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Challenges for tax compliance

6 August 2013

Agenda

• • • • • Current tax law and regulations Common tax compliance issues Tax audit and resolution process Enforcement of tax regulations Questions?

Challenges to comply with tax regulations PwC 6 August 2013 Slide 2

Current tax laws and regulations

• • • • • • •

Tax laws

The comprehensive tax law was first introduced in 1997 Major amendment to the tax law in 2003 Cambodia has adopted a self-assessment tax system Tax regulations provide general guidelines - lack of specific rules, very subjective to interpretation Lack of supporting regulations and slow response to requests for clarifications from taxpayers Burden of proof is with taxpayers Time bar for tax audit is up to 10 years Challenges to comply with tax regulations PwC 6 August 2013 Slide 3

Current tax laws and regulations

Business environment

• Nature of business transactions are getting more complicated • Tax regulations have not developed as fast as the nature of business e.g. more electronic documents vs original signed and stamped documents etc.

• Certain industries require specific tax regulations e.g. airlines, freight forwarding, construction and real restate, mining, financial products etc.

Challenges to comply with tax regulations PwC 6 August 2013 Slide 4

Common tax compliance issues

Related party transaction

Article 18 of the tax law states that in the case of two or more

enterprises, whether incorporated or organised in or outside Cambodia, which are under common ownership, reflect the income of such enterprises or their owners.

the tax administration may, as necessary, distribute gross income, deductions, or other benefits among such enterprises and their owners in order to prevent the avoidance or evasion of taxes or to clearly

Key challenges: • Too broad to be able to comply and lack of guidelines • Uncertainty regarding what pricing is acceptable to the tax authorities? Transfer pricing study is acceptable? Independent evaluation is acceptable?

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Common tax compliance issues

Definition of tax terms: • “Technical or Management Services” for Withholding Tax – All services by non-resident?

• “Turnover” for Minimum Tax/Prepayment of Tax on Profit– Gross or net? payment on behalf? exchange gain?

• “Fringe benefits” for Tax on Fringe Benefit – Broad and subjective to interpretation Challenges to comply with tax regulations PwC 6 August 2013 Slide 6

Tax audit and resolution process

Tax audit process

• Time limit • Definition of “obstruction of the implementation of tax provisions” • Burden of proof • Interpretation of tax regulations: Inconsistent from one to another • Dispute resolution process Challenges to comply with tax regulations PwC 6 August 2013 Slide 7

Tax audit and resolution process

Time limit

Time limit for tax audit is: • Within 3 years after tax return is submitted, or • Within 10 years after the date the tax return is required to be submitted if there is evidence of obstruction of the implementation

of tax provision.

Challenges to comply with tax regulations PwC 6 August 2013 Slide 8

Tax audit and resolution process

Obstruction of implementation of tax provisions

Broadly defined to include: •

Failure to maintain proper records of accounts and other

documentation or failure to issue invoices for transactions; •

Failure to allow the tax administration access to records of accounts and other documents;

• • • Failure to register with the tax administration; Failure to notify the tax administration of any change in the registration as stated in this law; Making or furnishing fraudulent records, documents, reports, or other information; Challenges to comply with tax regulations PwC 6 August 2013 Slide 9

Tax audit and resolution process

Obstruction of implementation of tax provisions

• • • Concealing or deliberately destroying accounting papers, records, documents, reports or other information; Attempting to obstruct assessment or collection of taxes; Failure to submit a nil tax declaration within 30 days of the date required by law; • Wilfully supporting any of the above acts.

Challenges to comply with tax regulations PwC 6 August 2013 Slide 10

Tax audit and resolution process

Burden of proof Article 119: the burden of proof that the tax reassessed by the tax authorities is incorrect is on the taxpayer.

• • Issues with application of the provision: Many taxpayers don’t have proper documentation or could not provide valid documents – could be because of change in staff etc.

In reality, it could be difficult to produce supporting documents to prove a fact (e.g. besides audited accounts, what other documents can prove all revenue has been reported in financial statements, or price of goods should be higher etc.) Challenges to comply with tax regulations PwC 6 August 2013 Slide 11

Tax audit and resolution process

Interpretation of tax regulations

• • Could be very inconsistent from one member of the tax audit team to another Too good to be true – a very highly compliant taxpayer still has trouble in a tax audit as the tax auditors commonly do not believe that they are indeed compliant. There are still areas that tax auditors could re-interpret and impose taxes.

Challenges to comply with tax regulations PwC 6 August 2013 Slide 12

Tax audit and resolution process

Dispute resolution process

• • • It is easy for the tax auditors to issue a Notice of Tax Reassessment But, it is difficult to resolve Taxpayer’s appealing tax cases are not independently reviewed and resolved.

• No Committee for Tax Arbitration (CTA) or tax court:

Article 122 and 123 of the LoT states that in case a taxpayer does not accept a new decision from the tax administration, he can file a protest letter to the CTA and the organisation and functioning of the CTA shall be determined by a sub-decree upon a proposition from the MoEF.

Challenges to comply with tax regulations PwC 6 August 2013 Slide 13

Enforcement of tax regulations

Enforcement measures

Tax law gives power to the tax authorities to collect tax liabilities.

• Reminder of tax collections • Confiscation of property • Freezing bank accounts • Nullifying licenses • Stopping import/export operations etc.

Challenges to comply with tax regulations PwC 6 August 2013 Slide 14

Enforcement of tax regulations

Current practice

• The tax authorities are generally willing to discuss issues with taxpayers to resolve the objection to the Notice of Tax Reassessment including those that are long outstanding • Due to the lack of an independent review process, the resolution of the case could take years • The tax authorities usually send a gentle reminder to taxpayers to pay the reassessed tax liabilities • The tax authorities are flexible in enforcing the tax collection measures.

Challenges to comply with tax regulations PwC 6 August 2013 Slide 15

Questions?

Challenges to comply with tax regulations PwC

Q&A?

6 August 2013 Slide 16

Thanks!

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