The Cambodia General Department of Taxation (GDT) has formally announced that the Double Tax Agreements (DTAs) which Cambodia signed with Singapore in 2016, and with Thailand in 2017, officially came into effect on 1 January 2018 for Cambodia tax residents. The DTA’s officially came into force on the 26th (Thailand) and 29th (Singapore) of last month, after they were promulgated into law in Cambodia on the 9th of December 2017.
These developments represent major milestones in Cambodia’s ongoing tax evolution, and in practical terms, they signify that most of the substantive provisions contained in these DTAs, including the reduction of withholding taxes on certain cross border transactions, are applicable from 1 January 2018 for Cambodian taxpayers.
Simply put the primary objective of a DTA is to eliminate the double taxation of income arising in one territory and paid to tax residents of another – for the DTA’s that are in effect for Cambodian tax residents from this month the relief of double taxation is provided by way of a tax credit for the tax that was paid in the other jurisdiction.
For example a Cambodian tax resident that receives income that was taxed in Singapore would typically be allowed a tax credit for the tax that was paid in Singapore, up to the amount of tax that would be payable in Cambodia on the same income.
The DTA’s provide clarity as to the taxing rights of the countries governed by the treaty and set out the types of income that is covered under the treaty. The exchange of information provision contained in the DTA’s enables the contracting countries to obtain information in order to ensure their taxing rights are preserved and where there may be a difference of opinion between the contracting countries the Mutual Agreement article attempts to provide for such eventualities.
One of the key features of the two DTAs, from a Cambodian taxpayer perspective, is the ability to utilise a reduced withholding tax rate on payments relating to dividends, royalties, interest, or technical service fees to tax residents in Thailand and/or Singapore. The standard withholding rate on payments made by a Cambodian taxpayer to a non-resident is 14% whereas under the DTA’s this would be reduced down to 10%.
As of yet however, there are no formal procedures in place as to how a Cambodian tax resident may avail of these reduced withholding tax rates on payments to Thai or Singaporean tax residents made after 1 January 2018.
It is anticpated that the GDT will soon issue a Prakas setting down guidelines on the practical implementation of the DTAs in Cambodia. The Prakas is expected to provide guidance on:
- How to determine the tax residency of a person or legal entity in Cambodia;
- The procedures to obtain a Certificate of Tax Residence from the GDT; and
- The methods to obtain pre-approval on using the reduced withholding tax rate stipulated in the DTAs on cross-border transactions.
On the last point, early indications suggest that Cambodian tax residents will first need to obtain a Certificate of Tax Residence from the GDT, before submitting an official request to the GDT seeking approval to apply the reduced withholding tax rate, accompanied by supporting documentation.
Determining the full range of implications of these DTAs on your current or contemplated business activities can be a complicated affair. Singapore for example, can now apply an economic substance test to determine tax residency. This means that certain registered companies in Singapore may not even pass the first hurdle of obtaining a tax residency certificate from the local tax authorities. This would hamper the abilities of both the Cambodian and Singaporean parties to a transaction from claiming tax treaty relief.
Additionally, the DTAs contain specific rules on the creation of a taxable presence (or ‘permanent establishment), individual taxation, international transportation, disputes, and information exchange. DTAs now also factor largely into the growing concerns of governments currently seeking to protect their respective tax bases from predatory tax practices including profit shifting and so called ‘treaty shopping.’
In short the coming into force and effect of the DTA’s is evidence of Cambodia’s further intergration into the current global measures that countries are implementing to protect their tax revenues from being attacked via actions such as profit shifting and to also encourage foreign direct investment. The recent introduction of transfer pricing regulations in Cambodia is another example of this.
With these developments come opportunities, risks and obligations that taxpayers in Cambodia need to be mindful of.
The DFDL tax team has a vast and varied depth of experience with regard to the application of tax treaties, and as always, we stand ready to answer any questions that you may have on this and other tax issues of concern.
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.
The information provided in this article 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.