INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 3): Cambodia
By Larry Shuen Fai Ng, ALLNISON Auditing & Consulting Co., Ltd.
Compared to its neighbouring countries, Cambodia is relatively new in opening itself to the global market. Therefore, there have been very limited regulations and policies addressing matters related to international tax compliance. However, this has not caused limitations in the investment activities of foreign investors. Except for the investment in immovable property such as land holding, in general, the country has no restrictions to the foreign participation and activities in investments.
This enables the establishment of 100% wholly foreign-owned limited companies, a form preferred by a large proportion of investors.
Forms of Investment in Cambodia
Wholly foreign-owned limited companies fall under the category of limited liability company, which is one of the main forms of entities available in Cambodia. Limited liability company is then classified into single member private limited company, private limited company, and public limited company. The other main forms of business include branch, and representative offce, which is well known as a non-taxable legal entity.
Accounting and Tax Compliance
All entities established in Cambodia have the obligation to follow the Cambodia-International Financial Reporting Standards (“CIFRS”) or the CIFRS for SMEs. They are wholly based on the International Financial Reporting Standards (“IFRS”) and International Accounting Standards (“IAS”) which, therefore, ease the understanding and application process of international citizens and foreign entities in Cambodia.
In respect of the tax system, various relevant policies and regulations have been structured to target tax collection in different magnitudes. It is worth noting that the annual income tax declaration deadline is by the end of March of the following year. In some countries, such tax is referred to as the Corporate Income Tax (“CIT”) while it is called Tax on Income (“TOI”) in Cambodia. There are no individual income tax filings nor any tax obligations on trusts, foundations, and capital gains under the current taxation system.
TOI is imposed at the standard rate of 20%, except for oil and gas, and certain mineral exploitation activities, which are taxed at 30% on the total annual world-wide income of taxpayers that are considered as tax residents of Cambodia. The insurance sector is taxed at 5% on gross premium income. Qualified Investment Projects are exempted from TOI during the tax holiday period. The TOI rate for nonresident taxpayers is 20% on income derived in the Cambodia territory.
Cambodia has also introduced Minimum Tax (“MT”), which is taxed at 1% on total turnover, aside from TOI. Companies are subject to either the MT or TOI, whichever is higher. Certain companies which fulfil special conditions set by the tax department may be exempted from MT.
The most recent development on trusts is the promulgation of the new “Law on Trust” in early 2019. The law provides an introduction on trusts and its four categories, namely the commercial, public, social and private trust. However, tax implications on corporate trustees and beneficiaries have not yet been brought up at this point, not to mention the duties on individuals currently not liable to file income tax.
Although individuals are free from the annual TOI filing obligation, payrolls of residents and non-residents are subject to Tax on Salary (“TOS”) at a rate starting from 0% up to 20%. Certain incomes will also be taxed and withheld by a registered taxpayer/entity then remitted to the tax department as Withholding Tax (“WHT”). Such incomes include rental income and service-related income like personal service.
Speaking of WHT, services rendered within the territory of Cambodia are subject to WHT at a standard rate of 15%, 14%, or 10%. Any service including, but is not limited to, managerial and technical service, interests, any rental of property, royalties, and others of similar nature provided by non-residents (both legal persons and physical persons), shall have 14% WHT of the total amount payable withheld on behalf of the income recipient before payment is made to the service provider.
The repatriation of profit to nonresidents, for both legal and physical persons, are subject to WHT of 14% while such repatriation to residents is tax free.
Cross Border Taxation
With the ratification of the Double Tax Agreement (“DTA”), the standard rate of 14% WHT levied on non-residents (both legal and physical persons) shall be lowered to 10% in most cases. To be qualified for such tax relief, the aforementioned non-residents must be determined as a tax resident of the other contracting party of the agreement and are required to have suffcient documents of proof such as passport, certificate of residence, and so on. Depending on the relevant laws and regulations of the other jurisdiction, the amount of tax withheld and paid to the Tax Authority of Cambodia may be claimed as tax credits for the computation of income tax.
Up to the first quarter of 2020, eight countries and regions have entered and signed a DTA with Cambodia, seven of which have come into effect: the Republic of Singapore, the Kingdom of Thailand, Brunei Darussalam, the People’s Republic of China, the Socialist Republic of Vietnam, the Republic of Indonesia, and the Hong Kong Special Administrative Region.
Apart from the tax relief for the residents of the treaty partners, the ratification of DTA helps in eliminating double taxation on the same income, limiting income shifting, and improving the transparency of cross-border transactions. This implies that an income recipient must be determined as the tax resident of one of the jurisdictions, thus the income derived must be declared and subject to tax under the relevant tax authority(s).
The openness to international trading signifies that there will inevitably be flows of foreign currencies in and out of the territory. Although there is no strict control on the flow of foreign exchange transactions and capital movements, cross-border transactions of large figures or one considered abnormal or suspicious, are still subject to due diligence by the reporting entities in accordance with Cambodia’s anti-money-laundering regulations. Such regulations also extend to the real estate industry with both the developers and the investors under the supervision of the competent authority.
Despite being new to global integration and the rapid inflow of international citizens and investments, Cambodia is constantly putting effort into drafting new regulations and setting up systems to ease compliance in many areas, especially taxation. The Cambodia Authority announces that, in the near future, an online tax filing system will be released which would replace the current manual tax filing system to improve transparency and compliance procedures of resident and non-resident taxpayers. More tax and relevant regulations, as well as agreements between more countries and regions, are expected to be released to cope with the drastic change of Cambodia’s economic environment.
Larry Shuen Fai NgGGI member firm
ALLNISON Auditing & Consulting Co., Ltd.
Advisory, Auditing & Accounting, Tax
Phnom Penh, Cambodia
T: +85 2910 919 96
ALLNISON Auditing & Consulting Co., Ltd. provides a full-range of sophisticated and personalised services in accounting, audit, taxation, transactions, and advisory. With a team of professionals equipped with broad industry-specific expertise, unrivalled knowledge, and business insights ready to assist clients meeting their business needs.
Mr Larry Shuen Fai Ng, Managing Director of Allnison Auditing and Consulting, has over 20 years of expertise in professional accounting, taxation, M&A, and advisory sectors. Acquired professional background from Canada, Hong Kong, China, and Cambodia, he is extensively experienced in counselling individual clients and corporates from national to international level.
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: saiko3p - stock.adobe.com