Tax Insight: Amendments That Will Impact Your Business In 2017

There are a number of amendments included in the Law of Financial Management 2017 that are likely to have an effect on Cambodian businesses in the new year.

The Law of Financial Management 2017 contains a number of amendments to the Law on Taxation set to take effect this month. With the help of Anthony Galliano, CEO of Cambodia Investment Management, we highlight them here:

Tax on Salary

The zero percent, five percent and 10 percent tiers of the Tax on Salary (Article 47 of the Law on Taxation: “Determination of a Monthly Tax of an Employee”) have been amended. The zero percent and five percent taxable salary brackets have been expanded and the 10 percent bracket has been reduced to accommodate the broadened five percent bracket.

The zero percent tax bracket, formerly for monthly salaries up to 800,000 riel ($200), now applies to salaries up 1 million riel ($250). The five percent bracket, which previously applied to monthly salaries between 800,001 to 1.25 million riel ($200 to $312.50), has been altered to cover wages from 1,000,001 to 1.5 million riel ($250 to $375). Finally the 10 percent bracket, which used to be for salaries of 1,250,001 to 8.5 million riel ($312.50 to $2,125), is now reduced to wages of 1,500,001 to 8.5 million riel ($375 to $2,125). These amendments result in a decrease in the Tax on Salary for all employees, but they particularly benefit low-income workers.

The higher tax brackets – 15% for salaries from 8,500,001 to 12.5 million riel ($2,125 to $3,125) and 20% for salaries greater than 12.5 million riel ($3,125) – remain unchanged.

Article 46 of the Law on Taxation has been amended by increasing the monthly deduction applied to taxable salary for dependent family members. The present allowance of 75,000 riel ($18.75) has been raised to 150,000 riel ($37.50). Deductions for family members are allowed for dependent minors, children under 14, full-time students under 25 at an accredited institution, and housewives.

Minimum Tax

An amendment to Article 24 provides, under certain conditions, the possibility of lowering the annual Tax on Profit (TOP) for certain enterprises. Presently, taxpayers – with the exception of qualified investment projects, money exchangers, gold, diamond and gemstone dealers, and educational institutions – are required to pay a Minimum Tax of one percent of the annual turnover, inclusive of all taxes, except the Value Added Tax (VAT). This tax is paid monthly through the filing of the Prepayment of Profit Tax.

As per the new amendment, whenever the Minimum Tax exceeds the TOP due, the Minimum Tax prevails. It should be noted that no refund will be granted to offset the difference between the Minimum Tax and the TOP.

Conversely, if the Minimum Tax is lower than the TOP due, the amount prepaid through the filing of the Prepayment of Profit Tax can be applied to offset the annual TOP obligation. In this case, the taxpayer must pay the deficit no later than March 31 (the end of Cambodia’s fiscal year).

The amendment also envisions an exemption to the Minimum Tax for certain enterprises, with a Prakas to be issued by the Ministry of Economy and Finance defining the criteria for this. It is anticipated that this Prakas will oblige the exempted enterprises to maintain proper accounting records and to be audited by a licensed auditing firm.

GDT’s right to request information from third parties

Under Article 99, the tax authorities may issue a notification letter to a taxpayer or a third party for the purpose of requesting information related to the taxpayer. Third parties in this context include insurance companies, banks, and other financial institutions.

Amendments to Tax on Profit for sole proprietorships, partnerships, and insurance companies

Sole proprietorships and partnerships now benefit from lower annual TOP. Previously, only the first $1,500 of annual profit was taxed at zero percent. Now this has been expanded to the first $3,000. The five percent tax tier now applies to annual profits of $3,001 to $4,500, an improvement over the former range of $1,501 to $3,750. Finally, the 10 percent tier now starts at $4,501, rather than at $3,751. The 15 percent and 20 percent tiers remain unchanged.

The tax basis and rates for insurance companies have also been amended. For insurance or reinsurance of property or correlated risks, the rate is five percent of gross premiums. For insurance and reinsurance activities on life insurance, the 20 percent TOP rate will now apply. The MEF will issue a Prakas for further clarification.

Dividend distribution for local branches of foreign companies

Article 20 has been amended to clarify that if the local branch of a foreign company pays TOP for income generated in Cambodia – generally 20 to 30 percent – the Additional Tax on Dividend Distribution (ATDD) is then waived. In this case, the branch’s profit after tax will be subject to a 14 percent Withholding Tax if the income is generated from business activities carried out by a non-resident through a permanent establishment in Cambodia, as set out in Article 26 of the Law on Taxation.

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