M&A transactions in Myanmar: a republic on the verge of change?

updated on 25 February 2021 | reading time approx. 3 minutes

Though Myanmar has been opening up to the world since the end of 2010 with a transitional process from military rule towards a parliamentary democracy and an open economy to be observed, latest developments unfortunately point into a different direction. With the state of emergency having been declared on 2 February 2021, it needs to be seen where Myanmar's journey will lead to in the near future.

Key growth sectors to date have included telecommunications, garments, construction, insurance, pharmaceuticals, manufacturing, agriculture, infrastructure and electricity.

Myanmar has been a member of the WTO since 1995, and has shown stable growth rates averaging 6.3 per cent between 2016 and 2020. Basically, Myanmar's competitive advantage lies in its labor force with relatively low wage levels, a market of 53 million potential buyers that has only been partially tapped, and almost barrier-free access to other parts of Asia through the country's membership in the Association of Southeast Asian Nations (ASEAN). Amongst many changes in the regulatory framework, such as the new Companies Law (2017) and the new Tax Administration Law (2019), online systems for registrations and tax payments have been implemented and overall investment conditions have been improved significantly.

While under the previous Corporate Law it was virtually impossible for foreign investors to invest in Myanmar companies by acquiring shares, the new Myanmar Companies Law has allowed foreign investors to buy into local companies since August 2018. In this respect, too, it now remains to be seen whether a domestic political compromise can be found and Myanmar can continue to present itself as an interesting investment location in the future.

What are the common deal structures in Myanmar? »
How is a share transaction structured in Myanmar? »
What are the main tax drivers to be considered? »
Are there restrictions for foreign direct investment? »
Common risks and opportunities when entering the Myanmar market via M&A »
Which valuation methods are commonly utilised in the market? »
Have any M&A related investment or tax facilitations been enacted in your jurisdiction in light of the current pandemic? »

What are the common deal structures in Myanmar?

The most common type of acquisition in Myanmar are share purchases and asset deals.

How is a share transaction structured in Myanmar?

Share deals are usually based on cash consideration only.

What are the main tax drivers to be considered?

The main tax drivers to be considered are the Commercial Tax (in Myanmar equivalent to VAT) as well as the Corporate Income Tax, which could potentially have the biggest impact on the M&A. In this regard it is important to duly check until which financial year the tax assessments have been concluded and the demand notes (final tax clearance certificate for a financial year) have been issued, as only with the demand note, the actual tax liability may be revealed. Furthermore, the evidence of monthly and quarterly Commercial Tax and Corporate Income Tax filings for the present financial year should be analyzed to evaluate compliance and the actual filed amounts.

In addition to the above mentioned, the Personal Income Tax as well as the Social Security Contribution filings of the employees should be analysed to determine compliance with the actual filing obligations and possible liabilities also with regard to potential penalties.

In addition to the tax risks inherent in an M&A transaction, it is important to consider the transaction costs involved. Myanmar imposes a Capital Gains Tax on the sale, exchange or transfer of capital assets at the rate of 10 per cent, or 40 to 50 per cent for companies engaged in upstream oil and gas activities. Depending on the instruments executed for the M&A transaction, there would likely be stamp duty implications which will differ depending on the instrument of transfer.

Are there restrictions for foreign direct investment?

The major restriction is the prohibition to acquire real estate. Long term leases also require prior governmental approval. Further restrictions include steep minimum capital investment requirements for trading licenses.

Under the new companies law, however, as long as foreign investors take up no more than 35 per cent of the shares, a company will still be considered as local company.

Common risks and opportunities when entering the Myanmar market via M&A

Tax compliance and good corporate governance are still common risks. But there are well known companies with a strong market position and long established distribution networks which are opening up to foreign investment for the first time.

Despite the risk of tax liabilities, Myanmar has a comparably high growth rate of around 7 per cent, and is attracting FDIs also with tax incentives for certain investments and through special economic zones with optimised infrastructure and supply of electricity.

The transition process and political reforms are continuing more or less stable in a rather market-oriented direction, but, amongst other challenges, internal conflicts at the borders of the country are not entirely resolved yet. The current government has been re-elected in November 2020 without significant military invention being reported, which is seen as an important indicator for the direction of the development of the country.

Which valuation methods are commonly utilised in the market?

Valuation can be done at market value, i.e. where it is valued by a third party professional valuation service provider. Alternatively, the valuation can be based on a multiple average of EBITDA. The valuation can be negotiated and agreed by both parties.

However, for tax purposes, i.e. capital gains tax and stamp duty, where the tax authorities are not satisfied with the valuation submitted by the tax payer, the tax authorities may require that the valuation based on market value be used for the purpose of calculating capital gains tax and stamp duty.