Sector: Taxation

With the updated transfer pricing (“TP”) regulations that were issued by the Ministry of Economy and Finance via Prakas No. 574 on September 19, 2024 (“Prakas 574”) entering into effect on January 1, 2025 (and the abrogation of the prior regulations under Prakas No. 986), we take a look at what this means for taxpayers, particularly in terms of the TP documentation requirements.

1. TP documentation can be reused

Article 17 of Prakas 574 introduces a provision that allows taxpayers to reuse their TP documentation from the previous tax year provided there have been no significant changes in the controlled transactions and comparability factors that would affect the TP methodology used. The only update required is the annual revision of financial indicators for comparables.

In essence, instead of preparing new TP documentation each year from the ground up, taxpayers can reuse the prior year’s documentation, as long as core factors, such as intercompany transactions and comparability conditions, remain unchanged. By requiring only updates to the financial indicators for comparables, rather than a complete overhaul of TP documentation, this provision substantially alleviates the administrative burden on taxpayers.

2. Exemption from TP documentation obligation

As outlined in Paragraph 2, Article 17 of Prakas 574, Cambodian taxpayers are exempt from the obligation to prepare TP documentation for a tax year if they meet both of the following criteria for that year:

• The annual turnover is less than KHR8 billion (approximately US$2 million) and total assets are valued at less than KHR4 billion (approximately US$1 million); and
• The total value of all controlled transactions except loan transactions is less than KHR1 billion (approximately US$250,000).

For businesses that fall within these thresholds, the requirement to prepare comprehensive TP documentation is waived. This provision particularly benefits smaller enterprises or those with limited cross-border transactions, while enabling the tax authorities to focus their resources on larger, more complex transactions.

3. Exemption for intercompany loans

Prakas 574 maintains the exemption on loan transactions from related parties having to comply with the arm’s length principle if taxpayers can provide the supporting loan documents specified under Notification No. 10979 GDT.

In addition, Prakas 574 further simplifies the compliance process for certain businesses by allowing resident taxpayers that are not banks or financial institutions to bypass the need for detailed supporting loan documentation if they are one of the following:

• An enterprise that has been incorporated for less than three taxable years, counting from the date of tax registration.
• A single-member private limited company that enters into a loan transaction with a shareholder, with a loan balance for any period of less than KHR3 billion (approximately US$750,000).
• A sole proprietorship with a loan from the owner, spouse, or dependent children.

4. Other important notes

Arm’s length range

Cambodia’s approach to TP, as outlined in the Article 7 of Prakas 574, presents a relatively straightforward and taxpayer-friendly method of ensuring compliance with the arm’s length principle. Under this rule, no TP adjustments are made if the financial indicators for controlled transactions fall within the arm’s length range, provided the appropriate TP method is used. However, if the financial indicators fall outside this range, the transfer price must be adjusted to the median of the arm’s length range, with the caveat that such an adjustment must not lead to a tax reduction or tax loss.

Attribution of profits to a permanent establishment

If a non-resident taxpayer has a permanent establishment (“PE”) in Cambodia, the taxpayer must allocate gross income, any deductible amount, or other benefits in a manner that properly reflects the income between the PE and the non-resident taxpayer. The taxable income allocated to the PE and the non-resident taxpayer is then treated as the taxable income of two separate and independent enterprises. This ensures that income is taxed where it is economically generated and in accordance with the activities carried out by the PE in Cambodia.

Cambodia’s profit attribution rules for PEs are broadly consistent with the OECD’s general framework, ensuring that profits are attributed based on the economic activities performed by the PE. Compared to neighboring countries, Cambodia’s rules appear simpler and more flexible, which may benefit businesses seeking a less complex PE tax regime, but it also means that businesses may need to take extra care in ensuring their income allocation is fully compliant with international standards, especially when operating in multiple jurisdictions with more stringent rules.

TP adjustment – Primary vs secondary adjustment

The introduction of primary and secondary adjustments in Cambodia’s new TP regulations marks a significant step in aligning the country’s tax framework with international standards, particularly those outlined by the OECD Guidelines. This change is designed to mitigate base erosion and profit shifting, and enhance tax compliance among multinational enterprises (“MNEs”) operating in the country.

• Primary adjustment refers to an initial adjustment made by the tax administration of the taxpayer’s taxable income as a result of applying the arm’s length principle to transactions between the taxpayer and related parties. This means that if the tax authorities find that a taxpayer has underreported income or overreported expenses in related party transactions, a primary adjustment will be made to correct the reported taxable income.
• Secondary adjustment refers to an adjustment that arises from imposing tax as a result of a primary adjustment. Secondary transactions may take the form of constructive dividends, equity contributions, or loans. Secondary adjustments ensure that any excess profits or adjustments made during the primary adjustment process are properly accounted for in the financial transactions between related entities.

For MNEs operating in Cambodia, the adoption of primary and secondary adjustments introduces a layer of complexity to their TP documentation and compliance obligations. MNEs will now need to ensure that intercompany transactions are priced in accordance with the arm’s length principle to avoid the potential for primary adjustments. The risk of secondary adjustments further underscores the importance of maintaining robust TP documentation to support the pricing of related party transactions.

In April 2024, the General Department of Taxation (“GDT”) of Cambodia introduced its long-awaited Manual on the Methods and Procedures of Tax Audits, also referred to as the “Tax Audit SOPs.” This comprehensive document includes updated guidelines for tax audit procedures and aims to enhance the effectiveness and transparency of tax audits.

Currently, the GDT conducts approximately 4,000 tax audits annually, with some audits extending over multiple years due to their complexity. The introduction of the Tax Audit SOPs represents a significant step in the GDT’s efforts to reform and streamline tax audit procedures across the Kingdom.

In this article, we provide a clear and insightful analysis of the recently released Tax Audit SOPs. We will explore the key changes introduced, their practical implications for businesses, and what companies can expect moving forward.

Background: Rising Audit Activity Creates Pressure on Businesses

Before diving into the specifics of the new Tax Audit SOPs, it’s crucial to understand the evolving tax audit landscape through some pertinent statistics:

• Sharp increase in audits: Since 2018, the number of tax audits conducted by the Department of Large Taxpayers and the Department of Enterprise Audit has skyrocketed, rising from 907 to 3,883 in 2021, a staggering increase of 336%.
• Limited resources: While the number of audits has grown significantly, the number of tax auditors has only modestly increased, from 742 in 2018 to 746 in 2021. This highlights the growing pressure on existing resources.
• Focus on large taxpayers: Large taxpayers, estimated at about 4,000 and contributing 80% of the total tax collection, are a primary target of audits.
• Growing revenue from audits: In 2019, tax audit revenue contributed approximately 28% of the total tax collection, showcasing the significant role tax audits play in boosting government revenue.
• Limited success of appeals: Despite a growing number of tax audits, the appeal process remains largely ineffective. Annually, approximately 200 appeals are lodged with the Committee for Tax Arbitration under the Ministry of Economy and Finance, but only 50 of these cases are resolved. This low-resolution rate may discourage businesses from contesting tax reassessments.

These statistics paint a clear picture of the increasing challenges businesses are facing, with more frequent, less efficient tax audits, making the potential for a more streamlined and less time-consuming audit process welcome.

Key change #1: Gold Taxpayers Exempt from Routine Tax Audits

The new Tax Audit SOPs introduce a significant benefit for taxpayers with a gold taxpayer compliance certificate, exempting them from all tax audits while their certificate is valid, unless a risk or irregularity is detected.

This is a notable enhancement to the benefits of achieving gold taxpayer status. Previously, under Circular 007 MEF of 2017, gold taxpayers were subject to only one comprehensive audit every two years and were exempt from limited and desk audits, unless requested by the taxpayer.

A risk or irregularity refers to potential issues identified by the GDT before initiating an on-site audit. The GDT employs various methods to assess taxpayer risk and potential irregularities, which could include reviewing a company’s tax return filing history, economic activities, and accounting systems. According to the Tax Audit SOPs, risk indicators or irregularities include things such as frequent low tax payments, extended periods without tax payments, frequent changes or invalidations of invoices, significant year-to-year fluctuations in profit margins, discrepancies in financial statements, irregularities in debt affordability and repayment capacity, and deviations in profitability compared to similar businesses within the same industry.

While the Tax Audit SOPs provide a framework for identifying risks, how the exemption for gold taxpayers applies in practice may vary. Here’s why:

• Lack of specific guidance: The Tax Audit SOPs do not provide sufficiently detailed guidance on how the GDT assesses risk and determines the necessity for an audit on a gold taxpayer. This lack of clarity could lead to inconsistencies in application.
• Discretionary power: The SOP grants the GDT some level of discretion in initiating audits based on perceived risks. This could potentially lead to situations where compliant gold taxpayers face unexpected audits, creating uncertainty.

Despite these potential ambiguities, the new Tax Audit SOPs is a positive step towards a more streamlined and risk-based approach to tax audits in Cambodia. For businesses seeking to benefit from the gold taxpayer exemption, maintaining strong internal controls, accurate financial reporting, and a consistent tax filing history will be crucial in minimizing perceived risks by the GDT.

Other benefits of a gold tax compliance certificate

Achieving gold taxpayer status offers substantial advantages beyond exemption from routine tax audits. One key advantage is the streamlined Value Added Tax (“VAT”) refund process. According to Circular 007 MEF, gold taxpayers are entitled to receive VAT refunds for amounts of less than KHR500 million without undergoing a separate VAT audit. Additionally, gold taxpayers can apply in writing to be exempt from minimal tax payments.

Obtaining the two-year gold taxpayer compliance certificate involves submitting a written application to the GDT. The processing timeline typically ranges from one to two months.

Key Change #2: A Streamlined Desk Audit Process

Previously, desk audits could be lengthy and culminate in a Notice of Tax Reassessment (“NOTR”). The new Tax Audit SOPs introduce a significant change, transforming them into a more efficient and less time-consuming process focused on self-correction by taxpayers.

Steps in the new process

1. First notice: The GDT initiates the process by issuing a letter outlining discrepancies found between the taxpayer’s information and their records. This is not a NOTR, but rather an opportunity for self-assessment.
   • Taxpayers have 30 working days to correct identified issues and remit any additional tax owed. Crucially, any tax paid within this period is exempt from interest charges. However, the Tax Audit SOPs are silent on penalty exemptions. This implies that penalties may still apply to any unpaid tax, even if paid within the 30-day rectification period.
   • If the taxpayer disagrees with the identified discrepancies, they can submit a written response to the GDT within the same 30-working-day window, explaining their position. The GDT will then review and respond within 30 working days, either accepting or rejecting the explanation. If rejected, the taxpayer has the right to formally appeal.
2. Second notice: If the taxpayer fails to comply or resolve the issues within 30 working days of the first notice, a second notice is sent. The taxpayer must correct the issues and pay any additional tax within another 30 working days. Unlike the first notice, adjustments at this stage will include interest charges.
   • Taxpayers can still object within working 30 working days, and the GDT will respond accordingly. A rejection of the taxpayer’s explanation can be formally appealed.
3. Final step: on-site audit: Should the taxpayer remain non-compliant or the issues remain unresolved after 30 working days from the second notice, the process escalates to an on-site audit. This could evolve into a limited or comprehensive audit, depending on the findings.

While the new desk audit process aims to be faster by promoting taxpayers’ self-correction and reducing the need for lengthy audits, there are some potential drawbacks to consider. The tight 30-working-day window for responding to the first notice, while offering an opportunity to avoid interest charges, puts pressure on businesses to resolve discrepancies quickly. Additionally, the possibility for the process to escalate to a full audit after the first notice raises questions about its true efficiency in all cases.

Less New: Combined Audits – Avoiding Repetition

The Tax Audit SOPs address a common concern for taxpayers facing multiple tax audits, often with overlapping tax years. To streamline the process and avoid repetition, they allow the General Director of the GDT to authorize combined audits involving subordinate units.

What’s not new

This concept isn’t entirely new, as Article 8(4) of Prakas 270 MoEF.BrK (“Prakas 270”) already stipulates that: “In any special case, the General Director of the General Department of Taxation may allow a unit or multiple units to conduct a joint audit on the enterprise.” What constitutes a “special case” remains somewhat ambiguous, but the Tax Audit SOPs offer some clarity, suggesting that combined audits are intended to prevent repeated and overlapping tax audits.

Uncertainties remain

Key questions remain unanswered:

• Automatic vs. application-based: The specifics of when and how the GDT will combine audits remain unclear. It is not specified whether the process is initiated automatically by the GDT or if a taxpayer must submit an application.
• Potential for internal conflict: In practice, internal conflicts of interest between departments can arise. For example, in some cases, auditors conducting a limited audit might be motivated to issue an NOTR prematurely. This could be done strategically to keep the audit case within their department and avoid losing it to the team responsible for comprehensive audits. This raises a valid question: why conduct multiple overlapping audits when a single, comprehensive audit could address all potential issues?

Our experience with combined audits

In practice, taxpayers typically initiate combined audits by submitting written applications, which are often approved by lower-level GDT officials rather than requiring the General Director’s direct involvement.

Furthermore, combining audits doesn’t necessarily translate to a less comprehensive review. For instance, combining a limited audit with a comprehensive audit still results in a comprehensive audit, potentially involving auditors from various branches, like the DLT collaborating with the DEA.

In summary, while the concept of combining tax audits sounds appealing to streamline audits, the specific procedures and potential interdepartmental dynamics add layers of complexity that warrant careful consideration to apply for combining audits.

New Time Limits for Tax Audits, But Not That New

The Tax Audit SOPs introduce time limits for tax audits, but they are essentially an extension of existing regulations with some nuances.

Desk audits

The Tax Audit SOPs specify that desk audits must be completed within 12 months from the date the tax return is filed. For instance, if a taxpayer files their return on 31 March 2023, if a desk audit is initiated in September 2023, it must be completed by 31 March 2024.

On-site audits

The Tax Audit SOPs suggest a timeframe of one to six months for on-site audits (limited and comprehensive audit), with completion by the first quarter of the following year. This applies even if no irregularities or taxpayer errors are found during the audit.

For comparison, the Prakas 270, Article 9(7) established similar durations: three months for desk and limited audits, and six months for comprehensive audits.

Conditions and challenges

While these time limits seemingly offering a more predictable timeline, a closer look reveals a significant challenge: these deadlines hinge on the cooperation of the taxpayer to promptly provide “sufficient” documents and information. Unfortunately, neither the Tax Audit SOPs nor Prakas 270 defines what constitutes “sufficient” in this context.

This ambiguity creates a situation where audits can become open-ended. Without clear standards for evidence, the GDT could continually request additional documents, potentially extending the audit process well beyond the stated time limits. This lack of clarity has been a primary contributor to the protracted audit periods frequently endured by taxpayers.

Other New Aspects to Know

Beyond the streamlined desk audit process and exemption for gold taxpayers from routine audits, the Tax Audit SOPs introduce other significant changes.

Reduced documentation burden

The Tax Audit SOPs aim to reduce the documentation burden on taxpayers by stipulating that the audit department should utilize documents and information already provided during tax registration and filing, minimizing duplicate requests. However, the GDT retains the right to request additional documents if deemed necessary. Importantly, the Tax Audit SOPs mandate that the GDT maintain and share these additional documents with other relevant authorities to avoid future duplication.

Enhanced records and transparency

The Tax Audit SOPs emphasize the importance of recordkeeping and transparency during audits. Tax auditors are now required to document all verification of accounting records and taxpayer interviews. These records must be signed and stamped by the taxpayer or their representative. While this is likely already happening in many cases, the Tax Audit SOPs formalize the requirement, providing greater transparency for taxpayers.

Clarification of deadlines

The Tax Audit SOPs provide greater clarity on timelines. This applies to both GDT responses (e.g. decisions on taxpayer protests) and taxpayer responses (e.g. corrections and payments, written requests, protests). Previously stated deadlines of “60 days” are now clarified as “within 60 working days,” and “30 days” are clarified as “within 30 working days.” This distinction is important for taxpayers in accurately calculating response windows.

Conclusion

The new Tax Audit SOPs in Cambodia present both opportunities and challenges for businesses. The gold taxpayer exemption offers eligible businesses the advantage of avoiding routine audits. Additionally, all taxpayers can benefit from a streamlined desk audit process featuring a two-strike system, which allows businesses to promptly address discrepancies and potentially avoid interest charges. The Tax Audit SOPs also enhance clarity on deadlines and seek to reduce the documentation burden by utilizing information already provided during tax registration and filing.

However, uncertainties remain regarding the practical implementation of these reforms, particularly in terms of whether tax audits will indeed be streamlined and how the standards for “sufficient” documentation will be defined.

Navigating these reforms requires careful consideration and expert guidance. At Andersen in Cambodia, we specialize in helping businesses adapt to regulatory changes, optimize tax strategies, and ensure compliance with the latest legal requirements. Get in touch with us today to learn more.

On 23 July 2024, the General Department of Taxation (“GDT”) held a workshop Standard Operating Procedures (“SOP”) for Tax Audit and Tax Crime Investigation. The workshop featured prominent speakers, including H.E. Mr. Kong Vibol, Director General of the GDT, Neak Oknha Kith Meng, President of the Cambodian Chamber of Commerce, and Mr. Edwin Vanderbruggen, Senior Partner at Andersen in Cambodia.

The event aimed to ensure efficient tax audit procedures, the ethics of the tax auditors, and full compliance of tax crime investigations with the Criminal Procedure Code of Cambodia.

Key discussions and insights

1. SOP of tax audit for tax officers & taxpayers

• To streamline the tax audits performed by the tax administration, the SOP outlines two main types: Desk Audit and Onsite Audit (“OA“). Desk Audit (“DA”) is conducted at the tax administration office and involve reviewing and verifying tax returns. Onsite Audit is divided into Limited Audit (“LA”) and Comprehensive Audit (“CA”), focus on different aspects and timelines of tax assessments.
• To avoid an overlapping tax audit, a joint audit (LA and CA) at once will be conducted since only one OA is allowed every three-years.
• If hard evidence of serious tax evasion exists, the Director General of GDT may appoint any competent tax audit department/unit to conduct tax audit or alternatively, the Tax Crimes Investigation Department to carry out the necessary tax crime investigation procedures.
• Taxpayers may request the GDT to conduct an onsite audit within the three-year period. However, if no risk or irregularities are found, the tax administration will not conduct any tax audit.
• The tax auditors may not request documents that the taxpayers have already provided (i.e., during tax registration, previous tax filings, etc.).

2. Remarks on Comparing Cambodia’s Tax Audits to International and Regional Best Practices (Edwin Vanderbruggen)

• In terms of tax revenue (% of GDP), Cambodia scores higher than most in Asia, even higher than several EU countries.
• While the number of tax audits in Cambodia is normal, the lengthy duration of these audits creates a backlog, leaving both taxpayers and the tax authority frustrated by the slow pace of resolution.
• Mr. Edwin encouraged taxpayers to obtain a gold tax compliance certificate. Approximately 300 taxpayers currently hold a gold tax compliance certificate.
• He also suggested some type of express arbitration to eliminate the backlog.

3. SOP manual on tax crime investigation for tax official and tax payers

Taxpayers who obtain a Gold Certificate of Tax Compliance will, generally, not be subjected to audits or crime investigations, but if risk factors occur some type of verification will nevertheless be done.

Additional key highlights

The seminar also highlighted the GDT’s initiatives to resolve the on-going dispute within the shipping and airline industry, alongside efforts to reinforce the tax court system, as mentioned by H.E. Mrs. Bun Neary, Deputy Director General of the GDT.

The deadline for voluntary self-correction of tax returns is fast approaching, with only 30 days left for taxpayers to rectify their past tax returns without incurring penalties.

Refer to our previous article: “The Power of Forgiveness: How Cambodia is Offering Unprecedented Tax Savings for the Confession of Past Unpaid Taxes“, Cambodia’s General Department of Taxation has introduced Prakas 071 MEF.BrK.GDT. in January 2024, allows self-assessment taxpayers to correct prior tax declarations stemming from misunderstandings or confusion. The deadline to take advantage of this incentive is 30 June, 2024, so act fast!

This incentive applies to:

• Self-assessment taxpayers who need to amend prior tax declarations due to misunderstandings or confusion, whether by the taxpayers themselves or withholding agents.

Benefits of Proactive Self-Correction:

By submitting corrected accounting records and tax declarations by the 30 June deadline, you can benefit from exemption from administrative sanctions. This includes:

• Penalties range from 10% to 40% of the underpaid tax, plus a 1.5% monthly interest charge, and
• Fines between 5 million and 10 million riels, along with potential business license suspension or revocation.

Scope of Application:

To qualify for the exemption, requests to amend accounting records and tax declarations must relate to transactions prior to January 2024. Transactions after 01 January, 2024 do not qualify for this relief.

Additionally, if a tax audit is already underway, the exemption applies only if the disclosure is made before the tax auditor identifies the issue. Disclosures made after discovery will incur a 10% penalty on the underpaid tax and a 1.5% monthly interest charge. However, any previously paid penalties and interest can offset future reassessment penalties and interest on the same issue post-audit.

Act Now

With the deadline looming, it’s essential to act swiftly. For questions or assistance in navigating this opportunity, you can reach out to our dedicated team of advisors at VDB Loi. We are here to help you make the most of this regulation.

Don’t miss this chance to correct past tax errors penalty-free. The window closes on 30 June, 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.

The promulgation of Sub-Decree 49 ANKr. BK (referred to as the “New Sub-Decree”) on Value Added Tax (“VAT”) marks a positive update to the existing taxation framework, particularly the 1999 Sub-decree 114 ANKr.BK on VAT. Enacted by the General Department of Taxation (“GDT”) on 11 March, 2024, this new Sub-Decree introduces important updates and amendments aimed at streamlining VAT processes, enhancing tax compliance, and addressing the complexities of modern business transactions, particularly those through e-commerce.

Let’s delve into the key changes and provisions brought forth by this Sub-Decree:

• Integrated legal definitions from the Law on Taxation 2023 (the “LOT”) and Sub-decree 114 on VAT from 1999.
  • Simplified definition: VAT Taxable Turnover now clarified as “refers to turnover from VAT taxable supply of goods or services.
• Under the new Sub-Decree, a taxable person must register for VAT within 15 days of becoming liable. (Previously, the registration period was 30 days under Sub-Decree 114.)
• According to the new Sub-Decree, if a taxable person’s registration is canceled, they are deemed to have sold all goods in hand, including current assets (instead of capital goods as previously stated in Article 26 of the older Sub-Decree 114). Consequently, they are liable for output tax on all goods for which input tax credit was received, with the output tax payable based on the fair market value of the goods at the time of registration cancellation.
• Taxable persons can claim input tax credit for taxable sales of goods and capital assets acquired prior to registration, but they are no longer allowed to claim credit for importation of goods made before registration. This change implies that while taxable persons can still offset VAT paid on goods sold and capital assets acquired before VAT registration against their output tax, they are no longer permitted to reclaim VAT paid on imports made before registration.
• The new Sub-Decree extended the period for recognizing VAT credit. Previously, VAT credit was allowed for all taxable supplies received and importation of goods made within the month. Now, VAT credit is recognized for taxable supplies received within the month or within 60 days thereafter. Similarly, for importation of goods, VAT credit is acknowledged within the month or within 60 days after importation. These changes provide taxable persons with an extended timeframe to account for VAT credit, aligning with practical business operations.
• The new Sub-Decree introduces clarity on taxable and non-taxable supplies. It mandates that taxable persons must accurately record and segregate VAT input used for taxable and non-taxable supplies. VAT input utilized for non-taxable supplies is not permissible for recognition as VAT input, as per Article 68(2) of the LOT.
• In the old Sub-decree 114, if only a part of a taxable person’s supplies is taxable, the credit allowed is calculated using the formula A x B/C, where A is the total input tax for the period, B is the total value of taxable supplies made during the period, and C is the total value of taxable and non-taxable supplies made during the period, excluding non-taxable business transfers. The new Sub-decree further clarifies that the value of B/C must be determined to two digits after the decimal point, without rounding up or down.
• The new Sub-Decree introduces an additional supporting document for claiming VAT input: the custom declaration and tax payment receipt, serving as evidence of VAT paid on imported goods.
• The new Sub-decree confirms and integrates the VAT refund treatment for exporters and QIPs outlined in Instruction No. 018 MEF.NT.GDT. It specifies that:
  • Exporters and QIPs with excess input tax credits for three or more consecutive months can apply for a refund of the monthly excess input tax. They may submit their refund request to the Tax Department at the end of the third month or any subsequent month.
  • The Tax Department will not issue refunds to taxable persons who request a tax refund but fail to declare their taxable transactions.
• Criteria for VAT invoice, taxable value, and non-taxable supplies for diplomatic missions and international organizations have been updated to align with the LOT.
• Under the old Sub-decree 114, the taxable person transferring the business was required to notify the GDT of the transfer within 10 days of its occurrence. This timeframe has now been extended to 15 days in the new sub-decree. Additionally, the previous requirement for the taxable person transferring the business to seek cancellation of registration has been removed in the new sub-decree.
• The new sub-decree incorporates definitions of B2B and B2C, outlines tax obligations for each scenario, and addresses timing of supply and input tax credits for e-commerce transactions based on existing VAT e-commerce regulations. It mandates that registered taxpayers to apply VAT reverse charge for digital goods or services and e-commerce transactions supplied by non-resident suppliers who do not have a permanent establishment in Cambodia, and supplying from outside to inside the Kingdom.