With the issuance last week of Circular 011, the General Department of Taxation (GDT) has taken steps to clarify what was a grey area with respect to the taxation and scope of certain allowances provided to employees and workers.
Circular 011 states that allowances received by employees “within the framework of fulfilling employment activities” shall not be included in the tax on salary base and shall not be subject to fringe benefit tax provided that documentation supporting the allowances have been lodged with the GDT. Also importantly, Circular 011 expands the base of potential applicants for this exemption to employees and workers of all factories and enterprises.
The allowances expressly contemplated by Circular 011 as falling into the above framework are as follows:
- Transportation allowances covering travel from an employee’s residence to their workplace and from their workplace back to their residence, as well as accommodation or housing provided within the workplace in accordance with the Labor Law.
- Meal allowances provided to all employees and workers regardless of their position or function.
- National Social Security Funds or social well-being funds within the limit as provided in the Law.
- Health insurance or life insurance premiums which are provided to all workers and employees regardless of their positions or functions.
- Infant allowance or expenses on infant day-care center as stipulated in the Labor Law.
- Severance pay for employment termination or indemnity for layoff within the limit as provided in the Labor Law.
Historically, the GDT during the course of a tax audit would often re-assess allowances provided by employers to employees such as transportation, meals and accommodation as either part of the employee’s salary or as a fringe benefit – the latter resulting in a tax impost on the employer of 20% on the value of the benefit provided. Those most affected by these issues were factories and the taxation of these allowances, particularly as fringe benefits, dis-incentivized employers who at the same time were also faced with rising salary costs. Consequently, it is not surprising to see this clarification and re-direction to at least remove some of the tax imposts involved for employers to provide allowances which are designed to improve the living standard and working conditions of their employees and workers.
The issuance of Circular 011 replaces Circular 002 that was issued in January 2015, the salient differences between the two being as follows:
Circular 002 referred to “factory” employees and workers whereas the new Circular 011 refers to employees and workers of “all factories and enterprises”. The benefits as outlined in Circular 011 will potentially apply to a much larger range of taxpayers than originally anticipated under Circular 002.
The new Circular 011 contains a requirement for employers wanting to obtain the exemption from tax on salary or from fringe benefit tax to submit documents relating to the allowances to the GDT for each period. What is unclear is whether a determination on the ability to claim the exemption will take place at the time the documents are submitted or indeed what type of documents are required to be submitted. In addition, it is unclear whether the documents need to be submitted for each new tax year as evidenced to the reference in Circular 011 to “each period”.
We are making enquiries with the GDT on these points and will update you when we have obtained some further clarity.
This Circular is a timely reminder to all factories and enterprises that provide allowances to their employees and workers to take the opportunity to review their internal documentation and processes with respect to the allowances that they provide and ensure that the allowances are clearly defined, demarcated and documented.
The DFDL tax team is always ready to answer any questions you may have on this and other tax issues.
Cambodia Head of Tax
*The information provided is for information purposes only, and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.