A Cambodian woman holds riel bank notes. Photo: AFP Forum
A Cambodian woman holds a stack of riel bank notes. Photo: AFP Forum

Cambodia is seeking to squeeze more from less as the government ramps up tax collection amid a slowing economy.

While the nation previously had some of Asia’s lowest tax rates, the bid to boost state coffers threatens to discourage private business at a time the nation needs new growth drivers.  

Last year, the General Department of Taxation (GDT) collected US$2.2 billion in taxes, up roughly 28% from 2018.

Combined with the $2.3 billion taken by the General Department of Customs and Excise, the government collected a third more in taxes than it had projected.

For decades, Cambodia’s government took a mostly hands-off approach to tax collection, with many firms given generous tax holidays to invest in the transitional country.

The low rates were justified as “informal” taxes, namely in the form of bribes and under-the-table payments, were often paid to officials for privileges and concessions.

Small-scale businesses line the riverside area of Phnom Penh. Photo: iStock

Many Cambodian-run small businesses were spared from taxes altogether, while middle-sized enterprises haggled a fee with tax collectors who visited their premises once a year.  

A decade ago, taxation accounted for less than one-tenth of gross domestic product (GDP), one of the lowest rates in Southeast Asia.

By 2017, after the implementation of tax-related reforms, the state’s take was up to 17% of GDP, one of the region’s highest rates. As of last year, that rate was even higher.

The GDT has surprisingly increased collections without actually increasing taxes, notes Anthony Galliano, group chief executive officer of Cambodian Investment Management, a financial services company. 

Corporate tax rates have, for instance, stayed the same for years, while the government has even lowered some other taxes. As of this month, it suspended a 4% stamp tax on residential properties valued at less than $70,000.

Instead, the growth in tax collection has been done “through the immense increase in the taxpayer base, spreading and sharing the tax obligation among the business population and enforcing strict compliance, a credit to the GDT’s management,” Galliano said.

The trend looks set to continue. The GDT says it collected $239 million in revenue in January alone, up 8.3% from its target and some 15% higher than the amount it collected over the same period last year.

Analysts say the government is already well on track to hit its $2.8 billion tax collection target for 2020.

A woman working at a money exchange shows 500 Cambodian riel notes to photographer in central Phnom Penh March 12, 2011. The much delayed stock exchange regulator Securities and Exchange Commission of Cambodia (SECC) said that all prices of securities will be quoted in local currency riel. Cambodia is highly dollarized and that many foreign investors want to see US dollars quoted in the upcoming bourse. REUTERS/Samrang Pring (CAMBODIA - Tags: POLITICS) - RTR2JSDU
A woman working at a money exchange shop shows 500 Cambodian riel notes in central Phnom Penh. Photo: Twitter

“Tax reform in recent years has shown considerable success,” said Bradley Murg, assistant professor of political science at Seattle Pacific University.

“However, government expenditure has also increased, with a significant share of that increase going towards public employee salaries,” he said, adding “further reform is still necessary.”

State expenditure is expected to hit $8.33 billion this year, up substantially from last year’s $6.79 billion budget. In 2015, by comparison, it was just $3.8 billion, meaning state expenditure has more than doubled in just five years.

Higher tax revenues and state expenditures, officials say, aim to bolster the traditionally aid-dependent nation’s financial independence, allowing the government to spend more on vital infrastructure which was typically funded from abroad.

It is also politically important. Higher taxation will allow Phnom Penh to intervene in markets at times of stress.

This month, Prime Minister Hun Sen announced a four-month tax break for hotels in Siem Reap, the tourist town famous for Angkor Wat, which is already being hit by low Chinese visitor numbers because of coronavirus outbreak.

Deeper state coffers will also help the government absorb the blow of the European Union’s (EU) recent decision to lift tariff-free status on one-fifth of Cambodia’s exports to the bloc, a punitive response to Hun Sen and his ruling Cambodian People’s Party’s (CPP) democratic backsliding.

Cambodian Prime Minister Hun Sen delivers a statement to journalists in Phnom Penh, January 30, 2020. Photo: AFP/Tang Chhin Sothy

Hun Sen claims he won’t give into Brussels’ demands for democratic reform and reckons his government can subsidize exporters hit by the new tariffs from state coffers.  

“I think with sustained economic growth, not seeing any kind of significant increase in tax revenue would be odd, wouldn’t it?” said Sophal Ear, associate professor of diplomacy and world affairs at Occidental College, in reference to Cambodia’s average 7% GDP growth rate for much of the last decade.

This is “generally good news” if the government spends its new finances wisely, he said, but stressed that new taxes could negatively hit the ability of businesses to grow.

“There is a connection between tax revenue and profits, which in turn impacts the ability of firms to invest,” he said.

“The more taxed they are, the lower their profits and ostensibly the less investment they’d make, but I also think that what we’re not seeing is how much profit is impacted by bribe taxes, which hopefully are lower.”

Local business owners told Asia Times that now they are being hit twice since, apart from greater official tax demands, they are also still expected to pay bribes to government officials for permits and privileges.

That anecdotal evidence adheres to recent statistical surveys. Transparency International ranked Cambodia 162 out of 180 countries on its latest Corruption Perceptions Index.

There are also complaints that tax reform hasn’t gone far enough.

The World Bank in a 2019 report found that lingering tax exemptions on corporate income tax and value added tax (VAT), which largely benefits foreign-owned garment manufacturers, accounts for almost 4% of GDP, much higher than the nation’s annual expenditure on education. 

Mask-clad students line up at a school in Phnom Penh, January 28, 2020. Photo: AFP/Tang Chhin Sothy

“Currently,” it stated, “incentives in Cambodia are not being used to achieve national objectives such as supporting innovation, linking the domestic private sector to global value chains, training workers, or focusing on higher value-added sectors.”

An International Monetary Fund (IMF) report from 2019 predicted that if property taxes rose from their current level of 0.1% of GDP to 0.6%, akin to Malaysia and the Philippines, and the additional revenue was spent on infrastructure, it would boost economic growth by 2.7%.

According to the same report, 61% of Cambodia’s total tax and customs revenue is derived from VAT, the most regressive of taxes, the report noted, “since consumption makes out a larger share of income for poorer households.”

As a percentage of GDP, Cambodia collects more from VAT than any other country in Southeast Asia except Vietnam. 

Revenue from personal income taxation, capital income and capital gains account for only 4.2% of GDP, the lowest percentage for any Southeast Asian nation, while property taxes account for just 0.1% of GDP, also one of the region’s lowest rates, according to an IMF.

Not all taxation is equal, either. NagaCorp, which has a government-backed monopoly as the only casino operator within a 100-kilometer radius of the capital city, paid just $30.3 million in income tax, or 5% of its operating profit of US$571 million, in 2019. In 2018, it paid only $8.8 million in income tax.

Now that more companies are paying their fair share of taxes, they could soon start to demand more from the government in terms of public services and infrastructure.

Workers build a road in the seaside town of Sihanoukville, February 18, 2020. Photo: AFP/Tang Chhin Sothy

“As tax administration improves and the size of the informal economy shrinks, there could be increased public pressure as regards provision of social services. However, that is unlikely in the short to medium term,” said Murg.

Cambodia does not have a welfare state and state education and health care services are woeful compared to its Southeast Asian neighbors. The government spent just 2.8% of GDP on education in 2017, way below the 4.1% average for lower middle-income economies.

But now that the tax base is growing ever larger, making more and more Cambodians tax payers for the first time, a chorus could soon rise asking why they are paying more in taxes but receiving no more in services.