Tim Watson and Phyllis Lye work for PricewaterhouseCoopers

in Phnom Penh.

They specialize in Cambodian Taxation.

ON June 11, 1999, the Government of Cambodia issued Sub-Decree No 53 amending various

aspects of Cambodia's Investment Law. As US Federal Reserve Chairman Alan Greenspan

might say, the changes herald a move towards a "tightening bias". In this

sense, however, it appears that Cambodia's sometimes generous investment concessions

are being tightened.

Cambodia's Investment Law of August 1994 and its initial Sub-Decree of 1 February

1998 have stood out in the past few years for two features. First, the attractiveness

of the tax and other investment concessions on offer. These include a 9% Profits

Tax rate, tax holidays of up to eight years and various import duty breaks. Second,

and perhaps less famously, the Investment Law is known for some of the uncertainty

surrounding the qualifying criteria, especially for the Profits Tax holiday. The

former of these features only is being addressed by Sub-Decree No 53.

CDC Reports

Until the June 11 changes, the Investment Law required CDC licensed entities

to submit reports outlining:

• investment inflows into the project;

• the scheduling of imports;

• details of expected international remittances, including profits and interest;

• details of expected domestic remittances, including profits and interest; and

• any changes to the basis or details of the initial investment application.

Until the June 11 changes, the Investment Law required that this report be submitted

on a monthly basis. Under Sub-Decree No 53 the lodgement period has now been amended

to a less onerous quarterly basis. Copies of the quarterly report are to be sent

to the CDC, tax authorities and customs department.

More important, perhaps, than the reporting period itself, is that the changes may

indicate a renewed interest by the CDC (and other departments) in enforcing this

reporting obligation more strictly. CDC-licensed companies should note that failure

to comply with such obligations can lead to the withdrawal of CDC sanctioned tax

concessions.

Exporters should note that the report must also now include information on export

scheduling.

9% Tax Rate - Entitlement

Cambodia's Investment Law allows for the CDC to grant a company a 9% Profits Tax

rate. The grant also currently has no sunset clause, meaning the rate applies for

the life of the company (unless of course the concession is withdrawn in accordance

with the Investment Law). This is a significant concession, and means CDC-licensed

companies with the 9% rate shown on their license enjoy one of the lowest corporate

tax rates in the Asean group.

However, under Sub-Decree No 53 access to the 9% concessional rate has been restricted

quite considerably. For instance, the investment capital necessary to qualify for

consideration of the 9% rate has been increased from $500,000 to $1 million for investments

in the following industries:

• apparel and textiles;

• furniture and fixtures;

• chemicals and allied products;

• fabricated metal products; and

• machinery and industrial equipment.

The rise in the necessary capital commitment is likely to have the most impact on

small-capital investments in the clothing and textile sector. Of course, this has

been one of Cambodia's must successful sectors to date in terms of attracting foreign

(and domestic) investment. These types of investments are also largely export oriented

and have received some special VAT concessions in recent times. The more aggressive

tax approach appears to be an attempt by the authorities to ensure this relatively

vibrant industry contributes more tax to the Government coffers.

Infrastructure

On the incentive front, infrastructure projects, including those relating to the

generation of power and the production of clean water, are now included in the encouraged

or "suggested" investment list. Existing infrastructure investments have

typically been granted tax concessions and so this change is probably more a formalization

of what was occurring in practice. As would be expected, the incentive is likely

to be restricted to the infrastructure developing entity itself. Concessions should

not apply to contractors engaged in construction or operation of such projects. A

specific infrastructure matrix, by which a Profits Tax holiday period can be calculated,

remains outstanding.

Natural Resources

Mineral exploitation, including that for oil and gas, as well as investment in the

telecommunications sector have either been removed from the suggested investment

list and/or placed on the list of investments which do not attract incentives. Natural

resources exploitation was already subject to a separate (and higher) 30% Profits

Tax rate while few tax incentives have been granted in the telecommunications sector

to date. Again therefore, these changes appear to be more a formalization of what

was occurring in practice.

Oil and gas activity has been both removed from the suggested investment list but

not added to the list of investments which do not attract incentives. Import duty

incentives also appear to have been added for exploration activities. The policy

behind these changes remains to be seen.

Consumer Goods

Most important perhaps is the removal of consumer products from the suggested investment

list. Many of the large multinational investments into Cambodia to date have been

in this sector. The change perhaps signals a view that Cambodia is no longer prepared

to offer specific concessions for investments interested in domestically focused

consumer manufacturing (although food and beverage manufacturing may still qualify

under separate provisions).

In all cases outlined above, we understand that Profits Tax incentives attached to

investments licensed prior to the June 11 changes will survive.

Import Duty

Finally, the list of goods entitled to import duty concessions has been amended to

specifically exclude petroleum. It is uncertain at this stage whether this prohibition

will extend to diesel and other oil products necessary for power generation.