Diploma in Cambodia Tax

Pilot Exam Answers

Question 1

i) In Cambodia, there is no general personal income tax law, but rather a specific “tax on
salary” (“TOS”). The rate at which TOS is applied depends on whether they are classed as
Resident or non-Resident. A person of any nationality will be deemed a Cambodian Resident
if (s)he is domiciled in or has a principal place of residence in Cambodia, or is present in
Cambodia for more than 182 days in any period of 12 months ending in the current tax year.
Therefore, a foreign national who lives in Cambodia on a (nearly) permanent basis will be
considered a resident from the moment of his or her arrival. Resident taxpayers in Cambodia
are subject to ToS on Cambodian and foreign source salary income, whereas non-resident
taxpayers are subject to tax on Cambodian source salary income only. For resident
taxpayers TOS is calculated on an incremental basis (0%, 5%, 10%, 15% and 20%),
whereas non-Residents are taxed at a flat rate of 20%.

Sec 1.3 PTOS states that a person has his or her residence located or situated in Cambodia
if (s)he “owns, rent, leases or has available for use a house, apartment, dormitory, etc”.
Furthermore, a person’s “principle place of abode” will be deemed Cambodia based on
factors such as “centre of economic interest, the amount of time spent, the nature of time
spent, where that person’s family resides, the physical person’s accounts are held, main
social activities take place”.

Anna works in a Cambodian hotel, has moved into an apartment and her whole family is now
based in Phnom Penh. As such, by reference to the aforementioned factors in PTOS, she
will be deemed a Resident taxpayer and so liable to pay TOS on both her Cambodian and
foreign source income.

ii) The LOT and PTOS provide for a number of potential exemptions from TOS:

Firstly, under Article 43 LOT and Section 1.5 PTOS, “salary and other benefits paid to
employees of diplomatic or consular missions of foreign governments holding an official or
diplomatic passport of that government have received ” are exempt from TOS, providing they
are received “within the framework of fulfilling their official function” in Cambodia.

Secondly, Article 43 LOT and Section 1.6 PTOS provide an exemption from TOS for
“representatives, officers and employees employed by the headquarters of international
organizations and agencies of technical cooperation of over other governments”, again
providing the salary and benefits are received in an official capacity.

Section 1.7 PTOS provides an exemption for persons or companies engaged by international
organizations or foreign governmental aid agencies in the context of approved “Technical
Assistance” (“TA”) projects.

Fourthly, under Cambodian tax law there is a limited exemption for non-resident employees.
Provided that the employee’s presence in Cambodia does not exceed 182 days and the
remuneration for “technical assistance” is paid by a non-resident (and not by a resident of
Cambodia) and the employer does not have a permanent establishment in Cambodia, non-
resident employees are not subject to tax on the salary earned for working in Cambodia
(Section 1.3.2 and 3 POTS).

iii) According to Section 3.1 of the PTOS, contributions to a pension plan may be considered
a taxable fringe benefit if they exceed 10% of an employee’s monthly salary, exclusive of
fringe benefits.

Section 2.1 of the PTOS defines the base for a person’s monthly taxable salary as being “all
payments in cash or in kind except those payments classified as fringe benefits”. Therefore,
Anna’s monthly salary amounts to US$8,000 (US$7,500 basic salary plus US$500 bonus).
As the monthly pension contribution she receives is $750, this is evidently less than 10% of
her salary and as such is not a taxable fringe benefit.

iv) TOS for February 2008:

Article 46 LOT 2003/Section 2.2 PTOS provide for a TOS deduction of KHR75,000 for each
dependent minor child under the age of 14. We are told Anna has two children enrolled in
primary school, therefore she receives a deduction of KHR150,000 (approx. US$37.50) from
her monthly TOS.

Furthermore, we are told that in February, Anna was still being paid from Germany and was
liable to pay 10% tax in that jurisdiction. According to Article 50 LALOT/Section 4 PTOS,
providing she complies with the formalities regarding documentation, Anna is therefore
allowed to claim a Foreign Tax Credit and deduct the tax she paid in Germany (being 10% of
US$8000, i.e. US$800, or KHR3,200,000) from the TOS due in Cambodia.

First method:

- Anna’s gross monthly salary = US$8,000 (US$7,500 + US$500)

- Deduction = KHR150,000 (KHR75,000 x 2 children)
- Exchange rate 1US$ = KHR4,000

Step 1: Calculate taxable base

Gross salary Deduction Monthly taxable salary

A B C=A-B
US$ KHR KHR KHR US$
8,000 32,000,000 150,000 31,850,000 7,962.50

Step 2: Calculate TOS payable

Monthly taxable salary Tax rate TOS payable

A B C=AxB
KHR US$ KHR US$
(500,000 – 0) 500,000 125.00 0% 0 0.00
(1,250,000 – 500,000) 750,000 187.50 5% 37,500 9.38
(8,500,000 – 1,250,000) 7,250,000 1,812.50 10% 725,000 181.25
(12,500,000 – 8,500,000) 4,000,000 1,000.00 15% 600,000 150.00
(31,350,000 – 12,500,000) 4,837.50 20% 3,870,000 967.50
19,350,000
31,850,000 7,962.50 5,232,500 1,308.13

Step 3: Application of Foreign Tax Credit:

Taxable salary of US$8,000 taxed at rate of 10% = US$800 tax payable

As this is less than the Cambodian tax liability, the tax paid in Germany can be
deducted.

So, total TOS = US$508.13

Second method:

- Anna’s gross monthly salary = US$8,000 (US$7,500 + US$500)

- Deductions = KHR150,000 (KHR75,000 x 2 children)
- Exchange rate 1US$ = KHR4,000
 Step 1: Calculate taxable base

Gross salary Deductions Monthly taxable salary

A B C=A-B
US$ KHR KHR KHR US$
8,000 32,000,000 150,000 31,850,000 7,962.50

Step 2: Calculate TOS payable

Taxable monthly
salary Rate X Taxable salary at
500,000 5% 25,000 25,000 5%

1,250,000 5% 62,500 87,500 10%

8,500,000 5% 425,000 512,500 15%

12,500,000 5% 625,000 1,137,500 20%

TOS payable = (Monthly taxable salary x tax rate) – KHR1,137,500

= (KHR31,850,000 x 20%) – KHR1,137,500
= KHR5,232,500 (approximately US$1,308.13)

Step 3: Application of Foreign Tax Credit:

Taxable salary of US$8,000 taxed at rate of 10% = US$800 tax payable

As this is less than the Cambodian tax liability, the tax paid in Germany can be
deducted.

So, total TOS = US$508.13

Third method:

- Anna’s gross monthly salary = US$8,000 (US$7,500 + US$500)

- Deductions = KHR150,000 (KHR75,000 x 2 children)
- Exchange rate 1US$ = KHR4,000

Step 1: Calculate taxable base

Gross salary Deductions Monthly taxable salary

A B C=A-B
US$ KHR KHR KHR US$
8,000 32,000,000 150,000 31,850,000 7,962.50

Step 2: Calculate TOS payable

Taxable monthly salary Rate X Taxable salary at

750,000 5% 37,500 37,500 5%
7,250,000 10% 725,000 762,500 10%
4,000,000 15% 600,000 1,362,500 15%
TOS payable = KHR1,362,500 + 20% (Monthly taxable salary – KHR12,500,000)
= KHR1,362,500 + 20% (KHR31,850,000 – KHR12,500,000)
= KHR5,232,500 (approximately US$1,308.13)
Step 3: Application of Foreign Tax Credit:

Taxable salary of US$8,000 taxed at rate of 10% = US$800 tax payable

As this is less than the Cambodian tax liability, the tax paid in Germany can be
deducted.

So, total TOS = US$508.13

FBT for February 2008:

In addition to her basic salary and bonus, Anna receives a number of additional payments.
Article 48 LALOT/Section 3 PTOS provides that fringe benefits, being “any good, services, or
other benefits in cash or in kind, provided directly or indirectly by an employer to a physical
person for employment activities that the physical person has fulfilled for the benefit of the
employer”, will be subject to tax.

FBT is levied against the ‘fair market value’ of the benefit. So, the value must first be grossed
up (by dividing it by 0.8) before FBT (levied at a rate of 20%) is calculated.

However, not all the payments received by Anna amount to fringe benefits. Some, like her
housing allowance and that for her children’s school fees are clearly within the scope of the
tax. However, as discussed above, her pension contributions are not because they do not
amount to more than 10% of her monthly salary.

In certain circumstances the use of the hotel car might not also be a taxable fringe benefit,
however, we are told that it is reserved for Anna’s exclusive use and as such “specially
assigned to one employee”.

Another potential issue is the US$800 payment for Anna’s medical insurance. If this same
benefit was “provided to all employees regardless of employment or job classification”, then
this would not be taxable. However, as only ‘management’ are apparently entitled to this
premium, it too is a taxable fringe benefit.

Lastly, we are told that Anna is remunerated for expenses incurred on a 3 day business trip
to Singapore. According to Article 44 LALOT, this is tax exempt providing the expenses were
“made for the direct and exclusive interest of the enterprise, not exaggerated or extravagant
and supported by detailed invoices already paid and made in [Anna’s] name”. Assuming
these conditions are all fulfilled, this amount should not be subject to FBT.
Applying this to the payments received by Anna:

Payment Value of fringe benefits (A) FBT payable (B = A*20%)

USD KHR KHR
Housing allowance 1,000 4,000,000 800,000
Medical insurance 800 3,200,000 640,000
School fees 1,000 4,000,000 800,000
Use of company car 2,500 10,000,000 2,000,000
Total 5,300 21,200,000 4,240,000
Exchange rate USD1= KHR 4,000
Question 2

a. i) Compute ABC’s Profit tax for the year 2008

TOP calculation for the period ended 31 Dec 08 US$

Accounting profit/(loss) before tax 200,000
Add back/(less):
Permenent differences
Subsidized/grant income
Donation and charitable contribution 7,000
Reassessment of tax 20,000
Penalty and interest for late payment of taxes 4,000
Unclaimed VAT input
Entertainment expense 2,000
Supply of goods free of charge 6,000
Bonus unpaid within 60 days of next tax year 12,000
Total permanent differences 51,000
Temporary differences:
Add: Provisions (closing balance)
-Doubtful debts 1,700
-Accrue pension fund
-Others(bonus unpaid within 60 days of next tax year)
Less: Provisions (beginning balance)
-Doubtful debts (1,000)
Add: Accounting depreciation 10,000
Less: Tax depreciation (8,000)
Add: Unrealized loss on exchange 7,000
Less: Unrealized (gain) on exchange (6,000)
Total temporary differences 3,700
ADJUSTED PROFIT (LOSS) 254,700
Less : charitable contribution within threshold (W1)
Adjusted profit before interest 254,700
Interest adjustments (refer calculation bellow)
Add: Interest expense
Adjusted profit before interest
Less: Interest deduction (W2) (800)
ADJUSTED TAXABLE PROFIT/(LOSS) 253,900
Less: Loss carried forward
Taxable profit (loss) 253,900
Tax payable @20% 50,780
Less: Prepayment of tax on profit (8,000)
ToP payable 42,780
W1: Charitable contribution
Limitation of charitable contribution USD
Adjusted profit (A) 254,700
Charitable contribution (B) 3,000
Net profit excluded charitable contribution (C=A+B) 257,700
Maximum deductible charitable contribution (D=5%*C) 12,885
Deductible contribution during the period 3,000

W2: Interest expense

Calculation on interest expense deductible during the period USD
Adjusted profit/ (loss) before interest adjustment (A) 254,700
Interest expense during the period (B) 50,000
Interest income during the period (C) 500
Net non-interest profit (D=A+B-C) 304,200
50% of net non-interest profit (F=D*50%) 152,100
Maximum interest expense allowed for deduction during the period (G=C+F) 152,600
Interest expense brought forward from previous year (H) 800
Total interest deduction (I=H+B) 50,800

b. i) Assuming the transactions listed in part (a) are the same, compute
ABC’s Profit tax for the year 2008.

TOP calculation for the period of 31 Dec08

US$
Accounting profit/(loss) before tax
200,000

Add back/(less) :
Permanent differences
Subsidized/grant income -
Donation and charitable contribution
10,000
Reassessment of tax
20,000
Penalty and interest for late payment of taxes
4,000
Unclaimed VAT input
-
Entertainment expense
2,000
Supply of goods free of charge
5,000
Total permanent differences
41,000

Temporary differences:
Add: Provisions (closing balance)
- Doubtful debts
1,700
- Accrue pension fund
10,000
 - Others (bonus unpaid within 60 days of
next tax year) 12,000
Less: Provisions (beginning balance)
- Doubtful debts
(1,000)
Add: Accounting depreciation
10,000
Less: Tax Depreciation
(8,000)
Add: Unrealized loss on exchange
7,000
Less: Unrealized (gain) on exchange
(6,000)
Total temporary differences
25,700

ADJUSTED PROFIT(LOSS)
266,700 (a) 13,335

Less: 5% of (a)-charitable contribution within

threshold 3,000
Adjusted profit before interest
263,700

Interest adjustments (refer calculation

below)
Add: Interest expense
50,000
Adjusted profit before interest
313,700 (b)
Less: Interest deduction
(50,000)
ADJUSTED TAXABLE PROFIT/(LOSS)
253,900
Less: Loss brought forward year 2006
(10,000)
Loss brought forward year 2007
(10,000)
Taxable profit (loss)
233,900
Tax payable @20%
46,780
Less: WHT credit
(6,000)
Less: Prepayment of tax on profit
(8,000)
ToP payable
32,780
ii) State the conditions under which a Company’s loss can be carried forward

- A loss must be recorded in the tax return

- Taxpayer not subject to unilateral tax assessment
- No change to the owner of the company
- No change in business activity

A loss must be brought forward for deduction against the results of the first (subsequent)
period which has profit. Loss can be carried forward for 5 years and, if the loss still remains
at the end of 5 years, the remaining amount will be forfeited.
iii) LOT Article 3 defines a Permanent Establishment as “a fixed place of business in the
Kingdom of Cambodia, the branch of a foreign company or an agent resident in the Kingdom
of Cambodia, through which the non-resident person carries on their business”. The term
also includes “any other association or connection through which a non-resident person
engages in economic activity in the Kingdom of Cambodia”.

According to Sec 1.2 PTOP, a PE includes mainly:

- a place of management;
- a branch of a foreign enterprise, an agency;
- an office of a foreign enterprise;
- a warehouse;
- a factory;
- a workshop;
- a mine, an oil or gas well, a quarry or any other place of extraction of natural
resources;
- a farm or plantation.

Also:
- a building site, a construction project or an assembly project, or supervisory activities
connected to such site or project, where such site or project or activities continue for a
period of more than six months;
- the furnishing of services including consultancy services by the employees or other
personnel of a foreign enterprise where such activities continue within the Kingdom of
Cambodia for periods aggregating more than six months in any 12 month period.

And may also be ‘an agent’, providing that person satisfies one of more of the following
conditions:
- has and regularly exercises the authority to conclude contracts in the Kingdom of
Cambodia on behalf of a foreign enterprise;
- regularly maintains in the Kingdom of Cambodia a stock of goods or merchandise
from which he regularly delivers or supplies such goods or merchandise on behalf of
a foreign enterprise;
- collects insurance premiums or insures risks, except the reinsurance of risks, situated
in the Kingdom of Cambodia, on behalf of a foreign enterprise.
Question 3

a) Computation of taxable profit

Computation of Taxable Profit Amount (USD)

Net profit as per account 200,000

Add: depreciation 5,000

Adjusted profit 205,000
Less: tax depreciation (note 1) (4,935)
Taxable Profit 200,065

Note 1: tax depreciation

Plant and Asset Cost after Cost Rate Tax NBV

Machinery Class VAT before Depreciation
VAT
Computers Class 2 5,040 4,582 50% 2,291 2,291
Photocopier Class 3 2,100 2,100 25% 525 1,575
Machinery Class 4 10,080 9,164 20% 1,833 7,331
Conference Class 3 1,260 1,145 25% 286 859
Table

Total 18,480 16,991 4,935 12,056

b) Computation the amount of input VAT

Output VAT Value VAT rate VAT

Sale of electrical 1,500,000 10% 150,000
equipment (75%)
Sale of electrical 500,000 - -
equipment (25%)
Total (a) 2,000,000 150,000

Input VAT Value VAT rate VAT

Purchase of electrical 1,205,000 10% 120,500
equipment
Computer 4,582 10% 458
Machinery 9,164 10% 916
Conference table 1,145 10% 115
Total (b) 1,219,891 121,989

Total output VAT 28,011

payable (a-b)

c) No output tax is chargeable on a zero rated supply ( since the tax rate chargeable is 0%) or
on an exempt supply ( since it has been specifically excluded as a taxable supply).
However, input tax attributable the making of a zero-rated supply is recoverable from the
General Department of Taxation as an input tax credit, whereas input tax attributable to the
making of an exempt supply is generally not recoverable as an input tax credit.

Supplies involving the export of goods and services, the provision of international transport
services are zero-rated. The provision of financial services is exempt VAT.
Question 4

(a) Direct taxation is a tax charged on the income of any person such as Cambodia
salary tax. It is based on the principle that the burden of taxation is in accordance with
a person’s ability to pay. Therefore the higher the income level of a person, the higher
would be his tax burden.

On the other hand, indirect taxation is based on the consumption pattern of a person.
It is a regressive tax, as it does not conform to the principle of taxation based on
one’s ability to pay. A person in the high income bracket pays the same amount of
indirect tax as a person in the low-income bracket if both persons consume the same
value of goods or services.

(b) i.

Computation of limitation of deductible interest expense Amount

Adjusted profit 7,000
Add: Interest expense 60,000
Less: Interest income (5,000)
Net non interest income 62,000
50% of net non interest income 31,000
Maximum interest expense allowed for deduction during the period 36,000
Total interest deduction 36,000
Interest expense to be carried forward 24,000

ii. Cambodia law on taxation requires any person paying interest to a non resident to
deduct tax at the applicable rate. ABC Private limited is thus obliged to deduct withholding
tax at the rate of 14% from the interest paid to HB BANG, and pay this to the General
Department of Taxation.

iii. Cambodia law of Taxation stipulates that where a person fails to make a deduction
of tax which he is required to make, any amount which he fails to deduct shall be debt due
from him to the General Department of Taxation and shall be recoverable as such.

iv. The tax deducted from the interest payment must be paid over the General
Department of Taxation by the 15th of the month following the month in which such interest is
paid or deemed to be paid ( the due date). Failure to comply with this requirement shall be
subject to the following penalties:

 Additional tax at 10% or 25% of the tax to be paid, depending on the seriousness.
 Interest rate at 2% per month is levied on the underpaid tax.
Question 5

i) Art 131 LOT provides for an additional tax for the underpayment of taxes. This is
levied at 10%, 25% or 40% of the underpaid tax, depending on whether a person has been
negligent, seriously negligent or has undergone a unilateral tax assessment.

According to Arts 125 and 126 LOT, a taxpayer or withholding agent is considered negligent
if they underpay by up to 10% of the tax due, and seriously negligent if the underpayment
comprises more than 10% of the tax due.

If a taxpayer or withholding agent has been negligent, Art 131 LOT provides that additional
tax shall be charged at a rate of 10% of the amount of the underpaid tax. For serious
negligence the rate is 25%. In both cases, 2% interest is levied on the amount of the
underpaid tax for each month or part of a month that the amount of the underpaid tax is not
paid.

(ii) Applying the aforementioned Articles of the LOT to Myser Lee Ltd:

WHT: US$20,000 due - US$19,000 paid = US$1,000 outstanding

US$1,000 < 2,000 (10% of US$20,000)
(So, Myser Lee has been negligent, therefore 10% penalty will be applied)

Additional tax = US$100 (10% of US$1,000)

Interest = US$40 (2%*1,000*2month)
Total P&I is US$140