Thailand and other developed countries, is also overdue, he believes.
As pointed out by our contributors, there are some sizeable problems with the current tax collection system. However, Cambodia seems to be moving in the right direction, with initiatives and regulations that promote transparency, accountability, and the simplification of processes. “Even though the automatisation is occurring with fits and starts, ultimately we will have a better tax collection process,” concludes Sciaroni.