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What does Myanmar tax law say about permanent establishment?

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What does Myanmar tax law say about permanent establishment?

As multinational corporations begin to operate with Myanmar, they will become liable to pay Myanmar taxes. They should be acquainted with the term "permanent establishment", or PE, which describes a situation in which an entity has an income-generating presence in a foreign country by way of engaging in activities, holding assets or having an agent perform activities on their behalf in that foreign country.

The exact parameters of what constitutes a PE depend on how it is defined under domestic tax laws and on whether there is an applicable tax treaty between the countries involved.

The concept of PE is, however, not clearly laid out in Myanmar's domestic tax laws. PE has only recently become relevant in Myanmar during instances in which foreign entities interact with Myanmar and, as previously exemplified, are obligated to pay 3.5 per cent withholding taxes (WHT) on any payment received from Myanmar. Tax treaties generally include a clause on PE, whereby as long as resident entities of treaty countries do not have a PE in Myanmar as per the relevant tax treaty, the Myanmar payer of income will have no obligation to deduct the WHT upon the remittance of payment to the non-resident payee.

Several non-resident entities that initially paid these taxes eventually turned to the Internal Revenue Department (IRD) to determine whether the taxes could be reduced or the companies exempted. The department determined that a WHT exemption certificate could be provided to any non-resident entity that could (1) prove that it is a resident of a treaty country and (2) that it does not have a PE in Myanmar as per the relevant treaty.

Nonetheless, the WHT exemption cannot be automatically applied. A non-resident payee must apply for a WHT exemption certificate from the department. The IRD requires the Myanmar entity to guarantee that the non-resident payee does not have a PE in Myanmar and thus, the payer of income is obligated to assess the PE status of the non-resident payee as per the relevant tax treaty. The IRD requires documentation (such as the payee's tax residency certificate and the service agreement between the payer and the payee) to prove that the non-resident payee does not have a PE in Myanmar.

The service agreement, in particular, is very important in this process as it is used by the IRD to substantiate the amount of time the non-resident payee has been in Myanmar. The duration of time that a resident of a treaty country can spend in Myanmar without triggering a PE depends on the relevant treaty with Myanmar.

For example, India enjoys the most favourable treaty terms with Myanmar, such that a resident entity of India can remain in Myanmar for up to 270 days without triggering PE, ceteris paribus; however, residents of most other treaty countries can remain in Myanmar for up to 180 days without triggering PE.

Common issues with the WHT exemption application include ambiguity in service agreements regarding the duration of a given project. For example, a service agreement may specify 120 days as the duration of a project but then include a six-month warranty clause whereupon the non-resident service provider will provide on-site repair services as needed. Cases such as these make it difficult to pinpoint the exact duration of a project, which can result in disagreements between companies and the IRD regarding the duration of such projects (ie, is it 120 days or 120 days plus six months?).

Furthermore, in cases where the service recipient and service provider are related parties, the service recipient may choose to pay the 3.5 per cent WHT tax on behalf of the service provider or just choose to keep detailed documentation of the transactions in case of a challenge by the IRD, instead of requesting the service provider to obtain a WHT exemption certificate; this would be unlikely in a third-party arrangement.

In any case, an application for the exemption certificate can take months to receive approval. Companies will generally apply for such certificates, but there are also cases where non-resident entities choose to simply absorb the tax instead of applying for the certificate. In the interim, the Myanmar payer of income will continue to deduct the tax but the payee of income could request for a full refund once the exemption certificate is issued. The refund process is, however, quite administratively burdensome and not a popular choice among non-resident entities.

As Myanmar is still trying to do its best to accommodate itself to a more global business environment, complex administrative procedures such as PE and WHT refunds should soon be a lot easier to deal with.

Anthony Visate Loh, Partner Tax Services Country Tax & Legal Leader, Deloitte Touche Tohmatsu Jaiyos Advisory Co

-- The Nation 2015-07-27

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