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Cambodia - Tax Changes and Relief Affecting Your 2020 Corporate Income Tax Return

Cambodia – Tax Changes and Relief Affecting Your 2020 Corporate Income Tax Return

January 26, 2021

On 29 January 2020, the Ministry of Economy and Finance issued Prakas No. 098 MEF.PrK on Tax on Income (“Prakas 098”), which made several changes to the previous Tax on Income (“TOI”) Prakas No. 1059 MEF.PrK.TD that will affect the preparation of TOI returns from the year 2020 onwards.

We highlight below some of the main changes.

Prakas 1059 (Old)

Prakas 098 (New)

Taxable income

There is no indication in the Prakas on taxable income arising from an asset that is not sold.

In Article 10.2.c, taxable income includes an asset that is not sold on the day an entity suspends its business activities. Assets (e.g. fixed assets, stock, raw materials, and work-in-progress assets) are deemed as transferred from business to private assets, and must be valued at market value and included in taxable income.

Turnover

Not defined

The term “turnover” refers to income both from an entity’s main business activities and its subsidiary income, except for other income as specified under Article 21.

Deductible expenses

Per Section 5.2, an entity can deduct in the current tax year the below unpaid expenses:

  • Remuneration related to employment activities paid within 60 days after the end of the tax year.
  • Expenses associated with a related party paid within 180 days after the end of the tax year.

Otherwise, these expenses become permanently non-deductible, despite an actual payment being made later.

Under Article 25.2 an entity can deduct in the current tax year the below unpaid expenses:

  • Remuneration (excluding pension fund) related to employment activities paid within 180 days after the end of the tax year. If not, it can be deducted in the year that the actual payment is made.  
  • Expenses associated with a related party paid within 180 days after the end of the tax year – except for expenses with a related party that is resident and not under the self-declaration regime, which can only be deducted when actual payments are made. Otherwise, the related party expenses become permanently non-deductible, despite an actual payment being made later.

Self-amendment is allowed to add back the unpaid expenses in the current tax year when an entity cannot pay within 180 days. No penalty is imposed on the underpaid tax if the amendment is made within 30 days after the said 180 days.  

Interest

In Section 5.9, any interest expense that is disallowed for deduction in the current tax year can be carried forward to succeeding years until the disallowed part of the interest expense is completely utilized.

In Article 32.3, non-deductible interest expense can be carried forward for only five years after the year the interest expense was incurred. After that any unutilized expense becomes permanently non-deductible.

Depreciation

In Section 6.5, Asset Class I (i.e. buildings, structures, and basic structure components) is individually depreciated using the straight-line method at 5% of the acquisition cost yearly.

In addition to what was specified in Section 6.5 of Prakas 1059, Article 35.2.b extends Asset Class I to cover roads, railways, and transport ships.

With regard to the 5% straight-line depreciation for Class I assets, Article 38.2 specifies that taxpayers should use a 10% rate per year (straight-line) for buildings with non-concrete structures.

An additional guideline is given for long-term agricultural assets that are not under Classes I – IV. Article 38.4 provides three depreciation methods for the following assets:

For rubber plantations, the 20-year depreciation is allowed at the below rates:

Beneficial Year

Depreciation rate

Year 1 – 2

3%

Year 3 – 4

4%

Year 5 – 10

5%

Year 11 – 12

7%

Year 13 – 15

6%

Year 16 – 19

5%

Year 20

The remaining balance

For agricultural plantations other than rubber plantations, the amount of depreciation is calculated by the straight-line depreciation method over the life of harvest or 5% per year, whichever is shorter.

Similarly, the amount of depreciation for animal husbandry is under the straight-line depreciation method over the life of the harvest or 10% per year, whichever is shorter.

Rules on Capital Gains and Capital Losses

In Section 7.1.4.b, capital gains arising from an unauthorized revaluation of a fixed asset for accounting purposes become the taxable profit of the entity.

In Article 42.3.b, the realization of capital gains arising from a fixed asset’s revaluation for accounting purposes does not affect taxable income if the value is not used for the purpose of tax depreciation.

Rules on the Carry Forward of Losses

In Section 9.5.2.a, tax losses are not allowed to be carried forward from previous years for deduction in the event of a unilateral tax assessment by the tax administration. Article 55.2.a changes the previous rule of forfeiting tax losses in the event of a unilateral tax assessment: if a unilateral tax assessment occurs in a tax year, carried forward tax losses are not allowed to be used for offset in that tax year. Additionally, the taxpayer is not allowed to carry forward any tax loss in the tax year of the unilateral tax assessment. Tax losses incurred before the tax year of the unilateral tax reassessment are still allowed to be utilized to offset against taxable profit in the next tax year (in which there is no unilateral tax assessment) if the 5-year limitation has not yet expired.

Section 9.5.2.b: If there is a change in ownership of the entity, the tax losses of the former owner cannot be brought forward for deduction against the taxable profit of the new owner. Such change includes the sale of the enterprise, the death of the owner, and so on.

This condition has been removed.

Advanced Tax on Dividend Distributions

Section 10.2 discusses the Additional Profit Tax on Dividend Distributions. The distribution of dividends is subject to additional TOI unless the profit has already been subject to income tax that has been fully paid at the prevailing rate (20% or 30%).

The Additional Profit Tax on Dividend Distribution  has been replaced with the Advanced Tax on Dividend Distributions in Article 58, which states:

“Except for Qualified Investment Projects during the tax exemption period, if an entity distributes dividends from its annual profit before paying TOI to its local or foreign shareholders, it shall pay advance tax on dividend distribution by grossing up the dividend to be distributed by the TOI rate and multiplied by the TOI rate.”

Extension of previous tax relief measures for another three months

On 23 December 2020, the Royal Government of Cambodia announced a seventh round of tax stimulus measures to boost the economy hit by the COVID-19 pandemic.

The newly announced package extends the previous tax relief measures that covered the following sectors for the period from March 2020 to December 2020:

1. Tourism sector

All companies in the tourism sector (i.e. hotels, guesthouses, restaurants, and travel agents) will continue to be exempt from the payment of all monthly taxes for another three months (i.e. from January 2021 to March 2021). This applies to businesses that are registered with the General Department of Taxation and have business activities in Phnom Penh, Siem Reap, Sihanouk, Kep, and Kampot provinces, as well as Bavet and Poi Pet cities.

In addition, travel agents and operators are given an exemption on annual taxes, including Patent Tax, Tax on Billboards, TOI, and Minimum Tax for the tax year 2020. Nevertheless, the said companies are obligated to print a new patent tax certificate and submit their TOI return by the stipulated deadline (i.e. 31 March 2021).

2. Aviation sector

All airline companies established in Cambodia are granted exemption from Minimum Tax for another three months, i.e. from January 2021 to March 2021.

3. Banking sector

The Withholding Tax rate on the interest on loans borrowed by banks and financial institutions from either local or overseas lenders is reduced from 15% (for local lenders) or 14% (for overseas lenders) to:

For new loans:

  • 5% for all countries, regardless of whether or not there is a Double Taxation Agreement with Cambodia, for the year 2021.
  • 10% for all countries, regardless of whether or not there is a Double Taxation Agreement with Cambodia, for the year 2022.

For existing loans:

  • 10% for all countries, regardless of whether or not there is a Double Taxation Agreement with Cambodia, for the year 2021.

If you have any questions on this alert, please contact the undersigned or your usual VDB Loi adviser.

AUTHOR

An ACCA-qualified adviser, Sivila is an expert in Cambodian taxation with over 10 years of tax consulting experience, including several years with Big 4 firm KPMG.

At VDB Loi, he advises on tax structuring, disputes, and controversy, and conducts tax due diligence for clients across a range of industry sectors, including financial services, telecommunications, real estate, and garment manufacturing.

Sivila is also an associate member of the Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA).


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