Expert Insights: 2023 Tax threshold changes and their impact on businesses and individuals

In January 2023, the Royal Government of Cambodia enacted Changes to Tax on Income, making amendments to the Tables of Taxable Thresholds for Annual Tax on Income and Monthly Salary Tax. We discussed the new measures with Clint O’Connell, Partner, Cambodia Deputy Managing Director & Head of the Cambodia Tax Practice at DFDL, to learn what these new changes mean for businesses and investors in Cambodia in 2023.

What are the intentions behind the new tax changes in Cambodia?

A. As we saw during the recent Covid-19 period, the Royal Government of Cambodia is particularly proactive when it comes to implementing regulations to ease the burden caused by external factors on vulnerable businesses and individuals in Cambodia. External factors can range from a once-in-a-century virus outbreak, inflationary pressures, rising living costs and the rising minimum wage.

The changes brought about by Sub-Decree 196 to the monthly progressive tax on salary rates for resident employees and the annual progressive tax on income rates for individuals, sole proprietorships and partnerships are very much intended to provide some relief to those who are most vulnerable to external economic circumstances that are out of their control.   

What effect will the changes in annual tax on income and monthly tax on salary have on businesses and consumers?

A. Most employees are responsible for the cost of tax on salary that is applied to their monthly gross salaries. For example, employment agreements are typically negotiated on a gross salary basis (noting that the employer is responsible to withhold and declare the tax on salary on behalf of their employees). This means that any reduction in the monthly tax on salary bands provides a tangible benefit that is passed on to the employee. Monthly tax on salary works on a progressive basis, such as 0%, 5%, 10%, 15% and 20%.

The tax on salary changes brought about by Sub-Decree 196, which are effective from January 2023, raise the lowest monthly tax on salary band from Khmer riel 1,300,001 (approximately USD 325) to Khmer riel 1,500,001 (approximately USD 375). Simply put, that means that a larger proportion of most resident employees’ salaries will be subject to 0%, which means that most employees will receive a bit more cash each month.

With respect to the annual progressive tax on income rates, what we are looking at here is the provision of some relief to the SME sector in Cambodia – those who make up the bulk of individuals and sole proprietorships impacted by this change.

Like the change in the monthly tax on salary bands, the lowest tax on income band threshold for individuals and sole proprietorships has been increased from Khmer riel 16,000,000 (approximately USD 4,000) to Khmer riel 18,000,000 (approximately USD 4,500). Again, that means a larger component of an individual’s or sole proprietor’s annual taxable income will be subjected to 0% tax on income, which leads to a saving on tax to be paid by the individual or sole proprietor.

Which industries are likely to be most affected, and how can businesses best adapt to these new changes?

A. From the perspective of the monthly tax on salary changes, those most affected would be on lower salaries such as garment workers, civil servants and many employees working in other enterprises.

With respect to the garment sector, the National Council on Minimum Wage (NCMW), and the Royal Government recently set the minimum wage for employees in the garment and footwear industry at USD 200 per month, citing factors such as inflation, cost of living, productivity, competitiveness, and sector profitability. Although the USD 200 minimum wage set down for 2023 is well below the bottom tax on salary tier of USD 375 – with overtime, seniority and attendance bonuses garment workers monthly salaries are often more than USD 200 per month, prompting the need to adjust the lowest tax on salary threshold band of 0%.

As mentioned earlier, those who benefit most from the update to the progressive tax on income rates would be SME’s including those in the hard-hit tourism industry if the government’s Covid-19 relief provisions are not extended further.

How are the changes likely to impact economic growth and mobility for taxpayers?

A. For most taxpayers who will receive a bit of extra cash due to these changes, we suspect this may go to paying increased living costs. The additional cash in circulation will no doubt help to some extent with spending in the local economy, although we note that in the current environment most taxpayers are being fiscally conservative with any spare cash that they receive.

What are the key takeaways for investors in light of these changes?

A. The key takeaway for investors considering these changes is that there can be continued optimism and faith in the pro-active and fiscally prudent stance of the Royal Government in taking fiscal action where necessary to support businesses and vulnerable workers during difficult economic times. We saw this throughout the Covid-19 period, and we will continue to see it in the future.

What happens next with the new 2023 tax changes in Cambodia?

The changes brought about by Sub-Decree 196 and the implementation of Instruction 018 is not the first time that the Cambodian government has made changes to the tax on salary and income rates. Going forward, we expect to see the Royal Government continues to review and assess these rates, considering the external factors present at that time.

Where can I find a breakdown of the new income tax rates following the tax law changes in Cambodia?

The revised tax on salary and tax on income rates can be found on the General Department of Taxation website www.tax.gov.kh. For members of the DFDL-Tax Plus Telegram group, we provide Khmer and English translations of Sub-Decree 196 and Instruction 018 along with a detailed analysis of both measures.

For information about subscribing to our DFDL-Tax Plus Telegram group, which provides real-time updates on tax regulations, analysis, publications and news, please contact us at [email protected]

You can also keep up to date with all new regulations and other key business news with AquariiBD, an official partner of DFDL.

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