Double-taxation deals in detail

Double-taxation deals in detail

By Sebastian Pawlita and Kyaw Zay Ya   |   Monday, 17 June 2013

An investor from, say, Indonesia profitably sells his shares in a company incorporated in Myanmar. Having done so, he is unhappy to hear that his capital gain is subject to an income tax of 40 percent in Myanmar. If the investor had been from Singapore, the rate would have been only 10pc or, in some cases, zero.

Why is that so? Myanmar has had a double-taxation agreement with Singapore since April 1, 2010, but no such agreement exists with Indonesia. According to Article 13 of the agreement, income tax in Myanmar must not exceed 10pc of the capital gain if a Singapore resident holds 35pc or more of the capital of the Myanmar company and sells at least 20pc of his shares.

Myanmar must not tax at all if a Singapore resident sells smaller shareholdings. As Singapore does not tax capital gains, the only tax accruing is, apart from the Myanmar stamp duty of 0.3pc of the value of the shares, Myanmar income tax of 10pc of the capital gain on sales of at least 20pc of a company.

In contrast, the unhappy investor from Indonesia has to pay 40pc of his capital gain as income tax in Myanmar and, in addition, income tax in Indonesia. If Indonesian domestic tax law is not kind enough to credit Myanmar income tax against Indonesian income tax, the capital gain is taxed twice (once in Myanmar and once in Indonesia). This would wipe out a large portion of his profits.

Double-taxation agreements are concluded between states in order to avoid the levying of tax on the same income in two jurisdictions. The agreement between Myanmar and Singapore, however, does even more: As Singapore does not tax capital gains, there is no double taxation to avoid. The agreement, in effect, reduces the tax burden for investors from Singapore to a level that is below what Myanmar domestic tax law usually requires foreign investors to pay. This is an area to watch as there are jurisdictions that refuse to apply a double-taxation agreement in such circumstances, and Myanmar may choose to follow their example. However, so far the Ministry of Finance and Revenue has announced no such intentions.

Could the Indonesian investor have profited from the agreement if he had incorporated a Singapore holding company to set up the Myanmar subsidiary? In certain circumstances, yes. If the Singapore holding company had sold shares in the Myanmar subsidiary, the double-taxation agreement between Myanmar and Singapore would have kicked in, but only if the holding company had been able to prove that it was tax resident in Singapore. In order to issue a certificate of residence, the Singapore tax authorities require that the control and management of the holding company be exercised in Singapore.

There are presently no explicit regulations in place that would subject a capital gain to Myanmar tax if shares in the foreign holding company itself are sold. However, this is an area that should be watched carefully for new developments.

The case of Vodafone in India provides a cautionary tale of how big tax liabilities can arise unexpectedly in this regard. Vodafone had acquired an offshore holding company that ultimately owned the majority of an Indian telecom operator. The seller never paid capital gains tax in India. The Indian tax authorities took the position that, in spite of the share purchase having taken place off-shore, Vodafone should have withheld Indian capital gains tax from the purchase price and requested payment of US$2.5 billion.

In addition to the treaty with Singapore, the Internal Revenue Department’s homepage lists double-taxation agreements with India, South Korea, Malaysia, Thailand, the United Kingdom, Vietnam and Laos. Apart from capital gains, double-taxation agreements are particularly relevant for royalty and interest payments as they are subject to rather high withholding tax rates in Myanmar (royalties, 20pc; interest, 15pc).

However, not all tax officers are aware of these agreements so it is imperative to discuss these issues in advance before any withholdings are omitted or reduced on account of double- taxation agreements.

Sebastian Pawlita and Kyaw Zay Ya are consultants at Polastri Wint Partners Legal Tax Advisors in Yangon.

Double-taxation deals in detail