Cambodia is strengthening its tax system while tackling niggling issues, and recommendations by investors and corporations in the second phase of its five-year revenue mobilisation strategy.
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The Kingdom’s tax revenue is forecast to be rather significant in 2019, based on its collection of $2.29 billion from January to May. As it stands, collection has already surpassed its first half-year target by 58.37 percent.
The General Department of Taxation (GDT)’s full-year target is $1.33 billion, albeit 30 percent lower than the $1.92 billion projection for 2018.
Director-general Kong Vibol says tax collection could reach over 60 percent by the end of June, and in the next six months, it could hit more than 65 percent of the target.
“It is because of the sharp reforms, both in terms of regulation and tax administration,” he says in a tax forum organised by the European Chamber of Commerce in Cambodia at Siem Reap last Friday.
The revenue mobilisation strategy (2014-2018) saw the achievement of 96 percent of the indicators implemented during that period. Within the strategy, GDT implemented five core strategies to collect revenue.
“It also talks about re-registration, and tax registration which is a complicated task. If there is no proper registration, we will not reach our tax collection (revenue),” he says.
In the past five years, tax revenue collected was either on target or above target as evidenced by the statistics. In 2014, the collection versus the target grew 7.4 percent, 2015 (11.8 percent), 2016 (5.7 percent), 2017 (15.2 percent) and 2018 (14.3 percent).
Last year, the government collected $2.19 billion, up 11.19 percent from $1.98 billion in the corresponding period a year ago.
Reforms in the tax administration also considered trade group suggestions such as withholding tax which burdened tax-compliant companies, value-added tax (VAT), and tax on profits and minimum tax.
Vibol cited recommendations by EuroCham in its White Book, published in 2016, as one of those taken into account when simplifying accounting practices.
Good governance, meritocracy
Although the reforms show positive results, with the second revenue mobilisation strategy (2019-2023) put into motion, Vibol recalls the first phase of revamp was not easy, even within GDT.
He says GDT had to implement a code of conduct into a framework that was derived from the rectangular strategy on core governance as part of an action plan to pave the general direction for taxation.
“What we have been doing is practicing good governance, and ensuring effective leadership and meritocracy,” he says.
For instance, the recruitment of tax officers was done carefully, where personnel hired from the Big Four (accounting firms) had volunteered to work with GDT.
“We selected qualify staff with high qualifications and put them in the right place. In the past, we only had five to six staff who only knew Microsoft Excel but were not experts.
“They could only do calculations but not update, which is what is required in auditing. How would they know how to do transfer pricing?” he says.
Vibol says tax revenue increased as the new staff knew how to read financial statements of companies.
“The higher revenue also meant that we practice transparency and good governance without the need of new laws,” Vibol says.
Work in progress
Still, he contends, there is plenty room for improvement as GDT works on issues such as the slow transfer of data, errors in tax credit claims, and submission of tax returns done on paper.
Noting the 20 percent error in tax credit claims, Vibol says the state does not have sufficient credit to pay the private sector as GDT has yet to collect from suppliers, which slows down processing time.
“GDT is the implementer of the process but we do not have credit to return,” he says.
In the meantime, entities are advised to update their registration information on the database (so that the tax office is able to contact them), follow proper instructions, and to only deal with service providers or suppliers who provide genuine invoices.
Vibol suggests that business entities do not buy goods from suppliers that are not registered or those with fake registration certificates as it affects tax credit claims or refunds on withholding tax, and value-added tax (VAT).
“We have to check the information to see if you can claim back VAT credits. If they are fake sellers, how can we return the money because VAT refunds are on the basis of money coming in and going out.
“Some suppliers have also given us fake tax invoices to claim tax credits illegally. We notice that about 60 percent of unofficial VAT claims are rejected when uploaded to the system. As such, we accept manual submissions as long as genuine invoices are attached,” he explains.
To date, there are some 600 companies registered for VAT in the system under the larger tax department. “It is a remarkable increase. We feel that a higher usage of the system means that it is easy to declare taxes and claim credit,” Vibol says.
Similarly, the recent introduction of e-filing allows companies and individuals to declare taxes including salary tax.
However, he points out that while most factory workers are exempt from salary tax due to the threshold, it should not be the case for foreign management staff.
“E-filing will be able to capture (income tax discrepancies) of individuals and companies that avoid tax (declaration),” he adds.
Moving forward, level playing field
GDT is aware the culture of paying tax is low and it has tolerated this for some time. He makes a note that in terms of the 10-year special depreciation mechanism, the law stipulates that an audit is required if there is clear evidence of profit.
“We need to comply with the law although this is subject to the decision by the Economy and Finance Ministry,” he says.
Meanwhile, he stresses that companies are entitled to good governance as shown in the second revenue mobilisation strategy which focuses on sustainable growth and revenue collection, a level playing field, and social justice.
“If different restaurants are paying different tax, how will the one that is paying (tax) survive? We are trying to create a fair playing field so don’t get angry with GDT (as are working on it),” Vibol says.
Going forward, the tax department looks at improving the system to be on par with other countries in the region such as South Korea which has pre-filing tax services.
“We aim to have this but it would take time and we would need to share information with other ministries to develop a large database for the country to include information like property tax,” Vibol says.
Until that happens, the department will be busy establishing an information technology platform to centralise business registrations in Cambodia.