CAMBODIA TAX UPDATES DFDL 15 August 2019 CLINT O’CONNELL

TAX REVENUE – SUMMARY

TAX DISPUTES

INTRODUCTION TO TAX AUDITS Principle of self-assessment Taxpayers are responsible for identifying, calculating and remitting their tax obligations to the tax administration, and the tax administration has the authority to re- assess non-compliance.

PRAKAS 270 – ON TAX AUDIT – 13 MARCH 2019 Purpose To improve audit procedures to ensure transparency in the payment of taxes and promote fair competition in businesses operating in the Kingdom of Cambodia. Objective To define rules and procedures, as well as the rights and obligations of the tax administration and taxpayers, concerning tax audits. Scope Applies to self-assessed taxpayers who are operating businesses in the Kingdom of Cambodia.

TYPES OF TAX AUDITS Desk Limited Comprehensive

TIME BAR – LIMITED AND DESK Limited Audit A Limited Audit can be carried out for the current tax year and the immediately preceding tax year (N-1) only. Desk Audit A Desk Audit can now only be carried out within 12 months after the submission of the tax return.

TIME BAR – COMPREHENSIVE TAX AUDIT Within three years after the date the tax declaration was submitted Within 5 years after the date the tax declaration was required to be submitted if there is evidence of tax evasion or tax losses or tax credits carried forward or a tax period that requires a comprehensive audit for more than the previous three tax years. Should there be specific evidence of tax evasion that requires a comprehensive audit for more than the previous five tax years, a comprehensive audit may be conducted in accordance with the regulations of the Law on Taxation, through a prior request for an audit to the Minister of Economy and Finance on a case by case basis.

TAX EVASION – DEFINITION LOT Article 127: Tax Evasion Tax evasion is the willful, knowing, or systematic and repeated violation of tax provisions with the intention of reducing or eliminating the tax amount required by tax provisions to be paid. Tax evasion includes any serious negligence which is committed on: Two separate occasions within a period of three calendar years; Three or more separate occasions in any period of time. Article 126: Serious Negligence The taxpayer or withholding agent is considered seriously negligent if the amount of tax paid is less than the amount of tax as determined by tax provisions by more than 10 percent.

INTEREST Prior to Prakas 272: In addition to the penalty on the underpayment of tax, interest is charged at 2% per month of the underpaid amount. Prakas 272: In addition to the penalty on the underpayment of tax, interest is charged at 1.5% per month of the underpaid amount.

TRANSFER PRICING Prakas No. 986 MEF.PrK. “Rules and procedures on income and expense allocation among related parties” – dated 10 October 2017

TRANSFER PRICING BASICS: WHAT IS TRANSFER PRICING? The transfer price is the price at which related parties transact Sale of goods Provision of services Licensing of intangibles Financing Related party A Related party B

DEFINITION OF RELATED PARTIES: PRAKAS 986 (ARTICLE 4) Immediate family members 01 >= 20% of voting power or holding capital* 02 * Previously 51% under Decree No NS/RKM/0303/01 (2004)

TRANSFER PRICING: ARMS LENGTH PRINCIPLE “arm’s length” principle: the transfer prices of related party transactions should be comparable to that of unrelated party transactions under comparable conditions. “substance over form” principle:  apply the required economic review and analysis of the business model and the transfer pricing arrangements. Independent X Independent Y Market price Transfer price Related party A Related party B

TRANSFER PRICING: GOOGLE/APPLE/AMAZON ETC

ANNUAL TP: DECLARATION FORM

DOUBLE TAX AGREEMENTS

DOUBLE TAXATION AGREEMENTS - SUMMARY DTAs Signed Date In Force Cambodia – Singapore 20 May 2016 1 January 2018 Cambodia – Thailand 7 September 2017 Cambodia – China 13 October 2016 1 January 2019 Cambodia – Brunei 27 July 2017 Cambodia – Vietnam 4 April 2018 Cambodia – Indonesia 23 October 2018 Cambodia – Hong Kong 26 June 2019

DTA : CROSS BORDER TRANSACTIONS WHT Rates Standard DTA Royalties 14% 10% Dividends Interest 10%* Technical Fees *China DTA –Interest payments paid on loans granted by Chinese state banks = 0% Withholding Tax

DIVIDEND DISTRIBUTION Prakas No. 372 MEF Dated 5 April 2019 On Amendment on the Implementation of Withholding Tax on Dividend Distributions

PRAKAS 372 Defines a new class of Deemed Dividends which are triggered by the transfer of shares or reduction of registered capital in a Cambodian entity. In the event of a share transfer: Retained earnings held by the Cambodian company are treated as deemed dividends. Shares which are transferred that have arisen from a earlier conversion of retained earnings are treated as deemed dividends. Tax implications of Prakas 372: Deemed Dividends resulting from the transfer of shares by a non-resident shareholder in a Cambodian entity will require the Cambodian entity to withhold 14% withholding tax on the amount of retained earnings relating to the share transfer. The WHT is required to be withheld by the Cambodian entity by the 20th of the month following MOC approval of the share transfer.

TAXATION OF INDIVIDUALS 2019 Law on Financial Management

2019 LAW ON FINANCIAL MANAGEMENT Law on Taxation Article 7 (new): The taxable income shall be the net income which is achieved/realized from the business activity and activities other than of the business of a physical or legal person. The taxable income shall include: Capital gains Interest, Rental, Royalty income as well as the income from the financial asset or investment asset including real estate/immovable property.

2019 LAW ON FINANCIAL MANAGEMENT Law on Taxation Article 7(new): For a physical person, the taxable income shall be the result which has been obtained/received from the total amount of income in the tax year to be deducted with the expenses and allowances determined by Sub-decree. Rules and procedures for tax collection shall be determined by Prakas of the Minister of the Ministry of Economy and Finance.

FUTURE DEVELOPMENTS Greater emphasis on compliance/registration Need to widen the tax base – not just FDI but SME’s are critical. More DTA’s More tax audits! Revision of investment incentives/SEZ’s – expected later this year Implementation of taxation of individuals on their Cambodian sourced income

Partner & Head of the Cambodia Tax Practice Group CLINT O’CONNELL Partner & Head of the Cambodia Tax Practice Group clint.oconnell@dfdl.com THANK YOU

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