Gov’t re­duces tax load on MFIs re­ceiv­ing money from abroad

Firm gets OK for $2M gar­ment fac­tory

The Phnom Penh Post - - BUSINESS - Hor Kim­say Hor Kim­say

THE Min­istry of Econ­omy and Fi­nance (MEF) re­cently de­cided to shrink the tax bur­den for lo­cal mi­cro­fi­nance in­sti­tu­tions (MFIs) by low­er­ing with­hold­ing tax on in­ter­est from loans ac­quired from abroad from 14 to 10 per­cent, a move that the gov­ern­ment claims will keep the mas­sive sec­tor sus­tain­able.

This is the first in­duce­ment the gov­ern­ment has of­fered the sec­tor since the sud­den im­po­si­tion of an 18 per­cent cap on an­nual in­ter­est rates ef­fec­tive as of April 1, a dras­tic cut from the pre­vail­ing 20 to 30 per­cent rates of­fered pri­mar­ily on small loans. The in­ter­est rate cap was widely seen as a pop­ulist mea­sure taken by the Na­tional Bank of Cam­bo­dia (NBC) ahead of the commune elec­tions ear­lier this year, and one that had an­a­lysts fear­ful that it could cause a string of bank­rupt­cies or see small lend­ing dry up.

Ac­cord­ing to the MEF’s new prakas, signed by Fi­nance Min­is­ter Aun Porn Moniroth on Oc­to­ber 27 and ob­tained by The Post yes­ter­day, the 14 per­cent with­hold­ing tax that MFIs pay on loans from abroad will be re­duced to 10 per­cent while the re­main­ing 4 per­cent will be considered as the gov­ern­ment’s re­spon­si­bil­ity to han­dle. The re­duc­tion was im­ple­mented from the sign­ing date and will last un­til the end of 2018.

“This prakas is pur­posed to re­duce the bur­den on ex­pen­di­ture on in­ter­est rates that mi­cro­fi­nance in­sti­tu­tions take on loans from abroad to en­sure the sus­tain­abil­ity of mi­cro­fi­nance sec­tor,” the MEF de­cree said. “This con­ces­sion is ac­ti­vated on pay­ment on in­ter­est rate within 2017 and 2018, but it is not sub­ject to ap­ply on any in­ter­est rate be­fore this prakas come into ef­fect.”

Ac­cord­ing to the MEF de­cree, in order to re­ceive the tax re­duc­tion MFIs need to have supporting doc­u­ments, such as loan agree­ments prop­erly legally ver­i­fied by both par­ties, doc­u­ments on the ac­tual trans­fer of cap­i­tal and proper ac­count­ing records show­ing that the loan has been re­ceived.

MFIs have tra­di­tion­ally tapped into for­eign loans from de­vel­op­ment agen­cies and in­ter­na­tional fi­nance or­gan­i­sa­tions to shore up cap­i­tal, ex­pand ser­vices and in­crease the abil­ity to lend.

Yun So­vanna, gen­eral sec­re­tary of Cam­bo­dia Mi­cro­fi­nance As­so­ci­a­tion (CMA), said the gov­ern­ment in­ter­ven­tion will help MFIs to lower ex­penses by re­duc­ing the costs as­so­ci­ated with ob­tain­ing funds, a main fac­tor that has forced op­er­a­tors to is­sue high in­ter­est rates.

“This prakas is clearly in­tended to pro­vide ben­e­fits to the peo­ple by re­duc­ing the cost of mi­cro­fi­nance loans,” he said. “MFIs will have to en­sure that these sav­ings will be passed on to the client.”

He said the CMA was still seek­ing clar­ity from the MEF on how to im­ple­ment the prakas, es­pe­cially in re­gards to the spe­cific terms and con­di­tions of legally ver­i­fy­ing over­seas loans.

To­tal debt among the top seven MFIs amounts to $1.33 bil­lion as of last year, ac­cord­ing to So­vanna. Of this fig­ure, $1.09 bil­lion of this debt is owed to over­seas lenders, equal to about 80 per­cent of to­tal out­stand­ing debt or 40 per­cent of gross loan port­fo­lio.

Based on the fig­ure of $1.09 bil­lion of over­seas debt, in­dus­try in­sid­ers pre­dicted yes­ter­day that MFIs could save about $4 mil­lion due to the gov­ern­ment’s de­ci­sion to lower the with­hold­ing tax on in­ter­est rates.

Sok Voeun, chief ex­ec­u­tive of LOLC (Cam­bo­dia), said that by de­creas­ing the tax obli­ga­tions on loans taken from abroad, cash flow will be freed up to meet the strin­gent 18 per­cent in­ter­est rate cap.

“We are happy with this de­ci­sion be­cause it re­duces our bur­den on spend­ing on the source of funds, which will also help us to ac­ti­vate the 18 per­cent in­ter­est rate cap,” he said.

How­ever, he added that with 2017 al­most over, the re­al­ity is that the re­duc­tion is tech­ni­cally only in ef­fect for one year and should be ex­tended.

Sean Thorn­nin, an eco­nom­ics lec­turer at Univer­sity of Cam­bo­dia in Ph­nom Penh, said that the gov­ern­ment’s in­ter­ven­tion ap­peared rea­son­able and showed the MEF was tak­ing into con­sid­er­a­tion the dif­fi­cul­ties that MFIs face in meet­ing the in­ter­est rate cap with­out slow­ing lend­ing ac­tiv­i­ties.

“This re­flects that the gov­ern­ment un­der­stands the bur­den MFI op­er­a­tors face,” he said. “And the time­line of end­ing the re­duc­tion at the end of 2018 gives the MEF enough room to amend fis­cal pol­icy, es­pe­cially if a new gov­ern­ment is formed af­ter next year’s elec­tion.” THE Coun­cil for the De­vel­op­ment of Cam­bo­dia (CDC) has ap­proved a $2.45 mil­lion in­vest­ment project al­low­ing gar­ment man­u­fac­turer Fushun Cambo Fash­ion Co Ltd to set up shop in Cam­bo­dia, ac­cord­ing to an an­nounce­ment re­leased yes­ter­day.

Ac c o rd i ng t o the CDC an­nounce­ment on its Face­book page, the com­pany will set up its new fac­tory in the south­west­ern Bati district of Takeo prov­ince. Once es­tab­lished, the fac­tory will pro­vide 1,069 jobs.

The CDC, a gov­ern­men­tal body in charge of ap­prov­ing large-scale in­vest­ment projects, started of­fi­cially an­nounc­ing its de­ci­sions on Face­book last month, a move that gov­ern­ment of­fi­cials say will pro­vide more trans­parency for both in­vestors and the pub­lic to track eco­nomic de­vel­op­ment in the Kingdom.

In Oc­to­ber alone, the CDC a p p r ov e d f o u r s e p a r a t e projects – all re­lated to the gar­ment and footwear sec­tors – with a com­bined t ot al in­vest­ment cap­i­tal val­ued at nearly $10 mil­lion.

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SUPPLIED

Tell­ers con­duct busi­ness at a mi­cro­fi­nance in­sti­tu­tion in Ph­nom Penh.

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