Sector: Taxation

On April 29, 2025, the General Department of Taxation (“GDT”) announced Clarification No. 12779 on tax audits to be conducted under the manual on tax audit methods and procedures, also referred to as the “Tax Audit SOPs.”

The GDT will conduct tax audits of 4,827 companies throughout 2025. In accordance with established protocol, each selected company will receive a formal tax audit notice from the GDT. This notice will outline the necessary preparations and the expectations for cooperation with the tax administration during the audit process.

Furthermore, the GDT has clarified that, based on the principles outlined in the Tax Audit SOPs, a company will generally be subject to an on-site audit only once in a three-year period. This limitation does not apply if the entity is found to be at risk or has irregularities.

On February 19, 2025, the General Department of Taxation (“GDT”) released Notification No. 5524 GDT on the official market interest rates for loans between related parties for the year 2024.

To determine these rates, the GDT calculated the average annual lending interest rates of 12 major Cambodian commercial banks.

The resulting official interest rates are as follows:

• 9.67% per year for loans in Cambodian riel
• 8.79% per year for loans in US dollars

As mentioned above, note that these specific interest rates apply only to loans made between related parties.

Introduction

Tax stability is essential for fostering cross-border investment, yet fiscal policy disputes can quickly escalate into international conflicts—a challenge that resonates both in South America and Southeast Asia. The Freeport-McMoRan v. Peru decision, rendered on 17 May, 2024, under the United States of America-Peru Trade Promotion Agreement (TPA), offers valuable insights for emerging economies like Cambodia.

As nations in Southeast Asia modernize their tax regimes to attract foreign investment, the Tribunal’s reasoning in this case provides a practical roadmap for balancing investor protections with the sovereign right to enforce domestic tax policies.

Case Overview

The dispute arose when Freeport-McMoRan Inc. (“Freeport”), a U.S.-based company holding a 53.56% stake in the Peruvian mining company Sociedad Minera Cerro Verde S.A.A. (“SMCV”), challenged Peru’s imposition of additional royalties and taxes. These fiscal measures were introduced after Peru enacted the 2004 Mining Royalty Law in response to rising copper prices, despite a 1998 Stability Agreement that had guaranteed fiscal and administrative stability for a major $237 million investment project until 2013. As Peru’s tax authority began assessing unpaid royalties and taxes from 2008 onward, Freeport argued that these enforcement actions breached both the Stability Agreement and the minimum standard of treatment guaranteed under the TPA.

Central to the dispute was the question of whether the penalties and interest imposed on unpaid taxes qualified as “taxation measures” under Article 22.3.1 of the TPA—thus excluding them from the Tribunal’s jurisdiction.

Claimant’s Allegations on Taxation Measures

Freeport argued that the penalties and interest imposed by Peru’s tax authority, on unpaid tax assessments against SMCV were not “taxation measures” as defined under Article 22.3.1 of the TPA.

According to Freeport, the term “taxation measures” applies only to obligations directly classified as taxes under Peruvian law, such as income taxes, contributions, or fees, and does not extend to penalties or interest. Freeport contended that penalties and interest are separate obligations intended to penalize or compensate for delayed payments, not taxes themselves. As such, Freeport maintained that these measures should not fall within the TPA’s tax carve-out and are subject to the Tribunal’s jurisdiction under Article 10.5, which ensures fair and equitable treatment.[1]

Respondent’s Defense on Taxation Measures

Peru, on the other hand, defended its fiscal measures by asserting that the penalties and interest imposed on SMCV for unpaid tax assessments are integral to its domestic taxation regime and thus qualify as “taxation measures” excluded from the scope of Article 10.5 of the TPA under Article 22.3.1.[2] The government underscored that the TPA defines “measures” broadly to include “any law, regulation, procedure, requirement, or practice” related to taxation. It argued that if the TPA’s drafters had intended to limit the carve-out solely to “taxes,” as Freeport suggested, Article 22.3.1 would have explicitly referred to “taxes” rather than the broader term “taxation measures.”[3] Peru argues that Freeport’s interpretation artificially limits the scope of this term.

Additionally, Peru highlighted that the TPA explicitly safeguards states’ sovereign authority to enforce tax measures, including penalties and interest, emphasizing that such measures are “taxation measures” because they “…(i) constitutes a measure for the enforcement of taxes, (ii) is a practice related to taxation, and (iii) is a measure related to taxation.”[4] Based on this reasoning, Peru maintained that the Tribunal lacked jurisdiction to consider Freeport’s claims regarding these measures.

Tribunal’s Decision on Taxation Measures

Ultimately, the Tribunal sided with Peru, concluding that Article 22.3.1 of the TPA barred Freeport’s Article 10.5 claims concerning penalties and interest on the Tax Assessments, concluding they were “taxation measures” outside its jurisdiction. It found that Article 22.3.1 broadly excludes taxation measures, with no applicable exceptions under Article 22.3.[5] Rejecting Freeport’s reliance on Peruvian law, the Tribunal interpreted “taxation measures” through international law under the Vienna Convention on the Law of Treaties, emphasizing the TPA’s broad definition of “measure” as “any law, regulation, procedure, or practice”.[6]

Further, the Tribunal agreed with prior jurisprudence[7] that “taxation” encompasses enforcement mechanisms, including penalties and interest, which are integral to a state’s tax regime.[8] Finally, the Tribunal agrees with the Murphy v. Ecuador tribunal’s finding, which considered that the purpose of the tax carve-out in the underlying treaty is to “preserve the States’ sovereignty in relation to their power to impose taxes in their territory.” It concluded that the penalties and interest fell under Peru’s domestic tax system and were excluded from the Tribunal’s jurisdiction.[9]

Implications for Southeast Asia: Stability, Sovereignty, and Systemic Gaps

For Cambodia and other Southeast Asian economies, the Freeport-McMoRan v. Peru decision carries profound implications. As these nations work to boost their attractiveness to foreign investors while simultaneously reforming their tax systems, this case serves as a cautionary tale. It highlights the challenges faced by low- and middle-income states—whether in South America or Southeast Asia—that often lack robust administrative frameworks to efficiently resolve complex tax disputes.

In the context of Cambodia’s evolving fiscal landscape, including reforms like the 2023 Law on Taxation, clarity in economic concessions, the structuring of qualified investment project agreements, and precise treaty drafting becomes essential. These measures can help prevent the ambiguities and uncertainties that lead to costly arbitrations. As cross-border investment continues to grow, proactive legal strategies will be key in balancing the drive for economic growth with the need to maintain fiscal sovereignty.

About Us:

With offices across Cambodia, Myanmar, Vietnam, Laos, and Bangladesh, our team specializes in resolving cross-border structuring and tax disputes. We leverage regional expertise and global treaty insights to safeguard client interests, ensuring that our solutions are both innovative and attuned to local regulatory landscapes.

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

1. TP documentation can be reused

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

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

2. Exemption from TP documentation obligation

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

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

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

3. Exemption for intercompany loans

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

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

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

4. Other important notes

Arm’s length range

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

Attribution of profits to a permanent establishment

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

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

TP adjustment – Primary vs secondary adjustment

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

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

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