HIV medications, automobiles, electrical transformers and condensed milk—these seemingly unrelated items are in fact intimately linked.
Each of these imported products—along with thousands of other foreign goods that Cambodia needs or wants—is charged a tariff so high that each remains out of reach for the average Cambodian.
The costly customs taxes placed on imported goods have limited businesses from expanding, blocked rural development and, in some cases, led to an increase in smuggling, said several businessmen in Cambodia.
“The high tariffs have greatly hindered our capacity to do business,” said Dawood Ghaznavi, general manager of Nestle. Nestle products, such as Nescafe, sweetened condensed milk and condensed coffee products, are charged a 35 percent tariff plus a standard 10 percent Value Added Tax (VAT).
That means that taxes account for slightly less than half of a typical $0.50 can of condensed milk.
“If the tariffs were not there, our product sales could be much higher and we could sell these products at a cheaper price,” Ghaznavi said.
The customs charges also lead to an increase in smuggling, Ghaznavi said. Importers who wish to avoid the high tariffs smuggle everything from food products to automobiles over the Thai or Vietnamese border and sell them to distributors in Cambodia, thereby dodging the tariffs.
Although many tariffs will be phased out or lowered to 5 percent by 2015 under the Asean Free Trade Agreement to invigorate trade between Asean countries, the high tariffs will remain the same for products imported from non-Asean countries.
In 1999, Prime Minister Hun Sen also brought the high tariff-smuggling connection to light after the government discovered they were losing an estimated $800,000 a month in tax revenues due to petroleum smuggling. At that time, gasoline cost $320 per ton but was taxed at $314 per ton.
Officials then suggested that lowering tariffs would have been one of the most effective ways to stop the smuggling.
According to Ghaznavi, smuggling hurts local Cambodian businesses most. Nestle, for example, is running a local company that manufactures and distributes condensed milk. Because of their overhead costs, however, they cannot compete with brands that are smuggled into Cambodia and sold at reduced prices.
“If you want to nurture business in Cambodia, then [the government] must start to crack down on smuggling, which could be done by lowing the tariffs,” he said.
Automobiles have by far the largest tariff charge. A 120 percent tax is placed on any new Ford Explorer or Toyota Landcruiser that comes into this country, in addition to the 10 percent VAT. By the time the vehicle is sold to a consumer, the tax can be as high as 214 percent, said Michael Freeman, regional manager for RM Asia, the distributor of Ford in Cambodia.
“In my opinion, the high tariffs impede private sales,” Freeman said. “Some people here ask ‘How much is a new Ford Explorer,’ and I tell them ‘It costs $27,000…plus $70,000 for taxes.’ So the final cost is around $90,000, and this really puts them off.”
RM Asia’s main market for automobiles is USAid, the US Embassy and the ministries, Freeman said, who added that typical Cambodians cannot afford to buy new automobiles.
Most Cambodians who buy cars, he said, purchase used Toyota Camrys or Hondas that have been damaged in the US, then shipped here to be repaired and re-sold. The Customs Department does not charge as high an import tax for such products.
Officials at the Customs and Excise Department disagree that the high customs duties increased smuggling. While Pen Siman, director of the Customs and Excise Department, agreed that a small amount of smuggling can be attributed to the high tariff rates, he disagreed that the tariffs lead directly to smuggling. He attributed the illegal import of goods to two things: the lack of enough local products for local consumption and the devaluation of currencies in neighboring countries.
Because currencies in countries like Thailand and Vietnam are decreasing in value, exporters within those countries are attempting to open new markets in Cambodia but refuse to go through legal means.
In addition, Pen Siman said, compared to neighboring countries, the import taxes imposed on items like automobiles is relatively low. The Thai and Singaporean governments charge between 300 and 400 percent on automobiles like the Ford Explorer.
“We consider Ford Explorers or Mercedes Benz a ‘luxury automobile,’ and these are not the products necessary for the well-being of Cambodia,” Pen Siman said. “Some items we don’t need so much in Cambodia—like luxury automobiles.”
He said Nescafe coffee and other food products are taxed highly because Cambodia is trying to produce many of these goods locally, and do not want to be dependent on foreign goods,
“We are trying to protect the local economy,” he said.
The irony of the high tariffs is that they were imposed to stimulate the fledgling Cambodia economy. According to an official at the World Bank who wished to remain anonymous, many of the high import taxes were established in the early 1990s when the UN and other NGOs flooded Cambodia and a majority of imported goods went specifically to foreigners living in Cambodia, not to the average Cambodian. “Luxury automobiles” for the UN, cheese—even paper—were heavily-taxed products, the official said.
And though the economic landscape of Cambodia has changed, the tariffs imposed in the early 1990s are still influencing the country.
Healol Pharmaceuticals Imp Exp Co Ltd, for example, is expecting their first shipment of HIV medications, and while the company is not required to pay an extremely high tariff, it does acknowledge that there is a cost for bringing those medications to Cambodia.
“We will pay a processing tax and some custom duties,” said Sandeep Majumdar, director of Healol, who said he was not certain of the price of the tax. “If the package we import is not registered, or if it is mislabeled, then they could charge us extra—anywhere from $200 to $600.”
Frantz Zaganay, sales manager for Comin Khmer, knows he can expect to pay upwards of 46 percent on the electric transformers Comin Electric imports. Transformers, which change electrical energy to a different voltage, are a necessary part of many energy-supplying devices.
While all the large electricity projects approved by the Council for the Development of Cambodia are exempt from paying tariffs, the smaller projects are not required to seek approval from the CDC, and therefore are forced to pay a tariff.
And for an electrical equipment supplier like Comin, which supplies small transformers and switchboards to the provinces, this can make supplying energy equipment more costly, Zaganay said.
Since Comin ends up paying upwards of 46 percent taxes on their transformers—which range in cost from a few thousand dollars to $50,000—they must charge a higher price for their equipment. And because of the higher costs, many poor, rural Cambodians cannot afford the electrical gear and therefore buy generators or go without electricity, Zaganay said. In a country where only 7 percent of Cambodians have electricity, this lack of power is deeply felt.
“In the end, it is the customer who pays [for the high tariffs],” Zaganay said.
