Continued Tax Amnesty on Undisclosed Income at Slightly Higher Income Tax RatesAugust 31, 2020
If an individual or a company is buying a capital asset or making an investment, the source of income is required to be provided as proof for the funds used for the purchase or the investment. If the source of income cannot be proved for the portion of the funds used in such purchase or investment, such funds will be taxed as an undisclosed source of income at the prevailing income tax rates applicable as per the Union Tax Law (“UTL”). Therefore, even though the income may have been received in previous income years, the income tax will be assessed at the current prevailing income tax rates as per the UTL.
Tax amnesty for FY2019-2020
The current financial year, FY2019-2020 (1 October 2019 to 30 September 2020), is a special year for taxpayers, as tax amnesty is provided on undisclosed income by reducing the income tax rates as low as 3% for an income amount up to MMK100 million.
As FY2019-2020 will be ending at the end of September and to encourage income tax payment under the tax amnesty rates, the Internal Revenue Department (“IRD”) has formed a special tax assessment team for assessment of undisclosed income especially for funds contributed as capital in a company.
Who should declare under this assessment?
Myanmar citizen shareholders who have already received a tax clearance certificate issued by the IRD in relation to all the capital contributed in the company as well as foreign shareholders who remitted the capital via bank transfer are not required to declare under this assessment, as the income has already been reviewed and assessed.
On the other hand, if the original or additional capital contributed by Myanmar citizen shareholders has not been issued with a tax clearance certificate, such shareholders are required to declare the source of income for the original or additional capital by submitting the relevant supporting documents to the special tax assessment team.
Generally, there are four main sources of income: dividends, salaries, business income, and other categories of income (e.g., exempted income, income from state lottery); the required documents for tax assessment vary depending on the source.
We understand that if the total capital contributed to the company is the same as the total amount of salary or exempted income received by the shareholder, the IRD will issue a tax clearance only for 85% of the total income received, as the remaining 15% will be deemed as spent for living expenses by the shareholder. Accordingly, such 15% will be assessed under undisclosed income.
Continuance of tax amnesty for FY2020-2021
Under the draft Union Tax Law 2020 (“UTL 2020”), which will be applicable for FY2020-2021 (1 October 2020 to 30 September 2021), tax amnesty on undisclosed income was proposed to be abolished by increasing the income tax rate to flat rate of 30%. However, the Union Parliament (Pyidaungsu Hluttaw) has decided to keep the tax amnesty on undisclosed income in the final version of the UTL 2020, which was approved on 28 August 2020. However, there will be a slight increase in the income tax rates. We have compared the income tax rates for undisclosed income between FY2019-2020 and FY2020-2021 in the table below.
|1 – 100,000,000||3%||6%|
|100,000,001 – 300,000,000||5%||10%|
|300,000,001 – 1,000,000,000||10%||NA|
|1,000,000,001 – 3,000,000,000||15%||NA|
|300,000,001 – 3,000,000,000||NA||20%|
|3,000,000,001 and above||30%||30%|
Although the tax amnesty is to be continued in the next financial year, tax amnesty rates in FY2019-2020 are definitely more favorable for taxpayers. It should also be noted that tax assessment on undisclosed income is generally made at the relevant township IRD based on the residential address of the shareholder. However, now there is a special tax assessment team making assessment on undisclosed income at the one-stop tax service unit. Therefore, tax assessment can be done efficiently within one week provided that supporting documents are complete. As such, taxpayers are advised to look at their tax position now and request for tax assessment before the end of the financial year should there be any undisclosed income.