Key Updates on Myanmar Withholding Tax Implications on Offshore Services

The Withholding Tax (“WHT”) regime is a mechanism to tax a non-resident for income derived from Myanmar. In the past, the definition of income derived from Myanmar included services performed both outside and inside Myanmar for Myanmar projects. Under Notification 47/2018, the Internal Revenue Department (“IRD”) has subsequently narrowed the interpretation to capture only services performed in Myanmar; however, taxpayers are still required to seek approval from the IRD upfront on a case-by-case basis in terms of their interpretation of offshore services. Recently, the IRD removed the requirement to seek approval upfront for WHT exemption on offshore services by issuing Practice Statement 2/2020 on 3 September 2020. 

Impact of Self-Assessment System  

The IRD has been implementing some reforms in recent years, including the implementation of the Self-Assessment System (“SAS”). Under this system, taxpayers are required to be more proactive in assessing their tax position as well as complying with tax payment and filing deadlines, as the penalties for non-compliance are quite hefty. Starting from FY2020-2021, the Medium Taxpayers’ Office (“MTO”) 2 will also be adopting the SAS in addition to the Large Taxpayers’ Office (“LTO”) and MTO-1, which are currently under the SAS.  

WHT exemption on services performed offshore  

Starting from 3 September 2020, approval from the IRD is no longer required for WHT exemption on offshore services for taxpayers under the SAS if the contract value is US$100,000 or less.  

As an example, if a company in Thailand (“Thai Co”) provides legal advice to a company in Myanmar under the SAS (“MM Co”) with a service fee of US$50,000, WHT is exempted for this payment, as the legal advisory services are performed entirely in Thailand. In such case, the MM Co can make payments to the Thai Co without obtaining approval from the IRD regarding WHT exemption on the service fee payments.   

WHT exemption under the Double Taxation Agreement  

Myanmar has Double Taxation Agreements (“DTAs”) in force with eight countries; the United Kingdom, Singapore, Malaysia, Thailand, Vietnam, India, and the Republic of Korea and Laos.  

Although there is no concept of Permanent Establishment (“PE”) under the current Income Tax Law 1974, the concept of PE is relevant when considering the provisions under the DTA. It is also noteworthy that PE will be applicable when the Draft Income Tax Law 2020 is enacted.  

If a tax resident of a DTA country is providing services in Myanmar, 2.5% WHT can be exempted under certain DTA provisions on the basis that there is no PE in Myanmar. Similar to WHT exemption on offshore services, approval is no longer required for contracts valued US$100,000 or less for companies under the SAS.  

Penalties for non-compliance of WHT 

WHT payments are due to the IRD within 15 days from the payment date to the suppliers or service providers. The payer has the legal obligation to deduct applicable WHT regardless of whether they are a resident taxpayer in Myanmar or a non-resident foreigner who does not have a legal entity in Myanmar. Previously, there were no specific penalties for failure to comply with WHT compliance obligations; however, starting from FY2019-2020, penalties for non-compliance of WHT have been introduced under the Tax Administration Law.  

Late WHT payment will be subject to a 10% penalty imposed on the payable WHT amount, whereas the IRD will recover the WHT in addition to the late-payment penalty if the payer has failed to deduct applicable WHT from the payments.  

Conclusion  

The abolishment of having to obtain the IRD’s approval for WHT exemption indeed facilitates a faster process for taxpayers, as the approval usually takes approximately one to two months. However, it is important to note that this benefit is only for taxpayers under the SAS, as approval is still required for taxpayers under the Official Assessment System.