Building an expanding and compliant tax base for a fiscally secure national future
The Financial Management Law (2017) ushered in the new fiscal year with tax breaks and reductions.
Specifically, tax on salary was reduced – especially benefitting lower income earners with salaries of less than $375 per month – dependent allowances were doubled, and profit tax for small taxpayers was reduced through expansion of the lower tax bands.
There was also an intention to eliminate the oppressive one percent pre-payment of profit tax and subsequent minimum tax for those that maintain proper accounting records and were granted approval by the General Department of Taxation (GDT).
However, the first quarter’s momentum quickly shifted gears with the GDT vigorously fixated on incentivising small and middle-sized enterprises (SMEs), which stubbornly remain outside the tax system, to assimilate without the consequence of penalties and interest, and benefit from a waiver for profit tax and minimum tax.
In a further initiative to bolster compliance, an amnesty program was introduced, allowing those taxpayers who under-declared in the previous three years to re-file and pay the tax underpayment free of penalties and interest. With the carrots came the stick with the GDT continuing to significantly increase the number of audits, with greater tools of sophistication and with a workforce of skilled and aggressive auditors.
GDT Notification No. 1219, dated 19 January 2017, highlighted a quarter with the GDT driven to both enlarge the tax coffers and significantly widen the tax base. Registered taxpayers who under-declared, thus underpaid their taxes, within last three years, were given an opportunity to voluntarily amend and rectify their tax returns and pay the proper tax owed without the assessment of penalties and interest.
Currently penalties, generally levied in an audit or late filing, range from 10 percent of the tax amount due to negligence, 25 percent for serious negligence, and as high as 40 percent for a unilateral assessment. A further two percent interest is charged on the amount of underpaid tax.
What has come to be known as the ‘Amnesty Program’ was a genuine offer by the GDT to provide a window for those taxpayers who either intentionally underpaid tax or those taxpayers whose returns contained errors and omissions. To take advantage of this offer, the taxpayer is required to file the amended return and pay any underpayment before the deadline of April 1, 2017.
It is believed the program has not had the expected response, given the apprehension of violating taxpayers that disclosing underpayment of tax may draw future suspicion, which is unfortunate as penalties and interest levied in audits are usually exponentially higher than the actual tax owed. And with audits on the rise, it is best to come clean now than pay much more later.
The Financial Management Law (2016), amended Article 4 of the Law of Taxation, abolishing the inefficient Estimated Tax Regime (ETR), with all taxpayers falling under the Self-Assessment Regime. Not only did this change in law consolidate the taxpaying community into one jurisdiction, it also increased the tax collected from small taxpayers as those formally in the ETR paid considerably less tax than those in the Real Regime.
As a further measure, the GDT, empowered by Notification No. 039, conducted onsite inspections of businesses, of which one of the objectives was to substantiate whether the business was a registered taxpayer and filing tax. While these measures achieved a measurable spike in new registered taxpayers, a wider net, perhaps as much as half of businesses in Cambodia, remain outside of the system.
In the same spirit as the Amnesty program, the Royal Government issued Sub-Decree No. 17 to encourage, if not to entice, unregistered SMEs to voluntarily transform into compliant taxpayers, and as a result, be rewarded with exemptions. Businesses that take up the offer can claim a two-year exemption from tax on profit, either from the year the SME first generated revenue, or from year of tax registration (if revenue was earned before tax registration), whichever occurred first. As a further sweetener, the one percent Minimum Tax is waived for the exemption period.
This extra push by the GDT to encourage unregistered SME taxpayers hints at the tenacity of those businesses which remain stubbornly outside the tax system, and the GDT’s unrelenting crusade to drive them in. It is expected similar endeavours will be introduced in the future to reign in remaining outliers.
Two further material actions were undertaken in the quarter by the GDT.
Through Prakas No. 1539, the filing deadline for monthly tax returns was amended to the twentieth day, generally harmonising most monthly tax filings with the VAT return deadline and matching the cut-off date for medium and large taxpayer with small taxpayers.
Finally, GDT Instruction No. 216606 clarified the serial numbering system, requiring a sequential serial numbering arrangement for each year, an alphabetized prefix abbreviation in the invoice number which defines location, and a TI (tax invoice) and CI (commercial invoice) in the body of the invoice to differentiate between the two.
It has been a very busy quarter for the GDT, with continued progress on executing a fairer and more level playing field, providing more guidance and clarity on process, and engaging those underpaying or not paying tax to make amends.
Anthony Galliano is the CEO of Cambodian Investment Management Tax Services