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07 September 2018 Cambodian Tax Authority issues instruction requiring arm's-length interest on related-party loans On 21 August 2018, Cambodia's General Department of Taxation (the GDT) released Instruction 11946), which requires an arm's-length interest rate on related-party loans to reflect Prakas 986, issued in October 2017. The change is effective as of 21 August 2018.1 Prakas 986 released in October 2017 contains Cambodia's transfer pricing rules based on the arm's-length principle.2 Instruction 151 was introduced in 2014 and permitted interest-free loans between related parties if the loan agreement was provided to the GDT within 30 days of the effective date of said agreement. Instruction 11946 conforms to Prakas 986 by removing the inconsistency between Prakas 986 and Instruction 151 and requiring that terms and conditions of a loan between a Cambodian taxpayer and its related party should be at arm's length. Accordingly, an interest rate and terms and conditions of interest payments in the related-party loan should be determined by reference to the interest rate and payment terms and conditions that exist with a third-party loan. Instruction 11946 also clarifies that related-party loan agreements no longer need to be provided to the GDT. Cambodian taxpayers who currently hold interest-free related-party loans should consider amending their loan agreements to include an arm's-length interest rate on the loan to comply with Instruction 11946 requirements. In addition, taxpayers must substantiate and document the arm's-length interest rate in a transfer pricing report in accordance with Prakas 986 requirements. Annex 1 to the FY 2018 TOI return which, for most Cambodian taxpayers, will be due on 31 March 2019, will require disclosure of an arm's-length interest rate on the taxpayer's related-party loan, in addition to details of all other related-party transactions entered into in FY 2018. It is critical that the disclosures in Annex 1 and the taxpayer's transfer pricing documentation be consistent. If Cambodian taxpayers have any interest-free related-party loans, they should consider amending the terms and conditions of the loans to comply with Instruction 11946, as Instruction 11946 became effective as of 21 August 2018. Transfer pricing documentation should also be prepared to support the determination of an arm's-length interest rate. 1 This Instruction was released by the General Department of Taxation, which is part of the Ministry of Economy and Finance. 2 See EY Global Tax Alert, Cambodia issues new transfer pricing compliance rules and documentation requirements, dated 1 November 2017. Document ID: 2018-6064 |
