The Cambodian government has made negligible progress in bringing small- and medium-size enterprise (SMEs) into the regulatory fold, reporting a less than 0.5 percent increase in the total number of companies registered in the last five years – a sign business professionals claim shows that tax incentives aimed at increasing SME compliance and expanding the country’s low tax base have garnered little traction.

According to data in the yet-unpublished annual report of the Ministry of Industry and Handicraft, Cambodia had a total of 39,141 registered SMEs as of end-2016 – just 184 more than five years earlier.

This represents just a fraction of the estimated 530,000 SMEs nationwide, according to Te Taing Por, president of the Federation of Association for Small- and Medium-Sized Enterprises of Cambodia (FASMEC), who cites a lack of incentives and enforcement for the low level of compliance.

“The SME sector faces a lot of challenges and there is a lack of motivation from the government to make them compliant, while at the same time they struggle to compete to be profitable,” he said. “There is no benefit for SMEs to register because they are not protected from neighbouring competition.”

“Tax enforcement is not balanced and transparent in the SME field and there is no government policy to help define the business classification for them to access finance,” he added.

In neighbouring countries SMEs are a major contributor to tax revenue, Taing Por noted. However, in Cambodia the lack of registration meant that the government was losing out on taxable revenue, as commercial registration was a step toward tax compliance.

Oum Sotha, spokesman from the Ministry of Industry and Handicraft, was sceptical of FASMEC’s estimate that about half a million SMEs remained unregistered, claiming that the number was probably closer to 100,000.

Nevertheless, he blamed low registration levels on the lack of human resources needed to cover the whole country as well as the failure of the government to adequately define what qualifies a business as an SME.

“We’ve heard a lot about the challenges in the SMEs sector, and we are trying to solve them step by step,” he said. “We have now finished a policy that sets the definition of what a SME is, and we continue to discuss this with relevant ministries.”

Oum added that the government’s sub-decree issued in early February that provides a two-year tax holiday for SMEs to voluntarily register with the General Department of Taxation (GDT) should encourage greater compliance.

Under the legislation, the definition for what qualifies as small- and medium-business categories is broad, with a small business defined as one that has an annual turnover from $62,000 to $175,000, while medium-size is classified from $175,000 to $500,000. Medium-size businesses were previously subject to a 20 percent annual tax on profit.

“The government is actively trying to encourage SME registration and the tax holiday incentive should speed that up,” he said.

Clint O’Connell, head of Cambodia Tax Practice at foreign investment advisory and tax firm DFDL Cambodia, said that while there are a number of challenges in encouraging SMEs in Cambodia to join the formal sector, a large part of it stems from a fear of being forced to meet unclear tax obligations.

“Practically speaking, if you have had a large section of the Cambodian business community historically negotiate minimal annual tax liability or simply not register for tax at all, for a large number of years, it is always going to be difficult to motivate a transition overnight,” he said, adding that both the government and SMEs need a “change in mentality”.

“[Businesses] need to accept their responsibility under the laws in Cambodia to register and pay taxes properly, which will only come about through targeted campaigns, education and encouragement,” he said.

“[Meanwhile, the government] needs to encourage voluntary tax compliance by dealing with taxpayers fairly and in good faith and not with the perceived mentality of trying to cripple them with arbitrary re-assessed taxes so as to make it unsustainable to operate a business.”

He added that on paper the two-year tax holiday, simplified accounting procedures for SMEs and less stringent requirements to enter into progressive Tax on Profit rates should encourage more SME compliance.

“[However,] with some recent updates, they are so broadly drafted that they are open to a number of conflicting interpretations as to their scope and applicability, which means that a taxpayer may receive a different answer to the same question from different tax officers,” he said.

“This undermines to some extent the intended benefit that the regulation was supposed to provide.”