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Cambodia’s new draft law on investment and its effects

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A view of Phnom Penh skyline. Stability and predictability are key for investment confidence. Heng Chivoan

Cambodia’s new draft law on investment and its effects

The Council for the Development of Cambodia (CDC) has completed the drafting of the long-awaited new Law on Investment. The draft will be later tabled at the Economic and Financial Policy Committee before being submitted to the Council of Ministers and the National Assembly for elaboration, and is expected to enter into force by the end of the first semester of 2021, if things go smoothly.

The new draft law is expected to enhance predictability and boost further incentives on top of the existing ones.

New incentives have been developed based on long-term consultations with the private sector and internal discussions among key government stakeholders. Within the government, introducing new incentives is the constant battles between dual duties and dilemma between the need to maintain and increase revenue collection, and the need to nurture long-term business and attract new investment. It is a “chicken-and-egg” discussion on which should come first, all the while without compromising the current level of national revenue.

The 21st Cambodia-Japan Public-Private Sector Meeting held on February 11 can offer a good glance of dialogue between public and private sectors on terms and conditions for investment, and even internal cross-sectoral debates between various government stakeholders. This platform is rather uniquely targeting Japanese investors, with a no-nonsense atmosphere and attachment to technical details saved for serious and real business dealings on the ground.

The Japanese side is represented mainly by the Japanese Business Association of Cambodia (JBAC) which currently boasts 270 Japanese company members belonging to various sectors including manufacturing, construction, real estate, trade, transport, commerce, finance, insurance and services. All of them are holding a high standard of compliance with Cambodian law and following strictly new regulations, social rules and labour conditions. Therefore, their concerns are being taken care of very seriously by the Cambodian government.

And such platform is in fact beneficial not only for Japanese firms but also for the overall improvement of Cambodia’s investment climate and confidence.

With the CDC as coordinator, other key Cambodian stakeholders include the Ministry of Economy and Finance; the General Department of Taxation (GDT); the General Department of Customs and Excise (GDCE); the Ministry of Commerce; the Ministry of Mine and Energy; the Electricite du Cambodge (EDC); the Ministry of Public Work and Transport; the Ministry of Labour and Vocational Training; the Ministry of Environment; and other ministries that may vary according to challenges of the days raised by the Japanese side.

Discussion focused on extremely specific technical issues, namely seniority indemnity; applying accounting treatment of CMT (Cut-Make-Trim) to the whole manufacturing industries; parallel import; new price table for electricity; the Environmental Endowment Fund that is voluntary and the Social and Environmental Fund that is obligatory; early operationalisation of the Stung Bot border gate; and multi-stakeholder human resource development supported by the Japanese government.

The face-to-face discussion helped both sides to clarify on interpretation and implementation of new regulations, raise mutual concerns and update on key policy issues.

Some of the key concerns for Japanese companies have been structural challenges for Cambodia such as electricity cost; difficulties to localise managers and site managers; employee competency; increasing employee wages; underdeveloped logistics infrastructure; and difficulty in local procurement of raw materials and parts. It is worth noting that Cambodia’s local content in terms of raw material and parts supply is relatively very low. According to the most recent survey conducted by the Japan External Trade Organisation (JETRO), only 5.4 per cent of inputs used by surveyed Japanese firms are procured locally compared to at least 20 per cent for other countries in the region.

These challenges are in fact the very essence of new incentives that the draft Law on Investment aims to address.

For instance, the draft law provides for the exemption of value-added tax (VAT) for the purchase of certain production inputs that are locally produced. The draft law also gives special tax deduction rate of 150 per cent from the tax base for companies’ expenses on research and development (R&D) and innovation; human resource development through provision of vocational training and skills for Cambodian workers; upgrading of machinery to serve the production line; construction of dormitories, canteens, and nurseries; provision of comfortable means of transport; and other expense that aims to promote the welfare of Cambodian employees. These are concrete structural policy measures provided by the new draft law to improve competitiveness as well as provide welfare support toward workers that in effect will also address challenges raised above by Japanese companies.

On top of that, the tax holiday has been revised to make it even more generous as Qualified Investment Projects (QIPs) can obtain an income tax exemption period from three to nine years from the beginning of the first income. After the end of tax holiday period, QIPs can also pay tax at a progressive rate for six years, while all imports are exempted from full duty including excise and VAT. In terms of operation, the draft law also provides for the enhancement of investment facilitation, particularly through the improvement of “One Stop Mechanism”.

Learning especially from the Covid-19 situation, the draft law also provides government flexibility in giving special incentive for specific industries through the annual Law on Financial Management in the unforeseen circumstances or to newly emerging industries that are not stipulated in a separate sub-decree.

Stability and predictability are key for investment confidence. In other words, instability and unpredictability are the enemy for investors. Despite attraction to incentives, it is common that investors often seek early warning and are very cautious for abrupt policy changes that may disturb their mid- and long-term investment plan.

Strong political, social and macro-economic stability have been a great asset for Cambodia in the last two decades, resulting in a stronger investment confidence. Nevertheless, Cambodia still needs to constantly make more efforts in gaining more trust and confidence from investors especially when it comes to legal frameworks, and implementation on the ground, if Cambodia wishes to further strengthen its competitiveness in the region.

Sim Vireak is strategic adviser to the Asian Vision Institute (AVI)

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