The Cost of Business in Cambodia Compared With China
Although Cambodia is a relatively small player in ASEAN, its proximity and political closeness to China has made it an interesting alternative to the China manufacturing costs associated with provinces such as Yunnan, Sichuan, and Guangdong. Cambodia is currently attempting to achieve the ASEAN Economic Community compliance deadlines by year end, a move that if successful will see it come into customs and dutiable harmony with the rest of the trade bloc. As ASEAN has a Free Trade Agreement with China, Cambodia’s bilateral trade and investment from the PRC can be expected to boom. In fact this has already started to happen – bilateral trade rose by over 30 percent in 2013 and reached a high of US$3.7 billion in 2014.
The number of Chinese tourists traveling to Cambodia has also been on the rise, with 600,000 expected to visit the country in 2015, up from 460,000 last year. Some are drawn by Chinese invested casinos, others for the cultural sights. Yet other Chinese based businesses have been investing in Cambodia precisely because it offers lower operational costs. In this regard, China invested some US$427 million in Cambodia in 2014, up from US$263 million the previous year. Much of this is related to Chinese manufacturers establishing subsidiary operations in the event of Cambodia meeting its AEC obligations. These investments have been focused on the garment and manufacturing industries, banking and finance, agriculture, tourism, energy, mining, real estate, transport ,and telecommunications.
Elsewhere, Cambodia enjoys good trade relations with the following countries:
The reasons that China based companies are looking to invest in Cambodia are clear. They wish to take advantage of the lower operational costs in the country, use the ASEAN-China FTA as a duty free platform, and then re-export the goods back to China. While China is becoming expensive for manufacturers, the flip-side is an increase in wealth creation. China’s middle class is expected to reach 600 million by 2025, meaning that investing in production facilities with lower operational costs close to China makes a lot of commercial sense.
We can compare Cambodia and China in terms of average operational costs as follows:
Cambodia Foreign Investment Law
Foreign investors looking to establish operations in Cambodia can do so via a number of legal structures, and must do so if they undertake any of the following activities:
- Rent office or any other space for manufacturing, processing or performing services for more than one month
- Employ any person for more than one month
- Perform any other act permitted for a foreign physical and legal person by Cambodian law
In terms of the legal structure, Cambodia permits the following entry vehicles for foreign investors:
- Limited Liability Company
- This can be in the form of “private limited companies” or “public limited companies”.
- An enterprise formed through the creation of a contract between two or more persons.
- Sole proprietorship
- An enterprise established and operated by a single natural person who owns all of its capital.
- Foreign Business
- A legal entity formed under the laws of a foreign country where it has a place of business and is currently conducting business in Cambodia using one of the following forms:
- Commercial representative office, commercial relations office or agency (“representative office”)
All businesses in Cambodia are subject to tax under the Self-Assessment System (Real Regime Tax System), regardless of their type of activity or level of annual revenue. Every year, taxpayers must submit a tax declaration, a balance sheet, results account, and tables of complementary information to the tax administration.
Businesses must first register with the Ministry of Commerce, and then register at the Large and Medium Tax Payers Bureau (LMTB) of the Tax Department in order to receive a tax identification number (TIN).
Cambodia also possesses a number of Special Economic Zones (SEZ) that offer tax incentives and negate the need to pay VAT on imports into the zone. These are useful structures when considering an export manufacturing base in Cambodia as they can attract tax incentives as well as alleviate the need to budget for VAT cashflow requirements. The main port in the country is located at Sihanoukville, while road and rail links to China and into neighboring countries such as Thailand, and Vietnam in particular, are improving. As always in the emerging ASEAN nations, logistics and infrastructure issues need to be factored into any business modelling.
In terms of overall development, Cambodia appears to be stepping up to the plate. It has recently partnered with the Singapore government concerning assistance with patent applications, and has recently approved its first patent. Singapore remains a center for getting money into and out of Cambodia, although currency restrictions do apply. This means that it is advisable to pay attention to budget costs, since once money is remitted into the country, it can be hard to repatriate it.
A list of local and foreign banks operating in Cambodia can be found here.
Cambodia’s close relationship with and proximity to South-West China make it a viable proposition for complimenting existing production facilities in Yunnan, Sichuan, and Guangdong. Its lower operational costs may provide an opportunity to reduce overall China production costs by using a Cambodia facility to produce part of the existing or future required China manufacturing capacity for resale into the Chinese domestic market. Cambodia’s export markets to Thailand and ASEAN are buoyant, and internationally to the United States and EU, demonstrating that rail and shipping infrastructure to these destinations is at an acceptable level, and is continuing to improve.
Links to the other articles in this series are as follows:
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email email@example.com or visit www.dezshira.com.
Chris can be followed on Twitter at @CDE_Asia.
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