The General Department of Taxation (GDT) reported a 32 percent year-on-year increase in tax collection for the first six months of 2017, continuing a string of impressive double-digit, and at times triple-digit annual gains since a new team took the reins at the Ministry of Economy and Finance (MEF) and GDT five years ago.
The main driving force underpinning this growth is an increase in registered taxpayers, primarily due to the elimination of the suboptimal estimated regime in 2016 and stricter registration and tax compliance enforcement.
A big increase in annual audits has reaped an additional $2 billion over the last few years, also greatly contributing to record tax collection numbers. However, what may be the most underestimated achievement by the GDT is the population’s reluctant acceptance that tax compliance is becoming an essential part of doing business and is a civic obligation required by law.
While presently an estimated 30 to 40 percent of Cambodian businesses obstinately evade tax registration, continuing to do so will eventually prove to be counterproductive. The GDT has made enormous headway in encouraging, if not inducing businesses to legitimise their tax registration status. It has done this by using a tempered and informative approach. There remains little justification for defiant holdouts to persist as unregistered taxpayers.
Undoubtedly it is becoming substantially more difficult to operate as an unregistered taxpayer within the business infrastructure of Cambodia. GDT Instruction No. 1127, issued on September 24, 2016, established rules on value-added tax (VAT) invoices for registered taxpayers. The greatest long-term consequence of this notification is that invoices which do not conform to state requirements can no longer be used to obtain VAT input credits or to claim as an expense with respect to tax on profit. Unregistered taxpayers obviously are incapable of issuing legitimate VAT invoices, and are therefore a financial risk to do business with. While the GDT allowed for a grace period of six months, to date tax departments in remain tolerant of invoices from unregistered taxpayers on tax declarations. However, Instruction No. 1127 signaled that registered taxpayers must eventually transact with other registered taxpayers.
The GDT has also been robustly active with a slew of prakas and notifications in 2017. In January, notification 1219 introduced a tax amnesty, allowing taxpayers to voluntarily disclose underpaid tax for the last three years without imposition of penalties or interest. While the outcome was modest, it again conveyed the GDT’s practical approach to taxpayer compliance. Given the increasing number of audits, a second amnesty round would surely garner a better response, giving delinquent taxpayers an opportunity to address errors and omissions prior to an inevitable audit.
The 2017 Law of Financial Management amended Article 24 of the Law of Taxation by imposing a minimum tax on enterprises that do not maintain proper accounting records. The taxpaying community has been lobbying to eliminate this one percent “prepayment of profit” tax . The tax, on revenues, is paid monthly. If a business makes a loss over the year, the government keeps the total of these monthly payments as a one percent “minimum tax” on revenues. Profits are taxed at 20 percent, with the one percent contributions being taken off the annual bill. While the GDT has granted exemptions to the one percent minimum tax, primarily to gold classified taxpayers, the significance of the amendment is the terminology “improper accounting records”.
Increasingly auditors are requiring financial statements and general ledgers. Historically most taxpayers either maintained very basic (Excel-based) accounting records, or none. With this amendment and the increasing need to provide accounting records in audits, proper accounting practices by medium and large taxpayers should become more common.
The GDT scored some other noteworthy biannual achievements, including creating additional non-taxable supplies for VAT, namely educational services, supply of electricity, unprocessed agricultural products and waste removal services. Advancements in payment in property taxes foreshadow an eventual efficient online tax registration and tax payment capability.
There are, however, areas where further gains would be beneficial. The introduction of the small taxpayer category, and associated tax incentives such as charging 10 percent on VAT and paying only 20 percent of this, and the exemption from the 15 percent withholding tax on services purchased form unregistered taxpayers, encouraged new business start-ups and unregistered business to register under this category, greatly supporting the GDT’s effort of broadening tax registration.
However, despite the good intentions, small taxpayers are having difficulties. Some large and medium taxpayers are refusing to pay VAT to small taxpayers, saying that an input credit cannot be claimed. Some tax departments are alleging that the 10 percent VAT charge, 20 percent tax payment on this, only applies to goods not services. Early small taxpayer registrants did not receive VAT certificates, where recent registrants have. While the GDT has been extremely efficient in delivering tax registration documents to newly registered taxpayers, provincial tax offices, responsible in this case for small taxpayers, are not as vigorous in informing registrees, requiring small taxpayers to check the status of their paperwork more than they should.
The toughest issue for small taxpayers right not is VAT. Help could be provided on this by allowing small taxpayers to claim the 20 percent paid of the 10 percent VAT charged, for transactions between small taxpayers, and clarifying whether large and medium taxpayers may claim VAT when transacting with smaller taxpayers.
Anthony Galliano is the Group CEO of Cambodian Investment Management Group