On 13 March 2019, the General Department of Taxation (“GDT”) released Notification 4630, which provides the “market rates” for determining the caps on interest rate deductions for loans that had been entered into using Khmer Riel (“KHR”) and United States Dollars (“USD”) in the 2018 financial year.
The “market rates” for 2018 are as follows:
These rates were gathered by the GDT through the averaging of the interest rates of eleven (11) of the largest Cambodian banks for the USD market rate and eight (8) of the largest Cambodian banks for the KHR market rate. The banks were not identified in the Notification.
We note that the literal translation of the Khmer language mentions that the above rate will apply to “money borrowed in 2018”. There is some ambiguity in the use of this Khmer term as it is not certain whether the rate cap will apply only to:
(i) Interest on loan agreements that were executed in 2018; or
(ii) Interest on loan agreements executed before 2018 but with drawdowns that occurred in 2018 (such as facility agreements).
It would appear from the straightforward application of Notification 2126 that the 2018 drawdowns on facility agreements executed before 2018 should still be considered as “money borrowed in 2017.”
The interest rate deduction cap for Cambodian tax registered borrowers paying interest is based on the following:
These interest deduction caps are applied for each loan, and are in addition to the annual deduction limit under Article 12 of the Law on Taxation and Section 5.9 of Prakas on Tax on Income, which caps the annual interest deduction to the sum of 50% of the taxpayer’s non-interest income and 100% of its interest income for the applicable tax year.
In order to confirm that the “market rates” are in line with the taxpayer’s risk profile (credit rating), or to support the application of a rate below the “market rates” it is suggested that an independent economic benchmarking study be prepared and included in the taxpayer’s transfer pricing documentation in accordance with Prakas 986.
Interest free or low-interest loans
Since the introduction of transfer pricing regulations in2017 there has been uncertainty around the validity of interest free or low-interest loans between related parties. Instruction 11946 dated 21 August 2018 provide that taxpayers are required to ensure that any interest charged on a related party loan is arm’s length.
In recent discussions with the GDT they have confirmed that the loan between related parties should adhere to the transfer pricing regulations. The GDT has further clarified that interest-free loans or low interest rate loans between related parties may still be acceptable in some cases provided they are supported with proper documentation.
Any tax reassessment with respect to an interest adjustment will be reviewed by the specialized transfer pricing unit of the GDT. Additionally, the GDT has stated that they will no longer use a “deeming” method/approach on related party transactions. Any “adjustment” made by the GDT on related party transactions will be based on valid evidence.
The key take away from this is that it seems that interest free or low-interest loans are still possible between related parties in certain limited circumstances e.g. acquiring an asset, but taxpayers should ensure that they have strong supporting documentation in place.
The DFDL tax team is always ready to answer any questions you may have on this and other tax issues.
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.