Sector: Taxation

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.

“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	Serious negligence (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.

Withholding agents may also invoke Prakas 071[6].

What kind of corrections are you allowed to make?

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 by submitting 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.

---

[1] The Holy Bible, Proverbs 17:9

[2] Prakas 071 MEF P.GDT dated 30 January 2024 (“Prakas 071”)

[3] We discuss below how these exemptions may not apply for correcting tax returns under audit.

[4] Prakas 217 MEF.P dated 14 march 2022 (“Prakas 217”)

[5] Prakas 009 MEF Pr.K on Classification of Taxpayers, dated 12 January 2021.

[6] Art. 3 Prakas 071.

[7] Art. 2 Prakas 071.

[8] Correction of years already under audit is a separate issue, which we discuss below.    

[9] Art. 14 Prakas nr. 270 MoEF. Brk on Tax Audit dated 13 March 2019

[10] Art. 15 Prakas nr. 270 MoEF. Brk on Tax Audit dated 13 March 2019

[11] For example, an underpaid tax of 100,000 in January 2019 plus a penalty of 40% can have increased to 230,000 or more by January 2024.

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.

Introduction

Siem Reap and Phnom Penh’s success as a tourist destination, as well as a fairly robust economic development, has among other things resulted in a significant boost in connectivity by air for Cambodia. Just before COVID, international arrivals amounted to more than 6 million persons per year, roughly 2 million each from ASEAN and China, and the remainder shared by Japan, Korea, Europe, India and other countries.   Direct flights exist with many Asian countries, serviced by more than 50 internationally or regionally renowned airlines. Add to that the significant volume of cargo airfreight (around 100,000 tons cargo airfreight annually, post-COVID) and the true importance of the air transportation sector becomes apparent.

The significant volume of passengers and cargo in the aviation sector is in sharp contrast with the lack of specific tax regulations for the industry.  International airlines are merely subject to the same general rules as all other industries such as manufacturing, construction or hospitality while their industry is radically different. Most of their expenses airlines incur in international airspace. Costs for airlines are never incurred in only one country. Passengers and cargo most often use various aircraft and even various airlines in a journey, and assigning a profit to one single branch is very difficult to do. One can see right from the outset how having the same tax rules for a simple manufacturer in Cambodia and for an international airline that sells tickets online and has departures from Cambodia for global air travel, is going to be challenging.

The tax problems international airlines face in Cambodia were highlighted at a recently held industry event facilitated by the Department of Civil Aviation and the airports of Cambodia, base don a survey held among airlines servicing the country . 

In this analysis we set out and examine some the Cambodia tax problems of international (non-Cambodian) airlines contrasting them with the prevailing international rules and practices. We put this in the perspective of both direct and indirect taxes applicable to airlines in Cambodia.

The interesting backdrop is that internationally, and historically, source states (states where airlines fly and derive income, but are not based) have moved strongly toward the exemption of income from international air traffic. That is, as is provided in the OECD and UN Model Double Tax Agreement (DTA) international airlines are only taxed in the state where the airline is a resident, and its overseas branches are exempt from income tax in the states where they are located . But, the source exemption for airline income is not yet universal. It is nearly always created by a DTA between the state where the airline is a resident and the state of the branch (or, in tax terms, a permanent establishment (PE)), and there are plenty of states in Asia that do not (yet) have a DTA between them. Particularly Cambodia, which started concluding tax treaties only from 2017, has several important (air) trade partners without a DTA . 

The international practice of taxing the branches of international airlines

There are several ways how states approach the income tax of airlines that are somehow connected to their territory .

1. Probably the most wide spread and simplest way to approach the income taxation of non-resident airlines is to subject their profit only to income tax in the state where they are a resident and to exempt them from tax everywhere else. So, all local branches are exempt from income tax, at least on qualifying income. This is the “exemption-approach” propagated by the OECD and UN Model DTAs, and the method of choice recommended by the International Air Transport Association (IATA). 
2. In Cambodia, this method is required under art. 8 of Cambodia’s DTAs, which prescribes that any airline resident in another DTA state is taxed only in that other state, and not in Cambodia, even if it has a branch or permanent establishment in Cambodia.  
3. Only slightly more complex is tax on a gross revenue basis. This is levying income tax at a reduced rate on gross revenue of the branch, or, which very much results in the same end result, levying a deemed net profit margin for airlines based on revenue and taxing it at the normal rate. For this and all other below methods the locally sourced gross revenue needs to be determined, which is a another problem in itself. But the expenses do not come into play under this approach, so one could say the method is easier than some of the following ones. For example, Vietnam and India follow this approach for their non-DTA airlines.
4. The disadvantages of this approach are obvious: an airline might be taxed on income it actually does not locally or even internationally realize because net profit is determined on a deemed basis, without checking actual profit. This problem is made worse if loss carry forward is inapplicable, resulting in an airline paying profit tax while it incurs loss after loss.
5. Taxing the branch on its own net income is the somewhat more complicated but arguably fairer method. Complicated, because one needs to come up with rules to determine not only which revenue must be assigned to the branch, but also which expenses are acceptable. This is the “Calcutta method”, which allows the branch to deduct local and apportioned expenses from its gross revenue to thus way determine the taxable net profit of the branch .
6. Finally, one could instead of trying to determine the local net income of a branch simply abandon that pursuit and instead focus on the worldwide net profit of the airline. If the airline has realized a profit globally, how much of that net profit should be assigned to one particular branch? There are variations how to do this allocation of net profit. The “Maritime method”  provides that the percentage of the branch in the global revenue can be used to determine the branch’s portion in the global net profit. The “Massachusetts method”  calculates that percentage by taking the average percentages in terms of not only revenue but also employee costs and cost of assets used. In both these options, some percentage of the global net profit is deemed to be the branch’s profit and taxed accordingly by the state of the branch.    

All these approaches and methods have pros and cons. Some states use more than one, e.g. Australia allows branches of foreign non-DTA airlines to declare local profit based on the Maritime or the Calcutta method.

The administrative difficulties with the exemption approach such as in Art. 8 DTA are very limited. Mostly there could be debates if there is any non-aviation, “normal local income” that is carved out from the income tax exemption. One feature, however, is that the exemption method can result in an unbalance of tax revenue between states that have significant differences as a home base for international airlines. That is to say, this is typically a problem between least developed countries, which may have just one or two airlines of their own, and advanced developed nations with a long list of airlines based on their state. On the other hand, there seems to be ample evidence that international airlines greatly contribute to the economic development of developing nations , and there is no arguing with the success of the exemption method, which is included in both the OECD and the UN Model Tax Convention. 

Taxing gross revenue is clearly not the IATA’s favorite approach, and it is easy to see why. The aviation business is notoriously cyclical, with high peaks and periods of significant losses. Airline branches taxed on gross do not have loss carry forward and are thus, by definition, double taxed on many occasions. Furthermore, taxes on the gross mean that even loss generating branches or routes are paying income tax, while the head office may also be taxed on global income.

Approaches based on the global net profit might be seen as inadequate for very lucrative individual branches, while the Calcutta method may invite more local scrutiny as the tax authorities might feel they need to go through all apportioned expenses, one by one.   

The Cambodian taxable presence of non-DTA airlines

Cambodia’s Law on Taxation  featured a definition of “permanent establishment” (the Cambodian PE) from its first draft in 1997. The Cambodian PE functions much like in other countries as a source nexus for the Cambodian income taxation of business income derived from Cambodia by non-residents.

After various (and recent) changes to the definition of “permanent establishment” (PE) in Cambodian tax law and regulations, presently the definition of PE in the LOT reads as follows:

The term “permanent establishment” means a fixed place of business in the Kingdom of Cambodia, the branch of a foreign company or an agent resident in the Kingdom of Cambodia, through which the non-resident person carries on their business. The term “permanent establishment” also includes any network or connection through which a non-resident person engages in economic activity in the Kingdom of Cambodia. Any person in Cambodia may be considered as a PE of a non-resident if the person has and regularly uses the right to enter into a contract on behalf of the non-resident person or to play a primary role in facilitating reaching the contract. A PE is considered as a resident legal person only for the income from Cambodian sources” . 

Foreign airlines that want to carry goods or passengers to or from Cambodia are often pulled into the Cambodian income tax jurisdiction through the operation of regulatory requirements. To receive permission from Cambodia’s Civil Aviation Authority, a foreign airline needs to fulfill various local requirements, which sometimes includes registering a type of commercial presence in Cambodia. As a result, there is for that standard situation little doubt if the foreign airline has a taxable presence in Cambodia, because that commercial presence will constitute a PE for tax purposes, at least under the Cambodian LOT. A non-resident non-DTA airline which opens a commercial presence in Cambodia will automatically be drawn into the income tax jurisdiction because the GDT regards every commercial presence as a taxable branch or PE. So, there is little uncertainty in this situation for the GDT or for the taxpayer. 

But there may be many less obvious cases where no formal branch is created by the airline. Under the LOT definition, which was expanded as recently as 2023, the following situations would also give rise to a Cambodian taxable presence for a non-resident airline:

1. The non-resident airline has no formal branch in Cambodia but it has a “network or connection” through which it engages in air transportation business in Cambodia; or
2. The non-resident airline has no formal branch in Cambodia but there is a (legal or individual) person or company in Cambodia which:
   1. Has and habitually uses the right to sell carriage on behalf of the non-resident airline to customers in Cambodia; or
   2. That person does not have the right to itself sell carriage but plays “a primary role in facilitating reaching” such sales .

Particularly the “network or connection” and the “person with primary role in facilitating” are perhaps vague concepts that raise questions and uncertainties for both the GDT and the taxpayers. What is more, there is presently no administrative path for a non-resident non-DTA airline to self-declare an agency PE distinct and separate from its agent proper unless it has a commercial presence as well. In other words, an airline with a dependent agent in Cambodia cannot really declare its own Cambodia source income separate from that agent’s own income, short of registering a commercial branch which it may not be in a position to do.  Typically, for these situations, which we also encounter in the Cambodian taxation of carriage of goods by the sea, the GDT may on occasion add the liner’s income to that of the agent, particularly if they are group entities. This is practically troublesome and theoretically unsound. If the LOT calls for certain situations to be taxable, the GDT needs to create the proper administrative possibilities for taxpayers to comply with that tax obligation.  

When considering the above situations of a non-branch non-DTA airline, one area of uncertainty is the business models of code-sharing, agency and similar arrangements. In a very general sense, under the code sharing model passengers or freight may purchase a ticket from one airline but are actually transported over another airline or airlines. This typically involves an ‘operating carrier”, which actually operates the aircraft, and the “marketing carrier”, which purchases seats from the operating carrier for re-sale to the market. The airlines may alternatively swap seats with each other. In the agency model, the marketing airline merely represents the operating airline. The contract concluded or the ticket issued only binds the operating airline, not the marketing airline.

It is clear that the Cambodia branch of a non-resident non-DTA marketing airline that acts as an agent on behalf of other airlines which do not have a branch in Cambodia, may squarely fall within the Cambodian definition of a PE, if the above conditions for PE are met. That is to say, if the marketing airline has the authority to fully conclude the contract for the carriage or plays the primary role in getting to the end result, can it be said that the marketing airline is the agency-PE for the operating airline? Again, however, the operating airline might decide not to comply with its (alleged) tax liability as there is no administrative way for him to declare income separately from the marketing airline, except to register a commercial branch (which may not be feasible for regulatory reasons).

What is “Cambodia sourced income” and “domestic ticket sales” for non-DTA airlines?

Cambodia source income in general

Cambodia’s Law on Taxation sets out a list of source rules, determining which income derived by non-residents is taxable in Cambodia . The source rules are somewhat different per class of income, as is the case in most countries. Two heads of jurisdiction as Cambodia source income may -conceivably- come into play for international air transport: art. 33 (3) “income from services performed in the Kingdom of Cambodia” and the general art. 33(10) “income from business activities carried on by a non-resident”.

It is difficult to argue that “income from services performed in Cambodia” is an appropriate category of income for international air transport. The plain reading of the text seems to refer to just the opposite, in fact. In addition, there is no official general guidance from the GDT to indicate that this class of income could comprise income from international air transport, in fact quite the opposite. In actual cases, payments for international transport, including those for passengers and goods departing from or arriving in Cambodia, have by the GDT consistently been treated as not subject to withholding tax. At the very least, we cannot equate the purely temporary physical presence of an aircraft on Cambodia territory, including its airspace, as “performance in Cambodia”, as such an interpretation would result in any aircraft touching or crossing the airspace (not only arriving in or departing from it) triggering taxability.  This is entirely unfeasible practically, and internationally unprecedented. At the most, international airlines departing from and arriving in Cambodia “perform” only a very short part of their trajectory within national boundaries.

When considering income realized from the transportation of passengers and goods by non-DTA airlines, the class “income from business activities” seems the more appropriate one . Business income derived by a non-resident taxpayer is only taxable in Cambodia if it is realized through a Cambodian PE .

Cambodian tax law does not provide much detail on how to determine which income that is derived from Cambodia should be included in the income of a Cambodian PE. The LOT merely provides that “business income from a non-resident through a PE in Cambodia” is considered Cambodia sourced income .  “Through a PE” was the original language of the draft law in 1997, prepared by consultants who were well aware of the internationally customary attribution of income to PE’s, as per the OECD Model DTA.  In Cambodian language this was translated into “tam royak” which means “by means of” or “through” . The main regulation on income tax, the Prakas on Income Tax, remarkably, merely repeats the LOT’s statutory rule, without adding any clarification or detail.

In our view, the use of the word “through” a PE (or, in Cambodian language “tam royak”) in the LOT before 2023 at least meant that the PE must have been the link between the income and the non-resident. Not only must the PE have been involved, it must have been in the middle between the income and the non-resident. This seems to be the equivalent of the OECD’s approach in art. 7 OECD Model DTA. 

Cambodia’s transfer pricing regulation does offer some more color on determining a PE’s income. Prakas 986 provides in rules to determine the arm’s length price for transactions between related enterprises and follows, by and large, the OECD’s main concepts in the matter such as functional analysis, comparability, CUP and other methods, etc. In the 2023 amendment of the LOT, it is emphasized that the relationship between a PE and its head office is also a related party relationship for transfer pricing purposes . The arm’s length principle is not a source rule per se, but it will operate with much the same result under the circumstances.  

In 2023, the allocation of income to a PE was amended and enlarged. A new sub-paragraph was added reading:

“The allocation of income to the PE of a non-resident in Cambodia must also include income from the same or similar supply of goods or services to the business activity of the PE supplied by the non-resident in Cambodia”. 

There is a similarity here with the UN Model DTA’s “limited force of attraction”, but both concepts are not the same .

The UN Model’s provision reads:

“[…] may be taxed in the [source] state …(b) sales in the [source] state of goods or merchandise of the same or similar kind as those sold through that PE or (c) other business activities carried on in that [source] state of the same or similar kind as those effected through that ME”.

The idea that all income from a source country should end up in a PE’s tax calculation is not uniformly considered workable, even by the developing countries in the UN Committee of Experts:

“Some members from developing countries pointed out that the force of attraction rule had been found unsatisfactory and abandoned in recent tax treaties concluded by them because of the undesirability of taxing income from an activity that was totally unrelated to the establishment and that was in itself not extensive enough to constitute a PE. They also stressed the uncertainty that such an approach would create for taxpayers”

Income from international traffic specifically

Internationally, there are two alternative approaches to determining the source revenue of an international airline: the Point of Uplift Method and the Point of Sale Method. A 2008 “Practice Statement” of the Australian Tax Office (ATO) in the matter of non-treaty airlines provides a well written illustration of this .  First of all, the ATO’s Practice Statement sets out that non-DTA airlines may in Australia choose between the Maritime or the Calcutta method. Then, to determine the “gross Australian revenue” of the branch under each method, the taxpayer may use, and the ATO will generally accept, one of two rules: 

• Point of Uplift: the Practice Statement states that “in most cases the place of performance, being where the actual provision of the transportation service takes the place will be the vital factor leading to the derivation of the income. […] The Commissioner considers that where the carriage commences, otherwise known as the point of uplift- is a reasonable approximation of the place of performance source rule”. Under this rule, income will be regarded as locally sourced income for flights where the carriage commences in the source country. For this rule, transit stops to transfer to a different aircraft, change aircraft or take fuel are disregarded. The income for the entire trip from the source country to the destination is counted, including transfers. The ATO makes an exception for flights that have a stopover, i.e. the passenger or goods leave the airport and move into the state, stay in a hotel outside the airport and continue their voyage after some time .  This means that the return trip is not counted as Australian source income, as the point of uplift is overseas. Practically, the income of a return ticket is divided in two to count only the Australian uplift income.
• Point of Sale: This rule looks at all the carriage of goods and passengers sold in the source state, irrespective of whether the transport is to or from the state where the carriage was sold. In this case, the revenue from an entire flight, go and back is included in the branch’s gross income of the branch that sold the ticket.

From the ATO’s point of view, taxpayers might propose either the Uplift rule or the Point of Sale rule to determine gross revenue. But for a non-DTA airline with “significant operations in Australia as evidenced by the existence of an operational or sales office or with specific and strategic marketing and advertising in Australia” the Point of Sale rule is the more appropriate one, the Practice Statement provides .

How do e-commerce sales affect this source issue? The fact that carriage is sold to customers does not have much impact under the Uplift method. Regardless where the sale has been concluded, passengers and freight departing from the branch state will be included in that state’s revenue. For the Point of Sale rule, this is less clear. The ATO Practice Statement seems to take the view that it suffices that the carriage is sold “in Australia” and not necessarily by the Australian branch.

With respect to Cambodia, there is no actual law or regulation to clarify which part of the revenue of a non-resident non-DTA airline should be allocated to the Cambodian branch or PE (if any) of such airline for income tax purposes. At the higher referred event of 27 September 2023, the GDT as far as we are aware for the first time publicly stated its view that “[airlines] shall recognize income from the sale of tickets based on the total number of passengers departing from Cambodia (passenger Uplift from Cambodia) and regardless of the number of the tickets at the point of sale. The airfare shall be calculated based on one way ticket which departs from Cambodia or half of the round way fare” .

Following general Cambodian tax principles, it seems fairly uncontroversial that tickets or cargo sold by and paid to the Cambodian branch itself (as the Point of Sale) should be included in its gross revenue. But the GDT seems to have chosen for the Uplift method instead, in all situations, which is not in line with for example the recommended method in Australia in case the airline has a full blown local sales office. Accordingly, the GDT suggests that the income related to passengers living abroad who buy tickets and depart from overseas, is also included in Cambodian source income for the round trip when they are uplifted from Cambodia. For example, if they take a round trip from France to Cambodia, then half of the return trip fare should be deemed Cambodian source income. Furthermore, along the same lines, passengers or cargo leaving Cambodia booked and paid for at the airline’s head office, for example by the passenger’s employer, or by the overseas buyer of the cargo, may according to the GDT be deemed Cambodia source income.  The GDT also takes the view that tickets sold online, and for example recognized at the head office should be included in Cambodia source income (half if a return trip) provided the passenger who booked this trip is uplifted from Cambodia at some point.  

“Domestic sale” in Cambodia’s indirect tax system

The Cambodian indirect tax system for airline tickets offers little comparative guidance, as the nature and structure of an indirect tax cannot be compared in any way with an income tax. Cambodia provides in a -presently- 10% “Specific Tax” on the gross value of the “domestic sale of passenger airfare for domestic and international routes”. There has been a Specific Tax on airline tickets for passengers in some form or another since 1997 in Cambodia, with various rates and taxable bases.

According to the GDT, the scope of “domestic sale” for the purposes of Specific Tax was provided in a regulation issued in 1997: “

“Any air ticket shall be considered as departing or sale to passengers in Cambodia if those air tickets have been given to the passenger before departing from Cambodia”.

Th GDT recently added that “this means the local air ticket sold includes the direct sale through the Branch, sale through agency using air ticket system and sale through the internet. The Branch shall calculate Specific Tax based on the number of passengers who have their first departure originated from Cambodia”. 

It is not entirely certain how the definition of Prakas 341 from 1997 is useful to clarify the application of Specific Tax in the age of e-commerce. The reference to “delivery” or “giving a ticket to the passenger” in Prakas 341 is difficult to understand now that physical tickets are rarely used. The same Prakas continues in par. 4 that:

“[T]he person liable to charge [Specific Tax] is the issuer of tickets if issued in Cambodia. For any air carrier which issues tickets abroad and sends them to Cambodia, it must carry our business through an authorized agent [ and] who is liable to pay this [tax]”.

Again, it is difficult to understand if a non-resident airline is “sending a ticket to Cambodia” by allowing, for example, a corporate customer in the same country as the airline to book a ticket online for its employee departing Cambodia. Furthermore, the definition of Prakas 341 referred to a taxable basis that has since gone through several reforms. It is a little counter-intuitive that the concept “domestic sale” which was introduced since the tax was created in 1997, actually according to the GDT regulation has very little to do with selling something in Cambodia.       

How to determine the Cambodian branch profit of a non-DTA airline?

As with the revenue determination, Cambodia’s tax laws and regulations itself have no explicit guidance for determining the net profit of the Cambodian branch or PE of a non-resident non-DTA airline. There are no specific rules for the airline industry on the recognition or allocation of expenses to such a branch, either with regard to local expenses or allocated global expenses. Taxpayers and GDT officials will have to make do with the general, all-purpose expense rules which were not written for the industry or even for cross-border situations.

From the internationally recognized formulas discussed above, it seems that the Calcutta formula is most readily in line with general Cambodian tax principles, as it involves determining a net profit for the branch based on the deduction of local and allocated expenses. These are all elements known to the tax determination of ordinary Cambodian subsidiaries and branches.

It is a bit more complicated, theoretically at least, for the Maritime and Massachusetts formulas, which would result in a branch declaring a net profit based on a percentage of its global profit, if any. Cambodian tax law prescribes that the Tax on Income charges “taxable income” which is, including for a branch, derived from business activities and is the excess over expenses made to acquiring a profit . The branch is required to apply Cambodian Accounting Standards as a starting point to derive taxable income . There is no basis in the LOT itself to replace the net profit calculation of a branch with a percentage of a global result. On the other hand, intercompany arrangements on allocating profit can have exactly the same effect, and these are commonly found and tested by the GDT on their arm’s length character under Cambodia’s transfer pricing regulations . The GDT has practically speaking the final say, as it can decide whether or not the accounting records of the taxpayer are “proper” in the sense of the LOT . Deciding the accounting records are not proper opens the way for the GDT to issue a reassessment. No reassessment can be issued if the GDT is of the view that the accounting records (based on the Maritime or Massachusetts formula) are proper and the correct amount of taxes has been paid.

The Cambodian GDT typically accepts the allocation of foreign shared services or general and administrative expenses by the head office or group companies to its Cambodian subsidiaries or branches. However, a common area of disputes is whether such shared services or costs trigger any Cambodian lax liabilities such as withholding taxes.

This problem is exasperated when it comes to expenses that can be specifically allocated to routes involving Cambodia such as interest, fuel hedging fees, expenses for the lease or use of aircraft, depreciation of aircraft, insurance, and the like. There is a question whether one or more of these payments might trigger withholding taxes in certain scenarios, and disclosing their details might open up the taxpayer to a whole new group of tax reassessments.

For example, lease payments of an aircraft. Let us take the example of a non-resident leasing company in a DTA or even a non-DTA country which leases an aircraft to a non-resident and non-DTA airline. This aircraft is sometimes or even always used on the route to and from Cambodia by the lessee/airline. Is this lease income a Cambodia source income? I would argue it certainly is not. First of all, the lessor derives income from the country of the airline, not from Cambodia. The airline, not the branch is the lessee. Secondly, even if we would deem that the lessor derives (some) income from Cambodia, it does so without having a Cambodian PE. So, under art. 33 (10) LOT the lessor is not taxable in Cambodia, and the lease income is not Cambodia source income.  In my view, the fact that the branch would have included the allocation of the lease costs in its financial statements does not change the tax analysis in the slightest. Compare it to the situation where the branch would record a service payment to an overseas transporter for bringing a computer used by the branch from Cambodia to an overseas destination. Clearly an international transport which is accepted by the GDT for many years as not a Cambodian source income and not subject to withholding tax, even though it is recorded as an expense by the branch. Incurring expenses does trigger taxability of an income which has a Cambodia source, but not the other way around. In other words, just by incurring an expense which is not a Cambodia source income, it does not become Cambodia sourced.  

Conclusions: significant uncertainty

A combination of factors have resulted in significant uncertainty for international airlines and their agents and partners when it comes to predicting the tax consequences of their Cambodian routes. One such factor is the rise of e-commerce, which allows passengers regardless of their location to purchase tickets wherever they like online, with unpredictable impact on the notion of “domestic sale of tickets” as a taxable trigger in Cambodian Specific Tax regulation.

Another such factor is the repeated enlargement of the Cambodian PE-concept, possibly casting a wider and deeper net while very few taxpayers in the industry are aware of the development.

At the core lies the lack of industry specific detailed regulation or guidance on the determination of direct and indirect tax imposts for airlines and aircraft lessors. Certainly in non-DTA situations but also when a DTA applies, industry actors need a predictable enforcement and calculation of their liabilities and exemptions. In that sense it is not useful to try and “re-invent the wheel”: all market participants, including the Government, have much to gain by choosing well established and familiar international concepts such an incremental use of the source tax exemption for airlines, the Maritime or Calcutta formula, and the Uplift or Point of Sale method of determining income.