On November 2, 2012, a new Foreign Investment Law (FIL) was passed by Myanmar’s Union Parliament, an important step towards economic liberalisation. The final version was signed into law by the Union President as Union Parliament Law No. 21. The passage of the new FIL was eagerly awaited by the global investment community that saw this as the firing of the starting gun for the Myanmar investment rush.

The new FIL confirms Myanmar’s already foreign-investor-friendly policy. Under the previous FIL, foreign investment was allowed in nearly all sectors, with a few exceptions – mainly in agriculture and distribution. Of course, there were and to some degree remain, a number of sectors where only joint ventures with the state are allowed, but the state does accept foreign partners for these areas.

Which activities are not allowed for foreign investment under the new law ?

Chapter 2 of the FIL stipulates that the law “shall apply to the economic activities prescribed by notification” of the Myanmar Investment Commission (MIC). Enterprises seeking to start ventures in areas not listed by notification may apply to have their projects approved by the MIC on a case-by-case basis. The general principle is that foreign investment will be allowed in all sectors, unless specifically restricted.

The list of restricted and prohibited activities will also come out later in a notification. There will be, however, some common themes running through the restricted and prohibited list spelled out under Chapter 2. Activities prejudicial to traditional cultures, public health, natural resources, flora and fauna, and those which involve toxic waste are among the activities that will be restricted. In terms of economic activity, certain sectors will be restricted, including:

lTo be specified production activity which will be reserved solely for Myanmar nationals; lTo be specified services activity which will be reserved solely for Myanmar nationals; lCertain agricultural activities which are open to foreign investors but through a joint venture with a local partner only; and lInvestments in livestock and fisheries are open to foreign investors but through a joint venture with a local partner only.

Foreign ownership and minimum capital

According to Chapter 5, investments in areas outside the restricted and prohibited economic activities list can be 100 per cent foreign-owned, which should be welcome news to many foreign investors. The MIC will set a foreign ownership cap in each joint venture’s rules and regulations in those areas of economic activity that will be restricted and not prohibited outright.

The Parliament decided to drop from Chapter 5 a provision to impose a US$5 million invested capital requirement for foreign investors seeking to do business in Myanmar. The contentious debate over a minimum capital requirement led, at least partially, to the delay in passing the new FIL. There is now no universally required minimum capital amount, although the MIC can determine individual capitalisation requirements for each investment project. Tax incentives

The most eye-catching tax incentive is the five-year tax holiday that begins when the enterprise starts production or service activities. This five-year period can be extended by the MIC if “beneficial to the state.” Another interesting feature of the tax incentive framework is the granting of customs duty exemption and internal tax exemption for the expansion of an existing investment.

Employment of expatriates

According to Chapter 11, expatriate employment in new foreign owned ventures is limited in the following ways. For the first two years, 75 per cent of the workforce is allowed to be foreign. For the next two years, 50 per cent of the workforce is allowed to be foreign. And, in the third two years, the foreign workforce must only make up 25 per cent of the venture’s workforce. An exception may be made to the time limits for “knowledge-based enterprises”. In addition, the entire unskilled workforce must be Myanmar nationals.

This is a remarkable tightening of the previous policy, which lacked specific quotas. Note also that the FIL provides a prohibition on salary discrimination between local and foreign employees with the same professional skills.

Permission to lease land

Another key provision describes the allowable use of land for foreign investors. According to Chapter 14, a foreign investor may lease land up to an initial term of 50 years depending on the economic activity and amount of investment. Land may be leased from the government or from a private citizen with permission of the government. The initial 50-year period may be extended for two consecutive 10-year periods.

Why is Vietnam well-positioned to invest in Myanmar ?

Vietnam’s exports to Myanmar over the last three years has averaged about US$100 million per year, with an upward trend. Vietnam exports steel, steel products, plastics and chemicals to Myanmar, many of which are used in construction. The construction sector is only one of the key sectors where Vietnamese enterprises are highly competitive in Myanmar. Vietnam’s experience with opening the economy to foreign investment after doi moi offers useful insights to private sector and the government into how a large new market can be tapped. In addition, Vietnam’s experience with hospitality, real estate, manufacturing, resources, telecommunications, and agriculture are all acutely relevant in Myanmar. It is noteworthy that as an ASEAN state, Vietnam will receive even more market access in Myanmar in 2015.

Benefits of the Vietnam-Myanmar Tax Treaty

Vietnam has concluded a Double Taxation Agreement (DTA) with Myanmar (currently in force), which reduces or exempts Vietnam-based companies from Myanmar taxes in a number of situations. For example, financing a project from Vietnam instead of from China or the US will result in a much lower financing cost, as Myanmar withholding tax on interest is reduced from 15 to 10 per cent under the DTA.

Vietnam Investement Review - November 26, 2012