A panacea for the economy?

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There’s been a broadly positive response to the new Myanmar Investment Law, which levels the playing field between domestic and foreign investors and seeks the accelerated development of targeted areas and economic sectors.

THE LONG-AWAITED Myanmar Investment Law has received a generally positive response from the business community, which had been more critical of the legislation it replaced.

The new law, which replaces the Foreign Investment Law enacted in 2012 and the Myanmar Citizen Investment Law of 2013, was enacted by President U Htin Kyaw on October 18 and is expected to be implemented before the next fiscal year begins on April 1.

As well as combining elements of the laws it replaced, it also includes some new concepts, such as targeting areas and economic sectors for accelerated development.

There had been finger-pointing between domestic and foreign investors over the two previous laws, with each side accusing the other of having an unfair advantage.

Domestic investors enjoyed privileges not available to foreigners under the MCIL, while the FIL gave foreign investors a five-year income tax holiday.

One of the main changes of the MIL is that it levels the playing field between domestic and foreign investors. Tax breaks are equally available to both in the new law, under which the Myanmar Investment Commission will designate economic sectors to be promoted and areas to be prioritised for development. They are also no longer mandatory; instead, they will be awarded at the commission’s discretion based on the nature of the project.

The priority areas will be classified into one of three zones based on their development status. For example, there will be a maximum seven-year tax holiday for investing in the least developed Zone 1 areas, such as Chin State. Investment in developed Zone 3 areas, such as Yangon Region, will qualify for a three-year tax holiday. Investment in Zone 2 areas with in-between development will have a maximum five-year tax holiday. Domestic and foreign investors will enjoy access to the same tax holidays.

“I am not worried about foreigners and local investors having the same tax holidays – in fact I welcome it because it will bring an end to the finger pointing,” said U Myat Thin Aung, patron of the Hlaing Tharyar Industrial Zone Management Committee.

He welcomed another change in the new law. “Before, if a business was expanding it was not eligible for tax incentives because they were only granted to new ventures in new locations,” Myat Thin Aung told Frontier. “But I heard from the MIC that tax incentives will be granted under the new law regardless of whether a business is expanding at its original location or a new site; that’s good news.”

The geographic areas and economic sectors to be targeted for accelerated development will be determined by the MIC. The priority sectors would be infrastructure and labour-intensive industries, such as manufacturing and agriculture, said U Aung Naing Oo, the MIC secretary.

Poor infrastructure has contributed toward Myanmar having the highest logistics costs in the region, said U Khin Maung Lwin, assistant permanent secretary of the Ministry of Commerce. “It costs more to send a container across Yangon, from the Hlaing Tharyar Industrial Zone to the port at Thilawa, than it does to send one from Thilawa to Singapore,” he told Frontier.

The example highlights the challenge that investors in the underdeveloped Zone 1 areas will face. Aung Naing Oo said this should be seen as an opportunity to invest in infrastructure where it is needed.

Investors can also apply to enjoy other tax incentives under the new law. For example, they may be granted an income tax exemption if the profit from an MIC-approved project is re-invested in the same or similar business in the same year.

Imported raw materials that are used to create value-added products for export also qualify for a complete or proportional tax exemption.

As before, the law allows investors to lease government or private land for 50 years, with two extensions of 10 years permitted.

The new law has also streamlined the investment approval process by decentralising the role of the MIC. Investors no longer need to seek MIC permits for all projects, with those requiring permits limited to five categories. They are investments that are of strategic importance, are capital intensive, that have an impact on the public and the environment, involve the use of state-owned land or buildings, or are submitted to the MIC by the government.

Investments outside these five categories are divided into two types. Those where the investment total is above a certain level, which has not yet been defined, will be submitted to the respective regional government. Those below that amount need what is known as an MIC endorsement – a recommendation from the MIC. It appears that applications for an endorsement will be less rigorously scrutinised than those for a permit in restricted sectors.

U Than Aung Kyaw, the deputy director general of the Directorate of Investment and Company Administration, said only investments in the five categories would need an MIC permit. State or regiole to approve investments outside the five categories.

The MIC will soon issue notifications outlining in more detail what projects will fall under these five categories, as well as the level of capital investment that will trigger the need for regional government approval.

The new law also makes changes to clauses in the Foreign Investment Law which stipulated that investors must hire at least 25 percent of Myanmar workers within two years, 50 percent within four years and 75 percent within six years. The new law eliminates the requirement to hire a minimum number of Myanmar workers, but does place restrictions on the use of foreigners as unskilled labour and requires investors to undertake training of local workers.

Dr Soe Tun, the executive director of Myanmar Agribusiness Public Corporation, said the change would create a challenge for young Myanmar workers because they would find it difficult to compete against skilled labour from abroad.

“The government should spend money on skill development programs for young people. It is not proper to let [investors]take care of skills development themselves,” he said.

Outside the business community, some human rights groups have described the law as “disappointing”. In a recent blog post after the law was approved by parliament, Ms Kate Taylor, a legal fellow at EarthRights International, said the law paid only “lip service” to investors’ environmental and social responsibilities, and deprived residents of a voice when a project that will affect their community is being considered by MIC.

MIC is given broad discretionary powers, with little oversight, and there are no transparency requirements, Taylor wrote.

The enactment of the new legislation means that Myanmar has four investment-related laws, including the Foreign Investment Law of 1988. This is likely to be the case for many years, but will have little practical impact. New applications can only be made under the MIL, but according to section 93 those made under previous laws will continue to remain in effect until they expire.

The by-laws of the other three laws will also remain in force until by-laws are drafted and approved for the MIL, a process that Than Aung Kyaw said was expected to be completed before the next fiscal year begins on April 1, 2017.

There are also laws that will complement the MIL but are yet to be either enacted or amended, such as the new Companies Law and the Foreign Workers Law. However, MIC officials have given an assurance that all investment-related laws are expected to be ready by next fiscal year.

One of the most important provisions in the Myanmar Investment Law is Section 94, which states: “Notwithstanding anything contained in any other law, matters relating to any provision covered by this Law shall be carried out in accordance with this Law.”

Than Aung Kyaw said the provision is aimed at making clear that in any legal disputes or contradictions involving MIC-approved projects will be resolved according to the MIL.

“This is very important because it will eliminate confusion about which law to follow when disputes and contradictions occur,” he said.

An example of such a scenario was the government’s decision in July last year to cancel five big real estate developments on military-owned land near the Shwedagon Pagoda because of opposition from the public.

The projects, including the US$300 million Dagon City development on which work had begun, had been approved by the MIC. They were halted because of concerns the Dagon City project could destablise the pagoda’s foundations. An alternative site was found for the Dagon City project but the cancellation of the original development unnerved foreign investors.

Foreign direct investment has plunged this fiscal year amid investor uncertainty over the change of government and ahead of the enactment of the new law. Pledged FDI from April to September was US$1.4 billion, down from $3 billion in the first six months of the previous fiscal year, Aung Naing Oo told a news conference on October 10. “I think it is usual for this to happen when a new government comes in,” he said.

At a meeting in Nay Pyi Taw on October 21 with the country’s top taxpayers, Daw Aung San Suu Kyi admitted that economic growth in the six months since her government came to power had fallen below expectations.

The enactment of the new Myanmar Investment Law has brought new hope for the economy. Although it remains to be seen how much the law will benefit the economy and national development, most stakeholders are optimistic, though they recognise that challenges remain.

Ms Jo Daniels, managing partner at international law firm Baker & McKenzie, said potential investors considered the law a step forward, particularly the possibility of a more streamlined process to receive MIC approval for projects.

“The more targeted tax incentives are also generally considered a good improvement,” she said. “Investors will be very keen to see that the new process does not undermine the movement towards the ‘one stop shop’ as the simplicity of having one stop shop for getting government approvals is considered highly desirable.”

Aung Naing Oo is confident about the outlook for foreign investment. “I think international investors are impressed by the new law,” he said.

 

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