Cambodia’s transfer pricing laws align with the Guidelines set by the Organization for Economic Co-operation and Development (OECD). They are incorporated within the Transfer Pricing Regulation known as the Prakas 986.
Arm’s Length Principle
Under Cambodia’s transfer pricing rules related party transactions must follow the arm’s length principle as set out by the OECD Transfer Pricing Guidelines. This means that the prices referenced in such transactions should be the same as they would have been between unrelated independent parties.
Related Party Definition
A related party is considered either a relative of the taxpayer or a business that has control over, is controlled by, or shares common control with the taxpayer, which in this context means owning 20% or more of the business or its voting shares. Also, these rules apply to both domestic and international transactions.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Cambodia are:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. The comparability analysis in Cambodia, as outlined in Prakas 986, ensures that transactions between related parties are assessed under market conditions. To determine if a related party transaction is fair by the arm’s length standard, it will be compared to what independent companies do in similar situations. This includes a review of the agreement terms, the role and risk each party plays, the products or services that are the subject of the deal, the market conditions (which include location and size of players), and the business growth strategies used (for instance in product development or market expansion). The purpose is to see if the conditions are similar enough to consider the transaction fair.
Documentation Requirements
If a business has transactions with related parties, it must prepare special documents explaining those deals. These documents need to include details about the business, the related parties, the transactions between them, and the method used to prove the prices are fair (like they would be with unrelated companies). There is no set deadline to submit these documents to the tax department, but if the tax authority asks for them during a tax audit, the business must usually provide them within seven working days. An extension might be allowed, but only if the tax auditor agrees. Also, businesses must keep all related records like invoices, accounting papers, contracts, and financial documents for 10 years after the tax year of the transaction, and show them if the tax office asks.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
There are no specific provisions for APAs in Cambodian law.
Approach to Transfer Pricing Audits
Tax authorities are now paying much more attention to transfer pricing during audits. They closely examine businesses that keep losing money or have very low profits, as well as those involved in complex deals within their group, like services, royalties, or financial transactions. They also look at whether companies are following transfer pricing rules properly, especially in large multinational groups with many related-party transactions. Authorities check if the companies used for comparison in the documentation are appropriate and sometimes make changes to profits, which can create a lot of paperwork and challenges for the business.
Penalties
If a taxpayer doesn’t follow the transfer pricing rules, they can face serious consequences. First, they might lose their tax compliance certificate, which could mean they have to pay more taxes. Second, the tax authorities might review their certificate again and charge them extra taxes (between 10% and 40%), plus 1.5% interest for late payments. Lastly, if the issue is serious, the people responsible could even face criminal charges and go to jail.
Taxation at a Glance
Cambodia’s tax system operates under a self-declaration regime, where taxpayers are responsible for reporting and paying their taxes. Businesses are classified into three categories, small, medium, and large, based on their legal form and annual turnover.
The currency of Cambodia is the Cambodian Riel. The official name of the Cambodia tax authority is the General Department of Taxation.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 20% |
VAT | 10% |
Withholding tax on dividends to non-residents | 14% |
Withholding tax on interest to non-residents | 14% |
Withholding tax on royalties to non-residents | 14% |
Our firm provides our clients with comprehensive assistance in their transfer pricing needs globally. To contact a team member, please click here.
