A Talk on the Benefits of Double Taxation Avoidance Agreement between Cambodia and Singapore

In May 2016, the Cambodian and Singaporean government authorities signed a new agreement to avoid double taxation with respect to taxes on income and on capital.

What are the objectives and benefits of a double taxation avoidance (DTA) agreement?

The “big-picture” objectives of the DTA between Singapore and Cambodia are the encouragement of free flowing trade and investment between the two countries by reducing tax barriers that may have previously existed.

The DTA serves as very important milestone, in terms of being the first DTA that Cambodia has entered into – it is hoped that many more will shortly follow. When the DTA comes into force it will serve to encourage inbound investment into Cambodia, and also encourage local businesses to expand and invest into other countries. It is also important that Cambodia readies itself for participation in the AEC which advocates that all ASEAN members have comprehensive DTA networks.

Practically speaking, articles contained within the DTA will provide certainty to taxpayers engaged in cross-border transactions between the two countries, by ascertaining the taxing rights of either country, eliminating double taxation, and by providing avenues through which the settlement of tax disputes is possible.

Can you provide some practical examples of transactions that may be affected by the DTA between Singapore and Cambodia?

As is the case with most DTAs that follow the OECD and UN models, the DTA signed between Singapore and Cambodia reduces the withholding tax rate on particular cross-border transactions such as dividends, royalties, interest and technical services. For a Singaporean investor with a subsidiary in Cambodia, the practical outcome of this is that under the DTA, the withholding tax rate for the above listed transactions is reduced from 14% (Cambodia’s domestic rate) to 10%.

With respect to the elimination of double taxation, the DTA provides for a tax credit to a Singaporean resident deriving income that may have been taxed in Cambodia, preventing double taxation on this income. A Cambodian resident deriving income that is taxed in Singapore, can similarly claim a tax credit for this.

We hear a lot in the news about concepts such as BEPS with respect to International Taxation. Can you briefly explain these concepts and how they relate to DTA’s?

Base Erosion and Profit Shifting or BEPS refers to tax planning strategies, most commonly used by multi-national companies, that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. Recently high profile corporations have been in the spotlight for implementing such strategies which while legal undermined the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level.

DTA’s often act as the cornerstone of international tax planning particularly with respect to the reduction or elimination of taxes on various forms of business and capital. This has led to abuse of tax treaties by multi-national companies with respect to how they structure their tax affairs. Recently the OECD have agreed on a new set of international tax rules to combat this abuse.

Can you provide some final thoughts on the DTA between Singapore and Cambodia?

Crucially, the DTA provides mutually agreed processes for resolving uncertainties via its application and information exchange articles. This will require co-operation and collaboration between the tax authorities of both jurisdictions in order to prevent tax avoidance. Singapore of course, is an experienced hand on these aspects of DTAs and it is hoped that their Cambodian counterparts be properly trained so that the intended outcomes of the DTA are not undermined.

It is symbolic that Singapore is the first country that Cambodia has entered into a DTA with. Singapore has an extensive network of DTAs in place already and appreciates the benefits that result from increased trade and commerce.

For Cambodia, the DTA will hopefully encourage and further expand the already significant contribution of investment that Singaporean investors have made in Cambodia.