Double Taxation Agreements for Cambodia: Who Will Benefit?

Almost any type of business transaction which involves more than one country will attract tax, and probably tax in all the countries involved. Supplying technical services to a customer in Cambodia, for example, will be subject to a 14% withholding tax in Cambodia on the fee paid, while the service supplier will also be taxed on that same income in his home country. Expatriate employees sent to Cambodia on assignments will pay salary tax (top rate 20%) on their remuneration, but often their home country will include the same “Cambodian” salary to calculate the total taxable income as well. Double taxation agreements are heralded as the appropriate instrument to reduce this kind of double taxation and they are very widespread indeed. Most developed countries have more than a hundred double tax treaties, while developing countries as Thailand and Indonesia have over 50 treaties in force.

Unavoidable but When?

Until now, Cambodia did not conclude any tax treaties. That is not surprising, since income taxation itself is relatively new and the current “Law on Taxation” is only in force for less than a decade. It’s no use thinking about ways to avoid double taxation if the rules of the internal tax system itself are not yet clearly established, so to say. But there is definitely an interest, especially from Cambodia’s major trade partners. Also within ASEAN a recommendation was adopted for all members to pursue tax treaties with each other. Justified or not, double taxation agreements are seen as an essential part of the “package of international legal standards” aimed at economic development just like WTO agreements, protection of investments, recognition and enforcement of international arbitration awards, protection of intellectual property rights, and the like.    

With Which Countries?

Tax treaties for Cambodia are thus just a matter of time. But it may be expected that Cambodia will commence negotiations with a strict agenda. In all tax treaties, both states give up tax revenue in the hope that the increase in trade and investment will make up for the loss. But this balance is distorted in the case of Cambodia, which is a capital importer and which may lose more than the other state if that is a capital exporter. This can be to a large extent prevented by insisting on specially drafted rules in the treaty and by not reducing withholding taxes. At the negotiating table Cambodia will thus have to stick to its agenda in that regard in order not to lose tax revenue which it cannot afford.

Keeping that in mind, which countries will Cambodia conclude tax treaties with first? First of all, negotiating and concluding an actual tax treaty will easily take between one and three year before entry into force. It does not matter if Cambodia starts with a large country or a little one, as long as the outcome achieves the objectives of Cambodia in terms of not giving up too much and not creating loopholes for tax avoidance and evasion.

Sectors Likely to Benefit

Supposing those treaties are in force, which companies or sectors are likely to benefit? Probably, it will be easier for foreign companies that sell goods or services through connections or staff present in Cambodia to stay out of the scope of Cambodian taxation. Foreign construction companies on projects in Cambodia, for example, will only be taxable in Cambodia under treaty rules if the project passes a certain time period. Certain types of branches will be exempt from tax all together (even minimum tax), such as branches that only purchase raw materials or collect information for their foreign head office.

Foreign Employees

Also, expatriate employees on short term assignments will in most cases benefit from tax exemption in Cambodia under treaty rules. Typically, when an expat is sent to Cambodia for a period less than 6 months, his salary will remain untaxed in Cambodia if some other conditions are also respected. Interestingly, this tax exemption will even apply if that salary is also exempt from tax in his home country, which may often happen when he is paid by an entity in a third country.     

Transfer Pricing

Another important benefit for the business community is protection on transfer pricing adjustments. Both tax authorities are under a tax treaty bound to apply the same international rules and practices on re-assessing prices on transactions between group companies. It may be confusing and complicated for companies to go through tax audits in various countries when tax authorities apply different or less than transparent rules on re-adjusting the taxable profit of the company. There is even a procedure under the treaty, a remedy open to taxpayers when a tax authority fails to apply those international rules.  

Benefits for Tax Department

But the real winner, in my view, would be the Cambodian tax authorities themselves. Provided the treaties are carefully negotiated, and if necessary treaties with too demanding countries are simply not concluded, actual loss of revenue will be minimal. But the Tax Department stands to gain a wealth of new information. Under tax treaties, both tax authorities exchange information on individual taxpayers such as income, sales prices, profit margins, shareholders, costs and expenses, etc. For Cambodia’s tax officials, who have little resources at their disposal, getting this information on companies that do business in or with Cambodia will certainly help curbing international tax evasion. Information from abroad may help determining, for example, the real profitability of manufacturing companies that sell their finished products first to related companies before they are resold to actual customers.

In any event, double taxation agreements will connect Cambodia’s tax system with that of the world, for better or for worse. Both the taxpayer and the tax administration will both have to adapt to that fundamentally new situation.