TBCC

1. TBCC Michael Gordon

2. Tax Law • Where are we ? • Where are we going ? Focus: Business & Investment : Global circumstances

3. Tax Law – Highlights • Corporate income tax rate 20%. • VAT rate 10% (0% export). • Withholding tax system (local/offshore). • Salary taxes (approx 20% rate). • Q.I.P Incentive / Paddy

4. Tax Law – Key Issues • Currently no Double Tax Treaties (DTA) in place; • Simplistic legislation; • Statute of limitations; • Tax audit program; • Tax disputes; • “Grey” Issues. : Concepts

5. Tax – Key Issues Analysis • No DTA • Lack of international tax principles • Lack of policy/admin understandings • Lack of Double Tax protections (14% WHT on certain offshore payments) * Management and Technical Services

6. Tax – Key Issues Analysis • Simplistic legislation • “Big” is not better -> but the existing law needs to work effectively with certainty. • Lack of clarity and certainty; • Questionable interpretations; • Tax court (precedent) • Rulings • Lack of DTA

7. Tax – Key Issues Analysis • No CFC • No Thin Cap • No Anti – Avoidance • No CGT • No Explanatory Memorandum • No Rulings or Determinations

8. Tax – Key Issues Analysis Article 18: The Tax Administration may as may be necessary distribute gross income, deductions, or other benefits among such enterprises (i.e. under common ownership)…… in order to prevent… the avoidance or evasion of taxes or to clearly reflect the income of such enterprise….. Article 92: Powers of Tax Administration 8. To re-determine transactions between related taxpayers…..

9. Tax – Key Issues Analysis • Statute of limitations – “10 years” − Most jurisdictions have 3 or 4 year timeframe − Tax audit practice issues • Maintenance of records • Unilateral Assessments − Do we have a 10 year timeframe? “Obstruction” ???

10. Tax – Key Issues Analysis • Tax audit program Tax Office conducts a fairly aggressive tax audit program. • Limited Audit • Final Audit Note: (a) Primary Tax; + (b) culpability penalty 10%,25%,40%; + (c) Interest penalty 2% per month

11. Tax and Penalties Calculation Example :- “Management and technical service” Fee of $500,000 paid 5 years ago and no WHT deducted. $500,000 x 14% = 70,000 Culpability penalty @ 40% = 28,000 112, 000 5 years Interest @ 2% = 84,000 182,000

12. Tax – Key Issues Analysis • Tax Disputes −There is no tax court or tax tribunal in Cambodia; −Tax Office is the final decision maker in a tax dispute.

13. Tax – Key Issues Analysis • “Grey Issues” – Concepts • Tax Office has power to re-determine transactions; • 20% relationship threshold; • DTA. • 10 year statute of limitations. • Tax disputes. • Penalty. • No clarity / explanation of the law • No rulings

14. Tax Law – Issues of concern Proper Administration & Interpretation:- − What does a law mean; − What is its purpose; − How will it work; − When does it apply; − How will it be administered.

15. Tax Law – Issues of concern Proper Administration and Interpretation  Various “Rules” have evolved;  Various court approaches have evolved;  Various “Presumptions” have evolved;

16. Tax Law – Issues of concern Many governments have enacted laws which set out how laws and regulations will be interpreted & applied :- “Acts interpretation Act”

17. Tax Law – Issues of concern Most jurisdictions issue clarifications / rulings / determinations on the administration, policy and meaning of laws.  (Also note OECD etc)

18. Tax Law – Issues of concern Interpretation rules Mischief rule:  What problem is the law trying to resolve/stop.  What purpose was behind the law and its operation. Intention/Purpose rule:  Usually a clearly stated explanation of what the government was trying to achieve when the law was implemented. This is now a preferred approach.

19. Tax Law – Issues of concern Presumptions: − A taxing law should be clear & concise to apply a taxing sanction (you can’t read into a law something that the law does not say): − A taxing law shall be interpreted to the benefit of a taxpayer if it’s meaning is not clear: − A presumption against retrospective operation of a law: − A presumption that officials will not be granted arbitrary discretion: − A presumption against the imposition of a penalty without clear fault:

20. Tax Law – Issues of concern In most legal systems “Precedent” will apply: − Previous decisions on a matter. − Requires update of rulings, etc. − May require amendment of the law. Also:- Most established systems will not tolerate a failure to properly administer a law.

21. Tax Law – Issues of concern Also in many countries a system of Administrative Law applies:- − Procedural fairness; − The right to a fair & proper hearing; − No final decision to be made unless a fair & proper consideration is made of all the issues; − Transparency of process.

22. Tax Law – Issues of concern So – where are we? − Lack of complete laws; − Lack of clarity / certainty, substance of laws; : Administration : Operation : Application − Lack of understanding of operation of laws; : Statutory interpretation

23. Tax Law – Issues of concern − Lack of an independent decision – maker or review system; − Laws which allow arbitrary discretion over a law’s operation; − Laws which place the onus on the taxpayer to prove a case (almost to “beyond reasonable doubt”);

24. Tax Law – Issues of concern − Issues of corruption / self interest

25. Tax Law – Issues of concern So − where are we going? − Urgent need for clarity & certainty of operation of laws; − Government needs to embrace Policy & Admin changes; − Urgent need for proper tax administration; − Urgent need for an “Independent” review process; − Urgent need for a productive consultative process; − Seems to be the urge to legislate or “re-interpret”. − Global circumstances.

26. Tax Law – Issues of concern Key Take − Aways : Lack of most “Safety Nets” : Onus on taxpayer • Be prepared in the widest sense. : Prudential consideration of issues: “What can go wrong?” : Risk management

27. kpmgCambodia Thank You Michael Gordon Tax and Corporate Services email: mgordon@kpmg.com.kh