Chapter 3 Functions of Public Finance

1. Chapter 3Functions of Public Finance In EM, M. Sc. in Economics

2. Learning objectives • Functions of Public Finance • Lessons of Economic Policy • Important Innovations of Tax Policy • Pattern of Tax Revenue Collection • Composition of Government Revenues and Government Expenditures • Principles to Evaluate a Good Tax System • Tax System in Cambodia In EM, M. Sc. in Economics

3. Functions of Public Finance • Allocation • Distribution • Stabilization • Growth In EM, M. Sc. in Economics

4. Allocation Function • Allocation function refer to: • Allocate financial resources in order to produce and provide public goods and services for society. • Public goods include: • Defense, • Law and order, justice • Infrastructure • Where the funds are coming from? • Taxation is used to raise funds to pay for production of these goods and services In EM, M. Sc. in Economics

5. Redistribution Function • Redistribution: acts or processes to reduce inequalities in wealth or nation incomes distributing in the society. • Redistribution methods: • progressive income taxation, and • antipoverty program. • Purpose of redistribution function: • attaining a proper distribution of income in order to maximize social interests or common welfare. • This function should be under the governments’ role in order to promote economic growth, increase equity and to reduce inequality among the society member. In EM, M. Sc. in Economics

6. Redistribution Function Methods of redistribution Division among the members of society of national income or wealth; and Apportionment of the value of outputs of goods among the factors or agents of production, namely labor, land, capital and management. Division or apportionment of value may be taken in the form of “Monetary Payment” for: wages and/or salaries, rent, interest and profits. In EM, M. Sc. in Economics

7. Stabilization Functions Stabilization policy economic policy: fiscal and monetary policy keep economic growth stable with price level and unemployment monitorbusiness cycle and adjust benchmark interest rates to control aggregate demand in the economy The main objectives keep actual level of income close to its potential avoid abnormal change in GDP and inflation rate target full employment and price stability. This is governed by the government and central bank In EM, M. Sc. in Economics

8. Growth Function • Tools of taxation and public expenditure need to be focused on how to promote growth • Need policies that encourage investors to reinvest their business surpluses not take them out of country • Government budget surplus important for providing savings for private sector to borrow In EM, M. Sc. in Economics

9. Lessons of Economic Policy • Avoid false technique in economic policymaking. • Keep budgets under adequate control. • Keep inflationary pressures under reasonable control. • Take advantage of international trade. • Recognize that some types and patterns of trade restrictions are far worse than others, and work both to liberalize and rationalize them. (For example, uniform tariff rates are not as damaging as import quotas) • If import restrictions are excessive and reducing them is politically impossible, thus apply an indirect tax to attack on the problem by increasing incentives to export. In EM, M. Sc. in Economics

10. Lessons of Economic Policy • Make tax systems simple, easy to administer, neutral and non-distorting with respect to resource allocation. • Income tax rates should not be exceeded 35 to 40% which are representing a plausible marginal rate . • Avoid excessive use of tax incentives to achieve particular objectives • Use price and wage controls sparingly, if at all. • Rarely can an economic justification be found for quotas, licenses, and similar quantitative restrictions on output, imports, exports, etc. • The borderline of public-sector and private-sector activity should be clear and well-defined. When the two compete in a given area, the same rules should govern their operations. In EM, M. Sc. in Economics

11. Important Innovations of Tax Policy • Introducing more progressivity in a value added tax system, but its benefits have to be weighted against significant extra vulnerability to avoid tax evasion. • Differentiation among rates of import tariffs can lead to huge economic inefficiencies. • Personal income tax rates should not exceed 35 to 40% due to its difficulty to justify their efficiency and incentive costs. • Increasing in income tax rate of corporations should be balanced to avoid tax burden on labor, once an open-economy is in place. • Indexing a tax system for inflation to promote both equity and efficiency in income redistribution. In EM, M. Sc. in Economics

12. Pattern of Tax Revenue Collection (Source: Wagner's Law – State takes an expanding share of GNP as per capita incomes rise.) In EM, M. Sc. in Economics

13. In EM, M. Sc. in Economics

14. Composition of Government Revenue In EM, M. Sc. in Economics

15. Composition of Government Expenditures In EM, M. Sc. in Economics

16. Principles to evaluate a good tax system • Revenue Adequacy : • tax introducing & government expenditure required • tax rate & growth of GDP or GNP • tax system & economy changes • deficit, financing, crowding out, inflation, crisis • Stability: tax revenue, tax rule, tax rate & company growth • Simplicity: not complicated, administrative & compliance • Economic efficiency: low deadweight loss, small cost, • Low administration and compliance costs: • low cost for tax system setting up • no red tape or corruption • low cost for taxpayers to comply with the tax system. In EM, M. Sc. in Economics

17. Tax System in Cambodia • History of Tax System • Tax Regimes • Main Taxes • Composition of the Tax Revenues In EM, M. Sc. in Economics

18. History of Tax System in Cambodia • Pre reform period • 1981- 1993: Estimated Regime • Estimated Regime (official assessment) where the taxes are assessed durably in the period of 3 or 6 months with the compromise between the taxpayers and the tax officials. • Transitional period of reform • 1994 - 1996 : Estimated Regime to self-assessment tax system (real regime) In EM, M. Sc. in Economics

19. History of Tax System in Cambodia • Reform period and afterwards: 1997 - Present • Introduction of law on taxation, administrative rules and procedures for: • profit tax, salary tax, VAT, excise tax, withholding tax, • Restructuring of Tax Department: • Headed by one Director and 6 Deputy Directors. • 9 offices at central level for developing policies, ... • Operational level consists of: • Large & medium taxpayer office (LMTO); • Cross checking office; • Tax audit office; and • 24 provincial tax offices. In EM, M. Sc. in Economics

20. Tax Regimes in Cambodia • Estimated Regime : • (official assessment) where the taxes are assessed durably in the period of 3 or 6 months with the compromise between the taxpayers and the tax officials. • Real Regime: • (Self-Assessment) where the taxpayers are obliged to file tax returns and make the payment themselves. In EM, M. Sc. in Economics

21. Main Taxes in Cambodia • Pre reform period : 1981-1993 • Business Taxes : • Turnover Tax • Profit Tax • Domestic Goods Tax : Tobacco, Lotus grain, Ice cream • Slaughter Tax • Patent Tax • Vehicle Tax ... In EM, M. Sc. in Economics

22. Main Taxes in Cambodia • Transitional period of reform 1994-1996 • Estimated Regime • Turnover Tax, Profit Tax, Specific Tax, Patent Tax, • Vehicle Tax, Stamp and Registration Tax, Unused Land Tax .. • Real Regime • Salary Tax, Profit Tax, Minimum Tax, Turnover Tax, • Specific Tax, Patent Tax ... In EM, M. Sc. in Economics

23. Main Taxes in Cambodia • Reform period 1997 - Present • Estimated Regime • Almost same taxes in transitional period of reform • Real Regime • Introduced Law on Taxation (LOT) : • Amended Profit Tax, Salary Tax, Specific Tax; • introduced Withholding Tax; • Introduced VAT to replace Turnover Tax; • Introduced Rules and Procedure for Tax Administration In EM, M. Sc. in Economics

24. Main Taxes in Cambodia • Tax on Profit, • Minimum Tax, • Tax on Salary, • Value Added Tax, • Specific Tax on Certain Merchandise and Services, • Tax for Public Lighting, • Tax on Accommodation, • And other type of taxes such as Patent Tax, Stamp and Registration Tax, Unused Land Tax, Tax on Property etc… In EM, M. Sc. in Economics

25. Taxes on profits • The debt of a resident taxpayer on Cambodian and Foreign sources of incomes, • For a non-resident of taxpayer, the profit tax is the debt assessed based on the Cambodian sources of incomes only. • Profit Tax Returns • Monthly tax return for prepayment of profit tax at the rate of 1% of the turnover (inclusive of all taxes except for VAT) • Yearly tax return filed in the form prescribed by the tax administration no later than 3 months after the end of the tax year. In EM, M. Sc. in Economics

26. Taxes on profits • The Rate of Taxes on profits • 20 % for legal person. • 30 % for natural gas production sharing contract and the exploitation of natural resources including timber, ore, gold, and precious stones. • 9 % for the profit of qualified investment project to be entitled to the 5 year transitional period. • 0 % for qualified investment project during the tax exemption period. • 5% of the gross premiums received in the tax year for the insurance or reinsurance. • Progressive tax rates for physical person. In EM, M. Sc. in Economics

27. Taxes on profits • The Rate of Taxes on profits • For physical person progressive Tax Rate by Tranche (portion) is realized for Profits. • Parts of the annual taxable profit tax rate are as follow: • From 0 to 6,000,000 Riels 0% • From 6,000,001 to 15,000,000 Riels 5% • From 15,000,001 to 102,000,000 Riels 10% • From 102,000,001 to 150,000,000 Riels 15% • Greater than 150,000,000 Riels 20% In EM, M. Sc. in Economics

28. Withholding Taxes • Resident • 15%, tax on performance of services: management, consultancy, and on interest paid to a physical person or an enterprise; • 10% , tax on payment for rental of movable/immovable property; • 4%, tax on interest paid by bank or savings institution to a resident physical person having a non-fixed term savings account; • 6%, tax on interest paid by bank or savings institution to a resident physical person having a fixed term deposit account; • Non-Resident • 14%, tax on interest, royalties, rent, income connected with the use of property, compensation for management or technical services, and dividends. In EM, M. Sc. in Economics

29. Minimum Tax • Is payable by the taxpayers subject to the self-assessment system of taxation except the qualified investment projects (QIP). • 1% on annual turnover inclusive of all taxes, except VAT, and • It is payable at the time of annual liquidation of the tax on profit. • May be reduced by the annual tax on profit. In EM, M. Sc. in Economics

30. Tax on Salary • Enterprise which is the employer has obligations to withhold tax before salary payment from emplogees. • Pay this tax to the tax administration by the 15th of the following month in which the salary is paid. • Monthly salary (Riels) Rate: • 0 - 500,000 0% • 500,001 - 1,250,000 5% • 1,250,001 - 8,500,000 10% • 8,500,001 - 12,500,000 15% • 12,500,001 - upwards 20% • Fringe benefit - 20% The TOS Taxable Person shall be allowed a deduction from the taxable salary the allowance of 75,000 riels for each spouse and children. InEM, M. Sc. in Economics

31. Value Added Tax • VAT is implemented in Cambodia since 01 January 1999. • Applicable to Self-Assessment Taxpayers who are making supplies of goods and/or services. • Imposed at the rate of 10% on all local supplies and 0% on exports. • The taxable persons must file the VAT return and pay the VAT collected from their customers by the 20th of the month following the month that the supplies occurred. • Taxable supply and non-taxable supply In EM, M. Sc. in Economics

32. Specific Tax on Certain Merchandises and Services • Imposed on a number of local and imported products, and services; • Cars and spare parts and motorcycles and spare parts (tax rates are 45%, 30%, 20%, 10% respectively); • Petroleum products (20%); • Soft drinks, alcoholic drinks and cigarettes (10%); • Beers (25%); • Entertainment services(10%), • Transport by air of passengers (10%), • Telephone services (3%).. • Payment is made by the 15th of the following month In EM, M. Sc. in Economics

33. Tax for Public lighting • Public Lighting tax is an indirect tax . • It is imposed on every supply of alcoholic drink and cigarette usage at the rate of 3%. • Those who supplies these products are responsible for the payment of this tax to the tax administration . • The payment date must be on the15th of the month following the month that the supplies are made. In EM, M. Sc. in Economics

34. Tax on Accommodation • Imposed on the stay in hotel, guest house, apartment, condominium etc... • At 2% on the room rate inclusive of all taxes. • The person who supplies accommodation service is responsible for the payment of this tax to the tax administration. In EM, M. Sc. in Economics

35. Patent Tax • Yearly tax for each activity • Paid by the real regime and Non-real regime taxpayers • Patent Tax Certificate must be displayed at the business premises. • Patent Tax return filing and payment must be made by the end of March every year In EM, M. Sc. in Economics

36. Fiscal Stamp Tax • Paid on certain official documents and certain advertising postings and signage. • Amounts vary according to such factors as the location of the signage, illumination and the language used (foreign or Cambodian). In EM, M. Sc. in Economics

37. Registration Tax (or "Transfer Tax") • Imposed on : • certain legal documents relating to the establishment, dissolution or merger of a business; • the transfer of title in certain assets (such as land, houses, vehicles) at 4% of the transfer value. In EM, M. Sc. in Economics

38. Tax on Unused Land • Subject to land in towns and other specified areas, without construction, or with unused construction, and certain developed land. • At the rate of 2% of the land value • Value evaluation issued by the Commission for the Evaluation of Unused Land • The owner of the land is required to pay the tax by 30th September each year. In EM, M. Sc. in Economics

39. Tax on Property • Property refers to Land, House, and Building. • It shall be imposed on properties located in municipality and provinces of the Kingdom of Cambodia. • Allow a deduction of 100 MR from property value for calculating the tax base and the tax rate is 0.1% of the property taxable value. • Value evaluation issued by the Commission for the Evaluation of Property. • Owner of the properties is required to pay tax by 30thof the September each year, starting from 2011 onward. In EM, M. Sc. in Economics

40. Composition of the Tax Revenues In EM, M. Sc. in Economics

41. End of Chapter 3 Thank you! In EM, M. Sc. in Economics