In Myanmar, as in many nations with developing economies, tax evasion and illegal border trade is rampant. Such practises have essentially become institutionalised through the almost complete lack of enforcement of existing tax laws and the failure to punish those who have clearly avoided or evaded paying the proper amount of tax. In practise, income is often not reported or is well underreported. In the case of rental income, for instance, a practise has developed whereby two contracts will be drawn up, but the income received under only one will be reported to the tax authorities.
In an effort to curb the abuse of the tax system and increase tax revenues, the Pyindaungsu Hluttaw recently drafted a Union Tax Law, which was set to go into effect as of the 1st of April. In large part, the new law is simply a codification of regime that had previously been implemented through ministerial notification, but there are some changes to be aware of.
The published draft generally does not substantially depart from the current income tax rates. Under the draft, salary income tax rates remain at: one to 20 percent for resident individuals; 35 percent for non resident foreigners; 25 percent for resident companies; and 30 percent for undisclosed income. “Other income” will be taxed at two to 30 percent, but the rates governing professionals and income from property have not been clearly provided for yet.
The current tax exemptions and deductible allowances for resident individuals have largely been preserved, as well. The deductions from income when a taxpayer has a spouse and/or children were maintained at the current levels of 300,000 kyat for a spouse and 200,000 kyat for each dependent child. However, the monthly threshold requiring the payment of income tax has risen from 120,000 kyat to 160,000 kyat – i.e. low wage earners do not need to pay any income tax.
An additional “income tax” of ten percent will now be levied against “income used for buying, construction and taking possession” of capital assets (including shares of a company). This will be chargeable to the buyer for spending rather than earning income, meaning honest tax payers may end up paying tax on their income twice. This is a major departure and is generally a very unique provision. As mentioned, tax evasion has been a major issue that Myanmar has struggled to curb, so this is a way for the tax authorities to get another bite at the apple, as it were. As for the seller, the Union Tax Law retains the capital gains tax rates of ten percent for residents, 40 percent for non residents and 45 to 50 percent for those engaged in the oil and gas industry.
In addition, the draft 2014 Union Tax Law retains major aspects of the current Commercial Tax (CT) regime. The CT rate remains generally at five percent, but the scope of CT on services has expanded considerably.
Under existing law, only 14 types of services are covered by the CT Law. The new tax law now states that all services are subject to CT, except as may be provided for by the Ministry of Finance. We understand this to mean that all types of services, unless specifically exempted, will be subject to CT moving forward. Service providers that have, or anticipate having, annual revenues in excess of ten million kyat (approximately US$10,000) will have to charge CT on their invoiced amounts. If a service provider has annual income below ten million kyat, there is no need to charge CT.
The regular rate of five percent CT will also apply to importers and sellers of goods whose annual revenue exceeds ten million kyat. There is a slight reduction in the number of goods on which CT is levied, although there are fewer goods subject to the higher rates of eight percent to 100 percent.
The idea of broadening the tax base is a wise one, however, many more changes are needed. Enforcement by tax officials and voluntary compliance by individuals must improve. The government recently released a list of more than 10,000 businesses said to be evading taxes. This “public shaming” may push some businesses to comply with the tax laws moving forward but, with tax evasion so engrained in the collective mind of Myanmar citizens, more may need to be done, as well. Education is the key, both of the tax officials and the tax payers.
The approved bill is still subject to signature or veto by the President, but it is anticipated that he will sign it into law later this month.