On 27 June 2018, the Ministry of Economy and Finance issued Prakas 597 entitled “Recognition and some Tax Obligations of Agents Supplying Goods or Services on behalf of a Principal Enterprise”, the stated objective of which is to establish the rules and procedures related to the recognition of a principal-agent relationship, and the value added tax (“VAT”) treatment of transactions resulting from such a relationship, including the delivery of both goods and services. The Prakas applies to medium or large taxpayers who supply goods or services on behalf of a principal that is a resident taxpayer conducting business in Cambodia.
Historically taxpayers in a principal-agent business relationship have faced challenges in their tax reporting, including instances where goods supplied by the principal have been treated as sales to the agent. This has caused some taxpayers to structure their arrangements as “buy and sell” rather than principal-agent, causing additional layers of VAT and other taxes to be payable. This Prakas thankfully provides a clear mechanism by which principal-agent transactions can be recognized and reported.
Article 4 of the Prakas sets out the criteria that must be met for a business relationship to qualify as a principal-agent relationship, as follows:
- The agent must be a medium or large taxpayer
- There must be a contract between the principal and agent, and other supporting documents that confirm the relationship between the principal and the agent
- The principal must determine the prices of goods or services and commissions for the agent
- The inventory of goods remains under the ownership of the principal until the goods are delivered to a third party
- When supplying goods or services to customers, agents may use their own invoices but must indicate the name of the principal, or they may use the principal’s invoices. The principal and agent must choose one invoicing method from these two options, and must use that method throughout the entire tax year. Where an agent has multiple principals, there must be separate sequential numbering schemes for each principal
- Agents must issue VAT invoices to their principals for any commission earned. Principals are allowed to claim an input VAT credit for VAT paid to an agent.
- Each month, agents must submit to the General Department of Taxation (“GDT”) a table detailing the supply of goods or services to its principals during the month, in the format prescribed (a sample is attached to the Prakas), and must also submit a report on the movement of inventory to the GDT on a quarterly basis
Under Article 5 of the Prakas, agents are required to submit to the GDT a “request for recognition” of their relationship with their principal. This request must be accompanied by a copy of the contract with the principal, tax registration documents evidencing that the agent is registered as a medium or large taxpayer, and a sample invoice showing the invoicing method chosen (as per Article 4, paragraph e). After reviewing the request, the GDT will issue a letter confirming the principal-agent relationship. This confirmation is valid for two years; however, agents must notify the GDT within 15 working days of any change in, or termination of, the principal-agent relationship. Agents who have received confirmation of their principal-agent relationship may not transfer their rights under their agency agreement to a third party. The GDT’s confirmation of the principal-agent relationship will become invalid immediately if any of the criteria listed in Article 4 are no longer met. Under Article 7 of the Prakas there is an official fee of KHR400,000 for the issuance of the confirmation letter.
Agents may request an extension of the validity period of the GDT’s confirmation letter by submitting a written request at least 30 days before it expires. This request must be accompanied by a copy of the original confirmation letter, the VAT and patent tax certificates, and the principal-agent contract. If no request for extension is submitted, the principal-agent relationship will no longer be recognized, and transactions between the agent and the principal will be treated as “normal transactions”. The official fee under Article 7 for the issuance of an extension letter is KHR200,000.
Article 8 of the Prakas sets out the Agent’s responsibilities in respect of the taxes applicable to the transactions undertaken on behalf of, or with, the principal. These consist of VAT, Specific Tax (“ST”), and Public Lighting Tax (“PLT”). ST and PLT only apply to transactions involving certain types of goods (mainly tobacco products and alcoholic beverages). Agents supplying goods or services on behalf of a principal must collect the appropriate taxes on behalf of the principal, but do not have the obligation to file tax returns in respect of these, as reporting and remitting such taxes are the principal’s responsibility. The agent must issue a VAT invoice in its own name for commissions earned, and report this in its monthly tax returns, together with Prepaid Tax on Income.
Our comments and concerns
Normally there are positives (and negatives) in new regulations, and this Prakas is no exception. On the positive side, Prakas 597 is a model of clarity. It is clear that, in order for a business arrangement to qualify as a principal-agent relationship, an application must be submitted by the agent to the GDT, with the required documentation. It is also clear that if approval is granted, the VAT (and if applicable, ST and PLT) on the goods (or services) delivered on behalf of the principal must be collected by the agent, but reported by the principal. This will reduce the additional layers of these taxes that many have had to pay previously. It is also very clear that such approval will be valid for two years, and can then be extended.
There are, however, a couple of potential issues that are not clear at this stage, and which may cause concern. Firstly, if a principal-agent relationship can only be recognized if it has been approved by the GDT, following an application by the agent, does this mean that in the absence of such application or approval, the GDT will not be able to unilaterally deem that a principal-agent relationship exists (particularly if the contractual documentation does not establish such a relationship)? Secondly, will the application and approval process be timely and straightforward?
If you have any questions about this alert and its impact on your business, or would like assistance with an application under this Prakas, 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.
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