With Cambodia introducing a new online commerce tax on sales of digital products and services made by international tech firms, experts warn that consumers and small online businesses might be the ones who bear the brunt.
Cambodia will require tech companies without a physical presence in the country to pay a 10% value-added tax (VAT) on their sales of digital goods and services, making it the latest country in Southeast Asia to levy charges on recognizable firms like Google, Facebook, Netflix, and AliExpress.
The new regulation, which has been approved by Prime Minister Hun Sen, specifies that foreign firms that facilitate their services over the internet and have an annual turnover exceeding USD 61,500 (KHR 250 million), or which generate a turnover of more than USD 14,700 (KHR 60 million) for three consecutive months per calendar year, are subject to the 10% VAT and must declare this status with Cambodia’s tax authorities.
“Cambodia’s new law appears to be quite sweeping, which means that all kinds of companies are likely to be at risk. While authorities might prefer to tackle tax collection from larger, mostly foreign firms, it can be much easier for regulators to find and address issues at the domestic level,” said Deborah Elms, executive director of Singapore-based Asian Trade Center. “This means that the implications will likely be felt most keenly by smaller firms in Cambodia and by Cambodian consumers.”
Under the new tax code, B2C service providers based outside Cambodia should declare and pay the tax on behalf of their consumers, according to a report published by accounting firm KPMG on April 20.
However, in the case of B2B services, the businesses in Cambodia that are being served will be responsible for paying the taxes on behalf of the foreign providers. But because it is up to the foreign firms to register the tax payment, it remains unclear how the process will be coordinated. “There would not be much difference if the transaction would be accounted for as a local supply of goods or services, instead of applying the ‘reverse charge’ mechanism,” the report’s authors said.
Elms added that compliance would be a challenging task for many. “Even local firms struggle to be properly registered in Cambodia. Foreign firms, and especially smaller foreign firms, may not even realize such a rule is required,” she said.
Even though large businesses may have “more options,” they might suspend supplying web-based services to consumers in Cambodia if the compliance cost becomes too high, warned Elms.
Companies that continue doing business in the country will likely adjust their fees to reflect elevated tax rates. “To cover tax payments, compliance costs, and potential risks associated with failure to comply with challenging regulations, firms are likely to raise their prices. These price hikes will be felt by consumers,” Elms said.
The new regulation comes almost one year after Indonesia, Southeast Asia’s largest economy, imposed a 10% VAT on global tech firms, as the government sought to boost tax revenue in light of a weakening economy during the pandemic. Indonesia’s regulation targets tech giants that sell products and services worth more than IDR 600 million (USD 41.6 million) annually, or which generate yearly traffic of more than 12,000 users.
Similar tax rules are already in place in Singapore and Malaysia. Other regional countries like Vietnam, the Philippines, and Thailand have also moved forward with plans to do the same and reap economic benefits from a burgeoning digital economy, which is set to cross USD 300 billion in value by 2025, according to the e-Conomy SEA Report released by Google, Temasek, and Bain & Company last year.