Anonymous: “One never appreciates their lot until one must pay tax on it.”
On 7 February 2017 the Royal Government of Cambodia enacted Sub-Decree No. 17 ANKr.BK (“Sub-Decree 17”) with the stated objective of creating a transparent and equitable tax system by encouraging all businesses to register for tax.
Sub-Decree 17 specifically addresses this objective by providing tax incentives to small and medium enterprises (“SMEs”) that voluntarily register themselves for tax during the upcoming years 2017 and 2018.
The key elements of Sub-Decree 17 are as follows:
- SMEs that voluntarily register with the General Department of Taxation (“GDT”) in 2017 and 2018 may claim a two year exemption from Tax on Profit (“TOP Exemption Period”). The TOP Exemption Period will commence from the year in which the SME first generates revenue, or from the year of tax registration should the SME be in the position that they have earned revenue prior to the date of tax registration – whichever comes first; and
- During the TOP Exemption Period, SMEs will also be exempted from the annual 1% Minimum Tax and its associated monthly pre-payments – otherwise known as Pre-payment of Tax on Profit.
Additional factors to bear in mind:
In the year following the end of the TOP Exemption Period, the SME will be subject to the standard TOP rates and/or Minimum Tax in accordance with the regulations provided by the Law on Taxation.
Small Taxpayers are now subject to annual progressive Tax on Profit rates that were recently amended by the 2017 Law on Financial Management. Most Medium Taxpayers are subject to a standard Tax on Profit rate of 20%.
Sub-Decree 17 defines SMEs as those enterprises falling under the category of either a Small or Medium Taxpayer. This revised self-declaration regime was introduced by the 2016 Law on Financial Management at the beginning of last year. In summary it states that;
- Small taxpayers are Sole Proprietorships or Partnerships which:
- Have an annual taxable turnover of KHR 250 million (approx. USD 62,500) to KHR 700 million (approx. USD 175,000);
- Have a taxable turnover, in any three consecutive month period within one tax year exceeding 60 million KHR (approx. USD 15,000);
- Have an expected taxable turnover of 60 million KHR (approx. USD 15,000) or more in the subsequent three consecutive month period; and
- Participate in any bidding process, quotations or surveys for the supply of goods and services.
- Medium taxpayers include:
- Enterprises with an annual turnover ranging from KHR 700 million (approx. USD 175,000) to KHR 2 billion (approx. USD 500,000);
- Enterprises that have been incorporated as legal entities; and
- Sub-national government institutions, associations, and non-governmental organizations.
The Tax on Profit exemption is not applicable to SMEs that do not voluntarily register for tax. In other words, any SME that is compelled to register for tax or is unilaterally registered by the GDT may not avail of this exemption.
SMEs that register with the GDT must still submit and declare an annual Tax on Profit return during the exemption period, and declare and pay all other taxes in accordance with the law.
Failure to register with the GDT will constitute an act of obstruction and criminal violation of the tax provisions as per Article 128 of the Law on Taxation.
Generally speaking, the directors, managers or owners of an entity will not be personally liable for that entity’s tax obligations. However, if they knowingly or intentionally influence the entity in not declaring or under-declaring tax or failing to remit tax withheld to the authorities, they will be held personally liable for the outstanding taxes payable.
Furthermore, any individual found obstructing the implementation of the tax provisions will face a fine ranging from KHR 5 million (approx. USD 1,250) to KHR 10 million (approx. USD 2,500) or imprisonment from one month to one year, or both.
Sub-Decree 17 is the latest in a series of recent updates issued by the Cambodian tax authorities to smooth the transition from a historically small proportion of tax registered businesses to a widening of the tax net to include the greater commercial community. These include simplified accounting procedures, adjustments to the annual progressive Tax on Profit rate thresholds for Small Taxpayers, and the proposed abolition of the 1% Minimum Tax.
Transitioning from the abolition of the discredited estimated tax regime to tax registration of the SME sector has been fraught with challenges, given the mere lip-service, over many years that has been paid to the formal tax system, for a multitude of reasons. Nonetheless, the developments over the past 24 months have clearly indicated that the days of SMEs avoiding or ignoring their tax responsibilities are very much drawing to a close.
With that in mind, there still remains a substantial number of businesses, particularly SMEs, which have yet to formally register for tax. Sub-Decree 17 has been specifically implemented to smooth this transition by motivating and incentivizing these SMEs to enter the fold, register, and avail themselves of the two year TOP and Minimum Tax exemptions.
The TOP exemption bears a resemblance to an abridged version usually awarded to Qualified Investment Projects (“QIPs”) under Cambodian investment regulations. Whether the Tax on Profit exemption provided by Sub-Decree 17 is permanent or not remains to be seen. In the case of the QIPs exemption for example, the Tax on Profit is de facto recouped as Additional Tax on Profit on Dividend Distributions. Essentially, the 20% Tax on Profit is deferred until the time of dividend distribution from retained earnings that were generated during the exemption period.
We expect this issue to be clarified in the forthcoming Prakas that will be issued shortly by the Ministry of Economy and Finance. This is expected to supply the implementing guidelines for Sub-Decree 17.
For any further information concerning this update, please contact your usual DFDL advisor or contact;
Senior Director, Head of Cambodia Tax Practice