Businesses do not particularly enjoy uncertainty, especially regarding tax matters. The prospect of a tax audit, even when no significant exposure is anticipated, can be daunting. If a problem is known to lurk in the shadows, the prospect of a tax audit can be beyond terrifying. In Cambodia, attempting to wait out the applicable statute of limitations for the General Department of Taxation (“GDT”) to conduct an audit and issue an assessment is often a fool’s errand.
For those experiencing restless nights or elevated blood pressure because of questionable tax positions, help may be at hand. The introduction of Prakas 217 MEF.P (“Prakas 217”), which was issued by the Ministry of Economy and Finance in March 2022, provides incentives to taxpayers who wish to make voluntary declarations with the GDT.
Under Prakas 217, taxpayers who choose to voluntarily amend lodged tax declarations and pay under declared tax resulting from an unintended error may benefit from:
- A reduced penalty rate of 10% on the underpaid tax (which re-states the current practice);
- A 50% reduction in the monthly late interest rate of 1.5% if the amendment is made within six (6) months after the original filing date of the tax declaration;
- A 20% reduction in the monthly late interest rate of 1.5% if the amendment is made after six (6) months of the original filing date of the tax declaration.
It should be noted that cleansing previous discrepancies via a voluntary disclosure under Prakas 217 is not based on an unconditional acceptance by the GDT. There is an element of subjectivity that can be applied by the GDT when determining if a taxpayer qualifies for the incentives listed above. Prakas 217 details that the underpaid tax payable under a voluntary disclosure must have resulted from an unintended error rising from a lack of understanding of the tax regulations, negligence or a misunderstanding.
Consequently, taxpayers who have registered tax agents assisting them with their tax compliance obligations, have implemented intentional tax evasion or avoidance schemes, or who fail to meet the negligence threshold (under which the underpaid tax is less than 10% of the total tax payable), may find that the incentives do not apply to them unless a case can clearly be made that a unintended oversight or error had occurred. The Prakas notes that the GDT will issue instructions regarding the application process voluntary disclosure that may help further clarify some of these points.
To obtain the full benefit of the incentives, a voluntary disclosure should be made before the taxpayer receives a formal notice from the GDT of a tax audit investigation for the period in which the underpaid tax occurred.
If a voluntary disclosure is made after the formal notification of a tax audit, a taxpayer shall be subject to an additional penalty of 10% and late interest of 1.5%. Even so, if additional tax and late interest is assessed under the tax audit, it cannot be offset with any underpaid tax and late interest paid under the voluntary disclosure unless the taxpayer is being subjected to a tax audit for the first time.
Prakas 217 is a welcome development insofar as it incentivizes taxpayer compliance in the event that the taxpayer has made an unintentional error or omission in their self-assessed tax declarations. After all, even with the utmost care and diligence, errors and oversights can occur. For taxpayers, the best way to utilize the incentives provided under Prakas 217 is to have independent regular compliance reviews undertaken so issues involving the underpayment of tax can be quickly identified and dealt with before a tax audit investigation begins.
To discuss how DFDL can assist you to best utilize the incentives under Prakas 217, and how to discuss the benefits of a tax compliance review, please contact the author or your DFDL advisor.
Tax services required to be undertaken by a licensed tax agent in Cambodia are provided by Mekong Tax Services Co., Ltd, a member of DFDL and licensed as a Cambodian tax agent under license number – TA201701018.