Tax amnesty could spell big changes for Myanmar

How would you feel if a big part of your monthly salary was taxed while your boss paid almost nothing? Or if your small business paid its tax and your competitor didn’t? Not too happy, and probably worse upon hearing the Myanmar government’s plan to offer these tax cheats an amnesty. Instead of facing penalties, they may enjoy rates as low as 3 percent under the 2019 Union Tax Law.

This type of scenario occurs when the government cannot supply basic services or invest in infrastructure because it has one of the lowest tax takes in the Association of Southeast Asian Nations (ASEAN) – around 8pc of GDP against a global average of 15pc. However, the qualified amnesty in section 25 of the Union Tax Law could yet prove to be a good thing for all.

Direct the money into productive investment

Myanmar desperately needs money for investment. With tax revenues of only US$5 billion a year, the government will never close the infrastructure funding gap, which the Asia Development Bank says is $120 billion. There is not enough private capital in the formal economy either, and likely vast sums outside the system.

Will people declare this black money if they have to pay significant penalties on it and a 30pc tax rate? Not if they can avoid it. But if they had a choice between paying a smaller fraction now and investing it in productive assets, and severe penalties in the future, well I’d invest big in 2020.

The Union Tax Law offers low tax rates only if the undeclared income is invested in capital and other productive uses. Clear guidance and regulation of this is needed to ensure that the economy expands. The government must signal exactly the types of investment that will qualify – investments in approved special purpose infrastructure funds would be one idea.

Amnesties work to mobilise private capital. The Indonesian amnesty of 2017 saw over $330 billion declared – or about one third of its GDP. With the right guidance, administration, and a credible threat of future sanctions, Myanmar should aim to mobilise around an extra $25-30 billion in private investment. Add some leverage to that, increase the government’s expenditure out of the higher tax base and attract more FDI and that $120 billion infrastructure gap would begin to look manageable.

Improve tax administration and compliance

Indonesia’s amnesty was generous, with a rate of around 2.7pc on assets declared, but still raised $9 billion in revenue. In Myanmar, the rates depend on the amount declared. The effective rate could end up being around 10pc, raising $2.5-3 billion based on the target above. That would be a 50pc increase in tax revenue for the Myanmar government in one year, with a recurrent benefit too.

What to do with the extra revenue? Put it all on economic reform, including a huge spend on tax administration. Invest in knowhow, systems, people and technology to ensure effective administration and compliance in the future.

Development of these systems and people will take time, so co- invest in external expertise and horsepower to make a difference now. We need a quantum leap in the quality of our administration and the Myanmar government will have several hundred million dollars more to make it happen.

Didn’t take advantage of the amnesty to declare your income? Expect to be bankrupted. It may take three, five or even ten years for the Internal Revenue Department (IRD) to find the money, but with the use of advanced systems, well trained specialist personnel and an effective legal process to back it up, the days of the large-scale tax cheats should be numbered. Penalties for future non-compliance must be strict and severe.

The amnesty should be about both quick wins –bringing capital into the system and boosting the quality of tax administration – and a longer-term transition to a tax compliant culture.

The system cannot work if honest people have to pay tax while receiving little in return from the government, and while the non-compliant go free. We need a system where the government has the revenue to provide the services people expect, and the tools to combat non-compliance. A tax amnesty can be a pragmatic way to achieve this.

I urge the Myanmar government to invest in these measures and the private sector to respond. Here is a one-off chance to mobilise a deep capital pool to expand the economy and grow the revenue base for the future.

Chris Hughes is a partner at SCM Legal and chair of AustCham Myanmar. He is best known for his work advising the Myanmar government on the Companies Law and Investment Rules. He is writing solely in a personal capacity.

Source: Myanmar Times

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