Taxpayers feel the noose tightening as government auditors up the ante to meet national targets. However, audits motivated by incentives have spurred overzealousness for one party and agony for the other

By the third quarter of 2020, nearly 78 per cent of the $2.9 billion tax revenue target had filled the government coffers.

Ministry of Economy and Finance (MEF) spokesman Meas Soksensan said the General Department of Taxation (GDT) contributed the most, with a high chance of hitting 85 per cent of the target by the final quarter of this year.

“We are waiting [for] the figure from the Customs [General Department of Customs and Excise] to fill our projection,” he said.

The jubilation in keeping to the target during austere times is compelling. Although, it is should be mentioned that the collection is reflective of buoyant earnings in 2019.

“… companies will pay more taxes in 2020,” Soksensan told The Post.

But it comes at a price – one that is being paid by scores of companies comprising medium to large firms, which are allegedly subject to rigorous audits by government auditors.

A lot of this stems from the 10 per cent incentive auditors make from penalties ranging from 10 to 40 per cent and 1.5 per cent monthly interest rate on any reassessed additional tax due.

What this essentially means is that auditors work harder to secure a higher income, independent of their salaries. Often enough, government wages are comparatively low, so the incentives help to augment their takings

To be sure, the Law on Taxation allows three types of audits – desk, limited and comprehensive – but the frequency and robustness of these audits are “killing companies”, complained a director of a foreign-owned firm in Phnom Penh.

In March last year, the audit timeline turned stricter with the entry of Prakas 270, which drew up the penalties on administrative faults, such as the failure to keep accounting records for up to 10 years, settlement differences in monthly and annual taxes, and documents for transfer pricing.

GDT Kong Vibol has once endorsed the incentive for auditors. Heng Chivoan

According to law and tax advisory firm VDB Loi Ltd, in a note on its webpage to clients last year, taxpayers are, in principle, subject to one type of audit for any tax year.

But if the findings from the desk and limited audits suggest errors or issues beyond their scope, the GDT may expand the audit scope to be that of a comprehensive audit.

“If during any tax audit, the audit team finds evidence of tax evasion, the GDT may assign a special team to investigate the issues,” wrote VDB Loi manager Tepwinuth Chhim.

Pocketing the incentives

In Cambodia, the process begins with a desk audit which is conducted within 12 months after the submission of the tax returns. But if there are complex or high-risk irregularities, it will be replaced by a limited audit.

The limited audit looks at the taxpayers’ compliance with monthly tax obligations and can be conducted for the current tax year and immediately preceding tax year.

As for the comprehensive audit, it re-examines the compliance, including the annual tax on income for the current tax year and the previous three tax years.

This audit can be extended to include the previous five tax years, right up to 10 years if there is actual evidence of tax evasion, or losses or tax credits from previous years that require auditors’ verification.

Source: Cambodian authorities, and International Monetary Fund (IMF) staff calculations

For the maximum 10 years tax coverage, approval would have to be given by the MEF.

On the ground, it is not quite the case due to the alleged competition among the tiered auditing departments to pocket the incentive, observed an auditor attached to an international firm in Phnom Penh.

“Of course, they don’t want to share [the incentive] with other departments. [What happens is] when audits start, letters are sent out … it is [as if auditors] mark their territory.

“They might not finish the audit until months later, but at [the very] least they have earmarked the taxpayer, which means they [will likely] get 10 per cent out of any interest collected,” the auditor said.

“Frivolous and unrealistic”

Yet, the problem surrounding the audits is not just tax alone as the interests and penalties can go all the way back to 10 years.

“These days, it is three or five years but the interests on accumulated underpaid tax can be at times higher than the tax itself,” the auditor said.

The issue of incentives being ethical or not is moot but GDT director-general Kong Vibol has reportedly endorsed the fee in 2014.

Source: General Department of Taxation

“I think the idea is to encourage [GDT] auditors to complete their tax audits … but is this the right kind of motivation?” the auditor asked.

While the “agony” is cognisant throughout the business community, company directors and auditors who were interviewed declined to speak on record, fearing repercussions.

Tax revenue is a primary revenue generator for Cambodia. In 2018, it represented 17.1 per cent of gross domestic product (GDP), the World Bank said in its May 2020 economic update.

The steady year-on-year growth was evident last year with total tax revenue accounting for $2.8 billion – 28.3 per cent more than in 2018. It was the highest collection in 20 years, news reports show.

According to the World Bank, the largest contribution at 12.6 per cent of GDP came from taxes on goods and services, consisting mainly of the value-added and excise taxes from domestic businesses and goods. Direct taxes which includes taxes paid by entities rose to 4.4 per cent of GDP in 2019 from four per cent a year ago.

This surge in tax revenue is owed to new mechanisms and policies in the five-yearly revenue mobilisation strategies that have strengthened segmental taxation such as property, excise, and value-added tax (VAT), as well as non-tax revenue.

It is in addition to ongoing system digitalisation, including the newly-launched e-filing service, and software upgrade for the financial management information systems.

Overall, it is part of the government’s plan to widen the tax base to boost revenue and reduce its dependence on borrowings in future.

This year, with three key economic sectors under severe pressure as figures for garment and footwear exports, and tourist arrivals plunge, national revenue has been impacted.

It will be a far cry from an all-time high of $6.9 billion in total revenue in 2019, which made up nearly 90 per cent of the $8.2 billion government budget for 2020.

Conversely, the budget for 2021 has been halved to $4 billion.

Source : World Bank Data

Driven by the apparent fall in total revenue, GDT auditors are evidently going all out to avoid falling short of their tax target this year.

In the last three years, the tax department has increased its staff, which might presently seem disproportionate, seeing that the taxpayer base has shrunk due to Covid-19.

But coupled with the desperate need to fill the state coffers, audits have become prevalent and aggressive, an industry source commented.

“At times, it is frivolous and unrealistic,” the source said.

Get the money and get out

According to a tax adviser, who has been in Cambodia for 20 years, a comprehensive audit in theory has to wait until a limited audit is completed.

“The comprehensive audit cannot re-litigate the same issues that have already been litigated in the limited audit. So, auditors who conduct limited audits will look at all the issues they can and raise as much taxes to get the interest,” the adviser said.

This practice makes comprehensive audits redundant because much of that is covered by the limited audit.

“A limited audit will look at sales and taxes such as withholding tax or VAT whereas a comprehensive audit, as its name suggest, looks at everything.

“But what happens is that auditors of limited audits will start off looking at withholding tax and broadening their scope, even though legally they are not supposed to,” the adviser remarked.

He opined that it is a “hit and run” approach, where auditors look at a component of the taxable item, “get their money and get out”.

“Whereas a comprehensive audit [which] looks at everything, takes a long time to complete. So limited audits are like a snapshot.

“Perhaps other jurisdictions [practice] it because Cambodia usually sets its regulations based on overseas jurisdictions but often [most jurisdictions] have [only] one audit a year,” said the adviser.

When asked, the ministry’s Soksensan denied the notion that taxpayers are pushed hard, especially under present circumstances.

“We are just reinforcing our tax collections by making progress in our administrative reforms. In your opinion is that wrong?” he asked.

Tax collection in Asian low income countries

A series of questions to the GDT’s Vibol went unanswered despite several reminders.

Owing to the current predicament, one auditor reckoned that the general sentiment among taxpayers was that they were being penalised even when they claim to be fully tax compliant and honest.

In fact, some companies have resorted to de-registering their business to avoid being targetted by government auditors.

They allegedly do so having noticed the purported immunity enjoyed by the companies due to absent audits, or reduced at best, by the tax department compared to four years ago.

“Malpractice cripples State resources”

More disconcerting is the possible abuse of power, including bribery, to cull repeated audits.

“It is what we have heard from time to time although it is not well documented. I think it is a violation of the tax law and tax system,” said Transparency International Cambodia executive director Pech Pisey.

He felt that frequent audits hinder government efforts to create an enabling environment for the private sector.

In addition, alleged corruption is in itself a type of collusion for tax evasion because it facilitates the reduction or elimination of the tax amount required by the tax provision.

“The malpractice is really devastating for the country as it cripples State resources and harms citizens as State resources [are] common resources [which] are being stolen for personal enrichment,” Pisey said.

Economist Chheng Kimlong said the practice of conducting a series of the same audit should be abolished, if it exists.

“It is in the best interest of the economy and of the private sector to remove any duplication of audit practices and have a set of unified and easy-to-follow audit guidelines for small- and medium-sized enterprises,” he said.