On the 25th of May 2022 the General Department of Taxation (“GDT”) issued Notification No. 10979 GDT on the “Required Documents to Support the Interest Charge on Related Party Loans” (“Notification 10979”). The key points to be taken from Notification 10979 are as follows:

To ensure compliance with Prakas No. 986 MEF.P. dated 10 October 2017 on Transfer Pricing, and to provide a reasonable basis for determining the interest rate on related party loans, the General Department of Taxation provided the following guidance:

A- A Cambodian enterprise entering into a loan with a related party may determine the interest based on an interest rate that is mutually agreed upon. The enterprise does not need to comply with the Arm’s Length Principle (contained in Prakas 986), provided that the enterprise has the following documents to support the loan:

1. A loan agreement that specifies the terms of loan and repayment obligations.
2. A business plan or current/forecasted financial statements at the time of borrowing that provides evidence of the purpose of the borrowing, as well as explanations.
3. Approval of the Board of Directors (for those enterprises that are not single-member private limited companies)

B- When borrowing money from related parties, the interest rate used by the enterprise shall not exceed the prevailing annual market interest rate at the time of borrowing. The prevailing market rate is the average of the lending interest rates of five large Cambodian banks. The market interest rate is issued on an annual basis by the GDT.

C- Those enterprises that have received a cash advance from a related party that is repaid within one year of receipt shall not be considered to be a related party loan for the purpose of Prakas 986 and the Arm’s Length Principle contained within.

Instruction No. 4909 GDT, dated 18 March 2019, on the required documents to support the interest charge of the related party loan shall be abrogated.

DFDL Commentary

Instruction 10979 has come about due to years of dissatisfaction from taxpayers regarding the treatment of shareholder loans by the GDT in tax audits.

The motivation of tax auditors with respect to related party loans has long been questioned. The motivating factor appeared to be the collection of withholding tax, on a deemed market interest rate, with scant regard for the tax deduction and reduced corporate tax assessment that should accompany a higher interest rate, which in turn highlights the conflict in the aspirations and interests of auditors carrying out a limited tax audit verses a comprehensive audit. 

It now seems that we have gone back in time to the same scenario pre-Prakas 986, in which interest-free or low-interest loans were tolerated by the GDT under the then Circular 151. The key point to note under Instruction 10979 is the supporting documentation, which needs to be maintained by taxpayers who want to ensure they can put in place a related party loan with a 0% or low interest rate.

There is no obligation for taxpayers under Instruction 10979 to submit the supporting documents to the GDT for prior approval at the time of entering the loan. This leaves open the question as to the ability of over-zealous tax audit officers to potentially try and use their discretion to argue that supporting documents maintained by a taxpayer do not meet their standard.

The remaining question to be asked is, to what period does Instruction 10979 apply to? For example, can a taxpayer be assured that if they had an interest-free loan in place in 2020 and 2021 with the aforementioned supporting documentation that they would not be re-assessed for withholding taxes on a deemed market interest rate in a tax audit by the GDT?

We have seen tax auditors in recent audits often taking the approach with other tax regulations that they should be implemented retrospectively when they stand to collect more tax. We do not believe this generosity will apply when the taxpayer stands to save on tax, but that is yet to be seen.

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