6.1.2.4. Tax Reform Program in 2003-2004 

In 2003, the Department of Taxation (DOT) prepared a new organizational structure and drafted a circular (Prakas) for review. Communication strategies and recommendations regarding taxpayer services have been proposed and discussed. DOT also initiated a change process in the Large Taxpayer Unit (LTU) and the Medium Taxpayer Unit (MTU). The department is considering to require the use of the banking system for paying tax at the MTU. The DOT also reviewed the policy of tax regime to make it consistent with the Amendment to the Law on Taxation (LOT). An unambiguous depreciation schedule based on the needs of all stakeholders has been established and the method of taxing dividends has been revised as it is a priority with Law on Investment and Amended Law on Investment.  

The DOT reviewed the elimination or reduction of the tax exemption provided under the Law on Investment (LOI) and provided recommendations regarding return on investment and risk management. In terms of tax administration, the department accepted the option regarding the lowering of tax bands without changing the exemption level. The DOT started the work on computerization. Computer system support is completed with the integration of the computer system. 

The DOT reviewed the regulation to lower the threshold of VAT to service level and removed the threshold on government contracts. This is aimed at transferring more taxpayers from the assessment regime to the real regime. The department decided to propose VAT on all electricity bills and that a VAT exemption should exist on the first 100 kwts per month in order to mitigate the impact on low income families. A joint Tax and Customs committee has been formed to address the smuggling of liquor, cigarettes, milk and other products. The committee has completed reports on Motorcycles and parts.

 Several training courses have been provided to strengthen the tax policy analysis capacity of the tax officials i.e. Train the Trainer, Specific Industry Audit Training, Tax Treaty Training, Collection Enforcement, Revenue Estimation and Forecasting, Basic Tax Training for 60 new tax officials, and Auditing, Risk Assessment and Accounting. Data on filing of tax returns (returns processing) in electronic format has been developed.   

To strengthen tax policy and administration in 2004-2005, three areas have been identified to be the priority areas for implementing the tax reform namely (i) Change process, (ii) Tax policy, and (iii) Tax administration:

 (i)          change process includes establishing a formalized and transparent approach to the change process through the use of an Organizational Technology Framework and identifying the essential elements; providing the linkage and balance all the essential elements as they are dependent on each other; establishing the Departmental vision and communicate that vision within and outside the Department; conducting a review of the current Tax Department’s functional roles and responsibilities and provide advice and assistance in the taking of appropriate action to establish formal roles and responsibilities of Headquarters, Regional or Provincial Offices and District Offices, (functional model); 

(ii)        tax policy reform involves identify anomalies in the laws and make recommendations for changes based upon the modernization of tax policy and linked to fiscal direction and policy of the central government with regard to tax regime, tax on profits for the estimated regime, tax on salaries, local taxation, value added tax, turnover tax, excise, and tax policy analysis; 

(iii)      tax administration reform involves improving headquarters’ management capacity; implementing the real regime in the five main regional offices; establishing a solid management information system with appropriate data to meet the needs of the MEF, head office, and the field or district offices; developing an operational procedures and manuals at all level and performance standards at the divisional and individual staff level; establishing of LTU and MTU in Phnom Penh to improve administration of the largest taxpayers; establishing a monthly statistical reports; ensuring the real regime covers all large and medium sized business; implementing the real regime in all provinces in the medium term; establishing formal audit manuals and procedures and a modern management information system within the audit operation, developing an audit strategy that provides for a broader coverage of taxpayers, utilizes new selection techniques based on risk analysis; and ensuring information on importations from registered/non-registered taxpayers is received from the Customs Department. 

6.1.2.5. Customs Reforms 

Given the presently weak enforcement capabilities of the customs administration in Cambodia, having PSI as part of its overall customs operations is both necessary and important, at least in the short term, for safeguarding the collection of duties and taxes on the one hand, and facilitating trade on the other.  

At the same time, the customs administration can be strengthened in a number of areas by several short-term measures, most notably (1) removing overlapping and duplicative controls on customs operations presently performed by government agencies unrelated to the customs, especially CAMCONTROL and the

Economic Police; (2) establishing with adequate resource support a dedicated anti-smuggling task force to detect and deter contraband; (3) implementing the new customs code and supporting regulations; (4) improving the present customs database, computerization of operations, and communications between customs headquarters and branch offices by a modest upgrade to computer hardware and software, and by installing fax machines; and (5) initiating a review of present customs procedures with a view to streamlining them.

In the medium term, reforming the customs administration would require the formulation of a comprehensive customs reform program. This program would build on the short-term measures and further their effectiveness, as well as address issues in areas where they cannot be meaningfully tacked in the short term, most notably (1) the comprehensive adoption of customs procedures in line with international norms, such as those established by the World Customs Organization (WCO), of which Cambodia is a member; (2) a substantial upgrading in the computerization of customs operations and database development; and (3) a concerted and systematic effort to address human and material resource needs of the customs administration, including the upgrading of human capital through a comprehensive and sustained training program.  

The basic objectives of the medium-term customs reform program are to build on the short-term measures and further their effectiveness, and to address issues in areas where they cannot be meaningfully tackled in the short term. The main emphasis of this program should be on strengthening overall customs enforcement capabilities; streamlining, simplifying, and modernizing customs procedures in line with international norms; amending customs legislation and regulations to provide adequate legal underpinnings for customs operations; computerizing customs operations; and upgrading customs' human and material resources. Such a wide-ranging program is essential to ensure that the reforms are self-sustaining and that the PSI can be phased out over time.  

To implement the above reform programs, the Ministry of Economy and Finance has revised the Law on Customs and related regulations to provide the legislative base for reform and to meet international commitments and standards. Customs reforms include: (i) implementing streamlined customs clearance procedures to enhance trade facilitation and improving effectiveness of operations; (ii) developing an enforcement strategy and programs based on the principles of risk management in order to reduce smuggling and other illegal cross border activities; (iii) automating Customs Systems and Procedures. All information technology (IT) opportunities will be exploited to improve business systems, operating efficiency and service to clients; and providing a comprehensive and coordinated training and development program to strengthen management skills and technical expertise; and (iv) strengthening the Internal Audit Unit of the Customs and Excise Department to strengthen good governance. 

6.1.2.6. Tariff Restructuring 

Cambodia relies heavily on import duties for budgetary revenue. During 1998, import duties amounted to about 54 percent of total tax revenue, or about 3.4 percent of GDP. However, as an ASEAN member, Cambodia is required to implement a number of trade liberalization measures on both the tariff policy and customs administration fronts. Most notably, tariff rates would have to be lowered substantially, over a period of ten years beginning in 2000, according to the Common Effective Preferential Tariff agreement on intra-ASEAN trade.  

Restructuring tariff rates and reforming the customs administration, including issues of pre-shipment inspection (PSI) services, are also important elements in the government's customs reform program. 

2001 was the second year that, as a member, Cambodia was fully subject to all ASEAN accords and agreements.  ASEAN membership provides strong bonds for strengthening peace, stability and regional cooperation, and this will further strengthen Cambodia’s internal political stability. To fulfill Cambodia’s membership obligations, the RGC initiated the action needed to implement the agreement on Common Effective Preferential Tariff (CEPT) and ASEAN Free Trade Area (AFTA) through tariff reduction and non-tariff barrier elimination. To meet its obligations, the RGC initiated the technical changes needed to reduce the maximum tariff rate to 35% and the tariff bands from 12 to 4.  At the same time, to avoid revenue loss from the tariff reduction and to increase budget revenue, the RGC introduced measures to expand the tax base and implement local taxation, including, as the first step, the application of excise tax on some goods subject to the tariff reduction. The RGC also initiated legal amendments and revised procedures, and undertook institutional restructuring to meet the international standards.

6.1.2.7.Customs Reforms Measures 

·        Develop and implement a revised Law on Customs and related regulations to provide the legislative base for reform and to meet international commitments and standards;

·        Implement the tariff restructuring program resulting in an un-weighted tariff rate of less than 15% in the year 2003;

·        Develop and implement streamlined customs clearance procedures to enhance trade facilitation and improve effectiveness of operations;

·        Develop expanded multi-lateral and bi-lateral relations, including accession to the World Trade Organization (WTO), membership in the World Customs Organization (WCO), ASEAN commitments, and development of bilateral trade agreements; and deriving maximum benefit from WCO, WTO, membership, ASEAN and from bi-lateral relations;

·        Develop and implement an enforcement strategy and programs based on the principles of risk management in order to reduce smuggling and other illegal cross border activities;

·        Automate Customs Systems and Procedures. All information technology (IT) opportunities will be exploited to improve business systems, operating efficiency and service to clients.  The long-term goal is fully automated systems for all customs business processes;

·        Implement a new organizational structure to better meet the needs of the Department, and develop and implement a comprehensive human resource plan, including training and development plans; and

·        Develop and implement a comprehensive and coordinated training and development program to strengthen management skills and technical expertise. The plan will include all training courses provided by donor organizations such as IMF, ASEAN Secretariat, WTO, and bilateral donors;

• Strengthen the Internal Audit Unit of the Customs and Excise Department to strengthen good governance.

6.1.2.8.  Customs Reform Program in 2003-2004 

Increases revenue is one among the most important strategies to maintain macroeconomic stability and fiscal improvement. The Royal Government of Cambodia (RGC) has implemented public finance reform program in which improving customs and tax administration and policies are the two most vital measures.  

In 2003, the Customs and Excise Department (CED) prepared a draft Law on Customs (LOC), which was approved by the Council Ministers and waiting for the approval of the new National Assembly. Draft regulations for implementation of the law (Prakas, sub-decrees, and directives) have been completed and are undergoing the review process. The new tariff (AHTN) will be started to implement on the first January 2004. Sub-decrees for implementation the new tariff has been approved and the tariff book is in the design process for publication before the implementation date. The review of customs procedures for modernizing and streamlining has been completed and report has been finalized and submitted to the reform working group. The Asean Customs Valuation Guide manual will be introduced in 2004. 

With regard to the strengthening enforcement, a new format of the enforcement report has been introduced, but training is needed for using the new report format. Further IT assistance is needed for developing and improving the database system for intelligence unit. In addition, more facilities, equipment, qualified customs officials, and cooperation are also required for strengthening the capacity of the unit. The government will approve the ASYCUDA system in an effort to automate the customs-related services. However, funding is still a problem for developing an automated customs systems and procedures. Database development for statistics has been completed and staff operators are being trained.  

To improve customs administrative and policy, the Government's reform agenda in 2004-2005 is focusing on:

 (i)          strengthening customs legal framework by developing and implementing a revised law on customs (LOC) and related regulations to provide the legislative base for reform and to meet international commitments and standards;

(ii)        modernizing and streamlining customs procedures by developing and implementing of streamlined customs clearance procedures to enhance  trade facilitation and improve effectiveness of operations;

(iii)      strengthening enforcement by developing and implementing an enforcement strategy and programs based on the principles of risk management in order to reduce smuggling and other illegal cross border activities;

(iv)      improving departmental organization and human resources by implementing a new organizational structure to better meet the needs of the department, and the development and implementation of a comprehensive human resource plan including training and development plans;

(v)        improving departmental infrastructure by developing and implementing and infrastructure plan to ensure the department is provided with adequate office and examination facilities, equipments, and enforcement tools; and

(vi)      enhancing service to the public and trade facilitation by improving the levels and quality service to the public and providing reliable and professional service to legitimate business. 

6.1.2.9. Non-Tax Revenue 

After 2-3 years of illegal logging, the government has shown a new willingness to tackle the problem at its roots as evidenced by the government’s 17-point Order issued in January 1999.  Several decisions and measures have been promulgated and there are already signs that illegal logging activity is slowing down.  The government has also revoked all ad hoc tax and duty exemption and grants no new ones.  To ensure sustained implementation and enforcement, the government has taken action (i) to prepare and adopt a new Forestry Law to provide a permanent framework for sustainable use and protection of Cambodia’s forest resources; (ii) to establish an effective control and monitoring system; and (iii) to review all existing concession contracts, terminate those in violation of the terms of the contract of the Cambodian law, and revise the remaining ones.  

Following are non-tax revenue measures implemented by the government: 

• Rigorously implementing timber royalties of $54 per cubic meter;

• Full and timely transfer to the budget of garment quota management fees and all revenue from quota auctions and the use of this transfer to reduce the government's net debt to the NBC;

• Act to ensure timely transfer of revenue, lease payment, and arrears to the Treasury by telecom companies and lessees of the Government.  Arrears recovery is being enhanced by improved cooperation between the Taxation Department, the Customs and Excise Department and the CDC to ensure that private companies are current on their obligations, before they can be eligible for incentives under the Law on Investment; 

• Intensifying controls to ensure timely transfer of non-tax revenue by line ministries to the Treasury and avoid earmarking revenue for specific use in contravention of the Financial Law.  Upgrade the role and responsibilities of the financial controllers in non-tax revenue collection by scrupulously monitoring the transfer of revenue to the Treasury.

• Strictly implementing the Prime Ministerial Order No 30 BB dated 25 December 1997 on the Management of State Property.  The MEF issued several inter-ministerial acts in conjunction with a number of line ministries, requiring government business partners to make a direct transfer of revenue to the Treasury;

• Ensuring strict compliance with the Labor Law and the upholding of the ILO standards to be eligible for an annual quota increase from the US government.  This category of revenue will be used to invest in infrastructure;

• Improving the management of fisheries sector and revenue generated from the auctions of fishing lots;
• Rigorously implementing measures aimed at ensuring a proper transfer of revenue from timber, rubber and other kinds of revenues to the Treasury.  Review forest concession contracts and cancel any contract, which has not been implemented or has been implemented in violation of the terms thereof;

 6.2. Fiscal Performance

 Fiscal policy is driven by three main thrusts: (i) increased revenue collection by improving the mobilization of taxes and the governance of its administration and by banning the tax avoidance, (ii) strengthened management of state property, especially forestry reform; and (iii) administrative reform and military demobilization. Given that the overall administration capacity is limited, the initial reform program aims at improving tax collections from large taxpayers and minimizing tax leakage. To this end, the Tax Department and CED will focus on strengthening the recently established large taxpayers unit, and the anti-smuggling task force (for example, by establishing formal cooperation arrangements among the CED, the Armed Forces, and the Police).  

Fiscal performance improved significantly in 1998-2002.  During the four years of fiscal reforms total revenue increased by 3.4 percent of GDP to 11.2 percent of GDP in 2002 from 7.8 percent of GDP in 1998.  Tax revenue to GDP has tripled, while non-tax revenue increased by 1.4 percent of GDP. This allowed current expenditure to strengthen from 7 percent of GDP in 1998 to 10.1 percent of GDP in 2002.  

6.2.1.     Tax revenue 

Tax revenue augmented from 5.8 percent of GDP in 1998 to 7.9 percent of GDP in 2002, reflecting government’s efforts in promoting revenue collection through successful implementation of the value added tax (VAT) in 1999 and collecting the other tax and non-tax revenue, as well as the introduction of tax audit. Improvements in tax administration also contributed to better revenue performance.  

After implementation of the fiscal reforms, particularly after the introduction of the value added tax (VAT), tax revenue increased satisfactorily.  The VAT enhanced revenue and improved efficiency of the tax system by simplifying the tax structure, widening the coverage, and reducing cascading. VAT has been the main source of tax revenue, accounting for 36% of tax revenue. VAT collection increased from 2.52 percent of GDP since its introduction in 1999 to 2.67 percent. As a result of the policy to expand the real tax collection regime both in Phnom Penh and the provinces, the share of VAT collected by the Tax Department doubled during that period from 0.34 percent to 0.66 percent of GDP.  

Tax audit has substantially contributed to improved collection and compliance. The tax audit identified 76 billion CRs or 0.5 percent of GDP in 2001 and 144 billion or 0.9 percent of GDP in 2002. Tax arrears collection also contributed to substantial increase.

Moreover, the RGC introduced the following tax measures aimed at collecting more revenue: (i) VAT on diesel; (ii) public lighting tax; (iii) cigarette stamp; (iv) increasing the excise rates on beer; (iii) the additional 0.02 USD and 0.04 USD tax on gasoline and diesel; and (v) structural measures such as the creation of large and medium tax payer units and the implementation of direct payment to the National Treasury.

Table 6.1: Revenue Performance for 1997-2003

(in percentage of GDP)