Myanmar aims to mobilize funds hidden in its vast informal economy through a tax amnesty, a controversial bid to galvanize new investment and business activity in the nation’s stalling economy.
The “reduced tax rates for undeclared income” scheme, part of the recently approved Union Tax Law, entered into force this month, slashing prevailing 15-30% tax rates to as low as 3%.
Under the amnesty, an individual with undisclosed income of up to 100 million kyat (US$66,000) will be taxed just 3%.
The rate climbs to 5% for between 100 million and 300 million kyat ($200,000) in undeclared earnings, 10% for between 300 million and 3 billion kyat ($2 million), and 30% for any income above 3 billion kyat.
The undeclared income must be invested in capital assets or businesses to qualify for the tax amnesty.
A similar proposal, pushed by the local construction and property industries, was rejected last year by the national legislature and branded “fundamentally unfair” by a top government adviser.
This time, however, State Counsellor Aung San Suu Kyi’s government hopes that the scheme will encourage individuals to move assets from the underground to mainstream economy, significantly at a time her government could use an economic boost ahead of November 2020 elections.
The World Bank expects Myanmar’s gross domestic product (GDP) to hit 6.6% by 2020-21, supported by an increase in foreign and domestic investment resulting from various liberalisation measures.
Despite the upbeat projection, investor sentiment remains cautious. From a high mark of $9.5 billion in fiscal 2015-2016, total approved foreign direct investment (FDI) fell to $6.6 billion in 2016-17, $5.6 billion in 2017-18 and is not expected to recover this fiscal year.
Unveiling the scheme in August, Deputy Finance Minister Maung Maung Win told parliament that “The tax revenue collected as a result can then be used to promote investment and consumption and push for more development in the current economic slowdown.”
Myanmar is home to one of the largest informal economies in the world, representing over 50% of economic activity between 1999-2006, according to a 2018 study published by the Norwegian Institute of International Affairs.
The new amnesty scheme is for undeclared income earned from only legitimate trades, such as undeclared property rental, and not for laundering proceeds from prevalent illicit trades including drug trafficking. How that will be enforced, however, is unclear.
Tax amnesties that effectively allow for the laundering of hidden or ill-gotten assets are not new in Myanmar.
In 1990, a previous ruling military regime announced a four-month tax amnesty, allowing individuals to declare and pay a 25% profit tax on assets they could not prove were obtained legally.
“It is impossible to estimate the quantity of narco-dollars laundered in this fashion, although the entire program reportedly netted over six billion kyat ($900 million at the then official exchange rate),” stated the March 1991 International Narcotics Control Strategy Report, prepared by the US State Department’s Bureau of International Narcotics and Law Enforcement Affairs.
More recently, in 2016, the Internal Revenue Department granted an amnesty on stamp duty fines that effectively allowed businesses to pay overdue import taxes without shelling out for late fees.
Compared to past amnesties, however, observers note that this latest scheme essentially rewards tax evaders while punishing those who duly paid.
For the business community, though, the move has the potential to release streams of liquidity into the lackluster real estate, motor vehicle and financial asset markets.
“Should the tax amnesty be successful in generating more property transactions, it would not only be beneficial for the real estate market, but also for the government’s ability to raise revenue,” said Hugo Slade, managing director of Slade Property Services, a Yangon-based real estate company.
“The condominium market is most likely to receive the largest share of this new capital due to the lack of supply of viable alternatives and the historical preference of Myanmar investors,” he said, adding that his firm has recently received a number of valuation and acquisition inquiries.
The mobilized funds are also expected to boost automotive sales, while Myanmar companies will benefit from increased investments from Myanmar citizens, according to Alexander Bohusch, Luther law firm’s resident managing director and partner.
Such investments, including in land or motor vehicles, were taxed at a rate of up to 30% if the investor could not show the source of funds.
“Many people may be hesitant to pay such a premium for their undeclared money. The tax amnesty provides for reduced taxes on undeclared income, which come closer to the tax rates that would have been applicable in the first place,” the lawyer said.
Business executives in Yangon are hopeful that a surge of liquidity and revived property market will also support Myanmar’s wobbly banks, which are under pressure to clear up their bad loans.
A 2017 Reuters report estimated overdraft loans as high as 70% of all lending in the banking system, though the Central Bank of Myanmar declined to provide an estimate.
Concerns over debt defaults and repayments resurfaced after a 2017 central bank ruling that requires commercial lenders to clear overdraft loans that can be rolled over indefinitely.
The tax amnesty will in addition provide an avenue for businesses to dispose of assets to get the liquidity needed to meet their financial obligations.
Meanwhile, an increase in property transactions could also keep real estate prices buoyant, which in turn will help to boost securities-based lending, industry sources say.
A Yangon-based banker, however, warns that Myanmar banks currently rely excessively on collateral-based lending.
“Collateral is the last resort to collect the loan. Unfortunately, most of the local bankers don’t understand this,” he commented on condition of anonymity.
Crucially, the government has not indicated that the amnesty will be final, meaning that evaders could wait for future amnesties to bring their hidden assets above ground.
Without making clear that this amnesty is “one last time”, one business executive says, it will be difficult to convince individuals to bring their funds above ground.
Another problem, observers say, is that Myanmar’s tax administration and collection systems are too weak to crack down on tax evaders, meaning there is still strong incentive to keep funds hidden.
If the government injects a significant investment funds mobilized by the amnesty to improve the tax system, it would still take years to move from the current paper-based system to a digital one.
The finance ministry aims to have an IT system in place for registration, processing, accounting and case work within the Internal Revenue Department IRD by 2022. IRD capabilities have improved significantly in a handful of offices but overall remains extremely low, observers say.
Myanmar’s tax-to-GDP ratio, projected at 7.2% for 2019-2020, is the lowest in Southeast Asia, according to International Monetary Fund research.
Moreover, experts are divided on whether the amnesty will have ramifications for the intergovernmental Financial Action Task Force’s impending decision on whether to put Myanmar back on a money laundering watchlist.
The review, which will inevitably have implications for the risk premium attached to holding Myanmar bank and financial assets, will conclude this month while a decision is expected by next February.
The UN Office on Drugs and Crime (UNODC) has argued that since the anti-money laundering review focuses on operational effectiveness rather than regulations, the new tax amnesty will not likely be a decisive factor in the task force’s decision.
“The Myanmar legal framework isn’t so much the problem,” said UNODC Myanmar manager Troels Vester. “[It’s] more the lack of operational effectiveness, for example in implementing anti-money laundering policies across all predicate crimes, including tax evasion.”