Doing Business in Myanmar: Part 1 – Challenges & Opportunities

Your IP Insider has been on the road recently, in fact, it’s been more of a voyage of discovery…. The subject? Myanmar.

shutterstock_71051062Political and civil unrest have kept this country in almost complete isolation for decades but with the success of the National League for Democracy in by-elections held in 2012, Myanmar is gradually opening its market to the outside world. We’re going to describe the considerations for doing business in Myanmar in a mini-series of posts starting with part 1 today: The economic situation and challenges & opportunities for European businesses.

Economy

With an extensive coastline along the Bay of Bengal and the Andaman Sea, and borders shared with 40% of the worlds 7 billion population (China, Thailand, India, Laos, and Bangladesh), the trade opportunities for and in Myanmar are vast. It is also a member of Association of Southeast Asian Nations (ASEAN) and stands to benefit from its increasing economic integration  in this region, that alone has a cumulative population of more than 500 million and GDP in excess of €500 billion. Myanmar will itself chair ASEAN and host the East Asia Summit in 2014.

As well as the potential brought by the region, the Myanmar Government has recognised the importance of issuing the new Foreign Investment Law (FIL), which will grant a large amount of decision-making power to the Myanmar Investment Commission. The government is also working with the IMF on the exchange rate in order to improve instances of foreign investment in the country. With the lifting of EU sanctions, and easing of US trade restrictions, the market has become more liberalised and is beginning to widen its export partners.

Up until March 2012, foreign investment in Myanmar totalled just €30 billion. Its neighbours, Thailand, India and China, have been Primary importers of Myanmar’s raw materials? in recent years, with more than 75% of Myanmar’s exports between 2006 and 2010 heading to these 3 countries. There is now more than a willingness on the part of the government to expand its links with European, American and other Asian partners: the country’s policy for imports aims to prioritize the importing of capital goods, industrial machineries, and other essentials such as medical equipment.

In addition to the new FIL, 18 Special Economic Zones offer incentives and exemptions to investors producing for the international market. The profits from such sales are completely tax-exempt for the initial eight years of operation, and are eligible for further tax reliefs thereon in. Furthermore, businesses operating in a foreign currency within a Special Economic Zone are permitted to open a foreign bank account with any banking establishment in Myanmar.

In the past, companies operating under the FIL and enterprises established under the Myanmar Companies Act 1914 were subject to a flat-rate of 30% of net profits. In March 2012, the income tax rate was amended  to 25%. Double taxation agreements have also been established with the United Kingdom, Singapore, Malaysia Vietnam, Thailand, South Korea and India (and an agreement with Japan is on the way). These stipulate that if the government enters into a notified agreement relating to income tax with the foreign state in question, the terms will be followed regardless of any contradictory provisions outlined in the Income Tax Law.

Challenges

Despite the above progress there are still significant challenges to operating in Mynamar. The country is, according to the International Energy Agency, an extreme example of ‘energy poverty’ with rolling black-outs throughout. High bureaucracy, expensive and unreliable internet connectivity and an overworked legal system mean that investors and companies should consider the long-term benefits when conducting business in Myanmar.

Banking and legal reforms are in progress but the independence and effectiveness of the judiciary system is still in question. The government has been criticised for attempting too much, too soon as there is currently a shortage of qualified lawyers in Myanmar.

Opportunities

Though the challenges are considerable, the Myanmar Government is adopting a market-oriented system. Under the FIL and through applying for a ‘Permit to Trade’ from the Ministry of National Planning and Economic Development, it is possible to establish 100%-foreign owned companies, joint ventures or a ‘special company’ whereby part of the equity is owned by the state. Foreign companies are now also able to lease land privately from individuals as well as from the state and for increased periods of up to 50 years.

Many opportunities exist in Myanmar for EU small businesses across a variety of sectors. For example, there are considerable opportunities in the agri-business and power sectors alone. Given that 75% of the country is still without power, with blackouts on a daily basis even in Yangon, and there are still severe shortages of milk and meat, it is not difficult to see the areas where EU goods, services and expertise could prove beneficial for all involved. Only 10% of Myanmar’s hydropower capacity has been tapped, only 6 of 17 offshore and 14 onshore oil and gas basins have been thoroughly explored and foreign technical expertise is also required to delve abundant coal deposits.

Another sector where investors might be advised to investigate is precious stones where EU small businesses with know-how and machinery could benefit. Other sectors which will likely provide plenty of investment opportunities for outside investors include ICT, Financial and professional services, and manufacturing. The Myanmar Government also has plans in place to improve all infrastructure: roads, railways, ports and airports.

As with many developing countries in Southeast Asia, the telecommunications sector is an area that has also generated a lot of interest. The announcement in June that Ooredoo (Qatar) and Telenor (Norway) were awarded the licences marked an important milestone in Myanmar’s modernisation and integration into the global economy. The entire process, seen as a litmus test for the government’s modernisation efforts, went smoothly and to schedule and the government resisted calls for local partners to be included. Ooredoo alone will invest USD 15 billion in Myanmar.

Finally, a large and relatively cheap labour force means that manufacturing is an area which is also sure to generate international interest. The removal of sanctions has also opened up the sector to the production of various goods for export.

In spite of the challenges, the doors are opening and the government is offering shiny incentives to tempt you in.  Next week we’ll take a look at the practicalities and IP issues to consider before you take the plunge.

Already operating in Myanmar? Tell us about your experiences!

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