Banking sector leaders have expressed concern over a new government decree that places additional fees on financial services, warning that the costs of what some have described as an “impractical and inefficient” tax would likely be passed along to consumers.

The Ministry of Economy and Finance issued a prakas on May 25 that more clearly defines the government’s laws for nontaxable supplies. The decree identifies five financial activities eligible for an exemption from the 10 percent value-added tax (VAT), including stock market transactions, while potentially exposing other financial services to VAT.

In Channy, president and group managing director of Acleda Bank, said yesterday that before the prakas all financial services were understood to be under the blanket definition of nontaxable supplies. However, now the only ones that are exempt are loan interest repayments and money exchange services.

Fees on financial services including money transfers, loan assessments and account maintenance services will now be subject to the 10 percent VAT, as well as any service that traditionally generates revenue under fees and commissions, he said.

“Customers need to pay a bit more to use financial services,” he said, adding that the additional fees levied on customers should not be viewed as a bank-led initiative. Instead, he insisted that it was the government’s way of boosting revenue.  

“Please do not confuse that the banks are charging these additional fees,” he said. “The revenue from VAT is for the Finance Ministry, and this will contribute to enlargement of our national budget.”

According to Acleda’s 2016 financial report, total revenue from banking fees and commissions amounted to $52.8 million.

Bun Mony, adviser to the Cambodian Microfinance Association (CMA), said yesterday that the move the impose VAT on financial services came unexpectedly, as in the past the government did not identify which banking services were subject to VAT.

While he declined to speculate on how this would impact clients of microfinance institutions (MFIs), an industry that earlier this year was shaken by a surprise 18 percent interest rate cap on microfinance loans, he said the CMA would review its potential effects.  

“We will have a board meeting [today] to discuss the impacts it could have on the sector,” he said.

Charles Vann, executive vice president of Canadia Bank and chairman of the Association of Banks in Cambodia (ABC), said commercial banks would also be studying the impact of the prakas.

“Representatives of ABC are calling members to have a meeting in order to collect their opinions about what they think of the new VAT,” he said, declining to give a forecast on how it would impact clients and operations.

However, Stephen Higgins, managing partner at investment firm Mekong Strategic Partners, said that not only would the additional VAT burden trickle down to end consumers, it could also force banks to make large financial investments to meet compliance.

“There’s a reason the rest of the world (with the odd exception) doesn’t do this,” he said in an email. “It is impractical and inefficient, and banks will have to make significant IT investments to be able to properly manage VAT on fees, including the provision of tax invoices.”

He added that the majority, if not all, of the $300 million that banks and MFIs are projected to collectively generate from fees this year would fall under the 10 percent VAT mandate.
“So that would be an impost of about $30 million on all bank and MFI clients,” he said.

Clint O’Connell, head of tax practice for foreign investment advisory and tax firm DFDL Cambodia, said that the prakas would naturally cause “uncertainty in the financial sector as clarity is sought from the tax authorities on the practical scope and application of this development.”

He added that while banks may face additional compliance costs and that fees may increase, the brunt of the change would inevitably be carried by consumers.

“[With] VAT being a consumption tax, typically the party which bears the cost is the end user, which in many cases will be those individuals dealing with the banks for their financial requirements,” he said.

However, he said that one possible upside of the prakas was that with more certainty on how VAT will be applied, it would leave less discretion for future tax audits of financial institutions or “for auditors to issue arbitrary tax re-assessments”.