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Hot Tax and Investment Issues when Structuring Investment into
Myanmar
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At a Glance
Southeast Asia’s first full service international law firm with a major specialization in taxation
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Myanmar
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Contents
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The forms of business for foreign investment in Myanmar are:‐ Foreign-owned company (in the form of an LLC, sole proprietorship,
partnership)‐ Joint venture‐ Branch The most common forms for foreign investors are an LLC or
branch A resident company is a company as defined and formed under
the Myanmar Companies Act of 1913 or any other existing law of Myanmar (i.e. the Myanmar Foreign Investment Law)
A branch is a non-resident
Forms of Entity for Foreign Investment / Residency
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DICADirectorate of Investment &
Company Administration
Company set up for locally owned or foreign-owned companies and branches
Investment Licensing
MICMyanmar Investment Commission
List:‐Agriculture‐Livestock and Fishery‐Forestry‐Mining‐Industry‐Construction‐Transport‐Road transport and repair services‐Hotels and tourist industries
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Tax Incentives (MIC Permit)
Incentive
Mandatory:3 Year Income Tax ExemptionDiscretionary:Extension of Income Tax Exemption
Income Tax Exemption for Reinvested Funds
Accelerated Depreciation
Export Income Tax Relief
Right to Pay Foreign Employee Income Tax
Deduction for R&D Expenses
Loss Carry forward
Customs Duty Exemption
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25% CIT for Myanmar companies, foreign-owned resident companies, joint ventures and non-resident foreign companies engaged in special State sponsored projects
35% CIT for branches, except if granted an Investment Permit by the Myanmar Investment Commission (25% CIT)
Tax exemption under the Foreign Investment Law (FIL): 3 years; expected to be extended to 5 years under the new FIL (not 8 years, as was incorrectly reported)
Losses may be carried forward for 3 consecutive years following the end of the exemption period
Corporate Income Tax Features
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Notes:Rates amended effective 26 August 2011 (Notification 167/2011)Tax is triggered by receipt of payment or accrual WHT on payments to residents in not a final tax, but tax on payments to non-residents is a final tax
Withholding Taxes
Payment type Paid to Residents Paid to Non-Residents
Dividends 0% 0%
Interest 0% 15%
Royalties 15% 20%
Procurement of goods(excluding imported goods)
2% 3.5%
Services (performed in Myanmar or abroad)
2% 3.5%
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Was significantly amended in 2012 ‐ Old: 6 rates (exempt, 5%, 10%, 20%, 25% and 30%-200%)‐ New: exempt, 5% or 8%-100%
Schedule 1: 70 types of goods‐ Domestic production or domestic sales are exempt‐ Importation subject to CT at 5%
Schedule 6: Specific goods ‐ Including alcohol, fuel and cigarettes‐ CT applies for both importation and domestic sales
Schedules 2, 3, 4, 5 and 7 now at 5% including 14 types of services‐ Including hotel, restaurant, transport, entertainment, trading services,
tourism, insurance (except life), broker, advertising/movie distribution and agent/accounting/legal services
Commercial Tax
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Threshold for operators to apply CT was introduced this year Credit system
‐ Yes, but not for all operators (depends on activity) ‐ Recent update: credit possible for downstream petroleum products
(Notification 323/2012) Exemptions for agriculture sector (Notification 288/2012) Special Economic Zones
Commercial Tax
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• Foreigners who reside in Myanmar for 182 days or more during the financial year are considered as resident foreigners.
• Previously, resident foreigners were taxed at a flat rate of 15%.
• From 1 April 2012, progressive rates of 1% to 20% now apply to both resident foreigners and resident Myanmar citizens.
• In addition, an expatriate working for a foreign-owned company incorporated under the FIL is deemed to be a tax resident of Myanmar, regardless of period.
• Non-residents are taxed at a flat rate of 35%, except under certain circumstances.
Personal Income Tax
Myanmar Income Tax Rates on Salary
Residents and Citizens
Non-Residents
1%-20% 35%
Progressive rate, allowances
Flat rate
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Double Taxation Agreements‐ Bangladesh (signed, but not in force)‐ India (in force)‐ Indonesia (signed, but not in force)‐ Korea (in force)‐ Malaysia (in force)‐ Singapore (in force)‐ Thailand (in force)‐ United Kingdom (in force)‐ Vietnam (in force)‐ Laos (signed, but not yet in force) Note: negotiations in process with 4
more countries
Treaties and Agreements
Bilateral Investment Treaties concluded
‐ China‐ Philippines‐ Laos‐ Thailand‐ China‐ India‐ Kuwait ASEAN Comprehensive
Investment Agreement (ACIA)‐ Member states: Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam
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Withholding Tax and Capital Gains
Myanmar Tax RatesNon-residents
Dividends 0%
Gains40%(oil/gas 40-45-50%)
Interest 15%
Royalties 20%
Services/ goods 3.5%
DTA with Thailand
Dividends 10% Gains on shares: Myanmar may tax if (1) participation is at least 35% or (2) company consists principally of immovable property
Interest 10%
Royalties 5-10-15%
Service10%
(deemed as royalty)
DTA with Korea
Dividends 10% Gains on shares: Myanmar may tax if (1) participation is at least 35% or (2) company consists principally of immovable property
Interest 10%
Royalties 10%
ServicePE if > 6 months
DTA with Singapore
Dividends 5-10% Gains on shares: Myanmar may tax if (1) participation is at least 35% and the alienated shares amount to at least 20% of the holding or (2) company consists principally of immovable property
Rate reduced to 10%
Interest 8% - banks; 10% -others
Royalties 10-15%
ServicePE if > 6
months, no general WHT
DTAs in force at 1 August 2012
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Withholding Tax and Capital Gains
Myanmar Tax RatesNon-residents
Dividends 0%
Gains40%(oil/gas 40-45-50%)
Interest 15%
Royalties 20%
Services/ goods 3.5%
DTA with Vietnam
Dividends 10%Gains on shares: Myanmar may tax
Interest 10%
Royalties 10%
Service 10%
DTA with Malaysia
Dividends 10% Gains on shares: Myanmar may tax if (1) participation is at least 35% or (2) company consists principally of immovable property
Interest 10%
Royalties 10%
Service 10%
DTA with UK
Dividends 0%
No article on capital gains
Interest No DTA article
Royalties 0%
Service No DTA article
DTA with India
Dividends 5%
Gains on shares: Myanmar may tax
Interest 10%
Royalties 10%
Service
10% (deemed
as royalty)
DTAs in force at 1 August 2012
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Capital Gains on Myanmar Shares and Oil & Gas Interests
Tax on Capital GainsResidents 10%
Non-residents 40%
Oil & gas sector ‐ 40% for gains up to US$100M;
‐ 45% for gains between US$100M and US$150M; and
‐ 50% for gains above US$150M
Income Tax LawCapital assets include
Assets of an enterprise
Land
Shares
Compliance: tax return is due within 1 month following execution of the transfer or the date of delivery of the asset, whichever is earlier.
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Myanmar-Singapore DTA Article 13: Capital Gains1.Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.2.Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State.3.Gains from the alienation of ships or aircraft operated in international traffic, boats engaged in inland, waterways transport of movable property pertaining to the operation of such ships, aircraft or boats shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
Capital Gains on Myanmar Shares and Oil & Gas InterestsTaxing right under the DTAs?
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4. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State.
5. Gains from the alienation of shares of a company other than those mentioned in paragraph 4 may be taxed in the Contracting State of which the company is a resident but only if:
6. The shares held or owned, directly of indirectly, by the alienator amount to at least 35 percent of the entire share capital of such company at any time during the fiscal year in which alienation takes places: and
7. The total of the shares alienated by the alienator during the fiscal year in which the alienation takes places amounts to at least 20 percent of the aggregate of his holding in the share capital of such company at the beginning of such fiscal year and any acquisition of the shares in that year.
Capital Gains on Myanmar Shares and Oil & Gas InterestsTaxing right under the DTAs?
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6. The tax on the gains from the alienation of property referred to in paragraphs 1,2,4 and 5 shall not exceed 10 percent of such gains.
7. Gains from the alienation of any property other than that referred to in paragraphs 1,2,3,4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.
8. Notwithstanding the provisions of the preceding paragraphs, gains derived by the government of a Contracting State from the alienation of property referred to in paragraphs 1,2,4 and 5 shall be exempt from tax in the other Contracting State. The term “Government” shall have the same meaning as provided in paragraphs 4 of Article 11.
Capital Gains on Myanmar Shares and Oil & Gas InterestsTaxing right under the DTAs?
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Capital Gains on Myanmar Shares and Oil & Gas Interests
Myanmar-Singapore DTA Article 13(6):The tax on the gains from the alienation of property referred to in paragraphs 1,2,4 and 5 shall not exceed 10 % of such gains.
MOGE Singapore Holding Co
PSCPSCSingapore SPV
100%
Interest in PSC
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Capital Gains on Myanmar Shares and Oil & Gas Interests
- Cap. gain 40/45/50%- Includes non-residents
Oil & GasMyanmar Income
Tax Law
- Tax rate?- Refers to Myanmar Income tax law- Calculation of gain?- Impact of recovery petroleum?
Oil & GasPSC & Side letter
MOGE
Oil Companies Shareholders
of SPV
SPVPSCPSC
BLOCKMyanmar DTAs
Article 6 & 13(1) Article 5 Article 13(4) Article 13(5)
Is a block “immovable property”?
Does holding rights to a block trigger a PE?
Is disposal of an interest in a block equivalent to disposal of a PE?
Is a company that holds an interest in a block principally holding “immovable property”?
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Holding Structures for Investment in Myanmar:Labuan vs. Singapore
Malaysia (Labuan)‐ DTA with Myanmar: cap gains
taxed at 0-40%‐ 0%: alienated shares > 35%
and not principally holding immovable property
‐ 40%: others‐ Malaysia does not tax capital
gains‐ Labuan taxes by means of a
fixed fee or at 3% rate
Singapore‐ DTA with Myanmar: cap gains
taxed at 0-10%‐ 0%: alienated shares > 20%
and participation held > 35% and not principally holding immovable property
‐ 10%: others‐ Singapore does not tax capital
gains (but some short term gains may be deemed profit)
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Example: Tax Efficient Holding Structure
Key points of attention:Obtain a “Certificate of Residence” from Singapore IRAS, which may depend on substance and shareholdingMyanmar dividends not taxed in hands of Singapore Co (“tax sparing”)Stamp dutyObtain approval from Myanmar IRD (CCTO) for application of DTA
Cayman Co
100%
Singapore Holding Co
Myanmar Foreign Invested
Company
In case of divesting Singapore Holding Co: no tax in Singapore
DividendNo WHT
100%
PROJECT
In case of divesting Myanmar Co: cap. gain at 10%
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Financing Structures: Case Study
Financing Structure A:SPV lends directly to Project CoMyanmar WHT = 15% on interest
Fund LLP Cayman
Cayman SPV
Project Co, LLCMyanmar
100%
HOSPITALITY PROJECT
LoanCapital 100%
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Financing Structures: Case Study
Financing Structure B:SPV provides cash pledge to Singapore BankBank provides back-to-back loan to Project CoMyanmar WHT = 8% on interestAcceptable to Myanmar tax authorities?
Fund LLP Cayman
PledgeCayman SPV
Project Co, LLCMyanmar
Loan
100%
HOSPITALITY PROJECT
Singapore Bank
LoanCapital 100%
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Profit Extraction
Shareholders
Holding Company
Myanmar Project Co
(foreign invested LLC)
Dividend
Corporate Income Tax‐ 25% tax rate (35% for branch)‐ 3/5 year tax holiday‐ Reinvestment reserve
‐ 50% reduction on export profits‐ Accelerated depreciation possible
Dividend Distribution‐ No withholding tax‐ Approvals for dividend needed‐ Foreign exchange issues
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Alternative Structures to Repatriate Income
Corporate Income Tax‐ 25% tax rate (35% for branch)‐ 3/5 year tax holiday‐ Reinvestment reserve
‐ 50% reduction on export profits‐ Accelerated depreciation possible
Dividend Distribution‐ No withholding tax‐ Approvals for dividend needed‐ Foreign exchange issues
Shareholders
Holding and Procurement
Company
Myanmar Project Co
(foreign invested LLC)
Purchase price for supplier and dividend
100%Supplier
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Income Derived from Myanmar No presence in Myanmar
3 Questions?‐ Permanent Establishment ‐ Withholding Tax‐ Personal Income Tax
Malaysia Singapore Thailand
Myanmar WHT on Payments to Non-Resident Foreign Companies
Services performed in Myanmar
3.5%
Services performed outside Myanmar
3.5%
Goods (excluding imports) 3.5%
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Permanent Establishment Malaysia Singapore Thailand
From Art. 5 (2) “A PE shall include especially […] a drilling rig, ship or aircraft used for exploration or exploitation of natural resources”
“A PE shall include especially […] an installation, structure, drilling rig or ship used for the exploration or exploitation of natural resources but only if such exploration or exploitation is not preliminary or preparatory in nature”
“A PE shall include especially […] drilling rig, ship or aircraft used solely for exploration or exploitation of natural resources (and not specifically for the purposes of international traffic as referred to in Article 8)”
Art. 5 (3) (b) Myanmar-Singapore
- “The term "permanent establishment" likewise encompasses: […] (b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any 12-month period.”
-
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Withholding Tax
Malaysia [Art. 13 on Technical Fees]
Singapore Thailand
[In royalty article]
“Technical fees derived from one of the Contracting States by a resident of the other Contracting State who is the beneficial owner thereof and is subject to tax in that other State in respect thereof may be taxed in the first-mentioned Contracting State at a rate not exceeding 10 per cent of the gross amount of the technical fees. The term "technical fees" as used in this Article means payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any services of a technical, managerial or consultancy nature.“
- “10 per cent of the gross amount of the royalties for the consideration for any service of a managerial or consultancy nature”
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