Government and business officials Monday resisted a donor-driven proposal to repeal most of the tax incentives offered to investors, despite Cambodia’s need to increase its tax revenues.
Reviewing the draft amendment of the Investment Law, Commerce Minister Cham Prasidh said the repeals would work in a country with an ideal investment environment: established infrastructure, low telephone tariffs and a skilled work force.
“The situation of Cambodia is not an ideal one,” Cham Prasidh said at a workshop chaired by Finance Minister Keat Chhon.
Cambodia needs to attract investors with incentives until the country becomes competitive in Southeast Asia, he added.
“We’re going to have fierce competitions with neighboring countries like Thailand and others. [The] recommendations are not for Cambodia’s situation,” Cham Prasidh said.
The proposal, prepared by a government task force and the World Bank group’s Foreign Investment Advisory Services, suggests repealing all but one of the tax exemptions granted to registered investors. It seeks to raise the corporate tax from 9 percent to 20 percent and to eliminate import duties on materials and equipment for export businesses.
Only the export tax will likely remain exempted, according to the proposal.
James Crittle, the FIAS official who recommended the repeals, said the 1994 Investment Law gives so many incentives to investors that it threatens government revenue.
Prime Minister Hun Sen said last month the government has already sacrificed significant revenue in order to attract investors, saying various tax breaks have taken about $170 million out of national coffers.
Despite those “sacrifices,” investment has declined for several years. Last year only $270 million in investments were pledged, about one-tenth the amount pledged in 1995.
The downturn shows that tax incentives alone can not attract investors, Hun Sen said.
Given pressures for tax reform from the International Monetary Fund and World Bank, the government hopes to increase tax revenue next year by about $46 million, Keat Chhon said.
Amending the Investment Law to generate more income from the private sector is part of that effort, he said.
“This participatory review [of the proposal] is to solve both demands—government revenues and investment attraction,” he said.
However, many businesses do not see the proposal as a way to balance the two. Investors say the repeal would hurt Cambodia’s competitiveness.
“The current law is the most liberal investment law in Asia and that is a great selling point of Cambodia,” said private sector legal expert Bretton Sciaroni. “The proposal is going to eliminate lots of incentives” in the law.
Van Son Ieng, chairman of the Garment Manufacturers Association in Cambodia, warned that the proposal would chase investors from the country.
“We do strongly object to taxing import duties on raw materials and equipment for” export-oriented investors, he said. “Not only future investors, but also existing investors will drop out. Who would be here to replace our industry in Cambodia in two years?”
The garment industry is the largest industry in the country, contributing $25 million to revenues in 2000.
Hun Sen said the garment industry costs $163 million in revenues lost by the tax exemptions.
Participants agreed to have another meeting within a month.
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