Chinese dual tax burden relieved

An extensive tax treaty that would shield Chinese businesses operating in the Kingdom from double taxation, and vice versa, has been drafted and is expected to be approved imminently, according to a senior Cambodian tax official.

Experts said yesterday the double taxation agreement (DTA) would create a clear legal framework built on increased fiscal transparency, allowing Chinese investment to continue to flood into the Kingdom without fear of an onerous tax obligation.

Bun Neary, deputy director-general of the General Department of Taxation, said China has fully endorsed the DTA, which was among dozens of bilateral agreements inked during the state visit of Chinese President Xi Jinping last week. The document has been sent to Minister of Economy and Finance Aun Pornmoniroth for final approval, which could come within days.

“There are a lot of Chinese investors in Cambodia and we need to have clear tax procedures to protect investors from being overly taxed,” she said. “The agreement will define what can and can’t be subject to double taxation.”

While a copy of the tax treaty has yet to be made public, Neary said it was nearly identical to the framework agreement signed between Cambodia and Singapore in May.

That DTA lowered withholding tax on dividends, interest and royalties for Singaporean firms operating here from the current rate of 14 percent for non-residents, to 10 percent. It also set up a mechanism to halt tax evasion through the exchange of information so that the respective governments could verify a corporation’s or individual’s tax filings.

While Neary insisted that the Chinese-Cambodian DTA was no more important than the one with Singapore, legal experts hailed it as a landmark development given China’s status as Cambodia’s biggest donor and investor.

Joseph Lovell, a senior legal counsel at regional law firm Sciaroni and Associates, called it a “very significant development.”

“China is the largest aid donor and leading source for foreign investment in Cambodia,” he said. “This agreement takes the relationship to a closer, more integrated level by largely eliminating the risk of double taxation.”

He added that Chinese investors would no longer need to worry about an excessive tax burden derived on income earned in either Cambodia or China, or at the very least would enjoy tax credits on inbound and outbound capital.

He said the agreement was both a sign of the increasing bilateral commitment between the countries, as well a symbolic overture of close diplomatic and commercial relations, which could boost the government’s coffers.

“As Cambodia continues to move up the ladder in manufacturing and increases its agricultural exports to China, as is expected, there should be an increased rate of compliance among those income earners to accurately report,” he said.

“Moreover, the agreement is expected to provide increased cooperation between the tax authorities of the two nations, which could lead to improved enforcement and, therefore, higher levels of compliance.”

Yum Sui Sang, chairman of the China, Hong Kong and Macau Expatriate and Business Association in Cambodia, said while the DTA was a positive step, it had to ensure that it did not increase the tax burden on Chinese investors.

“Of course, the government would like to collect more revenue, but if [the DTA] is used to increase taxes, it would not bring in more Chinese investment,” he said. While he admitted that increased tax clarification was beneficial, he claimed that “Cambodia’s tax system is not something that is really taken into account when the Chinese decide to invest.”

However, Clint O’Connell, head of Cambodia Tax Practice for foreign investment advisory and tax firm DFDL Cambodia, said that when dealing with Chinese companies the lack of a clear framework is often a major concern.

“While the absence of a DTA may not necessarily be a deal-breaker when it comes to a Chinese investor making a decision to invest in Cambodia, in my experience it is typically a consideration that is taken into account as part of a market-entry analysis – especially with respect to issues such as profit repatriation and cross-border transactions,” he said.

He added that greater taxation certainty was a much-needed step for Cambodia to compete for Chinese investors that are increasingly looking beyond the mainland. “China has an extensive DTA network in place, which already includes competing regional nations such as Thailand, Laos and Vietnam,” O’Connell said.

He added that given the highly competitive nature of the region, “Cambodia [must] continue to promote itself as an attractive destination for FDI.”