“It’s a dangerous business, Frodo, going out your door. You step onto the road, and if you don’t keep your feet, there’s no knowing where you might be swept off to.” — Bilbo Baggins
For those embarking on the process of obtaining a Value Added Tax (VAT) refund in Cambodia – it may feel at times like a perilous journey. It is not unusual for a VAT refund process to be fraught with unexpected twists and turns, testing both your character and your patience. In our experience, however, if you prepare well and travel with the right companions, the VAT refund process can be successfully navigated.
In this update we provide our top five (5) tips that may help you successfully obtain that elusive VAT refund.
(1) Make sure you can claim!
Before even getting to the starting line, taxpayers in Cambodia need to make sure they are eligible to submit a VAT refund request.
Prakas 576 on “Value Added Tax Refunds” was enacted by the Ministry of Economy and Finance in June 2018. It restated the criteria for who is eligible to submit a VAT refund request in Cambodia.
Under Cambodia’s current self-assessment tax regime only Medium and Large Taxpayers can request a VAT refund. Small Taxpayers are not able to claim a VAT refund due to the special VAT input tax rules that they operate under.
For Medium and Large Taxpayers, the following criteria applies:
- For any month when the VAT input credit is higher than the monthly VAT output – Medium and Large Taxpayers who are exporters or are registered as an investment enterprise, i.e., a Qualified Investment Project (QIP), can submit a request for a VAT refund.
- The remaining Medium and Large Taxpayers must have excess VAT input credit for three (3) or more consecutive months to be able to submit a request for a VAT refund.
- While not stated in Prakas 576, we note that, in addition to the above, Article 41(2) of the VAT Sub-Decree provides that Medium and Large Taxpayers that are not considered to be a QIP and that did not declare any taxable supplies, i.e., sales, will not be eligible to claim a VAT refund.
For Diplomatic Missions/Foreign Councils/INGO’s and Technical Co-Operation Agencies of other governments the following criteria applies:
- Registration with the General Department of Taxation (GDT) is required.
- Submission of the VAT refund must be on a form prescribed by the GDT.
- Include only VAT paid on invoices that have a value of at least KHR 200,000 (approximately USD 50), exclusive of VAT, in the refund request.
- Request a VAT refund amount of at least KHR 2 million (approximately USD 500) on the total invoices that each have a value of at least KHR 200,000, exclusive of VAT; and
- Have the application form certified by the “mission director” or head of the organization.
(2) Preparation is the best form of defense.
In most cases a request for a VAT refund by a Medium or Large Taxpayers will trigger a VAT tax audit. Delays can occur in the VAT refund process if the requested documentation is not provided by taxpayers to the GDT officers who carry out the VAT tax audit.
Typically, taxpayers must have proper evidence to support the amount of input VAT that is being claimed as a VAT refund. Supporting documentation would include:
- Evidence of the input tax payment e.g., an original import declaration form, customs payment receipt or a purchase invoice from a supplier.
- If the taxpayer is an exporter, submit evidence that its exports were subject to 0% VAT, e.g., an export declaration form or a sales invoice with a 0% VAT charge – or if the invoice relates to exported services – a contract, documents showing remittance from outside Cambodia to a bank inside Cambodia.
- Have the proper accounting records for VAT purposes, including purchase-sale journals and other supporting records.
A large part of the VAT tax audit will involve GDT officers looking to disallow VAT input on the basis that the purchase invoices do not meet the criteria to constitute a valid tax invoice – click here, the VAT input has not been claimed in the correct month or that the supplier(s) has failed to properly declare VAT to the GDT.
The first two points can be largely avoided by ensuring that your finance team has a robust internal vetting process in place. This would ensure that supplier tax invoices are checked for validity before they are countersigned and accepted and that supplier tax invoices for the month are only accepted before the end of month cut-off date to ensure that VAT input is recorded in the correct monthly VAT return that relates to the date of issuance of the tax invoice. Unfortunately, not much can be done with respect to ensuring that your suppliers are compliant with their ongoing VAT obligations with the GDT.
(3) Submit your VAT refund request promptly
As noted above, for most Medium and Large Taxpayers a VAT refund request can be made if the taxpayer has surplus input credit for three (3) months or more. Article 73 of the Law on Taxation provides that a taxpayer may apply for a refund of the tax at the end of the third (3rd) month or in any month thereafter. Prakas 576 provides no time restriction as to when a taxpayer must submit a VAT refund request once eligible to do so.
We are starting to see cases in which the GDT is asserting that a taxpayer has not submitted their VAT refund request within a prescribed timeframe and is therefore prevented from claiming a VAT refund. The regulation used by the GDT to disallow a VAT refund request is Prakas 270 on Tax Audits, which was issued by the Ministry of Economy and Finance on the 13 March 2019. Prakas 270, among other things, defines the various types of tax audits that can be conducted by the GDT and the timeframe in which they must be carried out by the GDT.
Prakas 270 defines a Limited Tax Audit as an on-site audit on monthly taxes, including VAT and VAT refunds. A Limited Tax Audit can only be carried out by the GDT on the current year (N) of a taxpayer and the tax year prior to the current year (N-1). Consequently, the GDT contends that a taxpayer applying for a VAT refund when all or some of the VAT input tax that makes up the request was recorded before (N-1) may have that VAT input credit rejected.
This practice seems a little contentious given that the time limitation for tax audits is imposed on the GDT and not the taxpayer. Both the Law on Taxation and Prakas 270 clearly provide that a tax audit can take place at any time by request of the taxpayer i.e., even outside of the time limitations outlined above.
Despite doubts on the ability to impose time limitations as to when a VAT refund request should be submitted, we recommend that those looking to apply for a VAT refund should do so as soon as possible and ideally within twelve (12) months from when the surplus VAT input credit was first recorded.
In addition, we note that surplus VAT input credits cannot be used to offset other tax liabilities of a taxpayer. Therefore, it is not recommended to hold back from requesting a VAT refund for the purpose of trying to apply for a tax offset in a future tax audit.
(4) Its as good as gold
In 2016 the Ministry of Economy and Finance issued Prakas 1536, which provided a table of weighted criteria, to determine whether a taxpayer could be classified as Gold, Silver or Bronze based on the points they reach out of a total score of 20. Circular 007, passed in early 2017, outlined the benefits of being classified as a Gold and Silver taxpayer, which included the following:
- Gold Taxpayers (16-20 points)
Taxpayers who attain Gold Status will receive a certificate of tax compliance, valid for two years.
Gold taxpayers will be able to request a VAT refund below the threshold of KHR 500 million
(approx. USD 125,000) without having to undergo a VAT audit. In addition, they will only be subject
to one Comprehensive Tax Audit every two years and will not need to undergo a Limited or Desk Audit
during the same period.
- Silver Taxpayers (11-15 points)
Taxpayers who obtain Silver Status will receive a certificate of tax compliance also valid for two
years. Silver taxpayers may request a VAT refund below KHR 200 million (approx. USD 50,000)
without having to undergo a VAT audit. They will only be subject to one Comprehensive Tax Audit
every two years, a Limited Tax Audit every year, and no Desk Audit during the same period.
In short, it is most advantageous for a taxpayer to forgo the VAT Audit process before receiving a VAT refund. It should be noted that if the GDT subsequently discovers that the input credits that made up the VAT refund were not valid they can request a repayment of the affected VAT refund back. The monetary threshold for not having to undergo a VAT tax audit should also be noted i.e., if you have Gold Status, make sure you submit a VAT refund request before your total VAT inputs exceed USD 125,000.
It should be noted that under Prakas 576 the GDT has the discretion to still conduct a tax audit on a VAT refund request even if the taxpayer has Gold compliance status. We assume that the GDT would only do this if they suspected there was some irregularity with the refund request.
Finally, Prakas 577, which was issued at the same time as Prakas 576, provides the Director General of the GDT the authorization to approve certain VAT refund applications and payments, depending on the type of taxpayer and the VAT refund amount:
- For companies with Gold Status and not-for-profit entities, the Director General may approve a VAT refund of any amount; and
- For other companies, the Director General may approve a VAT refund of up to KHR 2 billion (approx. USD 500,000), while the Minister of the MEF must approve refunds exceeding this amount.
(5) Tax Audits and VAT Refunds
In practice, the GDT will not release a VAT refund if the taxpayer requesting the VAT refund has amounts of tax that are outstanding. There is no reference to this requirement in the tax regulations and it seems to be the internal policy of the GDT. It seems somewhat unfair to punish a taxpayer who may still be in the process of actively protesting a tax re-assessment by not allowing a valid VAT refund request to be processed.
This practice provides additional incentive for taxpayers to obtain Gold or Silver compliance status to reduce their exposure to the various types of tax audits that may be carried out by the GDT.
Finally, we note that the GDT may use the opportunity of a VAT tax audit to look at other taxes to re-assess – so don’t be surprised if you apply for a VAT refund and instead of getting a cash refund you receive a tax reassessment!
For those looking to apply for a VAT refund, this can now be done by submitting a request letter to the GDT for a VAT refund. An enterprise is also required to submit the following document together with the request letter:
- Original application to request for VAT refund extracted from the GDT e-filing system.
- Original custom declaration forms (for import enterprise).
- Original custom declaration forms (for export enterprise).
- Original sales and purchase invoices.
- Sale and purchase records extracted from e-filing system.
- Original lodged monthly tax returns declarations.
- Inventory listing (if any); and
- Stock movement listing (if any)
In practice, the GDT will request copies of the documents during the submission of the request letter. The original documents may be requested later in the tax audit process by the tax auditor.
In 2021, the IMF issued a publication on VAT refunds with the authors concluding that the administration of VAT refunds requires a balanced approach that facilitates refunds for legitimate claims but also has robust anti-fraud and anti-evasion measures in place.
The IMF wrote: “Recovering excess input VAT credits is critical to a well-functioning VAT system. Most VAT laws include provision for this design feature; taxpayers usually have the right to claim legitimate excess input VAT credits and receive cash refunds within legally prescribed deadlines (for example, one month).
However, the reality is often different from the VAT law’s intention. Country experience, especially in low-income countries, shows that access to VAT refunds is often limited. The refund requirements taxpayers must meet in order to claim VAT refunds, and the associated tax administration procedures, are complex and burdensome, often discouraging taxpayers from claiming legitimate VAT refunds. When taxpayers do claim such refunds, they frequently experience significant delays or are not paid at all. These problems are not the result of the VAT’s design, as such, but stem from inadequate legal and institutional frameworks and weak (administrative) capacity to identify VAT refund fraud and implement preventative measures….”
The report concluded that an efficient VAT refund system should:
- Not impose layers of administrative requirements and stringent legal restrictions on legitimate refund claims.
- Be based on risk analysis to ensure that claims are processed.
- Be fully resourced, with revenues and refunds reconciled, accounted for, and registered in the national accounts to ensure transparency.
“There is nothing like looking if you want to find something. You certainly usually find something, if you look, but it is not always quite the something you were after.” J.R.R. Tolkien in The Hobbit
Tax services required to be undertaken by a licensed tax agent in Cambodia are provided by Mekong Tax Services Co., Ltd, a member of DFDL and licensed as a Cambodian tax agent under license number – TA201701018.
The information provided here is for information purposes only and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.