Issues & Proposals
Sinavith Sang
Abstract
Taxation is an important instrument of economic policy in a country. Tax reformdeals with wide range of
issues of economic policy as well as specic problems of tax structure, design and administration. In the process
of improving and drawing tax policies that encounter the requirements of a fast changing economy, society, and
polity, tax revenue in Cambodia increased dramatically after the democratic coalition government formein
1993,
Similar to other developing countries Cambodia began the cbangesom a socialist economy to theee
market in the late 1980s. From mid 1990s, the Royal Government of Cambodia devoted its full energies on
numerous measures toght corruption, restore good governance, increase transparency and predictability as
laid out in its latest public reform effort called the Rectangular Strategy for Grow, Employment, Equity, and
EfrlCiency and to accelerate economic development in Cambodia throughthe implementation of an ambitious
economic and political reform plan, a process the internationalnancial institutions and donors participate in and
monitor narrowly. Also the Royal Government of Cambodia has set out some specic procedures with a view to
promoting business, in particular small and medium businesses, in Cambodia by reducing costs ande time
cost of business registration
by establishing numeral committees for trade facilitation and promotion of business.
Section I Introduction
With regard to the taxation system, the Municipal Industrial Commercial Tax Office was established in 1981,
which in 1993 became the Tax Department under the direct control of the Ministry of Economy and Finance,
introducing taxes -
business registrationtax atenttax), turnover tax, profit tax and import and export duties
- under the ofrlCial assessment system. Under this tax system, the Tax Department and its branches in the
PbnoPenh capital city spread through out the provinces and carried out both collection and assessment
activities. In response to the government's adoption of a market-oriented economy,e Tax Department initiated
its reform in 1994, 1995, 1997, 1998 and 1999 to transform the official assessment system to the self-assessment
system. The process of this reform is stillunderway.
Under the guideline of the Royal Government of Cambodia, the Ministry of Economy and Finance has
played a vital role in implementing the triangular strategy, mainly in economic and publicfinancial reform, which
included promoting private sector development and human resource development, strengthening good
governance, ensuring macroeconomic stability, implementing flSCal reform, increasing investment in physical
134 (586) 105(20061)
and social infrastructure sectors, strengthening banking and financial system, improving state property
management. Designed for the publicnancial management, the Minist of Economy and Finance has launched
four key programs of improvement including (i)tax administration and policy, (ii)customs administration and
policy (iii)treasury operation reform, and, (iv)budget formulation and execution reform
However, there has been some inadequate progress in tax and customs administration and non-tax revenue
policy and administration even though some measures have been adopted and implemented efficiently,
resulting in major achievement. Further reform efforts are needed to address the current issues
and to broaden
the policy options of the taxes. In addition, Cambodia must put its hard e#orts in reforming the tax system in
order to ensure more efficientand effective taxation system.
The aim of this article deals wijust two main aspects of the national revenue. It gives comments and
recommendations on efforts to improve both tax and non-tax revenue collection in Cambodia based on the
lessons of national revenue collection strategies learnt in the late 1990s and early 2000s by bringing togeer wi
good strategies and experience from development programs, various strand of its ongoing improvement and
reform efforts and to reformulate them for higheffectiveness and efficiency. This article will show overview of
the Cambodian recently tax reform and its main obstacles and the major problems of the Domestic Revenue
Mobilization and its remaining problems and may be able to point out the solutions to overcome bygiving some
suggestion strategiesthat can generate more national revenue from tax revenue and non-tax revenue.Aswell as,
itwill ensure the safetyof the Cambodian tax system and economic development throughtransparency
The paper will be stmctured as follows. Section II describes the literature reviews about background of
Cambodian Tax System. Section III discusses the major problems of the domestic revenue mobilization Section
shows the major problems withe current Cambodian tax system. Section V emphasizes the Cambodian
future tax strategies.
The last Section summarizes the research findings as a conclusion.
Section II Background of Cambodian Tax System
l. Brief Review of History of Tax Reform in Cambodia
The history of the legal system in Cambodia is a mixture of four parts; the first part -
statutes modeled on
French law until early 1975, the second part -
socialist period legislation dating.om 1979-1991, the third par
statutes put in place by the United Nations Transitional Authorityin Cambodia (UNTAC) during the period
1991-93, and the fourth part - legislationpassed by the Royal Government of Cambodia since 1993. Therefore,
the legal system contains many gaps in key areas such as law on taxation, company law, bankruptcy and
commercial arbitration. The Cambodian legal system has also traditionally favored mediation over adversarial
conflict and adjudication.Ti1erefore,compromise solutions are the norm, even in cases where the law clearly
favors one party in a dispute. The Royal Government of Cambodia is presently working on draft to draw
legislation to form a Commercial Courtat may consist of an arbitration or mediation component
In the viewpoint of the Cambodian tax system, itshares many features of tax systems found in other socialist
countries and is currently undergoing a process of reform and development that has resulted in a great deal of
uncertainty in implementing tax regulations and business compliance, Many tax reforms that have taken place in
the mid and late 1990s was either in response to pressing needs to correct deciencies in the tax system, or
under conscious plans to improve flSCalfunction of the government. Many Issues concerning these tax reforms
were ve much conditioned by its stage and degree of economic developlnent. In the early stage of its economic
development in the 1990s, international trade taxesgured prominently in the revenue structure of Cambodia
Domestic and foreign investments were encouraged, andscal incentives were given to potential and prospective
Cambodian Tax Revenue and Non Tax Revenue (SinavithSang) (587) 135
investors Asose investors were likely to be those who had accumulated wealth and income, governmentscal
incentives worked to stimulate greater accumulation of wealth and income to the detriment of income equality i
the country.
Taxation in Cambodia are governed by numerous laws and regulations comprising of the law on Taxation of
1997,Amended Finance Law of 1995, Finance Iaw of 1995, Finance Law of 1994, Regulation No. 18 on ProfltTax
ofFebruary 28, 1994, Regulation No. 19 on ProfltTax of February 28, 1994, Regulation No. 21 on House and Land
Rental Tax of February 28, 1994, Regulation No.26 on Proflt/Turnover Tax of March 9, 1994,Announcement
No12 on Proflt, House and hnd, Turnover Tax of March 9, 1994, Announcement No. 240 on Proflt tax/turnover
ouly ll, 1995 The 1994 Law on lnvestment provides for tax incentives to encourage and promote certain
industries in Cambodia. nis law was supplemented by implementing legislation,namely, the Sub-Decree on the
lmplementation of the Law on lnvestmeIlt dated December 29, 1997.
2. Overview of Cambodian Tax System
The Cambodian taxation system divides taxpayers into three taxation regimes: the real regime, the
simplied regime and the estimatdregime. The determinative factors to decide which regime a taxpayer will
belong to are the form of business enterprise, thetype of business activityand the level of turnover of the
business. At present, all limited liabilitycompanies fallunder the real regime of taxation.
The effect of having three taxation regimes is that different taxes or methods of tax assessment will apply
under each regime. Until 2001,e real regime tax system was applied only in Phnom Penh, and administered
exclusively by the Real Regime Tax Bureau (RRTB), which was established in 1994 with the technical assistance
of the Fiscal Affairs Department -
FAD (theInternational Monetary Fund - IMF). Since 2001, this system
is being implemented in five other provinces: Battambang, Siem Reap, Kompong Cham, Koh Kong, and
Sihanoukville Underis system, tax assessment follows, in principle, conventional practices and procedures on
the basis of normal books and records of taxpayers, tax1ing and payment obligations are broadly in line with
modern self-assessment methods, but problems of noncompliance are prevalent. To address them, the tax
authorities have resorted to highly distorted and/or ad hoc measures, such as denial of input tax credits on
certain goods under the value-added tax NAT).While such blunt instruments may be effective in safeguarding
revenue in the short-term, they are not sustainable solutions in the long-term The key, instead, is the
formulation of a coherent and comprehensive compliance strategy to strengthen monitoring and enforcement,
with an enhanced audit capacity as a central ingredient.
The estimated regime tax system applies to all other small business and is administered by the local tax
ofFICeS under the supervision of the twenty-three provincial tax branch ofFICeS. In theory, tax assessment under
the estimated regime includes partial self-assessment methods -- taxpayers are required to report their
turnover as a base for calculating their liabilities (prottax, 2 percent turnover tax, and patent).In practice, these
liabilities are largely negotiated between taxpayers and tax officials,giventhe extremely low level of compliance
of this categoIγ Of taxpayers As it is presently administered, the estimated regime tax system is inherently
subjective,arbitrary, and nontransparent, and negates the basis purpose of many provisions in the Law on
Taxation It is also poses serious risks to the integrity of revenue collection, especially in view of the generally
low public service pay. To address this problem effectively, formulating a mechanism of strict internal controls
and independent monitoring is crucial.
The Ministry of Economy and Finance has recently established a Large Taxpayer Unit for administration of
persons supplying goods or seices, or making contracts withe government that have an annual turnover of
136 (588) 105(20061)
one Billion Riels (Cambodian currency) or higher. A Medium Taxpayer Unit has been established to administer
persons that have an annual turnover from 500 Million Riels for the supply of goods, 250 Million Riels for the
supply of services and 125 Million Riels for contracting with the government, up to anamount of less than one
Billion Riels.
3. Overview of Cambodian Tax Administration
ln Cambodia,e highest authority in the tax administration is the Minister ofe
Ministry of Economy and
Finance. 1e Minister carries out the general management ofe tax administration and supeises its activities
Institutions responsible for the administration of tax provisions are the Tax Department and other institutions of
the Royal Government of Cambodia The tax administration has the obligation to collect taxes and apply penalties
as determined by the tax provisions and to appeal to the courts in the case of violations of the law The current
tax system has been reformed since 1994 in accordance with the concurrent transaction to a market economy As
part of the Ministry of Economy and Finance (MEF), the Tax Department has been devoting all its efforts in
order to improvee domestic tax system and to reform the tax administration withe assistance of overseas
advisers.
4. Overview of Cambodian Tax Policy
cambodia has one ofe lowest tax revenue/GDP ratios (about 8.5% of GDP in 1999 and 2000) in the world.
Furthermore, the share of domestic tax revenue rose from 44 percent of tax revenue in 1998 to 56% in 1999 and to
62% in 2000. At the same time, the share of revenue from international trade taxes decreased from 56% of tax
revenue in 1998 to 44% in 1999 and to 38% in 2000. In addition, the share of international trade taxes will drop
drastically once the customs tariff reform has become effective Hence, its present tax base is extraordinary
narrow.
5. Organization, management, and personnel of the Tax Department
ln Cambodia, the tax department consists of two parts: a head oFICe at the central level, and 24 branch-
taxation btlreauS (4municipalities and 20 provinces) I Head ofFICefunctions are managed by the Director, a First
deputy Director -
primarily responsible for formulating tax policy reform formulation, and three Deputy
Directors, whose responsibilities include the supervision of operations (includingtaxpayer services, registration,
accounting, research, audit, collection and appeal activities),preparation of tax procedures and methods, and
general administration (personnel, recruitment, training and budget). The head ofrlCe develops overall policies
and plansfor the administration of the national tax, formulates directives and guidance to the municipal and
provincial tax bureaus to coordinate
a uniform and impartial application of the tax laws and regulations
nationwide.
Each of the 24 branch tax bureaus has a similar organizational structure, which mirrors their counterparts in
the head oWICe. The branch tax bureau is directly involved in investigation, assessment, and collection. They are
also thefrontlline administrative bodies for the administration, controlling internal taxes and keeping the closest
contact witaxpayers.
′mere are approximately 1,500 employees in the Tax Department. The Director of this department does not
have complete control over personnel policies related to hiring, promoting and dismissing of tax administration
employees. ′mis power resides in the Personnel Department of the MEF The director only has the power to
recommend personnel based on performance and to report to the Minister of Economy and Finance
cambodian Tax Revenue and Non Tax Revenue (SinavithSang) (589) 137
6. Administrative law and procedures
There has been a considerable amoullt Of work done to provide necessary administrative laws and
procedures to support the tax department's efforts in the administration of the tax system Previous provisions
for tax administration are found in both the Finance Acts of 1994 and 1995 and in their amendments. Currently,
the provisions can be alsofound in the Law on Taxation. In general, these provisions are similar in scope to those
found in most modern tax systems. The provisions cover awide range of topics such as registration,assessment,
collection, appeals, penalties, and enforcement. However, in most cases, these provisions are poorly specifled,
lack the necessalenforcement sanctions, and lack a clear attribution of the responsibilityeither to the tax
administration or to the taxpayer.
¶1ere is an implicit transfer of the obligations of the taxpayer to the tax administrator. This transfer of an
obligation is the result of placing an obligation on the taxpayer while not providing the necessary sanctions to
enforce the obligation when taxpayers do not comply. Without the necessary enforcement provisions, the tax
administrator is put in the awkward position of having to attempt tofu1Bll the obligation on behalf of the taxpayer.
Section III Major Problems of the Domestic Revenue Mobilization
Cambodia has long been acknowledged the fundamental importace of improving its publicnancial
management policies, systems and some necessary measures which have been set out and implemented since
the late 1980s especially in the area of revenue mobilization and budget expenditure management While
remarkable efforts have been devoted and signicant achievements have been made, however Cabodia's
current revenue-to-GDP ratio is veIγ low by global standards, amounting to about half the average for low income
countries. Internal revenues hardly cover current expenditures, which capital expenditures are flnanCed almost
more than balfom external sources.
The principal problem causes of low domestic revenue performance in Cambodia are:
Giving tax exemptions in whole or in part, of customs duties and taxes, granted under the Law on
lnvestment;
Insufficient implementation of the Law on Taxation and delay in introducing a Value-Added Tax to the
wbole country;
Ad hoe tax and customs dutyexemptions, often associated with unwarranted political parties interference;
Weak capture oHishery lots and timber revenues.
1. Limiting Tax and Duty Exemptions
The I_,aw on Investment is one of the most critical impediments to improved revenue mobilization. The Law
provides for duty free importation of capital goods and other flXed and movable assets, duty free importation of
raw materials for export enterprises tax holidays of up to eight years, a permanent 9 percent corporate tax rate
after the end of the holiday period, and restrictions on the taxation of remissions abroad. Aer a long delay, the
Implementing Regulations for the Law on Investment were adopted in January 1998 with a view to strictly
limiting the scope of ad hoc tax and dutyexemptions. The implementation of these Regulations was a signicant
step in improving investor accountabilityfor
taxes. The recommended areas of investment, however, cover
virtually every sector ine economy, including natural resource exploitation, in sharp contrast to the initial
proposal of limitinge recommended activities strictly to medium ad large scale manufacturing activities. -e
combination of the Law and the Regulations has eliminated any room for the business income tax to be a policy
138 (590) 105(20061)
instrument in the revenue mobilization effort.
Assuming a modest return on the capital base, the lost revenue under the tax on profltS would have been
us$12 million, or OA percent of GDP in 1997. Custom; exemptions under the Law on Investment in 1997
amounted to US$249 million of imported goods. Assuming a dutyrate of 15 percent, the foregone customs
revenue in 1997 was US$37 million or 1.2 percent of GDP.
1eSe are some proposals for the Law on Investment and the Implementing Regulations to be revised:
Removing all the incentives currently granted to resource and resource processing firms from the
lmplementing Regulations.
Removing the production of consumption goods from the preferred sectors in the lmplementing
Regulations. (However, the revision of the lmplementing Regulations to this effect should not be
retroactive.)
'Repealing the 9 percent tax rate, the tax holiday period, and the profltS reinvestmentru1e in the IJaW On
lnvestment, with grandfathering clauses. Those activities other than resource activities could maintain
their holiday status but not to exceed three years. All the holiday period would be rescinded ar this
period Those flrmS Currently paying taxes at the rate of 9 percent would begiven a grace period of up to
reeyears.
Amending the hw on Investment to make all repatriations and payments of interest subject to border
wiholding tax.
'Reducing the duty exemption under the Law on Investment to 50 percent in dutyin all provisions and put
the reduction on a drawback scheme.
In addition to the exemptions granted under the Law on Investment, various ad hoe tax exemptions, such as
onrubber exports, play a significant role in undermining the revenue potential of the tax system. It is, however,
difficult to estimate the loss of revenue resultingfrom these ad hoe exemptions. ¶1e authorities need to amend
the Law on Taxation to require that any other exemptions not specifled in the Law on Taxation should be void.
Even more serious, the government has granted a quasi-legal character to the exelnptions as in the case of
logging and cement production ¶-is has been accomplishedrough the lmplementing Regulations which now
extend its scope beyond the initial intent to cover only manufacturing activity. In addition, the government
received ad boc duty exemptions on government imports which should have been paid, and the loss of revenue
from this was 0.4 percent of GDP in 1997.
2. Proper Capture of Forestry Revenue
Forests are Cambodia's most developmentally important natural resource and could bring in signicant
additional revenues The current forestry situation, however, poses serious governance problems and shows
evidence of pervasive corruption. The revenue loss arising from illegal logging to the government in 1997 is
estimated as well in excess of US$60 million, or 2 percent of GDP (as compared withe actual collection of one-
fifthof that amount in the budget) It was reported that private and unofficial rent amounted to US$14 per cubic
meter, in addition to the official royalties and the unofficial charges associated with the originalfelling operation.
These levels of side-payments and extra-budgetary charges are indicative of the lack of governance in the
forestry sector The stresses in the Cambodia economy as a result of the regionalflnanCial crisis and the political
events of July 1997 and the ensuing losses innancial support from various donors have exacerbated the
cambodian Tax Revenue and Non Tax Revenue (SinavithSang) (591) 139
situation. ¶uS, in the short term, much of the potential for increasing government revenue would come from re-
channeling private and unofficial rent capture.
with a view to contrasting the revenue potentialfrom forestry under different policy lmPlementations, a
simple flnanCial model of the Cambodianforestry sector is developed
and applied to three alternative scenarios
over the period of the next 30 years.
In addition
to the proper capture of royalties on forestry exploitation, tax revenue collectionfrom forestry
also needs to be strengthened. The prepayment of the tax on proRts in late 1990s for log exporters was CR 182
million and for sawmill and board factories was CR 709 million.Asall companies were declaring a lossfor period
in late 1990s, the prepayment would be transferred to the minimum tax and the total amount of CR 891 million
would be the extent of the tax revenue collectionsfrom log exporters and sawmill operators in late 1990s. This
amount represents lessan 0.3 percent ofe total value of exported logs and sawn timber ¶mber has escaped
taxation throughthe manipulation of the Law on Investment. In order to avoid taxation, timber companies set up
sawmills, which allowed them to export rough sawn timber, and had the logging activity classified as
manufacturing and therefore enjoying the provisions of the Law on Investment and, most important, escaping
from the banon log exports. A conservative estimate of the foregone revenue from the tax on profits for both
legal and illegal exports in late 1990s is US$22 million or CR 66 billion as compared with the actual collection of
CRlbillion.
For the tax and non-tax revenue potential to be realized, the government must take the following
"emergency measures" immediately to arrest the deteriorating situation:
Stop granting new concessioIIS
Freeze approving all new investments in wood processing
Establish mecbanisms to mollitor and prevent illegal log felling and exports
Enforce cancellation of all permits for "collection" of logs and stop issuing new permits
strengthen the Forestry Department, with clear mandates and responsibilities
3. Proper Taxation of other Natural Resources
Natural resources represent a major revenue potential for Cambodia. Cambodia has a natural resource base
similar to its ASEAN neighbors and most ASEAN countries generate between 2 and 4 percent of GDP from the
taxation of resources, in addition to non-tax revenues that they may generate Cambodia has yet to effectively
utilize this revenue source. Timber is a prime example. Gem mining makes no definable contribution to tax
revenues. A portion of the gem exports from Thailand (US$2 billion in 1997) can be attributed
to uncut
gemstones mined in Cambodia The potential exists to derive revenue from the exploitation of petroleum
resources. Three petroleum contracts held by two contractors were carried into in late 1990s If natural gas is
found in viable quantities, revenues could be from 1 to 2 percent of GDP,given the proper contracts such as the
1991 draproduction sharing contract and proper negotiation
other potential tax revenue sources continue to evade taxation either througha liberal interpretation of the
Law on lnvestment or through political arrangements (for example, cement production, which is normally
classified as a mining activity, has escaped taxation in the same manner as timber). It should be borne in mind
that the lmplementing Regulations for the Law on lnvestment include natural resource extraction as a
recommended area of investment. If the same broad rules are applied to natural resource extraction as are
applied to togging and cement production, the revenue potential from these activities in the medium term will be
nonexistent.
Table 1 Monetary Survey (mi]JionUSS)
1993: 1994 l995 1996 199′7 l998 1999 20()0 2001 2002
NetForelgn~Assets 5().6
152.1 222..9333.S 391..7 457.0 529.3 673.4 784.4 950.0:
ForeignAssets 12-6.4 245.8 ′363.7 466.1: 533.8 583.9 657.6 792.5 913.6 1087.8
.ofNB.C 20,7- 118,8 196.5 .2739 301,.0. 443,4: 509.5
,610.9 _696.3 914.4:
ofDepositMoneyBanks 105.7. 127,0; 167.2 192.1. 232.8. 140.5 148.1 181.6: 217.3 173.3
ForeignLiabilities -75.7 -93.7 -140..8. -132.5 -142.1 -126..9, -128.3 -119.1 -129.1 -137.8
ofN.c -7.3 -29.6 -′73.4 -71.3 -65.1 -67.2 -72.8 -72.9 -79.0 -96.2
ofDepositMoneyBanks -68.4 -64.1 -67.3 -61.2 -77.0 -59,7 -5.5.5 .-46.2 -50.1 -41.6
NetDomesticAssets 100.8 2.3.2 40.2 ll.8. -2.2 -131.2 -151.1: -197.1 -223.4 ,-215.7
~DomesticCredit 146..7 150.4 181.0 .214.9 ?32.9 222.3 229.8 235.5 221.3 239.4
toGoVernment(net) 79.8 55.7 60.0 48.3 18.0 47.3 27,0 0.9. -19.1 -30.3
-ClaimsonGoVernment 93.0 83.7 88.1 81.0 70.7 76.5 74.3 70.8 69.1 78.8
-DepositsofGoVernment -13.2 -28.0 -28.2 -32.7 -52.7 -29.2 -47.3 -69,9 88.3
-109.1
toNon-Government 66.9 94.6 121.0 166.6 214.9 175.0 202.8 234.6 240.4 269.7
-St.ateEnterprises 2.6 2.3 2.1 2.0 2.0 1.6 2.7 0.9 1.8 0.5
-PriVateSector 64.3 92.3 118.9 164.6 212.9 173.5 200.1. 233.7 238.7
:269.2
o/w:inForeignCurrency 41.5 71. 114.0 159.9 181.7 168.8 190.8 219.7 224.3 252.9
Others -45.9 -127.1 -140.8 -203.2 -235.1 -353.5 -380.9 -432.6 -444.7 -455.1
RestrictedDeposits -9.5 -ll.4 -ll.6 -31.2 -13.7 -19.2 -20.9 -22.4 -25,4 -24.3
Capita1&Resees -64.8 -188,4 -191.3 -248.4 -288.4 -404.9 -429.4 -465.8 -499.4 -493.9
Others 28.4 72.7 62.1 76.4 67,0 70.6 69.4 55.7 80.1 63.1
Liquidity(M2): 151.5 175.3 253.1 345.2 389.5 325.8 378,2 476.3 561.0 734.2
Money 86.7 77.7 112.9 124.6 128,6 144.1 139.5 140.3 155.5 206.7
CurrencyOutsideBanks 80.7 68.6 101.7 113.6 119.0 134.9 128.4 128.6 147.3 194.7
DemandDeposits 6.0 9.1 ll.2 ll.0 9..6 9.2 ll.0 ll.7 8.1 12,0
Quasi-Money 64.7 97.7 150.2 220.7 260.9 l?1.7 238.7 336.0 405.5 527.5
¶meandSaVingsD.eposits 13.2 7.1 2.1 3,0 38.6 5.2 8.3 12.2 13.2 18.9
ForeignCurrencyDeposits 51.5 90.5 148.2 217.7 222.3 176.5 230.4 323.8 392.3 508.6
Source: CDRI, based on dataom the Cambodian Government, World Bank, IMF, and ADB.
4. Proper Transfer of Non-tax Revenes from Lime Ministries
Additional revenue can be generated by requiring that all rents and fees collected by some of the line
ministries should be deposited in the Treasury. At present, revenues from items such as passport and visa fees,
profits &om enterprisesrun by various ministries, and rents accruing from letting out buildings belonging to
individual ministries, are collected by the line ministries and are partly spent by them. Altbougb revenue
retention is an important incentive for those providing services, the current situation is such that rents and fees
are often collected and used in a non-transparent manner. Transferring these revenues to the MEF would
increasee revenues by 0,2 percent at a conseative estimate.
cambodian Tax Revenue and Non Tax Revenue (SinavithSang)
Tab]e 2 Budget Lmp[ementation (miHion USS)
(593) 141
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
DomesticReVenue 103.1 229.3 249.7 284.0 284.0 250.9 348.7 368.8 389.8 441.2
CurrentReVenue. 103.1 229.3 249.7 269.1 269.1 242.0 345.1 361.2 387.5 437.0
TaXReVenue 77.9 141.9 173.0 202.5 202.5 180.8 252.5 269.6 279.4 310.3
Non⊥TaXReVenue 25.2 76.7 76,7 66.6 66.6 61.2 92.6 91.6 108.0 126.7
CapitalReVenue 0.0 0.0 0.0 14.9 14.9 8.8 3.6 7.6 2,3 4.2
BudgetEXpenditure 216.2 392.8 482.7 500.3 500.3 416,1 478.1 527.2 641,4 635.5
CulTentExpenditure 132.6 262.3 2β4.2 299.4 299.4 238.5 287.3 307.3 260.8 342.3
Wages 63.7 112.4 134.5 130.4 130.4 119.1 135.8 133.6 129.7 138.9
Non-Wages 69.0 149.9 149;7 169.0 169.0 129.1 151.5 173.8 341.0 203.4
CapitalEXpenditure 83.6 130.5 198.5 200.9 200.9 167.6 190.8 229.9 280.7 293.2
Domesticfinanclng 1.8 30.6 22.1 23.3 23.3 52.0 58.6 80.0 72,1 73.5
EXternalassistance 81.8 100.0 176.4 177.5 177.5 135.6 132_2 149.9 208.5 219.7
EXpenditureadjustments 16,4 -8.8 -8.8 -2,0 -3.9
1.0 14 -30.4
OverallSurplus(Deficit) 113.1 -163.4 -216.6 -225.1 -225.1 -167.2 -133A -167.5 _237.6 _224.7
Financlng 113.1 163.2 216.6 225.1 225.1 167.2 133.4 167.5 237_6 224.7
ForeignFinancing 85.0 168.2 217.2 218.2 218.2 134.5 135.1 180.1 226.7 270.7
Budgetsupport 3.2 51.5 42.2 56.8 56.8 0,4 1.1 29.3 13.8 45.5
Projectaid 81.8 116.8 190.3 177.1 177.1 134.1 134.0 150.8 213.9 227.2
AmozationoneXterna1
31.1 -ll.8 -3.9
OtherMEF'saccoumt -0,6 -0.6
1.7 0.8 -0.4
OutstandingOperations 0.5 10.4 10.4 1.7 10.0 .8.8
8.2 -0.3
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
source: cDRl, based on datafromthe Cambodian Government, World Bank, IMF,and ADB.
Section IV Major Problems with the Current Tax System
Althoughtax administration has improved considerably,
it still remains very weak. First, there is a "lost
culre of taxation." Ine 1960's Cambodia's tax ratio was 13-15 percent of GDP. Fore next 30 years, when
most other countries were developing increasinglysophisticated tax systems, Cambodia levied almost no taxes
ande general population grew up with litde appreciation of the role of taxes or wi1itde willingness to pay
Now,with a tax ratio smaller than 10 percent of GDP there is a long way to go to achieve even the performance of
40 years ago People have to believe that their taxes are well used; a belief in well-run government helps the
development of a modem tax system Second, a modem tax system cannot operate where the rule of law is
142 (594) 105(20061)
P()sition Mon1yMedianSalaryRange
- 3,900
Source:Who's who in Cambodia 2003-2004, Ministry of Economy and Finance
uncertain. Tax officials need to have the certaintyof the law to enforce the tax code at the border andwithin the
country. Taxpayers need to be certain of the law. This implies that bureaucratic interference should be
minimized, and that the laws and regulations governing taxes should be transparent andfreely available to the
public. For example, prakasl) should not have the force of law until they are published. Third, for those
administering the tax system, the opportunity to exercise personal discretion should be minimized. Fourth,
salaries of tax officials are low, and real rewards should be raised combined with penalties exercised for abuse of
position. TYle average Salaryfor tax ofFICials being US$ 20 -
25 per month -⊥ far lower than a living wage or
the salaries of public officials of similar seniority, such as judicialofficials, law officials,private sectors employees,
NCO staffs, parliamentarians and other employees of other sectors - is an open invitation to corruption (see
in Table 3) The government m.ust pay its employees increasing salaries out of the increased national budget
which resultsoimproved revenue collection and reduced corruption.
Fifth, reliance on trade and sales taxes means that equitywill always have a low priorityin
tax policy. Equity
throughtaxation requires tax rates that can be adjusted to reflect personal and household income and wealth
differences. Income and wealth taxes appear unlikely to play a significant role in Cambodia in the short to
medium term This places greater weight on the expenditure side of the budget to ensure the appropriate social
cambodian Tax Revenue and Non Tax Revenue (SinavithSang) (595) 143
and welfare transfers. Sixth, this suggests that the tax system, for the next few years, should be kept simple Its
major function is to collect revenue in an evenhanded manner Otherfunctions to influence investment,
consumption, savings, incomes and wealth distribution are best left,for the time being, to other instruments
(e.g.,interest rates and government expenditures). As already mentioned and agreed under the PRGF, the
customs tariff revenue function should be transferred gradually to domestic taxes. A singletariff rate improves
the allocation of resources and avoids confusion over pyramiding and the relative taxation of goods at different
stages of production. Excises apply equally to imported and domestically produced goods and should be a major
revenue source. Seventh, there is a need for reviewing the VAT threshold, the tax on profits, the tax on salaries
and local taxation. For the local taxation, The Law on Administration and Management of the
commune/sangkat2) allows the commune to collect land taxes, immoveable propertytaxes, rental taxes, and
user charges including i)certain taxes and other revenues already allocated to the provinces (taxeson unused
land, business licences, vehicle taxes, and slaughtering taxes),ii) a betterment levy, iii)hotel taxes, iv)taxes on
entertainment, ) taxes on sale of drinks, vi) possible shared taxes on turnover and VAT, and vii)non-tax
revenues for various licences and seices. However, the mechanisms and strategies ofe Sangkat tax collection
process have not come into effect and not yet exercise their right to own-source revenue generation, because the
Ministry of Economy and Finance has not yet issued the related implementing regulations Eighth, there is the
low level of audit capability in the Tax Department. Most audit activity in the Tax Department is conned to desk
audits of information supplied by the taxpayer. ¶1e Only aempt to use information other than that supplied by
the taxpayer has been the use of SGS's pre-shipment inspection data on imports Most staffs assigned to the audit
function lack the skills to be able to successfully audit the flnanCial records of an international company Ninth,
there is insufficient political support and law enforcement to collect taxes. Thus, it is difficult for personnel.om
the Tax Department to audit, re-assess, or challenge a taxpayer. The Tax Department identified tax arrears of CR
14 billion during 1996-97, but ithas collected only 10 percent of the total assessments. As ittakes on average 6 to
12 mons to collect an assessment, withe aging of total assessments foregone revenue is estimated at US$4
million.
The Law on Taxation was the first serious attempt to consolidate tax legislationinto a code.Legislation
passed prior to the Law (such as the tax on turnover, the tax on speciflC merchandise and services, the tax on
rent, and the tax on unused land),however, remains outside the Law on Taxation. The intent was that as these
separate tax laws were redone they would be included as separate chapters in the I-aw on Taxation In addition,
there are several draft1aws in circulation that also contain tax provisions, such as the draft commercial code, the
draft law on casinos, and the draft1aw on NGOs. All issues relating to taxation should be included in the I/aw on
Tqxation with the Ministry of Economy and Finance responsible for legislative drajis,implementation, and
administration.
one related issue is that a part of the Law on Taxation has not been implemented and that has the potential
to seriously erode revenue if it is not implemented with the proper rules and controls As part of the
administrative protest procedure, thefinal step in the process involves the Committee of Arbitration Although
composition ofe Commiee is at the discretion of the Minister of Economy and Finance, it appears that the
Council of Ministers demands a substantial part of the membership. Constraints must be placed on this
Committee so that itdoes not legitimizethe process of appealing to the Prime Minister's Office or the Council of
Ministers for special relief or ad hoc exemptions. The Prime Minister's Oce and the Council of Ministers must
cease to be viewed as the major ft)utej:or tax
relief. The authorities need
other exemptions not specied ine Law should be void.
144 (596) 105(20061)
Section V Recommendations for Cambodian Future Tax Strategies
Since 1994 the Ministry of Economy and Finance had planned to implement the measures aimed at
enhancing tax administration. During these periods, there had been progress on a number offronts. A modem
taxpayer identification numbering system (TIN) was introduced for businesses, as well as new filing and
payment procedures under the real regime, and a Real Regime Unit (RRU) was established in Phnom Penh to
monitor tax collectionfrom taxpayers reporting under this regime, generally the largest taxpayers in Cambodia.
Therefore, since 2002 a number of measures have been proposed to support the tax policy reforms.
NeveIeless, some areas are stillin vain For those reasons, the recommending points will be as follows:
First, strengthen the Large Taxpayer Unit (LTU) to keep control over the largest taxpayers, reform the
organizational structure, widen the tax base (expanding the real regime system to the whole country, introduce a
10-percent excise tax on entertainment services),establish and implement a reporting system to follow up at the
headquarter level, the evolution of tax arrears and monitor collection enforcement activities of tax offices,
strengthen collection enfbrcemewhich is one ofe main weaknesses of the tax administration.
Second, in the field of law and policy concerning to tax system, the recommendation is to implement modern
self- assessment methods to support major tax policy reforms, and to amend the law on Investment of Cambodia
to become consistent with the Law on Taxation Based on the tax development reforms in the past, it should
consider the elimination or reduction of the tax exemption provided in the Law on lnvestment and provided
recommendations regarding return on investment and risk management. Continuously, it should review the
exemption of level of the tax on sala, as itis excessively high.
Third, Strengthening VAT compliance is obviously needed otbeise it could hamper its capacity to
mobilize more domestic tax revenue if sufficient action is not taken to address them. It should review the VAT
thresholds, with the possibility of lowering it slightly below the current threshold for goods, to an extent
acceptable)r Cambodia's level of economic development and revenue permance of its tax administration. As
well, the recommendation will include introducing mandatory VAT payments throughthe National Bank of
Cambodia for the largest taxpayers.
Fourth, the Tax Department Should not hesitate to decide to propose VAT on all electricity bills and Water
bills However, a VAT exemption should exist on therst 100 kwts per month of electricity bills in order to
mitigate the impact on low income families.
Fifth, strengthen the additionally two units - the audit and research units to develop audit activities and
enforce self-assessment In addition, the number of auditors should be enlarged throughinternal reallocation of
resources and organize appropriate audit training programs for auditors, ifneeded, seek technical assistance to
prepare and develop these programs As well as, set up a modern management information systemwithin the
Audit Operation and introducing audit procedures to support tax compliance.
Sixth strengthen the salient information including ageing of account by tax, interest and penalties collected,
number of accounts, dollars outstanding, budget to actual, opening to closing inventory, collection to liabilities.
Strengthen corporate governance, particularly the adoption of an international accounting standard is a main
priorityaction to facilitate business and commercial operations in Cambodia.
Seventh, keep exchange of taxpayer information within MEF departments, on the one hand, and between
MEF, Cambodian Development Council, the Ministry of Commerce, the Ministry of Agriculture, Forestry and
Fisheries and other relevant ministries and agencies On the other hand, apply strictly measures to recover
arrears from taxpayers orwithholding agents Cooperate with authorities and the local governments at all levels
cambodian Tax Revenue and Non Tax Revenue (SinavithSang) (597) 145
shall assist the tax administratioIl tO implemet these recovery measures.
Eighth, develop a modern tax framework and transparent procedures for managing natural resource
concessions, including mining, petroleum and forestry with the objectives of improving their sustainable,
efficient utilization and enhancing revenues to the government
Ninth, on the administrative side, attentionwill begiven to tackle staff integrity, improve procedures and
information system and strengthen collection enforcement. Also, a jointTax and Customs committee should be
kept to continue to form to addresse smuggling of liquor, cigarees, milk and other products
Tenth, simpli& and clarifythe Cambodian tax system and align the tax system with international tax
standards to attract foreign investors. Also, review double taxation agreements and seek the first agreement with
small countries. Moreover, make consideration of a thin capitalization provision as well as anti-avoidance rules.
Eleventh, Cambodia should introduce Inheritance Tax and Gift Tax. Taxes are designed with the intention
to promote efrlCiency in economics nationwide. Redistribution of personal income through]'udicious application
of relevant laws and regulations promotes equitable wealth distribution, and thereby promotes efrlCiency in the
economy. with years of dedicated effort, Cambodia has achieved significant gains in market economy
development. However, the cost to societyas a whole has been considerable; uneven income distribution has
created ever-widening income gaps between rich and poor citizens. Consequently, the role of wealth
redistribution as afunction of the income tax system can be said to be vital for not only the economic sector, but
also for Cambodian society as a whole. Recently, increasing gap of wealth inequality, the total portion of
cambodian wealth held by the rich people, a few percents of the countIY's population, make the gap between the
poor and rich very huge and a need for increased revenue sources, Cambodia should impose an inheritance tax
and gift tax. ¶1e purpose Of these taxes is to raise revenue to pay fornancing important social policy initiatives
Inheritance tax andgitax will also initially raise relatively some amounts of revenue, are expected to provide for
increasing levels of revenue in thefuture This strategy reduces the gap between the rich and the poor
Twelfth, Land Tax should be strictly enforced. By the year 2000, the law on Administration and
Management of the Commune/Sangkat permits the commune to collect land taxes, immovable propertytaxes,
rental taxes, and user charges. However, obviously Cambodia is not yet ready to authorize local government to
impose propertytaxes
based on the arguments that Cambodia faces i)weak and insufficient land mapping and
registration, ii)lack of data for property value assessment, iii)low levels of skills and competence in the tax
auorities, and iv)e low income level of the potential taxpayers.
Last, the success of the whole range of tax system reform also depends on progress made in oer key
pillars of good governance including the Legal and Judicial Reform and the Civil Service Reform, and active
participation of Development Partners including donor community, private sector, civil society, and all level of
government ofcials.Also, salaries of tax ofncials should be raised combined with penalties exercised for abuse
of position.
Section VI Conclusion
′me signicant element of the internal revenue strategy is to increase revenue to meet expenditure needs
The domestic revenue, both tax revenue and non tax revenue, has been increasing from year to year, mostly due
to growth in the tax base and properly management of national assets, However, there has been some limited
progress in customs and tax administration and non-tax revenue policy and administration In summary,
improving the efficiencies of the collection and increase the internal revenue Cambodia must be as follows:
1. Specific Customs Measures incldded: improvement and dissemination of customs rules and regulations
146 (598) 105(20061)
related to streamlining customs procedures, the preparation of a new customs law,e automation of Customs
valuation, strengthening administration and good governance in the customs and exercise department,
strengthening discipline, incentives and training for customs ofBcials, continuing to strengthen pre-shipment
inspection capacity, streamlining and improving reporting procedures and controls, improving legal
framework, procedures, and institutional structure in accordancewith international standards especially in the
implementation of the customs tariffs and code which determine new import and export procedures,
implementing anti-smuggling measures and training for ASEAN customs officials to strengthen institutional
capacity.
2 Specific tax measures included: expanding VAT coverage, expanding the tax base (salaryand profit taxes),
improving the legal framework and tax collection procedures, tax arrears collection enforcements,
strengtheninge Vr return mechanism, continued expansion of the real regime to additional provinces,
increasing the number of tax officials throughselection and training ofrlCials within the Ministry of Economy
and Finance, and strengthening the compliance capacity of the tax department throughtraining in auditing
skills.
3 Specic Non-Taxes Revenue measures included: Strictly control and managee national assets such as
natural resources, immovable assets, and proper transfer of non tax revenue from line ministries. Moreover,
the recent experience suggests that administrative capacity, in terms of systems, legal framework and
regulations, and human resources, is acting as the binding constraint on efforts to improve tax and non-tax
revenue collection. The core concern is the delays in re10rganizing the tax department alongfunctional lines,
and inadequate number of professional tax and customs collections, and the poor incentive structure
roughout the revenue collection system.
Notes
1) Praka means degree
2) Commune/Sangkat means 'ku'in Japanese language or a quarter in English.
Reference
Books:
Cambodia's Annual Economic Review, September 2003, Cambodia Development Resource lnstitute
Cambodian Investment Guide 2002, DFDL/Mekong I,aw Group, i.awyers & Advisers
CDRI, based oIl data from the Cambodian Government, World Bank, IMF, and
ADB. Cambodia's Annual Economic
Who's who in Cambodia 2003-2004, Media Business Networks in Partnershipwith Promo1mer
Public Financial Management Reform Program: Strengthening Governance through Enhanced Public Financial
Management, Ministry of
Economy and Finance, The Royal Government of Cambodia, December 2004
Websites:
hp://ad.org
Cambodian Tax Revenue and
Non Tax Revenue (SinaviSang)
www.worldb ank. o rg/index.html
World Bank in Cambodia
Prakas on the Profit Tax, January 2004
D o cuments/Articles
Development Policy Seminar, Economic and Finance lnstitute, Phnom Penh, 06-10 August 2001
A Study of lncreasing Cambodian lnternal Revenue
Experience of lnternal Revenue Collection Reform in Cambodia.
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