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Taxation

Cain Gamalo, CPA, LLB Lecturer Mobile: 012 530 662 Email: cain_gamalo@yahoo.com

General Introduction

Introduction Definition of taxation


Taxation is a system of raising money to finance government. Taxation is the most important source of revenues for modern governments. All governments require payments of moneytaxesfrom people. Governments use tax revenues to pay soldiers and police, to build dams and roads, to operate schools and hospitals, to provide food to the poor and medical care to the elderly, and for hundreds of other purposes. Without taxes to fund its activities, government could not exist.

Introduction Functions of taxation


Governments may raise or lower taxes to achieve social and economic objectives or to achieve political popularity with certain groups. Taxation can redistribute a societys wealth by imposing a heavier tax burden on one group in order to fund services for another. Also, some economists consider taxation an important tool for maintaining the stability of a countrys economy.

Introduction Taxation schemes


Progressive taxation - with higher rates for higher incomes; describes a form of taxation in which the tax rate increases in proportion to the taxable income Regressive taxation - taxing poorer people more harshly; describes a tax system in which those with low incomes pay proportionally higher taxes than the wealthy Uniform taxation - describes a taxation system where same amount of tax is levied on everyone Proportional tax - takes the same percentage of income from all people

Introduction Types of taxes


Individual income tax - an individual income tax, also called a personal income tax, is a tax on a persons income. Income includes wages, salaries, and other earnings from ones occupation; interest earned by savings accounts and certain types of bonds; rents (earnings from rented properties); royalties earned on sales of patented or copyrighted items, such as inventions and books; and dividends from stock. Income also includes capital gains, which are profits from the sale of stock, real estate, or other investments whose value has increased over time.

Introduction Types of taxes


Corporate profit tax - corporations must pay tax on their net income (profits) to the national or federal governments and also to most city or provincial governments. Corporate income tax may lead to double taxation of corporate income, i.e. income is taxed once when it is earned by the corporation, and a second time when it is paid out to shareholders in the form of dividends.

Introduction Types of taxes


Payroll taxes - whereas an income tax is levied on all sources of income, a payroll tax applies only to wages and salaries. Employers automatically withhold payroll taxes from employees wages and forward them to the government. Payroll taxes are the main sources of funding for various social insurance programs, such as those that provide benefits to the poor, elderly, unemployed, and disabled.

Introduction Types of taxes


Consumption tax - a consumption tax is a tax levied on sales of goods or services. The most important kinds of consumption taxes are General sales taxes, Excise taxes, Value-added taxes, and Tariffs.

Introduction Types of taxes


Consumption tax - levied on sales of goods or services. The most important kinds of consumption taxes are general sales taxes, excise taxes, value-added taxes, and tariffs.

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Introduction Types of taxes


General sales taxes - imposes the same tax rate on a wide variety of goods and, in some cases, services.

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Introduction Types of taxes


Excise taxes - sales taxes on specific goods or services; also called selective sales taxes; goods subject to excise may include tobacco products, alcoholic beverages, gasoline, and some luxury items applied either on a per unit basis, such as per package of cigarettes or per liter or gallon of gasoline, or as a fixed percentage of the sales price.

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Introduction Types of taxes


Value-added taxes - in this system, the seller pays the government a percentage of the value added to goods or services at each stage of production. The value added at each stage of production is the difference between the sellers costs for materials and the selling price. In essence, a VAT is just a general sales tax that is collected at multiple stages.

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Introduction Types of taxes


Tariffs - also called duties or customs duties, are taxes levied on imported or exported goods. Import duties are considered consumption taxes because they are levied on goods to be consumed. Import duties also protect domestic industries from foreign competition by making imported goods more expensive than their domestic counterparts.

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Introduction Types of taxes


Property tax - tax on an individuals wealththe value of all of the persons assets, both financial (such as stocks and bonds) and real (such as houses, cars, and artwork). In practice, property taxes are usually more limited.

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Introduction Types of taxes


Estate tax - tax on the deceased persons estate, which includes everything the person owned at the time of deathmoney, real estate, stock, bonds, proceeds from insurance policies, and material possessions. Most governments levy estate taxes before the deceased persons property passes to heirs, although many governments do not impose an estate tax on property inherited by a spouse. Inheritance tax - also taxes the value of the deceased persons estate, but after the estate passes to heirs. The inheritors pay the tax. Estate and inheritance taxes are sometimes collectively called death taxes. Gift tax - is a tax on the transfer of property between living people.
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Introduction Types of taxes


Property tax - tax on an individuals wealththe value of all of the persons assets, both financial (such as stocks and bonds) and real (such as houses, cars, and artwork). In practice, property taxes are usually more limited.

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Introduction Types of taxes


Poll tax - also called a lump-sum tax or head tax, collects the same amount of money from each individual regardless of income or circumstances

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Introduction Types of taxes


Pollution tax - levied on a company that produces air, water, or soil pollution over a certain level established by the government. The tax provides an incentive for companies to pollute less and thus reduce damage to the environment.

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Introduction Principles of taxation - fairness


Ability-to-pay principle - holds that peoples taxes should be based upon their ability to pay, usually as measured by income or wealth. Horizontal equity - states that people in equal positions should pay the same amount of tax. Vertical equity - tax system should distribute the burden fairly across people with different abilities to pay. This idea implies that a person with higher income should pay more in taxes than one with less income.

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Introduction Principles of taxation - fairness


Benefits principle - benefits principle of taxation states that only the beneficiaries of a particular government program should have to pay for it. The benefits principle regards public services as similar to private goods and regards taxes as the price people must pay for these services

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Introduction Principles of taxation - efficiency


Efficiency principle - a good tax system should be efficient, wasting as little money and resources as possible. Administration cost - no tax system is perfectly efficient, but government should strive to minimize the costs of administration. Compliance cost - paying taxes costs taxpayers money above and beyond the actual tax bill thus the government should strive to minimise this burden on taxpayers Excess burden -instead of choosing what goods to buy solely on the basis of their intrinsic merits, consumers are influenced by taxes.

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Introduction Effects of taxes


Tax incidence - the way a tax affects people Statutory incidence - refers to the individuals or groups who must legally pay the tax Economic incidence - refers to its actual effects on peoples incomes Tax evasion - failing to pay legally due taxes Tax avoidance - occurs when people change their behavior to reduce the amount of taxes they legally owe Tax affects labour supply Tax affects savings Tax affects physical investments

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Introduction A very brief history of taxation


In the ancient civilizations of Palestine, Egypt, Assyria, and Babylonia, instead of taxing individuals to support the government, the king could simply force them to work for him. Also, tributes are exerted on conquered subjects. The government of ancient Athens, Greece, relied on publicly owned silver mines, tribute from conquered countries, a few customs duties, and voluntary contributions from citizens for revenue. It levied poll taxes only on slaves and aliens (noncitizens) and made failure to pay a capital crime. In the early years of the Roman republic all Roman citizens paid a poll tax.

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Introduction A very brief history of taxation


During the Middle Ages, from about the 5th century ad to the 15th century, taxation varied from region to region. Europeans were subject to many forms of taxation, including land taxes, poll taxes, inheritance taxes, tolls (payments for the use of bridges, roads, or seaports), and miscellaneous fees and fines During the 16th and 17th centuries, states relied heavily on revenues generated by the kings own estates and by taxes on land. By the 18th century, England started imposing various taxes on transactions. Taxes on imported goods (tariffs) assumed great importance, as did taxes on a wide variety of commodities, including sugar, meat, chocolate, alcohol, coffee, candles, and soap.
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Introduction A very brief history of taxation


In the late 19th and early 20th centuries, concerns about both fairness and the ability of tax systems to generate sufficient revenue led governments to enact income taxes. In 1799 Britain enacted the first national income tax, to finance the Napoleonic Wars. The government discontinued the tax when the war ended in 1815, but revived it in 1842. The first progressive income taxwhich imposed a greater tax burden on people with higher incomeswas introduced in Prussia in 1853. Other countries introduced progressive income taxation in subsequent decades, including Britain in 1907, the United States in 1913, and France in 1917.

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Introduction Cambodian tax system


Relevant laws Law on taxation - promulgated 31 Mar 2003, effective 01 Jan 2004 Investment law - promulgated 31 Mar 2003, effective 01 Jan 2004 Note that tax rates may change from time to time!

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Introduction Cambodian tax system


Taxes affecting investors in Cambodia Tax on profit Minimum tax Various withholding taxes Payroll tax Value added tax Import duties Various specific taxes Other taxes

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Introduction End of presentation

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Taxation
Cain Gamalo, CPA, LLB Lecturer Mobile: 012 530 662 Email: cain_gamalo@yahoo.com

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Profit tax

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Profit tax Scope


The assessment of the tax on profit shall be made according to the taxation system of the real regime, simplified regime or estimated regime. The tax payers regime shall be determined according to the form of the company, type of business activities and the level of turnover (Article 4, Law on Taxation). Incorporated taxpayers are governed by the real regime.

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Profit tax
Residency and source
Resident taxpayers they include companies organised or managed or having their principal place of business in Cambodia; taxed on world-wide income/profits; for taxes paid on foreign-sourced income/profits, they can receive tax credits. Internationally recognisable permanent establishment (PE) is taxed on its Cambodian source income only. Non-residents taxed on Cambodian sourced income/profits only.

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Profit tax Tax rates


Standard Preferential rate Oil, gas, certain mineral Insurance Resident individuals 20% 9% or 0% 30% 5% 20%

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Profit tax Prepayments


1% of turnover inclusive of all taxes except VAT to be paid on a monthly basis by the 15th day of the succeeding month and may be offset against the Profit Tax and Minimum Tax Taxpayers on tax holiday are exempt from the prepayment but must lodged a nil monthly return Taxpayers not subject to minimum tax needs monthly prepayments on the Profit Tax. Unutilised prepayments can be used to offset the current amount due and no physical payment is needed.

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Profit tax Tax holidays


QIPs (Qualified Investment Project recognised and registered by the Council for the Development of Cambodia or CDC) will be entitled to a tax holiday. Means a total exemption from the profit tax Begins from the earlier of the year the QIP becomes profitable or 3 years from the commencement of business (i.e. first sale). Duration period is from 3 to 6 years.

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Profit tax Calculation of taxable profits


For Cambodian resident taxpayers Total revenue (domestic and foreign sourced) Less: expenses paid or incurred to carry on the business Add: passive income, i.e. interest, royalties, rent

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Profit tax Expenses


Designated reasonable payments to company officers and directors - deductible Plant and building related interest and taxes to the extent incurred during construction/ acquisition phase, the expenditure must be capitalised and depreciated with the relevant property - deductible Interest not mentioned above are deductible to the extent of interest income and 50% of residual income. The nondeductible portion maybe carried forward to the succeeding years calculation

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Profit tax Expenses


Expenditure on tangible property are depreciable (and deductible) according to designated rates and methods of depreciation Building and structures 5%, straight-line Computers, electronic information systems, software and data handling equipment 50%, declining balance Automobiles, trucks, office furniture and equipment 25%, declining balance All other tangible property 20%, declining balance

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Profit tax Expenses


Expenditure constituting exploration and development costs amortisable (and deductible) with reference to the exploitation of the relevant natural resource. Charitable contributions deductible to the extent the amount does not exceed 5% of taxable profit. Amusement, recreation or entertainment not deductible Tax on profit, including where paid on anothers behalf not deductible Various accrued expenses depending on stipulated conditions - deductible.

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Profit tax Expenses


Special depreciation QIPs are entitled to an additional 40% special depreciation in the later of the year of purchase or first use. This applies only to assets used in manufacturing and processing and only if taxpayer has not elected to use a tax holiday. A clawback provision exists for assets held for less than 4 years

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Profit tax Losses


Taxpayers may carry forward their losses for 5 years. Carryback is not permitted. No provision for any form of group loss relief Taxpayer must not change its activities or ownership to be eligible to carry forward losses.

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Profit tax Transfer pricing


The CTA can redistribute income and deductions between parties under common ownership in order to prevent the avoidance or evasion of taxes. Common ownership will exist at a relatively low level of 20%. No deduction is available for certain losses incurred on dealings between 51% commonly owned parties.

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Profit tax Administration


Profit tax returns are to be filed annually within 3 months after year end. Standard tax year is the calendar year although different accounting year-ends can be granted upon application. The 1% prepayment on profit tax is due on a monthly basis , by the 15th day of the succeeding month.

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Profit tax Minimum tax


General overview Real regime taxpayers are subject to a separate minimum tax. It is an annual tax liability of 1% of turnover inclusive of all taxes except VAT QIPs are exempted Imposed irrespective of the taxpayers profit or loss.

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Profit tax Minimum tax


Administration Minimum tax returns is due 3 months after year-end. May be reduced by tax on profit payments including prepayments.

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Profit tax End of presentation

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Taxation
Cain Gamalo, CPA, LLB Lecturer Mobile: 012 530 662 Email: cain_gamalo@yahoo.com

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Value added tax

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Value added tax Scope


Applies to real regime taxpayers making taxable supplies (goods or services) Applies also on the duty paid value of imported goods including the associated services thereto (except in certain concessions for exporters, tax-exempt bodies and cigarette, alcoholic and motor vehicle products imported for the purpose of re-export). The importer must pay VAT to the customs at the same time they pay the import duties. Applies also to appropriation of goods for personal use or a result of gifting goods and services.

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Value added tax Tax rates


0% - applies to goods exported from Cambodia and services consumed outside Cambodia. Exports are defined to include international transportation of passengers or goods, or services in connection thereto. 10% - applies to all non-exempt supplies

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Value added tax Exempt goods and services


Pubic postal services Hospital and medical services and the provision of goods incidental thereto Public transportation activities operated by state owned providers. Insurance activities Import of certain personal effects Non-profit activities in the public interest (as approved) Electricity

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Value added tax Basis of taxation


Output tax calculated by multiplying the taxable value (net of VAT) by the applicable VAT rate Imported goods CIF import price plus any specific tax on certain merchandise and services Goods sold on a hire purchase or financial lease basis total price at the time of supply rather than installments received. Goods under rental or periodic payment arrangement are treated as being successively supplied. Input credits will not be made available for VAT charged on entertainment, petroleum products, mobile telephone calls or the purchase of passenger motor vehicles.

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Value added tax Registration


All real regime taxpayers making supplies of taxable goods and services in Cambodia must register for VAT. All companies must complete registration for VAT before commencing business. Others must register within 30 days after their taxable turnover for the preceding consecutive three months exceeds 125 million Riel for goods; 60 million Riel for services CDC licensed investment enterprises may register for VAT prior to making taxable supplies. This allows the taxpayer to claim VAT input credits, and in theory obtain monthly refunds Invoices vary according to whether a VAT-registered or non-registered person is being invoiced.
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Value added tax Administration


For domestic supplies, taxpayers will be required to file VAT returns and make VAT declarations and payments on a monthly basis, by the 20th day of the succeeding month For imports, VAT is payable to customs at the time of import If input VAT for the month exceeds output VAT, the business can carry forward the excess for three months forward. It can apply for a refund from the CTA (CDC licensed taxpayers in pre-operating stage may qualify for monthly refunds)

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Value added tax End of presentation

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Taxation
Cain Gamalo, CPA, LLB Lecturer Mobile: 012 530 662 Email: cain_gamalo@yahoo.com

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Withholding and payroll taxes

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Withholding taxes Rates


Income received by individuals for services such as management, consulting, etc. 15% Payment of royalties for intangibles and interests in mineral resources 15% Payment of interest by a resident taxpayer carrying on business, other than domestic banks or financial institutions -15% Income from the rental of movable or immovable property 10% Interest payment by domestic banks to residents with fixed term deposit account 6%

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Withholding taxes Rates


Interest payment by domestic banks to residents with nonfixed term deposit account 4% Payment to non-residents i.e. interest, royalties, rent and other income connected with the use of property, dividends, payment for management or technical services 14%

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Withholding taxes Additional tax on profits


Distributions of dividends are subject to Additional Tax on Profit or additional ToP as follows: Addl ToP calculation Dividends subject to profit tax 0% distribution x 20/10 9% distribution x 11/91 20% nil 30% nil A shareholder is entitled to establish a special dividend account from which the relevant dividend is on-paid without additional ToP obligations. A dividend will be exempt from tax in the hands of the shareholder if additional ToP (and withholding tax for nonresident shareholders) has been paid.
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Withholding taxes Administration


Withholding tax is due when the amount is paid. For this purpose, an expense is paid when it is recorded in the accounting books. Withholding tax is required to be remitted by the payer on a monthly basis by the 15th day of the succeeding month.

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Withholding taxes Payroll taxes


0 Riels - 500,000 Riels (Approx. USD 125 or less) 0% 500,001 Riels - 1,250,000 Riels (Over 125 - 312.5) 5% 1,250,001 Riels - 8,500,000 Riels (Over 312.5 - 2,215) 10% 8,500,001 Riels - 12,500,000 Riels (2,215 - 3,125) 15% Over 12,500,000 Riels (Over 3,125) 20% For fringe benefits 20% on MV Non-residents 20%

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Withholding taxes End of presentation

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Taxation
Cain Gamalo, CPA, LLB Lecturer Mobile: 012 530 662 Email: cain_gamalo@yahoo.com

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Specific taxes, import duties, & export duties

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Specific taxes Overview


Specific tax is a form of excise tax that applies to the importation or domestic production and supply of certain goods and services.

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Specific taxes Tax rates


Diesel fuel 4.35% Lubricant, brake oil, raw material for producing engine oil 10% Motorcycles including motor tricycles with capacity of more than 12cc and its spare parts 10% Local & international air tickets sold in Cambodia 10% Local & international telecommunications services 10%* Certain carbonated and similar non-alcoholic drinks 10%

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Specific taxes Tax rates


Cigarettes 10% Hotel accommodation and entertainment charges -10% Tires, inner tubes and inner tube covers - 15% Cigars 25% Beer 30% Wine 33.3%** * March 2005 upwards ** Temporarily maintained at 20%

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Specific taxes Basis of taxation


Domestically produced ex-factory selling price Imported goods customs duty inclusive CIF value Hotel and telecom services invoice price Air tickets value of travel within and outside Cambodia

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Specific taxes Administration


Domestic sales taxpayers must make declarations and payments on a monthly basis, not later than the 10th day of the succeeding month Imports payable to Customs at the time of import

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Import duties Rates


Rate of 0% for goods that government policy provides not to collect duties. Rate of 7% for primary products and raw materials. Rate of 15% for machinery and equipment. Rate of 35% for finished products and government protected goods. Rate of 50% for luxurious goods.

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Import duties Clearing imports


Invoice Packing list Bill of lading/airway bill Import license Report of Finding Report of finding Other documents

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Export duties Rates


Rate of 2%, 5% and 10% for natural rubber (Cambodia temporary uses cascade rates for this product). Rate of 7% for primary products and raw materials. Rate of 5% and 10% for processed wood (depends on level and type of processing). Rate of 10% for fish and other aquatic products, and uncut precious stone. government protected goods.

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Export duties Clearing exports


An invoice A packing list or airway bill An export license

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Specific taxes, import & export duties End of presentation

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Taxation
Cain Gamalo, CPA, LLB Lecturer Mobile: 012 530 662 Email: cain_gamalo@yahoo.com

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Property taxes, patent, other taxes, & statutory audit requirements

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Property taxes Property transfer tax


Property transfer tax - for the transfer of ownership of real property and certain types of vehicles as a result of direct transfer or a contribution of share capital to an enterprise. Note: it is prohibited to issue certificates of ownership of property until the Property Transfer Tax has been paid. Tax rate 4% of the transfer value.

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Property taxes Unused property tax


The Committee for Evaluation of Undeveloped Land, in cooperation with municipal and provincial authorities, decides whether a plot is unused or not and the amount of tax liability. Taxable for the portion over 1,200 square meters Tax Rate 2% on the assessed value of unused land.

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Patent, other taxes Fees and tax rates


For annual business registration - approx. USD 300 Tax on house and land rent - 10% of the relevant rental fees.

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Introduction Statutory audit


All enterprises (physical or legal persons) that meet 2 of the following criteria are required to have their financial statements audited by an independent external auditor registered with the KICPAA (Kampuchea Institute of Certified Public Accountants and Auditors. Annual turnover above 3B Riels (approximately (USD 750,000) Total assets above 2B Riels (approximately USD 500,000) More than 100 employees A QIP registered with the CDC is required to have its financial statements audited by an independent external auditor registered with the KICPAA (Kampuchea Institute of Certified Public Accountants and Auditors.
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Property taxes, patent & other taxes, statutory requirements End of presentation

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