Whilst a lot of discussion has been in made in recent times regarding the impact of the proposed seniority payments a much more significant and far-reaching area of tax reform is expected to be ushered into effect with the anticipated promulgation into law this month of the 2019 Law on Financial Management (2019LFM).
Compared to its predecessors in 2016, 2017 and 2018 the 2019LFM does not contain a large number of tax updates however the few amendments it has made to Articles 5 and 7 of the Law on Taxation (LOT) lay the foundation to what we expect to be the next significant piece of tax reform in Cambodia – a comprehensive regime of taxation for individuals residing in Cambodia.
Article 7 of the LOT provides an explanation as to what is considered to be “taxable income” which simply put is the net income, income after allowable deductions, of a legal person after taking into account all of its activities during the year. The taxable income of a legal person includes:
- Capital gains;
- Rental income,
- Royalty income,
- Income received from financial assets or investment assets including real estate.
The 2019LFM has expanded the scope of Article 7 from a legal person, which previously excluded individuals, to now include a physical person. What this means is that “taxable income” as it is defined above now also applies to individuals.
Article 5 of the LOT has also been amended to provide that for individuals, the applicable Tax on Income rates shall be calculated on the aggregate (total) taxable income which individuals receive in each calendar year.
A Sub-Decree and further regulations will be issued to provide guidelines on what deductions/allowances will be able to be claimed by individuals when determining their taxable income. Additional guidance will also be provided on how the Tax on Income for individuals will be collected.
The importance of the amendments to Article 5 and Article 7 of the LOT should not be understated. Under the current tax regime individuals in Cambodia are typically only taxed on their salaries via their Employers, under the withholding tax regime for certain transactions such as services, rental and interest, or under the Immovable Property Tax regime as landowners.
Taken at face value – in the near future individuals residing in Cambodia may be required to pay Tax on Income, at the stated progressive rates in the LOT, on taxable income that they receive such as interest, rent, financial investments and perhaps most importantly from the sale of land.
Of course there are some obvious hurdles for the tax authority to overcome to implement these changes. The first that comes to mind is how to get individuals to comply with the new regulations and to potentially voluntarily register and pay tax on their taxable income. The tax registration and compliance status of a large number of businesses, particularly SME’s, operating in Cambodia is not particular spectacular so to expect individuals to be focused on their tax compliance and registration maybe wishful thinking.
It should be noted that the tax registration requirements currently provide criteria for the tax registration of a “sole proprietorship” which is defined in the LOT as “a business enterprise owned 100 percent by one physical person.” The term “business” is also defined as “meaning a person’s economic activity aimed at producing and selling goods, supplying services, lease, renting or selling property or any other activities…”
In addition Prakas 496 on Tax Registration provides that Small Taxpayers or individuals who undertake economic activities in the Kingdom of Cambodia or have annual turnover below 250 million riels (USD62,500), or turnover of any three consecutive months of the current calendar year below 60 million riels (USD15,000), shall be required to complete their information in the form determined by the tax administration.
One would think that the tax authority may look to first insert this new requirement into existing processes the most obvious being land transactions whereby the individual owner of land with a hard title is required to deal with the Land Office which currently works with the tax authorities to ensure that historical land taxes and the 4% Registration Tax on the transfer of land title are paid.
It is not too much of a stretch to see how the tax authority could further impose themselves in this process to require an individual to pay Tax on Income on deemed capital gains arising from the sale of land at the same time as the Registration Tax is paid.
It will also be interesting to see what allowances and concessions are provided to the individuals, including owners of land in Cambodia, when the additional Sub-Decree and regulations are issued in the future. Based on similar regulations in other jurisdictions we speculate that land which is occupied by the owner as primary residential property may be excluded from the scope of the tax base for individuals and there may be allowances provided up to a certain value for non-primary residential property that is sold by an individual.
Whatever the outcome maybe this is indeed a very significant development in the Cambodian tax landscape and we will update you as soon as we become aware of any further developments in this area.
The DFDL tax team has a vast and varied depth of experience concerning the tax obligations of individuals. 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 here 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.