2016 13 December

Cambodia Tax Update – New tax compliance regulations introduced for multi-activity Enterprises

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Prakas 1127 MEF,BrK – dated 11 October 2016 (“Prakas 1127”) was issued by the Ministry of Economy and Finance (“MEF”) to provide updated requirements for those enterprises in Cambodia that carry out multiple business activities including one or more Qualified Investment Projects (“QIP”). The date of implementation of this important update is the date of signing i.e. 11 October 2016.

The Salient Points

Who is affected by Prakas 1127?

Three types of enterprise in Cambodia are affected by Prakas 1127 as follows:

  • Enterprises in Cambodia that contain more than one QIP (“Multi-QIP”);
  • Enterprises in Cambodia that carry out more than one business activity – where those business activities are subject to different rates of Tax on Profit (“Multi-Non-QIP”),
  • Enterprises in Cambodia which carry out both a QIP and a non-QIP business activity (“Mixed-QIP’s”).

(For the purposes of this tax update we will refer to the three classes of enterprise that are outlined above collectively as “Qualifying Enterprises” and the classes of activities, Multi-QIP/Non-QIP and Mixed QIP, collectively as “Multiple Activities” or as “Business Activity” singularly).

As noted in the foreword to this update it would appear that Prakas 1127 does not only apply to Qualifying Enterprises that are incorporated and carry out Multiple Activities post 11 October 2016 but also to Qualifying Enterprises that have operated prior to 11 October 2016, and continue to carry out Multiple Activities.

Tax Registration Requirements

Qualifying Enterprises are required to register each of their Business Activities separately with the General Department of Taxation (“GDT”) within 15 days of commencing economic activity and obtain a separate Value Added Tax (“VAT”) – Tax Identification Number (“TIN”) for each Business Activity that they carry out.

A Qualifying Enterprise is now also required to submit separate monthly and annual tax returns for each registered Business Activity.

Example:

Company ABC was incorporated in 2013 in Cambodia. Company ABC obtained approval from the Council for the Development of Cambodia to operate two QIP’s, in 2013 and 2015 respectively, and in addition also carries out consultancy services. To date Company ABC has only obtained one VAT TIN under its Company name and has only filed one set of monthly and annual tax returns.

Under Prakas 1127 Company ABC is a Qualifying Company and will need to register all three of its Business Activities with the GDT and obtain three corresponding VAT TIN’s and Patent Tax. The Company will need to submit three sets of monthly and annual tax returns.

VAT Obligations

Qualifying Enterprises that have Multiple Activities that purchase or provide taxable supplies (for VAT purposes) must;

  • Apply the correct VAT TIN for each Business Activity that imports or exports or that purchases or supplies domestic goods and/or services;
  • Prepare purchase and sales records for each Business Activity and record VAT input credit and output for each Business Activity.

Tax Obligations and Accounting Records

Each Qualifying Enterprise must maintain the following;

  • As well as registering each Business Activity with the GDT for tax and VAT the Qualifying Enterprise must also obtain a corresponding Patent Tax declaration for each Business Activity that it carries out.
  • Each Business Activity which is carried out by the Qualifying Enterprise must have clearly distinguishable supporting investment capital, assets, fixed assets, liabilities, employees-worker, manager(s) and other financial information;
  • Each Business Activity must maintain separate accounting records and separate income and expenditure on an individual Business Activity basis.

Detailed Analysis and Commentary

The premise of a QIP as defined in Sub-Decree #111 ANK/BK on the Implementation of the Law on Investment (“Sub-Decree 111”) is that it is project based and not entity based. In other words it is possible for a legal entity such as a Limited Liability Company in Cambodia to contain more than one QIP. To date this scenario has been quite rarely entertained as the CDC is quick to categorize a substantial capital increase in a Company which has a pre-existing QIP as merely an expansion of that initial QIP which would not qualify for additional TOP exemption (On a separate note it is hoped that the MoEF will shortly provide clarification as to whether an expansion of an existing QIP can also qualify for addition TOP exemption).

However given the right hypotheticals i.e. a different location, separate or distinguishable business line and sufficient job creation/output and capital it is feasible that one LLC could have more than one qualifying QIP.

What is perhaps more readily entertained in the current environment is the scenario where an enterprise contains both a QIP and also carries out a separate business activity that is not considered to be a QIP or as subsidiary income that relates to a QIP (see exemptions below which discusses subsidiary income). In addition, given that Cambodia has different TOP rates for certain non-QIP business activities it is also not so difficult to contemplate an enterprise that carries out a number of non-QIP activities such as retail – taxed at 20% TOP, exploitation of natural resources such as forestry, mining or oil – taxed at 30% TOP or insurance activities – taxed at 5% of gross annual premiums.   

Previously an enterprise that fell into one of the above scenarios would normally only register one time for tax and VAT and would only file one set of monthly and annual tax returns. Now under Prakas 1127 the obligations of those enterprises have dramatically changed – as outlined above and below.

The new Prakas does contain some exemptions which we outline below;

  • Multi-QIP’s that receive approval from the Council for the Development of Cambodia (“CDC”) at the same time and whose Tax on Profit (“TOP”) exemption starts and ends at the same time are exempted (which in practice means that the QIP’s are subject to the same TOP rate at all times);
  • Enterprises that carry out more than one business activity (that are not QIP) where those business activities are subject to the same TOP rate are exempted;
  • An owner/shareholder which carries out more than one business activity in Cambodia (QIP or non-QIP) but who registers those activities in separate legal entities are exempted.

The “subsidiary income” of an enterprise is not considered as a separate Business Activity and as such does not fall within the ambit of Prakas 1127. Subsidiary income is defined in Section 4.9 of the Tax on Profit Prakas (Prakas No. 1059 MEF.Pr.GDT) as mainly including;

“Income from the sale of scrap and waste, rental of business equipment, profit from consigned packaging, profit from business activities carried out for the benefit of staff……”

Prakas 1127 also includes income that an enterprise may receive from immovable property, securities and shares, interest, royalties, dividends, grants and donations as falling under the umbrella of “subsidiary income”.

Other income as defined in Section 4.10 of the same Prakas also falls out of the scope of Prakas 1127. Other income is defined to include insurance compensation, other types of compensation, tax and debt reduction.

This is quite an important distinction particularly with respect to QIP entities. If a company holds a QIP and also receives “subsidiary or other income” as defined above the company will not need to register those types of income separately with the GDT.

Tax Obligations and Accounting Records

In addition to the salient points outlined above each Qualifying Enterprise must maintain the following;

  • A Qualifying Enterprise must record subsidiary income and expenditure for each Business Activity as follows:
  • Tax losses incurred in previous years by the Qualifying Enterprise need to be allocated between the Multiple Activities.
  • For fixed assets that cannot be split and are used by the Multiple Activities the Qualifying Enterprise must record the depreciation expenses as follows;
    • The Business Activity that uses the asset first shall record the depreciation expense;
    • Where two or more Business Activities use the asset then the depreciation expenses shall be calculated on the turnover ratio between the Activities;
    • In the event that two or more Business Activities use the asset but one Business Activity has no turnover the total usage ratio between the two shall be used to attribute the depreciation expense.
  • The Qualifying Enterprise must keep, maintain and record separate inventory lists, finished goods, WIP, materials and other supplementary equipment for the Multiple Activities.
  • For income and expenditure that cannot be clearly attributed to a Business Activity, the Qualifying Enterprise must apportion such income and expenditure on a pro-rata basis using a ratio based on the total turnover and total expenses. In the event that one or more of the Business Activities have yet to receive turnover the Qualifying Enterprise must apportion the expenses based on the asset ratio of the combined Multiple Activities. (see example below)
    • The subsidiary income must be allocated to each Business Activity that receives those incomes or be distributed on a pro-rate basis using the total turnover of the Qualifying Enterprise. In the event distribution of the income is not applicable the Qualifying Enterprise must record the income under the Business Activity that has the highest TOP rate or earliest expiration of the TOP holiday.
    • The subsidiary expenditure must be allocated to each Business Activity that incurs those expenses or be distributed on a pro-rata basis using the total expenditure of the Qualifying Enterprise. In the event that the expenditure relating to subsidiary income cannot be allocated the Qualifying Enterprise must record the expense under the Business Activity with the lowest TOP rate or the latest expiration date with respect to a TOP holiday.

DFDL Commentary:

There are a number of references above to pro-rata/income and expense allocation and usage with respect to revenue, expenditure, assets and subsidiary income/expenditure that cannot be clearly attributed to one of the Business Activities that is undertaken by the Qualifying Enterprise.

Examples of how these attributions may apply are illustrated below:

 

Income/Expenditure Attribution (1) above;

Company XYZ was incorporated in Cambodia in 2012. In 2012 the Company obtained approval from the CDC for a QIP. The Company also carries out non-QIP activities in the form of consulting services. For the purposes of Prakas 1127 Company XYZ is a Qualifying Enterprise.

In 2016 the Qualifying Enterprise had total turnover (exclusive of un-attributable income) of USD 10,000 and total expenditure of USD 6,000.

Of the total turnover of USD 10,000 received by the Qualifying Enterprise in 2016, USD 7,000 was attributed to the QIP and USD 3,000 was attributed to the consulting services.

Of the total expenditure of USD 6,000 claimed by the Qualifying Enterprise  in 2016, USD 3,000 was attributable to the QIP and USD 3,000 was attributable to the consulting services.

The Qualifying Enterprise also received un-attributable income of USD 1,000 and un-attributable expenditure of USD 800 in 2016 i.e. income and expenses that could not be clearly attributable to either the QIP or the consulting services.

Using the income ratio the Qualifying Enterprise would apply USD 700 of the un-attributed income to the QIP and USD 300 to the consulting services and would apply USD 400 of the un-attributable expenditure to the QIP and USD 400 of the un-attributable expenditure to the consulting services.

If either the QIP or consulting services had no turnover in 2016 than the distribution of the un-attributed expenses would be based on the overall asset value of the Qualifying Enterprise. If the Qualifying Enterprise had total assets valued at USD 1,000,000 of which USD 800,000 related to the QIP and USD 200,000 related to the consulting services then the un-attributable expenditure would be distributed on a 80/20 basis between the QIP and consulting services respectively.

 

VAT Obligations

In addition to the salient points outlined above each Qualifying Enterprise must maintain the following;

  • Where a Qualifying Enterprise has acquired a fixed asset which is used by more than one Business Activity the Business Activity which has used the asset first will record the corresponding VAT input credit under its VAT TIN for VAT purposes;
  • Any remaining VAT input that is carried forward as at 31 December 2015 that cannot be separated between the Multiple Activities will be applied on a Business Activity basis by applying a ratio based on the pro-rated total turnover of the Qualifying Enterprise. In the event that one or more of the Multiple Activities have yet to receive turnover then the asset usage is used of to apportion the VAT input credit on a Business Activity basis.
  • Any VAT input credit that has been claimed by the Qualifying Enterprise in the 2016 tax year must be apportioned on a Business Activity basis. This may result in the Qualifying Enterprise having to submit amended VAT monthly returns for the 2016 tax year where VAT input credit has not been correctly applied to the relevant Business Activity and its associated VAT TIN.

DFDL Commentary:

The key point to note here is that a Qualifying Enterprise, after registering all of its Business Activities for tax and VAT may need to amend VAT returns that have been submitted in 2016 to reflect the correct apportionment of VAT input credit brought forward from 2015 and on assets acquired in 2016 that have not been correctly distributed to the Business Activities.

For any further information regarding this update please contact your usual DFDL advisor or contact;

 

DFDL contact:
Clint O’Connell
Senior Director, Head of Cambodia Tax Practice
clint.oconnell@dfdl.com

The information provided in this post 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.