Component report-Part B-10-Dec-01

In addition to the customs duty, two indirect taxes are levied on the value of imports: excise tax and value added tax (VAT). Overall, Cambodia gets almost 80 per cent of its tax revenue from taxes on imports, of which these two indirect taxes represent approximately 51 per cent of total taxes on imports in 2000. As noted earlier, excise taxes are levied on five product groups: beverages (including mineral water), tobacco, passenger vehicles, motorcycles and petroleum products. The VAT is a uniform 10 per cent rate. With few exceptions, both taxes are levied on imports at the same rates and conditions as on domestic traded goods. Exporters are VAT zero rated for imported materials used for producing exportable goods. There are unofficial taxes on imports and exports, which can add up to significant amounts. For example, according to one estimate, informal trade facilitation taxes can amount to $150 per container of imported or exported goods. These ‘hidden’ costs are discussed in detail in the trade facilitation section.

Import duty concessions and exemptions are available to certain types of importers. Items imported for the purpose of re-exporting (for example, cigarettes) are charged a concessionary duty rate (see box 2.8). Imports of goods by international donors, NGOs and the Cambodian government are all exempt from paying import duties. Investors who export more than 80 per cent of their production are entitled to duty exemption on capital goods, raw materials and intermediate inputs under the law of investment. Other investors approved by the Cambodian Development Commission (CDC) under the Investment Law are entitled to duty exemptions on imported goods, normally for one year, although a one year extension of duty exemptions is possible. According to customs data about half of imports came in duty and tax exempt in 2000 and forgone tax revenue was estimated at $207 million (see table 2.4). In the first semester of 2001, forgone revenue amounted to $128 million (or CR501 billion), compared with customs collection of $112 million (or CR436 billion). Almost eighty per cent of trade tax exemptions arise from imports of raw materials (mainly fabrics) and capital goods used by garment producers (table 2.5).

Given the widespread availability of import duty exemptions, nominal tariff rates applied in practice are quite different from listed tariff rates. Moreover, there are other trade taxes that tend to be somewhat less visible, but are often no less important (for example, see implicit surcharges below). As a result the average burden of tariffs on traded goods will be quite different from the listed tariff rates. Annex B reports estimates of effective tariff rates on trade goods for 2000, defined here as the ratio of total collected tariff revenue (revenue from tariffs less exemptions) to the value of total imports, or exports.

Of course, there are good economic reasons to have a low effective tariff rate on most imported goods, but accomplishing this goal through an ad hoc, unsystematic tax exemption scheme is not an effective way of doing this. In particular, the differential tariff treatment creates unpredictability and non transparency for importers and investors. Also, since this system requires an elaborate customs administration process, this becomes timely and costly for both the government and the investor with all the negative effects of a discretionary process (see section on trade facilitation).

Examining the effective tariff rates on imports, it is apparent that there is a heavy reliance in a relatively narrow base of imports in these statistics. The traditional excisable goods petroleum, alcoholic beverages, tobacco and autos — account for more than 60 per cent of customs tariff revenue. According to customs data the ratio of total collected tariff revenue to the total value of imports is 6.7 per cent. The fact that this ratio includes a large proportion of tariff revenue on a small number of excisable goods means that the average burden of tariffs is in fact much less. If the major excisable goods are eliminated, the ratio is 3 per cent.

Reflecting in part the various exemptions along with preferential rates applied under CEPT, the average effective tariff rate for all imports is 10.8 per cent, much lower than the average listed nominal rate of 16.5 per cent. Nevertheless, the ad hoc nature of the various exemption schemes has created as much variability or distortions in the tariff structure as implied by the listed nominal rates. This is indicated by the fact that the dispersion of effective tariff rates (measured by the standard deviation of 12.8 per cent) is not much smaller than the dispersion of listed rates (13.4 per cent).

As indicated above, officially recorded trade taxation of exports (that is, through customs) is relatively limited. The average effective trade tax for exports was 5.7 per cent. Wood, rubber and fish are the primary goods burdened with significant export taxes (see table 2.6).

The estimates presented in annex B also indicate a number of cases where the effective tax rate is less than the listed nominal tariff rate. For example, the effective tax rate for imports of fabrics is much less than the nominal tariff rate of 7 per cent. This undoubtedly reflects significant exemptions from duty granted to garment manufacturers of exports. This raises an important tariff policy issue, which is discussed below in a section on appropriate tariff policy. Briefly, as indicated above garment producers must follow a timely and costly administration process to obtain duty exemptions. Given that producers of garments account for about 80 per cent of total value of duty exemptions, one option for the garment industry could be to reduce tariff rates on all imported materials and accessories to zero. (The tariff rate on most of these items is currently 7 per cent.)

An advantage of a zero tariff policy on fabrics is that garment exporters would not have to maintain a Master List for imports of materials at CDC. (This list provides detail information on the type, volume and value of imported goods, which CDC officials are empowered to modify if they have grounds to believe that the exporter is inflating material requirements.) Many producers complain that the master list involve a timeconsuming and costly administration process. This change would help reduce administration costs for both the garment industry and the government. This policy would have little effect on customs revenue because most imported fabrics and accessories are already exempted from duties.

Customs operates two valuation schemes for the purpose of calculating dutiable values for import and exports of goods. The first scheme refers to fair market value (FMV), whereby the valuator (SGS under the Pre-Shipment Inspection (PSI) agreement) uses international prices to determine the dutiable value (see customs chapter). The second scheme involves the MEF setting predetermined, minimum or fixed dutiable values for certain products to be used by SGS and customs. Customs duties, excise and VAT are calculated based on these administered prices. For some of these products, SGS is required to use the pre determined minimum values in cases where the pre determined values are greater than the actual SGS valuations based on FMV or c.i.f. value of imports (see table 2.7). For a small number of other products fixed dutiable values are used irrespective of c.i.f. value of imports (for example, petroleum). The stated purpose of this scheme is to circumvent under-valuation of imported items and, thus, ensure stability in customs revenue collection. In cases where the predetermined minimum value is above the FMV, the amount of the customs duty charged will therefore be larger than otherwise, indicating that there is a specific duty and, thus, the implicit ad valorem tariff rate will be higher than the applied tariff rate. Where minimum values are set according to brands (motorcycles, cigarettes) or source country (for example, passenger automobiles) the implicit ad valorem tariff rate will often vary across brands and countries. This system gives rise duties which are not transparent and can give rise to high protection and protection increases whenever international prices fall below administered minimum dutiable import values.

Table 2.7 lists selected products subject to administered dutiable values. In addition, more then 400 items made in Thailand and Vietnam are also subject to administered minimum dutiable values. While it is not practical to compare all items subject to administered dutiable values with their corresponding c.i.f. value or FMV of imported goods, selected examples demonstrate the extent to which these prices deviate. For some products the current administered prices are roughly in line with international prices such as for gasoline ($320/ton), although these prices will deviate if international oil prices suddenly change. For other products, the c.i.f. value or FMV value of imports is below their administered prices. For example, the ‘FMV’ of ordinary portland cement exported to Cambodia between May and July of 2001 ranged between $32–34/ton compared to the minimum administered price of $40. With a tariff rate of 10 per cent applied to the administered price of $40, the implicit ad valorem tariff rate on imported cement is approximately 12.5 per cent. Administered dutiable values for used automobiles are generally set above c.i.f. value of imports. For example, the importation of a used, 1999 Toyota Camry (2000cc) in 2001 was subjected to an administered price of $8500, whereas its FMV was estimated at $4634. Thus, the implicit ad valorem tariff rate on this imported vehicle was 64 per cent and not the applied tariff rate of 35 per cent. A recent MEF letter instructs SGS to use FMV for mercedes passenger cars and trucks made in Korea; thus, no implicit surcharge is imposed on mercedes models produced in Korea and exported to Cambodia. However, smuggling of automobiles to Cambodia is prevalent and this activity undermines customs duties collection.

For some products, the fixed dutiable value is deliberately set below c.i.f. value of imports. Two examples are the importation of cigarettes and used motorcycle parts. Cigarettes are a major re-export product, whereby as much as 80 per cent of imported cigarettes are informally re-export mainly to Vietnam. To encourage this activity, as well as to capture some customs revenue from it, Customs applies the normal tariff and excise rate to cigarette imports at a dutiable value set below the c.i.f. value of imports (see box 2.8). Similarly, the government predetermines dutiable values for used motorcycle spare parts, which is set below market value according to an import substitution strategy for the industry as three or four firms assemble these components locally.

Overall, this minimum dutiable valuation regime creates uncertainty in the tariff structure as it creates ‘hidden’ specific duties or concessions that are not explicitly included in the tariff schedule. Valuation regimes and resulting specific taxes create additional protection and protection increases whenever international prices fall below administered prices. Regimes like this one are also often used as ‘back door’ ways of protecting certain domestic or foreign producers from competitive imports. The implicit specific duty regime is also discriminatory, as it treats some product relatively differently from each other depending on brand or country of origin. Another problem with this regime is that import (c.i.f. or FMV) prices often deviate from administered prices, especially if the latter are not frequently updated, as appears to be the case (as of December 2000, many administered prices had not been updated for two years). In some cases the fixed administered prices fall below the market price, in which case the government forgoes revenue to the budget. Finally, like high tariffs the imposition of implicit specific duties encourages smuggling of goods across the border. Ad valorem tariff rates are preferred to specific taxes as a tariff instrument because they are less costly to the economy in terms of resource misallocation. This is because whenever international prices of imports change, specific taxes create more variability in domestic prices than ad valorem tariff rates and, thus, greater domestic resource misallocation.

Re-exports of goods are handled somewhat differently in Cambodia than in most other countries re-export trade. In most countries, re-exports enter and leave with little or no transformation and are typically permitted to come and go duty free. It is not unusual for duty rebate or bonded warehouse schemes to be in place to ensure that the goods are in fact re-exported. In Cambodia, much of the re-export activity is informal with Vietnam and Thailand as the major destinations for this trade. Goods are identified as re-export goods on admittance, and there is no official documentary evidence of their departure. According to Customs estimates, cigarettes are by far the largest good re-exported, and about 80 per cent of all imported cigarettes are informally re-exported, mainly to Vietnam in response to the latter country’s relatively high tariff and excise taxes on cigarettes. Because of the informal nature of this trade (which makes a bonded warehouse scheme or duty draw back facility inappropriate), and recognizing this trade as a source of central government revenue, the Cambodian government admits imported cigarettes at a concessionary tax rate. Until recently, the system of taxes and duties levied on cigarettes involved the setting of three parameters: i) the dutiable value, ii) the domestic consumption coefficient (20 per cent sold domestically), and iii) the tariff refund rate, and subjecting imported cigarettes to the same type of tax scheme as regular imports. In 2000 the government simplified the system by abolishing ii) and iii) and an import tariff and excise tax rate applied uniformly to imported and domestically produced cigarettes. However, concerned that a uniform system of taxes may significantly reduce the re-export trade and therefore customs revenue from cigarettes, the government retained and revised the minimum dutiable value for cigarettes.

Whether any further action to simplify the system of taxes on cigarettes is required by policy makers depends on the extent that the goods are actually re-exported and this is virtually impossible to determine directly. There are two points to note. First, the amounts of cigarette re-exports are large relative to likely domestic demand and, thus, leakages are probably under reasonable control. A second factor to consider is whether re-exports can be expected to be a major source of revenue for very many years. It can be expected that as Vietnam reduces its trade barriers within the ASEAN Free Trade Area Agreement (AFTA) agreement over the next 8 years, the long term future for significant re-export generated revenue is limited. Of course, it is possible to greatly reduce revenues from re-exports if the duties on re-exports are raised sufficiently high. This would likely move this trade outside formal channels. For example, the introduction of a duty draw back system could be expected to have a negative impact on re-exports. Given the informal nature of the re-export trade in cigarettes, and the difficult fiscal constraints facing the RGC continuation of present policies without any further major changes to the system of taxes for cigarettes makes sense.

With a few exceptions, all official quantitative restrictions on imports were eliminated in 1994 as part of comprehensive trade reform measures. The import license system was also eliminated in 1994, except for selected items such as pharmaceutical products, gold and silver, armaments and ammunitions and various cultural and medical materials. Ministerial authorization is required for importing these items. A few bans on imported goods remain. Recent examples of import prohibitions include pig meat, used motorbike tyres, right hand autos, and used footwear (see table 2.9). Otherwise, firms are unrestricted in importing goods as long as the importer is a registered firm incorporated under Cambodian law. Foreign trading companies are free to operate in Cambodia, as long as they are incorporated under Cambodian law and registered with the Ministry of Commerce. While a few state trading companies continue to operate, for most they compete with private trading companies in the same markets.

Commodity	Rationale	Measures	Responsible agency
Live pigs and pig meat	Public health	Prohibited	Ministry of Agriculture
Armaments & ammunitions	National security	Prohibited, except for military procurement	Ministry of Defence/Internal Affairs
Illicit drugs	Public health	Prohibited
Firecrackers	Public safety	Prohibited, except for special occasions	Ministry of Defence/Internal Affairs
Printing material	Public morality	Prohibited if deemed to have negative impact on society	Ministry of Education/Culture
Gold bars	Monetary policy	License	Central bank of Cambodia
Cultural items	Protection of culture	License	Ministry of Culture
	Monetary policy	Automatic license as long as declared items above $10 000	Central bank of Cambodia
Pharmaceuticals	Public health	License	Ministry of Health
Artificial sweeteners	Public health	License	Ministry of Health
Right hand drive vehicles	Public safety	Prohibited
Used motorcycle tyres	Environment	Prohibited	Ministry of Environment
Used footwear and leather bags	Environment	Prohibited	Ministry of Environment

Licensing is used to administer quotas, conditional prohibitions, and absolute prohibitions on certain exported goods. These measures are typically in place for public health and security reasons as well as to implement arrangements with trading partners, concerning notably textiles and clothing to the US and European Union (EU). Currently, Cambodia has an absolute ban on exports of logs, export quota on rice, and garment quotas (as reported in the sector studies some of these bans are apparently not binding). There are five items that are subject to the export licensing requirements: processed wood products (including furniture, wooden handicrafts etc), garments, weapons, all vehicles and machinery for military purposes, pharmaceuticals and medical materials. Ministerial authorization is required for exporting these items. A state owned enterprise, KAMFIMEX, has a monopoly on fish exports. An export quota on rice has been in place since 1996 as a replacement for a ban on rice exports before 1995. The export quota is an element of the government’s food security program. Evidently, the quota on rice exports is not binding since the actual recorded export volume has never reached the ceiling set by the quota. A special inter ministerial working group decides on the annual ceiling for the rice export quota. Individual shipments, which should not exceed 3000 tons, are granted an Export License from the Ministry of Commerce after approval is obtained from the Ministry of Agriculture. However, unofficial (non quota) exports of rice and also padi are apparently substantial, although estimates are not available (CDRI 2001).

An export ban has been imposed on logs and sawn logs since May 1995. Strong economic growth recorded in the Asian countries in the early 1990s had created a substantial increase in the demand for logs. Meanwhile, neighboring countries such as Malaysia and Thailand strengthened their control on log exports; hence the prices of logs substantially increased. These elements, together with limited institutional capacity for proper forestry management, created a strong incentive for illegal log exports from Cambodia. This ban on logs, combined with export taxes on semi processed wood, is believed to be inefficient as it encourages excessive and costly domestic processing of plywood and veneer sheets. The government intends to review the export log ban in the future in line with improvements in overall forestry management.

An export quota has been in place for garment exports to the US since 1999, in response to the surge in garment exports from Cambodia. Quota restrictions were imposed on 12 broad categories of garments. The quota agreement is initially for three years ending in December 2001. Under the current arrangement the quota restriction will be eased by 6 per cent per annum. Up to an additional 14 per cent easing of the quota will be provided if Cambodia ‘substantially complies with labor standards’ including those set out in Cambodia’s labor laws and the four core ILO conventions. Following on from an assessment of Cambodia’s labor standards, the US government granted a 9 per cent quota increase (see garments case study for a discussion of labor standards). The government has implemented a flexible quota system whereby about 80 per cent of the quota has been allocated to firms operating in Cambodia in 1998 based on their past export performance and production capacity of the producer. Up to 10 per cent can be allocated to exporters as a reward for current export performance and compliance with the country’s labor laws. The remaining 10 per cent is auctioned to garment producers through competitive bidding. The government charges a specified fee (known as visa fees) per dozen of garments sold under the quota to US as well as garments exports to Europe. The fees were introduced when the government introduced the electronic visa implementation system (ELVIS) to identify fake Cambodian exports to the US, as part of the bilateral agreement with the US. The purpose of the fees, however, appear to simply raise revenue (see garments case study for details).

The garment quota arrangement raises several important long term competitiveness issues. First, institutional labor arrangements — such as relatively high minimum wages and restrictions on work shifts as well as compliance costs to these standards are raising the cost structure of the garment sector. While these rigidities may benefit existing workers in the short term, they put expanded employment in the industry at risk, if preferred markets cease to exist, by creating a cost structure that is only viable with preferences. Further, by putting in place these institutional rigidities the development of other potential export sectors are also at risk as they create a relatively high cost structure in labor intensive sectors that Cambodia has a comparative advantage (see garments sector case study for a discussion of labor issues).

The second issue relates to the costly export facilitation process arising from preferential market access to the US and EU. The export facilitation process is cumbersome compared to many other exporting countries in the region. Much of the process involves around ensuring that Cambodian garment exports meet rules of origin requirements. For example, garment exporters require up to 11 documents from three ministries and five departments before their shipments are permitted to leave the port. Further, four government agencies are involved in the product inspection process, essentially duplicating each other’s functions. For example, to export to the US or EU, the exporter must obtain a Certificate of Processing from the Ministry of Industry, Mines and Energy (MIME) as proof that the garments are made in Cambodia. Ministry officials will visit the factory to verify origin. In the next step, exporters obtain a Certificate of Temporary Authorization to export from the Generalized System of Preference (GSP) division at MOC. Officials do not carry out verification of origin at this stage. Both Camcontrol and Customs carry out a pre shipment verification of exports at the factory premises and issue a certificate of inspection. Containers are then permitted to leave Cambodia. This process is costly and time consuming for exporters. As it is heavily dependent upon the physical inspection of shipments by three agencies, and is thus very much open to abuse by petty officials. According to one estimate, these informal taxes can amount to $150 per container of garment exports valued at $30 000 f.o.b. One reason for this excessive licensing procedure was in reaction to EU and US concerns about third country garment exports arriving at their ports using fake Cambodian labels (see trade facilitation section).

As is the case for import duties, export taxes in Cambodia consist of statutory rates, stipulated in the Customs Tariff Schedule. In general, the number of products and the level of applied export taxes (except for re-exports) continued to be very low and their contribution to government revenue negligible. However, export taxes on live animals and fish (10 per cent) burden on earnings of farmers and fishermen. In addition to the export tax, the Ministry of Agriculture, Forestry and Fisheries (MAFF) has granted a fish export monopoly to state owned enterprise, KAMFIMEX, which is under the Ministry’s purview. Evidently, KAMFIMEX does not take physical delivery of fish, but instead licenses five export distributors to purchase all the fish and transport them across the Thai border. Distributors collect a 4 per cent fee on all fish transported in the province. Apparently, the export price is about 35 per cent of the retail price of fish sold in Phnom Penh, indicating that returns to fishermen are relatively low as a consequence of the distribution monopoly (see fisheries chapter).

Taxes are imposed on raw hides and skins and semi processed skins These taxes reduce the export price received by farmers and benefits producers using them as inputs such as processed (tanned) leather and leather related products. (Cambodia also imposes maximum tariff rates on semi-processed hides and tanned leather imports and on several leather based consumer products such as handbags and footwear.) However, the experiences of several other countries demonstrate that there are significant costs to such a strategy. Hides and skins for most part are by products of farmers’ main activity of breeding animals for the food industry. Table 2.10 summarizes export controls and taxes.

An export tax, by reducing the domestic price farmers receive for raw hides, typically reduces the incentive for farmers to take care of the hides and this in turn reduces the quality of locally produced tanned leather. Local producers of leather related goods, especially those who want to compete in the lucrative international market (for example, manufacturers of footwear, handbags, travel cases etc) require international quality leather, which the local industry is typically unable to supply. While large exporters of footwear are able to source high quality leather at international prices through the duty exemption scheme, firms (especially SMEs) supplying the domestic market or who want to export some proportion of their products are restricted to purchasing low quality, higher priced domestically processed leather. This reduces the competitiveness of downstream industries. Other countries such as Indonesia have recognized these adverse consequences on end users and have recently removed export taxes on local hides and skins as well as reduce tariff rates on imported processed leather.

There is a similar rationale for the export tax on semi processed wood, veneer sheets and sheets for plywood (there are no corresponding export taxes on finished products such as plywood, veneer panels and other laminated panels). Camcontrol, the government’s health standards and product quality inspection agency, also imposes a fee of 0.1 per cent on the value of all imported and exported goods.