Gov’t quells anx­i­ety over trans­fer tax

The Phnom Penh Post - - BUSINESS - Kali Ko­to­ski

AT A con­fer­ence held yes­ter­day to ad­dress con­cerns over Cam­bo­dia’s evolv­ing tax regime, rep­re­sen­ta­tives of the pri­vate sec­tor sought clar­i­fi­ca­tion from govern­ment of­fi­cials on a con­tentious new de­cree that in­tro­duces trans­fer pric­ing rules that re­quire multi­na­tion­als to record and re­port all trans­ac­tions between two com­pa­nies within the same cor­po­rate group.

The prakas, re­leased late on Wed­nes­day night, sets out new re­quire­ments for multi­na­tional com­pa­nies and how they de­clare prof­its, costs and trans­ac­tions in­volv­ing over­seas par­ent com­pa­nies and their wholly owned sub­sidiaries. The reg­u­la­tion is aimed at pre­vent­ing trans­fer mis­pric­ing that can ma­nip­u­late mar­ket prices and rob the state cof­fers of due tax rev­enue.

Speak­ing at a tax fo­rum hosted by the Euro­pean Cham­ber of Com­merce, Vann Puthipol, deputy di­rec­tor of the Gen­eral Depart­ment of Tax­a­tion (GDT), de­scribed the prakas as an im­por­tant step for­ward in cor­po­rate com­pli­ance that was mod­elled on sim­i­lar reg­u­la­tion in neighbouring coun­tries.

“We tried to study [the ex­pe­ri­ences of ] coun­tries like Viet­nam, Thai­land and Malaysia about how to im­ple­ment th­ese guide­lines,” he said. “We need this as a first step. No­body can run at full speed to their des­ti­na­tion, but we need to try.”

Tax ex­perts speak­ing at the fo­rum said that in or­der to com­ply with the reg­u­la­tions of the new prakas, multi­na­tion­als would need to di­vide the rev­enue and ex­pen­di­ture of their Cam­bo­dian op­er­a­tions us­ing the “Arm’s Length Prin­ci­ple”.

The Arm’s Length Prin­ci­ple, a pro­ce­dure that has been adopted by the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD), re­quires multi­na­tion­als to con­duct trans­ac­tions between re­lated com­pa­nies as if they were deal­ing with an in­de­pen­dent third-party.

The new prakas states that multi­na­tion­als can choose from five OECD-recog­nised method­olo­gies: Com­pa­ra­ble Un­con­trolled Price, Re­sale Price Mi­nus, Cost Plus Meth­ods, Profit Split Method or Trans­ac­tional Net Mar­gin Method.

“Tax­pay­ers are re­quired to pre­pare and pro­vide sup­port­ing doc­u­ments to choose one of th­ese meth­ods, while in the nec­es­sary cases, the tax author­ity has the right to in­tro­duce and re­quire tax­pay­ers to use any method that is suit­able for the real sit­u­a­tion of the tax­payer,” the de­cree added.

Clint O’Con­nell, head of tax prac­tice for DFDL Cam­bo­dia, ex­plained that th­ese rules are aimed to stop firms from ar­ti­fi­cially ma­nip­u­lat­ing prof­its by set­ting prices for the trans­fer of goods and ser­vices between re­lated par­ties.

“If th­ese trans­ac­tions are ma­nipu- lated prof­its they may be ar­ti­fi­cially shifted out of one ju­ris­dic­tion – typ­i­cally with a high cor­po­rate tax rate – to an­other ju­ris­dic­tion typ­i­cally with a low cor­po­rate tax rate,” he said in an email.

He added that th­ese rules are gen­er­ally ap­plied to cross-border trans­ac­tions.

Bren­dan Lalor, di­rec­tor of tax and ad­vi­sory ser­vices at Ernst & Young, who gave a pre­sen­ta­tion on trans­fer pric­ing leg­is­la­tion, said that OECD guide­lines were the most widely adopted and recog­nised prin­ci­ples.

“The im­por­tance of this leg­is­la­tion is to make sure that trans­fer pric­ing ad­just­ments can be used by the reg­u­la­tor author­ity to use the Arm’s Length Prin­ci­ple to do a risk anal­y­sis to see which tax­pay­ers it feels are not earn­ing the profit mar­gins they should be,” he ex­plained. “If they de­cide that a com­pany is not us­ing that prin­ci­ple they can use that ev­i­dence to ini­ti­ate au­dits.”

Lalor said the big­gest chal­lenges that com­pa­nies could face with trans­fer pric­ing reg­u­la­tions would be to bench­mark their op­er­a­tions against those in sim­i­lar in­dus­tries, some­thing he ad­mit­ted would be dif­fi­cult in the King­dom’s non-trans­par­ent mar­ket.

“The way to bench­mark is to find in­de­pen­dent com­pa­nies in Cam­bo­dia and get a hold of their fi­nan­cial state­ments to test the mar­gins they earn against your own,” he said. “If this is not pos­si­ble, look at other com­pa­nies in the re­gion, but do not com­pare to com­pa­nies op­er­at­ing in de­vel­oped mar­kets be­cause they would likely show a lower level of growth.”

He added that while the GDT was un­likely to en­force the reg­u­la­tions on in­di­vid­ual trans­ac­tions, it will make com­pa­nies file an an­nual trans­fer price dis­clo­sure form – an ad­mit­tedly te­dious and costly ac­count­ing prac­tice.

O’Con­nell said that de­spite the costly im­ple­men­ta­tion, the ob­jec­tive of the GDT was clear in pro­tect­ing its tax base with­out de­ter­ring for­eign in­vest­ment and cross-border trade. He added that many coun­tries in the re­gion had al­ready adopted vari­a­tions of th­ese rules.

“The jug­gling act is how Cam­bo­dia im­ple­ments the Arm’s Length Prin­ci­ple with­out sub­ject­ing tax­pay­ers to overly oner­ous com­pli­ance obli­ga­tions,” he said. “As they say, Rome wasn’t built in a day, and most coun­tries started mod­estly and built their trans­fer pric­ing leg­is­la­tion and prac­tices grad­u­ally over sev­eral years.”

Pri­vate sec­tor at­ten­dees at yes­ter­day’s con­fer­ence ap­peared vis­i­bly anx­ious for govern­ment clar­i­fi­ca­tion on the prakas, cit­ing con­cerns about whether the Tax Depart­ment would po­ten­tially au­dit just lo­cal op­er­a­tions or would try to ex­tend its scru­tiny to the par­ent com­pany. They also claimed that trans­fer pric­ing rules were be­ing adopted too soon for the Cam­bo­dian mar­ket, were glob­ally prob­lem­atic, and would dampen prof­its with their high com­pli­ance costs.

Puthipol sought to way­lay fears about a swift im­ple­men­ta­tion of the prakas, claim­ing that while on pa­per the de­cree threw the full weight of the Tax Depart­ment be­hind it, in prac­tice the govern­ment would take a step-bystep ap­proach to give com­pa­nies time to con­duct proper ac­count­ing.

“Even though the trans­fer pric­ing de­cree may not make cur­rent tax­pay­ers happy, it is a tool we need to ap­ply to tax­pay­ers to en­sure they are com­pli­ant,” he said. “We need to be able to bench­mark com­pa­nies, and while we do not re­quire com­pa­nies to sub­mit trans­fer pric­ing doc­u­ments im­me­di­ately, they need to be pre­pared and avail­able when we re­quest them.”

He added that the govern­ment would hold work­shops over the com­ing months to ed­u­cate stake­hold­ers about how the reg­u­la­tions are ap­plied to en­cour­age com­pli­ance.


Traf­fic passes the head­quar­ters of the Gen­eral Depart­ment of Tax­a­tion in Ph­nom Penh.

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