Within a year, the General Department of Taxation (GDT) collected more than $2 billion in tax revenue in 2018, surpassing 2017’s collection by 13.37 percent. The rise was due to more awareness by taxpayers and the sheer grit of the tax department to raise the country’s revenue.
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Amid Cambodia’s transforming economic landscape, policies are being laid and amended to sustain its revenue in the long run. This includes Prakas 986, a directive on transfer pricing that involves related party transactions. The scheme outlines the arm’s length principle, where related companies or subsidiaries must deal with each other and its parent in a similar fashion as non-related parties.
“The deal must mirror the behaviour within the group. Parties must hypothesise that the pricing within the group is the same as it would be with independent parties. It is a simple concept but challenging to apply,” says Steven Carey, managing director of corporate financial advisor Duff & Phelps LLC.
A real push for transfer pricing happened in the past three to four years because of the view that tax payments had reduced. Transfer pricing being part of that, caused the entire tax system globally to breakdown. “Companies dealing with each other were undermining the tax base of certain jurisdictions particularly in developing countries, hence the need for a drastic change,” Carey adds.
At a transfer pricing talk organised by legal and tax consultancy DFDL Cambodia, Carey cites the case of Starbucks Corp’s United Kingdom unit which brought the issue of transfer pricing to the front. Starbucks was allegedly paying high royalty for its trademark to Starbucks Netherlands, high purchase price for coffeebeans from Starbucks Switzerland, and a high interest loan in Luxembourg. Based on its profit and loss account, the combination of these transactions, stemming from alleged transfer pricing disparity meant that there was no profit left for Starbucks UK.
“People were upset that Starbucks was not contributing to the UK tax regime and began boycotting its stores. It became a real issue for Starbucks, eventually volunteering tax payments with the tax authority to settle the issue,” Carey says.
Safe harbour for SMEs
In Cambodia, the prakas took effect in 2018 which requires taxpayers to declare related party transactions for that fiscal year ended December 31. Taxpayers are to submit its form with the annual corporate income tax returns by March 31, 2019.
From January to early March this year, taxpayers have agreed to pay $1 million to the government following transfer pricing audits, says Traing Lay, chief of General Department of Taxation advance pricing arrangement (APA) and transfer pricing bureau.
“We are using a soft approach for now as we conduct ongoing seminars to create awareness among taxpayers. We understand that most are still unsure of the impact on their business,” Lay tells Capital Cambodia.
The government is considering accepting zero interest rate loans taken by small and medium enterprise (SME) taxpayers, provided the unit has one shareholder. “It is not official yet as we are still discussing. If it is issued, it would be considered a `safe harbour’ for SMEs starting 2020,” Lay says.
OECD-based prakas, trigger issues
Based on the Organisation for Economic Cooperation and Development, the prakas specifies that related parties include family members and entities with more than 20 percent voting right or holding capital. It also explains that financial results’ operating margin that fall between one percent and 12 percent is construed as arm’s length transaction but this can be determined through a benchmark study of comparability for interest rate, royalty and management fee.
“I agree we lack information in Cambodia for comparable data, so we allow taxpayers to look at the first stage of comparability locally, then regional, and if none exist still, we accept Asia but taxpayers must first show efforts in finding domestic comparables,” says Lay.
Companies that inject capital by way of zero-interest loans from parent companies to raise capital must reason out its intention. It should be noted that some companies do this to avoid paying withholding tax.
“We’ll consider whether to accept the interest rate based on loan, tenure, and future business plan information,” he adds.