There is no specific provision for group taxation in Cambodia.
On 10 October 2017, the MEF issued Prakas No. 986 to provide ‘rules and procedures on income and expense allocation among related parties’ (known as the ‘Local Transfer Pricing Rules’), which is effective immediately.
The Prakas defines the transfer price as ‘the price of goods, services, or property charged between related parties’. Transfer pricing refers to setting the value of transactions (e.g. the sale or purchase of goods or services, royalties, or interest) 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 property transferred or services provided and to prevent entities from manipulating profits between related parties to minimise tax exposure.
We’ve summarised key information from the Prakas, including the definition of related party, acceptable transfer pricing methodologies, and the required documentation, below.
Related party definition
The Prakas defines ‘related party’ as a relative of the taxpayer or an enterprise that controls, is controlled by, or is under common control with the taxpayer. The term ‘control’ means ownership of 20% or more of the equity interest in the enterprise or voting power of the board of directors.
Transfer pricing methodologies
The acceptable methodologies for determining arm’s-length pricing under the Prakas are those endorsed by the Organisation for Economic Co-operation and Development (OECD) in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The five methodologies are described below:
|Transfer pricing method||How it works||When to use it|
|Comparable Uncontrolled Price (CUP)||The CUP method 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.||The CUP method is generally the most direct and reliable way to measure an arm’s-length result for the same property in substantially the same circumstances as the controlled transaction. But it can be difficult to find a transaction that is similar enough that no differences have a material effect on the price.|
|Resale Price (RP)||The RP method determines the arm’s-length price by deducting an appropriate gross margin for the activities of the reseller from the actual resale price.||RP is the easiest method to use if the distributors do not add significant value to the product transferred.|
|Cost Plus (CP)||The arm’s length price is determined by adding an appropriate mark-up to the cost of the product or service.||The CP method is most useful for sales of semi-finished goods, joint facility agreements, long-term buy-and-supply arrangements, and the provision of services.|
|Transactional Net Margin Method (TNMM)||The TNMM compares the net profit margin relative to an appropriate base (e.g. costs, sales, or assets) that a taxpayer realises from a controlled transaction to an appropriate base. It is similar to the CP and RP methods but at the net profit margin level.||The TNMM applies to cases where one of the parties contributes unique intangibles, while the other party does not make any unique contribution.|
|Profit Split Method (PSM)||The PSM establishes 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.||The PSM is the most appropriate method in cases where both parties to a transaction make unique and valuable contributions to the transactions.|
Transfer pricing documentation
Entities that transact with related parties must prepare and maintain transfer pricing documentation setting out related-party transactions and the transfer pricing methodologies used to justify an arm’s-length value. Documents related to the transactions, such as invoices, must also be kept for ten years from the tax year end.
Entities must also disclose related-party transactions when filing their annual CIT return and provide relevant transfer pricing documents if required by the tax authority.
There is no provision for thin capitalisation in Cambodia. However, there are various rules and restrictiosn for tax deductions of interest expenses (see the Deductions section).
Controlled foreign companies (CFCs)
There is no provision for CFCs in Cambodia.