On 12 February 2020, the European Commission adopted a delegated regulation to partially withdraw trade preferences for some products imported from the Kingdom of Cambodia (“Cambodia”). If implemented, the delegated regulation will impact the duty free exemption currently enjoyed by Cambodia on certain exports.
The European Union (“EU”) adopted the Generalised Scheme of Preferences in 2012 (Regulation (EU) 928/2012) in January 2014 (“EU GSP”), which allows exporters from developing countries to pay less or no duties on exports to the EU. More specifically, under the EU GSP, certain trading partner countries are classified into three separate categories with the countries labeled as Least Developed Countries by the United Nations grouped into the third and most beneficial classification of “Everything But Arms” (“EBA”) and entitled to duty and quota-free access to the EU for all products, other than arms and ammunitions.
On 26 February 2018, the Council of the European Union invited the European Commission to undertake a monitoring process in respect of Cambodia. In accordance with such recommendation, the European Commission commenced an intensive six month monitoring process on 11 February 2019 and rendered a decision in respect of its investigation on 12 February 2020 by means of the issuance of the delegated regulation mentioned above.
The delegated regulation adopted by the European Commission on 12 February 2020 will become effective on 12 August 2020 unless an objection is raised prior to such date by the European Parliament or the European Council.
Historic Benefits to Cambodia under the EBA
According to a recent European Commission report, Cambodia is the second largest beneficiary of EBA preferences after Bangladesh. The EU is Cambodia’s largest export destination and accounts for approximately 50% of exports with a value of €5.4 billion in 2018. Of the €5.4 billion of Cambodian products exported to the EU in 2018, 95.7% of these exports entered the EU market under the duty-free, quota-free access for all products. The majority of Cambodian exports to the EU consists of garments (74.2%), which are followed by footwear (12.6%), bicycles (5.7%), and rice (3%).
Products Affected by the Partial Withdrawal
The European Commission amended Annexes II and IV of the EU GSP and approximately 40 products are suspended from the trade preference with such products estimated to be worth around €1 billion. From a policy perspective, the European Commission sought to limit the impact of the decision on Cambodia’s macroeconomic development by excluding products from the partial withdrawal that require significant training and investment in skills, such as higher value-added garments and bicycles (as opposed to the products selected for withdrawal, which were lower value-added products garment products, footwear, travel goods and sugar, which products comprise approximately 20 percent or €1 billion of Cambodia’s annual exports to the European Union).
If the delegated regulation adopted by the European Commission on 12 February 2020 becomes effective on 12 August 2020, the withdrawn products will be subject to import customs duties ranging from 1.7 and 12 percent.
In some ways, the decision of the European Commission to apply a partial withdrawal of the trade preference could be viewed as less negative outcome compared to complete withdrawal of the trade preferences.
In addition, the trade preferences are only withdrawn until such time as the reasons for justifying the withdrawal are no longer applicable. Indeed, the EU specifically stated that if Cambodia shows significant progress, the European Commission may review its decision and reinstate tariff preferences under the EBA arrangement.
We also note that negotiations are underway between Cambodia and China with respect to a free trade agreement, which if concluded will open up a new market to Cambodian manufacturers to export goods and services using preferential rates. There may also be scope for the United Kingdom, the second largest importer of Cambodia’s goods within the EU, to adopt terms similar to the EU GSP if a free trade agreement is to be entered into between Cambodia and the United Kingdom, upon its exit from the EU.
Finally, we note that Cambodia is currently updating its investment regime, which is likely to lead to the introduction of fundamental changes to the incentives that are provided to investment companies with qualified investment projects (“QIPs”). Among other things, from 1 January 2020, the requirement for investment companies with QIPs to pay the 20% tax on income with respect to dividend distributions on retained earnings that have benefited from a tax on income holiday has been removed, provided that the investment company is still in its tax holiday period at the time the dividend is distributed.
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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.
Partner & Cambodia Managing Director
Head of Cambodia Tax Practice