Tax incentives introduced to encourage informal economy
Tax incentives introduced to encourage informal economy
Under newly implemented regulations, the Royal Government of Cambodia (RGC) has offered various tax incentives for micro, small and medium-sized enterprises (MSMEs) currently operating in the informal economy to properly register their businesses with the Ministry of Commerce (MoC) and the General Department of Taxation (GDT).
The new regulations seeks to ease requirements of compliance for currently informal businesses nationwide, and ultimately initiate a consolidation of all informal enterprises into the legal economy in coming years.
According to Sub-Decree No. 113, which was enacted May 21, incentives will apply to MSMEs that voluntarily register for tax on enterprises in prescribed timeframes, offering a window of opportunity for such operations to engage with formal requirements while being exempt from most penalties, fees and tax obligations for extended periods.
The sub-decree specifies that the tax incentives will apply to business categories including wholesale, retail, repair, accommodation, food and beverage services, crafts and agriculture.
MSMEs involved in such businesses that have voluntarily registered for tax on their enterprises are entitled to several tax incentives, as follows.
Firstly, micro-enterprises that have voluntarily registered for tax between 2023 and 2028 will be exempted from tax any registration fees and information update fees.
Regarding small enterprises that voluntarily register for tax between 2023 and 2028, exemption from penalties and tax liabilities for non-compliance prior to registration is granted, as well as exemption from any tax registration fees and update fees.
Furthermore, micro-sized enterprises will be exempt from income tax and minimum taxes for two years after their initial formal registration.
In regards to medium-sized enterprises that voluntarily register for tax between 2024 and 2025, the sub-decree confirms that they too are exempted from penalties and tax liabilities for non-compliance prior to formal registration.
Medium-sized enterprises will also benefit from exemption from income tax and minimum taxes for two years after their registration is lodged with the MoC and GDT, given they register during the prescribed timeframe.
Small and medium-sized enterprises which voluntarily register for tax in 2024 or 2025 are also exempt from paying patent tax for two years after formal registration.
Despite the significant exemptions in regards to levied taxes on these MSMEs, the sub-decree stipulates that all such enterprises are still required to maintain full accounting records and submit tax returns as mandated by generally applicable tax laws and regulations.
The tax incentives highlighted in the recent sub-decree seek to encourage informal enterprises to join the formal economy, allowing greater support for the growth of such businesses, as well as standardizing the national economy.
In Cambodia, the informal economy is defined as those enterprises conducting transactions of goods or services without official legal status, regulation or protection by state institutions.
These businesses are neither taxed nor monitored by the government.
According to a labour force survey released in 2023, approximately 6.2 million out of the 7.9 million employed people in Cambodia work in the informal sector.
In October of last year, the RGC announced the launch of a national strategy to combat this statistic and develop, support and ultimately consolidate the informal economy nationwide, entitled the National Strategy for Informal Economic Development 2023-2028.
Key tenets of the five-year initiative include easing access to the formal system for currently informal enterprises, reducing burdens of registration compliance and providing social support to newly formalized workforces.
The initiative also seeks to develop and strengthen skills throughout the economy and expand outreach and awareness regarding the formalisation process and benefits nationwide.
Prime Minister Hun Manet, speaking at the launching ceremony of the National Strategy, emphasized the importance of ensuring that “no Cambodian is left behind.”
The Premier went on to say, the informal sector serves as a catalyst for sustainable economic development and the strategy will contribute to reducing poverty, enhancing social equity, and strengthening the overall resilience of the economy.
