When applying Value Added Tax (“VAT”), a key consideration is the place of delivery of the goods or services, which is often determined by reference to the place of consumption. If goods are consumed outside of the territory, then they are considered to be export goods, and 0% VAT is usually applied. Likewise, services consumed outside the territory are considered to be export services and again, 0% VAT is usually applied. However, a number of countries have developed further specific rules for export services to be eligible for 0% VAT.
In Cambodia, Article 64 of the current Law on Taxation states that 0% VAT is imposed on each taxable supply of services rendered outside of Cambodia. Article 46 of Sub-decree 114 further mentions that a supply of services for use outside of Cambodia is considered to be provided outside Cambodia (export services) and should be subject to 0% VAT.
From these existing regulations, many practitioners have taken the interpretation that if the service is consumed (or used) outside of Cambodia, then 0% VAT is applied, which is consistent with the VAT principles applicable on export goods, where the place of consumption is used as a reference to determine the applicable VAT rate. However, some tax regulators are of the view that if the service relates to economic benefits in Cambodia (e.g. the provision of tax advice on Cambodian laws), then in substance it is consumed in Cambodia (regardless of actual consumption), and therefore subject to 10% VAT. This difference in interpretation over the intended meaning of “for use outside of Cambodia” between practitioners and tax regulators has been a matter of debate for years.
In June 2019, the General Department of Taxation (“GDT”) issued Notification No. 176 (the “Notification”) to further clarify this issue and put these different interpretations to rest. We summarize below the main points.
How is export service now defined?
Article 1 of the Notification states that a service is considered to be exported if the service is provided outside of Cambodia by a Cambodian resident enterprise. The provision of such service outside of Cambodia may be conducted by a Cambodian resident enterprise through the dispatching or hiring of employees or technicians outside of Cambodia to perform related tasks outside of Cambodia.
A specific example is given in the Notification: Enterprise A (a Cambodian resident) dispatches its employees or technicians from Cambodia or hires employees or technicians outside of Cambodia to provide consultancy services for a non-resident customer who resides outside of Cambodia. This service provision will be zero-rated for VAT.
Note 1: The place where the service is provided or delivered is an important consideration.
How is “for use outside of Cambodia” now defined?
Article 2 states that the provision of a service is considered to be for use outside of Cambodia if that service is provided by a Cambodian resident enterprise to a non-resident customer, and it will not in any way be used in connection with the customer’s presence or any economic activities in Cambodia.
A specific example is also given in the Notification: Enterprise A (a Cambodian resident) provides services for construction design, software programming, or drafting of an article for Enterprise B, which resides outside of Cambodia. Enterprise A is considered to have provided services for use outside of Cambodia on the basis that Enterprise B will use the design, software program, or article outside of Cambodia. Enterprise A may need to provide documentary evidence to the GDT of the intended or actual use of the services outside of Cambodia by Enterprise B (see below). Thus, if the services are used outside of Cambodia by Enterprise B, the VAT will be zero-rated.
Note 2: The term “for use outside of Cambodia” has been clarified to cover both “for intended and for actual use outside of Cambodia”.
How can a taxpayer determine whether a service is “intended” for use inside or outside of Cambodia?
Article 2 paragraph c of the Notification states that the provision of a service will not be considered to be for use outside of Cambodia where that service is used by the non-Cambodian resident for any business objective or economic interest that relates to Cambodia.
Two specific examples are given in the Notification to elaborate on this.
Enterprise A (a Cambodian resident) provides consulting services, such as legal, accounting, tax, trade, data research or analysis, etc., relating to Cambodia for Enterprise B, which resides outside Cambodia. Enterprise A is considered to have provided the service in Cambodia for use in Cambodia as this service will be used for a business purpose or economic interest that is connected to the country. The provision of these services will be subject to 10% VAT.
Note 3: Any services that could be viewed as connected or related to an economic interest in Cambodia are considered to be “intended for use in Cambodia” and will be subject to 10% VAT.
Enterprise A (a Cambodian resident) provides services for testing or checking the quality of goods for export from Cambodia for Enterprise B, which resides outside of the country. In this scenario, the service is considered to be provided and used in Cambodia, as it is performed on the goods before they are exported from Cambodia. The provision of these services will be subject to 10% VAT.
Note 4: If the service is provided in Cambodia, then it is considered to be a local supply of service subject to 10% VAT (consistent with Article 1 as described above).
In the examples provided above, Enterprise A is liable to the GDT for the 10% VAT if it incorrectly charged zero-rated VAT on its invoice, and the GDT then subsequently discovers that Enterprise B has used those services inside Cambodia.
Taxpayers in Cambodia looking to charge zero-rated VAT invoices must maintain the following supporting documents:
- A contract that clearly specifies the service charge, type of service, and place where the service is provided;
- Documents showing payments remitted from outside of Cambodia to a bank in Cambodia for the service;
- Original invoice; and
- Verifiable accounting records.
The Notification appears to impose criteria for determining an applicable VAT rate for services beyond the normal consideration of place of consumption. This creates an inconsistency in the applicable VAT rates for the supply of goods versus the supply of services.
Importantly, if you are a service provider, you should note that it is NOT sufficient to think that if your customer (a non-resident entity) does not currently have any business presence or interests in Cambodia at the time of supply, you can apply zero-rated VAT. The terms in the service contract should be carefully and clearly spelled out to justify the application of zero-rated VAT and safeguard your business against any related tax exposure.
If you have questions about this alert, need help reviewing your current service contracts, or require assistance with drafting a service contract, please contact the undersigned, or your usual VDB Loi adviser.
VDB Loi is a network of leading law and tax advisory firms with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam. We provide the highest quality solutions for transactions and taxation. Our general areas of practice are corporate, finance, licensing and disputes. Our principal specialized areas of practice are energy, infrastructure, real estate and construction, telecom, and taxation.
You can find more information on our Cambodia office here.
Tepwinuth Chhim | Tax ManagerM:
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