“There is nothing permanent except change.” – Heraclitus
In October 2023 the newly elected Cambodia government launched the National Strategy for Informal Economic Development 2023-2028. At the launching ceremony Prime Minister Hun Manet outlined that the National Strategy adopts the policy of leaving no Cambodian behind, recognizing the vital role of the informal sector in propelling sustainable economic development and its potential to alleviate poverty, enhance social fairness, and fortify the economy’s overall resilience.
“Informal economy: all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements.” ILO
One of the key pillars of the National Strategy involves easing the transition of those businesses currently in the informal economy into the formal economy. There is no question that significant benefits would arise from formalizing the informal economy not least the creation of a larger tax base and with it the collection of tax revenue and reduced tax audit pressure on the currently relatively small registered taxpayer base, greater transparency and a level playing field for businesses and more accurate data that would allow the Cambodia Government to identify and target relief and incentives to those Micro, Small, and Medium Enterprises (MSMEs) that most need it.
There were 735,456 non-agricultural establishments operating in Cambodia’s economy according to the 2022 economic census, excluding agricultural businesses involved in production. Approximately 99.8% of those businesses are MSMEs, which are collectively responsible for 58% of employment and 58% of gross domestic product (GDP). However, many enterprises – especially smaller ones – remain informal. Most establishments (87.6%) are not registered. Only 6.5%, or 45,793 micro establishments were registered.
Instruction 18412
In accordance with the National Strategy for the Development of the Informal Economy 2023-2028 the General Department of Taxation (GDT) issued Instruction 18412 on 20 May 2024 which provides guidance and incentives for MSME’s to voluntarily register for tax. Instruction 18412 outlines Priority Sectors that would receive tax incentives upon registration. These priority sectors consist of:
- Wholesale, Retail, and Repair;
- Accommodation and Food Services;
- Handicrafts, and
- Agricultural Co-Operative.
The Annex to Instruction 18412 provides a comprehensive list of the MSME business codes and activities that may be eligible for tax incentives.
What is an MSME?
The Ministry of Economy and Finance issued Prakas 360 on 19 June 2024 which defined the rules and procedures regarding the tax incentives provided to MSME’s in the priority sectors who register for tax. MSME’s are defined as follows:
Tax Incentives
Both Instruction 18412 and Prakas 360 set out the tax incentives for MSME’s as follows.
Micro Enterprises
Micro enterprises that voluntarily register for tax between 2023 and 2028 are entitled to an exemption from the tax registration fees, information update fees and tax registration card printing fee.
Small Enterprise
Small Enterprises that voluntarily register for tax between 2023 and 2028 are exempted for the same fees as micro enterprises outlined above in addition small enterprises are exempted on any tax penalties and debts, including taxes, additional tax, interest, and monetary fines relating to non-compliance with past voluntary tax registration requirements.
Small Enterprises are also exempt from Patent Tax at the time of their tax registration and for two years following the completion of their tax registration if completed in 2024 or 2025.
Finally Small Enterprises are exempted from Prepayment of Tax on Income, Tax on Income, and Minimum Tax for two years starting from the year the tax registration is approved and the following tax year.
Medium Enterprise
Medium Enterprises which voluntarily register for tax with the GDT between 2024–2025 are exempted from any tax penalties and debts, including taxes, additional tax, interest, and monetary fines related to non-compliance with past voluntary registration requirements.
Medium Enterprises are also exempt from Patent Tax at the time of their tax registration and for two years following the completion of their tax registration if completed in 2024 or 2025.
Finally Medium Enterprises are exempted from Prepayment of Tax on Income, Tax on Income, and Minimum Tax for two years starting from the year the tax registration is approved and the following tax year.
Obligations
Micro Enterprise
A Micro Enterprise that receives the incentives outlined above is obliged to report its annual turnover to the GDT between the period of 1 January to 31 March of the following year and update the GDT within 15 days if there is any change in its address, name, activities, phone or email. In addition, the GDT must be updated within 15 days if the business is transferred or closed.
Small and Medium Enterprise
Small and Medium Enterprises must notify the GDT within 15 days if they change their address, structure, name, business objective, owner, manager, authorized tax representative, bank account, contact information, phone number or email. In addition, the GDT must be updated within 15 days if the business is transferred or closed.
Small and Medium Enterprises must maintain proper accounting records and file tax returns, even during the tax exemption period. Small and Medium Enterprises must file and pay monthly and annual taxes in accordance with the tax regulations.
*Important
It is important to note that a MSME unilateral tax registration undertaken by the GDT, and failure to register with the GDT within 15 days following receipt of a 2nd invitation letter from the GDT is not considered to be a voluntary tax registration for the purpose of Instruction 18412 and Prakas 360.
Tax registration can be performed through the business registration platform (CamDX) at https://www.registrationservices.gov.kh or directly at the GDT.
Tax services required to be undertaken by a licensed tax agent in Cambodia are provided by Mekong Tax Services Co., Ltd, a member of DFDL and licensed as a Cambodian tax agent under license number – TA201701018.
