by Pedro Jose Fausto Bernardo, Kelvin Chia Yangon Ltd

Transcription

1 Foreign investment in Myanmar by Pedro Jose Fausto Bernardo, Kelvin Chia Yangon Ltd 74 Considered by many as the last economic frontier, Myanmar has been the object of much investor interest, especially following further liberalisation of its foreign investment regime through the passage of the Myanmar Foreign Investment Law in At a time when other more developed South-East Asian economies have generally seen a net outflow of foreign direct investment (FDI), in large part due to the US Federal Reserve s announcement that it is scaling back its quantitative easing programme, Myanmar has registered a net inflow of FDI amounting to an estimated US$43.6bn as of the third quarter of This is not surprising, considering the significant investment opportunities in virtually all areas of commerce and industry, from manufacturing and real estate to energy and power, telecommunications and natural resource extraction. While the delicate transition towards greater openness and democratisation has caused some to take a wait-and-see attitude, large multinational conglomerates have decided to make the push and claim first-mover advantage in this nation of 60 million consumers. Firms like Unilever Plc, the Coca-Cola Company and Ford Motor Company have established business presences in Myanmar with major investments that have led the McKinsey Global Institute to estimate that Myanmar could receive as much as US$100bn of foreign investment by 2030, more than double the current estimate of US$43.6bn. The Myanmar government, for its part, has been very active in fostering an environment conducive to FDI. Apart from updating and liberalising the legal regime for investment, it has allowed foreign participation in activities previously reserved to state entities, such as oil and gas exploration and telecommunications. Along with opening up sectors previously dominated by state-run firms, the Myanmar government has also moved towards developing and expanding its banking sector and financial markets, beginning with the float of the country s currency, MMK (Myanmar kyat), in April Representative offices of Pedro Jose Fausto Bernardo Foreign Consulting Attorney Kelvin Chia Yangon Ltd tel: (ext. 108) fax: pedro.bernardo@kcpartnership.com

2 foreign banks are now allowed to operate with the approval of the Central Bank of Myanmar and foreign exchange controls have been overhauled, enabling both locals and foreigners alike to deal with foreign currency more freely. The process of opening and modernising a long-isolated economy is no easy task, and there will surely be some bumps along the road to a system fully integrated into regional and global markets. While acknowledging these obstacles, we can confidently say that Myanmar is assertively pursuing the necessary policies to allow for greater integration and is firmly committed to the process of re-engagement. What follows is an overview of the foreign investment environment of Myanmar, as well as a discussion of the legal and regulatory framework that underpins the foreign investment system as a whole. Foreign investment vehicles in Myanmar Foreign investors looking to establish themselves in this growing market must rely on the framework established by the Myanmar Companies Act and the Foreign Investment Law. These interconnected laws grant foreign investors the choice of establishing a foreign branch office, incorporating a private limited company, or applying for an investment permit from the Myanmar Investment Commission (MIC), which is also known as an MIC permit. Entities under the Myanmar Companies Act A branch office under Myanmar law is considered an extension of its foreign parent company and is a non-resident entity for purposes of Myanmar taxation. It is authorised to engage in revenue-generating activities in Myanmar that are related to the primary business of its foreign parent company. A private limited company, by contrast, has a legal existence separate from its shareholders, and is considered a resident entity for purposes of Myanmar taxation. Furthermore, private limited companies may be incorporated either as wholly-owned by a foreign parent, or with an equity structure with shares held by local Myanmar ownership in a joint venture. While private limited companies may engage in and provide a myriad of activities and services, care must be taken during the registration process to avoid including activities that would require an MIC permit under the Foreign Investment Law. In any event, all foreign entities seeking to operate in Myanmar are required to secure a business licence known as a permit to trade, as a precondition to their commencement of business. This licence enumerates the business scope that an entity may pursue in Myanmar, but actually provides no permission to engage in trading, as there exist numerous restrictions on the practice as elaborated later in this chapter. An additional application is necessary for the actual incorporation and registration of an entity with the Companies Registration Office (CRO). While branch offices and private limited companies may engage in commercial operations in Myanmar upon issuance of their respective certificates of registration, they do not enjoy the concessions and benefits extended to foreign investors under the Foreign Investment Law. For this, the foreign investor must secure an MIC permit. Investment permit from the MIC Foreign investors establishing a private limited company in Myanmar are generally free to apply for an investment permit from the MIC, though existing government regulations and policies have appeared to limit the activities for which an investment permit can be granted. Activities for which an MIC permit would be proper include investments in industrial, manufacturing or real estate development activities, investments in activities reserved to the state, and investments requiring the long-term use of land. The MIC has also issued a notification classifying specific economic activities that are generally prohibited for foreign investment, those that must be undertaken through a joint venture with Myanmar nationals, and those that require compliance with certain conditions by sector. Beyond these requirements, applications will be evaluated according to certain key factors, including the likelihood that a proposed investment will result in a significant level of domestic labour, the required importation and use of 75

3 heavy equipment or advanced technology, the value added by the economic activity to the domestic economy, and the degree to which the economic activity will uplift the living standards of Myanmar citizens. Applications that fail to offer any of the preceding are unlikely to be granted, although an investor whose application has been denied may still attempt to establish a private limited company with the CRO. An MIC permit confers on foreign investors certain benefits including an exemption from income tax for five consecutive years from the commencement of commercial operations, the opportunity to lease and develop land for a period up to a total of 70 years, the ability to engage in import and export activities, and a mechanism for repatriation of capital and profits. It is interesting to note that while a significant number of these permits have been issued in relation to garment manufacturing enterprises, there now appears to be shift towards other investment activities, such as hotel and tourism development, as well as food, manufacturing and consumer goods (FMCG). Trading restrictions Foreigners are generally restricted from engaging in any kind of trading or retail activities, including the importation of goods for resale, or the procurement of local goods for resale. Recent government issuances, however, have relaxed this long-standing trading restriction, allowing wholesale trading activities with permission of the MIC, the 76 MIC permit application and CRO incorporation procedures Exhibit 1 MIC Regulated by the Myanmar Foreign Investment Law (2012) and subsequent implementing rules and notifications issued and administered by the MIC. Regulated by the Myanmar Companies Act (1913) and administered by the Directorate of Investment and Company Administration under the Ministry of National Planning and Economic Development. Establishing a company Establishing a branch office Cabinet committee Executive committee Applying for a permit to trade with the CRO (business licence) Registering company or branch office with the CRO Source: Kelvin Chia Yangon Ltd

4 Approved foreign investments by sector (as of August 31, 2013) Exhibit 2 Sector Foreign enterprises approved Amount of foreign investment (US$m) 1 Power 6 19, Oil & gas , Mining 67 2, Manufacturing 274 3, Hotel & tourism 48 1, Real estate 21 1, Livestock & fisheries Transport & communication Industrial estate Agriculture Construction Other services Total 600 US$43, Source: Department of Investment and Company Administration, Ministry of National Planning and Economic Development Singapore Yangon Jakarta Bangkok Hanoi Ho Chi Minh City Phnom Penh A BUSINESS APPROACH TO LAW Kelvin Chia Yangon Ltd (KCY) is an international legal consultancy that has been in active operation in Myanmar since KCY is part of the regional group of offices of Kelvin Chia Partnership, a full service commercial law firm headquartered in Singapore with a strong regional focus and extensive experience in assisting businesses venture overseas. We combine local know-how with international commercial expertise. With a multifaceted team of over 30 experienced lawyers, paralegals, and business researchers based in Yangon, we provide top-notch legal services and advice to our clients. Unit th Floor, Sakura Tower 339 Bogyoke Aung San Road Kyauktada Township, Yangon Republic of the Union of Myanmar T + (951) F + (951) E csg@kcyangon.com Main practice areas: Foreign Investments; General Corporate and Commercial; Due Diligence; Mergers and Acquisitions; Investment Funds; Energy/Oil and Gas; Natural Resources/Mining; Banking Regulatory; Agriculture; Real Estate/Infrastructure; Insurance; Telecommunications; Licensing and Permits; Employment; Taxation; Intellectual Property. 77

5 List of state-reserved activities based on the State-Owned Economic Enterprises Law (1989) Exhibit 3 1. Extraction and sale of teak in the country and abroad. 2. Cultivation and conservation of forest plantation, with the exception of village-owned fire-wood plantation cultivated by the villagers for their personal use. 3. Exploration, extraction and sale of petroleum and natural gas; production of their derived products. 4. Exploration, extraction, and export of pearls, jade and precious stones. 5. Breeding and production of fish and prawns in fisheries which have been reserved for research by the government. 6. Postal and telecommunications service. 7. Air transport service and railway transport service. 8. Banking service and insurance service. 9. Broadcasting service and television service. 10. Exploration, extraction, and export of metals. 11. Electricity generating services other than those permitted by law to private and co-operative electricity generating services. 12. Manufacture of products relating to security and defense that the government has, from time to time, prescribed by notification. However, under Section 4 of the State-owned Economic Enterprises Law (1989) the Myanmar government has the discretion to permit any of the foregoing state-reserved activities to be undertaken by joint-venture between the government and any other person or any other economic organisation or under conditions by any person or any economic organisation subject to conditions. 78 Source: Kelvin Chia Yangon Ltd Ministry of Commerce and the relevant state/regional government authorities. Retail activities may also be conducted through an MIC permit after 2015, though, presently, foreign companies operating through MIC permits have been permitted, with the approval of the MIC, to sell and distribute products that were manufactured by the investor, in whole or in part, in Myanmar. Real estate projects Myanmar law prohibits foreigners from owning land or entering lease agreements for terms exceeding one year. Despite this prohibition, foreign investors with an MIC permit are granted the ability to secure approvals for the long-term lease of land. Additionally, foreign investors intending to engage in real estate development usually must enter into a joint venture with a Myanmar national. An exception to this rule exists for real estate development projects undertaken through a build-operate-and-transfer scheme with the owner of the land, which may be pursued by companies wholly-owned by foreigners. Government-reserved sectors While most economic activities are open for investment under Myanmar s liberalised foreign investment regime, there remain specific sectors that are exclusively reserved to the Myanmar government and its state-owned enterprises. These include the exploration, extraction and sale of petroleum and natural gas, postal and telecommunication services, air and railway transportation services, banking and insurance services, power generation and distribution, as well as the cultivation and conservation of forest plantations. Despite this, there exist a number of laws granting the government the discretion to approve non-governmental actors, including foreigners, to participate in these otherwise-reserved sectors, either through a joint venture with the government, or under specified requirements and conditions. The willingness of the Myanmar government to open these otherwise-reserved sectors of the economy is an acknowledgment of the limitations of existing government resources in developing crucial economic sectors and is

6 also recognition of the indispensable role that foreign investors can play in the development of the overall economy of Myanmar. Therefore, other foreign investors wishing to enter into such otherwise government-reserved sectors do have an available avenue through specific government approval, which also involves an investment permit application with the MIC. Dealings with foreign currency The promulgation of the Foreign Exchange Management Law in 2012 has significantly liberalised the ability of both locals and foreigners to deal with foreign currency in Myanmar. The law requires all foreign exchange transactions to occur through authorised banks, and at present, 15 out of 19 private banks and three out of four State-owned banks have the Authorised Dealer (AD) licence and are authorised to deal in foreign currency. This means that foreign investors may now open both local and foreign currency accounts in any of these Myanmar banks that have the AD licence, maintain foreign currency accounts abroad, and remit foreign exchange abroad subject to the approval of relevant government authorities. For foreign investors operating under an MIC permit, in particular, it is permissible with approval from the MIC to transfer or remit abroad foreign currency brought into Myanmar for purposes of the investment. These amounts include net profits, dividends received by shareholders who had brought foreign capital into Myanmar, and amounts receivable upon liquidation of the enterprise. Apart from the remittance of foreign currency in conjunction with an MIC permit, the Foreign Exchange Management Law stipulates foreign currency transactions categorised as payments for current transactions cannot be restricted, whether or not a company is operating through an MIC permit. Notwithstanding such language, Myanmar banks still generally require the approval of the MIC for any loan repayments, even for those companies that may not be operating under an MIC permit. The practical effect is that foreign investors without an MIC permit may not be required to submit any intended remittance of principal, interest and profits to the Central Bank of Myanmar for approval. Unfortunately, the procedure for such approval from the Central Bank of Myanmar remains uncertain. Conclusion The pace of change remains high in Myanmar with new legislation being passed at an accelerated rate. In the realm of foreign investment, several major additions are on the horizon including a long overdue redraft of the nearly century-old Myanmar Companies Act, which is expected to be completed by the end of With the approval of the Securities Exchange Law in late July 2013, the country is also pressing ahead with plans to open a full-fledged stock exchange with an intended launch date in Presently, the legal framework for investment is being quickly modernised to keep pace with the flurry of new investment interest in Myanmar. As further investment pours into the country, there is an expectation that legal structures and regulatory professionalism will progress in kind. Contact us: Kelvin Chia Yangon Ltd Unit 1509, 15th Floor Sakura Tower 339 Bogyoke Aung San Road Kyauktada Township, Yangon, Union of Myanmar tel: csg@kcyangon.com web: 79