New law to reform Myanmar's investment framework

 

In a move to further liberalise its business environment and improve investor certainty, the government of Myanmar recently promulgated the new Myanmar Investment Law (MIL), which was drafted by the country’s primary investment oversight entity, the Myanmar Investment Commission (MIC).

Although regulations outlining the law’s provisions and implementation have not yet been released, the law’s enactment will transform Myanmar’s current investment framework, merging regulations for foreign and domestic investors into a single law, as well as setting new project approval processes, tax incentives and land use regulations aimed at bolstering flagging foreign direct investment (FDI) inflows.

Historic Development

Myanmar’s modern legal framework for foreign investment dates back to Foreign Investment Law (FIL) of 1988, which permitted foreigners to own 100% of certain businesses without the need for a local partner – although foreign ownership restrictions were extended to any sectors deemed sensitive, including agriculture, prior to 2012. Although the FIL did not define long-term land leases, they were generally capped at 30 years, with two five-year extensions permitted per lease.

A total of $7.6bn of FDI was recorded between FY 1988/89 and 2003/04, according to the investment promotion body, the Directorate of Investment and Company Administration (DICA).

In November 2012 former President U Thein Sein approved the country’s new FIL, following months of parliamentary wrangling, allowing overseas firms to fully own ventures in previously restricted sectors, in addition to offering tax breaks and long-term land leases. Land acquisition has been one of the most significant obstacles to new FDI in the country.

The new law represented a critical component of economic liberalisation, with Reuters reporting that most major companies were waiting to see the legislation prior to committing funds to new projects.

2012 Change

A previous draft of the law stipulated that foreign ownership of businesses operating in sensitive sectors would be capped at 50%, with the law requiring that foreigners investing in a start-up joint venture must hold at least a 35% stake in the company. However, the final version permitted joint ventures between foreigners and Myanmar citizens, or government entities, with partners able to determine the stake ratio themselves. Another article of the law stated that the MIC can permit foreign investors into restricted sectors provided the project is in the national interest, and receives government approval. The law also permitted foreigners to lease land from the government of authorised private owners for up to 50 years, with each lease able to be extended twice, by 10 years each time.

The new FIL also granted tax holidays to foreign firms for the first five years of operation, as well as other forms of tax relief, provided the income be reinvested in the business within one year. Foreign manufacturing companies, for example, were permitted tax relief of up to 50% on profits from exports. Under the original FIL, tax holidays were set at three years.

Fdi Inflows

The 2012 FIL supported a surge of recent foreign investment, with DICA reporting that the value of approved FDI jumped from $1.42bn in FY 2012/13 to $4.1bn in FY 2013/14, a 189% increase. Approved foreign investment nearly doubled in FY 2014/15 to hit $8.01bn, and rose a further 18.4% to reach $9.48bn in FY 2015/16.

FDI inflows have moderated recently, however, with DICA revising its original target of $8bn of FDI inflows in FY 2016/17 to $6bn – 36% lower than 2015/16 levels – and reporting that total inflows stood at just $3.29bn at the end of November 2016, with four months to go before the end of the financial year.

U Aung Naing Oo, director-general of DICA, told local media in December 2016 that the directorate was reviewing 52 new projects valued at close to $3bn, which would allow the country to surpass its annual foreign investment target.

New Investment Law

Lawmakers have actively sought to further reform FDI legislation since 2012, and on September 28, 2016, Pyithu Hluttaw, or the People’s Assembly, approved the Myanmar Investment Law 2016 (MIL), followed by the Amyotha Hluttaw (House of Nationalities) on October 5. On October 18, 2016, President U Htin Kyaw signed the MIL into law. The MIL will come into force at the start of FY 2017/18, which begins in April 2017.

The law departs from previous legislation, most notably by combining previously separated local and foreign investment regulations, and replacing the 2012 FIL and the Myanmar Citizens Investment Law of 2013. The new law put an end to Myanmar’s status as the only ASEAN member with separate investment laws for citizens and foreigners, in addition to establishing a new approval process with the MIC, updating tax holidays and investment incentives, and further expanding foreign access to leased land.

Under the MIL, investors must apply for an MIC permit if the proposed project is considered strategic for the country, is capital-intensive, has the potential to impact the environment or local community, uses state-owned land and building, or involves restricted activities. The commission is also permitted to refer projects to the National Assembly if it determines that a proposed venture would have a significant impact on the security, economic condition, environment and national interest of Myanmar. Each project must be approved on a case-by-case basis.

As noted in a November 2016 analysis by international law firm Herbert Smith Freehills, the new law does not define what qualifies as a strategic project, and does not specify under which circumstances additional National Assembly approval could be required for a project. Additionally, the MIL does not specify which projects will require an MIC permit.

Mic Endorsement

In a welcome development, however, the MIL stipulates that investments which do not require an MIC permit can apply for an MIC endorsement, which will help investors seeking long-term leases, tax exemptions and other incentives.

The MIC will review applications and grant approval if the investment complies with relevant laws and regulations. According to professional services firm Dezan Shira & Associates, an MIC endorsement is expected to involve a simpler and more streamlined process confirming the project is merely in compliance, rather than benefitting national interest. Lack of specific regulations are a challenge, however. Government approvals must be in place prior to seeking MIC endorsement, although investors had usually sought any such approvals with the assistance of the MIC under its permit application process.

Incentives & Land Use

Importantly for investors in large-scale and labour-intensive projects, the MIL also establishes a classification system under which tax incentives will be granted. Targeting critical industries and underdeveloped regions, the law classifies the country’s least-developed areas as zone 1, offering seven-year tax holidays for any zone 1 project. Areas at a midway point of development are classified as zone 2, and offer five-year tax holidays, while well-developed zone 3 regions offer three-year holidays. Further incentives are offered for investment in priority sectors, or labour-intensive industries including manufacturing, infrastructure development, agriculture and food processing. Land leasing regulations were also reformed, with foreign investors now permitted to lease land directly from private owners, and potentially able to access longer leases than the 50+10+10 standard in underdeveloped regions.

The MIL stipulates that the government will not nationalise a company or impose any measures which effectively result in its expropriation, except in circumstances where it is in the public interest, in a non-discriminating manor, or upon payment of fair and adequate compensation. Local employee requirements have also been notably relaxed.

Potential Impact

Although the new law requires further clarity, the potential benefits of the MIL are significant. In addition to enhancing investor certainty, land use reform measures will boost development of supportive infrastructure, and should offer new employment opportunities to surrounding communities. A unified framework for foreign and domestic investors also brings the country more in line with international standards, and should remove disparity between the two investor classes.

Coinciding with the US government’s recent decisions to remove the majority of sanctions imposed on the country, the law demonstrates the government’s commitment to economic liberalisation and stable political transition, in addition to supporting growth in the manufacturing sector. Executive regulations for the law will further enhance the country’s investment attractiveness, and should help the country bolster its FDI inflows in FY 2017/18 and beyond.

 

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The Report: Myanmar 2017

Trade & Investment chapter from The Report: Myanmar 2017

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