The industry body representing the Kingdom’s myriad microfinance institutions (MFIs) threw down the gauntlet yesterday, announcing that its members had categorically rejected a government directive that orders them to charge a value-added tax (VAT) on financial services fees and would not apply it.

Hout Ieng Tong, chairman of the Cambodia Microfinance Association (CMA), said during a CMA board meeting that a prakas issued by the Ministry of Economy and Finance (MEF) in May that more clearly defines which nontaxable supplies receive a VAT exemption under existing legislation has created undue pressure on MFIs.

While many in the banking sector previously understood the law to exempt all financial services from VAT, the prakas indicates that a 10 percent tax must be applied to most banking services except loan interest repayments and money exchange services.

Ieng Tong said he was concerned about a backlash from MFI clients and that the association would lobby tax authorities to drop the controversial measure, which analysts have described as “impractical and inefficient”.

“At this moment, we have agreed with each other that we will not activate the 10 percent VAT on fees for financial services,” he said flatly.

“We are worried that clients will be annoyed when they use our financial services because in the past they have never been informed that they are obligated to pay VAT.”

The move to disregard the MEF’s prakas on nontaxable supplies follows weeks of uncertainty and social media uproar about how the financial sector would implement the additional fees on money transfers, loan assessments and banking services that traditionally generate revenue through fees and commissions.

Ieng Tong added that the government should have warned financial institutions about the clarification ahead of its issuance so that they could properly inform their clients. He also said operators needed time to put in place the necessary investments to properly manage the additional tax invoices that would have to be sent to the General Department of Taxation (GDT).

Bun Mony, an adviser to the CMA, said that if the group’s members followed the decree their clients would face higher costs to access financial services. He said CMA members, which include over 60 MFIs, would not apply the VAT as the association intends to meet tax authorities later this month to resolve the issue.

“In the past, we have never activated the VAT on financial services for clients so that is why our association prefers to meet with the GDT directly to lobby them to give us a grace period or to negotiate a complete removal of VAT on financial service fees,” he said.

He added that the Association of Banks in Cambodia, which represents commercial banks, would also lobby the government to drop the tax.

GDT Director-General Kong Vibol confirmed yesterday that the tax department was willing to meet the CMA to discuss the challenges that the new decree puts on financial institutions.

“We will meet with them to listen to and discuss their suggestions, and we will decide whether what they want from us is reasonable or not,” he said, adding that the final decision would be in the hands of the finance minister.

“I know that a team at the MEF has already held discussions about this issue, but I have not received any new decision from them yet,” he said.