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Cambodia’s Draft Investment Law 2021 expert panel discussion outcome: AmCham

The Presentation on Cambodia’s Draft Investment Law by Dr Sok Siphana, Chairman of AVI and Founding Partner of SokSiphana&associates, at the American Chamber of Commerce in Cambodia (AmCham) on 12th August 2021.

Executive Summary:

  • To respond to the evolving investment climate in Cambodia, the Council of Ministers has approved the Draft Law on the Investment of the Kingdom of Cambodia (Draft Law) to replace the old Investment Law.
  • The Draft Law is expected to be debated at both the National Assembly and the Senate by the end of this year and promulgated soon after that.
  • Although the Draft Law is not yet in effect, this article aims to give readers a heads-up regarding the new incentives available to Qualified Investment Projects (QIPs). It illustrates the reasons, objectives and approaches of the Draft Law.

Watch the full expert panel discussion here:

Read the full outcome here:

Following a plenary session chaired by Prime Minister Hun Sen via a video conference, the Council of Ministers approved on 9th July 2021 the Draft Law on Investment of the Kingdom of Cambodia (Draft Law).

The Draft Law will abrogate the old Investment Law of 1994, as amended in 2003, to reflect the evolution of the investment climate in the country. It was initiated by the Council for Development of Cambodia (CDC) in early 2015 as part of the implementation of the Industrial Development Policy 2015–2025 (IDP), and the momentum was built up in the first semester of 2019 per the instruction and guidance of Samdech Techo Prime Minister at the 18th Government–Private Sector Forum on 29th March 2019.

The drafting process, led by H.E. Sok Chenda Sophea, Minister attached to the Prime Minister and CDC Secretary-General, was an extensive exercise, involving various consultative meetings with representatives from the private sector, in particular the Cambodia Chamber of Commerce, GMAC, EuroCham and other relevant stakeholders to acquire their substantive inputs.

The CDC has benefited from the contribution of the Ministry of Economy and Finance (MEF) concerning tax and customs incentives. The Draft Law was cleared by Group D of the Government–Private Sector Forum on 28th March 2020 under the chairmanship of Deputy Prime Minister and Minister of Economy and Finance, H.E. Dr Aun Porn Moniroth. The last two reviews by the Committee of Economy and Finance Policy on 8 and 17 June 2021 cleared the way for its submission to the plenary session of the Council of Ministers and its approval, under the chairmanship of Samdech Techo Prime Minister Hun Sen.

The Draft Law is expected to be debated at both the National Assembly and the Senate by the end of this year and promulgated soon thereafter. Subsequently, the Government is expected to develop additional regulations to support its implementation. Although the draft law is not yet in effect, this article aims to give readers a heads-up regarding the new incentives available to Qualified Investment Projects (QIPs).

Why does the Draft Investment Law Matter?

Cambodia’s first investment law dated back to 1993 and was revised in 2003. Much has happened since then: the tremendous growth generated from the accession to the WTO, the deepening of ASEAN integration and the rise of intra-trade, the steady ascent of the middle class with its substantive savings and purchasing power, and the advent of the 4th Industrial Revolution and its sectoral spin-offs like e-commerce and FinTech, to mention just the main ones. The Government hopes that the new law will act as a driving force in generating adequate growth to turn the country into an upper-middle-income economy by 2030 and a high-income status by 2050.

So far this year, the flow of FDI is steady, with the CDC approving 87 investment projects worth US$3 billion in the first six months of 2021, up 10 per cent from the first half of 2020. Export of bicycles, electronics, electrical parts, vehicle parts and accessories, and rice and other agricultural commodities remain strong. The timing of the new investment law will correspond to the current trend of investment relocation from China under the Belt and Road Initiative (BRI) and Japan’s Free and Open Indo-Pacific (FOIP) to the Mekong subregion, and more urgently, the diversion of investment from Myanmar.

From Prime Minister Hun Sen’s perspective, peace and political stability are key priorities for investors. Strong political, macro-economic and social stability has been a hallmark of ISSUE: 2021, No. 10 3 Cambodia in the last two decades. Predictability is also key to secure investor confidence. The new law aims at enhancing Cambodia’s potentials to attract more domestic and foreign investors. Dr Aun Porn Moniroth stated that the new draft law considers recent COVID-19 developments and the need to diversify the economy and promote the private sector, which has been identified as the main engine of growth. These high-level policy statements have ushered in a fresh wind of optimism for the Kingdom.

The Draft Investment Law: Objectives and Approaches

The Draft Law was prepared for establishing a legal framework that is open, transparent, predictable, and conducive to local and foreign investment to develop the country’s social and economic sectors. Based on the latest draft version, the Draft Law aims to achieve these objectives through four complementary approaches.

First, establishing an investment incentive regime that is transparent, predictable, non-discriminatory, competitive, and supportive of socio-economic policies. The CDC, under the leadership of H.E. Sok Chenda Sophea, has been working on this draft for several years by actively soliciting inputs from the private sector and international partners to develop a new regulatory framework that will make the country more attractive to local and international investors and to significantly improve the business environment. In addition, new fiscal and non-fiscal incentives have been developed based on long-term consultations with the private sector and internal discussions among key government stakeholders to find the right balance between the dualistic duties to increase revenue collection and the need to nurture long-term business and attract new investment.

In this regard, the Draft Law has established a clear and targeted grant of incentives to the priority sectors, for approximately nearly twenty sectors, especially in high-tech sectors employing a high level of technology, innovation, research and development, digital infrastructure, new manufacturing with added-value goods, logistic supply chains and industries serving the regional and global value chains, environmental management and energy efficiency, among several others.

The tax incentive scheme in the Draft Law is categorised into three types, namely (1) basic incentives; (2) additional incentives; and (3) special incentives.

For the basic incentive, this scheme is differentiated into two options, subject to investors’ selection, with the first option focusing on the exemption of income tax for a period from 3 to 9 years based on sectors and investment activities, and the period will trigger on the date from when the first profit is disclosed. This is in sharp contrast to the current law wherein such exemption is calculated based on the complicated Trigger Period, the three years following the Trigger Period, and the Priority Period.

Option 1: Tax exemption period

  • 3 to 9 years counted from when the first profit is generated.
  • Exemption from the monthly Prepayment of Tax on Income (PTOI) during the tax exemption period.
  • Exemption from the Minimum Tax when there is an independent audit report.

After the tax exemption period, the QIP is entitled to a gradual phase-in of the percentage of the TOI payable as follows:

  • 25% for the 1st and 2nd years
  • 50% for the 3rd and 4th years
  • 75% for the 5th and 6th years
  • 100% from the 7th year onward

Option 2: Special depreciation (if the QIP does not choose the tax exemption period)

The second option focuses on the right to offset capital expenditure through specialamortization with the offset of up to 200% on other major expenditures for up to 9 years alongwith other incentives.

  • Depreciation at 40% for the 1st year for tangible assets.
  • Exemption from the monthly PTOI for a certain period based on the industrial sector and investment.
  • Exemption from the Minimum Tax when there is an independent audit report.

Importation

For export-oriented QIPs that are part of a supporting industry for export-oriented, the QIPs can import construction materials, construction equipment, production equipment, and production inputs with customs duty, Specific Tax, and VAT state-charge on importation. For QIPs selling products locally, they can import construction materials, construction equipment, and production equipment with customs duty, Specific Tax, and VAT as state-charge. As for custom duties, Cambodia’s trade regime under ATIGA, ASEAN-China FTA, Cambodia-China FTA, Cambodia-ROK FTA and the RCEP, several goods and materials imported are already subject to a 0% tariff. Contrarily, the specific or excise tax on some goods could be quite high, and this exemption can be a real benefit to the QIPs.

Second, by modernising and increasing the productivity of local industries and strengthening the connectivity in the regional and global supply chains by promoting the growth of capital inflows and the transfer of technology, knowledge, and know-how. Here are some examples:

1). Supporting local industries and SMEs are fundamental to Cambodia’s society, with 99% of enterprises are SMEs. They can provide local content in terms of raw materials and parts supply. Currently, their inputs are relatively very low. According to the most recent survey conducted by Japan External Trade Organisation (JETRO), only 5.4 per cent of inputs used by surveyed Japanese firms are procured locally compared to at least 20 per cent for other countries in ASEAN. For that purpose, the Draft Law provides exemption on VAT for any purchase of inputs made locally, enhancing the use of local inputs for final production in regional and global supply chains. Considering the upcoming Rules of Origin under the RCEP, Cambodia could benefit from this mega FTA. Optimism is high that this Draft Law focuses on new and greater options to support more local investors. Back in the 1990s and the early 2000s, the Cambodian private sector was still nascent, and very few of them had the opportunities to secure benefits from the investment law.

2). Upskilling type of activities will also benefit the economy as a whole, and that is why skills training receives special attention, as many of the new industries included in the Draft Law rely on a highly trained workforce: an offset of expenditure of 150% on any expenditure related to research and development (R&D), innovation as well as human resource development through the provision of vocational training and skills for Cambodian workers.

3). Improving the well-being and living standards of our workers is one of the Government’s long-term goals. Therefore, the Draft Law gives a special tax deduction of 150% on expenditures on construction of dormitories, proper canteens, nurseries, and provision of comfortable and safe means of transportation. Thus, it gives more dignity to our female workers.

4). Agriculture is another key sector in the Draft Law that so many Cambodians depend on for their livelihoods. The government is keen to leverage these untapped potential resources in agriculture for local import substitution and export like mango, banana, longans, food processing and agro-processing, rubber, and cassava. In addition, the proposed incentives of up to 150% tax deduction for production machinery upgrades and tax exemptions on imports of these agri-industry systems could significantly increase the deployment of modern technology to further expand Cambodia’s agricultural sector.

5). Another key sector that stands to benefit is green and renewable energy. This is a particularly important policy element considering that several leading garment brands operating in Cambodia have cited the country’s increasing reliance on fossil fuels as a potential source of conflict with low-or-no-emission business strategies in their global supply chains. With the EU’s high standards requirement on the use of renewable energy, this policy shift will be a welcoming move for the garment and footwear industries.

6). There are other special incentives to specific sectors and activities that have high impacts on the nation’s development agenda. They will be determined in the annual Law on Financial Management to reflect the Government’s policies and realities of the moment, as in the case of the last two years, with various supporting measures arising from the unforeseen circumstances like the Covid-19 pandemic situation.

Third, by increasing Cambodia’s competitiveness, attractiveness, and diversification in the economic structure to ensure a solid post-COVID-19 pandemic economic recovery and fostering resilience against regional and global shocks.

In terms of diversification, the main purpose of the Draft Law is to respond to opportunities arising from the recent free-trade agreement (FTA) with China and the soon-to-be ratified FTA with South Korea. In addition, it coincides with the vast trade and investment prospects when the Regional Comprehensive Economic Partnership (RCEP) eventually enters into force next year. There are, of course, the extension of the GSP (Generalized System of Preferences) with the US and the UK and other business opportunities, potentially emerging from the ongoing FTAs negotiations with India and the Eurasian Economic Union.

In terms of increasing competitiveness and attractiveness, the Draft Law has amended and streamlined the administrative and institutional mechanisms to register the QIPs. CDC remains the Royal Government’s Etat-Major with its one-stop service organisation responsible for managing the investment. However, it has strengthened the one-stop service mechanism to shorten the duration of issuing the “Certificate of Registration” from 31 to 20 working days by eliminating the two-step “Conditional Registration Certificate” and the “Final Registration Certificate”. Moreover, investment applications can be submitted via an online single portal platform. The mechanism for approving the master list of investment projects was also streamlined.

Furthermore, the Draft Law will strengthen the monitoring and inspection compliance mechanism by the relevant authorities to take place at the same time when dispute settlement related to investments occurs. A delegation of authority is made in favour of municipal/provincial administrations investment sub-committee.

Fourth, by protecting the rights and legitimate interests of investors in the Kingdom by establishing a comprehensive legal framework well balanced with national interests. The Draft Law incorporates some of Cambodia’s international obligations to demonstrate to investors the Government’s commitments to protecting their investments, providing guarantees against nationalisation and arbitrary expropriation, protecting against pricing intervention, and protecting of intellectual property.

In sum, Cambodia’s proposed new investment law will attract more diversified foreign investments, stimulate economic growth, and allow the country to rise to its full potential.

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