Bloomberg Tax
December 12, 2018, 12:25 PM UTC

INSIGHT: Myanmar—Impact of New Withholding Tax Regime

Jo Daniels
Jo Daniels
Baker McKenzie

Resident and nonresident taxpayers in Myanmar should be well-prepared for the new withholding tax regime.

A new withholding tax regime was introduced in Notification No. 47/2018 (“the new notification”) on June 18, 2018 by the Ministry of Planning and Finance. The new notification repeals the Notification No. 51/2017 and is effective from July 1, 2018.

A summary of the new withholding tax rates can be found here.

Interest Payment

In the repealed notification, an interest payment was defined broadly to include “interest payment for a loan or indebtedness or a transaction of similar nature or saving.” In the new notification, it has been trimmed to “interest payment.” It is unclear whether this change intends to narrow the definition by removing the broad words “transaction of a similar nature.” However, the withholding tax rate on interest payments remains.

Royalties

The withholding tax rate on royalties remains in the new notification.

Payments by Government

In the new notification, one new withholding tax has been added (paragraph (c) of the table) in relation to payments by government (i.e. union level organizations, union ministries, Nay Pyi Taw council, regional or state government, state-owned enterprises, municipal organizations), for the purchase of goods, work performed or the supply of services within the country under a tender, contract, quotation or other modes. These payments are now subject to withholding tax of 2 percent, and 2.5 percent for recipients who are residents or nonresidents respectively.

In payment to residents by the government, the new notification provides a small no withholding tax threshold on payments up to 1 million kyat ($637) per annum. In addition, there is no withholding tax for payments made between the government organizations.

Withholding Tax for Businesses

The new notification includes a new exemption that no withholding tax is applicable to the payments made by businesses domestically. Formerly, these payments were subject to withholding tax of 2 percent. Given that domestic payments between residents under paragraph (d) are no longer subject to the 2 percent withholding tax starting from July 1, 2018, along with the above exemption, the withholding threshold has been abolished.

However, the payments made to nonresidents are still subject to the withholding tax of 2.5 percent and no withholding threshold applies.

Interestingly, the new notification removes withholding tax on “hiring.”

Avoidance of Double Taxation Treaty

This remains the same under the new notification and no changes have been made. To enjoy tax exemption or relief on the withholding tax payment, the applicant needs to prove that they are a tax resident of the treaty partner, and a certificate of residency must be presented.

Legal Duty

The payer has the legal duty to withhold tax on the payment in accordance with this notification, regardless of whether the recipient has agreed to withhold or not. The deduction must be made in the name of the recipient, and the withholding tax paid in the name of the recipient to the relevant Internal Revenue Department. Therefore, the parties need to make clear whether the price to be paid is inclusive or exclusive of withholding tax, and other taxes such as commercial tax.

Power of Internal Revenue Department

The new notification specifically states that, with the approval of the Ministry of Planning and Finance and the Union Government, the Director General of the Internal Revenue Department may:

(a) grant withholding tax exemption if necessary;

(b) amend the withholding tax rate depending on the nature of the business;

(c) issue the withholding tax procedures, the required definitions and forms;

(d) determine the method of deducting withholding tax and tax payment separately depending on the nature of the business if necessary;

(e) notify the person who is responsible for withholding tax not to withhold tax so that no taxes are paid repeatedly on one transaction and for recipients who have been granted income tax exemption; and

(f) delegate the power mentioned in item (d) above to the Head of Large Taxpayers’ Office and Medium Taxpayers’ Office as well as the Head of the Region or State Revenue Department.

Item (c) is particularly welcome, as procedures would introduce a level of consistency and transparency as to how the individual tax offices should apply withholding tax. It is understood that exemptions or incentives are not available to nonresident foreigners at all. This may have the effect of providing tax incentives to transnational companies who formally incorporate in Myanmar under the new Companies Law 2017.

Planning Points

  • In respect of royalties, as there is a 5 percent difference to royalties for resident and nonresident receivers, in some structures a 100 percent onshore Brand Co may be suitable.
  • In some circumstances, the removal of the withholding tax on hiring may make the hiring of equipment more efficient than purchasing it outright, particularly for large mining and construction projects.
  • The changes may also play into the decision for companies entering Myanmar whether to establish as an incorporated subsidiary or an overseas corporation (this used to be known as a branch office). If incorporated locally then withholding tax is not payable on domestic goods and services. Similarly, overseas corporations are not going to be eligible for any tax exemptions. Although the withholding tax issue is not particularly significant (in that the withholding tax is paid but then offset against corporate income tax) the inability to obtain tax exemptions may become more important over time if general and specific exemptions are granted.

Jo Daniels is a Partner at Baker McKenzie, Myanmar

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