Special Depreciation

Lesson Summary-Special Depreciation for Fixed Asset under Cambodia Tax

• -If a company is granted Qualified Investment Project (QIP), so company has two options for Cambodia Tax.
• -For first tax option, Company can elect tax on profit/income exemption ( tax holiday), but tax depreciation rate is applied normal rate ( 20% for fixed asset class 4).
• -For second tax option,Company can elect special depreciation ( not to use tax holiday).
• -Special depreciation rate of tangible asset (normally fixed asset class 4) is 40% in the first year of purchase or the first year the assets are used. Special depreciation only is applied to assets used in manufacturing and processing, but claw-back provision exists for asset held for less than four years.
• -For first year of applied special depreciation,  fixed assets will be depreciated with two depreciation rates: special depreciation rate (40%) and normal depreciation rate (20% Fixed asset class 4), but second year onward, depreciation applied only one normal depreciation rate (20%).
• -Special depreciation applies only to tangible fixed assets used in “manufacturing and processing ” and these fixed assets must be held for a minimum of four years, otherwise Qualified Investment Project (QIP) will be required to add back a portion of the depreciation expense.

The following depreciation formulas are class 4 fixed assets.

Year 1 for applied special depreciation:

• -Special depreciation = cost of fixed assets x 40%
• -Normal depreciation =( cost of fixed assets – special depreciation ) x 20%
• -Total Depreciation for Y1 (year 1) = special depreciation + general depreciation

NBV1 (net book value Year 1) = cost of fixed asset – special depreciation – normal depreciation

Year 2 for depreciation expense:

Depreciation Expense (Y2) = NBV1 x 20%

From second year onward, no special depreciation is applied anymore.




Example 1

Assume ABC Factory is granted Qualified Investment Project (QIP) by the Council for the Development of Cambodia (CDC).

Company bought machinery of $1,000,000 on 20 April 2019.

Required:

Assume ABC company has elected special depreciation ( not to use tax holiday), and company will pay tax on income. You are required to calculate depreciation for year 1, 2 and 3.

Answer

Year 1 for depreciation:

• -Special depreciation = cost of fixed assets x 40%=$1,000,000 x 40%=$400,000.
• -Normal depreciation =( cost of fixed assets – special depreciation ) x 20%=(1,000,000-400,000) x 20%=$60,000

Total Depreciation for Y1 (year 1) = special depreciation + general depreciation=$400,000+$60,000=$460,000.

NBV1 (net book value Year 1) = cost of fixed asset – special depreciation – normal depreciation =1,000,0000-400,000-60,000=540,000

Year 2 for depreciation expense:

Depreciation Expense (Y2) = NBV1 x 20%=540,000 x 20%=$108,000

NBV(Y2)=NBV(Y1)-Depreciation Expense (Y2)=540,000-108,000=$432,000

Year 3 for depreciation expense:

Depreciation Expense (Y3) = NBV2 x 20%=$432,000 x 20%=$86,400