Understanding Value Added Tax (VAT)

• VAT is a consumption tax levied on the value added at each stage of production and distribution of goods/services.

Historical Development

• 1918: The VAT concept was proposed by German industrialist Dr. Wilhelm von Siemens.
• 1954: VAT was first implemented in France by the Direction Générale Des Impôts.
• 1999: VAT was introduced in Cambodia on January 1.

Definition

• VAT is a consumption tax on the value added at each production and distribution stage.

Key Features

• Final Consumer:
  • Bears the full VAT cost.
  • Cannot reclaim VAT paid on purchases.
• Businesses:
  • Act as tax collectors for the government.
  • Can reclaim VAT paid on inputs (input tax) against VAT charged on outputs (output tax).
• Multi-Stage Taxation:
  • Applied incrementally at each supply chain stage.
  • Total VAT equals a constant percentage of the value added by each business.

Mechanism

• VAT is charged and reclaimed at each stage, ensuring only the final consumer pays the cumulative tax.

Purpose

• VAT's purpose is for efficient revenue collection.
• VAT minimizes tax evasion via an invoice trail.

VAT Terms Used in Cambodia

• Goods:
  • Definition: Tangible property excluding land and money.
  • Example: Physical products like electronics, furniture, or machinery.
  • Key Point: Incidental services (e.g., installation) provided with goods are treated as part of the goods supply.
• Services:
  • Definition: Provision of value not classified as goods, land, or money.
  • Example: Consulting, repairs, or digital services.
  • Key Point: Incidental goods (e.g., tools used in a repair) provided with a service are treated as part of the service supply.
• Supply of Goods:
  • Transferring ownership rights to goods, even without payment (e.g., free samples).
  • Taxable Event: Occurs when goods are sold, leased, or gifted.
• Supply of Services:
  • Non-goods transactions conducted for consideration (payment).
  • Taxable Event: Occurs when the service is performed.
• Person:
  • Includes individuals, businesses, or groups engaged in taxable activities.
• Related Persons:
  • Criteria:
    • 20%+ ownership or voting rights.
    • Shared management/directors.
    • Family/spouse relationships.
    • Purchasing 30%+ of output over three months.
  • Purpose: Prevents VAT avoidance via undercharged transactions between related entities.
• Taxable Turnover:
  • Total revenue from taxable supplies (goods/services), excluding VAT collected.
  • Example: A business sells goods for 1,000+100 VAT; its taxable turnover is $1,000.

Practical Implications

• Goods vs. Services: Determines VAT treatment.
  • Example: Selling a printer (goods) with setup (incidental service) is taxed as goods.
  • Example: Repairing a car (service) with a spare part (incidental good) is taxed as a service.
• Related-Person Transactions:
  • Transactions between related parties must reflect market value to avoid VAT manipulation.
  • Example: Company A (owns 25% of Company B) sells goods below market price; VAT is calculated on the fair value.
• Taxable Turnover:
  • Ensures businesses report revenue accurately (excluding VAT collected) for tax compliance.

Taxable Person Registration and Obligation

• A taxable person is subject to the Self Assessment System and makes taxable supplies.
• Examples include retailers, service providers, and manufacturers.

Registration Requirements

• Mandatory Registration: Required if you operate under the Self Assessment System and make taxable supplies.
• Import/Export: VAT registration is mandatory before engaging in business-related imports/exports.
• Effective Date: VAT must be charged from the registration date.

Key Obligations After Registration

• Display VAT Certificate: Prominently display the VAT Certificate of Registration at your primary business location.
• Invoicing:
  • Tax Invoices: Issue to VAT-registered customers (include VAT details for input tax claims).
  • Commercial Invoices/Records: For non-registered customers, issue simplified invoices or maintain daily sales records.
• Maintain VAT-related records (e.g., invoices, receipts, accounts) for 10 years.
• File Monthly Returns: Submit by the 20th of the following month.
• Timely Payment: Pay the VAT owed by the same deadline.
• Notify Changes:
  • Report business changes (e.g., ownership transfer, closure) to the General Department of Taxation (GDT).
  • Apply for VAT cancellation if you cease taxable activities.
• Compliance Checks: allow GDT officials access to records, documents, and business premises for audits.

Practical Considerations

• Input Tax vs. Output Tax: Output tax (charged on sales) must be remitted to GDT; input tax (paid on purchases) can be claimed as a credit.
• Cash Flow Management: Ensure funds are available to pay VAT by the 20th.
• Audit Preparedness: Organize records systematically to facilitate smooth inspections.

Penalties for Non-Compliance

• Failure to meet obligations (e.g., late filing, incorrect invoices) may result in fines, audits, or legal action.

Taxable Supply

• Supply of Goods or Service in Cambodia: Any sale, exchange, or provision of goods/services by a registered business within Cambodia.
• Appropriate of Goods for Own Use: Using business goods for personal/private purposes.
• Gift or Supplies Below Cost: giving goods/services as gifts or selling them below cost
• Import of Goods into Cambodia: Bringing goods into Cambodia’s customs territory, regardless of whether the importer is VAT-registered.

Non-Taxable Supply

• Non-taxable supplies are goods or services exempt from VAT, so no VAT is charged, and suppliers cannot reclaim input VAT.

Categories of Non-Taxable Supplies

• Essential public Services
  • Public Postal Services: Government-run postal services.
  • State-Owned Public Transport: Passenger transport services operated entirely by the state.
  • Electricity and Clean Water Supply: Utilities provided to households and businesses.
  • Waste Management: Collection and cleaning of solid/liquid waste by municipal or approved entities.
• Healthcare and Social Services
  • Medical Services: Hospital, clinic, dental, and medical services.
  • Incidental Medical Goods: Sale of medical/dental goods directly tied to healthcare services.
• Education and Non-profit Activities
  • Education Services: Schools, universities, and vocational training institutions.
  • Non-Profit Public Interest Activities: Charities, NGOs, or organizations operating for public benefit.
• Financial And Insurance Service
  • Primary Financial Services: Core banking activities.
  • Insurance Services: All types of insurance policies.
• Agriculture and Basic Goods
  • Unprocessed Agricultural Products: Raw farm goods.
• Diplomatic and Personal Imports
  • Imports for Diplomatic Use: Goods imported by foreign embassies, consulates, or international organizations for official functions.
  • Personal Use Imports: Articles exempt from customs duties.

Class Activity: Taxable Person or Non Taxable Person

• CAN microfinance company with a turnover below 250 million riels is non-taxable because it is a financial service.
• Textile Cambodia exporting garments (zero-rated taxable supply) with no turnover is currently non-taxable.
• Dental Care, estimating turnover to exceed 500 million riels within 3 months, is non-tax supply.
• Kim opening Korean Electronic Shop and importing electronics for business (own uses) with turnover below 250 million riel is still VAT register because the goods is for personal gain.

VAT Considered as State Burden

• The concept of VAT as a State Burden is a special tax incentive designed by the Cambodian government to support public welfare initiatives and protect key industries.
• The government effectively assumes responsibility for paying VAT on specific transactions, relieving taxpayers of the obligation to remit the tax.
• This applies to:
  • Non-profit activities in the public interest.
  • Imports of goods for garment factory sector.
• In case goods and services are not used according the point mentioned above, the taxpayers shall bear his/her responsibility to repay the tax to government with penalties as stipulated in the law.