Turning up the heat in a cooling economy
Taxpayers feel the noose tightening as government auditors up the ante to meet national targets. However, audits motivated by incentives have spurred overzealousness for one party and agony for the other
BY THE third quarter of 2020, nearly 78 per cent of the $2.9 billion tax revenue target had filled the government coffers.
Ministry of Economy and Finance (MEF) spokesman Meas Soksensan said the General Department of Taxation (GDT) contributed the most, with a high chance of hitting 85 per cent of the target by the final quarter of this year.
“We are waiting [for] the figure from the Customs [General Department of Customs and Excise] to fill our projection,” he said.
The jubilation in keeping to the target during austere times is compelling. Although, it is should be mentioned that the collection is reflective of buoyant earnings in 2019.
“… companies will pay more taxes in 2020,” Soksensan told The Post.
But it comes at a price – one that is being paid by scores of companies comprising medium to large firms, which are allegedly subject to rigorous audits by government auditors.
A lot of t his stems from t he 10 per cent incentive auditors make from penalties ranging from 10 to 40 per cent and 1.5 per cent monthly interest rate on any reassessed additiona l ta x due.
What this essentially means is that auditors work harder to secure a higher income, independent of their salaries. Often enough, government wages are comparatively low, so the incentives help to augment their takings
To be sure, the Law on Taxation allows three types of audits – desk, limited and comprehensive – but the frequency and robustness of these audits are “killing companies”, complained a director of a foreign-owned firm in Phnom Penh.
In March last year, t he audit timeline turned stricter wit h t he entr y of Pra kas 270, which drew up the penalties on administrative faults, such as t he fa ilure to keep accounting records for up to 10 y e a r s , sett lement dif ferences in monthly and annual ta xes, and documents for transfer pricing.
According to law and tax advisory firm VDB Loi Ltd, in a note on its webpage to clients last year, taxpayers are, in principle, subject to one type of audit for any tax year.
But if the findings from the desk and limited audits suggest errors or issues beyond their scope, the GDT may expand the audit scope to be that of a comprehensive audit.
“If during any tax audit, the audit team finds e v i d e n c e of tax eva
s i o n , the GDT may assign a special team to investigate the issues,” wrote VDB Loi manager Tepwinuth Chhim.
Pocketing the incentives
In Cambodia, the process begins with a desk audit which is conducted within 12 months after the submission of the tax returns. But if there are complex or high-risk irregularities, it will be replaced by a limited audit.
The limited audit looks at the taxpayers’ compliance with monthly tax obligations and can be conducted for the current tax year and immediately preceding tax year.
As for the comprehensive audit, it re-examines the compliance, including the annual tax on income for the current tax year and the previous three tax years.
This audit can be extended to include the previous five tax years, right up to 10 years if there is actual evidence of tax evasion, or losses or tax credits from previous years that require auditors’ verification.
For the maximum 10 years tax coverage, approval would have to be given by the MEF.
On the ground, it is not quite the case due to the alleged competition among the tiered auditing departments to pocket the incentive, observed an auditor attached to an international firm in Phnom Penh.
“Of course, they don’t want to share [the incentive] with other departments. [What happens is] when audits start, letters are sent out … it is [as if auditors] mark their territory.
“They might not finish the audit until months later, but at [the very] least they have earmarked the taxpayer, which means they [will likely] get 10 per cent out of any interest collected,” the auditor said.
“Frivolous and unrealistic”
Yet, the problem surrounding the audits is not just tax alone as the interests and penalties can go all the way back to 10 years.
“These days, it is three or five years but the interests on accumulated underpaid tax can be at times higher than the tax itself,” the auditor said.
The issue of incentives being ethical or not is moot but GDT director-general Kong Vibol (pictured) has reportedly endorsed the fee in 2014.
“I think the idea is to encourage [GDT] auditors to complete their tax audits … but is this the right kind of motivation?” the auditor asked.
While the “agony” is cognisant throughout the business community, company directors and auditors who were interviewed declined to speak on record, fearing repercussions.
Tax revenue is a primary