FOREIGN TRADE UNIVERSITY

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REPORT

VAT IN CAMBODIA

Lecturer: Dr. Vu Thi Hien

No. Name Student ID

1 Phạm Hồng Hà 1517150042
2 Đinh Thị Quỳnh Anh 1513340003
3 Ninh Hà Thu 1417150115
4 Phạm Anh Ngân 1417150087
5 Nguyễn Thị Diệu Linh 1414150060
6 Đoàn Diệu Linh 1312150068

Hanoi, 2017
 Part analysis In charge
Phạm Anh Ngân
Introduction to the tax system
Overview of policy of VAT in Cambodia Phạm Hồng Hà

Strength + Weakness Ninh Hà Thu

Đinh Thị Quỳnh Anh

Impact of the tax on the economy Đoàn Diệu Linh

Recommendations for Vietnam Nguyễn Thị Diệu Linh

Presenter:
 Phạm Hồng Hà

 Đinh Thị Quỳnh Anh

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Contents

I. Introduction........................................................................................................................................4

II. Overview of tax policy in Cambodia...................................................................................................6

1. General overview.............................................................................................................................6

2. Scope of application.........................................................................................................................6

3. Exempt goods and services..............................................................................................................6

4. Rates of tax......................................................................................................................................7

5. Registration......................................................................................................................................7

6. Administration.................................................................................................................................8

III. Stregth and Weakness of VAT.........................................................................................................8

IV. Impact of VAT on the economy.....................................................................................................11

1. Impact of VAT on state budget revenues.......................................................................................11

2. Impact of VAT on businesses..........................................................................................................12

3. Impact of VAT on consumer...........................................................................................................13

V. Recommendation for Vietnam.........................................................................................................13

VI. References.....................................................................................................................................15

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I. Introduction
Regarding to the current situation of Cambodia, fiscal policy has become an extremely crucial
role in the economic system of this country. Because of the high level of dollarization,
Cambodia’s Government cannot control the monetary policy. The macroeconomic stability
depends soundly on fiscal policy and debt management, since Cambodia do not earn money from
bond issuing so that government revenue comes mainly from tax collection revenue and foreign
aid.

Although Cambodia has shown a sound macroeconomic performance over the past decades, the
level of revenue collection is still low and foreign aid is still the important source of national
revenue thus far. The tax system in Cambodia has had significant reform since 1997 when the
Law on Taxation was introduced, and it has continued being reformed each year until present.

Cambodian taxation has been improving over the past decade in terms of tax collection policy
and tax administration. The ratio of annual tax revenue to GDP has increased, and large
proportion of the revenue still comes from indirect tax including VAT, import duties and excise
tax.

Figure 1: GDP current and tax revenue (USD million)

Source: Cambodian Economic Review (2013), page 80

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Since indirect taxes contribute very over 50 percent of total tax revenue as seen in figure 2, it is
speculated that the whole tax system in Cambodia is regressive.

Figure 2: Composition of tax revenue, 2001-2011

Source: Cambodian Economist Association’s report (2013), page 83

However, Cambodia loses a significant amount of revenue every year resulting from ineffective
tax administration, very long tax holidays (Profit Tax holiday up to 6 years and exemption from
import duties and export tax) and all forms of tax evasion in the country.

Cambodia has more lenient tax regimes in comparison to neighboring countries; however the tax
requirements are different to most countries, and it is important for investors to adhere to the
regulations.

There are two major tax regimes, which are currently applied in Cambodia: real and estimated
regimes. Real regime is applied to large and medium taxpayers while estimate regime is applied
to small taxpayers.

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II. Overview of tax policy in Cambodia

1. General overview
A value-added tax (VAT) is a type of consumption tax that is placed on all commercial activities
involving the production and distribution of goods and the provision of services. However, if the
annual turnover of this person is less than a certain limit (the threshold), which differs according
to the Member State, the person does not have to charge VAT on their sales.

VAT is collected fractionally, via a system of partial payments whereby taxable persons (i.e.,
VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have
paid to other taxable persons on purchases for their business activities. This mechanism ensures
that the tax is neutral regardless of how many transactions are involved.

VAT is paid to the revenue authorities by the seller of the goods, who is the "taxable person", but
it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.

2. Scope of application
Cambodia’s VAT applies to the business activities of real regime taxpayers making taxable
supplies. In each case the business must charge VAT on the value of goods or services supplied.
VAT also applies on the duty paid value of imported goods (but it appears not including
services). The importer must pay VAT to Customs at the same time they pay Import Duties. VAT
may be payable on the appropriation of goods for personal use, or as a result of the gifting of
goods or services.

3. Exempt goods and services

VAT will not be payable in respect of a number of activities, including the supply of:

• Public postal services.

• Hospital and medical services, and the provision of goods incidental thereto.

• Public transportation activities operated by state owned providers.

• Insurance activities.

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• Primary financial services.

• The import of certain personal effects

• Non-profit activities in the public interest (as approved).

• Electricity.

If a business sells exempt goods or services, it will be unable to recover any input tax paid on its
purchases. This contrasts with zero rating, where the sales are within the VAT system (albeit at a
VAT rate of zero), and hence input tax can be recovered. Where a business generates both
taxable and exempt sales, it will only be able to claim a deduction of input tax for the portion of
inputs used in the taxable activity.

4. Rates of tax
There are only two rates of VAT in Cambodia

0% This rate applies only to goods exported from Cambodia and services consumed outside
Cambodia. Exports are defined to include the international transportation of passengers or goods,
or services in connection thereto. In addition, this 0% rate applies to supporting industries or sub-
contractors who supply certain goods and services to exporters (i.e. garment manufacturers,
textile and footwear industries) subject to certain criteria.

10% This standard rate applies to all taxable supplies in Cambodia. Taxable supplies are made
up of all supplies other than those that are exempt.

Note: Sale of land is not subject to VAT; however, sale of building and rental of land or buildings
are subject to 10% VAT.

5. Registration
All real regime taxpayers making supplies of taxable goods and services in Cambodia must
register for VAT. QIP may register for VAT prior to making taxable supplies. This allows the
taxpayer to claim VAT input credits and, in theory, obtain monthly refunds.

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Other enterprises, such as sole proprietorships and foreign entities doing business in Cambodia
through a branch, do not need to become VAT registered unless they exceed the VAT registration
thresholds as below. All translations to US$ are approximates and for reference only.

 Taxable turnover in any period of three consecutive months exceeds KHR125M

(approximately US$30,000) for goods or KHR60M (US$15,000) for services; or

 Expectation to exceed taxable turnover in the coming period of three consecutive months
of KHR125M (US$30,000) for goods or KHR60M (US$15,000) for services; or

 Having government contracts exceeding KHR30M (approximately US$7,500).

Note: Representative Offices of foreign entities cannot make supplies therefore are not required
to register for VAT.

6. Administration
For domestic supplies, taxpayers will be required to file VAT returns and make VAT declarations
and payments on a monthly basis, by the 20th day of the succeeding month. For imports, VAT
will be payable to customs at the time of import. Where the taxpayer’s input VAT for the month
exceeds its output VAT, the business will have to carry the excess forward for three months. The
business can then apply for a refund from the GDT. Detailed rules exist in regard to specific
invoicing and record keeping obligations. Invoices vary according to whether a VAT registered or
non-registered person is being invoiced.

III. Strength and Weakness of VAT

The transitory from using sales tax to VAT in 1997 was an urgent tax-reform action that
Cambodia must enact to facilitate trade liberalization (especially in preparation for the upcoming
AFTA membership at the time). Due to commitments to reduce tariff rates according to the
schedules under the CEPT (Common Effective Preferential Tariff) scheme of AFTA, the
governments of Cambodia will have to rely less on trade taxes as a source of total tax revenue. In
the long term, Cambodia has agreed to enact zero tariff rates on virtually all imports by 2015
under this scheme (Lao-Araya, 2003). Consequently, the country must now realize the reforming
of their tax structures to cope with the expected losses in the medium to long term.

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 1. Strength:

- VAT help to compensate for the revenue that is often lost when a country reduces or
eliminates import duties.

This form of tax complements a policy of trade promotion because it is broad based and a trade-
neutral, domestic indirect tax. VAT is normally administrated using the credit mechanism and is
based on the destination principle. The credit mechanism allows sellers to claim credit for any
VAT that they pay when purchasing inputs that are required to produce the goods or services that
they sell. The sellers are eligible to redeem those VAT credits against any VAT that they are liable
to pay when they sell the goods or services. (Lao-Araya, 2003)

- VAT can discourage tax evasion

Taxpayers wish to pay and obtain receipts for VAT paid on inputs purchased in order to be able to
claim credit against the VAT they will be required to pay at the point of selling their end product
or service. Since receipts are required at both ends of the transaction, taxpayers themselves
provide checks against one another. The same cannot be said for other types of general sales
taxes such as turnover tax and retail sales taxes. (Lao-Araya, 2003)

- VAT eliminates double taxation

On this point, VAT has proven its superior advantage over turnover sales tax since sales tax can
lead to doubly taxes on consumers.

- VAT promotes business competitiveness and is more compatible with a liberalized trade
regime

VAT is levied on a broad-based domestic consumption and based on the destination principle
which requires that taxes be imposed on imports while exports are not subject to taxation.
Therefore, domestic and foreign producers are able to compete on an even playing field because
their goods are subject to the same consumption tax rates.

DATA: VAT collections in Cambodia has proven to be very buoyant. In Cambodia, the sales tax-
to-GDP ratio prior to the VAT introduction in 1999 was only 0.7 and 0.9% in 1997 and 1998.
Since 1999, the ratio increased to 2.7-3.2% from 1999 to 2001 (IMF Country Report No. 02/24)

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 2. Weakness:

- Tax negligence will be extensive through fake invoices

Companies usually find their ways to evade VAT payment by issuing fake invoices. Though this
practice is happening in Cambodia, there is neither proof nor effective means to detect and
discourage it. In order to minimize this risk, the consumers need to be cognizant for successful
implementation of VAT. In addition, the government has paid more attention on the supervision
of invoice circulation in the market.

- VAT administration has several problems

Some countries in the Asian and Pacific region, including Cambodia, have encountered problems
administering VAT because economic circumstances are continually and rapidly changing. For
example, certain transactions that are not subject to or are difficult to assess for VAT have
increased dramatically in recent years. These include international business transactions, trade in
services, and electronic commerce. Such developments present new challenges to tax
administrators. (Lao-Araya, Emerging tax issues: Implications of Globalization and Technology,
2003).

Technology in Cambodia is still limited. Thus, it slows down the procedure. At the same time,
system and procedures to monitor and control the work of General Department of Taxation’s
officials are still underdeveloped. Furthermore, audition issue including underdeveloped audit
guideline, insufficient intelligence/risk assessment

Moreover, lack of knowledge and skill of tax officers have also put a strain on the smooth
functioning of the whole system. Hence, more intensive training is a must to solve current
problems.

- VAT refund system is a lengthy procedure

In Cambodia, the synchronicity of this system is hindered by the procedures and delays
associated with VAT refunds. As a matter of law, refunds are only allowed after an audit has been
conducted to verify the legitimacy of the VAT refund claim of the taxpayer. This audit may be a
lengthy procedure and disputes may drag out over months or even years. Even when a refund

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may be approved by the Tax Department (“TD”), in practice important delays exist for the actual
remittance of the refund

- Two tax regimes enhance tax evasion

Since two tax regimes are applicable in the system, there are loopholes that allow noncompliant
taxpayers to shift their income through the regimes for avoidance and evasion of taxes.
Taxpayers could easily manipulate the amount of business turnover because the law does not
require enterprises in this regime to submit regular financial reports. Thus, it is tough for tax
officers to uncover the actual size of turnover and profit for tax calculation. Furthermore, based
on the law, the amount of estimated profit shall be determined by the tax administration after
verification and discussion with taxpayers. This procedure seems to leave a chance for tax
officers to abuse the rule and for taxpayers to evade the tax by underreporting the actual taxable
amount. It also makes bribery from taxpayers to tax officers possible

IV. Impact of VAT on the economy

1. Impact of VAT on state budget revenues

VAT can generate increased revenue for the state budget, by extending and covering the taxation
of all import, production and service activities.

Cambodia is a developing country, like others, VAT can be consider as “ money machine”
because in these countries it is more difficult to administrative CIT and PIT. As in the following
chart, indirect taxes as percent of total taxes in 2011, indirect tax contribute more than 80% in tax
revenues. It seems that Cambodia was heavy dependent on indirect taxes

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On the other hand, VAT are levied on each product from the beginning, especially, for large
manufacturing company because of their production quantity VAT have a larger impact on their
income than sale tax . VAT is calculated by invoice-based make it become more difficult to tax
evasion than other kinds of tax. The VAT is, in principle, described as “self-enforcing.” The
description stems from the nature of the invoice-based credit VAT: a taxable business can claim
for the refund of the input VAT only if the claim is supported by purchase invoices—the
mechanism provides strong incentives for firms to keep invoices of their transactions and is an
efficient means for tax authorities to check and cross-check for enforcement enhancement

2. Impact of VAT on businesses

Theoretically, VAT is simple and economically neutral, but in practice, the implementation of
VAT accounting and auditing at each enterprise is not a simple task. Indeed, in the past, corporate
and tax accountants were only required to get revenue multiplied by a tax rate of x% as soon as
the results were sought. When applying the new tax law, The tax authorities have to sit down to
determine what is the input tax, the output tax to be deducted, the tax not to be deducted.

The application of VAT in Cambodia has a direct impact on the importing enterprises because the
imported goods are subject to this tax in addition to the current import tax. However this impact
is not too remarkable because of the unanimous between different economy.

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Increasing VAT lead to lower the purchasing power of real after-tax wages, VAT may curb labour
supply in much the same way as a proportional income tax. It can also reduce labour demand in
the short-term if they add to wages and labour cost

3. Impact of VAT on consumer

First of all, being a consumption tax, the VAT does not have discriminating effect on
savings/investment because savings are essentially excluded from the consumption VAT base

Secondly, VAT is a regresive tax, it have a larger effect on poor than rich, this can be consider as
a drawback of VAT. These two taxes are generally regarded as regressive because the lower
income people will bear a relatively greater burden than the rich despite the flat rate. Simply, the
rich pay smaller percentage of their income as tax compared to the poor because they consume a
lower proportion of income. With the very high VAT, it can lead to the decentralize in the
economy

V. Recommendation for Vietnam

1. Improving tax law

As mentioned, among weaknesses of VAT in Cambodia’s administration has not developed and
tax refund system is complicated process. To deal with this problem, their authorities have
designed tax laws carefully. It is also weakness of Vietnam’s tax system. We can learn from
Cambodian solutions and improve tax law to solve this problem.

- Amending regulations about VAT refund: The government should specifically regulate
subjects that receive VAT refunds. Besides, those receiving VAT refunds should be narrowed
down to exporter and newly-established enterprises.

- Adjusting tax rate: We have three applicable VAT rates: 0 percent, 5 percent, and 10 percent,
while Cambodia has only 2 rates, which is 0% and 10%. Thanks to fewer tax rates, Cambodia
has controlled their tax system more easily and effectively. We should apply this tax rate
from Cambodia to increase consistency of tax system.

2. Boosting propaganda about VAT

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In Cambodia, many large businesses can use the introduction of VAT as an excuse to raise prices
unreasonably. This situation arises because their government does not pay attention to educate
citizens about VAT. Vietnam also shares the same problem. Based on the mistake of Cambodian
authorities, we can fix our problem by boosting propaganda about VAT. The government needs to
instruct those who have to pay tax about VAT carefully. With the fact that tax law is being
improved and updated frequently, there should be a group of tax specialists that can consult with
individuals and enterprises to ensure that they can understand and apply the law. Moreover,
widespread propaganda about VAT helps to avoid the actions that violate tax laws.

3. Enhancing examination and supervision

Cambodian government has faced many situations of fake invoice, fraudulence on receiving VAT
refund… They have enhanced examination and supervision of tax system to solve this problem.
Vietnam’s tax authorities should also follow Cambodian solutions:

- Government should control the printing and issuance of invoices, manage the circulation
of invoices in the market. Specifically, those who pay for invoices are regulated to be
enterprises that provide goods and services and have to pay tax.

- Tax authorities should check goods, especially exported ones, carefully before and after
VAT refund. Customs department should improve management and supervision to avoid
repeated tax refund. This situation can also be reduced by refund through bank account.

4. Training tax staff

In Cambodia, the implementation of VAT is very complicated because tax administration has not
developed and human resources are lack of right attitude, knowledge and skills. Vietnam’s tax
authorities should learn from Cambodian weakness to improve our own system. There is a need
of ethical and professional tax staff. To apply tax system to reality, these staff should have
technical knowledge and skills. More importantly, professional ethics should be paid more
attention during staff training. Besides, there should have punishment for those who lack of
responsibility or collude with tax payers to avoid tax. Along with punishment, we should praise
staff with positive attitude and high responsibility.

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VI. References
1. Cambodia Poket Book 2010

https://www.pwc.com/kh/en/publications/assets/cambodiatax-2010-booklet-update.pdf

2. Cambodia: Key tax issues for leasing in Cambodia, 2013

http://www.internationaltaxreview.com/Article/3228576/Cambodia-Key-tax-issues-for-leasing-
in-Cambodia.html

3. Advantages & Disadvantages of VAT, 2017

http://www.obmworldwide.com/blog/advantages-and-disadvantages-of-vat/

4. A transformative year for the tax regime in Cambodia, 2016

http://www.phnompenhpost.com/supplements/transformative-year-tax-regime-cambodia

5. Cambodian Tax system and taxation of leasing

https://www.adb.org/sites/default/files/project-document/67436/39473-cam-dpta.pdf

6. Value added tax (VAT) in Cambodia

http://www.vdb-loi.com/cambodia-tax-and-legal/value-added-tax-vat-in-cambodia-2/

7. Thuế giá trị gia tăng: ưu điểm và nhược điểm

http://viettronics.edu.vn/trangchu/index.php/vi/cac-khoa/Tin-bai-cua-khoa-49/Thue-gia-tri-gia-
tang-uu-diem-va-nhuoc-diem-228/

8. Cambodia's taxation compared to Vietnam's

https://www.academia.edu/11698786/Cambodias_taxation_compared_to_Vietnams

9. A study on the economic effects of the current VAT rates structure

https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/vat_rates_structure_final_re
port.pdf

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