Cambodia Faces Rising Revenue Losses from Poorly Tracked Tax Incentives

Cambodia's fiscal challenge is not just about how much tax it collects, but how much it quietly gives away. A new report by the International Monetary Fund's Fiscal Affairs Department, supported by the Government of Japan and authored by Artur Swistak, Mansoo Kim, Ross Warwick, and Marius van Oordt, highlights the growing impact of tax expenditures in the country. These include exemptions, deductions, reduced rates, and tax holidays that are meant to encourage investment but are increasingly draining public revenues without clear oversight.

The issue is gaining attention as Cambodia pushes to increase tax revenue from 12.5 percent of GDP in 2024 to at least 14 percent by 2028. However, these efforts risk being undermined if large portions of potential revenue continue to be lost through unmonitored tax incentives.

Tax Breaks That Add Up

Tax expenditures in Cambodia are widespread and deeply embedded in the system. They include incentives for businesses, especially those classified as Qualified Investment Projects, as well as exemptions from value-added tax and reductions in excise duties. While these policies are often introduced to boost economic growth and attract foreign investment, their cumulative impact has become significant.

The report finds that the largest revenue losses come from excise tax concessions, particularly on fuel. These are followed by VAT exemptions and corporate income tax holidays. Personal income tax breaks are harder to measure due to limited data, but they are likely to be important as well. The problem is not just their size, but the fact that many of these tax breaks are not clearly tracked or reported.

Why the System Lacks Clarity

A major challenge identified in the report is the absence of clear benchmarks for what the standard tax system should look like. Without this baseline, it becomes difficult to determine which provisions are normal and which are special concessions. This makes it harder to measure how much revenue is being lost.

In simple terms, Cambodia does not yet have a consistent way of identifying and calculating tax expenditures. This leads to gaps in reporting and weakens the government's ability to make informed fiscal decisions. As a result, policymakers may not fully understand the trade-offs involved in offering certain incentives.

Data Gaps and Missed Targets

Another key issue is the lack of reliable data. Limited access to detailed tax records and gaps in statistical systems make it difficult to estimate the true cost of tax expenditures. To address this, the IMF team developed a preliminary model to study VAT exemptions using household and economic data.

The findings are revealing. Many VAT exemptions, which are often justified as helping lower-income households, do not effectively reach those who need them most. This raises concerns about both fairness and efficiency. In other words, the government may be giving up revenue without achieving its intended social goals.

A Roadmap for Reform

The report offers a clear path forward. It recommends that Cambodia create a formal system to track and report tax expenditures and publish its first comprehensive report by the end of 2026. This would involve defining clear tax benchmarks, improving data collection, and building stronger analytical tools.

It also calls for better coordination among government agencies, with the Ministry of Economy and Finance taking the lead. Importantly, tax expenditure reporting should be included in the national budget process, making these hidden costs visible to policymakers and the public.

Over time, Cambodia can also begin evaluating whether specific tax incentives are delivering real economic benefits. For now, the priority is to improve transparency and measurement.

The message from the report is straightforward. Tax incentives can support growth, but without proper oversight, they risk weakening the country's fiscal position. By bringing these hidden costs into the open, Cambodia has an opportunity to strengthen its public finances while ensuring that its tax policies truly serve its development goals.