In a move to urge small- and medium-sized businesses to enter into the regulatory fold, a new sub-decree issued by the government gives businesses a two-year tax exemption on profits providing that they voluntarily register with the Tax Department by the end of 2018.

The sub-decree, signed by Prime Minister Hun Sen and dated earlier this month, hopes to push those that have previously dodged the Tax Department by providing sweeping incentives, experts said yesterday.

Clint O’Connell, head of Cambodia Tax Practice at foreign investment advisory and tax firm DFDL Cambodia, said that the objective of the sub-decree aims to create a more transparent and equitable tax system by encouraging small- and medium-sized enterprise (SME) to be compliant.

“Any tax exemption we would imagine would be welcome by those SMEs who have yet to register formally for tax,” he said.

“These exemptions coupled with the recent amendments to the annual progressive Tax on Profit rates and simplified accounting procedures for small taxpayers are all designed to smooth the transition for SMEs to enter the formal system of taxation.”

Under the legislation, the two-year tax exemption is triggered when a business first declares revenue and shelters it from paying the 1 percent minimum tax and its monthly pre-payments if they are in a tax loss position.

The definition for what qualifies as small and medium business categories is generous. A small business has to have an annual turnover from $62,000 to $175,000, while medium sized is classified from $175,000 to $500,000.

Medium-sized businesses were previously subject to a 20 percent annual tax on profit.

While it is unclear if the tax exemption will be applied retroactively towards companies that are already compliant, O’Connell said it could annoy taxpayers that have followed the law as direct competitors that have historically failed to meet their obligations receive another benefit.

“However, this is a necessary evil to get to a point where all businesses are properly registered for tax in the future,” he said, adding that those registered taxpayers that had not yet been audited for historical years could take advantage of the current amnesty.

“In these circumstances you are always going to get some cases of inequality but if the greater purpose warrants it then the process is worth pursuing.”Joseph Lovell, a partner at the regional law firm Sciaroni and Associates, said the government was appearing to take a carrot approach towards formalising companies into the real tax regime with accurate accounting principles.

“It encourages companies to report, and the tax holiday further encourages such reporting to be honest, as there is no cost to reporting profit for the grace period,” he said.

However, as enticing as the legislation appears, he said that the government would still face its fair share of difficulties in convincing companies to follow the law.

“For widespread tax compliance there needs to be an enforcement stick to go together with this tax holiday carrot,” he said. “That requires resources and those are still comparatively limited in Cambodia.”

Nevertheless, Ngoun Meng Tech, director general of the Cambodian Chamber of Commerce, said that it was a positive move to garner trust with those companies that have so far failed to register.

“This is a good move by the government to encourage registration and transparency,” he said. “And it also gives those companies more time for those that have complained of the difficulties with the law.”