## wp1871 - 22.5 percent, it is not exceptionally low anymore. The depreciation schedules are comparable

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### Statutory and withholding tax rates (selected Asia-Pacific comparators, 2015)
- Cambodia: CIT main rate 20; Dividends withholding 14; Interest withholding 14
- China: CIT main rate 25; Dividends withholding 10; Interest withholding 10
- Hong-Kong: CIT main rate 16.5; Dividends withholding (blank); Interest withholding (blank)
- India: CIT main rate 30/40.5; Dividends withholding 15
- Indonesia: CIT main rate 25; Dividends withholding 10; Interest withholding 10
- Laos: CIT main rate 24; Dividends withholding 10; Interest withholding 10
- Malaysia: CIT main rate 25; Dividends withholding (blank); Interest withholding 10
- Mongolia: CIT main rate 25; Dividends withholding 5; Interest withholding 10
- Myanmar: CIT main rate 25; Dividends withholding (blank); Interest withholding 15
- Philippines: CIT main rate 30; Dividends withholding 15; Interest withholding 15
- Korea: CIT main rate 23; Dividends withholding 5; Interest withholding 10
- Singapore: CIT main rate 17; Dividends withholding 8; Interest withholding 15
- Thailand: CIT main rate 20; Dividends withholding 10; Interest withholding 15
- Vietnam: CIT main rate 22; Dividends withholding 5; Interest withholding 10
- Notes:
  - a) Local or surtaxes apply, these are very low, except in India: 13.3 percent.
  - b) Typical treaty rate, the rate may vary by home country, and the standard rate is often higher.
- Additional point:
  - Various double taxation agreements (DTAs) reduce the withholding rate on dividends to 10 percent in certain cases; two DTAs (Singapore and Thailand) were active as of January 1, 2018 and two more (China and Brunei) were awaiting ratification.

### Depreciation allowances (selected features and Cambodia specifics)
- Cambodia depreciation methods and rates (Table 3):
  - Industrial Buildings: SL 5
  - Intangibles: SL 10
  - Machinery: DB 20
- Regional comparators (selected entries from Table 3):
  - China: Industrial Buildings SL 5; Intangibles SL 10; Machinery SL 10
  - Hong Kong, SAR: Industrial Buildings SL 4+20; Intangibles SL 100; Machinery DB 20 + 60
  - India: Industrial Buildings DB 10; Intangibles DB 25; Machinery DB 15
  - Korea: Industrial Buildings SL 2.5; Intangibles SL 10; Machinery DB 45.1
  - Vietnam: Industrial Buildings SL 3.333; Intangibles SL 10; Machinery SL 14.2857
- Notes:
  - Additional first year allowances are marked with a “+”.
  - Table source: Wiedemann and Finke (2015), based on IBFD.

### Tax incentives and special regimes in Cambodia
- Qualified Investment Project (QIP) status:
  - Granted by the Council of Development of Cambodia (CDC), subject to minimum investment amounts varying by activity.
  - Provisions contained in the Law of Investment rather than the tax law.
  - QIPs exempt from certain import and export duties and exempt from the minimum tax on turnover.
  - QIPs entitled to a CIT holiday for 3-6 years, depending on sector and size of investment.
  - Alternative to holiday: companies can choose an increased depreciation rate of 40 percent (if not using tax holiday).
  - Cambodian tax holiday is a deferral: when a company distributes profits, the 20 percent tax rate is due (in addition to standard withholding tax for foreign investors).
  - All QIPs are exempt from duties on production equipment and construction materials; additional exemptions vary by type of QIP (e.g., projects with export share of at least 80 percent or located in SEZs get additional exemptions).
  - QIPs are exempt from the 1 percent minimum turnover tax; since 2017 firms with strong accounting practices are exempt from the minimum tax more generally.
- Special Economic Zones (SEZs):
  - Cambodia has approved 36 SEZs, of which 12 are in operation.
  - Most firms in SEZs are also QIPs.
  - In addition to standard QIP incentives, firms in SEZs are exempt from VAT on certain imports and receive various nontax benefits.
  - Properties in SEZs are exempt from property tax as part of the property tax law (not within investment law incentives).

### Comparative assessment and omissions
- Cambodia’s tax incentives broadly comparable to neighboring countries in types and targeted activities.
- Notable omission: Cambodia does not offer R&D incentives, while most other countries do.
- Cambodia’s tax holiday is comparable in length and availability but differs by granting only a deferral (not permanent exemption).

### Tax expenditures, transparency, and risks
- Tax expenditures:
  - Estimated tax expenditures resulting from existing exemptions and incentives reached at least 5.7 percent in 2015.
  - Total tax revenue in 2015 was 14.5 percent of GDP.
  - Caveat: the 5.7 percent estimate may be somewhat overestimated because it may include taxes that would be refunded or recovered (notably VAT exemptions on inputs and CIT paid on distributions). Benefits of job creation are not quantified in these estimates.
- Risks and governance issues:
  - Incentive packages are project based, allowing firms to re-classify existing investments as new projects to extend tax holidays indefinitely.
  - Observed tax evasion by companies de-registering and changing names to obtain further tax exemptions and import subsidies (UNDP, 2014).
  - Concerns about transparency of investment incentives have been expressed by selected multinational enterprises (especially from OECD countries).
  - Approval process for incentives may involve several stakeholders (e.g., CDC, Ministry of Environment, Ministry of Agriculture), increasing complexity.

### Evidence from effective tax rates (EATR and EMTR): methodology and findings
- Definitions:
  - Effective Average Tax Rate (EATR): net present value of tax liabilities divided by net present value of profits; relevant for discrete location decisions when investors can earn economic rents.
  - Effective Marginal Tax Rate (EMTR): applies when profits cover exactly the cost of capital (normal profits, no rents); relevant for domestic marginal investment decisions.
- Methodological notes:
  - Forward-looking effective tax rates are calculated for hypothetical investment projects using tax laws as they apply in the year of investment.
  - Key tax system aspects included: CIT rate, depreciation rules, deductibility of interest, major tax incentives; for cross-border investments, withholding taxes can be included.
  - Assumptions required: discount rate, true economic depreciation and inflation, share of debt finance, asset distribution, and profit rate (for EATR).
  - Indirect taxes and incentives related to them are ignored in these calculations.
  - Method used: based on Devereux and Griffith (2003) and Klemm (2012) extension adding tax incentives.
- Prior findings:
  - Previous work suggests Cambodia’s effective tax rates can be comparatively high in some cases despite the low statutory CIT rate.

### Regional comparisons of effective tax rates (EATRs)
- Wiedemann and Finke (2015) findings:
  - The standard Cambodian effective tax rate is among the lowest in the region, but once withholding taxes are accounted for, the Cambodian effective rate is above the median.
  - Under tax incentives, Cambodian rates are less competitive in relative terms.
- Table 5. EATRs in Asian Countries for Domestic and Cross-Border Investment, without Incentives (in percent):
  - Cambodia: Subsidiary 18.4; Investment 29.4; Cross-border Investments German 29.3; Singaporean 30.7; US 30.7
  - China: Subsidiary 23.9; Investment 31.5; Cross-border Investments German 28.4; Singaporean 31.8; US 31.8
  - Hong Kong, SAR: Subsidiary 10.6; Investment 12.1; Cross-border Investments German 11.9; Singaporean 29.1; US 29.1
  - India: Subsidiary 40.4; Investment 42.9; Cross-border Investments German 43.2; Singaporean 41.4; US 41.4
  - Indonesia: Subsidiary 23.9; Investment 31.6; Cross-border Investments German 31.6; Singaporean 31.9; US 31.9
  - Laos: Subsidiary 21.1; Investment 29; Cross-border Investments German 29; Singaporean 30.1; US 30.1
  - Malaysia: Subsidiary 21.9; Investment 23.4; Cross-border Investments German 23.4; Singaporean 30.1; US 30.1
  - Mongolia: Subsidiary 24.5; Investment 28.9; Cross-border Investments German 29; Singaporean 36.5; US 36.5
  - Myanmar: Subsidiary 23; Investment 24.4; Cross-border Investments German 24.4; Singaporean 31; US 31
  - Philippines: Subsidiary 30.4; Investment 37.3; Cross-border Investments German 40.3; Singaporean 38.4; US 38.4
  - Singapore: Subsidiary 18.6; Investment 20.1; Cross-border Investments German 18; Singaporean 32.9; US 32.9
  - Korea: Subsidiary 21.8; Investment 26.5; Cross-border Investments German 29.7; Singaporean 30.6; US 30.6
  - Thailand: Subsidiary 18.3; Investment 26.6; Cross-border Investments German 26.5; Singaporean 30.7; US 30.7
  - Vietnam: Subsidiary 20.0; Investment 21.4; Cross-border Investments German 21.4; Singaporean 30.7; US 30.7
- Note:
  - Withholding taxes materially change cross-border investor effective rates and raise Cambodia’s effective rate relative to peers.

### Effective tax rates by source of finance (standard system, no incentives)
- Assumptions used for Table 6 (Authors’ calculations):
  - assets: tangibles subject to 20 percent depreciation allowance
  - inflation: 3 percent
  - real interest rate: 5 percent
  - true economic depreciation 12.25 percent
  - Cambodian withholding taxes are included, but any additional home country taxation is not
  - pre-tax profit rate: 20 percent (EATR)
- Table 6. Effective Tax Rates for Investors under Standard Tax System (in percent):
  - Finance: Retained Earnings / New Equity / Debt
  - EATR, foreign: 27 / 38 / 20
  - EATR, domestic: 19 / 19 / 11
  - EMTR, foreign: 17 / 47 / -22
  - EMTR, domestic: 17 / 17 / -22
- Key findings:
  - Foreign investors face much higher EATRs, especially when using new equity (driven by high withholding tax on dividends and the “trapped equity” effect).
  - Retained earnings have smaller tax impact, but first-time investors typically lack access to retained earnings.
  - Debt finance produces lower effective tax rates; EMTR can turn negative under debt finance due to depreciation allowances exceeding true economic depreciation plus interest deductibility (investment effectively subsidized at the margin).
  - In practice tax rates are bound at zero unless firms can offset tax losses elsewhere.

### Effects of tax holidays (tax deferral until distribution)
- Tax holiday mechanics in Cambodia:
  - A deferral of corporate income tax recovered at distribution; profits from the holiday period face different distribution tax treatment than post-holiday profits.
- Counterintuitive effects:
  - Tax holidays can raise effective tax rates on investment financed by new equity.
    - Rationale: investor loses value of depreciation allowances during CIT holiday while any distributions are charged the full tax rate.
  - Projects financed from retained earnings benefit from tax holiday (avoids tax on distribution), but this advantage is limited for new projects which require outside financing.
  - Debt-financed investment is not much affected.
- Table 7. Effective Tax Rates for Investors under Tax Holiday (in percent):
  - Finance: Retained Earnings / New Equity / Debt
  - EATR, foreign: 22 / 51 / 20
  - EATR, domestic: 12 / 30 / 10
  - EMTR, foreign: -19 / 61 / -42
  - EMTR, domestic: -12 / 43 / -32
- Notes for Table 7:
  - Assumptions: assets: tangibles subject to 20 percent depreciation allowance; inflation: 3 percent; real interest rate: 5 percent; true economic depreciation 12.25 percent; Cambodian withholding taxes are included, but any additional home country taxation is not; pre-tax profit rate: 20 percent (EATR); Tax holiday of 6 years with distributions taxed at 20 percent if paid out of untaxed profits.
- Avoidance considerations:
  - Popularity of tax holidays suggests firms may avoid deferred tax (e.g., postponing distributions until after the holiday and claiming they are paid from taxed income).
  - If distributions are assumed not taxed (extreme avoidance assumption), the tax holiday behaves like a classical zero-percent holiday and reduces EATRs; however EMTR in final years can exceed the absence-of-holiday EMTR due to loss of depreciation allowance (Mintz (1990) effect).

### Conclusions and reform options
- Main diagnosis:
  - Current system combines (i) a low statutory tax rate, (ii) high withholding taxes, and (iii) complicated incentives — this combination is unlikely to be optimal.
  - High withholding tax on dividends raises effective tax rates for foreign investors and negates much benefit of a low statutory rate; few investors obtain foreign tax credits for this withholding tax, creating disincentives or incentives for avoidance.
  - Tax holiday structure (deferral-only) appears not very costly or competitive on paper but its popularity indicates avoidance and nontransparent liability reduction; tax holidays encourage footloose, low-capital density sectors and rent-seeking.
- Reform principles:
  - Design reform as a package containing tightening and loosening elements to balance competitiveness and revenue protection.
  - Reforms should be supported by careful revenue analysis using detailed company data and accompanied by appropriate communication.
- Recommended components:
  - Move away from tax holidays toward incentives directly linked to investment level:
    - Use accelerated depreciation or investment allowances automatically granted to all investors.
    - Advantages: less discretion, reduced rent-seeking, no time limits, additional investment qualifies.
    - Investment allowances can be refundable in selected sectors (e.g., small or high-tech industries).
    - Investment allowances can exceed 100 percent of the investment.
  - Reduce withholding taxes on dividends:
    - Recently-signed DTAs reduce these taxes to 10 percent; a general cut to 10 percent would likely not cost additional revenue because investors will structure to benefit from treaty rates.
    - Further cuts could raise attractiveness and reduce differential treatment of foreign and local investors.
    - Any reduction in withholding rates should be combined with reductions in incentives and improved enforcement of domestic taxes.
  - Structural governance improvements:
    - Regular estimates of tax incentive costs and a tax expenditure budget would improve transparency and monitoring.
    - Unify granting and administering tax incentives; keep all tax incentives in tax law.
    - Coordinate policy by the Ministry of Economic and Finance; tax administration should perform granting and monitoring.
    - Use sunset clauses to avoid perpetuating incentives by inertia.
  - Address tax system problems directly rather than via incentives:
    - For example, avoid imposing import duties or excises on intermediate goods that then require exemptions for investors.
    - Reduce administrative burdens and informal payments that make taxes a major constraint; address delay/incompleteness of VAT refunds to remove need for VAT exemptions.
  - Improve business climate to reduce need for incentives and raise their effectiveness:
    - Focus on low-cost, reliable electricity; enhanced transportation links; addressing skill gaps; strengthening rule of law; increasing transparency of business regulation.
    - Evidence: James (2013) finds fiscal incentives are particularly ineffective in countries with poor investment climate; IMF (2017) identifies weak business climate among top constraints to Cambodia’s growth.

### Appendix: modelling effective tax rates with tax deferral
- Framework:
  - Klemm (2012) extends Devereux and Griffith (2003) to allow for tax holidays but must be adapted for Cambodia’s tax holiday as a deferral recovered at distribution (different distribution tax treatment for holiday profits versus post-holiday profits).
  - EATR defined as ratio of present value of taxes over present value of profits: EATR = (present value of taxes) / (present value of profits) (as in Klemm (2012)).
- Key modelling elements and notation preserved from source:
  - γ = (1- m_d)/(1-z) measures difference in treatment of new equity and distributions, with m_d the personal tax on dividends and z the accrual-equivalent tax on capital gains.
  - ρ = (1- m_i)/(1-z) is the investor’s discount rate, with m_i the personal tax rate on interest and i the nominal interest rate.
  - τ is the corporate tax rate; π is inflation; p is net real profit; I is investment;  is official depreciation allowance; K_T is tax-written-down value of capital.
  - Y is the number of years of tax holiday.
- Adaptations highlighted:
  - Changing CIT rates and changing distribution tax rates imply distinct γ1 and γ2 values.
  - Depreciation allowances during holiday are not valuable while corporate tax liability is zero; post-holiday they matter and should be multiplied by γ2.
  - Financing-specific adjustments:
    - New equity financing adds F_NE as in Klemm (2012) but using the dividend tax rate applicable during the tax holiday.
    - Debt financing requires accounting that interest deductibility is worthless during the tax holiday and changing dividend tax effects, producing F_D.
- Cost of capital and EMTR:
  - Cost of capital is obtained by setting sum of baseline rent expression and financing effects to 0 and solving for p; EMTR then computed in the usual way.

*Source: IMF staff compilation of wp1871, using IBFD, Wiedemann and Finke (2015), World Bank (2017), UNDP (2014), and related material as cited in the source text.*

### 22.5 percent, it is not exceptionally low anymore. The depreciation schedules are comparable

### wp1871 - 22.5 percent, it is not exceptionally low anymore. The depreciation schedules are comparable

### Statutory and withholding tax rates (selected Asia-Pacific comparators, 2015)
- Cambodia: CIT main rate 20; Dividends withholding 14; Interest withholding 14
- China: CIT main rate 25; Dividends withholding 10; Interest withholding 10
- Hong-Kong: CIT main rate 16.5; Dividends withholding (blank); Interest withholding (blank)
- India: CIT main rate 30/40.5; Dividends withholding 15
- Indonesia: CIT main rate 25; Dividends withholding 10; Interest withholding 10
- Laos: CIT main rate 24; Dividends withholding 10; Interest withholding 10
- Malaysia: CIT main rate 25; Dividends withholding (blank); Interest withholding 10
- Mongolia: CIT main rate 25; Dividends withholding 5; Interest withholding 10
- Myanmar: CIT main rate 25; Dividends withholding (blank); Interest withholding 15
- Philippines: CIT main rate 30; Dividends withholding 15; Interest withholding 15
- Korea: CIT main rate 23; Dividends withholding 5; Interest withholding 10
- Singapore: CIT main rate 17; Dividends withholding 8; Interest withholding 15
- Thailand: CIT main rate 20; Dividends withholding 10; Interest withholding 15
- Vietnam: CIT main rate 22; Dividends withholding 5; Interest withholding 10
- Notes: a) Local or surtaxes apply, these are very low, except in India: 13.3 percent. b) Typical treaty rate, the rate may vary by home country, and the standard rate is often higher. Source: IBFD.
- Additional point: Various double taxation agreements (DTAs) reduce the withholding rate on dividends to 10 percent in certain cases; two DTAs (Singapore and Thailand) were active as of January 1, 2018 and two more (China and Brunei) were awaiting ratification.

### Depreciation allowances (selected features and Cambodia specifics)
- Cambodia depreciation methods and rates (Table 3):
  - Industrial Buildings: SL 5
  - Intangibles: SL 10
  - Machinery: DB 20
- Regional comparators (selected entries from Table 3) illustrate a range of methods (SL: straight line; DB: declining balance; SYD: sum of years' digit; var: varying depreciation rate) and rates, e.g.:
  - China: Industrial Buildings SL 5; Intangibles SL 10; Machinery SL 10
  - Hong Kong, SAR: Industrial Buildings SL 4+20; Intangibles SL 100; Machinery DB 20 + 60
  - India: Industrial Buildings DB 10; Intangibles DB 25; Machinery DB 15
  - Korea: Industrial Buildings SL 2.5; Intangibles SL 10; Machinery DB 45.1
  - Vietnam: Industrial Buildings SL 3.333; Intangibles SL 10; Machinery SL 14.2857
- Notes: Additional first year allowances are marked with a “+”. Table source: Wiedemann and Finke (2015), based on IBFD.

### Tax incentives and special regimes in Cambodia
- Qualified Investment Project (QIP) status:
  - Granted by the Council of Development of Cambodia (CDC), subject to minimum investment amounts varying by activity.
  - Provisions contained in the Law of Investment rather than the tax law.
  - QIPs exempt from certain import and export duties and exempt from the minimum tax on turnover.
  - QIPs entitled to a CIT holiday for 3-6 years, depending on sector and size of investment.
  - Alternative to holiday: companies can choose an increased depreciation rate of 40 percent (if not using tax holiday).
  - Cambodian tax holiday is a deferral: when a company distributes profits, the 20 percent tax rate is due (in addition to standard withholding tax for foreign investors).
  - All QIPs are exempt from duties on production equipment and construction materials; additional exemptions vary by type of QIP (e.g., projects with export share of at least 80 percent or located in SEZs get additional exemptions).
  - QIPs are exempt from the 1 percent minimum turnover tax; since 2017 firms with strong accounting practices are exempt from the minimum tax more generally.
- Special Economic Zones (SEZs):
  - Cambodia has approved 36 SEZs, of which 12 are in operation.
  - Most firms in SEZs are also QIPs.
  - In addition to standard QIP incentives, firms in SEZs are exempt from VAT on certain imports and receive various nontax benefits.
  - Properties in SEZs are exempt from property tax as part of the property tax law (not within investment law incentives).

### Comparative assessment and omissions
- Cambodia’s tax incentives broadly comparable to neighboring countries in types and targeted activities; one notable omission: Cambodia does not offer R&D incentives, while most other countries do.
- Cambodia’s tax holiday is comparable in length and availability but differs by granting only a deferral (not permanent exemption).

### Tax expenditures, transparency, and risks
- Tax expenditures:
  - Estimated tax expenditures resulting from existing exemptions and incentives reached at least 5.7 percent in 2015.
  - Total tax revenue in 2015 was 14.5 percent of GDP.
  - Caveat: the 5.7 percent estimate may be somewhat overestimated because it may include taxes that would be refunded or recovered (notably VAT exemptions on inputs and CIT paid on distributions). Benefits of job creation are not quantified in these estimates.
- Risks and governance issues:
  - Incentive packages are project based, allowing firms to re-classify existing investments as new projects to extend tax holidays indefinitely.
  - Observed tax evasion by companies de-registering and changing names to obtain further tax exemptions and import subsidies (UNDP, 2014).
  - Concerns about transparency of investment incentives have been expressed by selected multinational enterprises (especially from OECD countries).
  - Approval process for incentives may involve several stakeholders (e.g., CDC, Ministry of Environment, Ministry of Agriculture), increasing complexity.

### Evidence from effective tax rates (EATR and EMTR): methodology and findings
- Definitions and usage:
  - Effective Average Tax Rate (EATR): net present value of tax liabilities divided by net present value of profits; relevant for discrete location decisions when investors can earn economic rents.
  - Effective Marginal Tax Rate (EMTR): applies when profits cover exactly the cost of capital (normal profits, no rents); relevant for domestic marginal investment decisions.
- Methodological notes:
  - Forward-looking effective tax rates are calculated for hypothetical investment projects using tax laws as they apply in the year of investment.
  - Key tax system aspects included: CIT rate, depreciation rules, deductibility of interest, major tax incentives; for cross-border investments, withholding taxes can be included.
  - Assumptions required: discount rate, true economic depreciation and inflation, share of debt finance, asset distribution, and profit rate (for EATR).
  - Indirect taxes and incentives related to them are ignored in these calculations.
  - Method used: based on Devereux and Griffith (2003) and Klemm (2012) extension adding tax incentives.
- Prior findings:
  - Previous work suggests Cambodia’s effective tax rates can be comparatively high in some cases despite the low statutory CIT rate.
  - Botman and others (2010) calculated effective tax rates for 7 Southeast Asian economies (details beyond this excerpt).

*Source: IMF staff compilation of wp1871, using IBFD, Wiedemann and Finke (2015), World Bank (2017), UNDP (2014), and related material as cited in the source text.*

### 2008. For the standard tax system, they found that under most circumstances Cambodia had

### wp1871 - 2008. For the standard tax system, they found that under most circumstances Cambodia had 

### Regional comparisons of effective tax rates (EATRs)
- Wiedemann and Finke (2015) findings:
  - The standard Cambodian effective tax rate is among the lowest in the region, but once withholding taxes are accounted for, the Cambodian effective rate is above the median.
  - Under tax incentives, Cambodian rates are less competitive in relative terms.
- Table 5. EATRs in Asian Countries for Domestic and Cross-Border Investment, without Incentives (in percent):
  - Cambodia: Subsidiary 18.4; Investment 29.4; Cross-border Investments German 29.3; Singaporean 30.7; US 30.7
  - China: Subsidiary 23.9; Investment 31.5; Cross-border Investments German 28.4; Singaporean 31.8; US 31.8
  - Hong Kong, SAR: Subsidiary 10.6; Investment 12.1; Cross-border Investments German 11.9; Singaporean 29.1; US 29.1
  - India: Subsidiary 40.4; Investment 42.9; Cross-border Investments German 43.2; Singaporean 41.4; US 41.4
  - Indonesia: Subsidiary 23.9; Investment 31.6; Cross-border Investments German 31.6; Singaporean 31.9; US 31.9
  - Laos: Subsidiary 21.1; Investment 29; Cross-border Investments German 29; Singaporean 30.1; US 30.1
  - Malaysia: Subsidiary 21.9; Investment 23.4; Cross-border Investments German 23.4; Singaporean 30.1; US 30.1
  - Mongolia: Subsidiary 24.5; Investment 28.9; Cross-border Investments German 29; Singaporean 36.5; US 36.5
  - Myanmar: Subsidiary 23; Investment 24.4; Cross-border Investments German 24.4; Singaporean 31; US 31
  - Philippines: Subsidiary 30.4; Investment 37.3; Cross-border Investments German 40.3; Singaporean 38.4; US 38.4
  - Singapore: Subsidiary 18.6; Investment 20.1; Cross-border Investments German 18; Singaporean 32.9; US 32.9
  - Korea: Subsidiary 21.8; Investment 26.5; Cross-border Investments German 29.7; Singaporean 30.6; US 30.6
  - Thailand: Subsidiary 18.3; Investment 26.6; Cross-border Investments German 26.5; Singaporean 30.7; US 30.7
  - Vietnam: Subsidiary 20.0; Investment 21.4; Cross-border Investments German 21.4; Singaporean 30.7; US 30.7
- Note: Withholding taxes materially change cross-border investor effective rates and raise Cambodia’s effective rate relative to peers.

### Effective tax rates by source of finance (standard system, no incentives)
- Assumptions used for Table 6 (Authors’ calculations):
  - assets: tangibles subject to 20 percent depreciation allowance
  - inflation: 3 percent
  - real interest rate: 5 percent
  - true economic depreciation 12.25 percent
  - Cambodian withholding taxes are included, but any additional home country taxation is not
  - pre-tax profit rate: 20 percent (EATR)
- Table 6. Effective Tax Rates for Investors under Standard Tax System (in percent):
  - Finance: Retained Earnings / New Equity / Debt
  - EATR, foreign: 27 / 38 / 20
  - EATR, domestic: 19 / 19 / 11
  - EMTR, foreign: 17 / 47 / -22
  - EMTR, domestic: 17 / 17 / -22
- Key findings:
  - Foreign investors face much higher EATRs, especially when using new equity (driven by high withholding tax on dividends and the “trapped equity” effect).
  - Retained earnings have smaller tax impact, but first-time investors typically lack access to retained earnings.
  - Debt finance produces lower effective tax rates; EMTR can turn negative under debt finance due to depreciation allowances exceeding true economic depreciation plus interest deductibility (investment effectively subsidized at the margin).
  - In practice tax rates are bound at zero unless firms can offset tax losses elsewhere.

### Effects of tax holidays (tax deferral until distribution)
- Tax holiday mechanics in Cambodia: a deferral of corporate income tax recovered at distribution; profits from the holiday period face different distribution tax treatment than post-holiday profits.
- Counterintuitive effects:
  - Tax holidays can raise effective tax rates on investment financed by new equity.
    - Rationale: investor loses value of depreciation allowances during CIT holiday while any distributions are charged the full tax rate.
  - Projects financed from retained earnings benefit from tax holiday (avoids tax on distribution), but this advantage is limited for new projects which require outside financing.
  - Debt-financed investment is not much affected.
- Table 7. Effective Tax Rates for Investors under Tax Holiday (in percent):
  - Finance: Retained Earnings / New Equity / Debt
  - EATR, foreign: 22 / 51 / 20
  - EATR, domestic: 12 / 30 / 10
  - EMTR, foreign: -19 / 61 / -42
  - EMTR, domestic: -12 / 43 / -32
- Notes for Table 7:
  - Assumptions: assets: tangibles subject to 20 percent depreciation allowance; inflation: 3 percent; real interest rate: 5 percent; true economic depreciation 12.25 percent; Cambodian withholding taxes are included, but any additional home country taxation is not; pre-tax profit rate: 20 percent (EATR); Tax holiday of 6 years with distributions taxed at 20 percent if paid out of untaxed profits.
- Avoidance considerations:
  - Popularity of tax holidays suggests firms may avoid deferred tax (e.g., postponing distributions until after the holiday and claiming they are paid from taxed income).
  - If distributions are assumed not taxed (extreme avoidance assumption), the tax holiday behaves like a classical zero-percent holiday and reduces EATRs; however EMTR in final years can exceed the absence-of-holiday EMTR due to loss of depreciation allowance (Mintz (1990) effect).

### Conclusions and reform options
- Main diagnosis:
  - Current system combines (i) a low statutory tax rate, (ii) high withholding taxes, and (iii) complicated incentives — this combination is unlikely to be optimal.
  - High withholding tax on dividends raises effective tax rates for foreign investors and negates much benefit of a low statutory rate; few investors obtain foreign tax credits for this withholding tax, creating disincentives or incentives for avoidance.
  - Tax holiday structure (deferral-only) appears not very costly or competitive on paper but its popularity indicates avoidance and nontransparent liability reduction; tax holidays encourage footloose, low-capital density sectors and rent-seeking.
- Reform principles:
  - Design reform as a package containing tightening and loosening elements to balance competitiveness and revenue protection.
  - Reforms should be supported by careful revenue analysis using detailed company data and accompanied by appropriate communication.
- Recommended components:
  - Move away from tax holidays toward incentives directly linked to investment level:
    - Use accelerated depreciation or investment allowances automatically granted to all investors.
    - Advantages: less discretion, reduced rent-seeking, no time limits, additional investment qualifies.
    - Investment allowances can be refundable in selected sectors (e.g., small or high-tech industries).
    - Investment allowances can exceed 100 percent of the investment.
  - Reduce withholding taxes on dividends:
    - Recently-signed DTAs reduce these taxes to 10 percent; a general cut to 10 percent would likely not cost additional revenue because investors will structure to benefit from treaty rates.
    - Further cuts could raise attractiveness and reduce differential treatment of foreign and local investors.
    - Any reduction in withholding rates should be combined with reductions in incentives and improved enforcement of domestic taxes.
  - Structural governance improvements:
    - Regular estimates of tax incentive costs and a tax expenditure budget would improve transparency and monitoring.
    - Unify granting and administering tax incentives; keep all tax incentives in tax law.
    - Coordinate policy by the Ministry of Economic and Finance; tax administration should perform granting and monitoring.
    - Use sunset clauses to avoid perpetuating incentives by inertia.
  - Address tax system problems directly rather than via incentives:
    - For example, avoid imposing import duties or excises on intermediate goods that then require exemptions for investors.
    - Reduce administrative burdens and informal payments that make taxes a major constraint; address delay/incompleteness of VAT refunds to remove need for VAT exemptions.
  - Improve business climate to reduce need for incentives and raise their effectiveness:
    - Focus on low-cost, reliable electricity; enhanced transportation links; addressing skill gaps; strengthening rule of law; increasing transparency of business regulation.
    - Evidence: James (2013) finds fiscal incentives are particularly ineffective in countries with poor investment climate; IMF (2017) identifies weak business climate among top constraints to Cambodia’s growth.

### Appendix: modelling effective tax rates with tax deferral
- Framework:
  - Klemm (2012) extends Devereux and Griffith (2003) to allow for tax holidays but must be adapted for Cambodia’s tax holiday as a deferral recovered at distribution (different distribution tax treatment for holiday profits versus post-holiday profits).
  - EATR defined as ratio of present value of taxes over present value of profits: EATR = (present value of taxes) / (present value of profits) (as in Klemm (2012)).
- Key modelling elements and notation preserved from source:
  - γ = (1- m_d)/(1-z) measures difference in treatment of new equity and distributions, with m_d the personal tax on dividends and z the accrual-equivalent tax on capital gains.
  - ρ = (1- m_i)/(1-z) is the investor’s discount rate, with m_i the personal tax rate on interest and i the nominal interest rate.
  - τ is the corporate tax rate; π is inflation; p is net real profit; I is investment;  is official depreciation allowance; K_T is tax-written-down value of capital.
  - Y is the number of years of tax holiday.
- Adaptations highlighted:
  - Changing CIT rates and changing distribution tax rates imply distinct γ1 and γ2 values.
  - Depreciation allowances during holiday are not valuable while corporate tax liability is zero; post-holiday they matter and should be multiplied by γ2.
  - Financing-specific adjustments:
    - New equity financing adds F_NE as in Klemm (2012) but using the dividend tax rate applicable during the tax holiday.
    - Debt financing requires accounting that interest deductibility is worthless during the tax holiday and changing dividend tax effects, producing F_D.
- Cost of capital and EMTR:
  - Cost of capital is obtained by setting sum of baseline rent expression and financing effects to 0 and solving for p; EMTR then computed in the usual way.

*Source: wp1871 - 2008. For the standard tax system, they found that under most circumstances Cambodia had*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1871.pdf_