On 10th October 2017, the Cambodian Ministry of Economy and Finance issued Prakas No. 986. MEF.P. (“Prakas 986”) in order to combat perceived transfer pricing abuses and loss of tax revenue in the country’s state budget.
Cambodia has been relatively slow in focusing on transfer pricing and is now seeking to bridge the gap with its Asian neighbors (including Thailand, China, Vietnam, Malaysia and Indonesia) in respect of transfer pricing documentation rules and a more structured audit process.
In a nutshell, Prakas 986 regulates that Cambodian enterprises that have transactions with related parties must comply with new compliance requirements consisting of:
This form and documentation will then be used the tax authorities to identify taxpayers with significant related party transactions for review, audit and potential adjustment if found not to be “arm’s length”. Put simply the arm’s length principle states that the amount charged by one related party to another for a given product/service must be the same as if the parties were not related.
To be caught by Prakas 986, the transactions need to occur between two related parties. This is defined in Article 4 as one of the following:
The five methodologies endorsed by Prakas 986 to determine an arm’s length price in a related party transaction are as per those set out by the Organization for Economic Co-operation and Development (“OECD”).
Prakas 986 does not identify any specific target transactions within the scope of the guidelines or potential audit activity, however Articles 15-17 highlights intangible assets and services, which is an indication of one of the likely initial focus areas.
Article 15 introduces the term from the OECD BEPS Actions 8-10 of “DEMPE” functions (development, enhancement, maintenance, protection, exploitation) related to intangible assets. This reflects the application of a “substance over form” principle and the need to show that the party performing these key functions and incurring the associated costs is entitled to the reward. For example, if a Cambodian entity argues that its brand is owned by a related party in the Cayman Islands but the marketing team and associated marketing cost is in Cambodia, such a mismatch is likely to raise scrutiny under these measures.
In respect of intra-group services Prakas 986 requires the following criteria to be strictly applied to support a deduction:
Services are delivered, necessary to taxpayer’s business and bring economic benefits/ commercial value to taxpayer
The service charge must be at arm’s length.
Prakas 986 is effective from the signing date of 10th October 2017, with no clear indication of the first fiscal year to be applied. However, considering many Cambodian enterprises have fiscal years ending 31 December and the annual corporate tax filing deadline is 3 months from fiscal year end, the assumption is that both the transfer pricing form and documentation should be completed by 31 March 2018.
Failure to comply with the above requirements would lead to:
It is possible that an extension may be granted to prepare documentation given this is the first year of implementation.
Transfer pricing is not something that can be addressed at the time of lodging the tax return or preparation of the documentation. It needs to be considered at the time the transactions are entered into, to ensure the outcome is an arm’s length transfer pricing policy and defensible level of profitability.
It is recommended that taxpayers in Cambodia:
As with most issues surrounding taxation – a balance often needs to be struck between achieving cost effective compliance and the imperative of preparing a robust defense in anticipation of future tax audits.
In collaboration with Duff & Phelps, join us in our upcoming seminar where our tax professionals aims to offer those less familiar with the subject a clear and concise overview of the new transfer pricing regime, and how it will apply in practice to you and your business.
For more information and registration, click here.
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 in this email 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.