We have mentioned in some of our recent articles that there are indications that the Myanmar Internal Revenue Department (IRD) may be starting to enforce tax compliance matters more strictly. In keeping with that observation, the IRD issued a new Public Ruling (No. 3/2022) under the Tax Administration Law (TAL) on 16 November 2022. The Public Ruling has been issued to provide additional clarity on the scope of taxpayer transgressions under the TAL and how the IRD intends to enforce the relevant TAL provisions. For a summary of the potential taxpayer fines applicable under the TAL, please see our recent article on the topic.
As we have also observed in recent articles, the IRD taking a more pro-active role in tax enforcement and collection is a positive development. However, technical and capacity constraints continue to be an issue in efficient administration of the tax system in Myanmar. In that context, rulings and announcements that are not clear or that appear to misapply common understandings of taxation concepts risk undermining efforts to improve administration. While there are many helpful aspects to the new Public Ruling, some of the content is unclear and may pose some risk of causing issues in the enforcement of the TAL.
The following comments summarise the main aspects of the new Public Ruling.
An initial comment – “avoidance” versus “evasion”
In general, in English language the term “tax avoidance” is understood to refer to legitimate and legal measures taken to reduce a taxpayer’s tax liability. The term “tax evasion” is generally understood to refer to illegitimate and illegal measures taken to evade payment of tax for which the taxpayer should properly be liable.
The IRD’s unofficial English translation of the TAL refers to both “avoidance” (section 32) and “evasion” (section 77) as prohibited activities. The potentially confusing effect of these references is limited in the TAL as they are only used in section headings, not in the actual text of the sections themselves. However, the English version of the Public Ruling picks up the terms “avoidance” and “evasion” as both being prohibited activities in the substantive text of the ruling. English-speaking taxpayers in Myanmar should therefore bear in mind that both “avoidance” and “evasion” refer to prohibited activities here. (We suggest that the term “tax minimization” may be a preferable alternative to “tax avoidance” as this seems a more accurate and less confusing description).
Tax avoidance
The Public Ruling expands on the concept of tax avoidance under the TAL by providing that avoidance includes the following.
“(a) Failure to disclose an asset, property, service or benefit at market price;
(b) Making non-arm’s length transfers for cross-border transfer pricing;
(c) Splitting income between taxpayers and associated enterprises with the purpose of lowering the total tax payable on income;
(d) Re-organizing the structures of associations to enjoy tax benefits;
(e) Tax avoidance by abusing bilateral or multilateral tax treaties.”
These examples of tax avoidance appear to relate to application of section 32 of the TAL, which states that:
“32. In making an assessment, the Director General may disregard a transaction or series of transactions that are artificial or fictitious done with the purpose of reducing the tax payable. Moreover, the transaction or series of transactions that has been mischaracterised may be treated according to its economic substance.”
The Public Ruling prefaces the above list of examples of tax avoidance with a statement that tax avoidance occurs where a “person fully understands the tax laws and breaches the tax ethics with the purpose of avoiding the tax or acting to reduce the taxable income or tax liability”. This statement is potentially problematic in several respects.
On the one hand, while innocent mistake should ideally be excusable, understanding of the law is not generally a pre-requisite to being responsible for its breach. If a taxpayer undertakes steps with the purpose of illegitimately avoiding tax, it should be considered to have transgressed tax laws regardless of whether it fully understood those laws. In this respect, the preface to the tax avoidance examples is arguably too generous to taxpayers.
However, from the opposite perspective, the references to “tax ethics” and to “acting to reduce the taxable income or tax liability” are potentially confusing and potentially extend beyond the scope of taxation laws and the IRD’s authority under those laws. In this regard, we note the following.
“Tax ethics” is not a defined concept under either the TAL or the Public Ruling and there is no prohibition on breaching “tax ethics” under Myanmar law. This is not a basis on which a taxpayer can be found to have breached section 32 of the TAL.
Taxpayers are entitled to seek to minimize their tax liability as far as possible within the scope of applicable tax laws. It is not unethical (nor illegal) to deliberately seek to legitimately reduce one’s tax liability. Mixing references to prohibiting reduction of “taxable income or tax liability” in with unclear and undefined concepts of “tax ethics” is confusing and suggests potential risk of seeking to prohibit legal and legitimate activities under the Public Ruling.
Example (d) in the list of tax avoidance examples provides a further and more specific extension of the issue of the Public Ruling potentially seeking to prohibit legal and legitimate tax management activities. Reorganization of a company’s internal structure and operations, or of the structure and operations of a corporate group, to enable access to tax benefits available under applicable law and/or to reduce tax liabilities is a legitimate practice commonly undertaken all over the world.
Example (b) in the list of tax avoidance examples is also potentially problematic. Myanmar does not currently have any specific transfer pricing regulations. While it is likely that activities in the nature of transfer pricing are frequently being practiced in light of current economic conditions, trying to stretch the scope of section 32 of the TAL to apply it as a general anti-transfer pricing provision is likely to result in confusion. A further practical complication at present is that much of the current activity that is in the nature of transfer pricing is most likely actually being undertaken to avoid compulsory foreign currency conversion and exchange rate requirements under foreign exchange management laws – not for the purpose of tax avoidance or evasion. Where these activities transgress foreign exchange management laws, they should be prosecuted under the appropriate law. However, the lack of reasonably detailed specific transfer pricing regulations raises a potential risk that regulators may seek to prosecute foreign exchange management breaches as tax breaches, which may undermine clear and efficient administration of tax regulations. It would be preferable to introduce clear, detailed and dedicated treatment of transfer pricing in Myanmar tax regulations.
Negligent or Fraudulent Underpayment
Section 68 of the TAL imposes penalties on a taxpayer where “tax is underpaid, or might have been underpaid, as a result of an incorrect statement or a material omission in a taxpayer’s tax return, and that statement or omission is a result of intentional conduct or negligence on the part of the taxpayer”.
The Public Ruling expands on the concept of negligent or fraudulent underpayment of tax under section 68 of the TAL by providing that this will be taken to have occurred where a taxpayer files a tax return and under-reports the tax payable as a result of “negligence or fraudulence”. The following matters are listed as specific examples.
“(a) Deliberate failure to file a tax return for the period;
(b) Under-reporting of income and proceeds of sales;
(c) Fraudulently claiming tax relief;
(d) Fraudulently applying for depreciation;
(e) Using or submitting false documents or fictitious invoices;
(f) Receiving tax credit on input tax by fraudulent practices;
(g) Omission of output tax;
(h) Failure to affix the tax labels on the receipt for tax payable;
(i) Failure to affix the tax labels on identified specific goods;
(j) False or incorrect bookkeeping due to either person or machine.”
As set out above, section 68 of the TAL applies to “incorrect statement or a material omission in a taxpayer’s tax return” and therefore applies to the content of a return that has been filed, not to whether or when the return was filed. (The language of the Public Ruling itself also expressly refers to “negligence or fraudulence” in respect of under-reporting of tax payable in a return that has been filed). Example (a) in the list of negligent or fraudulent underpayment examples is therefore outside of the scope of section 68. Failure to file a tax return is separately dealt with under section 67 of the TAL.
False or Misleading Statements
Section 69 of the TAL imposes penalties on a taxpayer who “makes a statement to a taxation staff that is false or misleading in a material particular……if an amount properly payable by or refundable to the person exceeds or is inferior to the amount that would be payable or refundable if the person were assessed on the basis that the statement were true”.
The Public Ruling purports to expand on the concept of false or misleading statements under section 69 of the TAL by providing that this will be taken to have occurred where a taxpayer “submits false or misleading statements to the tax authority in order to either reduce the tax or to avoid tax collection or tax payment or to receive non-liable refund, and the tax authority assessed the person on the basis that the statements were true and amount properly paid or refundable to the person exceeds or is inferior to the amount that would be payable or refundable”. This language essentially only repeats the contents of section 69 in more expansive phrasing. However, the following matters are listed as specific examples.
“(a) Intentional omission of income and proceeds of sales;
(b) Declaration of false or misleading statements in a tax return;
(c) Submission of false or misleading statements during an official tax inquiry (whether in written or verbal form);
(d) Keeping or submitting false or misleading accounting records and documents;
(e) Illegal importation or export of commodities;
(f) Transferring the assets to avoid recovery of tax;
(g) Omission of the bank account information;
(h) Keeping more than one financial statement.”
It is not clear how “illegal importation of export of commodities” referred to in example (e) is a taxation matter or a matter over which the IRD has any authority. It may be that this example is intended to refer to inclusion of commodity import or export transactions in a tax return where the import/export was undertaken illegally. If so, it is not clear why inclusion of illegal transactions in a tax return should be considered misleading in relation to commodity import/export only.
Tax Evasion
Section 77 of the TAL makes it an offence (potentially punishable by imprisonment) where a person “wilfully evades the assessment, payment, or collection of tax, or…..wilfully claims a refund of tax to which the person is not entitled”.
The Public Ruling provides that where a taxpayer wilfully “offends the tax law”, or transgresses the negligent and fraudulent underpayment (section 68) and/or false or misleading statements (section 69) provisions of the TAL several times, or “massive losses of state’s revenue [occur] as a result of any failure to tax obligation”, this will be considered to be tax evasion under section 77 of the TAL.
This purported application of section 77 pursuant to the Public Ruling goes beyond the scope of section 77 as set out in the TAL and is beyond the authority of the IRD. Section 77 expressly applies only to wilful breaches. There is no basis for purporting to apply section 77 in respect of multiple non-wilful tax breaches, nor to apply section 77 on the basis of the size of the any loss to the State caused by a non-wilful tax breach. If the breach is not wilful, section 77 does not apply.
Examples
The balance of the Public Ruling sets out a number of purported examples of the application of the ruling. While it is helpful to attempt to provide examples of application, the examples set out in the Public Ruling unfortunately generally lack sufficient detail to be particularly useful.
Example 1, in particular, is problematic as it relates to the concepts of “tax ethics” and transfer pricing raised by the IRD under the tax avoidance provisions of the Public Ruling. Example 1 appears to state that if a manufacturing company chooses to sell products to its “associated entities” at a discount to its usual market-based sale price, this will be a breach of “tax ethics” for the purpose of reducing tax liability and will constitute tax avoidance. No definition of “associated entities” is provided. No basis or other explanation is provided as why to Example 1 involves an act done for the purpose of reducing tax liability (as opposed to general commercial purposes of increasing sales). These are important omissions, as the relationship between the two transacting entities and the nature of the transaction are essential elements of determining the boundary between prohibited transfer pricing and legitimate discounting in commercial activities.
On its face, Example 1 could be taken to mean that where a manufacturer provides discounts to long-standing and loyal customers (which might be considered to be “associated entities” in the absence of any definition of that term), this would be tax avoidance. If so, this is clearly outside the scope of the TAL. Further to the above comments on tax avoidance, there is no concept of “tax ethics” in Myanmar tax law, nor is breaching “tax ethics” prohibited by the TAL. Transfer pricing is a more complex concept than simply selling at a discount and section 32 of the TAL is prone to misapplication if the IRD seeks to use it as an anti-transfer pricing provision.
Conclusion
It is commendable to see the IRD seeking to provide additional guidance on tax compliance matters and – it appears – setting the scene for more strictly enforcing Myanmar’s tax laws in the near future. However, efficient tax administration and high compliance levels are best achieved through a reasonably clear and transparent regulatory framework that encourages compliance and allows ready identification of non-compliance. The contents of the Public Ruling do not provide sufficient detail or clarity in this regard and it is to be hoped that additional targeted regulations and more detailed rulings will be issued in not too distant future.