Cambodia Faces Economic Turbulence Amid US Trade Pressure and Tax Reforms

Phnom Penh – Cambodia, long seen as a promising frontier for foreign investment in Southeast Asia, is grappling with mounting challenges as US trade policies tighten and tax compliance emerges as a critical concern for businesses. Industry leaders and officials, speaking at a recent forum in the capital, warned that the Kingdom’s economic landscape is shifting rapidly, with global pressures and domestic reforms reshaping the environment for investors.

US Tariffs Cast a Shadow Over Exports

One of the most pressing issues facing Cambodia is a staggering 3,500% tariff imposed by the United States on certain Cambodian solar panel exports. Casey Barnett, president of the American Chamber of Commerce in Cambodia (AmCham), described the tariff as a troubling signal for the future of Cambodian exports to the US market. Speaking at the UK-Cambodia Joint Trade & Investment Forum Deep Dive Series on April 29, 2025, hosted by BritCham Cambodia and the British Embassy, Barnett cautioned that this move by the US Department of Commerce indicates a hardline stance.

“This 3,500% tariff is a bad sign for the future of Cambodian exports to the US” said Barnett. He added that Cambodia, lacking significant leverage as a market for American goods, should brace for potentially higher tariffs compared to other nations. The underlying tension stems from US allegations that Cambodia serves as a conduit for Chinese goods to bypass American tariffs—an accusation that both Barnett and Cambodian authorities have firmly rejected.

Seng Cheaseth, director of the Department of Law, Tax Policy, and International Tax Cooperation at Cambodia’s General Department of Taxation (GDT), defended the country’s trade practices. “We do not discriminate between US, Chinese, or any other companies” he stated, emphasizing that Cambodia offers uniform incentives and public safety systems to all sectors. However, he did not shy away from criticizing US trade tactics, alleging that the World Trade Organization (WTO) is unable to mediate fairly due to fear of US retaliation. “No judges at the WTO dare to go against the US because they’ll freeze your assets from entering the country” he said.

The economic ramifications of such tariffs could be profound. Cambodia’s export-driven sectors, particularly in manufacturing and renewable energy components like solar panels, have been key drivers of growth. A sustained US crackdown risks undermining investor confidence and could deter future trade partnerships, especially as the Kingdom seeks to position itself as a hub for advanced manufacturing with investments from global giants like BYD, Toyota, and Ford.

Tax Compliance: A Make-or-Break Issue

Beyond trade tensions, tax compliance has emerged as a pivotal concern for businesses operating in Cambodia. Barnett highlighted the high stakes of navigating the Kingdom’s tax regulations, warning that misunderstandings or negligence can lead to severe financial penalties. “Companies may start out on the wrong foot, misunderstand the tax regulations or even be dismissive of the consequences” he said, noting that a 1.5% monthly penalty on reassessments can accumulate rapidly over time.

The Cambodian government, aware of these challenges, is taking steps to streamline its tax environment. A notable initiative is the establishment of the Special Tax Audit Unit (STAU) under the GDT, tasked with overseeing audits for foreign investors and taxpayers. Seng Cheaseth explained that the unit, staffed by experts from Cambodia’s enterprise and technology sectors, aims to ensure a single, standardized audit process for eligible companies. “The new system guarantees that eligible companies will undergo a single, standardized audit—preventing confusion and undue complexity” he said.

James Roberts, head of advisory at KPMG Cambodia, underscored the significance of this development. “The law introduces a separate audit process for international companies that meet compliance standards, ensuring they are treated with utmost transparency and fairness” he noted. This move is seen as a step toward aligning Cambodia’s tax practices with international norms, a critical factor as global tax reforms—such as the OECD’s Pillar 2 rules under the Global Anti-Base Erosion Model—reshape the landscape for multinational corporations.

Foreign investors have responded positively to these efforts. Steven Solomon, partner and head of M&A Tax Deal Advisory at KPMG in Vietnam and Cambodia, praised Cambodia’s focus on fair tax treatment over mere incentives. “Most countries focus on offering tax incentives, but Cambodia is prioritizing fair tax treatment, which is just as critical for investors” he observed. This approach, if sustained, could differentiate Cambodia from regional competitors vying for foreign capital.

Global Reforms and Domestic Ambitions

The broader context of global tax reforms adds another layer of complexity for investors in Cambodia. The OECD’s Pillar 2 rules, designed to curb profit shifting by multinational corporations, are prompting countries worldwide to reassess their tax incentive structures. For Cambodia, which has historically relied on generous incentives to attract foreign direct investment, adapting to these rules could mean a significant policy shift. Barnett noted that the GDT’s adoption of a risk-based approach to audits is a positive step, but he cautioned that uncertainty remains the “new reality” amid ongoing US negotiations and global reforms.

At the same time, Cambodia is pushing forward with ambitious economic goals under its Vision 2050 framework, which aims to transform the country into a high-income economy by mid-century. Seng Cheaseth highlighted the government’s focus on attracting advanced manufacturing and technology investments. “We want the technologies here” he said, pointing to recent commitments from major automakers as evidence of Cambodia’s potential. These investments, if paired with transparent tax policies, could bolster the Kingdom’s industrial base and create jobs, though the path forward is fraught with challenges.

Navigating an Uncertain Future

Cambodia’s appeal as an investment destination remains undeniable, with a growing market and relatively low competition still drawing interest from abroad. However, the dual pressures of US trade policies and the need for stringent tax compliance are testing the resilience of this appeal. For businesses, the message is clear: success in Cambodia now hinges on meticulous adherence to local regulations and a readiness to adapt to an evolving global economic order.

The government’s proactive measures, such as the creation of the STAU and efforts to attract high-tech industries, signal a commitment to fostering a stable and transparent business environment. Yet, as Barnett warned, the road ahead is likely to be bumpy. The specter of escalating US tariffs looms large, and if perceptions of Cambodia as a transit point for Chinese goods persist, the economic fallout could intensify.

For now, stakeholders are watching closely as Cambodia navigates these turbulent waters. The Kingdom’s ability to balance domestic reforms with international pressures will be crucial in determining whether it can maintain its status as a rising star in Southeast Asia’s economic landscape. As trade negotiations unfold and tax systems evolve, one question lingers: can Cambodia turn these challenges into opportunities for sustainable growth?