By Sujeet Karkala, Sciaroni & Associates, Cambodia
Cambodia’s tax authority on 21 August, issued an important new transfer pricing instruction addressing the interest rate to be applied to related-party loans.
Previous Cambodian guidance, Instruction No. 151 dated 22 January 2014, provided that taxpayers could extend interest-free loans both domestically and internationally between related parties if these loan agreements were registered with the Cambodian tax authority within 30 days.
The Cambodian tax authorities later issued Prakas No. 986 dated 10 October 2017 (Transfer Pricing Regulation) and also Instruction No. 151 dated 22 January 2014 (Enterprises Interest Expenses), however.
Prakas No. 986, the transfer pricing regulations, are designed to ensure the fairness and accuracy of transfer pricing among related entities and also establish related party pricing based on similar transactions between unrelated parties.
The prakas defines the term ‘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.
Cambodia related-party loans
This newest Cambodia transfer pricing guidance, Instruction No. 11946 Interest Rate on Related Parties, clarifies that the Prakas transfer pricing guidance does impact interest related party loans, requiring that the interest on such loans be at an “arms-length price”.
Instruction No. 11946 clarifies that an enterprise that issues a loan among related parties must follow the arm’s length principle.
Moreover, there is no requirement to notify the Cambodian tax authority about the loan. Rather, taxpayers must maintain records and all documents related to the loan with the taxpayer’s transfer pricing documentation.
Under the new instruction, the taxpayer’s transfer pricing documentation must establish which transfer pricing method was adopted to determine the most appropriate interest rate for a related party loan.
Interest-free loans
In addition, Instruction No. 11946 implies that all taxpayers with outstanding interest-free related party loans must comply with the instruction effective immediately.
The new instruction applies only to the transactions among related parties. Loans between unrelated parties are still governed by the earlier Cambodian guidance, Instruction No. 151.
–Sujeet Karkala is a Legal Advisor with Sciaroni & Associates in Cambodia and specializes in international taxation laws and corporate laws. He advises clients on doing business in ASEAN and on market entry and exit strategy in the region.
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