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)
Mr. Edwin Vanderbruggen, Senior Partner at Andersen in Cambodia.
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.
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.
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:
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.
Department of Large Taxpayer (“DLT”): This department is tasked with conducting desk audits and limited audits for large taxpayers.
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.
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.
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 determination and taxation of the Cambodian sourced income of international shipping liners has long posed problems in this dynamic Southeast Asian country. As a longstanding manufacturing hub, imports of raw materials and export of finished and semi-finished products are hallmarks of Cambodia’s robust economy.[1] However, the taxation of shipping lines has been an area of uncertainty and concern for many years. This was not alleviated when Cambodia introduced transfer pricing (“TP”) in 2017 by means of Prakas 986.
In this note we discuss the source of the uncertainties between the shipping liners and the Cambodian tax authorities (“the GDT”) and the way forward this author has proposed to and is discussing with the authorities. We will update the readers again on the progress of the new draft regulation once it has been issued.
How are Global Shipping Lines Taxed in Cambodia?
Most of the global liners have over the years opened a subsidiary or a branch in Cambodia, and a minority has at least an independent agent in the country. This evolution was prompted by, besides economical and commercia reasons, the need at the time to issue invoices to clients with a local entity to avoid a hefty withholding tax of 14% on service fees paid to non-residents.[2] Accordingly, the model most liners follow is that the Cambodian subsidiary invoices the final customer as an agent of the liner (if in Cambodia) for Ocean Freight, Terminal Handling Charge, Document Fees and other parts of the income), and the non-resident liner invoices the same to the Cambodian subsidiary, Separately or as part of the same transaction, the non-resident liner also pays a compensation to its Cambodian subsidiary agent (“the Subsidiary”). This agent compensation is sometimes based on cost plus over the agent’s expenses, sometimes as a percentage of the gross income involved, or with fixed amounts per type of cargo. In reality, the Subsidiary usually does not do anything much besides this reinvoicing, although some larger offices also provide some import or export services or customer support services.
Cambodia has no special tax regime or tax rate for income from international transportation. Non-resident shipping lines are subject to the same tax rules as other non-residents, meaning that they are taxed on business income derived through a PE in Cambodia, or on income from services paid from or performed in Cambodia. No detailed guidance existed on how to determine the income of the agent subsidiary. Prakas 986 is a general TP regulation adopting a heavily simplified OECD approach to the arm’s length principle.
Subsidiaries have generally only included in their income tax returns whatever income they were entitled to under the agency agreement. As mentioned, this was generally a modest service fee based on cost plus, or a modest percentage of the gross income that ran through the invoices of the Subsidiary, or a fixed fee.
The GDT has never really agreed with that approach. The response in tax reassessments following tax audits has not been entirely uniform or harmonized, but in most cases the GDT would reassess a part of the income that was paid to the non-resident liner either as income realized through a PE in Cambodia (for which the Subsidiary is responsible) or, if the income was booked as turnover, through disallowing the payment to the liner as an expense. The liners, on the other hand, cannot agree with this approach, citing that the tax impost is unreasonably high and not based on any clear legislation or regulation.
The end result is a confusing situation rife with uncertainties and many, many unresolved tax disputes. To escape the deadlock, this author proposed to jointly draft a new Prakas with the GDT. Below we discussed a few features of the new Draft Prakas.
Attribution of Income to the Agent and the PE?
From the outset, the GDT took the view that two incomes need to be recognized: firstly the income of the Subsidiary Agent and, secondly the income of the PE of the non-resident liner, if any. The GDT also took the view that the mere involvement in the Cambodian market of the liner suffices in most cases to deem there is a PE[3].
Our suggestion was that from a TP perspective, given the limited administrative activity carried out by the Subsidiary, and based on the OECD thoughts on the attribution of income to a PE the activity of the Agent and the PE are one and the same, and it is not possible to assign two incomes to Cambodia under these circumstances. As was pointed out in the OECD’s Report on the Attribution of Profit to PEs: “there is no presumption that a dependent agent PE will have profits attributed to it. In some circumstances, the functional and factual analysis may determine that the amount to be attributed to the dependent agent PE is negligible”.[4]
The GDT will most likely go ahead with requiring two separate income streams, but it has agreed to lower the effective tax burden by providing a low deemed profit rate as a safe harbor.
Is Cost Plus Method Acceptable in This Case?
The determination of the arm’s length compensation for the Subsidiary agent was a second topic of discussion for several months. Our suggestion was that a cost plus 5% was internationally acceptable and even on the high side for intra group services of a simple administrative services.
The GDT took the view that some groups have marketing activities as well in Cambodia, or perform or arrange for high value import and export services such as assistance with customs clearance.
The GDT will likely adopt several options based on the activity of the Subsidiary.
Various Tax and Transfer Pricing Problems to Be Resolved for Liners
Besides the above mentioned issues, the GDT is likely to address a few other long standing issues in the Draft Prakas such as:
Approval for use of receipts that do not meet all conditions for tax invoices to some degree;
Confirmation that no additional withholding taxes apply to the income of liners;
Conformation of format and assumptions of TP report for logistics and shipping companies.
[1] Cambodia had one of the highest GDP growth rates in the region. The World Bank put Cambodia’s GDP growth pre-COVID at 7.1%, exceeding its larger neighbor Thailand (2.4%), closely approximating that of Vietnam (7.4%) https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=KH-VN-TH
[2] Nowadays, the GDT no longer claims that the general 14% for services paid to non-residents applies to income for ocean freight.
[3] It is indeed correct that Cambodia’s law on Taxation provides in a far more extensive PE concept compared to the OECD or UN Model DTA. Any “connection” or “facilitation” may trigger a PE, and independent agents may also constitute PE’s. In many cases it may be difficult to maintain that a Subsidiary which is collecting income for the liner does not constitute a PE under Cambodian domestic tax law.
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.
“Love prospers when a fault is forgiven, but dwelling on it separates close friends.”[1]
1. Introduction
Early in 2024, the General Department of Taxation (“GDT”) issued a new regulation to incentivize taxpayers to make revisions to their earlier tax returns[2]. The unstated but nevertheless clear objective of the GDT is to encourage taxpayers who are or become aware of past under- or misdeclarations to voluntarily and unprompted make the necessary corrections to their tax filings. To do so, the GDT will, in some circumstances, waive the otherwise due interests for late payment and the “additional taxes” (penalties for non-payment).
This is the crux of Prakas 071: it offers the taxpayer a full exemption on interest for late payment (which is set at 1.5% per month) and a full exemption on the penalties (at 10%, 25% or 40% of the underpaid tax) that would otherwise apply to declaring and paying a tax later than one was supposed to[3]. The below table sets out the interest and penalties that normally apply in the Cambodian tax regime.
Description
Penalty
1
Ordinary negligence (late tax payment or taxes underpaid by <10% of the amount due)
Penalty of 10% of the unpaid taxes (plus interest of 1.5% per month).
2
Seriousnegligence (late tax payment, or taxes underpaid by >10% of the amount due, or failure to pay tax within 15 days after receiving a tax liability collection reminder letter)
Penalty of 25% of the unpaid taxes (plus interest of 1.5% per month).
3
Unilateral tax assessment (This tax assessment may occur when taxpayers does not cooperate to provide information and documentation. Due to lack of required information, GDT may conduct unilateral tax assessment based on currently available information of taxpayers or publicly available information)
Penalty of 40% of the unpaid taxes (plus interest of 1.5% per month).
This is not the first time the GDT attempts to coax Cambodian taxpayers into correcting their tax compliance out of their own volution. In 2022, a somewhat similar regulation saw the light of day[4] but as we will see, in 2024 the GDT has significantly increased the incentive for voluntary correction of tax returns.
In this note we look into the conditions for applying Prakas 071, and we offer some observations as to its operation. Finally, we draw some conclusions as to which taxpayers and situations are in our view in the best position to make use of this renewed opportunity.
2. The conditions to carry out a penalty free correction of tax returns
Several conditions can be read in Prakas 071, relating to different perspectives:
Which taxpayers?
All self-assessment taxpayers can invoke Prakas 071. Cambodian tax regulations categorize taxpayers in the self-assessment regime as “small”, “medium” or “large”[5]. All companies are either “medium” or “large” self-assessment taxpayers, depending on key financial indicators, and are thus allowed to carry out the correction of tax returns.
NGO’s, non-profits and representative offices are “medium” taxpayers in the self-assessment system. Their tax liability is typically limited to withholding taxes and salary taxes. They too can carry out corrections under Prakas 071.
“Small” taxpayers are sole proprietorships below certain revenue and assets thresholds, and these are not included in the regular tax audit program. For that reason, it is difficult to imagine that small taxpayers will be eager to correct their tax declarations.
Prakas 071 speaks of “corrections of tax returns due to misunderstanding and uncertainty”[7]. At first glance, this choice of words suggests perhaps that not all corrections are allowed to be implemented under this system. For example, what happens to correcting an intentional omission or act of evasion?
The mechanics of the corrections themselves indicate that any type of correction including intentional omissions, may fall within the scope of Prakas 071. As will be seen below, for the most important taxes the corrections are done in the online filing system of the GDT, which allows for adjustment of earlier uploaded tax declarations. This online system does not have any appreciation for the deeper motive behind the error in the corrected tax return, and it seems to us that regardless of the earlier motive, all corrections are as a principle accepted by the system automatically, if the correction results in more taxes.
By which date must the corrections be carried out?
Unlike its predecessor Prakas 217, Prakas 071 states that corrections must be carried out by end of June 2024. There is thus a limited time window to benefit from the exemptions of interest and penalties set out in Prakas 071.
For which taxes are corrections allowed?
Prakas 071 does not state to which taxes it applies. The GDT which has issued this regulation is responsible for the the full wide range of taxes that exist in Cambodia. The most important and regular ones can be filed and corrected online, such as the Value Added Tax, the Tax on Income, Tax on Salary and Fringe Benefit Tax, and the Withholding Tax.
However, Prakas 071 does not say anything about limiting the right to self-correction to these most important taxes which can be filed online. We conclude from this that all taxes may be corrected under Prakas 071. For those taxes that are not filed online, the correction would have to be implemented by refiling corrected hard-copy tax returns. The same can be said for correcting tax returns that preceded the introduction of the online filing facility.
Can be amended online
Should presumably be amended bysubmitting hardcopy
Value Added Tax (“VAT”)Tax on Salary (“TOS”)Tax on Fringe Benefit (“TOFB”)Withholding Tax (“WHT”)Prepayment of Tax on Income (“PTOI”)Specific Tax (“ST”)Public Lighting Tax (“PLT”)Accommodation Tax (“AT”)Tax on Income (“TOI”)Minimum Tax (“MT”)
Advertisement Tax (“AdT”)Tax on Immovable Property Rental (“TOIPR”)Transfer Tax (“TT”)Tax on Immovable Property (“TOIP”)Unused Land Tax (“ULT”)Capital Gains Tax (“CGT”)Tax on Transportation Means (“TOTM”)Advance Tax on Dividend Distribution (“ATDD”)
For which tax years are corrections allowed?
Prakas 071 only states that tax returns related to transactions occurring before 01 January 2024, thus up to and including 31 December 2023.
There does not seem to be any limitation as to how far back tax returns can be corrected. Typically in Cambodia an audit can be commenced for a financial year of a taxpayer up to 3 years ago, or in case of evidence of tax evasion, a total of 5 years ago. Accordingly, when it comes to yet to be audited financial years, the taxpayer would likely be focused on the past 5 years, and not beyond[8].
3. Correction of tax returns pending an audit
The voluntary correction of tax returns which are already under a tax audit present several administrative and practical questions. On the one hand it is beneficial for the GDT that taxpayers volunteer to pay underpaid taxes which are already reassessed by officials in the course of a tax audit, instead of appealing them and delaying payment. Granting taxpayers benefits such as waivers of interest and penalties maybe justifiable from that perspective. Enforcement and seizures can be lengthy and costly for all involved.
On the other hand, granting blanket exemptions of interests and penalties for reassessed taxes unjustly prejudices those taxpayers who have declared and paid their taxes as they were due. Why would taxpayers pay on time if there is no cost for failing to do so?
This tension between on the one hand seeking to incentivize wrongly declaring taxpayers without disincentivizing timely compliance is palpable in Prakas 071.
Prakas 071 allows correction of tax returns for periods which are already under audit, but it distinguishes the incentives -somewhat vaguely- between two situations:
The issue that is to be corrected has not yet been found in the audit: in this case the 1.5% interest for late payment, and the additional penalty (of 10% or 25% or 40%) are all exempted, identical to where there is no audit at all; or
The issue that is to be corrected has already been found in the audit: in this case the 1.5% interest for late payment is NOT exempted. With respect to the additional penalty a penalty of 10% is payable and this can be offset with the final penalty imposed at the closing of the audit, which could be at 10% or 25% or 40%. In this situation, assuming the GDT would seek to impose a 25% or 40% penalty in any event for the underpaid tax issue, it is difficult to see any incentive for the taxpayer to self-correct.
The notion “not yet been found in the audit” is somewhat in need of a better definition. Although tax authorities are required to explain their reassessments to the taxpayer[9] this is -in practice- not necessarily the case in the Notice of Tax Reassessment itself[10]. It may thus be difficult to determine what issue has been “found”, although the common practice of drafting meeting minutes may serve as evidence in this regard.
Concluding remarks
Prakas 071 is a highly interesting initiative by the GDT for a significant group of taxpayers in a wide range of circumstances. It is a lot more powerful and better conceived than its predecessor Prakas 217.
Taxpayers which are dedicated to transparency and compliance are able to fix earlier mistakes, omissions, misunderstandings and calculation errors in a way that does not cost more than paying the unpaid tax at the time it was due. In other words, it would be as if the error never happened, even without any late payment interest or penalty. This is a significant benefit. Particularly for taxes that should have been paid many years ago, and which would enter in the 25% or 40% penalty range, the savings are very substantial[11]. Taxpayers in this situation should definitely look into moving forward with voluntary self-correction. This is also the case, for example, when the GDT has reassessed the same mistake or omission in several subsequent years of tax audits.
In all cases taxpayers should make a careful, calculated analysis of their past compliance and weigh the cost of the interests and penalties as the risk of “doing nothing”, to possibly seize this unique moment of penalty free corrections.
The question whether or not to move toward self-correction is more complicated for the (often numerous) tax years that are under tax audit. The benefits of self-correcting errors that are not yet detected in an audit are the same as if there is no audit, and therefore certainly worth considering. But if an issue is “found”, self-correcting becomes must less attractive. The complications associated with whether or not something is already found may present an obstacle to taxpayers from taking the leap in favor of voluntary revising their own tax returns.
Tax season is upon us, and this year, Cambodia’s General Department of Taxation (“GDT”) is offering a helping hand to self-assessment taxpayers through Prakas 071. This new regulation promulgated on 30 January 2024, provides a unique opportunity to correct past tax declarations made due to misunderstandings or confusion, without facing hefty penalties and interest charges. But act fast, as the deadline to apply is 30 June 2024. This is a good opportunity for (1) obvious, glaring, indefensible mistakes you have discovered afterwards, but prior to a tax audit or (2) issues you have already lost or accepted in earlier tax audits and a future reassessment of it is just a matter of time.
Who qualifies?
Prakas 071 extends to self-assessment taxpayers seeking to amend prior tax declarations stemming from misunderstandings or confusion by either the taxpayers themselves or withholding agents.
What are the advantages?
Self-assessment taxpayers who proactively submit requests to rectify their accounting records and tax declarations before 30 June 2024, stand to benefit from exemption of administrative sanctions, including additional tax, interest, and penalties.
Administrative penalties, outlined in Article 231(1) of the Cambodia Law on Taxation, encompass additional taxes (ranging from 10% to 40% of the underpaid tax), interest (at 1.5% of the underpaid tax per month), fines (ranging from 5 million riels to 10 million riels), as well as license suspension or revocation, temporary business closure, contingent on the offense’s nature and severity.
Should it apply retroactively?
Requests to amend accounting records and tax declarations must pertain to transactions prior to January 2024. Transactions occurring after 01 January 2024 are ineligible for exemption.
In cases where the relevant period is already under tax audit, exemption from administrative sanctions applies only if the disclosure before the tax auditor’s discovery. Subsequent disclosure following the tax auditor’s discovery entails a 10% penalty on the underpaid tax and a monthly interest charge of 1.5%. However, any penalties and interest paid as a result of prior disclosure can offset future reassessment penalties and interest on the same issue post-audit.
Challenges
Proving the initial mistake’s root cause as “misunderstanding and confusion” may pose challenges.
Discovering issues before a tax auditor does is crucial, as taxpayers often learn about prior year tax discrepancies only upon receiving a notice of tax reassessment.
However, what exactly is the “discovery” of an issue by the GDT in a tax audit? This is hard to evidence. Tying it to a Notice of Tax Reassessment would have made more sense.
Time constraints: The window for corrections is before the end of June 2024, presenting a challenge for taxpayers busy with fiscal year-end work, completing financial audits, and filing income tax returns by the end of March.
For any questions or inquiries regarding this incentive or our services, please reach out to our dedicated team of advisors at Andersen in Cambodia. We are here to assist you in navigating this opportunity effectively.
