Cambodia Investment Review

Flow meters remain a problem for small beverage producers in Cambodia

Flow meters remain a problem for small beverage producers in Cambodia

Brian Badzmierowski

When General Department of Taxation (GDT) director-general Kong Vibol visited the Heineken Cambodia Brewery in Phnom Penh last November, he commended the beer company for being one of the largest taxpayers in the Kingdom and installing flowmeters that help GDT officials corroborate tax payments with the amount of product being created.

The visit came after the Ministry of Economy and Finance issued Prakas No. 010 last January, stipulated that local manufacturers of beer and non-alcoholic beverages install devices that measure the volume of beverages being locally produced.

A flow meters (or flow sensors) are a device that measures the volumetric or mass flow rate of a liquid and applies to enterprises that produce beer and non-alcoholic beverages in Cambodia that fall under the jurisdiction of the Large Taxpayer Department (LTD), which would typically only include those generating more than $250,000 per year in revenue.

beverage producers in Cambodia
General Department of Taxation director-general Kong Vibol (L) with HEINEKEN Cambodia managing director Samson Wong Chung Wah at the flow meter inauguration.

However, some microbreweries and small beverage producers are unsure if they are also required to install these flowmeters. 

Usually, only larger companies fall under the LTD, but there could be cases where smaller companies fall under the LTD and there appears to be some grey area concerning the size of the breweries required to adhere to this requirement.

According to Clint O’Connell, a partner at DFDL Cambodia, the notice appears to be aimed at larger breweries to level the competitive playing field.

O’Connell said foreign subsidiaries and branches of multinational companies typically have to file under the LTD, but for locally-owned microbreweries, it appears they could be exempt from this rule.

Chair of the American Chamber of Commerce’s Beers, Wines, and Spirits Producers and Distributors Advocacy Committee Michael Berg said many smaller breweries and beverage producers may not be able to afford these flowmeters.

“What I am hearing is that this is unaffordable for small breweries and craft brewers, given the cost of the equipment and installation,” Berg said. 

“There has been positive dialogue between the private sector and the government on this, and we are optimistic that an exemption will be put in place, or non-applicability provision, for small brewers and manufacturers of non-alcoholic beverages based on revenues/volume. For some, the cost of the flowmeters alone could be greater than their annual revenue, and would therefore lead them to shut down, an outcome that I think everyone wants to avoid.”

Montelektro: The sole supplier

Currently, the only approved supplier of the flowmeters by the GDT is Montelektro, an electrical engineering company headquartered in Croatia.

 Prakas No. 010 mentions that the GDT would provide an updated list of suppliers, but this list does not appear to have been supplied yet.

It’s unclear how Montelektro became the front-runners and currently only approved option to purchase these flowmeters.

The flowmeters were supposed to have been installed by December last year according to a special announcement released on September 8 last year by the GDT.

However, during a roundtable discussion hosted by the European Chamber of Commerce last week on tax obligations, Director of the Large Taxpayer Department Eng Ratana said logistics issues partly caused by the pandemic had caused delays in the ordering of flowmeters. 

For now, he said it was good enough for breweries to show that they had placed an order with the company.

He said this month or next month, companies may be liable for penalties if they do not place an order with Montelektro.

The GDT did not respond to questions for this article.

On its website, Montelektro lists Cambodia Brewery Limited (Heineken), Khmer Beverages, Cambrew Brewery, Ganzberg Brewery, Hanuman Brewery, and YHS Food And Beverage Pte as clients in Cambodia.

Montelektro did not respond to questions about the cost of the flowmeters, but unverified reports point to a minimum of $80,000 for flowmeters to be installed at a plant producing 50,000 liters per month.

Clint O’Connell Participates at Tax Forum. DFDL

While some small breweries are left in limbo wondering if they have to install these flowmeters, it appears the main goal is to ensure fair tax compliance.

Some industry insiders believe flowmeters may have been introduced to ensure large breweries remain tax compliant, as some of them may have been under-reporting the amount of product created, something the flowmeters would catch.

Interestingly, Thailand introduced flowmeters as a means of tax governance recently, but moved away from the system, partly due to inconsistencies in their functioning and maintenance issues.

DFDL said in a report: “It is interesting to note that the Thai authorities replaced flow meters as they were seen to have a limited lifetime, high maintenance costs and were not capable of measuring the amount of beer produced daily or the median losses for accurate tax calculation.”

Non-alcoholic beverage producers are required to install the flowmeters as well.

The GDT’s instructions defined non-alcoholic beverages as liquids that are carbonated or have added sugar, sweeteners, or flavors. Water, mineral water, milk, fruit juice, and vegetable juices are excluded.

Leveling the playing field

While harsh crackdowns have not yet occurred, Vibol’s visit to Heineken and Ratana’s recommendation to place orders for flowmeters suggests breweries should keep strict records of their sales and production, regardless if they have ordered a flowmeter yet or not.

In January 2020, the GDT changed the tax rates for alcoholic and non-alcoholic beverages. It implemented the “Specific Tax” which is applied at a rate of 30 percent of the “ex-factory selling price”. 

The ex-factory selling price amounts to 90 percent of the selling price excluding value-added tax, specific tax, and public lighting tax. For non-alcoholic beverages, the specific tax rate is 10 percent of the ex-factory selling price.

In January 2020, The GDT changed the tax rates for alcoholic and non-alcoholic beverages. In Cambodia, locally produced alcoholic beverages are subjected to 10 percent value-added tax, as well as Public Lighting Tax (an indirect tax on alcohol and cigarettes), and Specific Tax.

Craft beers from Two Birds Craft Beer.

According to O’Connell: “The tax base for the calculation of Specific Tax has increased significantly over time from 65 percent of the ex-factory sales price, pre-tax, to now being applied to 90 percent of the ex-factory sales price, pre-tax. The current rate of specific tax for alcoholic beverages is 30 percent whereas for non-alcoholic beverages the rate is 10 percent.”

Given the high rates, DFDL noted it was critical to ensure a level playing field for companies in their analysis of the flowmeter requirement.

O’Connell said he understood the flowmeter requirement put in place, as it can help ensure fairness in the increasingly competitive industry.

“This would actually bring some much-needed consistency to the market because you always want to make sure you pay the same taxes as competitors. What the flowmeter is supposed to do, if it works correctly, is provide assurance to the market that everyone is paying their fair share based on the number of units being produced,” he said.

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