Economic partners: A new law is aimed at stimulating foreign direct investment

In March 2011, President U Thein Sein shocked the world in his inaugural speech by taking a new tack for Myanmar’s development, speaking of the need to “open doors, make reforms and invite investments as necessary for development of the nation and the people”. He stated clearly that Myanmar aims to “attract foreign investments” as part of a wider set of radical reforms set to affect all areas of the economy.

No document better represents that aim than the Foreign Investment Law (FIL) passed by the Myanmar parliament in November 2012. The legislation lays out a clear set of incentives, restrictions and guidelines for potential investors looking to tap into this once-closed economy, aiming to attract capital from outside the country to build and grow the businesses within.

Foreign Investment Law

The FIL was passed as part of the government’s drive to promote and expand exports; develop capital-intensive extractive industries; improve technology; create employment; train and educate the local workforce; and ameliorate living standards for the Myanmar people. It improves on the 1988 law that left many areas uncovered and forced any foreign investor to negotiate directly with the government. Perhaps most importantly, as part of the document’s introduction, the Myanmar Investment Commission (MIC) guarantees against any nationalisation or termination of businesses during the permitted time. The law also includes a basket of incentives to entice investors.

Land leases are granted for a lengthy 50 years, with the option of increasing this by an additional two, 10-year periods for a maximum of 70 years. Companies receive a five-year income tax exemption for any businesses registered under the new law, and any losses incurred within the first two years of operations can be carried forward. Any re-invested profits within the first year of operations are tax free, depreciation and research costs are tax deductible, and there is up to 50% income tax relief on exported products.

Restrictions

The FIL also lays out some restricted segments in which foreign investors are prohibited from operating without special permission from the MIC and relevant ministries. Some of these areas are unsurprising, such as arms manufacturing and chemical waste disposal, as well as operations that may cause significant damage to the environment. Other prohibited segments are more strategic, such as the exploration and production of gems and jade, or the small-scale production of minerals. Energy production and electricity administration is also on the blacklist, as is air navigation, and print and broadcasting services.

In the first two years of operation, new businesses must ensure that at least 25% of their employees are local; however, this condition changes as the company ages. In years two to four, 50% of employees must be local, and, after operating for four years, 75% of workers must be Myanmar citizens.

In all, the FIL lists 237 business activities with details on how an investor can legally engage within the country, acting as an invitation for international partners to reconsider the risks and returns associated with Myanmar. A company registration office in Yangon can process much of the paperwork required to register a new business, preventing a lengthy trip to the country’s capital, Naypidaw, and an online platform for the same process is presently being developed.

“The new foreign investment law is a step in the right direction,” Alisher Ali, CEO of Silk Road Finance, an investment firm with operations in Mongolia, Myanmar and Mozambique, told OBG. “Investors should take comfort in the fact that the Myanmar government understands the importance of foreign investment.”

Results

FDI increased by over five times in FY2012/13, according to official sources, and Myanmar may attract as much as $100bn in the next 15 years, according to a McKinsey Global Institute report written in May 2013.

At the moment, investors come predominantly from Asia, with a surge in tourism and garment manufacturing industries over the past two years. However, as Western companies warm up to the idea of operating in Myanmar, investment activity is set to pick up dramatically.