The long awaited Prakas outlining the criteria for taxpayers in Cambodia to be exempted from the annual 1% Minimum Tax obligation was issued by the Ministry of Economy and Finance (the “MoEF”) on the 4th of July 2017. This is an important development; however, we urge our readers to carefully assess the practical ramifications of this Prakas that we have outlined below – in particular the distinction between the annual Minimum Tax and the monthly Pre-payment of Tax on Profit, which is summarized at the end of this update.
The salient points to come from Prakas No. 638 MEF.Prk on the Criteria of Improper Accounting Records and Procedures for Paying Minimum Tax (“Prakas 638”) are set out below.
Improper Accounting Records
The 2017 Law on Financial Management that was issued in December 2016 amended Article 24 of the Law on Taxation (the “LOT”) which deals with the imposition of the 1% Minimum Tax. The amended Article 24 provides that the Minimum Tax will be imposed on enterprises that maintained improper accounting records and that criteria to determine what constitutes improper accounting records would be provided in a separate Prakas.
With the issuance of Prakas 638 improper accounting records have been defined as follows:
- Enterprises with accounting records which do not meet the requirements set out by the General Department of Taxation (“GDT”) and the MoEF
- Enterprises which fail to issue invoices for business transactions as stated in Articles 77, 79 and 98 of the LOT;
- Enterprises which commit serious negligence as stated in Article 126 of the LOT;
- Enterprises which commit tax evasion as stated in Article 127 of the LOT;
- Enterprises which do not have an audit report from an independent auditor if their annual turnover is more than 2,000 million (approximately USD 500,000)
With respect to point (1) above, we note that the National Accounting Council of Cambodia has adopted International Financial Reporting Standards for Small and Medium-sized Entities. We also note the Council has adopted International Financial Reporting Standards (IFRS) referred to as Cambodian International Financial Reporting Standards for Small and Medium-sized Entities (CIFRS for SMEs) and Cambodian International Financial Reporting Standards (CIFRS). Public accountability entities are required to adopt CIFRS and non-public accountability entities that meet the audit requirements below are required to adopt CIFRS for SMEs or opt to use CIFRS, if necessary.
In addition, all enterprises that meet two of the three following criteria must submit their annual financial statements to be audited by an independent auditor.
- Annual turnover above Khmer Riel 3,000,000,000 (approximately USD 750,000);
- Total assets above Khmer Riel 2,000,000,000 (approximately USD 500,000); or
- More than 100 employees.
For QIPs registered with the Council for the Development of Cambodia in accordance with the Law on Investment, there is an obligation to submit their annual Financial Statements to be audited by an independent auditor registered with registered with the Kampuchea Institute of Certified Public Accountants and Auditors.
We also note that the MoEF issued Prakas 1820 with respect to the Rules and Procedures of the Implementation of Simplified Accounting for Small Taxpayers in December 2015 which as its title suggests, provides accounting and bookkeeping requirements for small taxpayers under the self-assessed regime of taxation.
Serious negligence as referenced in point (3) above occurs if the amount of tax paid by a taxpayer is less than the amount of tax as determined by law (typically in the course of tax audit) by more than 10%.
Out of all of the criteria listed above we see point (3) above as a point of concern. In our experience most taxpayers undergoing a tax audit in Cambodia will be found to have committed serious negligence under the LOT and as a result be charged with a 25% penalty on the underpaid tax. Practically speaking this requirement will remove a large number of taxpayers unnecessary from the group of taxpayers that are eligible to claim the Minimum Tax exemption.
Tax evasion, as per point (4) above is defined as the willful, knowing, or systematic and repeated violation of tax provisions with the intention of reducing or eliminating the tax amount required by the tax provisions to be paid.
In addition, serious negligence which occurs with the following frequency will be considered to be tax evasion:
- Has happened on two separate occasions within a period of three calendar years; and
- Has happened on three or more separate occasions in any period of time.
With respect to point (5) we note that the threshold for having to obtain audited financial statements is set at USD500,000 annual turnover which excludes by default small and medium taxpayers.
Article 5 of Prakas 638 refers to the establishment by the GDT of a committee which will evaluate the accounting records of taxpayers based on the criteria outlined above. The evaluation must be carried out every two years. The results must be notified to taxpayers who have the right to ask the GDT for a review of the decision if taxpayers believe it is incorrect.
Prakas 638 is silent as to whether a taxpayer can request for an evaluation from the committee or whether the committee will issue a notification automatically to all taxpayers notifying them of their decision. It is our understanding that to date the committee has not yet been established by the GDT and we will update you with further details on the process as they come to hand.
Minimum Tax and Pre-payment of Tax on Profit
In regards to Prakas 638, we understand that the MOEF has made a clear distinction between the 1% annual obligation to pay Minimum Tax and the 1% Pre-payment of Tax on Profit which is consistent with the existing tax regulations. This is a very important distinction to make and practically speaking puts the actual economic benefit of this update in perspective.
The annual Minimum Tax is a separate and distinct annual tax from Tax on Profit which is typically levied at 20%. The annual Minimum Tax rate is calculated at 1% of a taxpayers annual turnover inclusive of all taxes except VAT, and is payable at the time a taxpayer files their annual Tax on Profit return. Currently, Minimum Tax is payable by all taxpayers in the self-assessed tax regime with a few exemptions most notably those entities that have QIP’s. The comparison between Prakas 638 and QIP’s with respect to Minimum Tax is not entirely helpful as we will illustrate in this alert.
The reason why the 1% Minimum Tax is often seen as going hand-in-hand with the 1% Pre-Payment of Tax on Profit is because both use 1% of a taxpayer’s turnover as the basis to determine the amount payable to the GDT the difference being that Minimum Tax is based on annual turnover and the Pre-Payment of Tax on Profit is based on monthly turnover. A taxpayer’s annual Minimum Tax obligation should be completely offset against the monthly pre-payments that were made during that particular year. In the event that the taxpayers annual Tax on Profit liability is higher than its Minimum Tax liability results in the monthly pre-payments being used to partially offset the Tax on Profit liability.
As noted in Article 28 of the LOT, an enterprise which is liable to Tax on Profit according to the self-assessed regime has the obligation to make a monthly Pre-payment of Tax on Profit at the rate of 1% of turnover inclusive of all taxes, except VAT, realized in the previous month.
We have emphasized the reference to Tax on Profit above to highlight the fact that even though a taxpayer may qualify for a Minimum Tax Exemption under the new Prakas 638, they will still be required to pay the monthly 1% Pre-payment of Tax on Profit.
It should be noted that Article 28 also provides an express reference to QIP’s by stating that the turnover attributable to a QIP during its Tax on Profit exemption period (as determined under the investment regulations) will be exempt from this prepayment. Hence why we note above that for the purposes of Prakas 638 the comparison with QIP’s is not helpful.
What then you may say is the benefit of even obtaining a Minimum Tax exemption if you will still have to pay the monthly 1% pre-payment of Tax on Profit? Practically speaking, if you expect that the annual tax on Profit liability of your enterprise will always exceed the 1% Minimum Tax obligation then in reality there is no benefit. However, if you expect to run at a tax loss at any stage in the future or if you operate on a low profit margin basis and expect your annual Minimum Tax liability to be higher than your Tax on Profit liability, it would still be worthwhile to obtain the Minimum Tax exemption provided you meet the criteria outlined above.
If you take the scenario that you are a business that operates at a tax loss for, example, in its first few years of operation – if you obtain a Minimum Tax exemption under Prakas 638 – the 1% monthly pre-payment of Tax on Profit (calculated on monthly turnover) will simply be carried forward each year as a tax credit until the business is profitable at which time the accumulated tax credits arising from the monthly pre-payments can be used to offset any resulting tax on profit liability.
The information provided in this email 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.
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.