Myanmar’s COVID-19 Economic Relief Plan: Navigating Tough Times With Tax ReliefsJune 19, 2020
The Office of the President issued Order 1/2020 related to Union Tax Law (“Order”), which prevails as the law, on 12 June 2020. The Order was issued in accordance with the COVID-19 Economic Relief Plan, Goal No. 2, to grant tax reliefs for the private sector, applicable for the FY2020-2021 assessment year. In other words, the tax reliefs granted under the Order can be applied when preparing Corporate Income Tax (“CIT”) returns for the FY2019-2020 income year (i.e., 1 October 2019 to 30 September 2020).
What kinds of tax reliefs are granted under the Order?
Two main types of tax reliefs are granted under the Order – non-refundable tax credits and tax-deductible expenses. A non-refundable tax credit means that the tax liability of the taxpayer can be reduced to zero by applying a tax credit. However, any unutilized tax credits can neither be carried forward to the next income year nor will it be refunded by the Internal Revenue Department (“IRD”). In other words, non-refundable tax credits will be beneficial only if the taxpayers have taxable profits and payable CIT. For taxpayers who are in a tax loss position, there will be no additional benefits from the non-refundable tax credit.
On the other hand, tax-deductible expenses mean that expenses can be claimed when calculating CIT to reduce the tax profit position. We understand that taxpayers who incurred tax losses before applying this relief may question how this allowance will provide additional benefits, as they are already in a tax loss position. Please note that tax losses can be carried forward to three consecutive years from the year such losses are incurred under the current Income Tax Law 1974 (“ITL”). Therefore, tax losses incurred in this income year (FY2019-2020) from claiming such deductible expenses can be carried forward to the next three years (i.e., until the end of FY2022-2023) to offset against taxable profits in upcoming years.
Applicable tax reliefs
The tax reliefs granted under the Order include:
- 10% of the total additional wages and salaries paid during the 2019-2020 income year is allowed as a non-refundable tax credit
- 125% of the total additional wages and salaries paid during the 2019-2020 income year is allowed as a tax-deductible expense
- 10% of the total additional investments used in the expansion of the prescribed capital equipment during the 2019-2020 income year is allowed as a non-refundable tax credit
- 125% of depreciation of the additional prescribed capital equipment is allowed as a one-time tax-depreciation allowance
We note that the terms “additional wages and salaries” and “prescribed capital equipment” are not clarified under the Order. The Ministry of Planning, Finance, and Industry (“MOPFI”) issued Notification 65/2020, Procedures relating to the Order, on 17 June 2020 to provide clarifications, procedures, and limitations for utilizing the tax reliefs granted under the Order (“Procedures”).
Non-refundable tax credits on additional salary expenses
According to the Procedures, the IRD will compare the salary expenses of the taxpayer in this income year (FY2019-2020) against the salary expenses incurred in the previous income year, FY2019. If there is an increase in salary expenses due to salary increment of the employees or new employments, 10% of the additional wage and salary expenses can be applied as non-refundable tax credits from the payable CIT of the taxpayer.
It is noteworthy that the non-refundable tax credit will be applied only after the refund of overpaid income tax from the previous income year or unutilized income tax credit has been offset against payable CIT. In other words, if the taxpayer does not have payable CIT after offsetting overpaid CIT and unutilized income tax credits, the non-refundable tax credit on the additional salary expenses will be lost.
We understand that income year FY2019 is only six months long and, therefore, the total salary expenses incurred in FY2019 will be multiplied by two for comparison with this income year. We provide an example below to illustrate the non-refundable tax credits on additional salary expenses.
|FY2019 SALARY EXPENSE (US$)||FY2019-2020 SALARY EXPENSE (US$)||10% NON-REFUNDABLE TAX CREDIT (US$)|
|10,000 X 2 = 20,000||30,000||10,000 X 10% = 1,000|
Additional salary expenses as deductible expenses
Another tax relief is that the taxpayer can claim 125% of the additional salary expenses as tax deductible expenses when calculating CIT. Referring to the clarifications in the Procedures, we have summarized the calculation method in the formula below:
Total salary expense = Current year’s salary expense (100%) + 25% (this year’s salary –previous year’s salary expense)
In other words, the taxpayer can claim only 25% of the additional salary expenses in addition to the current year’s salary expenses (100%) as deductible salary expenses. We note that the additional salary expenses are deductible even if the company is in tax loss position, and the tax losses incurred can be carried forward for three consecutive years.Please refer to the example below.
|FY2019 SALARY EXPENSE (US$)||FY2019-2020 SALARY EXPENSE (US$)||125% TAX DEDUCTIBLE EXPENSE (US$)||TOTAL TAX-DEDUCTIBLE SALARY EXPENSE (US$)|
|10,000 X 2 = 20,000||30,000||10,000 X 125% = 12,500||32,500|
Non-refundable tax credits on additional capital equipment
10% of the total additional investments in capital equipment can be applied as non-refundable tax credits from the payable CIT of the taxpayer. However, the Procedures clarify that the investments in intangibles; purchase, upgrade or expansion of land and buildings; and increases in capital equipment value due to revaluation will be excluded under the definition of the additional investment in capital equipment.
Similar to non-refundable tax credits on additional salary expenses, non-refundable tax credits on additional capital equipment will benefit only taxpayers with payable CIT. In addition, the taxpayer is not allowed to transfer or sell any of the capital equipment on which the non-refundable tax credits were applied during the following three years; otherwise, tax credits granted will be revoked.
One-time accelerated depreciation allowance
125% will be applied on the depreciation allowance of the additional capital equipment purchased during the FY2019-2020 income year. It should be noted that the taxpayer can enjoy a tax depreciation allowance for the whole year in the year of acquisition, even if the capital equipment is used for only a certain period of time during the income year. Therefore, 125% will be applied on the total tax depreciation allowance of the new capital equipment. We provide an example below to illustrate this clarification.
|FY2019-2020 ADDITIONAL CAPITAL EQUIPMENT VALUE (US$)||TAX DEPRECIATION RATE||125% TAX DEPRECIATION ALLOWANCE APPLIED ON THE ADDITIONAL CAPITAL EQUIPMENT|
|1,000||10%||1,000 x 10% x 125% = 125|
Tax reliefs and restrictions for companies with an investment license under Myanmar Investment Law and Special Economic Zone Law
It should be noted that tax losses, incurred after claiming additional salary expenses and depreciation allowances on the additional capital equipment, are allowed to be carried forward even during the income tax holiday period of the companies with an investment license from Myanmar Investment Commission (“MIC Company”) or Special Economic Zone (“SEZ”) Committee (“SEZ Company”).
However, an MIC Company and an SEZ Company whose CIT has been exempted due to reinvestment of profits will not be entitled to apply non-refundable tax credits on the additional capital equipment.
The tax reliefs under the Order mainly benefit companies that have taxable profits and payable CIT. Although there is no immediate benefit for the companies that are already in a tax loss position, the ability to carry forward losses from claiming additional expenses significantly assists with regard to their future tax position. After all, every bit of help will count during the tough times ahead.