PUBLISHED: 27 August 2019

2016 Law on Financial Management (transition to Real Regime)

Until early 2016 Cambodia had two types of tax system: the ‘real regime’ which requires taxpayers to file monthly and annual tax returns, be open to tax audits, and charge value added tax (VAT) to their clients, and the ‘estimated regime’ which was a legal but more informal method of tax calculation intended for smaller businesses. In practice this ‘estimated regime’ was often exploited by larger companies as a means to pay less tax than they would have done under the more stringent reporting requirements of the ‘real regime’, and was perceived by some businesses who were under the ‘real regime’ as a source of unfair competition.

The 2016 Law on Financial Management now requires all businesses to register under the ‘real regime’. This is a major reform by the Royal Government as previously around 80% of businesses within the country participated only within the ‘estimated regime’. This transition is a large component of the Royal Government’s broader objective of formalizing the economy, an important step towards ensuring a level playing field for foreign investors. In 2015, tax collection increased by 25% on the year before despite no increase in corporate tax rates, which is demonstrative that the General Department of Taxation’s efforts to better implement the Kingdom’s tax requirements are bearing fruit.

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