Non-resident e-commerce companies now have until the end of March 31, 2022, to register with the General Department of Taxation (GDT) to ensure a 10 percent value-added tax (VAT) can be collected on digital goods and services bound for the Kingdom.
The GDT released Notification No. 776 GDT on January 17 extending the deadline for companies to register.
International trade advisor Sven Callebaut said the extension is a “welcome respite” for non-resident e-commerce providers because it allows more time to review the new guidelines and explore the online registration service.
However, he said, it will be an uphill battle to introduce this tax and pointed to the struggles faced by EU and OECD-member nations to impose similar taxes, as well as the recent cases of France and Canada attempting to tax large digital companies.
Callebaut told Cambodia Investment Review, “Their experience shows as well that while it is laudable to try to collect new tax revenue from tech giants, the enforcement process might be too onerous for the revenue to be meaningful.
A balance needs to be struck between fair taxation and much-needed foreign direct investment in the tech sector, following the introduction of the new Law on Investment.”
According to Prakas 542 on the Rules and Procedure for the Implementation of VAT on E-Commerce issued on September 8, 2021, the VAT regulations were set to be implemented from January 1, 2022.
Legal service firm DFDL hosted a discussion with Eng Ratana, the Director of the Large Taxpayers at the GDT to introduce the simplified VAT registration process and encourage businesses to register prior to April 1.
Non-resident taxpayers can register online through the GDT’s Simplified VAT Registration website.
These taxpayers will be required to complete the digital application for Simplified VAT Registration, provide a certificate of business registration, an ID or Passport of the company owner or a representative, two current photos of this person, and the non-resident taxpayer’s bank account information.
The process costs $100, with a $50 fee to make any changes after registration is complete.
Registered companies will receive a certificate of their registration, an identity card for tax registration, and a notification letter on tax obligations. These will be provided physically for companies that register in-person at the GDT and via an electronic document for companies that register online.
Cambodia Investment Review has previously reported that as Cambodia’s e-commerce sector continues to rise government officials are playing catch-up to regulate the sector and ensure it forges a sustainable path to success that benefits the government, the private sector, and consumers alike.
Questions remain for e-commerce definitions
Grey areas remain, as the definition of goods listed under the new ordinance is very broad, but Ratana said anything sold under the umbrella of e-commerce was fair game to be taxed.
It also remains to be seen how the GDT will enforce these new guidelines if large companies like Google, Facebook, Microsoft, Amazon, and YouTube fail to register before the deadline.
Anthony Galliano, CEO of financial services firm Cambodian Investment Management Co Ltd, said the extension was much-needed and didn’t expect that many companies registered with GDT during the previous timeframe.
“I would expect there wasn’t a mass drive of non-resident e-suppliers to register, whether due to unawareness of tax laws of Cambodia, digesting the process to register, its costs and mechanisms, and frankly local market comprehension in the Kingdom, both with taxpayers and tax agents,” he said.
He added that the extension would allow more time for stakeholders to adapt, but expects many non-resident taxpayers to stay unregistered. This would require the GDT to enforce these new laws to ensure the burden didn’t rely entirely on local taxpayers.
“The best deterrent is the threat of enforcement, with a substantial cost for non-compliance,” he said.
Exemptions under Cambodia’s VAT law
Tax exemptions for non-resident taxpayers include business-to-business (B2B) transactions that aren’t related to e-commerce, such as parent companies making transactions with subsidiaries in Cambodia, and non-resident taxpayers that do not meet the minimum threshold of revenue.
“If the royalty or the charge is related to e-commerce activity, they [resident taxpayers] have to apply the reverse charge and withholding tax. If it’s not related to e-commerce, there is no need to apply the reverse charge,” Ratana said.
Small taxpayers — those generating less than $62,500 of revenue per year, or less than $15,000 per month for three consecutive months — are exempt from paying VAT on digital goods and services.
According to Clint O’Connell, Partner and Head of Tax and Customs at DFDL, it is not yet clear if non-resident taxpayers aiming to stay within the law need to register with the GDT if they accrued $62,500 in revenue in 2021 or if they can use the criteria of accruing $15,000 in sales for the first three months of 2022.
Instruction 20552 issued by the GDT last December reported that companies that earned above the threshold in 2021 were required to complete the Simplified VAT Registration with the GDT by December 31, 2021. However, with the extended deadline, it’s not clear if this still applies.
For B2B transactions that fall under the definition of e-commerce activity, the purchaser is required to pay a 10 percent VAT on goods through a reverse charge regardless of whether the supplier has registered with the GDT or not. These payments are to be made monthly with supporting documents from the supplier.
Ratana said taxes charged with the reverse charge mechanism are considered input VAT credits and can be deducted when filing VAT returns.
Making payments through e-commerce platforms
Manual VAT payments, or payments made physically at the GDT, must be made by the 20th of the following month after a transaction is completed. Electronic payments will enable taxpayers to pay using a credit or debit card, or a foreign bank transfer. The deadline for the e-payments is the 25th of the following month after a transaction is completed.
A three-day grace period will be provided to allow payments to clear for each of these methods of payments, extending the actual deadlines to the 23rd and 28th, respectively. All payments must be made in Khmer riel, using the exchange rate published by the National Bank of Cambodia on the last working day of the month.
The electronic payment system is still under development, per the GDT.
According to the GDT, VAT payments are triggered “at the time of supplies”. For non-resident taxpayers, this is the earliest instance of an invoice issued, a digital good delivered, a digital service rendered, or payment received.
For resident taxpayers, this is the earliest date a digital good is received, a digital service is rendered, or a payment is due or paid.
Companies without a physical presence in Cambodia that wish to pay manually can hire a tax service agent in the Kingdom to visit the GDT and make VAT payments on their behalf.
When a digital good or service is provided through a platform operator operating on behalf of a supplier, Ratana said the platform operator is responsible for paying the VAT on goods delivered.
“The platform operator is responsible for charging VAT, not the supplier. The service providers provide services to customers through the platform provider, so the platform operator has to charge the VAT and pay to the GDT,” he said.
VAT registration does not create a permanent establishment
O’Connell said there were concerns from large e-commerce multi-national enterprises that registering with the GDT for VAT would then constitute the creation of a permanent establishment (PE) in the Kingdom, thus requiring non-resident taxpayers to obey local income tax laws.
During the webinar, Ratana said registering for VAT would not constitute the creation of a PE but did caution that this could change in the future, and pointed to changing standards in the international community regarding PEs as possible guidelines to follow.
O’Connell said it was a win for large e-commerce companies now, but it might not last long.
“I suspect a short-term one [win] as the GDT will not give up the opportunity for further taxation opportunities for long,” he said.
While the deadline looms, it will bear watching to see how many of the largest players in Cambodian e-commerce register before April 1.
The punishment for not registering, per Sub-Decree 65, is a fine between $1,250 and $2,500 and/or imprisonment from one month to one year.
While cumbersome to implement, Galliano said he supports the measure and applauds the government for its efforts.
“The expansion of the tax base and targeting additional avenues of tax collection is a progressive universal policy, rather than reliance on a limited tax base in the Kingdom where enacting additional taxes or increasing audits would only be more burdensome in difficult economic times,” he said.