1. Challenges for tax compliance 6 August 2013 www.pwc.com

2. PwC Agenda Current tax law and regulations Common tax compliance issues Tax audit and resolution process Enforcement of tax regulations Questions? Slide 2 6 August 2013 Challenges to comply with tax regulations

3. PwC Current tax laws and regulations Tax laws The comprehensive tax law was first introduced in 1997 Major amendment to the tax law in 2003 Cambodia has adopted a self-assessment tax system Tax regulations provide general guidelines - lack of specific rules, very subjective to interpretation Lack of supporting regulations and slow response to requests for clarifications from taxpayers Burden of proof is with taxpayers Time bar for tax audit is up to 10 years Slide 3 6 August 2013 Challenges to comply with tax regulations

4. PwC Current tax laws and regulations Business environment Nature of business transactions are getting more complicated Tax regulations have not developed as fast as the nature of business e.g. more electronic documents vs original signed and stamped documents etc. Certain industries require specific tax regulations e.g. airlines, freight forwarding, construction and real restate, mining, financial products etc. Slide 4 6 August 2013 Challenges to comply with tax regulations

5. PwC Common tax compliance issues Related party transaction Article 18 of the tax law states that in the case of two or more enterprises, whether incorporated or organised in or outside Cambodia, which are under common ownership, the tax administration may, as necessary, distribute gross income, deductions, or other benefits among such enterprises and their owners in order to prevent the avoidance or evasion of taxes or to clearly reflect the income of such enterprises or their owners. Key challenges: Too broad to be able to comply and lack of guidelines Uncertainty regarding what pricing is acceptable to the tax authorities? Transfer pricing study is acceptable? Independent evaluation is acceptable? Slide 5 6 August 2013 Challenges to comply with tax regulations

6. PwC Common tax compliance issues Definition of tax terms: “Technical or Management Services” for Withholding Tax – All services by non-resident? “Turnover” for Minimum Tax/Prepayment of Tax on Profit– Gross or net? payment on behalf? exchange gain? “Fringe benefits” for Tax on Fringe Benefit – Broad and subjective to interpretation Slide 6 6 August 2013 Challenges to comply with tax regulations

7. PwC Tax audit and resolution process Tax audit process Time limit Definition of “obstruction of the implementation of tax provisions” Burden of proof Interpretation of tax regulations: Inconsistent from one to another Dispute resolution process Slide 7 6 August 2013 Challenges to comply with tax regulations

8. PwC Tax audit and resolution process Time limit Time limit for tax audit is: Within 3 years after tax return is submitted, or Within 10 years after the date the tax return is required to be submitted if there is evidence of obstruction of the implementation of tax provision. Slide 8 6 August 2013 Challenges to comply with tax regulations

9. PwC Tax audit and resolution process Obstruction of implementation of tax provisions Broadly defined to include: Failure to maintain proper records of accounts and other documentation or failure to issue invoices for transactions; Failure to allow the tax administration access to records of accounts and other documents; Failure to register with the tax administration; Failure to notify the tax administration of any change in the registration as stated in this law; Making or furnishing fraudulent records, documents, reports, or other information; Slide 9 6 August 2013 Challenges to comply with tax regulations

10. PwC Tax audit and resolution process Obstruction of implementation of tax provisions Concealing or deliberately destroying accounting papers, records, documents, reports or other information; Attempting to obstruct assessment or collection of taxes; Failure to submit a nil tax declaration within 30 days of the date required by law; Wilfully supporting any of the above acts. Slide 10 6 August 2013 Challenges to comply with tax regulations

11. PwC Tax audit and resolution process Burden of proof Article 119: the burden of proof that the tax reassessed by the tax authorities is incorrect is on the taxpayer. Issues with application of the provision: Many taxpayers don’t have proper documentation or could not provide valid documents – could be because of change in staff etc. In reality, it could be difficult to produce supporting documents to prove a fact (e.g. besides audited accounts, what other documents can prove all revenue has been reported in financial statements, or price of goods should be higher etc.) Slide 11 6 August 2013 Challenges to comply with tax regulations

12. PwC Tax audit and resolution process Interpretation of tax regulations Could be very inconsistent from one member of the tax audit team to another Too good to be true – a very highly compliant taxpayer still has trouble in a tax audit as the tax auditors commonly do not believe that they are indeed compliant. There are still areas that tax auditors could re-interpret and impose taxes. Slide 12 6 August 2013 Challenges to comply with tax regulations

13. PwC Tax audit and resolution process Dispute resolution process It is easy for the tax auditors to issue a Notice of Tax Reassessment But, it is difficult to resolve Taxpayer’s appealing tax cases are not independently reviewed and resolved. No Committee for Tax Arbitration (CTA) or tax court: Article 122 and 123 of the LoT states that in case a taxpayer does not accept a new decision from the tax administration, he can file a protest letter to the CTA and the organisation and functioning of the CTA shall be determined by a sub-decree upon a proposition from the MoEF. Slide 13 6 August 2013 Challenges to comply with tax regulations

14. PwC Enforcement of tax regulations Enforcement measures Tax law gives power to the tax authorities to collect tax liabilities. Reminder of tax collections Confiscation of property Freezing bank accounts Nullifying licenses Stopping import/export operations etc. Slide 14 6 August 2013 Challenges to comply with tax regulations

15. PwC Enforcement of tax regulations Current practice The tax authorities are generally willing to discuss issues with taxpayers to resolve the objection to the Notice of Tax Reassessment including those that are long outstanding Due to the lack of an independent review process, the resolution of the case could take years The tax authorities usually send a gentle reminder to taxpayers to pay the reassessed tax liabilities The tax authorities are flexible in enforcing the tax collection measures. Slide 15 6 August 2013 Challenges to comply with tax regulations

16. PwC Questions? Q&A? Slide 16 6 August 2013 Challenges to comply with tax regulations

17. Thanks! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2013 PricewaterhouseCoopers (Cambodia) Ltd. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers (Cambodia) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.