Prakas 559 was issued last week by the Ministry of Economy and Finance and it provides welcome clarification on the recent addition to the existing list of non-taxable supplies for VAT purposes, as implemented by the 2017 Law on Financial Management.
Prakas 559 additionally sets out the activities that constitute Primary Finance Services, supplying much needed guidance on these for those in the financial sector and to those engaging in related services. Further analysis is provided below.
Typically in Cambodia, a tax registered entity must charge 10% VAT on supplies that they produce i.e. goods and/or services – referred to as taxable supplies. The VAT regulations in Cambodia provide certain exceptions to this general rule – for example, if goods or certain services are exported outside of Cambodia (typically referred to as zero-rated supplies), or if the supply being produced is not deemed to be a good or service for VAT purposes i.e. land or money.
Additionally, Cambodian tax regulations also make reference to ‘non-taxable supplies’. As the name suggests, these kinds of supplies, as contained in the tax regulations in Cambodia, are not deemed as taxable supplies for VAT purposes. Essentially this means that a registered taxpayer carrying out a non-taxable supply is exempted from having to charge the 10% VAT on those same supplies that it invoices to its customers.
The key difference between a non-taxable and a zero-rated supply is that in principle, an entity that zero-rates VAT may still claim VAT input credits from tax registered suppliers that issue VAT invoices to them. On the other hand, entities providing a non-taxable supply cannot claim VAT input credits through the VAT invoices they receive from VAT registered suppliers. Entities that carry out non-taxable supplies may only claim VAT charged by tax registered suppliers as an expense for tax purposes.
Primary Financial Services
One of the noteworthy categories of non-taxable supplies as stated in the Law on Taxation and the VAT Sub-Decree is Primary Financial Services (“PFS”). The historical issue with PFS is that prior to the enactment of Prakas 559 they were never defined. Unofficially, many businesses assumed that in order to qualify as a PFS, the activity needed to be licensed in some manner by the National Bank of Cambodia.
Prakas 559 has now defined PFS as “financial services which derive profit on a margin/difference basis including:
- Money deposit operations, the provision of credit or loans, excluding service fees related to the provision of credit or loan;
- Initial Public Offering (IPO), securities trading or other financial instruments, and clearance and settlement services with respect to the Cambodia Security Exchange;
- Money exchange services;
- Surety and pawn brokerage services; and
- Trade on gold which has not been processed as jewelry.
New Non-Taxable Supplies
The 2017 Law on Financial Management creates some additional non-taxable supplies for VAT purposes, namely;
- Educational Services;
- The supply of electricity and clean water;
- Unprocessed agricultural products; and
- Services relating to the removal and/or removal of waste material either solid or liquid.
Prakas 559 further expands upon the scope of the bottom four activities above as follows:
- The term “electricity” refers to electricity which is supplied for the purpose of domestic consumption or business consumption. The supply of electricity does not include cable installation or other related measurement tools.
- The term “clean water” refers to clean water which is supplied for the purpose of domestic consumption or business consumption except for the sale of drinking water. The supply of clean water does not include pipeline installation or other measurement tools.
- The term “unprocessed agricultural products” refers to bulbs, flowers, leaves, shoots or suckers, roots, and miscellaneous plant elements which have been obtained from local cultivated land, whether sliced or grounded or not, which has not been processed to create a final product.
- The term “solid and liquid waste” refers to solid and liquid material or substances which can no longer be used, or that have been abandoned.
Input VAT Credit
Lastly, Prakas 559 makes reference to Articles 29 to 41 of the VAT Sub-Decree which delineate the rules in regard to claiming input VAT credits from VAT registered suppliers. In practical terms, these rules adhere to the principle outlined above whereby an entity engaging in non-taxable supplies may not claim VAT input credits. The Articles also proffer a formula to claim input VAT credits in the event that an entity deals in both taxable and non-taxable supplies.
The DFDL tax team, as always, stands 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