Executive Summary

• Despite some progress in the past decade, registering businesses in Cambodia is costlier and more time-consuming than in many countries in ASEAN and the world.
• Difficulties in doing business encourages growth in non-registration of businesses or informality. The consequences of this include non-payment of taxes.
• Improving overall ease of doing business in Cambodia requires governmental commitments to reducing regulatory burden.
• Improving access to and encouraging the online business registration is needed to shorten the process, procedures, cost, and time of business registration.
• Launching one-stop shops, both online and physical, can be an effective strategy for improving business registration governance and efficiency in doing business in Cambodia.

Introduction

Enhancing governance of economic institutions is key to social and economic development. To an extent, business climate governance can be reflected partly in regulatory enforcement and is as relevant as modern public policy governance. In Cambodia, business and investment climates have improved in the past decade, yet the process of registering and starting up a business involves more steps, time, and money than probably necessary. If Cambodia aspires to be an attractive economy where domestic and foreign businesses can easily formalise, the country may need to minimise the steps and procedures, simplify business registration, and make formalisation attractive. For domestic entrepreneurs, existing complications in procedural requirements for setting up a legal business entity, many tax obligations, and obscurity that involves unofficial payments have prevented them from formalising their businesses.

For foreign investors, Cambodia’s attractiveness as an investment destination includes its liberal economic system and sustained growth rates. Since its adoption of an open and liberal trade and investment regime, Cambodia has provided attractive incentives to foreign direct investment, such as 100 percent foreign ownership of companies, corporate tax holidays of up to eight years, a 20 percent corporate tax rate after the incentive period ends, duty-free import of capital goods, and no restrictions on capital repatriation. Given these incentives, FDI inflows have increased dramatically. Cambodia’s average annual economic growth has been impressive, growing slightly above 7 percent. GDP per capita in 2018 was USD 1,230, compared to USD 670 in 2008. Since 2016, Cambodia has become a lower middle-income country, with a gross national income per capita of USD 1,140 in 2016.

Despite this progress, the overall outlook for improvement in doing business has been affected by numerous challenges, including bureaucracy in business license application, inconsistency in policy coordination, and weak regulatory enforcement, among other issues. What does Cambodia need to do to reduce regulatory burdens for business registration and make the starting up of a business simpler and more attractive? It does not appear to cost the government to lower barriers for the business start-up process. In contrast, reducing barriers whilst minimising the regulatory burden for business entrepreneurs will expand the formal economy and revenue collection for the government from registered business enterprises.

Ease of Doing Business in Cambodia

In the World Bank’s Doing Business report, Cambodia made dealing with construction permits less costly by reducing the fees of obtaining a building permit in 2019. However, its 2019 score increased by 2.37 percentage points over 2018. In 2019, the overall Doing Business score will increase by 0.41 percentage points over the 2018 score, while the score for starting a business will increase by 0.89 percentage points. Cambodia is ranked 138 among 190 economies by ease of doing business, a deterioration from the rank of 135 in 2017, according to the latest World Bank annual ratings. The Ease of Doing Business score in Cambodia averaged 136.09 from 2008 until 2018, reaching an all-time lowest ranking of 145 in 2009 and a record highest ranking of 128 in 2015.
To assess the status of Cambodia’s positioning in the global rankings on ease of doing business, Table 2 provides important indices. The ranking of economies on the ease of starting a business is determined by totalling the scores for starting a business. These scores are the simple average of the scores for each of the component indicators.

Benefits of Improving Doing Business in Cambodia

Cambodia’s overall poor business environment limits entrepreneurial opportunity. There is evidence that streamlining and enhancing regulatory procedures can encourage business entry, business growth, job creation, and national economy improvement. Improving the conditions for business registration and making it user-friendly may prevent the economy and private sector from reaping the benefits of business formalisation. Registered companies benefit from the legal and financial services provided by courts and commercial banks, services not available to unregistered businesses. Their employees take advantage of social security protections. Moreover, as more businesses register, the tax base expands, which enables the government to mobilise greater revenues to spend on the development of social, economic, and environmental policy objectives, such as the energy sector and sustainable urban development. A lot of empirical research explores the links between business entry regulation and social and economic outcomes. Evidence suggests that regulatory reforms that make it easier to start a formal business are associated with increasing numbers of newly registered firms and higher levels of employment and productivity. Formalisation allows entrepreneurs and employees to access the legal and financial services available to registered companies, including obtaining loans and social security benefits.

Starting Up a Business in Cambodia

As illustrated in the Appendix on official requirements for business registration, the process of registering a business in Cambodia takes at least three months. While cost is a factor, procedural requirements and the official paid-in minimum capital requirement prevent, or at least discourage, formal business entry into the economy. Until a business entrepreneur has completed his or her business registration process, the government is not eligible to collect any income tax or business tax. This process is tedious, burdensome, and costly. The specific requirements (in Appendix) appear to overwhelm entrepreneurs, particularly in small and medium enterprises.

The World Bank’s Doing Business report records all procedures officially required, or commonly required in practice, for an entrepreneur to start up and formally operate an industrial or commercial business, as well as the time and cost to complete these procedures and the paid-in minimum capital requirement (figure 3).^[ii] These procedures include the processes business investors are required to meet when obtaining approvals, licenses, permits, and completing notifications, verifications or inscriptions for the company and employees with relevant authorities.

In terms of the process of starting a business in Cambodia, Cambodia scores lowest in ASEAN (Figure 4). However, these low rankings do not correspond to the Royal Government of Cambodia’s (RGC) efforts to improve the regulatory frameworks that support institutional development and maintain macroeconomic stability. In recent years, while enforcing Cambodia’s tax laws, there have been accusations of greater scrutiny on foreign, rather than domestic, investment by employing audits and imposing large tax obligations for political purposes. Nonetheless, the RGC has repeatedly denied the accusation, saying that Cambodia has been enhancing its regulatory governance. All these recent developments may worsen the doing business ranking in the coming years, unless the RGC reduces regulatory burden on starting a business, improves the registration process, and makes it less costly.

Constraints to the Formalisation of Informal Sectors
Cambodia ranks 135 out of 190 countries in the World Bank’s Doing Business rankings. A poor business environment has the overall effect of hampering the creation and growth of enterprises. Competition from the informal sector came out as the top business environment constraint in the 2016 World Bank Enterprise Survey of Cambodia, where 28 percent of respondent firms reported that the biggest obstacle for enterprises was informality. Informal sector competition thus poses a major challenge to enterprises that choose to register their businesses. The significance of the informal sector helps explain why Cambodia has a low rate of enterprise entry. While new enterprise formation is not directly associated with an increase in the number of large formal enterprises in the economy, increasing the entry rate by simplifying business registration can make an important contribution to the economy.
There is evidence that business enterprises in Cambodia continue to face many constraints. Below are commonly known issues:

• Regulatory burden. Registering a business remains time-consuming and costly. Official registration of a business takes 99 days on average in Cambodia, resulting in non-registration of businesses, informality, and tax avoidance.
• Paid-in minimum capital requirement. Paid-in minimum capital requirement has restricted small business start-ups from formal business entry as it discourages those with little capital or are not able to secure capital funding through loans and other credits.
• Tax obligations. A threat preventing Small and Medium Enterprises (SMEs) from registering formally is tax obligations and bureaucracy in registration, including a lack of understanding about procedures for obtaining a patent tax certificate and the various types of payments. Doing Business 2018 indicates that there are 40 tax payments per year for a private company in Cambodia, compared to only 21.8 on average for the East Asian and Pacific region. This explains why the doing business score and corresponding ranking for Cambodia is among the lowest in the region.
• Credit and financial access. Many local enterprises choose to remain in the informal sector to avoid taxes and regulations or simply as the “path of least resistance” in a system that does not offer strong incentives to formalise. Credit supplied by the informal sector and underground financial lenders contain higher risks and are generally associated with high shadow prices. Microenterprises and SMEs are in general constrained by access to finance from formal banking institutions, due to the formality of obtaining loans and interest rates. In recent years, the RGC has attempted to create SME banks that aims to facilitate loans to microenterprises and SMEs that require capital funding for their business operations.
• Digital literacy and adoption of digital technology. The need to promote online business registration is challenged by limited access to digital technology and limited knowledge of online business registration. The government will need to put a lot of effort into promoting online business registration by upgrading the digital literacy of state institutions governing and administering the online business registration of micro enterprises and SMEs.

Options for Improving Business Registration and Operations

The following options can help improve business registration governance in Cambodia.

• Removing barriers and obstacles to entry when starting a business is key to improving the business climate. Burdensome and costly regulatory requirements prevent unregistered businesses from entering the formal economy.
• Reducing the number of procedures, time, cost, or paid-in minimum capital requirement associated with the business start-up process could ease business entry.
• Simplifying and shortening registration formalities or abolishing unnecessary procedural and legal requirements from state agencies and authorities are crucial. For example, some unnecessary procedures can be improved by eliminating the need to obtain a company seal and general business license.
• Reducing or eliminating the paid-in minimum capital requirement will spur entrepreneurship and business development.
• Creating or improving one-stop shops and simplifying registration processes will reduce the cost and time taken to register a business. In addition, the digitalisation of business registration will expedite the process. For example, Cambodia has adopted one-stop shops to attract and facilitate foreign investment in Special Economic Zones (SEZs) and to provide investors with ready access to land, infrastructure, and services to facilitate the set-up and operation of businesses. Services provided include utilities, tax services, customs facilitation, and other administrative services designed to support import-export processes.
• Using electronic services and digital platforms for business registration, tax payments, and legal claims is key to easing starting up a business. Online registration is useful for tracking tax obligations and for improving transparency and auditing processes. In January 2016, the Ministry of Commerce (MoC) of Cambodia launched an online business registration portal that allows all existing and new businesses to register their companies. The portal is available on MoC’s website and provides details on the types of business registration documents required.