Robert Porter of VDB Loi in Phnom Penh discusses the country's Fringe Benefit Tax

As employment costs here in Cambodia continue to rise, with upward pressure on the minimum wage, and a soon-to-be launched revised (and more expensive) social security system, many employers are becoming concerned that the Cambodian manufacturing sector may lose competitiveness compared with Vietnam, Laos, Bangladesh and Myanmar. One of the factors that makes employment costs in Cambodia higher than they need to be is the Fringe Benefit Tax (FBT), and the very broad interpretation the General Department of Taxation (GDT) takes when applying the related regulations.

FBT was introduced in 2003, when the Prakas on Tax on Salary was issued to add details to the provisions of the Law on Taxation. Section 3.1 paragraph 2 provides the following list of items considered as fringe benefits:

  • All kinds of vehicles
  • Food
  • Accommodation
  • Utilities, such as water, electricity, telephone
  • Household staff
  • Loans provided at lower than the market interest rate (which is determined by the Ministry of Economy and Finance)
  • Discounted goods
  • Educational assistance to employees, other than employment-related training
  • Educational assistance for the employee's minors
  • Life or health insurance premiums, except if the same benefits are provided to all employees regardless of role or function
  • Any portion of an expense allowance that is considered excessive and unnecessary to carry out the employer’s business
  • Amounts paid to the social security fund that exceed the level specified in the law
  • Amounts paid to a pension fund that exceed 10% of the employee’s monthly salary 
  • Amounts paid for activities that are not necessary to carry out the employer’s business, including for receptions, entertainment, vacations or the use of any means related to such activities

Internationally, fringe benefits are understood to be those benefits granted to employees on an individual basis, such as a company car, private health insurance, housing, and so forth, as part of their compensation package. The Prakas imposes FBT on these items, but also on a wide range of other expenditures that would not normally create a tax issue, such as the cost of an annual staff party or trip, which companies often arrange as a means to recognise workers’ contributions and motivate group performance. In the case of the hotel business, which requires that certain staff members be on-site overnight, the GDT insists on assessing FBT on the provision of a room for them.

Just to make things worse, both the Law on Taxation and the Prakas state that the amount subject to FBT is the “market value” rather than the cost. In the hotel business example referred to above, the GDT takes the view that providing a room to a staff member required to be present at night should be subject to FBT not on the cost of providing the room, but on the normal room-rate charged to guests!

Another unfavourable aspect of the current FBT regulations is that the tax is charged at a flat rate of 20%, unlike Tax on Salary, which is charged at progressive rates up to a maximum of 20%, with generally only senior management personnel having any salary subject to tax at that rate. Where FBT is imposed on so-called benefits provided to workers, it may be more equitable to charge FBT at a lower rate, more consistent with the rate applicable to the workers’ salaries.

The GDT has modified its position in one case, for one industry. In a letter issued in March 2016 to the Garment Manufacturers Association in Cambodia, the GDT clarified that food or meal allowances provided or paid to employees is not subject to FBT, as long as the food or meal allowance is made available to all Cambodian employees.

The government is in the process of revising the Law on Taxation, although it is not clear when this process will be complete. Hopefully the revised Law and related regulations will contain some, or all of the following suggestions:

  • FBT should not be applicable to company expenditures on company-wide staff welfare programs that are not of individual benefit to the employees, but are strategic initiatives to improve the health, morale and welfare of workers to promote efficiency and productivity.
  • As many of the expenses subject to FBT represent expenditures for workers whose actual Tax on Salary rate is much lower than 20%, perhaps consideration could be given to a new method of charging FBT, which would result in a rate more consistent with the average Tax on Salary rate paid by the workers concerned.
  • Expenditures incurred purely for the company’s benefit, rather than the individual’s, should not be subject to FBT. An example of this is hotel staff who are sometimes required to remain overnight on the premises. In these circumstances, the accommodation provided should not be subject to FBT.
  • Concessions such as that granted to the garment sector should apply consistently to all taxpayers.
  • FBT should be calculated on the cost to the company of providing the benefit, which will often be lower than “market value”.

While we wait for the new, and hopefully improved Law on Taxation to be promulgated, there are some things that can be done to mitigate FBT. For example, as the salary of most workers is subject to Tax on Salary at rates lower than 20%, there is a clear advantage in converting some of the items currently subjected to FBT at 20% to cash allowances subject to Tax on Salary at rates less than 20%. Of course commercial or HR considerations may place some restrictions on a company’s ability to implement such changes.

This is a fascinating time to be a tax practitioner in Cambodia. The government, with some assistance from international agencies, is making great efforts to reform and improve both the system, and the professionalism of GDT personnel. Large amounts have been invested in recruiting and training qualified people. Of course, as the tax system is reformed, similar reforms will be expected from taxpayers, who have not always been compliant. As they say, “We live in interesting times!”


Robert Porter


Phnom Penh