Hot Tax and Investment Issues when Structuring Investment into Myanmar

Hot Tax and Investment Issues when Structuring Investment into

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


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


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.


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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.


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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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- 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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Hot Tax and Investment Issues when Structuring Investment into Myanmar