Government officials, donors and private-sector representatives have been meeting regularly to finish the latest round of legal reforms aimed at making Cambodia a place where people want to do business.
That’s not always easy. Many investors came to Cambodia because of robust incentives packages offered by the government. Meanwhile, the International Monetary Fund and the World Bank have pushed the government to adopt fiscal policies that would give the government more revenue while eliminating many of the incentives for investors.
“We don’t feel sandwiched,” Finance Minister Keat Chhon insisted.
But in reality, economic policymakers are often caught between the advice of the donors and the needs of investors.
By following the strict economic policies laid out by the IMF, the World Bank and other donors, revenue will increase, and the country can expect to see more investment, Keat Chhon said.
Local investors, though, have seen tax holidays disappear and profit taxes rise, while the high costs of shipping and corruption continue. As a result, some investors have said they will have to move their businesses to another country.
The latest round of talks between the government and private sector centers around amendments to the tax law.
The tax law must be made to fit with the Law on Investment, which the Council of Ministers approved earlier this year after more than a year of negotiations with local investors, the World Bank and the IMF.
Following proposals made by a World Bank team of analysts and eventual agreements with private investors, tax holidays were reduced and taxes on profits increased, among other changes.
The law did not come easily, and only time will tell what kind of effect it will have on future foreign investors.
“The government has prepared a proper investment law that [we] hope will attract foreign investors, and raise revenue too,” Keat Chhon said. “To attract them, the government plans to ban corruption by providing a better system of doing business here.”
Amendments to the tax law have started a new round of negotiations with private investors. Those talks are still so sensitive that major investors here refused to talk about them.
“We’re making some headway,” said Denis Laurens, general manager of the Coca-Cola company, one of few multinational investors in Cambodia outside the garment manufacturing industry.
“There are still some disagreements,” conceded Bretton Sciaroni, a member of the government’s private-sector working group, which was formed to tackle problems like this one.
“We’ve made a lot of progress on a lot of issues,” he said. The government has agreed to send a statement of recommendations from the private investors with proposed tax amendments to the Council of Ministers, he added.
The tax amendments are part of an overall scheme by the government to build up “a vibrant private sector.”
The government “has doubled its efforts to create a climate that fosters investor confidence through improved dissemination of information to investors about the ‘rules of the game,’ with regards to taxation, regulations and the protection of property rights,” according to a government report prepared for this week’s international donor meeting.
“Removing the discretionary element in investment approvals can be only a good thing,” IMF Country Representative Robert Hagemann told an investment conference in May. “I often hear that tax rates have to be lower because hidden costs of doing business are so high. Well, I, for one, believe that one should address a problem directly. Using the tax system to offset hidden costs in no way addresses the problem and, indeed, perpetuates it by deflecting attention.”
The investment and tax laws are just the beginning of a long line of laws the government must pass, first to appease the donor community and then to gain acceptance into the World Trade Organization.
These include intellectual property laws, advanced law on the financial sector such as bankruptcy and securities exchange, and others.
With each new law, the government undergoes new growing pains. Perhaps the most painful was the restructuring of the banking sector under a 1999 banking law.
Many non-viable banks were closed under the law, and the Foreign Trade Bank split from the National Bank of Cambodia headquarters as a first step toward eventual privatization.
All banks are now required to have $13 million in capital registered at the National Bank.
The deadline for that capital passed in March, with at least two more banks closing this year.
At the same time, Standard Chartered Bank and Credit Agricole Indosuez yanked their foreign branches here, citing regional concerns and a global slump in the economy.