On the 5th of May 2020 the General Department of Taxation (“GDT“) issued Instruction No. 11581 which provided guidelines on the implementation of VAT for those enterprises in Cambodia that dispose of tangible fixed assets. Just over a month later Instruction 11581 was replaced with Instruction 15301 also issued by the GDT on the 22nd of June 2020. In this update we provide a summary of Instruction 11581 and then take some time to review the previous Instruction and examine why it was revoked.
As noted above Instruction 15301 replaced Instruction 11581 that was issued on 5 May 2020.
Instruction 15301 provides instructions on the VAT implications regarding the disposal of tangible fixed assets that have been used in a business by an enterprise in Cambodia.
Under Instruction 15301 any enterprise that disposes of tangible fixed assets must account for 10% VAT on the sale regardless of whether the enterprise had claimed a VAT input credit or not at the time that they purchased the tangible fixed asset. A disposal for VAT purposes includes a donation or supply of the tangible fixed asset at below market value. The VAT regulations make a distinction with respect to the disposal of tangible fixed assets that relate to the transfer of a business as a going concern which is typically exempted from VAT.
For tangible fixed assets that an enterprise ceases to use in their business the enterprise must account for 10% VAT, based on its fair market value, if the enterprise had initially claimed a VAT input credit when they acquired the tangible fixed asset.
If an input credit was not claimed by the enterprise at the time of the purchase of the tangible fixed asset then the enterprise would not need to account for 10% VAT at the time the tangible fixed asset ceases to be used in the business.
A tangible fixed asset is considered to have been ceased to be used when it has been kept by a business but is no longer used to contribute to the output of the business.
Enterprises that carry out activities that are considered to be non-taxable supplies under the VAT regulations and who therefore cannot claim a VAT input credit when they acquire tangible fixed assets still need to account for 10% VAT when they sell those tangible fixed assets but not when they cease to use the tangible fixed assets.
As noted above Instruction 15301 repealed Instruction 11581 which dealt with the same subject matter. When describing a disposal of a tangible fixed asset Instruction 11581 provided many examples of what were considered to be a disposal of a tangible fixed asset for the purpose of triggering a VAT implication, which included:
the sale of a tangible fixed asset,
As set out in Instruction 11581 the GDT viewed that any of the above actions would constitute a disposal of the tangible fixed asset for VAT purposes. Instruction 11581 went on to provide that the disposal of a tangible fixed asset will be considered as a taxable supply for VAT purposes meaning that 10% VAT would need to be applied at the time of disposal on the market value of the tangible fixed asset that is being disposed.
Importantly however Instruction 11581 provided that VAT would only apply on the disposal of a tangible fixed asset if the enterprise had claimed a VAT input credit at the time that they had initially acquired the asset.
Instruction 11581 provided a number of additional circumstances whereby the disposal of a tangible fixed asset would be treated as a non-taxable supply for VAT purposes and therefore not subject to 10% VAT as follows:
Instruction 11581 concluded by reminding enterprises that even if the asset disposal is exempted from VAT as a non-taxable supply it could still be subject to 20% Tax on Income if there is a deemed gain arising from the asset disposal i.e. the deemed market value of the disposed asset is higher than its adjusted tax value (historical cost – depreciation).
There are a number of material differences between Instruction 15301 and Instruction 11581 and whilst Instruction 15301 provides a less favorable result to enterprises we believe it is more aligned with the intention and purpose of the VAT regulations as contained in the Law on Taxation and VAT Sub-Decree.
The Law on Taxation and VAT Sub-Decree provides that an enterprise needs to account for VAT when they make a taxable supply. A taxable supply is defined as the supply of goods or services by a taxable person in Cambodia which includes:
For VAT purposes a good is defined as “tangible property other than land or money” and the supply of a good is defined as:
“The transfer of the right to use or dispose of a good as the owner whether or not for consideration. The supply of a service incidental to the supply of a good shall be considered a supply of a good.”
Consequently the disposal of a tangible fixed asset by an enterprise, whether or not for consideration, would typically be regarded as a taxable supply and therefore subject to 10% VAT. There are some exceptions to this for example the disposal of land and the transfer of a business is exempted, and certain supplies may be zero-rated i.e. if the good is exported and consumed outside of Cambodia.
Please note that with respect to the disposal of a tangible fixed asset there is no mention in the Law on Taxation or VAT Sub-Decree that VAT is exempted with respect to that taxable supply if a VAT input credit was not claimed by the enterprise at the time that they purchased the asset. This makes sense as VAT is a consumption tax and as such applies on each taxable supply that is made by an enterprise including the disposal of a tangible fixed asset. VAT is not a tax that is borne by the seller but rather it is borne by the buyer. Consequently whether VAT input was claimed or not at the time of the purchase of the asset is normally irrelevant when it comes to looking at whether VAT should be charged on a taxable supply that is made by an enterprise.
However the Law on Taxation does contain a specific Article that contemplates the VAT implications that would arise when a tangible fixed asset ceases to be used in the business of an enterprise. That Article 67 provides the following:
If a tangible fixed asset for which a VAT input credit has been received under Article 65 of this Law ceases to be used in the business of the taxable person, such asset shall be treated as sold and taxable for its then fair market value at the time of cessation of use.
Article 65 refers to the ability of an enterprise who purchases a tangible fixed asset from a VAT registered enterprise or imports an asset into Cambodia to be able to claim a VAT input credit.
It therefore makes sense that under Article 65 if the enterprise never claimed an input VAT credit at the time they purchased the tangible fixed asset and then ceased to use that asset in their business then they do not need to account for VAT at that time.
So why is there a difference in the VAT treatment of an asset that has ceased to be used in the business of an enterprise that is dependent of whether a VAT input credit was claimed or not claimed at the time of the purchase of the asset?
When an enterprise acquires a tangible fixed asset from a registered enterprise in Cambodia or imports an asset into Cambodia they are able to claim a VAT input credit at that time. The VAT input credit that is claimed can be used to offset future VAT output on sales made by the enterprise and therefore reduces the VAT that is payable to the GDT. In certain cases where the enterprises VAT input exceeds the VAT output an enterprise can receive a VAT refund.
Consequently the rationale of deeming the requirement of enterprise to account for VAT at the time that they cease to use the tangible fixed asset is premised on the fact that the enterprise was able to avail themselves of the VAT input credit when they purchased the tangible fixed asset. Even though the asset has not been disposed the VAT input credit that resulted from its purchase was still used by the enterprise during the course of its business.
However in the circumstance where an enterprise acquired the tangible fixed asset and did not pay VAT and did not have the benefit of a VAT input credit, it does not make sense to charge VAT when there has been no taxable supply (asset disposal) and where the asset has simply ceased to be used by the enterprise.
It should be noted that under Instruction 15301 a tangible fixed asset may have been fully depreciated but VAT may still need to be accounted for at the time the business ceases to use the asset based on its fair market value. What is an acceptable fair market value is also left open and in our experience a third party valuation would normally be required to support the market valuation of a tangible fixed asset.
For those enterprises who carry out non-taxable supplies and cannot claim a VAT input credit (noting that the VAT cost for these enterprises will be included in the asset value thereby increasing the depreciation base) this means that when they cease to use the asset in their business they will not need to account for VAT. However when they dispose of the asset they will need to account for VAT as a taxable supply.
In summary we believe that Notification 15301 is consistent with the intent of the underlying VAT regulations and we welcome the clarification from the GDT.
The DFDL tax team as always stand 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.
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 Deputy Managing Director & Head of the Cambodia Tax Practice