Client Alert: Tax Audit – Important Update!April 12, 2019
On 13 March 2019, the Ministry of Economy and Finance (“MEF”) issued Prakas 270 on Tax Audits (“Prakas 270”), which attempts to streamline the tax audit process, as part of the government’s large-scale economic reforms, to improve transparency in tax payments and collections, and promote a fair and competitive business environment.
The three types of tax audits (desk, limited, and comprehensive) defined in the Law on Taxation (“LOT”) and Prakas 1059 on Tax on Profit remain unchanged. However, more robust criteria on how each type of tax audit is carried out have been set out in the Prakas on Tax Audit, as follows:
- Desk audit: A desk audit (“DA”) is defined as a re-examination of a tax return, at the General Department of Taxations (“GDT”) office, regarding any irregularity or inconsistency between the tax return and other information collected by the GDT that is relatively straightforward to solve. A DA can now only be carried out within 12 months after the submission of the tax return. If the irregularity or finding is complex or considered high risk by the GDT, the DA will be terminated and replaced by a limited audit (“LA”).
- Limited audit: A LA is a more in-depth re-examination of taxpayers’ compliance with their monthly tax obligations (the annual tax on income (“TOI”) return can only be re-examined under a comprehensive audit). A LA may involve an on-site audit at the taxpayer’s business premises and inspection of the tax returns, actual business activities, accounting records, and other relevant supporting documents. A LA can be carried out for the current tax year and the immediately preceding tax year (N-1) only.
- Comprehensive audit: A comprehensive audit (“CA”), as its name suggests, is a much more thorough re-examination of taxpayers’ compliance with their tax obligations (including annual TOI). A CA can be carried out for the current tax year and the previous three tax years (N-3) only. If there is actual evidence of tax evasion, or losses or tax credits brought forward from previous tax years that require the tax auditors to verify such information, a CA may be extended to include the previous five tax years (N-5). Where there is actual evidence of tax evasion that requires further examination of taxpayers’ records beyond the previous five years, a CA may be extended to cover the statutory period of limitation (which is 10 years per the LOT), with prior approval from the Minister of the MEF.
Will there still be several different tax audit teams auditing the same tax year?
In principle under this Prakas, taxpayers will only be subject to one type of tax audit for any one tax year. However, if that audit is a DA or LA, and the findings suggest that there are errors or issues beyond their scope, the GDT may expand the audit scope to be that of a CA, and assign additional auditors from the relevant departments to the audit team. If during any tax audit, the audit team finds evidence of tax evasion, the GDT may assign a special audit team to investigate the issues.
How often will my company be audited?
The GDT has established criteria for the selection of enterprises considered to be at risk of non-compliance (Article 7 of Prakas 270), and will select companies meeting these criteria for audit.
Based on Circular 007, if an enterprise has obtained Gold status (16-20 points), it will be subject to only one CA every two years and it will not be subject to a LA or DA. This CA however will cover two tax years. A taxpayer that has Silver Status (11-15 points) will be subject to only one CA every two years, a LA every year, and no DA.
Gold taxpayers will therefore now benefit from having to deal with only one CA team every two years, in addition to being exempt from Minimum Tax.
Silver taxpayers will likely have to deal with a LA and then a CA the following tax year (but still only one tax audit team per tax year), and will benefit from having time to voluntarily amend their annual TOI returns, rectifying the issues found and agreed to during the LA, before the commencement of the CA. This should reduce the applicable penalties and interest.
Is there any specific timeframe for the tax audits? Can I request a delay?
Article 9, paragraph 6 of Prakas 270 states that the tax audit must commence within 10 working days after delivery of the tax audit notification to the taxpayer or earlier if requested by the taxpayer. The taxpayer must provide the requested documents to the tax auditors within a maximum of seven days. In special cases, as mentioned in Articles 100 and 116 of the LOT, the GDT can perform a tax audit without prior notice.
Taxpayers may request a delay of the tax audit if they have a reasonable cause; however, such a delay cannot not extend beyond 30 days.
In cases where the taxpayer provides all the required documents, the DA and LA must be completed within three months and the CA within six months (Article 9, paragraph 7).
With these new strict deadlines, taxpayers who may not have sufficient resources to deal with the tax audit (e.g. accounting staff have resigned or lack of staff to gather the required documents for the tax audit, etc.) may face unilateral reassessments by the GDT. Therefore, it is highly recommended that you immediately consult with your tax advisers to understand your enterprise’s tax compliance status and state of readiness for future tax audits.
My company keeps most of the supporting documents in soft copy, is this acceptable?
Article 12, paragraph 6 of Prakas 270 indicates that during the tax audit, if taxpayers are unable to provide the requested information in original hard copy, the tax auditors must be allowed access to the taxpayer’s computer system (i.e. accounting system) and to make a copy in an electronic format. This appears to mean that electronic supporting documents are acceptable to the GDT. However, taxpayers should remain alert to the possibility that the integrity of such electronic supporting documents may be challenged by the tax auditors in practice.
Do I have to provide my personal information if requested?
Article 12, paragraph 4 of Prakas 270 states that for sole proprietorships (or unlimited liability enterprises), the tax auditors can request taxpayers to provide documents other than their business documents, such as personal bank account records, records of personal expenses, purchases or sales of property, etc.
For most taxpayers (those with limited liability status as a company), this should not be relevant.
However, for unlimited liability enterprises, although Prakas 270 does not detail the conditions under which such a request is applicable, we believe that under a strict application of the law, the tax auditors could request such personal information only when there is actual evidence of tax evasion.
Will interest and penalties on additional tax reassessments remain the same?
Under Article 17 of Prakas 270, the monthly interest rate on any reassessed additional tax due is reduced from 2% to 1.5%.
The tax penalty rates (10%, 25%, and 40%) and the applicable conditions remain unchanged.
Aside from those noted above, there are no significant changes with respect to the rights and obligations of taxpayers, the powers of the GDT, or the required documentation that must be submitted to the tax auditors compared to those previously laid out under the LOT, nor are there any notable changes to the rules and procedures for protesting against a tax reassessment as previously laid out under Prakas 1470 on Rules and Procedures for Solving Tax Disputes.
What should you do now?
This newly introduced Prakas clearly imposes a stricter audit timeline; therefore, it is strongly recommended that taxpayers make themselves aware of their company’s tax compliance status and readiness for tax audits.
Some basic tax audit issues readers should be aware of are highlighted below:
- Retention of supporting documents: Cambodian tax laws require that supporting documents for taxpayers’ accounting records and tax returns are retained by all registered taxpayers for 10 years. Taxpayers who fail to locate the required documents from previous years might expose themselves to unnecessary additional tax penalties and reassessments. Reasons for this failure, such as a lack of qualified staff to find the relevant supporting documents, lack of a proper filing system for accounting records and supporting documents, insufficient knowledge transfer between former and current accounting personnel, will not be accepted as valid by the GDT.
- Differences between monthly and annual tax returns: Often tax auditors will compare multiple figures input in the monthly tax returns with those input in the annual TOI returns, such as taxable turnover (B0), salary expense (B20), etc. Taxpayers often fail to produce or keep records of a reconciliation of such differences.
- Permanent establishment: Some taxpayers, including multinational companies, fail to acknowledge the complexity of permanent establishment issues, and therefore fail to obtain the necessary professional advice about their commercial arrangements, which may result in an overseas affiliate being considered as having a business presence in Cambodia that generates Cambodian-sourced income, which is subject to tax in Cambodia.
- Transfer pricing documentation: Some taxpayers have not yet paid serious attention to the newly introduced transfer pricing regulations and seem to be taking a “wait-and-see” approach. Taxpayers who have entered into related party transactions and have failed to prepare the transfer pricing documentation required by Prakas 986 for the 2018 tax year are likely to be selected for tax audits, since this would indicate a clear risk of tax non-compliance (Article 7 of Prakas 270).
It is highly recommended that readers be proactive about your company’s tax compliance status and consult with the undersigned or their usual VDB Loi adviser to have a tax compliance review conducted to help assess your company’s readiness for future tax audits, in order to avoid unnecessary tax exposure, and the related penalties and interest.
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