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Global transfer pricing guide

Transfer pricing - Cambodia

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Introduction to transfer pricing in Cambodia
Transfer pricing rules
  • Cambodia’s transfer pricing (TP) legislation is stated in the Prakas no. 986 MEF.Prk dated 10 October 2017 issued by the Ministry of Economy and Finance to provide the rules and procedures on income and expense allocation among related parties. The Prakas represents one of the most important developments in Cambodian tax regulations in the last 20 years. In addition to being in line with Cambodia’s tax reform plans, this regulation demonstrates Cambodia’s commitment to aligning with global tax frameworks on transparency and combatting tax avoidance.
  • Prakas no. 986 defines the transfer price as the price of goods, services, or property charged between related parties. TP refers to setting the value of transactions (e.g. the sale or purchase of goods or services, royalties or interest, etc.) between related parties using the most appropriate transfer pricing methodology. If the transactions aren’t at arm’s length, the tax authority may adjust the value and impose taxes accordingly.
  • The purpose of transfer pricing rules is typically to make sure related entities compensate each other appropriately in an amount that is commensurate with the value of the property transferred or services provided and to prevent entities from manipulating profits between related parties to minimize tax exposure.
  • Based on instruction no. 10979 GDT dated 25 May 2022 on the confirmation documents on interest amongst related parties, the taxpayer can determine the rate as they agreed and shall be exempted from the implementation of arm’s length principle by having supporting documents for the loan transactions from related parties such as agreement which clearly shows the duration of borrow and repayment, business plan or current and forecasted financial statements upon borrowing and purpose of the loan with explanation, and board resolution. 
  • In case of borrowing from related parties, the rate shall not exceed the market rate at the time of borrowing. For the purpose of this Instruction, the market rate is the average of interest rates from at least 5 big local commercial banks issued every year by the General Department of Taxation ('GDT').
OECD guidance
  • Cambodia’s Ministry of Economy and Finance (MEF) issued the country’s first transfer pricing regulations (Prakas No. 986) on 10 October 2017. The rules, which apply as from the date of issuance and adopt the arm’s length principle as articulated in the OECD’s transfer pricing guidelines, cover key issues such as comparable transactions, transfer pricing methods, documentation, and penalties for noncompliance. Specific rules apply to intangible property and intragroup services.
  • To comply with the arm’s length principle, taxpayers must conduct a comparability analysis to assess the arm’s length nature of the price of a controlled transaction, and this analysis fulfill meet one of the comparable transaction has no significant differences from the controlled transaction that could affect the market price; or reasonably accurate adjustments can be made to eliminate the effects of any significant differences.
  • The 'arm’s length range' is a set of finance-related indicators (i.e. prices or profit margins) determined from comparable uncontrolled transactions by applying the appropriate transfer pricing method. The controlled transaction will not be adjusted if its finance-related indicator falls within the arm’s length range. In contrast, if the finance-related indicator falls outside the arm’s length range, the indicator will be adjusted to the median of the arm’s length range.
Transfer pricing methods
  • The acceptable methodologies for determining arm’s length pricing under the Prakas 986 are those endorsed by the Organization for Economic Co-operation and Development ('OECD') in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The five methodologies are described below:

    • Comparable Uncontrolled Price ('CUP'): compares the price charged for goods or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction.

    • Resale Price ('RP'): determines the arm’s-length price by deducting an appropriate gross margin for the activities of the reseller from the actual resale price.

    • Cost Plus ('CP'): determines by adding an appropriate markup to the cost of the product or service.

    • Transactional Net Margin Method ('TNMM'): compares the net profit margin relative to an appropriate base (e.g. costs, sales, or assets) that a taxpayer realizes from a controlled transaction to an appropriate base. It is similar to the cost plus and resale price methods but at the net profit margin level.

    • Profit Split Method ('PSM'): established transfer pricing by dividing the profits of a multinational company in a way that would be expected of independent companies in a joint-venture relationship. Independent companies would split the combined profit in proportion to the value of their respective contributions to the generation of profit in the transaction.

  • In Cambodia has a self-assessment regime, where the burden of proof is on the taxpayer to ensure that TP regulations are adhered to.
  • TP document, to be submitted upon request by the GDT.
  • An annual TP document has to submit together with the annual Tax on Income ('TOI'), the deadline is on 31 March of the next following year.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Taxpayers have to issue invoices on all business activities and record, occupy, and maintain all accounting books, legal documents, and other financial documents for 10 years from the end of fiscal years as determined by tax regulations and provide to tax administration as required.
  • Taxpayers who have transactions with related parties are obliged to prepare information such as general information about the enterprise and related parties, information regarding the operation of the enterprise, and information on transfer pricing methods.
  • Taxpayers are required to fill in the annual TOI return with some information concerning transactions among related parties and are required to provide all documents as stated in the second paragraph by the requirement of tax administration
Master and local file
  • Not applicable
Some risk factors for challenge or database used for benchmarking
  • In Cambodia there are no specific provisions in the Prakas that state the required database needed for benchmarking analysis. However, in most countries, the local database is the primary source of information. If the local database cannot be utilized, a regional database shall be allowed to be used.
  • In Cambodia, due to the lack of a local database and financial information for benchmarking purposes, confirmation from the tax authority shall be secured to ensure that regional databases may be used.
Timeline and penalties
  • Prakas 986 is effective from the signing date of 10th October 2017, with no clear indication of the first fiscal year to be applied. However, considering many Cambodian enterprises have fiscal years ending 31 December and the annual corporate tax filing deadline is 3 months from fiscal year-end, the assumption is that both the transfer pricing form and documentation should be completed by 31 March 2018.

  • If the taxpayers fail to comply with the above requirements would lead to:

    • Transfer pricing adjustments, which would result in additional tax.

    • Tax penalties, which range from 10% to 40% of the additional tax for violations of the Law on Taxation ('LOT') according to Article 133 of the LOT, plus an interest charge of 1.5% per month on late payment.

    • A lawsuit filed by the local tax administration against enterprises for charges stipulated under the LOT.

    • In exclusion of other penalties, the tax administration will be revoked the tax compliance certificate or be evaluated on tax compliance all over again and will receive a penalty for the obstruction of the implementation of tax provisions the additional tax shall be 2,000,000 Riels (equal USD500) for a person or a taxpayer or a withholding agent under the real regime system of taxation or a government official and 500,000 Riels (equal USD125) for a taxpayer or a withholding agent under the simplified or estimated regime system of taxation

Comparability determination factors
  • To determine the comparability under the arm’s length principle, one has to compare conditions between controlled transactions and independent enterprise transactions. The characteristic comparison related to the economic situation has to be made thoroughly based on similarity via some factors as follows:

    • Agreement conditions of the transaction such as delegation of responsibility, conditions which affect the price or profit margin, and behavior of agreement implementation of related parties compare to the implementation of the independent enterprises.

    • The analysis of function completed by each party to determine the comparable margin of the transaction via comparing the function of each department, current assets for usage, characteristics of current assets, usage of intangible assets, and risk of each related party such as market risk and financial risk.

    • Characteristics of assets or services via comparing products, services, and intangible assets.

    • Economic situation via comparing the geographical market location, market size, substitute goods and services, and economic intervention from the government.

    • Business strategies such as innovation and development of new products, diversification, offensive strategy, expansion and maintaining market, distribution network, size, and location of the market.

  • Enterprise which has cash advance transactions from related parties which is less than 1 year starting from the date of cash receiving until the actual repayment date, shall not be considered as loan transactions and shall be exempted from the implementation of the arm’s length principle.
Related developments
Digital services tax
  • From 8 September 2021 non-resident entities who provide digital goods/services or e commerce activities to Cambodian consumers and who expect to have sales of USD15k or more before the end of the year, over three consecutive months, have 30 days to register for VAT with the GDT in Cambodia.
  • From 2022 onward the same non-resident entities, as described above, that expect to have sales of USD62.5k or more in 2022 or future years, or expected sales in any calendar year of USD15k or more for three consecutive months, will need to register for VAT within 30 days.
  • Once registered for VAT non-resident entities will need to invoice customers in Cambodia with respect to business-to-business and business-to-consumer transactions. The VAT registered non-resident will need to file monthly VAT declarations and pay the 10% VAT on business-to consumer sales to the GDT.
  • E commerce is defined as goods, property and intangible goods bought online, including online shopping, hosting, advertising, data retrieval, software supply, and digital content consumption.
GDT and taxpayer behaviour
  • Transfer Pricing (TP) has become the key focus area for the GDT when assessing taxpayers. The local TP regulation requirements, initially adopted by the Ministry of Economy and Finance of Cambodia in late 2017, have been, in practice, increasing in tax audits. Any business enterprise continuously making losses or having low profitability will be scrutinized.
  • Moreover, during the tax audit process, there are a number of issues that have generally been scrutinized or challenged by the GDT; such as the pricing of goods and intangibles, intra-group services, and interest expense.
  • Therefore, TP documentation has become a major requirement for all taxpayers who have related party transactions. There is no separate TP audit, at this stage and generally, the GDT conducts such audits together with the general tax audit
  • In terms of TP and considering the effect of COVID-19, some of the enterprises that have business activity as tour agents, hotels, and restaurants have postponed their business activity, and some even close the company

For further information on transfer pricing in Cambodia please contact:

Ronald C. Almera.png

Ronald (Ron) C. Almera, CPA
+855 87 933 888
Ext 6523

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Chhorvon Sieng
T +855 87 746 888
Ext 6536

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Chetra Kong
T +855 87 396 888

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Sokhon Pork

+855 87 326 888
Ext 6535

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Sanin Son
+855 87 666 975
Ext 6533