Enforcement Trends and Compliance Challenges in Cambodia

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Enforcement Trends and Compliance Challenges in Cambodia The Fourth IMF-Japan High-Level Tax Conference for Asian Countries April 4, 2013 Tokyo, Japan By Mr. Eng Ratana Deputy Director, Department of Large Taxpayers, General Department of Taxation, Cambodia

Outline Macroeconomic Performance in 2012 Organizational Structure of General Department of Taxation (GDT) Background of Cambodian Tax System Tax Revenue Trend Collected By GDT 1994 2012 Tax Audit Debt Management and Settlement of the Taxpayers Protests Issues Facing Tax Reforms 2

Macroeconomic Performance in 2012 Population 14.95 Millions Real GDP Growth 7.3% Nominal GDP in 2012 14,038 Millions of US$ GDP per capita (US$) 971 US$ (911 US$ in 2011) Exchange Rate (Riel/$) 4,033 Riels/$ Inflation (Annual Average) 2.9% (5.5% in 2011) Domestic Revenue (% GDP) 14.5% Of which: Tax Revenue 12.5% Of which: Nontax Revenue 2% Expenditure (% GDP) 17.5% 3

Organizational Structure of GDT Tax Department was reestablished in 1982 and upgraded to the General Department of Taxation (GDT) in 2008 GDT is headed by one Director General and 5 Deputy Directors General GDT divided into: Central Level (Headquarter) and Operational Level The Central Level: 7 Departments Operational Level: 7 Phnom Penh Khan Tax Branches (KTB) and 23 Provincial Tax Branches (PTB) consisting of 135 Offices Total Tax Officials: 1458 (lady 330) Total taxpayers: 72,983 of which 26,399 are self-assessment taxpayers 4

DIRECTOR GENERAL Secretary 5 DEPUTY DGs Dept. Personnel Admin-Finance Personnel Bureau Admin Bureau Finance Bureau National Tax School Dept. Law Litigation-Statistic Law Bureau Litigation Bureau Statistic & Stampt Tax Dept. Taxpayer Service & Tax Arrears Taxpayer Service Bureau Tax Arrears Bureau Department of Controlling Bureau 1 Bureau 2 Cross Checking Bureau Dept. Information Technology Analysis & Develop Programs Network Man. & Maintenance Web Development Bureau Dept. Large Taxpayer Taxpayer Service Bureau Return Processing Bureau Tax Audit Bureau 1-3 Tax Arrears Collection Bu Dept. Enterprise Audit Enterprise Audit Bureau 1-8 PNH Khan Tax Branches 7 Tax Service Office Return Processing Office Tax Audit Office Tax Arrears Collection Office 23 Provincial Tax Branches Real Regime Tax Offices District Tax Offices 5

Background of Cambodian Tax System 1982 1993: Pure Estimated Regime/Official Assessment (ER); tax officials calculate the estimated profit and compromise with taxpayers, collection of taxes, and payment of tax revenue to government Reform 1994 1996: Introduced Real Regime/Self-Assessment System (RR); taxpayers file tax return and make tax payment themselves Tax Reform 1997 Present: Introduced Law on Taxation in 1997: profit tax, salary tax, VAT, excise tax, withholding tax, and administrative rules and procedures 6

Tax Revenue Collected by GDT 1994 2012 (in millions of Riels) 3,500,000 Tax Revenue Trend From 1994 2012 (Million Riels) Budget Plan Performance 3,000,000 2,964,871 2,500,000 2,089,898 2,360,049 2,000,000 1,736,252 1,745,428 1,500,000 1,259,119 1,000,000 886,025 500,000-16,682 634,349 384,804 481,186 111,977 16,682 47,481 66,562 151,859 184,900 270,592 292,980 318,846 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 7

Tax Revenue Collected By GDT in 2012 (%) VAT 29.06% Excise Tax 12.50% Stamp tax 0.13% Penalty 0.47% Registration tax 4.92% Unused land tax 0.13% Public lighting tax 2.79% Accommodation tax 0.26% Patent tax 0.71% Slaughter tax 0.04% Turnover tax 0.82% Property tax 2.61% Tax on Profit 33.38% Tax on salary 8.06% Tax on means of transportation 4.12% 8

Tax Audit 1. Scope of Tax Audit: Two tax regimes within tax system in Cambodia, Real Regime (RR), and Estimated Regime (ER) RR applied to Large and Medium Taxpayers, while ER applied to Small Taxpayers RR collected over 92% of total tax revenues Tax audit is only applied to RR Taxpayers 9

2. Entities Involved in Tax Audit: Department of Large Taxpayers (DLT): limited audit, desk audit Department of Enterprise Tax Audit (DEA): comprehensive audit Audit Bureaus in 7 Khan Tax Braches (PKBs) in Phnom Penh, Capital City), and 23 Provincial Tax Braches (PTBs): limited audit and desk audit Cross-Checking Bureau under Department of Controlling (gathering information to support audit) Tax Audit 10

3. Types of Tax Audit: Tax Audit Comprehensive Audit: multiple taxes, multiple tax periods, unlimited or broad scope, at the taxpayer s business premises Limited Audit: Issues-Oriented Audit, Desk Audit, Project Audit, and VAT Refund Audit Issues-Oriented Audit: restricted or limited in scope, at the taxpayer s business premises, audit by type of tax. (e.g., VAT, withholding tax, salary tax 11

Tax Audit 3. Types of Tax Audit (cont d): Desk Audit: No field work, conducted at tax office, verify tax returns, examine incomes, expenses, crosscheck data by requesting the taxpayer to bring specific documents to the tax office Project Audit: Restricted or limited in scope, at the taxpayer s business premises on a certain project, audit by type of taxes. (e.g., VAT, withholding tax, salary tax, and any other revenues and expenses (PL & BS)) Refund Audit: Verify VAT tax returns, output tax, input tax, and amount of credit and refund claimed 12

Tax Audit 4. Case Selection and Staff Assignment Number of auditors versus selected cases Each team has 2 officials and Deputy Chief of Audit Bureau as team s assistance Each team assigned 12 cases/year (or more) Audit program: DLT, DEA, KTBs, and PTBs The audit program approved by Director General of GDT 13

Tax Audit 5. Audit Results Description 2009 2010 2011 2012 Number of Self-Assessment Taxpayers 15,922 18,751 22,071 26,399 Number of Audit 880 1,552 1,760 1,640 Coverage Percentage 5.53% 8.28% 7.97% 6.21% Total Tax Reassessment (in millions of Riels) Average per Case (in millions of Riels) 345,19 2 542,977 370,009 291,93 8 392 349 210 178 14

Debt Management and Settlement of the Taxpayers Protest 1. Debt Collection Procedures Tax Collection Letter: Request taxpayer to pay tax liability, 30 days after receiving the letter of notification for tax collection, no additional interest Reminder Letter: Request taxpayer to settle tax liability within 15 days after receiving a reminder letter, no additional tax Debt Classification: Large amount, collectible debt (alive business) and non-collectible (wind-up business) 15

Debt Management and Settlement of the Taxpayers Protest 2. Enforcement Measures Invitation: Invite taxpayer to tax office Publication in Newspaper: Taxpayer s TIN in newspapers, informing taxpayer about their debt and request them to settle the debt within certain period Block Bank Account: Issue letter to all banks to block taxpayer s bank account Inform General Department of Custom & Excise, CDC: Cease import-export, discontinue tax incentive Invalidate Licenses: VAT certificate, license from various government entities 16

Debt Management and Settlement of the Taxpayer s Protest 3. Trend of Tax Arrears and Collection 2009 12 (million Riels) 17

Debt Management and Settlement of the Taxpayer s Protest 4. Procedures for Settlement of the Taxpayer s Protest Notification letter on tax audit Protest to office in charge of assessment Audit Notification Letter on tax reassessment Notification letter on tax debt collection Consent or no response within 30 days Letter of response to the taxpayer The taxpayer protests to Director General Director General redecides on tax reassessment No consent 60 days Ministry of Economy and Finance The Committee of Tax Arbitration (currently do not have) Court If no consent, protest within 30 days If no consent, appeal within 30 days after receiving notification letter 18

Issues Facing 1. Tax Policy Issues Two tax regimes in the system: no personal income tax with loopholes or allowing noncompliant taxpayers to shift their income through the regimes for avoidance and evasion of taxes Unclear tax rules and regulation of certain sectors, such as petroleum and mining extractive industries, taxes on financial lease No Committee of Tax Arbitration (LoT, Article 123) No Investigation Office to oversee serious noncompliance Lack of regulation and guidelines on transfer pricing taxation No tax treaty with other countries 19

Issues Facing 2. Tax Administration Issues Tax administration in Cambodia is very young (starting from 1982) Tax culture is still low Limit number and capacity of tax officials (around 50 70 tax officials retire every year), resources allocated to develop new policy and other special project work Lack of a code of conduct Most of procedures are manual and paper-based System and procedures to monitor and control the work of GDT s officials are underdeveloped 20

Issues Facing 2. Tax Administration Issues Audit manual/audit guidelines on certain complicated industries, such as petroleum, banking, international transportation, construction, telecommunication, etc. are underdeveloped Lack of tax auditors skills, expertise to assist audit team, information to support audit, develop risk strategic plan Insufficient intelligence/risk assessment, audit case selection, audit plan, execution to deter noncompliance Level of taxpayers noncompliance and cooperation with tax auditors are still big concerns for GDT Access to taxpayers books and records is limited 21

Issues Facing 2. Tax Administration Issues Information Sharing: Lack of information sharing amongst related government entities, such as General Department of Customs and Excise, CDC, and MOC Tax Arrears: Large tax arrears, no real legal action against noncompliance (no court case) Information Technology (IT): No electronic filing, insufficient information for risk assessment, lack of equipment and skill of IT experts to support tax filing, payment, audit, and tax arrears Human Resource Management: Low salary of tax officials and procedure of staff performance review is not well-organized yet 22

Tax Reforms Policy Reforms: Make and amend tax law and regulation to cope with specific industries Approve transfer pricing taxation rules and guidelines for implementation Set up a Committee of Tax Arbitration Establish Investigation Office to oversee the serious instances of noncompliance Reduce estimated regime by promoting a self-assessment system and introducing personal income To attract foreign direct investment and reduce international tax avoidance and evasion, conclude DTA with other countries 23

Tax Reforms Tax Administration Reforms: Strengthening Tax Culture: Taxpayer education through seminars, response letters, TV, radio, leaflets, guidelines, posters Tax Audit: Strengthen risk assessment, audit case selection, audit plan, increase tax auditors, tax auditors skills, and, information to support audit, develop risk strategy, and approve audit manual/guidelines on certain complicated industries to be implemented Tax Arrears: Implement modern debt management strategy for highest-risk cases and prevent the growth in arrears, legal action made public using taxpayer s names in newspaper, and bringing unpaid taxpayers to court; for classified debt, take in action of collectible debt and write it off if uncollectable 24

Tax Reforms Tax Administration Reforms: Information Technology (IT): Electronic filing, equipment to support operations, such as tax filing, payment, audit and tax arrears, and sharing information amongst related government entities Staff Management: Set up Code of Conduct, increase number of staff and training, increasing salary or bonus with penalty, development and implementation of appropriate and staff review performance procedures (recruitment, remuneration, retention, promotion), and improvement of system and procedures to monitor and control the work of GDT s officials 25

Thank You 26