A Prospective Look at The Draft Investment Law 2021
On 12 August 2021, Dr. Sok made a presentation at AmCham on the prospects of the Draft Investment Law which was approved by the Council of Ministers in early July 2021.
Dr. Sok highlighted that, for investors, the Draft Law would enhance the business environment in Cambodia as it provides a better incentive regime compared to the current law. Investment Incentive under the Draft Law is categorized into three including (i) basic incentives, (ii) additional incentives, and (iii) special incentives.
You can find out the details takeaway from Dr. Sok’s remarks and video as following-
–Presentation made at the American Chamber of Commerce in Cambodia (AmCham)
By Dr. Sok Siphana/Founding Partner
August 12, 2021
The Council of Ministers approved on July 9, 2021 the Draft Law on Investment of the Kingdom of Cambodia (Draft Law) following a plenary session chaired by Prime Minister Hun Sen via a video conference. The Draft Law will abrogate the old Investment Law of 1994, as amended in 2003, to reflect the evolution of the investment climate in the country. It was initiated in early 2015 as part of the implementation of the Industrial Development Policy 2015 – 2025 (IDP) by the Council for Development of Cambodia (CDC) and the momentum was built up in the first semester of 2019 per the instructions and guidance of Samdech Techo Prime Minister at the 18th Government – Private Sector Forum on 29 March 2019.
The drafting process, led by E. SOK Chenda Sophea, Minister attached to the Prime Minister and CDC Secretary General, was an extensive exercise, involving various consultative meetings with representatives from the private sector, in particular the Cambodia Chamber of Commerce, GMAC, EuroCham and other relevant stakeholders to acquire their substantive inputs. The CDC has benefited from the contribution of the Ministry of Economy and Finance (MEF) with regards to tax and custom incentives. The Draft Law was cleared by Group D of the Government – Private Sector Forum on 28 March 2020 under the chairmanship of Deputy Prime Minister cum Minister of Economy and Finance, H.E. Dr. AUN Porn Moniroth. The last two reviews by the Committee of Economy and Finance Policy on 8 and 17 June 2021 cleared the way for its submission to the plenary session of the Council of Ministers, and its approval, under the chairmanship of Samdech Techo Prime Minister.
The Draft law is expected to be debated at both the National Assembly and the Senate by the end of this year and promulgated soon thereafter. Subsequently, the Government is expected to develop additional regulations to support its implementation. Although the Draft law is not yet in effect, this article will give the readership a heads up regarding the new incentives that will be available to Qualified Investment Projects (QIPs).
Cambodia’s first investment law dated back to 1993 and was revised in 2003. Much has happened since then: the tremendous growth generated from the accession to the WTO, the deepening of ASEAN integration and the rise of intra-trade, the steady ascent of the middle class with its substantive savings, and the advent of the 4th Industrial Revolution and its sectoral spin-off like e-commerce and FinTech, to mention just the main ones. The Government hopes that the new law will act as a forceful driving force to generate adequate growth to turn the country into an upper-middle-income economy by 2030 and achieve its high-income status by 2050.
So far this year, the flow of FDI is steady with the CDC approving 87 investment projects worth $3 billion in the first six months of 2021, up 10 percent from the first half of 2020. Export of bicycles, electronics, electrical parts, vehicle parts and accessories, rice and other agricultural commodities remain strong. The timing of the new investment law will correspond to the current trend of relocation of investments from China under the Belt and Road Initiative (BRI) and Japan’s Free and Open Indo-Pacific (FOIP) to the Mekong subregion, and more urgently the diversion of investment from Myanmar.
From Prime Minister Hun Sen’s perspective, peace and stability are key priorities for investors. Strong political, macro-economic and social stability have been a hallmark of Cambodia in the last two decades. Predictability is also key to secure investment confidence. The new law aiming at enhancing Cambodia’s potential to attract more domestic and foreign investors will do just that. Dr. Aun Porn Moniroth stated that the new draft law takes into account to recent COVID-19 developments, the need to diversify the economy and to promote the private sector, which has been identified as the main engine of growth. These high level policy statements ushered in a fresh wind of optimism for the Kingdom.
The Draft Law was prepared for the purpose of establishing a legal framework that is open, transparent, predictable, and conducive to local and foreign investment in order to develop the country’s social and economic sectors. Based on the latest draft version, the Draft law will aim to achieve these objectives by way of four complementary approaches.
First, by establishing an investment incentive regime that is transparent, predictable, non-discriminatory, competitive, and supportive of socio-economic policies. The CDC, under the leadership of H.E. Sok Chenda Sophea, have been working on this draft for several years, by actively soliciting inputs from the private sector and other international partners to develop a new regulatory framework that will make the country more attractive to investors, both local and international, and to significantly improve the business environment. New fiscal and non fiscal incentives have been developed based on long-term consultations with the private sector and internal discussions among key government stakeholders so as to find the right balance between the dualistic duties to increase revenue collection and the need to nurture long-term business and attract new investment.
In this regards, the Draft Law has established a clear and targeted grant of incentives to the priority sectors, for approximately nearly twenty sectors, especially in high-tech sectors that employ high-level of technology, innovation, research and development, digital infrastructure, new manufacturing that provides added-value goods, logistic supply chains and industries that serve the regional and global value chain, environmental management and energy efficiency, among many others.
The tax incentive scheme in the Draft Law is categorized into three types, namely (1) basic incentives; (2) additional incentives; and (3) special incentives.
For the basic incentive, this scheme is differentiated into two options, subject to investors’ selection, with the first option focusing on the exemption of income tax for the period from 3 to 9 years based on sectors and investment activities, and the period will trigger on the date from when the first profit is disclosed. This is in sharp contrast to the current law wherein such exemption is calculated based on the complicated Trigger Period, the three-year period following the Trigger Period, and the Priority Period.
Option 1: Tax exemption period
- 3 to 9 years counted from when the first profit is generated.
- Exemption from the monthly Prepayment of Tax on Income (PTOI) during the tax exemption period.
- Exemption from the Minimum Tax when there is an independent audit report.
After the tax exemption period, the QIP is entitled to a gradual phase-in of the percentage of the TOI payable as follows:
- 25% for the 1st and 2nd years
- 50% for the 3rd and 4th years
- 75% for the 5th and 6th years
- 100% from the 7th year onward
Option 2: Special depreciation (if the QIP does not choose the tax exemption period)
The second option focuses on the right to offset capital expenditure through special amortization with the offset up to 200% on other major expenditures for up to 9 years along with other incentives.
- Depreciation at 40% for the 1st year for tangible assets
- Exemption from the monthly PTOI for a certain period based on the industry sector and investment.
- Exemption from the Minimum Tax when there is an independent audit report.
For Export-oriented QIPs and QIPs that are part of a supporting industry for export-oriented, QIPs can import construction materials, construction equipment, production equipment, and production inputs with customs duty, Specific Tax and VAT as state-charge on importation. For QIPs selling products locally, they can import construction materials, construction equipment, and production equipment with customs duty, Specific Tax, and VAT as state-charge as well. As far custom duties, Cambodia’s trade regime under ATIGA, ASEAN-China FTA, Cambodia-China FTA, Cambodia-ROK FTA and the RCEP, a number of goods and materials imported are already subject to a 0% tariff. Contrarily, the Specific or excise tax on some goods could be quite high and this exemption can be a real benefit to the QIPs.
Second, by modernizing and increasing the productivity of local industries, and strengthening the connectivity in the regional and global supply chains by way of promoting the growth of capital inflows and the transfer of technology, knowledge, and know-how. Here are some examples:
Supporting local industries and SMEs are fundamental to Cambodia’s society with 99% of enterprises are SMEs. They can provide local content in terms of raw materials and parts supply. Currently their inputs are relatively very low. According to the most recent survey conducted by Japan External Trade Organisation (JETRO), only 5.4 per cent of inputs used by surveyed Japanese firms are procured locally compared to at least 20 per cent for other countries in ASEAN. For that purpose, the Draft Law provides exemption on VAT for any purchase of inputs that are made locally, that enhance the use of local inputs for final productions in regional and global supply chains. In light of the upcoming Rules of Origin under the RCEP, that’s how Cambodia could benefit from this mega FTA. Optimism is high that this Draft law focus on new and greater options to support more local investors. Back in 1990s and the early 2000s, the Cambodian private sector was still nascent and very few of them had the opportunities to secure benefit from the investment law.
Upskilling type of activities will also benefit the economy as a whole and that’s why skills training receives special attention, as many of the new industries included in the Draft Law rely on a highly-trained workforce: an offset of expenditure of 150% on any expenditure related to research and development (R&D), innovation as well as human resource development through provision of vocational training and skills for Cambodian workers.
Improving the well-being and living standard of our workers is one of the long term goals of the Government. The Draft Law gives a special tax deduction of 150% on expenditures on construction of dormitories, proper canteens, nurseries, and provision of comfortable and safe means of transport. More dignity to our females workers, and it is about time.
Agriculture is another key sector in the Draft Law that so many Cambodians depend on it for their livelihoods. The government is keen to leverage these untapped potential resources in agriculture, for local import substitution and for export like mango, banana, longans, food processing and agro-processing, like rubber and cassava. The proposed incentives of up to 150% tax deduction for production machinery upgrades and tax exemptions on imports of these agri-industry systems could significantly increase the deployment of modern technology to further expand Cambodia’s agricultural sector.
Another key sector that stands to benefit is green and renewable energy. This is a particularly important policy element considering that a number of leading garment brands operating in Cambodia have cited the country’s increasing reliance on fossil fuels as a potential source of conflict with low- or no-emission business strategies in their global supply chains. With the EU’s high standards requirement on the use of renewable energy, this policy shift will be a welcoming move for the garment and footwear industries.
There are other special incentives to specific sectors and activities that have high impacts on the nation’s development agenda and they will be determined in the annual Law on Financial Management to reflect the Government’s policies and realities of the moment, as in the case of the two years with various supporting measures arising from the unforeseen circumstances like the Covid-19 pandemic situation.
Third, by increasing Cambodia’s competitiveness and attractiveness through the diversification of the economic structure, to ensure a solid post-COVID-19 pandemic economic recovery, and fostering resilience to regional and global shocks.
In terms of diversification, the main purpose of the Draft law is to respond to opportunities arising from the recent free-trade agreement (FTA) with China and the soon to be ratified FTA with South Korea. It coincides as well with the vast trade and investment prospects when the Regional Comprehensive Economic Partnership (RCEP) eventually enters into force next year. There are of course, the extension of the GSP (Generalized System of Preferences) with the US and UK, and other business opportunities potentially emerging from ongoing FTAs negotiations with India and the Eurasian Economic Union.
In terms of increasing competitiveness and attractiveness, the Draft Law has amended and streamlined the administrative and institutional mechanisms to register the QIPs. CDC remains the Royal Government’s Etat-Major with its one-stop service organization responsible for managing the investment. It has strengthened the one-stop service mechanism to shorten the duration of issuing the “Certificate of Registration” from 31 working days to 20 working days by eliminating the two-step “Conditional Registration Certificate” and the “Final Registration Certificate”. Moreover, investment applications can be made via an online single portal platform. The mechanism for approving the master list of investment projects was also streamlined.
Further, the Draft Law will also strengthen the monitoring and inspection compliance mechanism by the relevant authorities to be taken place at the same time. As far as dispute settlement related to investments a delegation of authority is made in favor of municipal/provincial administrations investment sub-committee.
Fourth, by protecting the rights and legitimate interests of investors in the Kingdom through the establishment of a comprehensive legal framework well balanced with national interests. The Draft Law incorporates some of Cambodia’s international obligations to demonstrate to investors the Government’s commitments to protect their investments and provide guarantees against nationalization and arbitrary expropriation, protection against pricing intervention, and protection of intellectual property, etc.
In sum, Cambodia’s proposed new investment law will attract more diversified foreign investments, stimulate economic growth and allow the country to rise to its full potential.
Annex: Structural Format of Draft Law
The Draft Law is structured in 12 Chapters and comprised of 42 Articles as followins:
Chapter 1 General Provisions 3 Articles
Chapter 2 Council for Development of Cambodia 5 Articles
Chapter 3 Capital/Provincial’s Investment Mechanism 1 Article
Chapter 4 Registration and Implementation of Investment Projects 5 Articles
Chapter 5 Guarantee and Protection of Investment 9 Articles
Chapter 6 Investment Incentives 5 Articles
Chapter 7 Purchase, Sale, or Merging of Investment Projects 2 Articles
Chapter 8 Revocation of Investment Projects 5 Articles
Chapter 9 Disputes and Dispute Settlement 1 Article
Chapter 10 Implementation 1 Article
Chapter 11 Transitional Provisions 3 Articles
Chapter 12 Final Provisions 2 Articles