Cam Dpta

45 Suramarit Boulevard (PO Box 7)
Phnom Penh, Cambodia

Tel: (855 23) 210 400|Fax: (855 23) 428 227
Cambodia@dfdlmekong.com|www.dfdlmekong.com
4 February 2008
BY EMAIL
Asian Development Bank

Mr. Joao Farinha
Re: Diagnostic Analysis of

Cambodian Tax System and Tax Reform of Leasing
TA-4786 (Cam) Contract S13548
(revised and updated)
Dear Mr. Farinha,
We refer to our engagement TA-4786 (Cam) and contract S13548. Please find here our
observations with respect to the necessary changes in tax regulations, and our views on how
to bring about these reforms, both for your comments. This advice was prepared in exclusive
cooperation with Mekong Law Group.
Legislative reference
We have based ourselves for our review on the Law on Taxation (as amended in 2003)
(“LOT”), the Sub-Decree on Value Added Tax No. 114 (1999) (“VAT Sub-Decree”), the
Prakas on Tax on Profit No.1059 PK/MEF/DT (2003) (“Prakas TOP”), Prakas on VAT No. 1031
PK.SHV.PD (1998) (“Prakas VAT”) and associated tax regulations, plus our understanding of
the interpretation and implementation of this legislation by the Cambodian Tax Department
(“TD”).
PART A. Diagnostic Analysis of Cambodian Tax System
In this part of our assignment, we render our considered appraisal of the Cambodian tax
system from the perspective of enterprises, particularly small and medium sized enterprises.
We formulate suggestions for reform and to discuss the feasibility of implementing these
suggestions.
1. Introduction: salient features of the Cambodian tax system
The taxation system in Cambodia is relatively new and is characterized by numerous taxes and
frequently changing legislation, which is often unclear, contradictory, and subject to
interpretation. Often, differing interpretations exist among different divisions of the Tax
Department (“TD”). Taxes are subject to review and investigation by a number of different
divisions of the TD. These facts may create tax risks in Cambodia substantially more
significant than in other countries.
C A M B O D I A L A O S ▪ M Y A N M A R ▪ T H A I L A N D ▪ V I E T N A M
DFDL MEKONG PAGE 2 OF 43
The LoT, promulgated in 1997, provides principle guidelines on the various types of taxes to
be implemented. Subsequent regulations need to be passed to support the Law. The LALoT
was promulgated on 31 March 2003 and introduced sweeping changes to the taxation of
QIP’s, and widened the tax net on payments to non-residents of Cambodia. The LALoT
became effective from 1 January 2004. With the Financial Act 2007, Cambodia has revised the
LoT again (notably art. 7), this time to introduce a taxation on capital gains on immovable
property, investment property and financial property realized outside of the scope of business
transactions, including gains realized by physical persons.
The Prakas on Tax on Profits (“PTP”) passed in August 2000 was not comprehensive. The
regulations were revised in December 2003 in an attempt to clarify ambiguities in the original
document and to be in accordance with the LALoT. Notwithstanding, the regulations in place
are often vague, inconclusive and subject to inconsistent interpretation and application.
Furthermore, due to the limited complexity of the domestic commercial environment, these
regulations are often insufficient to deal with complex agreements and transactions.
In the past 24 months there has been a large increase in the number of tax audits being
conducted, and the TD has been increasingly aggressive in issuing reassessments for
taxpayers that have not been complying with the LoT. The TD has also increased its efforts in
pursuing and collecting outstanding tax debts.
Due to the shortcomings in the law, and the lack of experience of the tax officials in dealing
with international tax issues, tax reassessments dealing with issues that are outside the local
operating environment (such as sophisticated operating and management agreements or
offshore arrangements) are often arbitrary and have little relevance to the actual issue under
consideration.
It is not possible to obtain rulings on tax issues from the tax authorities; in fact the TD is
reluctant to respond, in writing, to any issue that the taxpayer may raise with the TD.
We also advise that Cambodia does not have any Double Taxation Agreements with any
country, but treaty negotiations are soon to start based on a Model DTA prepared by the Tax
Department in cooperation with a foreign expert.
The LoT provides for three types of tax regime (i) the real regime tax system (“RRTS”); (ii)
the estimated regime; and (iii) the simplified regime. These three systems impose different
tax obligations on taxpayers. All enterprises, other than sole proprietorships, are taxable
under the real regime. Accordingly, our comments below are based upon the tax provisions
for the RRTS.
Basis of taxation
Taxpayers in Cambodia are classified as either resident taxpayers, or non-resident taxpayers.

A resident taxpayer is primarily an enterprise that has a place of management and carries on
business in Cambodia. A non-resident taxpayer is an enterprise that is a not a resident
taxpayer, but derives Cambodian source income.
A non-resident taxpayer will be deemed to be Cambodian resident for tax purposes if it is

found to have a Permanent Establishment (“PE”) in Cambodia. In such instances, the non-
resident will be subject to tax in Cambodia in respect of its Cambodian source income.
Cambodian source income for this purpose includes income from services performed in
Cambodia and income from business activities carried on by the non-resident through the PE.
Under the LoT and its implementing texts, a PE is established by having “a fixed place of
business or a resident agent in the Kingdom of Cambodia through which a non-resident
person carries out business, wholly or partially, in the Kingdom of Cambodia. A permanent
establishment includes also any other association or connection or mean through which a
non-resident person engages in economic activity in the Kingdom of Cambodia”1.
The term economic activity is explained as the “regular or continuous or from time to time
activity of a person, whether or not for profit, in the supply of, or the intent to supply, of
goods and services to other persons for the purpose of obtaining any benefit”2.
The LoT further states that a permanent establishment includes the following forms of
business activity in Cambodia:
• A place of management;
• A branch of a foreign enterprise;
• An office of a foreign enterprise;
• A warehouse;
• A factory;
• A workshop;
• A mine, or any other place of extraction, of natural resources;
• 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; and
• The furnishing of services including consultancy services by the employees or other
personnel of a foreign enterprise where such activities continue within Cambodia for
periods aggregating more than six months in any 12-month period.
Notwithstanding all the aforementioned criteria for establishing a PE, the TD will ultimately
decide on a case-by-case basis whether an enterprise’s activities constitute a PE. However,
we advise that there is the established precedent of the TD not applying the PE rules to
foreign companies that, although they have technically established a PE in Cambodia, do not
maintain a physical presence in Cambodia. As a matter of fact, we advise that the TD requires
that the concerned entity should have been duly registered with the MoC to enable a tax
registration to be effected.
Taxation of resident enterprises
Resident taxpayers are subject to the following tax imposts:
TAX ON PROFIT
The LoT provides for a 20% tax on profit rate for profit realized by a legal person and is
applicable to world-wide income. A PE (which is deemed to be a resident taxpayer) is taxed
at the rate of 20% of profits derived from Cambodian source income only.
Taxable profit is calculated by adjusting accounting profit for various expenses that are not
allowable, or subject to limitation, for tax purposes. Expenses subject to non-deductibility or
limitation include:
• Depreciation over allowable rates

• Interest (thin capitalization rules)
1
Section 1.2 (paragraph 5) of the PTP.
2
Section 1.3 of the PTP.
• Increase in provisions
• Amusement, recreation or entertainment expenses
• Penalties and fines imposed by the TD, Customs Department, or other government
bodies (including the courts)
• Donations, grants and subsidies
• Taxes reassessed by the TD
• Extravagant and / or unrelated business expenses.
PREPAYMENT OF PROFIT TAX
Taxpayers are subject to a prepayment of tax on profit calculated at 1% of monthly turnover.

This payment is made monthly and is offset against the tax on profit due at the annual tax
liquidation.
MINIMUM TAX
The Minimum Tax is a separate tax to the Tax on Profit, and similarly to the Prepayment of
Tax on Profit, is calculated at 1% of turnover. The Minimum Tax is only payable if the
Minimum Tax is greater than the Tax on Profit. The Minimum Tax is calculated at year-end,
however it should be totally liquidated by the monthly Prepayment of Tax on Profit.
WITHHOLDING TAXES
Withholding taxes imposed in Cambodia comprise resident withholding tax and non-resident
withholding tax.
Resident withholding tax
Payments of certain Cambodian source income, by a resident taxpayer carrying on a business

in Cambodia, to a Cambodian resident are subject to the following withholding taxes:
• Services provided by a resident person – 15%

Applicable for payments for services including management and consultancy services, to
a Cambodian resident enterprise that is not registered for the RRTS.
• Royalties – 15%
Applicable for all payments for the use of intangible assets, including know-how, the
granting of rights, and interests in minerals, oil or natural gas, regardless of whether the
recipient of the payment is registered for the RRTS or not.
• Interest payments – 15%
Applicable for all interest payments to a physical person or enterprise, other than
interest paid to a domestic bank or savings institution
• Rental payments – 10%
Applicable to all rental payments for the use of movable and immovable assets,
including motor vehicles, plant and equipment, office space, residential accommodation
etc, regardless of whether the recipient of the payment is registered for the RRTS or
not.
Non-resident withholding tax
Non-resident withholding tax at the rate of 14% is to be deducted from the following
payments to non-residents:
• Royalties, rent and other income related to property;

• Interest;
• Management and technical services (these fees are currently undefined in the LoT and
tax regulations, however the TD will in practice adopt a very broad definition of
management fees and technical services); and
• Dividends
Cambodia does not have double tax agreements with any country. Accordingly, the 14%
WHT impost will apply to all payments of interest, rent, management and technical service
fees and dividends to non-residents, regardless of the non-residents’ country of residence.
WHT tax is a final tax for the recipients of the payments that are subject to WHT.
Consequently WHT is the only Cambodian tax that will apply to non-resident entities receiving
income from Cambodian taxpayers that have not established a PE in Cambodia.
WHT is applicable for payments made by all resident taxpayers regardless of the taxpayer’s
legal form. Accordingly, the WHT liability in respect of the abovementioned payments will
apply to payments made by PE’s (deemed residents), corporate entities and branch operations
registered in Cambodia.
It should furthermore be noted that in our experience, the TD may take the position that WHT
on market interest rates is also due in case of interest-free loans or loans with interest rates
that are below market rates.
The liability for WHT rests with the remitter. The TD has no recourse to recover WHT from
the recipient of the payment.
VALUE ADDED TAX
Value added tax is applicable to the taxable supply of goods and services. An enterprise is
required to charge VAT at the rate of 10% on all sales of taxable supplies in Cambodia, and at
the rate of 0% on the sale of taxable supplies exported from Cambodia.
An enterprise registered under the VAT provisions can offset input VAT charged on purchases
against the output VAT. In theory, refunds are available subject to certain general conditions,
but in fact refunds are subject to prohibitive delays for most taxpayers (see below).
The prescribed thresholds to qualify as a VAT-taxpayer are as follows3:
• taxable turnover in any period of 3 consecutive months exceeds 125 M KHR (goods)
(approximately 30,000 US$) or 60 M KHR (services) (approximately 15,000 US$); or
• expectation to exceed taxable turnover in the coming period of 3 consecutive months of
125 M KHR (goods) or 60 M KHR (services); or
• having government contracts exceeding 30 M KHR.
In addition, there is an annual threshold, which is 500 M KHR in the case of the supply of goods
of 250 M KHR for services.
Taxable supplies are defined as all supplies other than exempt supplies. Exempt supplies are
not subject to VAT and include:
3
Art. 2 Sub-Decree on VAT No. 114 ANKR.BK
• Public postal service;

• Hospital, clinic, medical, and dental services and the sale of medical and dental goods
incidental to the performance of such services;
• The service of transportation of passengers by a wholly state owned public
transportation system;
• Insurance services;
• Primary financial services;
• The importation of articles for personal use that are exempt from customs duties; and
• Non-profit activities for public interest that have been recognized by the Ministry of
Economy and Finance.
Basic features and problem posed
The Cambodian VAT system has the same basic features of any VAT or GST system:
taxpayers must apply VAT on their sales and may deduct VAT on supplies made to them to
carry out VAT business. Taxpayers pay the excess output VAT or get a refund for excess input
VAT.
Under Cambodian tax law, offsetting input VAT with output VAT is effectuated in the VAT
return of the taxpayer, subject to verification by the TD. The VAT returns are specific per
taxpayer. Each taxpayer has a unique Taxpayer Identification Number (“TIN”) which features
on the VAT return.
VAT taxpayers are, for the most part, companies that are subject to the real regime of
taxation. Each company must register at the TD and is issued a TIN, often with the VAT
number. It is possible for a company not to have a VAT number if it will not perform any VAT-
taxable supplies such as selling land. Renting out immovable property is however considered a
taxable service for VAT purposes.
In Cambodia, the synchronicity of this system is hindered by the procedures and delays
associated with VAT refunds. As a matter of law, refunds are only allowed after an audit has
been conducted to verify the legitimacy of the VAT refund claim of the taxpayer4. This audit
may be a lengthy procedure and disputes may drag out over months or even years. Even
when a refund may be approved by the Tax Department (“TD”), in practice important delays
exist for the actual remittance of the refund.
As a consequence, your situation is not VAT effective from a consolidated perspective. CM I

will have to charge VAT on its sales (rent) while CM II will have no effective way to recoup the
input VAT that was charged to CM II on the supply of construction work.
Value Added Tax rules on deductibility of input VAT
The general rule on deducting input VAT is found in the LOT, which reads as follows:
The input tax credit and the non taxable supplies shall be determined as follows:
1.The tax paid by a taxable person on goods and services for use in the
business which are supplied by another taxable person or the tax paid by the
taxable person as an importer on imported goods or services for use in his own
4
Art. 41 par. 4 Sub Decree on VAT
business shall become an input tax credit deductible against the output tax.
Input means any goods or services purchased and output means any goods or
services sold.
2.In the case where goods and services purchased are used partly for taxable
supplies and partly for non taxable supplies, the tax credit shall be allowed only
for that portion used for taxable supplies5.
The Prakas on VAT adds on this point, among other things, that an input credit on goods
supplied to the taxpayer is allowed if “the goods are purchased to make taxable sales or to
use in the production of taxable supplies by the registrant”6.
The input tax credit is calculated based on all supplies made to the taxable person during the
month and on all imports made by that person that month7. The moment that the credit may
be effectuated is at the time goods or services are supplied or imported by the taxable person.
If supply or import takes place in another month than in the one the taxable person claims the
credit, the credit may not be deducted. This refers to the rules on “time of supply” as they
apply to output VAT. A supplier must pay VAT when he issues the invoice, regardless of the
time of the completion of the service or the delivery of the goods. Thus, whenever the
supplier issues the invoice, the time of supply of VAT is established. But when a supplier does
not issue an invoice, VAT is also established. In such a case the time of supply is when the
supplier should issue the invoice. That time is defined in Cambodian VAT law as at the
earliest of seven days after goods are shipped, services are rendered or when the payment is
received from the customer.
To obtain the credit in practice, the taxpayer must provide a value added tax invoice, drawn
up in accordance with article 77 of the LOT, or a customs Bill of Entry for Import, certified by
customs authorities, which must state the name of the taxable person as consignee or
importer and the amount of tax paid at the time of import.
Based on the legal provision cited above, the following constituting elements can be noted for
applying the deduction and constituting the VAT credit:
1. The input VAT must be “paid”. This should be interpreted as meaning that in
order to claim the deduction, the VAT must have been charged to the taxpayer;
It should be noted that under certain circumstances, VAT charged by an agent
may also be deducted by the principal8;
2. The input VAT is charged on the supply of goods and services which the
taxpayer uses for his VAT-taxable business. This means that the supplies
should have been incurred to make VAT taxable sales or production of goods or
services that will constitute taxable supplies;
3. The input VAT is evidenced by a VAT invoice with all the required features as
defined by law and regulations;
4. Input VAT can only be deducted in the period that the supply was made to the
taxpayer;
5
Article 65 Input Tax Credit and Non Taxable Supplies
6
Art. 27 par. 2 Prakas on VAT
7
Art. 28 Prakas on VAT
8
Art. 52 Sub Decree on VAT
Tax Incentives
On February 03, 2003, the National Assembly of the Royal Kingdom of Cambodia has adopted
the Law on Amendment to the 1994 Law on Investment and the Law on Taxation of 1997.
Under the amended LOI, only Qualified Investment Projects (“QIPs”) are entitled to the
benefits of the incentives provided for under this law. An investment project must be granted
a Final Registration Certificate (an “FRC”) in order to become a QIP.
To obtain an FRC, the potential investors must submit an Investment Proposal to the Council
for the Development of Cambodia (the “CDC”) in the required form. Within three business
days of receipt of the Investment Proposal, the CDC will issue to the applicant a Conditional
Registration Certificate (“CRC”) or a Letter of Non-compliance. If the CDC fails to issue a
CRC or a Letter of Non-Compliance within these three days, the CRC will be considered to
have been approved.
The CRC will state the approvals, authorizations, clearances, licenses, permits or other
registrations required for the QIP to operate, as well as the government entities responsible
for issuing such approvals. The CRC will also confirm the incentives to which the QIP is
entitled.
A Final Registration Certificate ("FRC") must be issued within 28 business days of the date of
issue of the CRC. The QIP will commence on the date of issue of the FRC. We noted that
approvals required under the CRC will still need to be obtained by the QIP, even after the QIP
commencement date.
Tax exemptions and incentives available to QIP under the amended LOI are as follows:
1. Profit Tax exemption
An exemption on profit tax imposed under the Law on Taxation (normally 20% on the
net profit) for a profit tax exemption period. The tax exemption period is composed of
a Trigger Period + 3 years + a Priority Period.
The Trigger Period is the earlier of the first year of profit or three years after the QIP
earns its first revenue. Therefore, the constructing and financing phase will be covered
by the Trigger Period.
The Priority Period will be determined in accordance with the Financial Management
Law.
You will need to get confirmation from the Royal Government on this issue, notably in
the QIP Final Registration Certificate.
2. The profit tax exemption entitlement will be subject to the QIP obtaining an annual
certificate of compliance.
3. QIP will be subject to profit tax (20%) after their tax exemption has expired. During
and after the tax holiday, transfer of dividends off-shore is subject to a 14%
withholding tax and an additional 20% withholding tax if such dividends benefited from
a tax holiday.
4. QIP will not be entitled to claim any special depreciation if they use an entitlement to a
profit tax exemption.
5. Domestically-oriented QIP will be entitled to import production equipment and

production input construction materials exempt of customs duty.
6. A QIP is entitled to obtain visas and work permits for the employment in Cambodia of
foreign citizens as managers, technicians and skilled workers, and residency visas for
the spouses and dependants of those foreign nationals as authorized by the CDC and
in compliance with the Immigration and Labor Laws.
In addition to these amendments, we note that QIP are no longer required to pay Minimum
Tax in accordance with Article 24 of the Taxation Law (normally 1% on the turnover), nor are
they subject to the Prepayment on Tax on Profit (normally monthly payment of 1% on
turnover).
TAX ON SALARY, WAGES AND FRINGE BENEFITS
A detailed explanation of the tax on salary is included at Appendix A. In summary, resident

employees (effectively any employee that spends more than 182 days in any 12 month period
in Cambodia) are subject to salary tax on worldwide salary income, with tax rates operating
on an incremental scale, with the highest marginal rate of 20%.
Non-resident employees are taxed on Cambodian source salary only, at a flat rate of 20%.
Benefits in cash or kind provided to an employee are subject to Fringe Benefits Tax, which is
payable monthly by the employer. The rate of Fringe Benefits Tax is 20% of the gross value
of the benefit provided.
SPECIFIC TAX ON CERTAIN MERCHANDISE AND SERVICES
Specific tax is imposed on certain merchandise and services at varying rates.
PENALTIES
Penalties for non-compliance with the tax regulations, or breaches of the tax regulations range
from 10% to 40% of the unpaid tax. In addition, interest is levied at the rate of 2% per
month on the unpaid tax. Officers of the taxpayer may be subject to criminal charges in cases
of tax evasion.
OTHER TAXES
Patent tax
All business enterprises are subject to an annual Patent Tax. This is the equivalent of a
business registration tax. The amount is currently fixed at KHR1,140,000 (approx. USD285).
Customs duties
Imported goods are subject to import duty at varying rates. A limited number of goods are
subject to export duties.
EFFECTIVE TAX RATE
Resident taxpayers are subject to tax on profit at the rate of 20%, and dividends distributed
to non-residents from fully taxed profits are subject to 14% withholding tax. Accordingly, the
effective tax rate on profits in the hands of a non-resident shareholder is 31.2%.
As noted above at Section 7.2.1.4, WHT applies to all dividend payments made by resident
taxpayers to non-resident entities regardless of the taxpayer’s legal form.
Accordingly, the 31.2% effective tax rate will apply equally to profits repatriated offshore by a
corporate entity, branch operation or a PE registered for the RRTS in Cambodia.
Estimated Regime
Under Cambodian tax law, taxpayers that are not and must not register for the RRTS, are
subject to tax under the estimated regime. In that case, the taxable profit as turnover tax will
be determined in common accord with the local tax official.
2. The international legal framework: global standards and principles on the

tax treatment of business and investment
In this part of our advice, we recall international principles and experiences relating to the tax
treatment of investment. We have approached this problem from the perspective of the
internationally respected rules on investment protection as included in investment protection
agreements and requirements or transparency under GATT and GATS, which may also apply
to tax matters.
Tax and foreign investment
The tax treatment by the host state of an investment (the state in which the investment is
made) and of the profits generated by an investment are an important factor for every
international business enterprise. Obviously, a foreign investor will want to get a clear picture
of all taxes that will apply and that may weigh on the net return of his investment in another
country.
Usually states have many different taxes that will concern the investor. Import duties or tariff
will for example increase the cost of raw materials and equipment that are used in the
manufacture of products, or will increase the cost price of goods that are meant to be resold
in the host state. Value added taxes will have to be passed on to the customers of the
investor and thus increase the sales price of products, or in case the investor is not entitled to
offset input VAT with output VAT may present a real cost for the operation9. Corporate income
tax will typically be levied on the net profit of the company and a withholding tax on dividend
distributions will further reduce the actual profit repatriation to the foreign investor. Attracting
loans, intellectual property or services from abroad will also trigger withholding taxes that will
normally be considered by the investor as economical costs. Depending on the type of the
investment other taxes may also play an important role such as transfer tax on immovable
property, excise duty, and so-called mineral royalties.
9
Under the tax laws of many countries that have a VAT system, certain types of business operation are not treated
as VAT-taxpayers but as end-consumers, such as real estate development, banks and insurance, hospitals and
universities.
On the other hand the host state may offer tax holidays or special tax reductions that may
have an impact on investment decisions. In that case, the investor will seek advice on the
conditions, the reductions and the period he is expected to benefit from this tax incentive.
The investment decision will normally take into account all important elements of the taxes of
the host state, mainly their taxable basis, rates and exemptions or reductions. It is of no use
just to compare tax rates when countries can have important differences in the calculation of
the amount subject to tax. From the economical perspective taxes and duties are costs and as
such they weigh on the net return of the investment.
Changes to the tax laws of the host state
Although taxation (or tax incentives) will rarely be the decisive factor for the investment
decision, it is certain that consequent changes in tax policy or practice may have an important
impact on the value of or the return on an investment. Careful investors will allow for a certain
flexibility in their calculations. After all, everybody knows that tax laws and tax rates will
evolve over time.
So, usually changes in host state tax regimes will not result in catastrophic consequences for
(a particular) foreign investor. Moreover, states will normally be careful not to deter foreign
investors with their tax policies. But on occasion a new tax regime may have a severe impact
on foreign investment anyway, intended or not. The canceling of a duty free zone in a host
state, for example, may make the business of a chemical processing company prohibitively
expensive because import tariff will now be levied on the materials that customers send to be
processed. The raising of excise duty on cigarettes may make the products to expensive for a
producer’s existing foreign markets if a rebate for export is not provided. The sudden increase
of corporate income tax rates may present severe difficulties for enterprises that have fully
reinvested their profits and now cannot raise the cash to pay the additional taxes. Some new
taxes may weigh relatively higher on foreign owned companies thus reducing their capacity to
compete with nationally owned companies.
Measures of tax administration
New taxes or tax increases are a major concern to every business, but surprising
administrative measures and decisions of the tax authorities concerning the existing ones may
also present severe difficulties for foreign investors. Tax audits and investigations may lead to
a re-assessment by authorities of (1) the taxable basis (amount) or (2) the characterization
(nature) of the transaction or event. An example of the first kind would be when the taxable
profit of the foreign investor is re-assessed either by disallowing costs or increasing revenue
for the purposes of corporate income tax. In most of these cases, high penalties and interests
apply. Also when the value of imported goods is increased by customs for the purpose of
calculating tariff, or when the tax authorities increase the basis for excise duty calculation
foreign investors may be subject to higher taxes and penalties. Examples of the second kind
are re-classification of imported goods for tariff purposes or re-characterization of the type of
income for the purpose of withholding taxes. Furthermore, authorities may decide to revoke
tax privileges attached to an investment incentive program, cancel or delay the refund of
taxes, refuse to apply tax exemptions, etc.
The manner in which the administrative measures and decisions which lead to increased tax
costs for the foreign investor are carried out, are particularly of note here. The investors may
feel –justified or not- that the process was arbitrary or not transparent, discriminatory or
unfair.
Administrative collection measures applied by tax authorities may also severely affect the
operation of foreign owned businesses. Bank accounts may be seized or frozen, goods
impounded or property foreclosed.
Fair and Equitable Treatment in Tax Matters
“Fair and equitable tax treatment” is a fundamental principle of business and investment.
Almost every investment treaty, for example, provides that the host state must accord to
foreign investment by investors from the other state “fair and equitable treatment”. Often the
provision reads:
“Each Contracting State shall in its territory in any case accord investments by
investors of the other Contracting State fair and equitable treatment as well as full
protection under the Treaty”10
Based on an analysis of the international case law on the subject, the OECD Working Paper
includes the following elements that are encompassed in the “fair and equitable treatment”
standard11:
• Vigilance and protection (due diligence)

• Due process and prohibition of arbitrariness;
• Prohibition of denial of justice
• Transparency
• Good faith and legitimate expectations
Due diligence in tax matters
Usually referred to as vigilance and protection, this obligation is an element of “fair and
equitable treatment”. It often applies to physical security, seizures and the acts of the state’s
police and security forces but in fact is extended to all powers of persons acting under the
authority of the state.
The obligation is for the state to control its functions, the measures taken by officials so that
illegal treatment does not occur. The state is not liable to prevent all violations, but it must
take reasonable measures to prevent and remedy violations. When agents of a state
enterprise illegally seized two hotels in Egypt, for example, in the context of a dispute
between that enterprise and the foreign investor who owned the hotels, the Tribunal found
that Egypt had violated its duty to extend fair and equitable treatment, namely due diligence
and vigilance. The government knew that the agents of the state enterprise were about to
illegally seize the hotels and did nothing to prevent it. And once the seizure was a fact, Egypt
did nothing to remedy the situation, the Tribunal considered12.
In tax matters seizures and other measures of pressure or collection are often applied when
taxpayers do not (timely) pay the tax debt. The question is thus raised to which extent the
duty of due diligence applies in these cases. As long as the host state’s tax collection
measures are legal under the law of the host state and do not violate international law
(including fair and equitable treatment, national treatment under investment treaties, etc.) it
seems that they cannot lead to a violation of the duty to due diligence on the host state. But if
10
Germany Model BIT art 2 par. 2.
11
OECD Working Papers on International Investment, Fair and Equitable Treatment Standard in International
Investment Law, Paris, September 2004, p. 26
12
Wena Hotels Ltd. (U.K.) v. Arab Republic of Egypt, ICSID Case No ARB/98/4 (Award) (Dec. 8, 2000), [annulment
denied] reprinted in 41 I.L.M. 896 (2002).
the seizure measures applied are illegal under the host state’s domestic law, or when the
measures violate international law, then the host state has the duty to take reasonable
measures to prevent them or, if they already were taken, to remedy the situation. It seems
that this is not an absolute duty, so it must for example be shown that the host state knew
about the measures and could have prevented them. A more fundamental question is exactly
when the host state’s collection measures may be deemed to violate international investment
law. Is it possible to deduce practical rules from the various sources of international law in this
respect? For the moment, this is an open question. The issue of collection or recovery
measures will be revisited below with respect to expropriation.
Denial of justice in tax matters
The principle of “denial of justice” is deemed a part of customary international law and is thus
binding upon all nations13. In its narrow sense, which is used here, “denial of justice” refers to
access to courts and to wrongdoing by courts both in terms of procedure and in terms of
substantive justice. Foreigners and thus also foreign investors must be given a fair judicial
treatment. A fair and independent court can squash unlawful governmental measures and
thus remedy a state measure that would otherwise be a violation of international law. That is
why tax assessments which are unlawful under domestic law are not (yet) violations of
international law. The host state’s judicial infrastructure must be allowed to perform its normal
function, which does by the way not necessarily mean that a foreign investor is barred from
the arbitration procedure under the investment treaty until domestic legal proceedings are
finalized.
The problem becomes one of “denial of justice” if the correcting function of a fair domestic
legal proceeding does not occur. However, international arbitration tribunals are not appellate
courts for domestic judicial decisions that foreigners do not agree with. Even an “error” by a
domestic court –supposing one would later establish that the decision was indeed erroneous-
does not necessarily constitute a denial of justice under international law14. The error must be
of such a significance, or the procedures applied so unusual and unfair that it puts into
question the legitimacy of the whole proceeding.
In the words of the Arbitral Tribunal of the Azzinian v Mexico15, denial of justice in the strict
sense would occur when:
• the relevant courts refuse to entertain a suit; or

• they subject it to undue delay; or
• they administer justice in a seriously inadequate way; or
• there was a clear and malicious misapplication of the law.
In another relevant investment case, Mondev v USA, denial of justice was seen as follows:
“The test is not whether a particular result is surprising, but whether the shock or
surprise occasioned to an impartial tribunal leads, on reflection, to justified concerns as
to the judicial propriety of the outcome, bearing in mind on the one hand that
international tribunals are not courts of appeal, and on the other hand that Chapter 11 of
NAFTA (like other treaties for the protection of investments) is intended to provide a real
measure of protection. In the end the question is whether, at an international level and
having regard to generally accepted standards of the administration of justice, a tribunal
13
F.V. García-Amador et Al., Recent Codification of the Law of State Responsibility for Injuries to Aliens (180) 1974
14
Encana v Ecuador, par. 194-196
15
Azzinian v Mexico, ICSID ARB(AF) 97/2, par 102-103 (available at www.investmentclaims.com/decisions/Azinian-
Mexico-Award-1Nov1999-Eng.pdf) (hereafter “Azinian v. Mexico”)
can conclude in the light of all the available facts that the impugned decision was clearly
improper and discreditable, with the result that the investment has been subjected to
unfair and inequitable treatment. This is admittedly a somewhat open-ended standard,
but it may be that in practice no more precise formula can be offered to cover the range
of possibilities”16
The implications of “denial of justice” as an element of the “fair and equitable treatment”
standard are important for matters involving tax disputes. The following examples can
illustrate this:
Review by courts in tax matters
The absence of an administrative appeal or independent judicial review is clearly very

problematic in terms of denial of justice. Even if nationals of the host state also have no
access to appeal or judicial review, it seems likely that a Tribunal will find that international
law is breached. In the absence of independent review, the taxpayer is always at the mercy of
the authorities.
In international law, the notions of a denial of justice and of a “fair trial” are relatively
developed. The appeal or independent judicial review must be of such a nature that it can
deliver justice to the investor. More precisely, the proceedings must be in accordance with the
requirements of the international minimum standard in all respects. This means that
fundamental rights as fairness, right to a defense, rule of law, good faith and proper rules of
procedure must be respected. A “rubber-stamp” review that agrees with the authorities
regardless of the merits of the case can certainly not fulfill that requirement.
The appeal or review must be timely so that the process does not become meaningless. It is
difficult to prescribe exact time limits in this regard as much will have to depend on the facts
and the circumstances of each case.
With respect to tax matters, various issues are raised when it comes to the international
obligation to provide the taxpayer with a “fair trial”. Most states have administrative phases of
dispute settlement, where the taxpayer’s protest is decided by a government official and not
by an independent judge. Sometimes, there is only the administrative procedure for certain
types of taxes. The question can be raised if that in itself constitutes a denial of justice. The
same can be asked for stringent conditions and restrictions to have access to independent
legal proceedings in tax cases, such as short time periods for filing a request or high
expenses.
Although many states provide that an appeal or a review does not suspend the obligation to
pay the tax that is in dispute, such a measure may easily lead to situations where the
taxpayer has no real chance to defend himself, so that there could be a denial of justice. This
could be the case with an arbitrary and extremely high tax assessment that is vigorously
disputed by the taxpayer. But, since the tax in dispute must be paid even in case of appeal or
review, for a high tax claim the taxpayer may go bankrupt even before winning the appeal or
the review.
Practical and economical circumstances can also raise questions of denial of justice in tax
cases. When disputing import duties, for example, in case an investor does not have the right
to import goods and pay duties while reserving his right to protest the assessment after
customs clearance, one could argue that the investor does not really has access to a fair and
16
Mondev International LTD v. United States of America, ICSID Case No. ARB(AF)/99/2, par 64 65.
independent legal proceeding. Commercial and financial considerations will prevent most
investors from leaving the goods in the customs depot to await the outcome of a lengthy court
battle.
Grossly unjust decisions by tax courts
When tax courts find in favor of the tax authorities in domestic tax disputes, there may be a
denial of justice under international law if the decision was “shocking to the sense of legal
property” or “clearly improper” against the backdrop of the administration of justice.
As was said above, it does not suffice that the domestic tax court came to the wrong
conclusion. That is not a claim which can be entertained before an international tribunal,
which does not sit in the capacity of appellate court to the host state’s tax courts. In other
words, the tax courts in the host state may come to the wrong decision without this in itself
being a denial of justice under international law17. For international law to be breached in this
respect, the host state tax court must have willfully ignored the law, applied rules of
procedure which are clearly dishonest to the investor or administer justice so slow that the
process becomes meaningless to the investor. “Dishonest rules of procedure” could include
review by a judge that is not impartial and independent and unequal rules on evidence. An
undue influence by the government on the decision by the court would probably also amount
to a denial of justice.
Due process and arbitrariness in tax matters
General remarks
The “fair and equitable treatment” standard is often interpreted to include respect for due
process and to prohibit arbitrariness. Moreover, many investment treaties include an obligation
on the host state forbidding certain unreasonable, discriminatory of arbitrary measures18.
In its wider sense, “denial of justice” applies to actions by all the branches of the state and the
executive, including the tax authorities and customs19. It has often been applied by
international courts and tribunals, sometimes in relation to “arbitrariness” which is mentioned
in provisions of many investment treaties20.
The decision of the International Court of Justice in the ELSI case is in this regard of particular
note. In that decision, the Chamber offered a definition of what is arbitrary:
“Arbitrariness is not so much something opposed to a rule of law, as something

opposed to the rule of law…It is a willful disregard of due process of law, an act which
shocks, or at least surprises, a sense of judicial propriety”21.
The Waste Management v. Mexico case also offers an interesting analysis of the content of
“fair and equitable treatment” with respect to due process:
“Taken together, the S.D. Myers, Mondev, ADF and Loewen cases suggest that the
minimum standard of treatment of fair and equitable treatment is infringed by conduct
17
Encana v Ecuador, par. 194-196
18
See for example Netherlands Model BIT art. 3.1
19
H. Accioly in Recueil des Cours (1959) p. 379; Hackworth, Digest of International Law ; A. Freeman shares the
same view in « The International Responsibility of States for Denial of Justice » (1938)
20
Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil Genin v. Republic of Estonia, ICSID Case no ARB/99/2 ,
25 June 2001
21
Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), ICJ Reports, 1989, p. 15, par. 128
attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly
unfair, unjust or indiosyncratic, is discriminatory and exposes the claimant to sectional
or racial prejudice, or involves a lack of due process leading to an outcome which
offends judicial propriety –as might be the case with a manifest failure of natural
justice in judicial proceedings or a complete lack of transparency and candour in an
administrative process. In applying the standard it is relevant that the treatment is in
breach of representations made by the host State which were reasonably relied on by
the claimant”22
The Tribunal in the Occidental v. Ecuador case also offers interesting considerations in this
regard23:
“Although fair and equitable treatment is not defined in the treaty, the Preamble
clearly records the agreement of the Parties that “such treatment is desirable in order
to maintain a stable framework for investment and maximum effective utilization of
economic resources”. The stability of the legal and business framework is thus an
essential element of fair and equitable treatment. The Tribunal must note in this
context that the framework under which the investment was made and operates has
been changed in an important manner by the actions adopted by the [tax authorities].
… The tax law was changed without providing any clarity about its meaning and extent
and the practice and regulations were also inconsistent with such changes. Various
Arbitral Tribunals have recently insisted on the need for this stability. The Tribunal in
Metalclad held that the Respondent ‘failed to ensure a transparent and predictable
framework for Metalclad’s planning an investment. The totality of these circumstances
demonstrate a lack of orderly process and timely disposition in relation to an investor
of a Party acting that it would be treated fairly and justly’.”
A denial of justice, arbitrariness and infraction on due process are not the same as
unlawfulness under domestic law. A regulation that is unlawful under the domestic law of the
host state of an investment is not necessarily “arbitrary” or “a denial of justice”24.
Due process in tax administration
The domestic legal systems of many states have developed notions of “due process” or
“principes de bonne administration” which have been applied to tax matters. Those domestic
laws or doctrines may in some ways actually have the same operational contents as the
international concept of due process.
In tax matters, the issue of due process and arbitrariness will mostly be raised in cases where
the tax authorities have an explicit or implicit discretion under the tax laws and regulations.
This discretion can relate to the granting (or refusing) of privileges such as tax holidays,
reductions and credit and delay of payment. It can also relate to investigation and
enforcement such as audits, tax recovery measures and measures to obtain information. As
opposed to the domestic laws and doctrines, due process of tax administration matters has
not been much examined in international law. Some further study of international25 and
national sources may result in a clearer understanding of the obligations of states on tax
proceedings.
22
Waste Management, Inc. v. The United Mexican States, ICSID Case No. ARB(AF)/00/3
23
Occidental v. Ecuador par. 184 et seq.
24
ELSI USA v Italy, loc cit, par. 128
25
For example the International Covenant on Civil and Political Rights, art. 14 (due process).
27
Transfer Pricing Guidelines for Tax Administrations and Multinational Enterprises, OECD Paris
Due process of a tax re-assessment
How does the requirement of due process affect the tax reassessment process? Errors may
happen and in every state and a tax re-assessment always involves some degree of discretion
for the tax officials that carry out the audit. The question can be raised if the requirement of
due process means that a re-assessment measure must be justified with objective arguments
in law and in fact. Given that a taxpayer must be able to defend his case, a re-assessment
that is completely unmotivated will be difficult to maintain in view of the requirement of due
process and the prohibition of arbitrariness.
When tax authorities carry out re-assessments based on factual data such as prices, values or
margins, ideally the relevance (the reasonable relationship with the taxpayer’s case) of that
data should be clearly demonstrated. In many states, the data should also be made available
to the taxpayer for review. The question remains how this would be regarded from the
perspective of international law. Tax re-assessments based on “secret comparables” in
transfer pricing cases, for example, is troublesome from the perspective of the standard of
“fair and equitable treatment”27, because it is for the taxpayer simply impossible to argue
against evidence he is not aware of.
Also, it seems likely that the taxpayer must be given proper notice in writing of the re-
assessment procedure and of the points of view of the tax authorities so he can offer
alternative explanations or arguments to the contrary. A re-assessment that is completed
without hearing some way or another the taxpayer may easily be seen as contrary to due
process.
The finality of the process is also an issue. Once an audit is completed and the re-assessment
is issued, are tax authorities prevented from revisiting the same tax years of the same
taxpayer to find new issues or grounds for re-assessments, unless newly acquired information
(for example from cross-checking with other taxpayers) has come up? Or may audits be done
and redone without limitation from the perspective of international law?
None of these failures in terms of due process or arbitrariness necessarily leads to a violation
by the host state of the “fair and equitable treatment” provision in an investment treaty. The
host state may have domestic measures in place to remedy the situation, such as an
administrative appeal or a judicial review. Unless those appeals or reviews are carried out in a
way that denies justice, the host state is not internationally liable under an investment treaty.
Answers by tax authorities on questions about the interpretation or application of the tax law
Many countries provide in the possibility for rulings on the interpretation of the tax law, and in
“advance pricing agreements” on transfer pricing cases. In some national legal systems, there
are some uncertainties as to the legal status and binding effect of such rulings and
arrangements. It would be interesting to explore this question from the perspective of
international investment law. It seems likely that the principle of due process and the
prohibition of arbitrariness implies that when tax authorities answer a request from a foreign
investor about the tax treatment of their investment, the given answer should bind the tax
authorities. This should be the case even when it turns out that the answer was in fact
incorrect.
In the Occidental v. Ecuador case, the Tribunal emphasized that the ruling the foreign investor
had requested from the tax authorities was answered “wholly unsatisfactory and thoroughly
vague” and this was one of the elements the Tribunal based itself on to find in favor of the
foreign investor28.
Refusal or undue delay by tax authorities to register a taxpayer
Tax systems usually operate by means of identifying and registering those who are subject to
its operation. Often, registration does not only create liabilities but also benefits for taxpayers
such as entitlement to refunds of tax that was paid or withheld at source in excess of what will
be finally due by the taxpayer. In such a case, tax authorities may delay the refund of excess
taxes by refusing or delaying the registration of taxpayers.
This may constitute a violation of the ”fair and equitable treatment” standard which requires
due process and good faith on the part of entities of the host state, or the “national
treatment” standard in case national investors are in fact being registered less cumbersome29.
Transparency in tax matters
There is reference to “transparency” in instruments of international trade law30 and many

investment treaties impose an obligation upon the host state to publish or make otherwise
available the laws and regulations that relate to foreign investment31. The US Model BIT
provides for example that:
“Each Party shall ensure that its:

(a) laws, regulations, procedures, and administrative rulings of general application;
and
(b) adjudicatory decisions
respecting any matter covered by this Treaty are promptly published or otherwise made
publicly available”32.
There are a few recent international decisions that associate “fair and equitable treatment”
with transparency of the host state’s legislation and regulation. In other words, the host state
is held to be in violation of the requirement of “fair and equitable treatment” in case the
regulations or procedures that cause injury to the foreign investor were not transparent.
In Metalclad Corporation v. United Mexican States (see paragraphs 66-69), the Tribunal found
that the absence of a clear rule concerning construction permits requirements in Mexico, had
“failed to ensure a transparent and predictable framework for Metalclad’s planning an
investment”33. It decided that this failure of the part of Mexico to ensure the transparency
required by NAFTA –in its Article 1802 on transparency—was a breach of fair and equitable
treatment under Article 1105.
A similar mention is reported by the OECD Working Paper outside of the scope of NAFTA. In
the Maffezini case, the Tribunal held that:
28
Occidental v Ecuador, par. 184
29
Feldman v Mexico par. 175 “The evidence also shows that CEMSA was denied registration as an export trading
company, apparently in part because this action was filed, and in part as a result of the ongoing audit of the
rebates for exports during 1996 and 1997, even though, as Mr. Diaz Guzman indicated, three other cigarette export
trading companies had been granted registration”
30
See for example art 63 of TRIPS and art. III of GATS
31
NAFTA art. 1802; See for an overview UNCTAD IIA Series Transparency
32
US Model BIT, art. 10 par. 1
33
Metalclad Corporation v. United Mexican States, par 101
“….because the acts of SODIGA (public company) relating to the loan cannot be
considered commercial in nature and involve its public functions, responsibility for
them should be attributed to the Kingdom of Spain. In particular, these acts amounted
to a breach by Spain of its obligation to protect the investment as provided for in
Article 3(1) of the Argentine- Spain Bilateral Investment Treaty. Moreover, the lack of
transparency with which this loan transaction was conducted is incompatible with
Spain’s commitment to ensure the investor a fair and equitable treatment in
accordance with Article 4(1) of the same treaty. Accordingly, the Tribunal finds that,
with regard to this contention, the Claimant has substantiated his claim and is entitled
to compensation…”.
It is however difficult to deduce hard and fast rules from these decisions with respect to all
investment disputes, especially with respect to tax matters, which are often seen as
inherently complicated and difficult to understand. Many uncertainties remain. What is the
consequence when a state failed to meet its general obligation to publish laws and
regulations? Is this (always) a violation of the “fair and equitable treatment” standard? Or
(only) a violation of the provision on the publication of laws and regulations itself? In the latter
case, how is the state liable towards investors? What if the state – a least developed country
for example- lacks the resources to fulfill its obligations? Although strictly speaking the dispute
settlement mechanism of the investment treaty may very well apply to each and every
obligation in the treaty, including the one on transparency, it is difficult to imagine a violation
of such obligation on transparency that is not also a violation of “fair and equitable treatment”
as well. How can foreign investors defend themselves in disputes with the host state if
relevant regulations are not made known? So, perhaps an explicit requirement on
transparency will mostly serve to emphasize that it is the duty of the host state to provide
clarity (publicly and on a case by case basis) on the interpretation and application of tax laws,
regulations and procedures.
An obligation to publish investment-related laws, regulations etc. will most likely apply to
taxation as well as “pure” investment laws and regulations if one takes the position that
taxation is included in “the treatment of investment”. Taxation may certainly “affect the
investments of investors” in the sense of that provision and thus tax laws, regulations,
procedures as well as rulings and decisions must be made known.
Good faith and legitimate expectations of investors
The fair and equitable treatment standard is taken to include the obligation of good faith on
the host state34. One can scarcely find a principle more fundamental to the law of treaties
than the requirement of observing treaty obligations in good faith. Not only is “good faith”
mentioned five times in the Vienna Convention on the Law of Treaties35, and enshrined in the
UN Charter36, it has repeatedly been invoked and acknowledged by international courts37 to
34
OECD Working Papers on International Investment, Fair and Equitable Treatment Standard in International
Investment Law, Paris, September 2004, p. 26
35
Preamble, art. 26 (pacta sunt servanda), art. 31 (general rules of interpretation), art. 41 (provisions of internal
law) and art. 69 (consequences of invalidity).
36
Art. 2 par 2 Charter of the United Nations
37
Including in Treatment of Polish Nationals case, PCIJ 1932 A/B, n. 44, p. 28.; Minority Schools in Albania case,
PCIJ, 1935 A/B, n. 64, p. 19-20.; Rights of Foreign Nationals in Morocco case, ICJ Reports 1952, p. 212.; North Sea
Continental Shelf cases, 1969 ICJ Reports 3 p. 47 par. 85.; Nuclear Tests cases, 1974 ICJ Reports 253, p. 268 par.
46.; WHO/Egypt Agreement Advisory Opinion, 1980 ICJ Reports 73, p. 95-8 (par. 48-51).; Military and Paramilitary
Activities in and against Nicaragua case (jurisdiction and admissibility) 1984 ICJ Reports 392, p. 418 par. 60.;
Border and Transborder Armed Actions Nicaragua-Honduras (jurisdiction and admissibility) 1988 ICJ Reports 396,
p. 69 par. 105
say nothing of the international literature dedicated to this topic38. The principle of good faith
has been associated with the respect for legitimate expectations of treaty partners39. This
means in essence that there may be circumstances where one party may reasonably expect
the other party will conduct itself in a certain manner.
In some investment law cases, international tribunals have referred to the legitimate
expectations of foreign investors with respect to the policy of the host state40. Tribunals
accept that investment decisions are made on certain basic expectations and assumptions. As
a principle states remain free and sovereign to issue regulations which are not what investors
may have hoped for. But there may be circumstances where it would be unreasonable for the
host state not to respect the legitimate expectations of foreign investors.
This issue may play an important part when it comes to drastic changes in the tax policy of
the host state, but it remains largely unexplored. Although the general rule remains that
states are free to change the tax regime of foreign investors, it is clear that the principle of
good faith protects the legitimate expectations of investors in specific circumstances. When a
tax exemption for investments in a certain sector is installed by the government of the host
state only to be cancelled just after a major investment has been completed, for example, the
principle of legitimate expectations may come into play. More study is however needed on this
issue.
Conclusions with respect to tax reform in Cambodia
Based on the review above of the prevailing principles in international law on the tax
treatment of business and investment, the following conclusions are in order:
1. International investment treaties, trade agreements and other economic treaties

incorporate fundamental principles that apply to the tax treatment of business and
investment;
2. Cambodia has concluded many of these treaties, which are currently in force, including
investment protection agreements, WTO agreements such as GATT and GATS and
ASEAN-related treaties;
3. These treaties provide a legal basis/obligation for the Cambodia tax system for inter
alia the following:
a. Transparency of the tax audit and re-assessment process;
38
Kolb R., La Bonne Foi en Droit International Public, PU France, 2000.; O’Connor Good Faith in International Law,
Darmouth, 1991.; Rosenne, S., Developments in the Law of Treaties 1945-1986 (Chapter 3- Good faith in the
codified law of treaties), Cambridge UP, p. 135-179.; Mani V.S. Basic Principles of Modern International Law,
Lancers Books, 1993, p. 200-220.; Stuyt A.M., “Good faith and bad faith”, N.I.L.J., vol. 28, 1981.; Zoller, E., La
Bonne Foi en Droit International Public, ed. A. Pedone, Paris, 1977.; Virally M., “Review Essay: Good faith in public
international law”, AJIL, 1983, p. 130-134
39
Tammes (Netherlands), GAOR, 20th session, 6th Cmtee, 974th mtg, p. 199 (referring to good faith and the
expectations that parties make while drafting an instrument, as noted by Mani, V.S. Basic Principles of Modern
International Law, Lancers Books, 1993, p. 205; Fisheries Jurisdiction, Judgment, ICJ Reports, 1973, p. 57-58, par.
22-23
40
See for example TECMED v Mexico ICSID case No ARB(AF)/00/2 (Award) (May 29, 2003) par. 102; Azurix v
Argentina, ICSID No. ARB/01/12, par 316
b. Independent settlement of disputes and judicial settlement;
c. Clarification and predictability of tax treatment;
d. Non-discrimination;
e. Due diligent tax treatment; and
f. Respect for legitimate expectations of taxpayers.
3. Suggestions for tax reform in Cambodia
a) Encouraging businesses to operate as registered taxpayers
Problem posed
As was noted above, the basic distinguishing criterion in Cambodian tax law is the duty to
register for tax purposes. All companies are required to register for tax purposes. Other
businesses must register if and when certain thresholds are reached or are expected to be
reached. As was already noted above, these thresholds are as follows41:
• taxable turnover in any period of 3 consecutive months exceeds 125 M KHR (goods)
(approximately 30,000 US$) or 60 M KHR (services) (approximately 15,000 US$); or
• expectation to exceed taxable turnover in the coming period of 3 consecutive months of
125 M KHR (goods) or 60 M KHR (services); or
• having government contracts exceeding 30 M KHR.
In addition, there is an annual threshold, which is 500 M KHR in the case of the supply of goods
of 250 M KHR for services.
In fact, compliance with this rule is difficult to monitor. To assess whether the businesses that
do not volunteer registration meet the threshold, the tax officials must have access to financial
information that is usually not available.
Furthermore it should be noted that the difference in tax implications and other compliance
costs between a non-registered business and a duly registered taxpayer is substantial. The
following are the main concerns in this regard:
• VAT: a taxpayer must on almost all supplies apply 10% VAT except for export. An
unregistered business obviously does not have VAT charged on its goods and services;
• Withholding tax: a taxpayer must apply a 14% withholding tax on most remittances to
foreign lenders, service suppliers, lessors and other recipients of most types of income
except for the buying of goods.
• Resident withholding tax: a taxpayer must assume a 15% withholding tax when paying
resident service suppliers, while unregistered taxpayers are not subject to this.
• Salary Tax: Taxpayers are subject to withhold salary tax for their employees which
adds to the cost of labor, while unregistered taxpayers do not have to account for this.
41
Art. 2 Sub-Decree on VAT No. 114 ANKR.BK and ….Prakas TOP
• Minimum Tax and Tax on Profit: unregistered taxpayers evade the 1% Minimum Tax
calculated on turnover and the 20% TOP on the net profit.
• Compliance: taxpayers must on a monthly basis file at least 4 tax returns: the
prepayment of TOP return, the VAT return, the withholding tax return and the salary
tax return. As most taxpayers do not have sufficiently trained human resources, often
tax officials are approached to do this, with obvious consequences in terms of
transparency. The cost of the monthly returns may be estimated at US$150 to US$300
on average per month, which is too high for SME’s.
The combination of a relatively easy to avoid registration requirement with a high incremental
tax- and compliance cost of operating as a registered taxpayer, results in high non-compliance
by all those that do not need to have a corporate legal entity, or can afford to dispose
regularly of corporate shell.
Options for reform
The Government is very much aware that the lack of proper taxpayer registration and the
existence of the estimated regime is the most important obstacle to proper revenue collection
and tax administration. It feels however that in the current situation, whatever the measures
the Government may take, businesses are unlikely to respond.
A part of the solution may be found in reducing the divide in terms of tax and compliance
costs between registered and unregistered taxpayers. This could be done by (1) reducing the
tax and compliance costs for registered taxpayers, or (2) increasing the tax and compliance
costs for unregistered taxpayers or (3) both.
As to reducing the tax and compliance costs for registered taxpayers, this may face opposition
if such measures would result in a loss of revenue for the Government. Not all measures need
to actually do that, however. It could be considered to:
• Provide in a concessionary TOP rate for certain newly registered SME’s;
• Provide in a temporary nominal TOP without compliance requirements for qualifying

taxpayers; It should be noted that the TD has ahead adopted a model for
bookkeeping for small tax payers;
• Provide in a temporary exemption or grace period for qualifying taxpayers;
• Change TOP and VAT compliance into quarterly returns; and
• Improve procedure and time for refunds of VAT.
As to increasing the tax cost of doing business as an unregistered taxpayer, the following
measures could be considered:
• Provide in a withholding tax of 15% on buying goods from an unregistered taxpayer,

not only on services;
• Improve administrative registration capabilities;
• Disallow receipts from unregistered taxpayers for TOP-deduction;

• Create a central register of taxpayers capable of identifying facilitators of repetitive

non-compliance with corporations; and
• Create legal impediments to businesses that operate as unregistered taxpayers, such

as inability to conclude certain types of contracts.
b) Clarification and simplification of tax laws and regulations
Problem posed
As was noted above, the Cambodian tax system is quite young. It was superimposed from
modern jurisdictions without having the benefit of being based on existing legal concepts or a
tax order. As a result, the meaning and workings of the tax laws are quite unfamiliar to most
persons that must use them.
The tax laws are complemented by few administrative regulations. There are no procedures
for asking tax authorities for clarification of laws and regulations. The TD currently receives
questions to and directs them to the Tax Policy office, but the resources to address these
questions in an organized and timely manner are not available, so the questions are few in
numbers.
Most business transactions, leasing being a case in point (see below) currently raise questions
in Cambodia as to the tax treatment. This can be said for TOP, VAT and basically all other
taxes.
Options for reform
The following measures could be considered to improve the clarity and predictability of tax
laws and regulations:
• Intensified program of issuing Prakas and Notifications by the MEF on a range

of issues;
• Program to issue Prakas and Notifications from the framework of the

Subcommittee;
• Create the possibility and administrative resources for a system of advance

rulings;
• Program to issue Prakas and Notifications in the context of a large scale

conference for tax reform;
• Create an independent dispute settlement system and publish the decisions

(see below); and
• Create and publish an official commentary on the tax laws and regulations to
be issued by TD.
c) Improvement of taxpayer service with respect to tax registration
Problem posed
A frequent complaint in the business practice of SME’s in Cambodia relates to the tax
registration process. Normally this involves instances of payment of tax:
• Payment of the Registration Tax and Stamp Duty (first registration)– The
payment of the registration tax and Stamp Duty for the Commercial
Registration Certificate can only take place within one week after the Ministry
of Commerce (“MOC”) issues the Commercial Registration Certificate. The
mount of Registration Tax payable is 100,000 in Khmer Riels and in the US
Dollar equivalence of approximately $25;
• Patent Tax payment on Office Lease Agreement – This tax payment is

due by the Lessor/Landlord on an annual basis at the progressive rates
determined by the TD; and
• Value Added Tax Registration;
This process is costly and time consuming. It is sensitive to abuse as well, as companies
manage to register at times without a VAT registration number, or when the same operators
are able to register company after company without ever complying with the tax obligations.
Options for reform
A major obstacle to reforming the tax registration process is the fact that various
governmental departments are involved. Coordination between these departments is difficult.
The following measures could be considered:
• One-stop registration at the Ministry of Commerce (“MOC”): The process could be

reformed so that all payments of tax and submission of documents takes place at the
MOC. The MOC would then have to remit the documentation to the other
governmental departments. This process is to a certain extent similar to what is at
present customary for companies that are registered at the Council for the
Development of Cambodia.
• Simplification of the process: The process could be simplified by the TD no longer

requiring stamps confirming the payment of tax on office leases at the Municipal tax
office.
Recently, the MEF has indicated that it is in favor of these reforms. In fact the Tax
Department has announced in the Government-Private Sector Tax Subcommittee on 3
December 07 that it will make a proposal to the MEF to introduce a “one stop” registration
system with the Ministry of Commerce. The main features of this planned reform are:
• The TD will daily recuperate information on new registrations;
• Issue a letter with a taxpayer ID number that is to validated by payment of the

appropriate tax;
• Registrants may pay the tax at the National Bank if they are clear about which tax
indeed to pay;
• Registrants may consult the Tax Department offices in case of doubt.
Obviously this initiative is quite interesting and deserves to be followed closely.
d) Improvement of transparency of the tax (re-)assessment process
Problem posed
Any body of rules needs independent dispute settlement to further develop and improve, and
to ensure an effective practical operation. At present, the Cambodian tax law does not have a
dispute settlement mechanism that is capable of playing that role. The LOT does provide in
the procedure for appeal, arbitration and judicial settlement. The provisions read as follows:
Section 8
Settlement of the Taxpayer’s Protest
Article 120: Rules for Administrative Protests
The rules for the settlement of the taxpayer’s protest on tax issues shall be as
follows:
1. A taxpayer who is not satisfied with the tax re-assessment or other decision
made by the tax administration can file a protest with the Director of the Tax
Department. The protest must be limited to facts or other information contained in the
tax re-assessment or the decision or the procedures of the tax re-assessment.
2. The administrative protest must be made in writing according to the form as
stated in the article 121 of this law, and must be submitted to the tax administration
within 30 days after the day the taxpayer receives the letter of notification for tax
collection from the tax administration.
3. The administrative protest does not relieve the taxpayer of any obligation to
pay various taxes, additional taxes, and interest as specified in the letter of notification
for tax collection.
Article 121: Contents of the Administrative Protest by the Taxpayer
An administrative protest can only be accepted if the letter of protest has the
contents as below:
1. identification number of the taxpayer who makes the letter of protest, if

available;
2. reference to the assessment, decision, or results which are the objects of the
letter of protest;
3. facts or acts which are objects of the letter of protest;
4. reasons of the protest;
5. date and signature of the taxpayer and signature of the taxpayer’s authorized
representative if necessary.
Article 122: Decision by the Tax Administration
The tax administration must issue a new decision within 60 days after the date the
letter of protest is received to confirm the correctness or incorrectness, in whole or in
part, of the tax assessment or other decision that the taxpayer disputes. The tax
administration shall also state the basis of this decision.
If the taxpayer does not accept this new decision of the tax administration he can file a
letter of protest to the Committee of Tax Arbitration within a period of 30 days.
Article 123: Committee of Tax Arbitration
The organization and functioning of the Committee of Tax Arbitration shall be

determined by sub-decree upon proposition of the Minister of Economy and Finance.
Article 124: Appeal to the Court
The taxpayer has the right to appeal to the competent court against the decision of the
Committee of Tax Arbitration within a period of 30 days after receiving notification of
that decision.
The taxpayer must deposit in the national treasury an amount of money equal to the
taxes, additional taxes, and interest under dispute and as assessed by the tax
administration before filing the appeal to the court.
The following problems can be noted at this time with respect to the dispute settlement
procedure:
• The TD may not have the necessary resources to take a decision on the administrative
appeal by taxpayers within 60 days as required by law because in practice this rule is
not respected;
• At present, the appeal process is not transparent in terms of motivation and evidence
relied upon by the TD to decide on the appeal;
• There is no official procedure for the taxpayer to complain about the application or
interpretation of the tax law by officials prior to the issuing of the reassessment notice;
• The Tax Arbitration Committee is not established. This means that no independent
review is available at the administrative level; and
• Judicial review is only possible after rejection by the Tax Arbitration Committee, which
does not exist, so in theory there is no judicial remedy open to the taxpayer either
(unless Cambodian courts would judge themselves competent anyway).
An effective dispute settlement system would protect the taxpayer from unreasonable or
illegal reassessments by the auditing tax officials, whereas now such protection is not readily
available.
Options for reform
In due course, the following measures may be considered:
• Capacity building for TD officials engaged in dispute settlement;

• Implementation of the Tax Arbitration Committee;
• Creation of a “consultative committee of experts” that renders a non-binding

recommendation on a dispute;
• Introduction of binding arbitration in tax matters;
• Capacity building for judiciary; and
• Ombudsman in tax procedures.
The MEF has indicated to be open to these reforms but is of the view that first some
experience with the ruling-system should be developed.
e) Increasing the predictability of the taxation of SME business activity
Problem posed
Against the background of unclear tax laws and lack of dispute settlement mechanisms, it is
not surprising that businesses often will not be able to assess the tax consequences of their
activity, and may resort to tax evasion rather than taking the risk that the official tax
treatment of an income or transaction turns out highly unfavorable.
Options for reform
The following measures may be considered:
• Advance Pricing Agreements resulting in a “fixed” tax cost for typical business
activities;
• Rulings on the tax treatment of income and expenses: an effective procedure with
clear and timely outcome to determine in advance how an income or an expense will
be treated for tax purposes. This requires the creation of small team of high level
officials (“ruling-committee”) possibly supported by technical assistance;
• Create and publish an official commentary on the tax laws and regulations to be
issued by TD.
• Creation of a “consultative committee of experts” that renders a non-binding

recommendation on a dispute;
• Introduction of binding arbitration in tax matters;
• Ombudsman in tax procedures.
f) Modernization of certain older tax laws
Problem posed
Some of Cambodia’s tax laws which were not addressed by the Law on Taxation are difficult
to apply in the context of the present economic and business situation. The Patent Tax law,
for example, requires businesses to pay a registration tax per type of activity they perform.
When companies want to carry out more than one activity, problems of interpretation arise.
Another example would be the Transfer Tax. The law for this tax only comprises a handful of
articles. Nevertheless, it covers important transactions such as sale of real estate and vehicles.
For the purposes of Transfer Tax, it is not clear if a transfer of real estate by order of a court,
inheritance or expropriation would be subject to tax since the limited language of the articles
does not address these cases.
Options for reform
The following measures could be considered:
• Modernization of Stamp Duty, Patent Tax, Transfer Tax, Tax on House and Land Rent,
Excise Tax, Turnover Tax;
• Replace Patent Tax, Transfer Tax, Tax on House and Land Rent and Stamp Duty by
one modern Registration Tax Law;
g) Improve the distribution of information on tax compliance requirements

among SME’s
Problem posed
In general, the knowledge on even the most basic tax obligations is poor among businesses.
Businesses are not aware of the details of their tax obligations, base themselves at times on
word-to-mouth incomplete information and do not know which liabilities they incur by not
complying with tax laws.
Our review has identified the following contributing factors to this problem:
• There exists no free or payable collection of tax laws and regulations available to the
public. Even basic regulations are not readily available and not even the collection kept
by expert firms seems to be complete;
• Only for VAT a simple, practical guideline exists. Tax on Profit, Transfer Tax,
Withholding Tax , Specific Tax and Excise Tax do not have any information written in
language that can be understood by SME’s;
• The TD does not seem to have the resources to organize a sufficient number of public
and free seminars which are meant to inform taxpayers of the practical working of the
tax laws;
• No organized question point exists for businesses to obtain clarification on the

application of tax laws
Options for reform
The following measures could be considered to improve the distribution of information among
SME’s:
• Compile a free and complete collection of tax laws and regulations for the public;
• Create and publish an official commentary on the tax laws and regulations to be issued
by TD;
• Organize regular free seminars to explain tax compliance issues in a practical manner
to a business audience;
• Create the possibility and administrative resources for a system of advance rulings on
the interpretation and application of the tax laws (see above);
4. Conclusions
Based on our experience and the observations noted above, we have the following conclusions
for tax reform in Cambodia.
1. The gap in tax and compliance cost between registered and unregistered businesses
remains a crucial obstacle to a systematic modern tax system. From the perspective of
businesses the competitive disadvantages of adopting the VAT regime while the
competitors do not, cannot be overcome lightly. At the same time, however, non-
compliance clearly mortgages the future growth potential of the business as well as its
transferability. Important liabilities are built up as long as the business continues to
operate without complying with tax laws. Encouraging compliance (including by
making compliance easier and less costly and by simplifying the process of registration
itself) by businesses is in our view and important element in enabling enterprises to
achieve some degree of financial, accounting and economic maturity.
2. Taxation must first and foremost be predictable and clear so as to not impede business
and investment. In Cambodia, the transparency of the tax system would firstly greatly
benefit from an intense program of tax regulations, clarifying or establishing the official
administrative position on dozens of questions that affect the taxation of business.
The TD however lacks the human resources to achieve this at present. Secondly, a
procedure providing in “rulings” (for which there is an existing legal basis) would
dramatically improve the predictability of the tax system. Thirdly, an independent and
efficient tax dispute settlement system would contribute much to the clarity and
predictability of the tax system.
3. In our view, in order for the Cambodian tax system to become “fair and equitable” in
accordance with the prevailing international legal principles on the subject, and to
empower businesses, an independent judicial or quasi-judicial procedure must be
implemented to settle disputes. Against the background of the stalled implementation
of the “Tax Arbitration committee”, alternative dispute settlement mechanisms may be
considered, including arbitration (for which there is an exiting legal basis) or non-
binding decisions by expert bodies. This reform could take place as a logical
consequence after implementing “rulings” (see above).
The following synoptic table gives an overview of the objectives and possible measures.]
Objective Possible Measures

Encouraging businesses to Provide in a concessionary TOP rate for certain newly
operate as registered incorporated SME’s;
taxpayers
Providing a temporary nominal TOP without compliance
requirements for qualifying taxpayers;
Provide in a temporary exemption or grace period for

qualifying taxpayers;
Change TOP and VAT compliance into quarterly returns;
Improve procedure and time for refunds of VAT.
Clarify and simplify tax laws Intensified program of issuing Prakas and Notifications
by the MEF on a range of issues;
Program to issue Prakas and Notifications from the

framework of the Subcommittee;
Create the possibility and administrative resources for a

system of advance rulings;
Program to issue Prakas and Notifications in the context

of a large scale conference for tax reform;
Create an independent dispute settlement system and

publish the decisions (see below);
Create and publish an official commentary on the tax

laws and regulations to be issued by TD.
Improvement of taxpayer One-stop registration at the Ministry of Commerce

service with respect to tax (“MOC”)
registration
Simplification of the process
Improvement of Capacity building for TD officials engaged in dispute

transparency of the tax (re- settlement;
)assessment process and
settlement of disputes Implementation of the Tax Arbitration Committee;
Creation of a “consultative committee of experts” that

renders a non-binding recommendation on a dispute;
Introduction of binding arbitration in tax matters;
Capacity building for judiciary;
Ombudsman in tax procedures.
Increasing the predictability Advance Pricing Agreements resulting in a “fixed” tax

of the taxation of SME cost for typical business activities;
business activity
Rulings on the tax treatment of income and expenses;
Create and publish an official commentary on the tax

laws and regulations to be issued by TD;
Creation of a “consultative committee of experts” that

renders a non-binding recommendation on a dispute;
Introduction of binding arbitration in tax matters;
Ombudsman in tax procedures.
Modernization of certain Modernization of Stamp Duty, Patent Tax, Transfer Tax,

older tax laws Tax on House and Land Rent, Excise Tax, Turnover Tax;
Replace Patent Tax, Transfer Tax, Tax on House and

Land Rent and Stamp Duty by one modern Registration
Tax Law;
Improve the distribution of Compile a free and complete collection of tax laws and
information on tax regulations for the public;
compliance requirements
among SME’s Create and publish an official commentary on the tax
laws and regulations to be issued by TD;
Organize regular free seminars to explain tax compliance

issues in a practical manner to a business audience;
Create the possibility and administrative resources for a

system of advance rulings on the interpretation and
application of the tax laws (see above);
PART B. Tax Reform of Leasing
As part of our assignment, we provide you with our advice on tax reform with respect to
financial and operating leasing. Our methodology is as follows:
1. Identification of impediments to leasing in terms of treatment that is

unfavorable compared to asset financing;
2. Withholding tax regime and options for reform;
3. Tax on profit depreciation regime and options for reform;
4. Tax point and recognition of income regime and options for reform; and
5. VAT regime and options for reform.
For each impediment, we have considered the following elements for the option for reform
and cited remarks where necessary:
• Level of difficulty to prompt reform from a procedural perspective;
• Impact of the reform on operators;
• Impact on government revenue; and
• Systematic nature of the law.
1. Leasing under current Cambodian tax law as viewed by the report

“A Proposed Framework of Modern Leasing”
The report “A Proposed Framework of Modern Leasing in Cambodia” (“the Report”) identifies
the following regulations as resulting in an unfavorable tax treatment of leasing as compared
to finance of assets:
1) Domestic withholding tax of 10% for rental of movable property (Art. 25 LOT);
2) Depreciation for TOP purposes by lessee only (Art. 13 LOT);
3) Time of supply for TOP purposes requires full payment of VAT upfront at inception the
lease in the case of finance lease (Sec. 4.1 Prakas TOP); and
4) Time of supply for VAT in the case of finance lease is the time of delivery of the goods
(Art. 48 Sub-Decree VAT).
In addition, the Report suggests that leasing should be zero-rated for VAT purposes to
compensate for perceived competitive disadvantages leasing has as compared to finance of
assets.
We have taken the points that were identified by the Report as a basis for our review.
2. Input from Private Sector interviews
We have conducted interviews with the following private sector enterprises to assess their
views on the Cambodian tax system with respect to leasing. Note that some interviews with
other enterprises are still pending.
− RM Asia
− ANZ Royal
− Acleda bank
− Cambodia Public bank
− GE Capital
The following preliminary conclusions can be drawn from those interviews:
1. Many divergent views exist on the current tax system applicable to leasing
transactions: some enterprises are thoroughly misinformed about the
application of withholding tax and VAT liability in this regard;
2. For most lessors, the withholding tax obligation is a matter solely concerning
the lessee and as such it is not much taken into account;
3. Every respondent felt that the uncertainties in the tax and regulatory field as
much as any particular taxation poses a difficulty for their business;
4. Besides taxation, respondents frequently cited lack of enforcement of

restitution of goods as a problem;
5. Some but not all of the banks felt no need to depreciate leased assets;
6. The larger operators felt that the current tax system renders leasing clearly less
competitive compared to finance.
3. Withholding tax (residents) paid for rent of movable property
Tax regime: rent
Under Cambodian tax law, withholding taxes (“WHT”) apply differently depending in first
instance on the residence of the recipient. When the recipient of the income is a resident of
Cambodia, the “general withholding tax” or rather the “resident withholding tax” applies. This
provision (Art. 25 LOT) reads as follows:
1. Any resident taxpayer carrying on business and who makes any payment in cash or
in kind to a resident taxpayer shall withhold, and pay as tax, an amount according to
the below mentioned rates which are applied to the amount paid before withholding
the tax:
a. The rate of 15 percent on:
- income received by a physical person from the performance of services including
management, consulting, and similar services;
- royalties for intangibles and interests in minerals, and interest paid by a resident
taxpayer carrying on business other than domestic banks and saving institutions to a
resident taxpayer.
b. The rate of 10 percent on the income from the rental of movable and
immovable property.
c. The rate of 6 percent on interest paid by a domestic bank or savings institution to a

resident taxpayer having a fixed term deposit account.
d. The rate of 4 percent on interest paid by a domestic bank or saving institution to a
resident taxpayer having a non-fixed term saving account.
2. The withholding in this article shall not apply to interest paid to a domestic bank or
savings institution and to the payment of tax exempt income as stated in article 9 of
this Law.
The Prakas TOP provides further guidance as to the interpretation of the resident withholding
tax in Sec. 8.2.1:
“The rate of 10% on income from the rental of a movable or immovable property: for
the purpose of the withholding tax, an income from the rental of a movable or
immovable property refers to an amount in cash or in kind paid by the rentee in
consideration for the use of a movable property such as an industrial, commercial,
technical, scientific equipment ... or an immovable property such as land, house, other
constructions, ... In this, an immovable property shall include all other properties
accessory to it as well as the right to act in accordance with the law on land
ownership, the right of usufruct, and any other right which can bring about a payment
in cash or in kind in a specified or unspecified amount”.
It should be noted that Cambodian tax regulations do not classify a lease payment in
connection with a financial lease (a concept which is not defined in tax law) as “interest”. The
notion of interest for withholding tax purposes is the same as for deductibility. It is defined in
the Prakas TOP as follows (Sec. 5.9.1 Prakas TOP of 12 December 2003).
The term “interest” refers to an amount paid by a debtor to a creditor in respect of

money owing by the debtor to the creditor. Interest is a consideration for the loan of
the money or for the forgiveness to sue for credit provided in the form of goods or
services. Interest includes mainly:
a1- an amount paid or accrued under a debt obligation which is not a return of
capital;
a2- any discount, premium, or similar payment”.
Interest?
It could conceivably be argued that the obligation to pay the capital of the lease is also a debt
obligation of some sort, but that is not quite in accordance with the definition that is used for
tax purposes of “debt obligation” found in Sec. 5.9.b. Prakas TOP. (“The term “debt
obligation” refers to the obligation to pay an amount in cash or in kind to another person and
includes the obligation of a bank or other financial institution with regard to a deposit, the
obligation with regard to an account payable, a bill of exchange, a bond, ...”).
We have ascertained that it is currently the position of the Tax Department that lease
payments fall under the scope of Sec. 8.2.1. (rent) rather than under Sec. 5.9.1. (interest)
Prakas TOP.
Services?
It is also noteworthy that “leasing” and “renting” of properties are excluded from the scope of
withholding tax for services (Sec. 8.2.1 a) Prakas TOP). It is recalled, incidentally, that the
withholding tax for services by residents is exempt subject to the condition that the service fee
is clearly identified on a proper VAT invoice from the service provider (Sec. 8.4.2 Prakas TOP).
Options for reform
Various options lay open to the MEF if one wanted to change the WHT treatment of leasing.
We overview these options, together with their advantages and disadvantages.
1) Exemption of WHT for lease payments:
The Report suggest as the sole remedy that lease payments could be exempted from
withholding tax when paid to banks or savings institutions, as is now the case with
interest. An amendment to the LOT in this sense would certainly be clear, but has the
disadvantage of being a very long procedure that requires the adoption by the National
Assembly and the Senate.
Creating a different, special category of income for lease payments in terms of WHT is not
customary in international tax law (see for example Art. 13 UN 2001 Model Tax
Convention). The usual solution is to treat leasing income as rent with special rules
applying to “financial leasing”.
With respect to Cambodia’s upcoming negotiations on double taxation agreements

(“DTA”), the reduction of WHT on lease in the LOT could be seen by the MEF as a
measure that undercuts the bargaining position. In other words, because of the exemption
of WHT for leasing in domestic relations, other countries will expect a reduction of WHT
for cross border leasing as well.
Advantages Disadvantages
Highest legal basis Slow to implement
Another classification of income
Undercuts DTA-negotiations
2) Treat leasing as payment of interest: The LOT does not define the notion of “interest”
or the notion of “rent”. Both are defined in the Prakas TOP. This means that it would be
possible for the MEF to revise the definitions of each term in the Prakas TOP so as to treat
payments in the context of a financial lease as interest or capital payment rather than
rent. In other words, a distinction would be introduced in Cambodian tax law between
“rent” and “lease”. The disadvantage of this approach is that the LOT does make it clear
that there is a classification of income which is “rent of movable goods” and therefore
there must be a distinction as to which is rent and which is not. That distinction will have
to be in line with the leasing law but there is no reason why the tax treatment would have
to wait for that law to come into force.
Under this approach, the lessee would have to be able to show a schedule of payments to
classify any periodical payment. In other words, only with a schedule could one determine
what is interest and what is capital repayment.
It is not likely that this change would affect the amount of non-resident WHT unless
different rates would be introduced for each classification of income. That is likely to be
the case at a later stage when DTA’s are concluded, but such a problem could be
addressed in the Protocol to a DTA should the need arise, or by including lease income
under “other income connected with the use of property” (Art. 26 b LOT).
There is an important disadvantage to this approach. The payment of lease income would
fall under the exemption for interest paid to domestic banks and savings institutions. For
other leasing institutions, however, qualifying lease income would be subject to 15% WHT
rather than the current 10% (As you know, the current Draft Leasing Law provides that
banks and financial institutions but also “leasing institutions” may be licensed for financial
leasing – Art. 34). This may be a factor if the MEF is set on giving non-banks access to the
leasing market as well. If that is the case, this option is not feasible.
In terms of procedure, a new Prakas would need to be issued that would be incorporated
at a later stage in the Prakas TOP.
Implementation by regulation possible Only suits banks and financial institutions
Schedule needed What remains “rent”?
No problem for DTA negotiations
3) Treating leasing as a service for WHT purposes
It should be noted that under Cambodian tax law, payment of service fees to a Cambodian
tax registrant is not subject to WHT. This is provided in the Prakas TOP, which reads as
follows:
2- Exemption of the withholding tax on the income of a legal person enterprise in

real regime:
a- The withholding tax shall not be applied on the income from the performance
of services including management, consultancy, and similar services of a legal
person enterprise which has been registered under the real regime system of
taxation.
b- For all cases as stated in sub-paragraphs a of this paragraph, an amount shall
be exempted from the general withholding tax if that amount has been
recorded in an invoice issued by the receiver of the money and which invoice
must be made clearly and must contain all information as stated in the Prakas
No 341-PK-MEF-TD, and the Prakas No 342-PK-MEF-TD, dated 30 May 1997 of
the Ministry of Economy and Finance.
c- The payor is responsible to the tax administration for any amount of the
general withholding tax for which the payor has decided not to withhold by
determining that the relevant income meets the conditions as stated in sub-
paragraph a and b, of this paragraph, or for any other reason.
Along the same lines of the option discussed above, the MEF could consider to reform its
regulations so that all or some types of leasing would qualify as a service rather than a
rent of movable goods. Effectively, this would normally result in a WHT exemption for
payments made to resident enterprises that are registered real regime taxpayers.
In terms of procedure, a new Prakas could be issued that will be incorporated at a later
stage in the Prakas TOP. As was mentioned above, the current Prakas TOP states that a
service does not include rent or lease.
Implementation by regulation possible Not very systematic

Applies also to non-banks What remains “rent”?
4) WHT credit more effective for the lessors:
Under Cambodian tax law, any WHT withheld by the lessee would constitute a credit for
the lessor. The effect of this credit is explained in Sec. 9.3. Prakas TOP as follows:
1- The determination of the tax on profit due or the tax credit for the tax year shall be as
follows:
a- If the result from the calculation in section 9.2 of this Prakas is greater than the sum of
any withholding tax made on behalf of the taxpayer in accordance with the provisions in
chapter 8 of this Prakas, and the prepayments for the tax on profit made by the taxpayer
for the tax year under new article 28 of the Law on the Amendment of the LOT, the
taxpayer shall pay the difference to the tax administration.
b- If the result from the calculation in section 9.2 of this Prakas is smaller than the sum of
any withholding tax made on behalf of the taxpayer in accordance with the provisions in
chapter 8 of this Prakas, and the prepayments for the tax on profit made by the taxpayer
for the tax year under new article 28 of the Law on the Amendment of the LOT, the
taxpayer may apply for a refund of the difference, or carry forward the difference to be
used as a prepayment in the following year.
In practice, however the refund of any excess WHT applied on behalf of the lessor is not
remitted back to the lessor in a timely manner. In fact it is that which creates a tax cost
for leasing in Cambodia, rather than the existence of a WHT in the law and regulations. In
theory, any WHT applied by customers in the context of a leasing contract is fully
creditable with the lessor’s TOP and Minimum Tax liability. The problem arises if the WHT
exceeds the tax due by the lessor, because in that case a refund is in order. Delays in the
refund would result in the transaction becoming economically unviable.
In principle, in other words, the application of a domestic WHT does not present any cost
of business for any type of leasing in excess of the CIT applicable in Cambodia to the
lessor anyway. The practical application of this credit at present does present difficulties
and costs to the lessor. This is because (1) there is no effective and timely refund in case
the WHT credit would exceed TOP liability of the lessor and (2) there is no official
documentary system in place to ensure the veracity of credit claims.
Therefore, alternatively, the MEF could ensure that the application of a 10% WHT on lease
and rent does not constitute a cost of business for the operation. This could in part be
achieved by fully applying the current provisions of the LOT concerning the determination
of the tax due of a tax year and the reimbursement of excess WHT applied on behalf of
the taxpayer (Art. 38 LOT).
The MEF could approach the issue from this angle, ensuring a full and effective tax credit
for WHT on rent payments to banks. The MEF could even consider to create a refund
procedure separate from the TOP returns.
Guaranteed no loss of revenue for Treasury Need new compliance system
Implementation by regulation possible Procedure for refund must be ensured
Applies also to non-banks What if refunds fall behind?

Current classification remains
Note: Informally the TD has informed us that there may be considerable

opposition to canceling the WHT for leasing any manner.
4. Tax on Profit depreciation of leased assets
Tax regime
Under Cambodian tax law, the party that is entitled to depreciations of assets is either the
owner or the lessee. This is provided in Art. 13 LOT which reads in relevant part as follows:
In determination of taxable profit, a deduction for depreciation shall be allowed to the

owner of a tangible property, or to the lessee of that property in the case where the
lessee bears the risk of loss or destruction of that property as determined by Prakas of
the Ministry of Economy and Finance
The Report has commented on this provision that the risk of loss is not relevant to the
question of ownership. The Report suggests that assets should be depreciable for the lessor
rather than the lessee, and that the lessee shall deduct the lease payments as expenses.
However, the question could be raised if this issue really needs reform. If the objective of the
reform is to grant depreciations to lessors, this will of course automatically result in lessees
having none.
Option for reform
The comments in the Report criticizing the current depreciation treatment are difficult to
understand. In fact, the law does not prevent in any way that the lessor would depreciate the
assets as long as he has the risk of destruction.
In our view, there does not seem to be any provision in the Draft Leasing law (see for
example Art. 16 and 17) which prevents the parties from agreeing that the risk of loss shall be
for the lessor.
No change/implement by lease agreements
As the text of Art. 13 LOT itself indicates, the matter of depreciation of leased assets depends
on the allocation of the risk of loss. How strict or liberal that must be interpreted is very much
a question of regulation by the Prakas that is to be issued under that provision.
No regulation needed Excludes lessors that do not want to assume
the risk of destruction
Impact of insurance premiums
What is “risk”? Definition by Prakas
The notion of “risk” is not defined by Art. 13 LOT, and may thus be regulated by Prakas or by
other measures. In that sense, it is legally possible in our view to define this notion in such a
way that normally in common lease transactions the lessor will be seen as the party that has
the risk of destruction, not the lessee.
Implementation by regulation Eliminates depreciations by lessee
Flexible
5. Tax point and recognizing leasing income
Tax regime
It should be noted that the Draft Leasing Law provides in the possibility of “advance lease
payments” (Art. 7).
Cambodian tax regulations provide in special rules for income recognition in the case of “hire
purchase” or “finance lease” and in the case of supply of goods under rental agreements or
supply under periodic payments for successive parts. Sec. 4.1. of the Prakas reads in this
respect as follows:
d) For goods supplied under a hire purchase agreement or a finance lease, the time of
supply is the time by which the goods are delivered, whether that delivery takes on the
characteristic of a transfer of the right to use or to dispose.
e) Where goods are supplied under a rental agreement, or goods or services are
supplied under an agreement or law which provides for periodic payments, or where
there is a continuous supply of services, such goods or services are treated as
successively supplied for successive parts of the period of the agreement, and the time
of supply of each successive supply is the earlier of the date on which the payment is
due and the date on which the payment is received.
It is noteworthy that for financial services, the same regulation provides that the income
accrues to the taxpayer as stated in the contract or at the moment of payment of the interest,
should that be earlier (Sec. 4.1.2. d Prakas TOP).
The Report has deduced from Sec. 4.1 of the Prakas that in case of hire purchase or finance
lease, the tax point would inevitably be the moment of delivery of the asset. For that
interpretation to be correct, one would have to assume that paragraph d) of Sec. 4.1.2. has
priority over paragraph e) of the same section when it comes to financial leasing, even if the
lease price is not paid in advance.
Although that is certainly not an unreasonable interpretation, it is not the only one. It is not a
foregone conclusion that both paragraphs are to be read as mutually exclusive. Paragraph e)
addresses the special case of supply with periodic payments while paragraph d) regulates the
case of the undefined hire purchase and finance lease. One could argue that a finance lease
which provides in periodic payments may be classified under both paragraphs. In that case,
under generally acceptable principles of interpretation, the taxpayer does not violate one
paragraph by complying with the other. As a result, the taxpayer is not required to recognize
the income at the inception of the lease, but he is entitled to do so if he so wishes.
Options for reform

1) Clarification of Prakas TOP: The MEF could, by a mere Notification, clarify that a
financial lease of hire purchase that provides in periodic successive payments, resorts
under paragraph e) of Section 4.1.2. Prakas TOP. No change in the LOT or the Prakas
would be required.
Implementation is simple Remains an interpretation by TD
Applies to all taxpayers
2) Amendment of Prakas TOP: Alternatively, the MEF could amend the regulation on rent,
financial lease and financial service. No change in the LOT is required.
Implementation by regulation, not law
Can be revoked
Note: Informally the TD has informed us that to agree with the interpretation
above under 1) and that indeed such a Notification may be issued.
6. Leasing under VAT law and time of supply for VAT purposes
Tax regime
Under Cambodian VAT law it is clear that at present, “financial leasing” and “hire purchase” as
well as rent are all considered VAT-taxable supplies. This can be derived from the provisions
of the Sub-Decree and the Prakas on VAT which both contain references to the time of supply
for VAT purposes for these types of transactions, although they are not defined. In other
words, the exemption for “primary financial services” noted in Art. 57 paragraph 5 LOT does
not seem to apply to leasing in general (or at least not to the concepts of leasing referred to
in the Sub-Decree and the Prakas).
As a matter of principle, the fact that the performer of the VAT-taxable service is a bank or
financial institution licensed under the Law on Banks and Financial Institutions (with reference
to Art. 2 of that Law) is not relevant for VAT law unless leasing would in that case be treated
as a “primary financial service”. As discussed in our meeting, the MEF is currently considering
to issue a Prakas to define the concept of “primary financial services” in this respect.
Unfortunately, as tax law is autonomous public law, it is important to note that the mere
mention of leasing as an allowed operation for licensed banks does not the status of that
operation for the purposes of tax law.
As was pointed out in the Report, Cambodian tax law now provides that the time of supply
(which is the tax point for VAT purposes) for a hire purchase agreement or finance lease is at
the moment of the delivery of the goods. The same provision points out, however, that
“where goods are supplied under a rental agreement; or goods or services are supplied under
an agreement or law which provides in periodic payments; or there is a continuous supply of
services, the goods or services are treated as successively supplied for successive parts of the
period of the agreement, and the time of each successive supply occurs on the earlier of the
date on which payment is due or received” (Art. 48 Sub-Decree on value Added tax).
The Report has, as in the case of TOP, deduced from Art. 48 of the Sub-Decree that in case of
hire purchase or finance lease, the tax point would inevitably be the moment of delivery of the
asset. As we noted above, although that is certainly not an unreasonable interpretation, it is

not the only one possible in view of the entire text. It is not a foregone conclusion that
paragraphs 2 and 3 are to be read as mutually exclusive. Paragraph 3 addresses the special
case of supply with periodic payments while paragraph 2 regulates the case of the undefined
hire purchase and finance lease. As is possible in the case of TOP, one could argue that a
finance lease which provides in periodic payments may be classified under both paragraphs.
In that case, under generally acceptable principles of interpretation, the taxpayer does not
violate one paragraph by complying with the other. As a result, the time of supply for VAT
purposes is in fact per successive payment rather than at the inception of the lease.
The Report also recommends the MEF to exempt lease transactions of one year or more. The
Report cites that after a leasing industry has been established this could be phased out. We
consider this an issue of pure fiscal policy which may come up in the course of the
consideration of the draft Prakas on “primary financial services” referred to above.
One remaining and rather complicated issue is that of the application of the input credit ration
to banks that engage in leasing transactions. Unless banks will be exempted from VAT when
leasing assets to customers, they will have to be granted a VAT input deduction for the
acquisition of the assets. The calculation of the input VAT ratio is however quite complicated
in the case of banks. For all VAT taxpayers a ratio can be calculated in two ways to determine
which portion of the input VAT may be deducted from output VAT in case the taxpayer has
VAT-taxable and VAT-non taxable transactions. To carry out these calculations, the turnover
of the taxpayer must be determined and there is little guidance as to what constitutes
turnover for a bank at this time.
Options for reform
1) Definition by Prakas of “primary financial service”
As was pointed out above, the MEF is currently reconsidering the VAT aspects of financial
services. It is not clear whether leasing will be included in the final version of the Prakas
that is currently being drafted. In that context, the MEF could issue a Prakas to define
“primary financial service” and include (certain types of) leasing as exempted from VAT.
This would in any event also necessitate the revision of the Sub-Decree and the Prakas on
VAT, which still refer to leasing as a VAT-taxable transaction. No change in the LOT is
however necessary.
From a policy perspective, VAT on leasing is by the TD viewed against the background of
what they see as massive non-compliance by taxpayers on VAT and the doubtful true VAT
status of many banks. In other words, the TD views that many more financial services
should be subject to VAT than in the present practice by most banks. At present, no bank
is registered as a VAT-taxpayer.
This means that most banks must maintain a wide interpretation of “primary financial
services” in the absence of a more limited regulation by the TD.
The problem of VAT on leasing has different considerations from the TD perspective. The
most important ones are as follows:
• Will lessors be able to lease assets on which no VAT or customs duty was paid?
• Will lessors be able to offset input VAT on assets with output VAT on non-leasing
operations?
• Will lessees be able to deduct more input VAT in the course of a lease than in the
course of finance of assets?
By defining “primary financial services” by Prakas, leasing itself will be included in the
scope of VAT supplies or will be excluded from being a taxable supply.
Implementation by regulation, not law The issue of non-banks
Revenue effect likely low If lease is subject to VAT, define ratio?
2) Clarification of Sub-Decree on VAT: The MEF could, by a mere Notification, clarify that
a financial lease of hire purchase that provides in periodic successive payments, resorts
also under paragraph 3 of Art. 48 Sub-Decree VAT. No change in the LOT or the Sub-
Decree would then be required.
Implementation by regulation, not law
Flexible to provide conditions
3) Amendment of Sub-Decree on VAT: Alternatively, the MEF could amend the Sub-
Decree on rent, financial lease and financial service. No change in the LOT (Art. 62 LOT)
would be required.
Needs amendment in Sub-Decree
Note: Informally the TD has informed us that there is agreement to exempt

leasing for banks and financial institutions in accordance with 1) above, subject
to final approval by the MEF.
*****
We hope these observations are helpful to you. Please do not hesitate to contact us in case
you have any query.
*****
Qualification
Our tax advice is based on our understanding of publicly known Cambodian laws, regulations
and official practice. Any tax calculation in this advice is for illustration purposes only and does
not engage our responsibility. There may however be instances where the unofficial practices
applied by tax authorities are not in accordance or even contradictory to the Cambodian law.
More importantly, as judicial interpretation of tax laws is at present not available, it can never
be excluded that the tax authorities or the courts adopt an interpretation or application of tax
laws which is not in accordance with our advice. We may furthermore not be aware of all laws
and regulations that apply to your situation as not all are published. Also, the tax authorities
or courts may translate laws, regulations and corporate documents differently from the ones
adopted for this advice.
****
Very truly yours

DFDL MEKONG
Edwin A. Vanderbruggen
Senior Tax Advisor
Head of the Indochina Tax Practice

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45 Suramarit Boulevard (PO Box 7)

Phnom Penh, Cambodia

Asian Development Bank

Re: Diagnostic Analysis of

Dear Mr. Farinha,

PART A. Diagnostic Analysis of Cambodian Tax System

1. Introduction: salient features of the Cambodian tax system

Taxpayers in Cambodia are classified as either resident taxpayers, or non-resident taxpayers.

A non-resident taxpayer will be deemed to be Cambodian resident for tax purposes if it is

Taxation of resident enterprises

Resident taxpayers are subject to the following tax imposts:

• Depreciation over allowable rates

PREPAYMENT OF PROFIT TAX

Taxpayers are subject to a prepayment of tax on profit calculated at 1% of monthly turnover.

Resident withholding tax

Payments of certain Cambodian source income, by a resident taxpayer carrying on a business

• Services provided by a resident person – 15%

Non-resident withholding tax

• Royalties, rent and other income related to property;

VALUE ADDED TAX

The prescribed thresholds to qualify as a VAT-taxpayer are as follows3:

• Public postal service;

Basic features and problem posed

As a consequence, your situation is not VAT effective from a consolidated perspective. CM I

Value Added Tax rules on deductibility of input VAT

1. Profit Tax exemption

5. Domestically-oriented QIP will be entitled to import production equipment and

TAX ON SALARY, WAGES AND FRINGE BENEFITS

A detailed explanation of the tax on salary is included at Appendix A. In summary, resident

SPECIFIC TAX ON CERTAIN MERCHANDISE AND SERVICES

Specific tax is imposed on certain merchandise and services at varying rates.

EFFECTIVE TAX RATE

2. The international legal framework: global standards and principles on the

Tax and foreign investment

Changes to the tax laws of the host state

Measures of tax administration

• Vigilance and protection (due diligence)

Due diligence in tax matters

Denial of justice in tax matters

• the relevant courts refuse to entertain a suit; or

Review by courts in tax matters

The absence of an administrative appeal or independent judicial review is clearly very

Grossly unjust decisions by tax courts

Due process and arbitrariness in tax matters

“Arbitrariness is not so much something opposed to a rule of law, as something

Due process in tax administration

Due process of a tax re-assessment

Refusal or undue delay by tax authorities to register a taxpayer

Transparency in tax matters

There is reference to “transparency” in instruments of international trade law30 and many

“Each Party shall ensure that its:

Good faith and legitimate expectations of investors

Conclusions with respect to tax reform in Cambodia

1. International investment treaties, trade agreements and other economic treaties

a. Transparency of the tax audit and re-assessment process;

b. Independent settlement of disputes and judicial settlement;

c. Clarification and predictability of tax treatment;

e. Due diligent tax treatment; and

f. Respect for legitimate expectations of taxpayers.

3. Suggestions for tax reform in Cambodia

a) Encouraging businesses to operate as registered taxpayers

Options for reform

• Provide in a concessionary TOP rate for certain newly registered SME’s;