INSIGHT: Change of Financial Year for Myanmar

The Ministry of Planning and Finance (MOPF) has confirmed that all taxpayers other than state-owned enterprises (SOEs) must adopt the new financial year from October 1 to September 30, which will take effect from October 1, 2019.

Prior to this change, Myanmar has been practicing the use of April 1 to March 31 financial year since 1974. However, in 2018, the Myanmar government decided to adopt a new financial year in order to align the reporting period with the government’s new budget year, which became effective on October 1, 2018.

The use of the new financial year was first introduced to SOEs on October 1, 2018 and will soon be adopted by all other taxpayers starting October 1, 2019. As a result, all taxpayers will be required to close their financial year and follow a six-month period starting April 1 to September 30, 2019.

In order to address ambiguities on the calculation of taxes for the relevant year, the MOPF issued Notification 64/2019 (Notification 64) on August 5, 2019, which provides the procedures on the collection and assessment of taxes for the six-month transition period. Notification 64 clarifies the determination of tax exemption thresholds and the manner of calculating the taxes for the six-month period ending September 30, 2019.

Tax Exemption Thresholds for the Six-month Transition Period

Under Notification 64, taxpayers are exempt from the payment of taxes if the revenue or income received during the six-month period multiplied by two does not exceed the following tax thresholds:

• Corporate Income Tax (CIT): 10 million Myanmar Kyats ($6,000)
• Commercial Tax: 50 million Myanmar Kyats
• Specific Goods Tax: 20 million Myanmar Kyats
• Personal Income Tax (PIT): 4.8 million Myanmar Kyats

The CIT exemption applies only to small and medium-sized enterprises (SMEs) provided that the six-month transition period is within the first three years upon commencement of operations of the SMEs. Meanwhile, the Specific Goods Tax exemption applies only on local production and sale of tobacco leaf, cheroots and cigars.

Calculating Corporate Income Tax for the Six-month Transition Period

The MOPF provided guidelines in the calculation of CIT for corporate taxpayers (including MIC-registered companies) and cooperatives for the transition period. To determine the CIT liability for the six-month period:

1. The total income received from April 1 to September 30, 2019 will be reduced by the expenses incurred for the related period. However, depreciation, interest payments, and donations will be excluded as these expenses will be considered only after the average annual net income is determined.

2. The total net income after the deduction in Step 1 will be multiplied by two in order to determine the average annual income. For SMEs, only profits in excess of 10 million Myanmar Kyats will be subject to CIT.

3. The total average annual income in Step 2 will be reduced by the allowable tax depreciation and the actual interest payment for the period.

4. The adjusted average annual income as determined in Step 3 will be reduced by the allowable donations. Such donations will be subject to the 25% limit of total net income as determined in Step 3.

5. The adjusted annual income in Step 4 will be multiplied by the income tax rate (generally at 25% but may be reduced to 20% for Myanmar listed companies) applicable to the taxpayer.

6. The income tax due as calculated will be divided by two in order to determine the applicable tax for the transitional period April 1 to September 30, 2019.

We have several reservations on the approach used by the MOPF. First, the manner of calculating the tax under Notification 64 is not consistent with the approach previously used by the MOPF when the transition period was first introduced for SOEs in October 2018.

Previously, the calculation was relatively straightforward as the actual income and expenses for the six-month period was used as the basis to determine the tax liability for the half-year transition period. The previous calculation does not require the use of the numerical two as a fixed multiplier of net income as well as a fixed divisor of the tax due.

However, Notification 64 requires the taxpayer to estimate an average annual income using the six-month actual income and expenses (with qualifications on depreciation, interest payment, and donation) and a fixed multiplier of two. This approach complicates the estimation of the annual income for the year and may result in payment of higher taxes in comparison to a relatively straightforward calculation using only the actual net taxable income for the six-month period.

Second, the MOPF qualifies that actual interest payments are deductible for CIT. It is unclear for now whether accrued interest expense recognized during the transition period can be allowed as deduction. Another issue also on interest is in regard to the mismatch in the recording of expenses as it will only take into account the actual interest payment made for the six-month period, as compared to other expenses which are estimated based on a 12-month period. Thus, the use of actual interest payment covering only the six-month period could potentially result in a higher CIT payment due to a lower deductible interest being allowed for income tax reporting.

Lastly, the guidelines are unclear on how to calculate the tax for taxpayers who are not earning income, who are in a net-loss position during the transitional period, and those who have carry-over losses from prior years. Notification 64 only addresses situations where the taxpayer is in a profitable position.

Currently, Notification 64 only states that the six-month period from April 1 to September 30, 2019 will be considered as one financial year for the purposes of determining the loss carry-over period. However, it remains unclear how past losses during the last three years may be claimed as special deductions during the current transitional period.

Calculating Personal Income Tax for the Six-month Transition Period

Notification 64 provides the manner of determining the residency and calculating the PIT for residents and nonresidents (including partnership businesses and primary cooperative societies).

In terms of residency, a foreign national will be considered to be a Myanmar tax resident if his or her total number of days in Myanmar during the six-month period as multiplied by two exceeds 183 days. This would mean that individuals staying in Myanmar for more than three months during the six-month period will be treated as tax residents. As a resident, the foreign national will be taxed based on worldwide sources of income and will have a right to claim relief and deductions under the existing tax rules. Meanwhile, if the foreign national will be staying for less than three months during the six-month period, the foreign national will be considered a nonresident and will be taxable based on Myanmar-sourced income without tax relief and deductions.

In terms of the calculation of tax, an individual who has an annual income of more than 4.8 million Myanmar Kyats during the six-month period will be subject to PIT that will be determined as follows:

1. The total income received from April 1 to September 30, 2019 (under the heading of salary, profession, or business) will be multiplied by two to determine the average annual income.

2. The total average annual income as determined in Step 1 may be reduced by personal relief and allowances (e.g., spouse, parental, and children allowances), life insurance, social security contributions, and allowed donations as provided under the Income Tax Law. However, nonresidents or those who stayed in Myanmar for less than three months during the six-month transition period will not be entitled to claim any relief and special deductions.

3. The PIT will be calculated based on the progressive tax rates of 0–25% based on existing tax laws. The PIT due will further be divided by two in order to determine the tax applicable for the transitional period April 1 to September 30, 2019.

If the taxpayer has rental income for lease of immovable properties, the taxpayer will be subject to 10% income tax based on the average annual rental income (if the lease period is less than one year) or the total rental income (if the lease period is one year or more), as applicable. In cases where the lease period does not exceed one year, the tax will be prorated based on the term of the lease divided by 12.

From our understanding, the approach of using a multiplier of two to determine the estimated annual income assumes that the individual will be receiving the same benefits for the next six months. However, this approach may not be favorable to individuals who will be receiving one-time benefit (such as a bonus) and variable benefits. If the guidelines provided by the MOPF will be strictly followed, the individual would potentially be exposed to paying higher PIT due to over-estimation of the annual tax liability for the six-month period.

When Should These Taxes be Filed?

The annual CIT return, annual salary statement, and annual commercial tax return for the short period ending September 30, 2019 must be submitted to the relevant tax authorities within three months from the end of the six-month period (i.e. on or before January 2, 2020).

Planning Points

As mentioned, the change in financial year is mandatory for all taxpayers in Myanmar. As such, Myanmar taxpayers and multinational companies that have Myanmar operations must be aware of how to properly calculate the taxes for the six-month period.

It is noteworthy to consider that the issuance of Notification 64 provides a better understanding of how the taxes will be calculated for the six-month transitional period. However, certain matters remain that need further clarification by the MOPF in order to effectively enforce the manner of calculating the taxes.

Among the areas of interest would be on the clarification of interest payments for CIT as well as the approach to be used for one-time benefits and variable benefits for PIT calculation. As the transition period ends on September 30, 2019, we hope that the MOPF will shed more light and clarify such issues in a timely manner so that taxpayers will have sufficient guidance on the tax procedures during the transition period.

Diberjohn Balinas is a Senior Tax Manager at DFDL Myanmar

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.