Expert outlines capital gains tax implications

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Cambodia Investment Management CEO Anthony Galliano says the implementaton of a capital gains tax will dampen the market. Photo supplied

The General Department of Taxation (GDT) released Prakas 346 to the public last week which outlines new capital gains tax implications of the transfer of assets in Cambodia such as, inter alia, immovable property, leases, investments, goodwill, intellectual property and foreign currency.

The prakas was signed by Minister of Economy and Finance Aun Pornmoniroth on April 1 and was scheduled to go into effect on July 1. GDT director-general Kong Vibol later announced that the effective date has been delayed to January 1, next year.

The proclamation sparked heated debate among property industry players on how high the capital gains taxes should be and to what extent the new regulation would stifle sectoral growth in the face of the Covid-19 pandemic.

Anthony Galliano, the CEO of financial services firm Cambodia Investment Management Co Ltd, sat down with The Post’s May Kunmakara to discuss the prakas and how it would transform the real estate industry.

Could you briefly explain what capital gains tax is?

A capital gains tax is a tax that, in its simplest form, is the tax due on the difference between the cost of what you paid for something, and the sales proceeds when it is resold, the capital gain.

The GDT, through Prakas 346, has mandated a capital gain taxes on the sale of certain asset sales, such as land, buildings, stocks, bonds, licences, patents and currencies at a rate of 20 per cent on the calculated gain, to be implemented on January 1, next year.

How will it help curb land price hikes?

The instinctive reaction by the real estate industry is that the implementation of a capital gains tax will dampen an already morose property market, with calls for further postponements in enactment.

Frankly the capital gains tax should have been in imposed decades ago, it is a customary tax in most jurisdictions and property speculators have had a free ride for far too long.

The government should have its share of capital gains, just as it does for salaries on individuals, value-added tax (VAT) as a sales tax, and profit tax from businesses, to support the national treasury for the benefit of the country.

Registered taxpayers have been required to pay capital gains tax – there is no reason to exclude individuals. Individuals who sell their residences or who pass along property as inheritance aren’t affected.

The tax is not applicable to property owned as a principal place of residence for at least five years, or transfer of immovable properties among relatives as stated in the registration tax regulations.

The GDT’s announcement noted that it would impose a 20 per cent capital gains tax on property sales. What are the implications on selling property under the market price?

The taxpayer can choose to deduct expenditures from the sale/transfer value based on two methods – the Determination Based Expense Deduction or the Actual Expense Based Deduction.

Based on the Actual Expense Based Deduction, the taxpayer can deduct the cost of acquisition and expenses holding and transferring the immovable property which qualify as deductible expenses. On this basis, if the costs are higher than the sale proceeds, there is no tax.

The GDT has been very generous to investors in regards to the calculation of the capital gains tax. If an investor has made a substantial capital gain from holding an asset that cost a fraction of the sale proceeds, they can choose the Determination Based Expense Deduction option.

The investor can deduct 80 per cent of sales proceeds as the cost and just pay the tax on only 20 per cent of the gain, rather than a true larger gain.

On the other hand, the Actual Expense Bases Method is favourable in cases where the investor has a small gain or suffers an overall loss when considering the cost of the asset acquisition cost and inclusion of additional expenses, such as consulting, legal, registration, advertising and commission fees.

This is more favourable for developers who can include most costs of the property development.

How does the tax rate in the Kingdom compare to regional and international levels?

The tax is applicable region-wide with few exceptions, mainly Hong Kong, Singapore and Pakistan. Capital gains tax rates are higher in most countries, such as South Korea at 42 per cent and neighbouring Thailand at 35 per cent.

Similar to the profit tax rate, the Kingdom comparatively ranks right in the middle, not too high, not too low.

Bearing in mind how much the real estate sector contributes to improving people’s incomes, do you think the new regulation was a bit too rushed?

The government has already postponed the implementation from July 1 to January 1. This gives a window for those individuals who wish to sell, free of capital gains tax.

Given the downturn in the economy, the impact of the pandemic and the possibility of further declines in operating businesses, I would much rather see a new tax on a “gain” from those individuals profiting on property speculation, then burdening businesses with increased or additional taxes or a continued proliferation in audits, in such challenging business conditions.

We all have to contribute without exception.

This interview has been edited for length and clarity.