More Tax Audit Cases Headed to the GDT’s Litigation Department

May 8, 2024

Note: All activities, publications, and events mentioned in this post were conducted under the name VDB Loi prior to our transition to Andersen in Cambodia on 18 September 2024.

Introduction

In an attempt to break the logjam of outstanding tax audit disputes, the General Department of Taxation (“GDT”) in Cambodia has been actively working to make progress on these cases. Recent findings from a study that VDB Loi conducted in early March 2024 on Cambodian tax audits processing identified areas for improvement, including audit completion times and disputed case processing:

• The average duration of a comprehensive tax audit is 5 years, with some large and medium taxpayers undergoing multiple simultaneous audits, extending for up to a decade.
• A notable 60% of disputed audits, even with professional tax advisory assistance, have remained unresolved for over 3 years.

Recognizing the need for efficiency, the GDT is taking proactive steps to address the backlog, including transferring some cases to its Litigation Department. This approach has the potential to streamline the dispute resolution process for taxpayers, although some adjustments may be needed to ensure a smooth transition.

Understanding the GDT departments responsible for tax audits

Before diving into the implications of having a case transferred to the Litigation Department, it is important to understand the GDT’s structure and its various departments responsible for tax audits:

1. Tax branches: The GDT’s network of tax branches, including 9 Khan Tax Branches in Phnom Penh and 24 Provincial Tax Branches nationwide, plays a key role in tax administration.
   • These branches are responsible for conducting desk audits and limited audits for medium taxpayers, with our experience suggesting a higher frequency of audits at the Khan Tax Branches.
   • A desk audit involves a tax official re-examining a taxpayer’s return at the GDT office, typically within 12 months of submission. Limited audits, on the other hand, are more in-depth examinations focusing on specific taxes and monthly obligations such as Prepayment of Tax on Income and Value Added Tax. Notably, the annual Tax on Income is not included in limited audits. These can be conducted for the current tax year (N) and the preceding year (N-1) only.
2. Department of Large Taxpayer (“DLT”): This department is tasked with conducting desk audits and limited audits for large taxpayers.
3. Department of Enterprise Audit (“DEA”): The DEA focuses on comprehensive audits for both medium and large taxpayers.
   • These comprehensive audits involve a thorough review of all tax types and the taxpayer’s accounting records. Unlike desk and limited audits, comprehensive audits can be conducted for the current tax year (N) and the preceding three years (N-3). However, in cases with clear evidence of tax evasion, the audit period can be extended to five (N-5) or even ten years (N-10) in the past.
4. While the Litigation Department is a broader term within the GDT, tax dispute litigation cases are officially handled by specialized Litigation Bureaus under the Department of Law, Tax Policy, and International Tax Cooperation. These bureaus house experienced tax auditors who, based on our extensive experience in this area, demonstrate a high level of expertise and meticulous attention to detail when handling tax dispute litigation.
5. Department of Tax Crime Investigation: If the GDT discovers significant taxpayer misconduct or intention to evade taxes (such as preparing false tax invoices to claim a value added tax refund), the audit will be forwarded to this department to handle.

Weighing the options: Implications for taxpayers facing transferred audit cases

The recent trend of the GDT transferring unresolved tax audits to litigation presents a complex scenario for taxpayers who have been protesting their cases for years. While the prospect of a more thorough review holds potential advantages, navigating the litigation process also carries significant risks.

On the positive side, taxpayers who believe their arguments haven’t been adequately considered by the DLT/DEA might benefit from the Litigation Department’s meticulous approach. A deeper analysis could uncover new evidence or perspectives that support the taxpayer’s position. Additionally, for some cases, litigation could offer a faster resolution compared to the seemingly endless delays within the DLT/DEA. A definitive ruling from the Litigation Department could bring closure and eliminate the uncertainty of a perpetually unresolved audit.

However, significant risks also come with litigation. The process is resource-intensive, and taxpayers will likely incur substantial legal fees and other associated costs in preparing and presenting their case before the Litigation Department. These costs can quickly escalate, especially for complex cases. While the GDT aims to expedite the backlog, litigation itself can be lengthy. The additional time and resources required for the Litigation Department’s review could further prolong the overall resolution timeframe. Finally, there’s no guarantee of a favorable outcome. The final decision rests with the Litigation Department, and taxpayers face the risk of incurring additional tax liabilities and penalties if their case is unsuccessful.

Facing a transferred audit case? Don’t navigate the rapids alone. Our team of experienced tax advisers are equipped with a deep understanding of Cambodian tax law and extensive experience navigating complex tax disputes through litigation. We can help you assess the merits of your case, develop a winning strategy, and represent you effectively before the GDT’s Litigation Department.

Contact us today for a consultation and let us help you navigate the challenges of a transferred audit case.