Transfer Pricing – Important New Developments!

VDB Loi have recently had the opportunity to meet senior members of the GDT’s Transfer Pricing team to discuss and clarify certain issues that are not clearly addressed in the new Transfer Pricing (“TP”) regulations. These issues, and the GDT’s current thinking on them, are as follows:

Will it be possible to obtain the GDT’s advance approval of Transfer Pricing policies and documentation?

In some countries it is possible to submit TP documentation to the tax authority for approval in advance of, or during the early stages of implementation, (usually referred to as an “Advance Pricing Agreement” (“APA”). The GDT have clarified that while this is under consideration, no mechanism is yet in place for APAs in Cambodia. The advantage of APAs is that if approval is granted the risk of challenge and adjustment in a subsequent tax audit is significantly reduced.

Does TP documentation have to be submitted with the annual Tax on Income Return?

The GDT have clarified that TP documentation does not need to be filed with the annual tax return, but must be readily available at the time this is filed. Once again I would stress to all readers the importance of having a Transfer Pricing Report prepared in respect of your related party transactions before filing your next Tax on Income return, which for most of you means before 31 March 2019.

Are 0% interest loans from related parties still permitted?

Interest-free loans from (or to) related parties are clearly inconsistent with the new TP regulations, however were specifically permitted under Instruction no. 151 dated 22 January 2014. The GDT’s current thinking on this issue is that the new TP regulations automatically override the previous Instruction no. 151, and that the terms and conditions of loans between related parties must now conform with arms-length principles, and carry an appropriate rate of interest. The terms and conditions of such loans, including the interest rate charged must be described and justified in the TP documentation.

This is an issue on which those of you with interest-free loans from (or to) related parties need to address now. When asked about the effective date of the purported cancellation of Instruction Letter 151 the GDT officials responded that this was clearly the date of issuance of the TP Prakas, which was 10 October 2017. It is entirely possible that future tax audits will seek to reassess Withholding Tax on deemed market rate interest from that date onwards; and given that severe penalties and high interest is applied to “underpaid” tax, readers are strongly advised to consider revising the terms of any existing interest-free loans immediately.

It is interesting to note that the main reason interest-free loans were permitted in the first place was to encourage investment by allowing investors to inject funds into a subsidiary company, without locking such funds in as share capital. It is far easier to repay loans when cash becomes available than reduce paid-in share capital when such capital is no longer required, which involves going through a possibly lengthy process of Ministry of Commerce approval. It appears that the GDT’s current position has not taken this background into account, and it is possible that there will be further discussions and developments on this subject.

We will continue to pursue a dialogue with the GDT on these and other issues relating to the implementation of the new TP regulations. In the meantime readers are invited to contact the undersigned, or their usual VDB Loi adviser to discuss these matters and what needs to be done now to react to these developments.

VDB Loi is a network of leading law and tax advisory firms with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam. We provide the highest quality solutions for transactions and taxation. Our general areas of practice are corporate, finance, licensing and disputes. Our principal specialized areas of practice are energy, infrastructure, real estate and construction, telecom, and taxation.

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